9911796707
TMI Blog2014 (10) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... ions from the contributors which will be invested by the Trustee in accordance with the objects of the trust. The objective of creation of the trust was to invest in certain securities called mezzanine instruments and to achieve commensurate returns to the contributors. The fund collected from the contributors together with the initial corpus was to be handed over to the trustees under the provisions of the Indian Trust Act, 1882. The trust was to facilitate investment by the contributors who should be resident in India and achieve returns to such contributors. The trust deed provides that the contributors to the fund will also be its beneficiaries. 3. The trustees had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the Settlor as investment manager are set out in an investment management agreement dated 25.9.2006 between the Assessee represented by the Trustee and Settlor. 4. The Settlor as investment manager issued memorandum to prospective investors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the Fund has declared an income of Rs. 1,81,68,357 in its revised return of income for the AY 2008-09. We wish to submit that the aforesaid declaration was made by the Fund out of extreme precaution and in good faith to provide complete information and details about the income earned by the Fund and offered to tax by the beneficiaries. As stated in our earlier submissions, while the Fund has disclosed the total income in its return of income, pursuant to the provisions of section 61 to section 63 of the Act, the same has been included in the return of income of the beneficiaries and offered to tax directly by them. In order to enable the beneficiaries of the Fund to include their share of income and tax deducted at source in the Fund, in their return of income, the Fund on a period basis, provides them with the allocation of each beneficiary share of taxable income vide an allocation letter. In this regard, we have provided below the table detailing the taxable income allocated to each beneficiary for inclusion in their total income. Consequently, the effective income taxable in the hands of the Fund is to be considered as NIL. Since, the provisions of the Act mandate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t out in the proviso to s. 164(1), the relevant income will be assessable not at the maximum rate but at the rate applicable to it as if it were the total income of an AOP. 10. Sec.166 of the Act provides that the provisions relating to making assessment in the hands of a representative assessee, income of person on whose behalf or for whose benefit income is received or receivable by the representative assessee, shall not prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income. 11. Under Section 61 of the Act "All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income". Sec.62 of the Act provides that if a transfer is irrevocable for a specified period than Sec.61 will not apply. Section 63 defines as to what is "transfer" and "revocable transfer" for the purpose of Sec.61 & 62 of the Act. It provides that:- (a) a transfer shall be deemed to be revocable if - (i) it contains any provision for the re-trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate under any of the provisions of this Act. The AO also held that the Assessee and the beneficiaries joined in a common purpose or common action, the object of which was to produce income, profits and gains and therefore constituted an AOP. The AO also referred to the fact that the Assessee had obtained PAN in the status of an AOP (Trust) and filed its E-Return of income by quoting the status as AOP/BOI. Consequently the income in question has to be brought to tax in the hands of AOP at the maximum marginal rate. In this regard the AO made reference to the decision of the Hon'ble Supreme Court in the case of ITO Vs. Ch. Atchaiah 218 ITR 239 (SC) wherein, in the context of assessment of income of an AOP, it was held by the Hon'ble Supreme Court that income has to be brought to tax in the hands of right person. The Assessee had before the AO relied on the following judicial pronouncements in support of its stand that there was no AOP in existence and therefore the Assessee should not be taxed at the maximum marginal rate. (1) Gopala Pillai A.K. Vs. ITO 75 ITR 120 (Mad); (2) CWT Vs. Trustees of HEH Nizam's Family (remainder Wealth) Trust 107 ITR 555 (SC); (3) CIT Vs. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration was as to whether Assessee which was a trust and whose beneficiaries were individuals is liable to deduct tax at source u/s.194A of the Act, which did not apply to individuals. The Hon'ble Delhi High Court upheld the plea of the trust that its beneficiaries were individuals and therefore it should also be regarded as individual and the provisions of Sec.194A of the Act should be held to be not applicable to the Assessee trust. 16.2 Sec.2(31) of the Act defines the term "Person". The definition includes "Association of Persons"(AOP). There is no definition of the expression AOP occurring in the 1922 Act. By a series of decisions, the meaning of this expression was precisely defined and tests were laid down in order to find out when a conglomerate of persons could be held to be an AOP for the purposes of section 3 of the 1922 Act. While interpreting this expression occurring in section 3 of the Indian IT Act, 1922, the Supreme Court in CIT vs. Indira Balkrishna (1960) 39 ITR 546 (SC) approved the view expressed earlier by Beaumont, C.J., in CIT vs. Lakshmidas Devidas (1937) 5 ITR 584 (Bom) and also Dwarkanath Harishchandra Pitale (1937) 5 ITR 716 (Bom), that "an AOP must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust. The objective of creation of the trust was to invest in certain securities called mezzanine