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TMI Blog2015 (4) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... Deed, the Contribution Agreement and the Memorandum of private placement are identical in substance and there is no dispute on this aspect either before the Revenue authorities or before the Tribunal. Assessment of trust - applicability of Sec.164(1) - Held that:- CBDT Circular No.281 dated 22.9.1980 wherein the CBDT has explained the scope of Sec.164 with regard to stating the name 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structions in Circular No.6/2012 dated 3.8.2012 to the effect that it will not be mandatory for 'private discretionary trusts', if its total income exceeds ten lakh rupees, to electronically furnish the return of income for assessment year 2012-13. Form No.49A which was the prescribed form of application for allotment of Permanent Account Number (PAN) also did not contain a separate status “Trust” but contained a column “AOP (Trust)”. The revised Form No.49A later notified contains a column for status as “Trust”. Therefore the argument of the revenue that all“Trusts” are AOPs is not correct. If the contention of the Revenue as raised in Ground No.9 is accepted than the provisions of Sec.161(1) of the Act would become redundant. The charge to tax in the hands of the representative Assessee has to be in accordance with Sec.161(1) of the Act and therefore the status of the Assessee cannot be that of AOP In the present case, however, we are concerned with a case of assessment of representative assessee or the person in respect of whom some other person is considered as representative assessee. Sec.161(1) by implication permits assessment of either the beneficiary or the Trustee. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under different instruments of trust. These trusts were created by transfer by the author of trust a sum of ₹ 10,000/- to the Trustee as initial corpus to be applied and governed by the terms and conditions of the indenture of trust by which they were created. The trustee appointed under the deed of trust 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 set out in the trust deed which was to make investments in certain kind of securities 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2008 intimating the AO that the income of the Assessee is included in the total income of the beneficiaries and offered to tax directly by them in their return of income. A revised return of income was filed on 29.3.2010 in which the total income declared was reduced to ₹ 343,27,09,174/- with tax liability as nil claiming refund of TDS. 5. For AY 2009-10, the Assessee in ITA No.475/Bang/2013, ICICI Emerging Sectors Fund, filed return of income declaring total income of ₹ 4,30,52,648/-. Thereafter the aforesaid ROI was revised u/s.139(5) of the Act, declaring nil income and claiming a refund of ₹ 21,51,930/- towards tax deduction at source. Along with the revised ROI a letter dated 4.5.2011, intimating that the income of the Assessee is included in the total income of the beneficiaries and offered to tax directly by them in their return of income, was also filed. 6. In the Assessment of the Assessees in ITA No.177/Bang/12 and 179/Bang/12 for A.Y.08-09, the AO was of the view that the individual shares of the persons on whose behalf or for whose benefit income is received or receivable by the Assessee or part thereof are indeterminate or unknown. In this re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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. Shamaraju Trustees 56 Taxman 175 (Karn.); (4) Lakshmipat Singhania Vs. CIT 72 ITR 291 (SC). 7. The AO without discussing the facts of those cases and the ratio laid down in those decisions and as to how the facts of the Assessee s case are different from those cases, held that the cases cited are not applicable to the facts of the Assessee s case. 8. The AO also observed as follows:- It is not denied that the business was carried on by the fund on behalf of the beneficiaries of the Trust (AOP) and that considerable profits were earned from the business. The control and management of the business was in the hands of the Fund. The control and management was a unified one. The beneficiaries had joined in a common purpose and they acted jointly. When they did so, they acted on behalf of the persons who are the owners of the business. The Fund did not and could not have represented the individual interest of the various beneficiaries. If they had done so, there would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the beneficiaries. 7. The CIT (A) ought to have appreciated the fact that the shares of the beneficiaries are not distributed exactly as per the formula determinable from the trust deed rather the shares vary depending upon the amount contributed by the beneficiaries for asset management. 8. The CIT (A) erred in holding that the assessee, trust cannot be assessed as an AOP . 9. The CIT (A) ought to have appreciated the fact that Section 2(31) of the I. T. Act gives an inclusive definition for the word Person . There is no separate status of Trust envisaged in the definition of person. All the trusts are assessed on the status of AOP. This being the case, the assessment of the assessee in the status of AOP is in order. Accordingly, whatever provisions of the Act applies to AOPs will apply to the assessee also. Hence it is not relevant whether the necessary ingredients for formation of an AOP are fulfilled by the assessee or not. The assessee who is a trust is rightly assessed in the status of AOP since there is no specific status of Trust is available in Section 2(31). 10. The CIT (A) ought to have appreciated the fact that Income tax Act envisages that the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Can such objective be achieved by forming a trust? 45. Similar questions arose for consideration before the Authority for Advance Ruling in the case of XYZ, In Re 224 ITR 473 (AAR). We need to look at the facts of the said case before we set out the ruling given by the AAR. An 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 ₹ 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust deed. Indeed even institutional investors contributing to the trust, in helping the CT achieve its target of 50 million dollars can be considered as supplemental authors of the trust, the CA constituting r/w the trust deed, the instruments constituting the trust in their cases. The purposes of the 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such income were the total income of an AOP, whichever course would be more beneficial to the Revenue. 51. When the Explanation was added in 1980, the CBDT issued the following circular [see (1980) 123 ITR (St) 159] [The quotation has been taken from the Memorandum explaining the provisions of the Finance (No. 2) Bill, 1980 and not from the relevant circular, which is Circular No. 281 dt. 22nd Sept., 1980 reported in (1981) 131 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 taxwise. In order to prevent such manipulation, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct retransfer of income or assets of the settlement to the settlor or gives the settlor a right to resume power directly or indirectly over such income or asset, the settlement should be deemed to be revocable. 