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TMI Blog2017 (2) TMI 1122X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and has no connection to this issue. The Income Tax Act is a self-contained Act and the AO is entitled to determine the head of income under which the income of a particular assessee is to be assessed. The decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) squarely applies to the facts of this case. The assessee's appeal on this issue is dismissed. Validity of trust - Holding the trust to be not a valid trust and consequently that section 161(l) of the Act is not applicable - whether all the transactions related to securitization are a facade worked out by the Bank and the assessee trust is not a valid trust? - Held that:- That the procedures and processes involved in the formation of a trust have been followed is not in doubt. RBI Guidelines itself contemplate the securitization process to be carried out by the originator; Yes Bank in this case. Therefore, no adverse inference can be drawn of the point strenuously put forth by the Revenue that the originator has been the guiding force of the securitization process. Most of the infirmities/defects pointed out in the documents by the Revenue is mainly on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee Trust is a revocable Trust and contribution by beneficiaries is a revocable transfer. Having held thus, it follows that the income shall be taxed in the hands of the beneficiaries, i.e. the Mutual Funds who purchase the PTCs from the assessee trust. In this view of the matter, we allow this ground of appeal No. II raised by the assessee Diversion by overriding title - assessee’s contention is that the amounts received by the assessee from Yes Bank under the Deed of Assignment dated 20th May, 2008 are diverted at source by an overriding title to the PTC holders (Mutual Funds) and therefore the amount of 21,49,72,486 /- handed over to the assessee and paid to the PTC holders in proportion to their respective investments is not income of the assessee for the A.Y. 2009-10 - Held that:- As held by the Hon'ble Apex Court in the case of CIT vs. Tollygunge Club Ltd. (1977 (3) TMI 1 - SUPREME Court ) every receipt in the hands of the assessee need not be its income and it is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax. In the case on hand, even at the initial stage, even before the money flow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed in the capacity of an ‘AOP’, and therefore there is no requirement for adjudicating this ground No. V as the same has been rendered infructuous and is accordingly dismissed. Enhancement of Income - Held that:- Para 3.5 of the Loan Agreement states that interest has to be computed on number of day basis using 365 days as a year basis. The above wordings cannot be stretched to mean that the interest has to be charged on day to day basis. Also, the Deed of Assignment under which the assessee is to receive the amount clearly provides that the assessee is entitled to receive the amounts on the 1st of the next month and to be passed on to the PTC holders in the proportion to the amount of their investments on the very next day. In view of the above clear provisions laid out in para 3.5 of the Loan Agreement and Deed of Assignment, we are of the considered view and hold that it is crystal clear that the interest for a particular month accrues on the first day of the next month as laid out in para 3.5 of the Loan Agreement and recital in the Deed of Assignment. Accordingly, ground No. VI of assessee’s appeal is allowed. Disallowance of expenses on accrual basis (if enhancement is up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust are seven Mutual Funds, namely, (1) UTI Mutual Fund, (2) SBI Mutual Fund, (3) DBS Chola Mutual Fund, (4) ICICI Prudential Mutual Fund, (5) HDFC Mutual Fund, (6) Lotus Mutual Fund and (7) Franklin Templeton Mutual Fund. The beneficial interest of these mutual funds in the trust is proportionate to their contribution in the assessee trust. 2.1.3 In the case on hand, Hindustan Petroleum Corporation Ltd. (HPCL), a Government company, proposed to raise loans for ₹ 300 crores. Based on an e-bid enquiry, Yes Bank (hereinafter referred to as 'Yes Bank'/ Originator/Seller) made the loan offer which was accepted by HDFC on 15.05.2008, to be effective from 16.05.2008 for 364 days at an interest rate of 9.18%. An Agreement for the loan was purportedly entered into between HPCL and Yes Bank on 15.05.2008, which specified that a standard format agreement shall be executed. This standard format agreement was executed on 21.05.2008, making it effective from 16.05.2008. Yes Bank entered into a Deed of Assignment dated 20.05.2008 assigning the receivables under the aforesaid loan to the Assessee for a consideration of ₹ 300,55,82,700/-. This transaction of Yes Bank assigning the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PCL shall pay the interest and loan repayment only to Yes Bank. Yes Bank, in terms of all these transactions will transfer the receivables, comprising both the loan amount and the interest thereon, to the assessee trust to be received by the mutual funds, being