instruments and to achieve commensurate returns to the contributors. The fund collected from the contributors together with the initial corpus was to be handed over to the trustees under the provisions of the Indian Trust Act, 1882. The trust was to facilitate investment by the contributors who should be resident in India and achieve returns to such contributors. The contributors to the fund are its beneficiaries; (ii) the trustees had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the settlor as investment manager are set out in an investment management agreement dated 25.9.2006 between the Assessee represented by the Trustee and Settlor; & (iii) the Settlor as investment manager issued memorandum to prospective investors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fund enters into a contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62 provides different forms for filing the ROI based on the status and nature of income of the persons. The CBDT has notified the following forms: ITR Form 1 - 4 is applicable to Individuals / HUF's; ITR 6 is applicable to Companies; ITR 7 is applicable to Persons being a company under section 25 of the Companies Act, 1956, Charitable or Religious trusts, Political parties, etc.; ITR 5 is applicable in the case of a person not being an individual or a HUF or a company or a person to whom ITR 7 applies. The Assessee pointed out that ITR 5 is a residual form and used by any category of persons other than an Individual, HUF, Company etc. Since, there is no specific form prescribed in the case of Trusts / representative assessee, the Assessee had used ITR 5. Further, the Assessee had electronically filed the return for the subject assessment year. In the section where the status of the person filing the return has to be mentioned, the Form for the subject assessment year contained only the following options: 1 -- Firm 2 -- Local Authority 3 -- Cooperative Bank 4 -- Cooperative Society 5 -- Any other AOP/BOI Therefore, the Assessee was left with no choice but to choose the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distributed. The said clause details formula with respect to the share of each beneficiary. It is not the requirement of law that trust deed should actually prescribe the percentage share of the beneficiary in order for the trust to be determinate. It is enough if the shares are capable of being determined based on the provisions of the trust deed. In the case of the Assessee the trustee have no discretion to decide the share of each beneficiary and are bound by the provisions of the trust deed and is duty bound to follow the distribution mechanism specified in the trust deed. 17.3 Sec. 161(1) lays down that income received by a trustee on behalf of the beneficiary shall be assessed in the hands of the trustee as representative assessee and such assessment shall be made and the tax thereon shall be levied upon and be recovered from the representative assessee "in like manner and to the same extent as it would be leviable upon the recoverable from the person represented by him". In other words, in a case to which s. 161(1) applies, the trustee cannot be assessed on the aggregate income received by it. The assessment in the name of the trustee in terms of the sub-section can be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GUMENTS: 18.1 The Assessee contended before CIT(A) that the Assessee was set up as a revocable trust and the scheme of the Act clearly indicates that income of the fund has to be assessed in the hands of the beneficiaries being the contributors/transferors. Reference in this regard was made to Section 61 of the Act which provides that "All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income- tax as the income of the transferor and shall be included in his total income". Sec.62 of the Act provides that if a transfer is irrevocable for a specified period than Sec.61 will not apply. Section 63 defines as to what is "transfer" and "revocable transfer" for the purpose of Sec.61 & 62 of the Act. It provides that:-(a) a transfer shall be deemed to be revocable if-(i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (b) "transfer" includes any settlement, trust, covenant, agreement or arrangement. It was arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profits and gains of business. The AO in this regard placed reliance on the decision of the ITAT Madras Bench in the case of DCIT Vs. Manilal Bapalal Family Benefit Trust 66 ITD 179 (Mad) wherein the provisions of Sec.161(1A) of the Act were applied. DECISION OF THE CIT(A): 20. The CIT(A) in the impugned order has narrated the whole of the written submission of the Assessee, the remand report of the AO and rejoinder of the Assessee to the remand report and finally gave his conclusion as follows: "24. In view of the above discussion, after careful consideration of the facts and circumstances of the case, I am convinced that the appellant trust is a revocable trust. It need not be subjected to tax as the tax obligations have been fully discharged by the beneficiaries of the appellant trust. Therefore the AO is directed to treat the income of the appellant trust as NIL as against Rs. 3,54,10,591 determined by the AO. As the income of the appellant trust is determined as NIL the issue of disallowance of expenditure made by the AO is not considered and the appeal is allowed." 21. Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is actually assessable cannot be excluded from assessment. 