54. In Chapter X of the private placement memorandum issued by the investment manager inviting contribution from investors, the tax considerations in making investments as understood by them have been set out. The contents thereof in brief are that the contribution by the contributors are akin to revocable transfer u/s.61 of the Act read with Sec.63 of the Act and therefore income arising from the transfer are assessable in the hands 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e power of revocation must be at the instance of the beneficiary/transferor. The power of revocation under Clause13 of the Deed of Trust is a general power of revocation and the same would be sufficient for construing the transfer in the present case as a revocable transfer. As rightly contended by the learned counsel for the Assessee it is not necessary that the power of revocation should be at the instance of the contributors/beneficiaries/ transferor and it can be at the instance of any person either settlor, trustee, transferee or the beneficiaries. Provisions of Sec.61 of the Act do not contemplate a power of revocation only at the instance of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows: 61. The general rule as laid down in Sec. 161(1) is 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 . To the above rule, however, three exceptions have been incorporated in the Act:- (a) Under s. 161(1A), this rule of apportionment and determination of proportionate tax attributable to the beneficiary will not apply to any income earned by the trustee as profits and gains of a business. The whole of such income shall be taxed at the maximum marginal rate . A similar proviso occurs also in s. 164(1) restricting benefits where business income is involved. (b) Under s. 164(1), if the beneficiaries are not identifiable or the individual shares of the persons on whose behalf and for whose benefit the income is receivable are indeterminate or unknown, such income, again, will be taxed at the maximum marginal rate . (c) In certain other circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each beneficiary. As rightly contended on behalf of the Assessee 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. The further aspect that may require consideration in the present case is with regard to the clause in the Trust Deed which authorises addition of further contributors to the trust at different points of time in addition to initial contributors. From this clause can it be said that share income of the beneficiaries cannot be determined or known from the trust deed. On the above aspect, we find the AAR in the case of XYZ In re (supra) has considered similar clause in a trust deed with specific reference to the provisions of Sec.164(1) of the Act and has held that if the trust deed sets out expressly the manner in which the beneficiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion 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 (supra) held an AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains . The Supreme Court, however, administered the following caution: There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an AOP within the meaning of section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not''. To the above judicial exposition of what constitutes AOP, there has been a statutory rider added. The Finance Act, 2002 has inserted w.e.f. 1st April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 beneficiaries joined in a common purpose or common action and therefore the tests for considering the Assessee as AOP was satisfied. The beneficiaries have not set up the Trust. Therefore it cannot be said that the beneficiaries have come together with the object of carrying on investment in mezzanine funds which is the object of the trust. The beneficiaries are mere recipients of the income earned by the trust. They cannot therefore be regarded as an AOP. Ground No.8 raised by the Revenue is therefore held to be without any merit. 69. Another reason assigned by the AO for treating the status of the Assessee as AOP was that in the return of income filed by the Assessee the status was shown in return of income. In this regard it is not in dispute before us that the form of return of income as it existed for the relevant assessment year did not contain a clause for filing retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 regard to the merits of the situation that received finality. Similar view has been taken by the Hon ble M.P.High Court in the case of Rai Sahe Seth Ghisalal Modi Family Trust (supra) and Hon ble Bombay High Court in the case of Trustees Of Chaturbhuj Raghavji Trust (supra). 72. The Hon ble Bombay High Court in the case of Trustees of Chaturbhuj Raghavji Trust (supra) held that under sub-s. (2) of s. 41, it is permissible for the IT authorities to make direct assessment on the person on whose behalf income, profits and gains from a trust are receivable. Sec. 41 having provided for two alternative methods, namely, either to tax the income in the hands of the trustees or directly in the hands of the person on whose behalf the income was receivable und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 individual member of the AOP. The Hon ble Supreme Court held that unlike under s. 3 of the 1922 Act, the ITO did not have an option under s. 4 of the IT Act, 1961, to assess either the AOP or the individual members thereof. If the ITO has assessed a wrong person, say individual instead of AOP, he is not precluded, in contradistinction to the 1922 Act, to seek to assess the right person under the 1961 Act. The Hon ble Court made it clear that wherever such on option is given under the 1961 Act, it has been specifically provided, as in s.183 and that under the 1961 Act, tax has to be levied on the right person, irrespective of benefit to Revenue. In the present case, however, we are concerned with a case of assessment of representative assessee or the person in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical. The intimation u/s.143(1) of the Act to the extent it is modified in proceedings u/s.143(3) of the Act cannot be sustained. Therefore the intimation u/s.143(1) of the Act on passing of the order u/s.143(3) of the Act no longer survives. Therefore the order u/s.154 of the Act and further proceedings thereon are also superfluous. The appeal, therefore, has to be dismissed as infructuous and of no legal effect in view of the subsequent proceedings u/s.143(3) of the Act. Accordingly, ITA No.348/Bang/2011 is dismissed. ITA No. 347/Bang/2011 18. For AY 2008-09, the Assessee in ITA No.347/Bang/2011, ICICI Econet, Internet Technology Fund, filed return of income declaring total income of ₹ 99,50,36,467/- and tax liability of Nil. The Assessee claimed that the income of the Assessee is included in the total income of the beneficiaries and offered to tax directly by them in their return of income. The Assessee also made a request for refund of TDS of ₹ 6,93,447. The AO issued an intimation u/s.143(1) of the Act dated 30.3.2010 in which he raised a demand for taxes without considering the claim of the Assessee that the taxable income of the Assessee was nil. The Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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