the beneficiaries of the assessee trust. It is in the background of these facts that the AO has held the Trust to be not genuine. Assessee's stand 2.2 The assessee filed its return of income for A.Y. 2009-10 declaring taxable income at Nil, as according to the assessee, the amounts received by the assessee from Yes Bank and in turn paid by it to the beneficiaries in proportion to their investment in PTCs as pay outs in a pre determined manner are not chargeable to tax in the hands of the assessee. During the assessment year under consideration, the assessee received an amount of ₹ 21,49,72,486/- as interest from Yes Bank and the entire proceeds were distributed to the beneficiaries of the assessee Trust, i.e. the MF beneficiaries through the PTCs, in proportion to their investment. It is the claim of the assessee that it received the interest for and on behalf of the benefit of the beneficiaries and since the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment would be made in the hands of the trustee as a single unit and tax shall be payable at maximum marginal rate in terms of section 161(1A) of the Act, because as per the A.O, Section 161(1A) of the Act overrides section 161(1) and accordingly, the fact that the income of the beneficiary mutual funds is exempt under section 10(23D) of the Act , would be of no consequence. The provision of section 161(1A) of the Act would still be applicable even if the income of the individual beneficiaries is exempt from tax. The assessment was accordingly completed u/s 143(3) of the Act, vide order dated 30.11.2011. CIT(A)'s stand 2.4.1 Aggrieved by the order of assessment for A.Y 2009-10 dated 30.11.2011, the assessee carried the matter in appeal to the CIT(A) - 30, Mumbai. The CIT(A), vide order dated 30th March, 2013, upheld the action of the AO in holding that the trust is not a valid trust and that the assessee constituted an AOP, not of eight members as held by AO, but consisting of nine members - the bank (Yes Bank), the trustee and seven mutual funds who were the beneficiaries. In support of his decision that the assessee is not a valid trust, the CIT(A) gave the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. Thus, both the assessee and the Revenue are in appeal before us against the impugned order of the CIT(A). These appeals are being disposed off in seriatum as under: - 3. Grounds of appeal of assessee in ITA No. 3986/Mum/2013 3.1 In this appeal the assessee raised the following grounds and concise grounds of appeal: - "I. Ground I: Holding the Trust to be not a valid Trust a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that the Trust is not a valid trust. b. The CIT(A) failed to appreciate and ought to have held that: i. All the essentials for the creation of a valid trust were fulfilled; ii. Provisions of sections 6 or 8 of the Indian Trust Act, 1882 have not been breached; iii. There is no violation of the provisions of section 293(1)(e) of the Companies Act, 1956; iv. The circumstances relied upon by him do not render invalid creation of the trusts by IL&FS Trust Company Ltd; v. The Settlor in the present case is empowered under its Memorandum of Association to carry on the Trusteeship business and to do all that may he essential for achieving the said object and hence it is entitled to create a trust and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made investments in the Trust individually; and ii. The fact as to whether one Mutual Fund knows which other Mutual Funds are the beneficiaries under the Trust is not decisive of the legal relationship and a mere co-investor or co-beneficiaries cannot be regarded as having formed an Association of Persons in law. c. The Appellant prays that it be held that the Appellant is not an AOP. V. Ground V: Invalidity of assessment order a. The CIT(A) having held that the AOP is constituted by Yes Bank Limited (originator), the Seven Mutual fund (PTC Holders) and IL&FS Trust Co. Ltd. ought to have quashed the assessment made by the AO on the AOP constituted by the Seven Mutual fund (PTC Holders) and IL&FS Trust Co. Ltd. b. The CIT(A) failed to appreciate that once he has come to the conclusion that the members of the AOP is not the same as what has been treated as the members of the AOP by the AO, the assessment made by the AO ought to be quashed as the said assessment is on a non existing entity. VI. Ground VI: Enhancement of income by the CIT(A) a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in enhancing the income of the Appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) erred in ruling that the Appellant is not a valid trust on the alleged ground that all the essentials for a valid trust were not fulfilled. Ground II: Holding that the Trust was not revocable a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the applicability of sections 61 to 63 of the Act to the contribution made by the Beneficiaries to the Appellant. Ground III: Diversion by overriding title without prejudice to grounds above: a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the income of the Appellant is not diverted at source to the Beneficiaries/PTC Holders on the alleged ground that an overriding title cannot be created