11. The appellant craves for permission to add or delete the grounds of Appeal at the time of hearing the case." 22. The learned DR reiterated the stand of the revenue as contained in the order of assessment and as set out in the remand report of the AO filed before CIT(A). Besides the above, the learned DR brought to our notice CBDT Circular No.13/2014 whereby the CBDT had clarified that Alternative Investment Funds which are subject to The SEBI (Alternative Investment Funds) Regulations, 2012 which are not venture capital funds and which are non-charitable trusts where the investors name and beneficial interest are not explicitly known on the date of its creation- such information becoming available only when the funds starts accepting contribution from the investors, have to be treated as falling within Sec.164(1) of the act and the fund should be taxed in respect of the income received on behalf of the beneficiaries at the maximum marginal rate. According to him the case of the Assessee would fall within the above directions of the CBDT and therefore the action of the AO was correct and had to be restored. It was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec.61 and 63 of the Act. Section 61 of the Act provides that "All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income". Section 63 defines as to what is "transfer" and "revocable transfer" for the purpose of Sec.61 of the Act. It provides that:- (a) a transfer shall be deemed to be revocable if - (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (b) "transfer" includes any settlement, trust, covenant, agreement or arrangement. The first aspect pointed out by him was that the beneficiaries transfer funds to the trust in accordance with the terms of the trust deed and therefore there is a transfer within the meaning of Sec.61 of the Act. It was his contention that the Sec.61 talks of a specific power of revocation conferred under the instrument of transfer and Sec.63 defining "revocable transfer" deals with "deemed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beneficiaries. According to him the provisions of Sec.61 of the Act does not contemplate a power of revocation only at the instance of the transferor. In support of the above contention the learned counsel for the Assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of Addl.CIT Vs. Surat Art Silk Cloth Mfrs. Association 121 ITR 1 (SC) at page-17, wherein the Hon'ble Supreme Court had to examine the question as to whether the expression " advancement of any other object of general public utility not involving the carrying on of any activity for profit" would mean that the charitable organisation cannot carry on any business. The Hon'ble Supreme Court observed as follows:- "It is clear on a plain natural construction of the language used by the legislature that the ten crucial words "not involving the carrying on of any activity for profit" go with "object of general public utility" and not with "advancement". It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply and consequently income has to be brought to tax only in the hands of the beneficiary/transferor. In this regard our attention was drawn to the document in the form of prospectus inviting contribution from contributors wherein the following clauses are found: "The Fund is expected to terminate seven years from the date of the Indenture of Trust. The process of redemption/termination shall be completed within a period of twelve months to completely liquidate its assets. However, in the event that the investments in the Portfolio Companies are not realised at the end of seven years from the date of the Indenture of Trust, its term may be extended for two additional periods of one year each, upon the recommendation of the Investment Manager and the approval of 75% of the Contributors. In addition, 75% of the Contributors, if unsatisfied with the performance of the Fund, by a written notice can revoke their Contribution to the Fund at any point of time and the Trustee shall then terminate the Fund subject to the following: (i) Capital Commitments will not be terminated to the extent necessary to pay Fund Expenses or honor investment commitments previously made by the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial distributions, if any, on as-needed basis. Further, to the extent of any un-drawn Capital Commitments, the Fund may, at the discretion of the Investment Manager, apply any Distribution Proceeds (as defined below) towards any purpose, which could otherwise have been funded by a Drawdown from Contributors. However the distribution will be at the discretion of the Trustee in consultation with the Investment Manager." 32. Our attention was drawn to the order of the CIT(A) in which the remand report of the AO filed before CIT(A) is extracted in the order of the CIT(A). In para-17.5 of the CIT(A)'s order the remand report of the AO on the aspect of the trust being revocable has been set out. It was pointed out by the learned counsel for the Assessee that the AO has not disputed in his remand report the fact that the Assessee trust is revocable but only says that beneficiaries are assessed at different places in India and it is very difficult to monitor all these beneficiaries as to whether they have filed their returns and even if filed, whether correct share of income received/receivable from the Assessee are admitted. To avoid such eventuality it would be correct to Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust deed gives the details of the beneficiaries and the description of the person who is to be benefited, the beneficiaries cannot be said to be uncertain, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries. The Hon'ble Court noticed in the above case that the Beneficiaries were five in number for the period from 1st April, 1986 to 31st March, 1989 and the respective share of each beneficiary was in different percentage as stated in the deed itself. From 1st April, 1989 onwards the beneficiaries were seven in number and their shares in the income was equal. As per trust deed, as and when B and P are married, their spouses would automatically become beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Likewise, as and when any child or children is/are born to the said B and P the child or children so born shall automatically become a beneficiary/beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed 36. The learned counsel for the Assessee then addressed arguments on grounds 8 & 9 raised by the Revenue in its grounds of appeal in which the revenue has questioned the order of the CIT(A) whereby the CIT(A) held that :- (a) that the Assessee cannot be assessed as AOP and (b) there is no separate status of Trust for making assessment envisaged under the Act. In this regard the definition of person u/s. 2(31) of the Act which does not specifically refer to "Trust" is being highlighted in the grounds raised by the Revenue. 37. On the above grounds of appeal, the learned counsel for the Assessee firstly pointed out that the definition of "Person" in Sec.2(31) of the Act is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere factum of common cultivation by a single manager of different parcels of land owned by different persons could not by itself be held to be sufficient to constitute the owners as association of individuals. (3) CIT Vs. Indira Balakrishnan 39 ITR 546 (SC). 39. The learned counsel for the Assessee thereafter took up ground No.10 raised by the Revenue for consideration. The Revenue therein has raised issue that income has to be brought to tax in the hands of the right person in the right status. In this regard our attention was drawn to the following decisions:- (1) CIT Vs. David Joseph 214 ITR 658 (Ker) wherein the Hon'ble Kerala High Court found that the Tribunal in the impugned order before the Hon'ble High Court has referred to three circulars dt. 24th Feb., 1967, 26th Dec., 1974 and 24th Aug., 1966. These circulars are to the effect that once the choice is made by the Department to tax either the trust or the beneficiary, it is no more open to the Department to go behind it and assess the other at the same time. The position that emerges would be a position for the application of the principle of finality. Once a beneficiary is assessed and his assessment is complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmitted the assessment in the hands of the trustees but did not preclude the direct assessment in the hands of the beneficiaries. There is nothing in s. 41 which would indicate that the choice between the alternative methods provided therein has to be made only at the time of the assessment of the trustees or that the choice only belongs to the ITO who is assessing the trust. 40. Our attention was also drawn to Circular No.157 dated 26.12.1974 of CBDT wherein the CBDT has clarified on assessment of trust where share of beneficiaries unknown. It has been clarified therein as follows: "According to the scheme of the IT Act of 1961, even as it was under the IT Act of 1922, the general principle is to charge all income only once. The Board desire to reiterate the earlier instructions in this regard. In order that there is no loss of revenue, the ITO should keep this point in view at the time of raising the initial assessment either of the trust or the beneficiaries and adopt a course beneficial to the Revenue. Having exercised his option once, will it not be open to the ITO to assess the same income for that assessment year in the hands of the other person (i.e., the beneficiary or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed on the individuals of the said family. To do so is not to re-open the final orders of assessment, but in reality to arrive at the correct figure of tax payable by the HUF." 42. We have given a very careful consideration to the rival submissions. The Assessee, as we have already seen, is the Assessee is a trust constituted under an instrument of trust dated 25/9/2006. M/S. ICICI Venture Funds Management Company Limited (hereinafter referred to as "Settlor") by an indenture of Trust dated 25.9.2006 transferred a sum of Rs. 10,000/- to M/S. The Western India Trustee and Executor Company Limited (hereinafter referred as the "Trustee") as initial corpus to be applied and governed by the terms and conditions of the indenture dated 25.9.2006. The trustee was empowered to call for contributions from the contributors which will be invested by the Trustee in accordance with the objects of the trust. The objective of creation of the trust was to invest in certain securities called mezzanine instruments and to achieve commensurate returns to the contributors. The fund collected from the contributors together with the initial corpus was to be handed over to the trustees under the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n American company in collaboration with an Indian financial services company proposed to set up another fund. For this purpose a trust was created whereby the Indian Financial services company was the author of the trust and another Indian Trust company was appointed as Trustee. The funds of the Trust were to be invested in Indian companies and projects in India. The Indian financial service company was to act as the principal Investment Adviser in India to the trust under an advisory agreement. By an Indenture of trust, the Indian financial service company made an initial settlement of Rs. 1 lakh on the trustees on trust. This along with contributions that may be made to the trust fund by others is referred to as `Contribution Fund'. The Indian financial services company was the only contributor and also the only beneficiary under the trust deed. Clause 7 of the trust deed contains a provision to the following effect :- "Power of Addition 7. (a) The trustee shall have the power at any time or times during the trust period to add as beneficiaries such one or more persons or class of persons as the trustee shall in their absolute discretion determine. (b) Any such addition s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust are, as stated in the TD, to invest