by voluntary act of parties and, hence, not chargeable to tax in the hands of the Appellant. Ground IV: Treating the status of the appellant as "AOP" a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding the status of the Appellant as that of an "Association of Person" constituted by Yes Bank Limited, the Seven Mutual fund (Beneficiaries/PTC Holders) and L&FS Trust Co. Ltd. Ground V: Invali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Standard Assets" dated February 01, 2006. Some of the salient concepts, procedures and features of the RBI Guidelines on securitizations are outlined in the following paragraphs, as under: i) Securitization is defined as a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. ii) Securitization involves a two-stage process. In the first stage, there is a sale of single asset or pooling and sale of pool of assets to a bankruptcy remote SPV in return of an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities. iii) 'SPV' is special purpose vehicle set up during the process of securitization to which the beneficial interest in the securitized assets are sold/transferred on a without recourse basis. The SPV may be a partnership firm, a trust, or a company. iv) 'Service Provider' means a bank that carries out on behalf of the SPV (a) administrative functions relating to the cash flows of the underlying ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making or dealing in the securities issued by the SPV. 5.2 By securitizing the existing loans, the banks can free up the funds for lending without diluting equity or incurring constraints of additional deposits. Thus the banks will be able to undertake larger volumes of business using the same amount of capital. On the supply side, securitization results in growth of retail loan portfolios in Banks/NBFCs. On the demand side, the capital available with mutual funds and other institutions is put to gainful use. Now we proceed to discuss the Grounds of appeal raised by the assessee. 6. Ground No. 1 6.1 Holding the trust to be not a valid trust and consequently that section 161(l) of the Act is not applicable: (a) On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that Trust is not a valid Trust. (b) The CIT(A) failed to appreciate and ought to have held that: (i) All the essentials for creation of a valid trust were fulfilled. (ii) Provisions of section 6 or 8 of the Indian Trusts Act have not been breached. (iii) There is no violation of the provisions of section 293(1)(a) of the Companies Act, 1956. (iv) The circumstances relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's Legal Compilation Box File No. 1 ii. Sancheti Leasing Co. Ltd. vs. ITO 246 ITR 814 (Mad.) at S. No. 5 of Assessee's Legal Compilation Box File No. 1 Reliance was also placed on the decision in the case of DHFL Venture Capital Fund vs. ITO (ITAT Mum.) wherein it was held that when SEBI has granted registration to the venture capital fund, it is not open to the AO to go into the validity of the said registration as the same is not within the domain of the AO. 6.2.2 It was also submitted that the RBI Guidelines on Securitization provide that securitization can be undertaken by company, trust or firm. The assessee has undertaken the securitization as a 'trust', which is valid and which was duly reported to the RBI and the RBI has not raised any objections to the securitization. It was also submitted that the reliance placed by Revenue on the decision of the Hon'ble Supreme Court in the case of Southern Technologies vs. JCIT 320 ITR 577 (SC) too is misplaced. It was submitted that, in the quoted case, the Hon'ble Supreme Court was concerned with taxability under the Act of the provision created as per the RBI Directions, whereas in the case on hand, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial precedents cited, we are of the considered view that the AO is competent to compute the income of an assessee under a head of income, other than what was claimed by the assessee, of course, after marshalling the facts properly and furnishing proper reasons. Merely by computing the interest accrued as income of the assessee instead of non taxable as claimed,, the inter-se rights of the assessee under any other statutory framework does not get affected. There is no requirement under the Income Tax Act that the AO has to get an order of the court for income determination. The requirement u/s 281 of the Act to get a suit initiated to annul a transfer of property before effecting attachment is totally different and has no connection to this issue. The Income Tax Act is a self-contained Act and the AO is entitled to determine the head of income under which the income of a particular assessee is to be assessed. The decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (supra) squarely applies to the facts of this case. The assessee's appeal on this issue is dismissed. Now we proceed to examine the other issues raised in Ground No. I. 6.5 A corporate e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t: (a) CIT vs. Trustees of Jadi Trust 133 ITR 494 (Born.) (b) Dr. D. E. Anklesharia vs. CIT 207 ITR 1068 (Guj.) (c) CIT vs. Sinivali Trust 267 ITR 165 (Guj.) (vi) The reference by the learned CIT(A) to the decision of Pestonji Jalbhoy Chichgar vs. Jalbhoy Jehangir Chichgar 1934 AIR (Bom.) 64 is erroneous as it has no relevance to the facts of the present case. (vii) The initial contribution of ₹ 500/- is for the benefit of the initial investors who are also the beneficiaries of the Trust. Hence the conclusion of the CIT(A) that there is no beneficiary at the time of the settlement of the Trust is invalid and incorrect. (viii) Section 6 of the Trust Act inter alia provides that transfer of trust property to the trustee is pre requisite for creation of a valid trust, except when the author of the Trust is the trustee himself. 