the trust funds and distributing the proceeds to the beneficiaries. This is, in a sense, nothing more than an arrangement by which certain parties agreed to contribute funds for a common purpose and divide the profits amongst themselves. No doubt the same objective could be achieved by the constitution of a firm or a company but, equally, there seems to be no valid objection if the parties wish to do it in the form of a trust which, under the Trust Act, merely represents certain obligations annexed to the ownership of property in the form of the contributed funds. The purposes of the trust cannot be said to be forbidden by law or likely to defeat the provisions of any law or fraudulent or involving injury to any person or property or opposed to public policy : vide s. 4 of the Indian Trusts Act (IV of 1882). It will appear later that, in entering into the present transactions, the parties took into account certain difficulties if the same transactions had been put through the format of a company and also took into account certain financial and tax implications. But these cannot render the purposes of the trust unlawful within the meaning o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which of them will be most in need, which will be deserving, which spendthrift, which inebriate, which will marry millionaires and which missionaries". The trustee can take all these factors into consideration in making their decisions. 49. When it comes to tax on income received by the Trust on behalf of the beneficiaries, there are some implications depending on whether the trust is a discretionary trust or a non-discretionary trust. As we have already seen in terms of Sec.164(1) a trust is assessed as a representative assessee in respect of income which it receives on behalf of its beneficiaries and if the beneficiaries are not certain or shares of beneficiaries are indeterminate, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Explanation 1 to Sec.164 deems that in certain situations beneficiaries shall be deemed to be not identifiable or their shares are unascertained or indeterminate or unknown. These provisions have already been set out in the earlier part of this order and are not being repeated. The legislative history of the above provisions needs to be examined to find out the object of introduction of the Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ITR (St) 4, though the Circular uses similar language--Ed.] : "49. xxx xxx xxx (iv) Under the existing provisions, the flat rate of 65% is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the Court or wakf deed. This provision has been misused in some cases by giving discretion to the trustees to decide the allocation of the income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted to a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiaries and their shares are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed, the trust will be regarded as a discretionary trust and assessed accordingly." 52. From the above extracts it can be seen that the object of the amendments to the provision was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the contributors. The contributors are therefore informed that in respect of their pro-rata share of income received by the Fund it is the contributors who will be liable to tax and not the Trust/Fund. The nature of income that is likely to arise from the revocable transfer has also been set out therein and the same is referred to as (1) Dividend declared by companies whose shares are held by the Trust, are exempt in the hands of the shareholders and therefore the dividend earned by the Trust from investment would be exempt from tax and therefore there would be no tax implications in the hands of the beneficiary. (2) Interest on loans given by the Trust/Fund to companies would suffer tax deduction at source. Nevertheless the beneficiaries have to declare interest income and pay tax thereon but claim refund of tax paid or credit for taxes already paid. (3) Gain on sale of Portfolio Investments would be subjected to tax either as Long Term Capital Gain or Short Term Capital Gain. There is also a reference to the fact that in case the gain on sale of securities of companies held/invested by the Trust/Fund are held to be in the nature of business income then such business incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferor. In this regard the reliance placed by the learned counsel for the Assessee on the observations of the Hon'ble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) support the plea taken by him. As rightly contended by him the existence of a power to revoke the transfer that has to be seen and not the manner in which/ or at whose instance such revocation is brought about. 58. The alternative submission of the learned counsel for the Assessee that the provisions of Sec.63(a) of the Act, which deems existence of power of revocation in certain circumstances, are also acceptable. In this regard prospectus inviting contribution from contributors clearly lay down in certain circumstances 75% of the contributors can revoke their contribution to the fund at any point of time and the trustees shall then terminate the fund. Though the above power of the transferor/beneficiary to revoke the transfer is not in the instrument of transfer but by virtue of the power conferred in a document by which the investment manager appointed by the trust by virtue of powers conferred under the trust deed, would be sufficient to conclude that the transferor/beneficiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income", "part of relevant income" and "beneficiaries", respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Explanation 1 to Sec.164 lays down that any income or part thereof to which Section 164(1) applies shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed." 61. The general rule as laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the beneficiaries in the trust deed. In the said circular the provisions of Expln.-1 to Sec.164 of the Act regarding identification of beneficiaries has been explained to the effect that for identification of beneficiaries it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the Court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the Court or the instrument of trust or wakf deed on the date of such order, instrument or deed. We find that Clause 1.1.13 of the Trust Deed clearly lays down that beneficiaries means the Persons, each of whom have made or agreed to make contributions to the Trust in accordance with the Contribution Agreement. We are of the view that the above clause is sufficient to identify the beneficiaries. 65. On the aspect of ascertainment of share of the beneficiaries, we find that Article 6.5 of the Trust Deed clearly specifies the manner in which the income of the Assessee is to be distributed. The said clause details formula with respect to the share of each beneficiary. As rightly contended on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that identity by reference to the terms of the trust deed is sufficient and it is not necessary that the beneficiaries should be specifically named in the deed of trust. Consequently Grounds 4 to 7 raised by the Revenue are held to be without merit. 66. In ground No.8, the Revenue has challenged the order of the CIT(A) whereby the CIT(A) held that the Assessee cannot be assessed as an "AOP". In Ground No.9 the Revenue has contended that there is no separate status of Trust for making assessment envisaged under the Act. In this regard the definition of person u/s. 2(31) of the Act which does not specifically refer to "Trust" is being highlighted in the grounds raised by the Revenue. These grounds can be conveniently dealt with together. 67. Sec.2(31) of the Act defines the term "Person". The definition includes "Association of Persons"(AOP). There is no definition of the expression AOP occurring in the 1922 Act. By a series of decisions, the meaning of this expression was precisely defined and tests were laid down in order to find out when a conglomerate of persons could be held to be an AOP for the purposes of section 3 of the 1922 Act. While interpreting this expression occurri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urns to such contributors. The contributors to the fund are its beneficiaries. (ii) The trustees had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the settlor as investment manager are set out in an investment management agreement dated 25.9.2006 between the Assessee represented by the Trustee and Settlor. (iii) The Settlor as investment manager issued memorandum to prospective investors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fund enters into a contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his capacity as investment manager. 68. It can thus be seen that the beneficiaries contributed their money to the Assessee and a separate agreement was entered into between the Assessee and each beneficiary. There is no inter se arrangement between one contributory/ beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the Assessee. Therefore it cannot be said that two or more benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax in the hands of the right person in the right status. In this regard there are circulars dt. 24th Feb., 1967, 26th Dec., 1974 and 24th Aug., 1966 on the issue wherein it has been opined that once the choice is made by the Department to tax either the trust or the beneficiary, it is no more open to the Department to go behind it and assess the other at the same time. 71. In the case of David Joseph (supra) the Hon'ble Kerala High Court after making a reference to the above circulars held that once a beneficiary is assessed and his assessment is completed prior in point of time, and his assessment is an element of finality, it is a natural consequence flowing therefrom that the Department does not get any permission to go behind it for the purpose of scrutinising the procedure, for finding out faults in regard thereto, the sole object of which is to justify the subsequent action taken by the Department. These are in fact the normal consequences that flow from the principle of finality. This principle especially emerges from three circulars and has established into a settled practice, any time a deviation therefrom cannot be permitted, even on the ground of a mistake with rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble trusts where the investors name and beneficial interest are not explicitly known on the date of its creation- such information becoming available only when the funds starts accepting contribution from the investors, have to be treated as falling within Sec.164(1) of the Act and the fund should be taxed in respect of the income received on behalf of the beneficiaries at the maximum marginal rate. 73. The reliance placed on the aforesaid circular, in our view, will not be of any use for the reason that the said Circular was not in force at the relevant AY when the assessment was made by the AO on the present Assessee. Circulars not in force in the relevant Assessment year cannot be applied as held by the Hon'ble Bombay High Court in the case of BASF (India) Ltd. & Anr. vs. W. Hasan, CIT & Ors. 280 ITR 136 (Bom). The decision of the Hon'ble Supreme in the case of Ch. Atchaiah (supra) on which the AO placed reliance in making assessment on the Assessee in our view is not applicable to the facts of the present case. In the said decision the status of the Assessee as that of an AOP was not disputed but it was argued that the ITO had option to assess either the AOP or the ind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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