6.5.2 In view of all of the above, it was contended that it is sufficient that the Trust was settled with ₹ 500/- and the actual transfer of the said amount to the trustee was not necessary. Therefore, the finding by the CIT(A) that the trust was invalid as the initial corpus of ₹ 500/- was transferred to the account of trustee after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strongly argued that the assessee is not a valid trust. In detailed arguments, both oral and written submissions, the learned counsel for Revenue strongly relied on the documents created for the transactions that went into the securitization process to contend that the trust was only a facade, if not a farce. The submissions of Revenue as regards the mistakes in the documentation related to the securitization process are elaborately outlined therein. The sum and substance of the contentions of the Revenue regarding the mistakes infirmities are summarized as under: - (i) The assessee trust is not a valid trust. (ii) Even before the trust was formed, the loan from Yes Bank has been assigned and all the procedures/ formalities related to the securitization had been completed. Therefore, the entire securitization process is only a façade and a farce. (iii) It was the Yes Bank which has been responsible for all the transactions and has controlled all the transactions. All the other players in the process are only dummies and have only lent their name for a fee/income. (iv) There was no intention to implement the scheme of securitization as envisaged in the RBI Guidelines 6.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment. (ii) The Agreement to give the loan by Yes Bank to HPCL was executed on 15th May, 2008, which provided for a standard format agreement to be executed. Hence, it is not correct to say that the agreement was executed after the securitization process was completed. The loan agreement provides that the loan agreement would be effective from 15th May, 2008. (iii) The loan agreement refers to the Demand Promissory Note to be executed by HPCL in favour of Yes Bank. In the Trust Deed instead of mentioning "to be executed on 21 Day of May, 2008" it has been stated as "dated 21st Day of May, 2008". Merely because a clause has not been properly drafted does not mean that the document or the agreement is null and void. (iv) If the proposed trustees have made the bank opening application before the settling of the Trust knowing that the Settlor is going to be trustees, it cannot have a bearing on the validity of the Trust especially considering that the Settlor and Trustee are same in the present case. (v) RBI Guidelines itself contemplate that the securitization is to be carried out by the originator i.e. the Yes Bank. The Trust Deed refers to the trust being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset to third party investors by issuance of tradable debt securities. It is the contention of the Revenue that the assessee has executed the transaction in the reverse order i.e. they have executed the second step first and then the first step and, therefore, the assessee has breached the RBI Guidelines. It is wholly unrealistic to hold that the trust must itself first finance the securitization and then issue the PTCs to the mutual funds contributors. * All Clauses of the RBI Guidelines are required to be read in entirety. RBI Guidelines emphasize on transfer of assets from the Originator to SPV, issue of PTC by receiving contributions from the PTC holders and payment of cash by the SPV to the originator. In the present case, the transaction has happened as per the RBI Guidelines. * Firstly an agreement to assign receivables is entered into by the parties. Then the PTC are issued and contribution received by the assessee and subsequent thereto, the deed of assignment is executed by the parties. This clearly shows that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions in connection with securitization. In fact, even after all the securitization transactions, HPCL repays the loan and interest to Yes Bank only. All the other transactions have been initiated and virtually controlled by Yes Bank. In fact, it is fairly accepted by the assessee that all the transactions are initiated and regulated by the Bank, by claiming that the RBI Guidelines envisage the lender to be the Originator. 6.8.2 The main contention of Revenue is that all the transactions related to securitization are a facade worked out by the Bank and the assessee trust is not a valid trust. The bank, the assessee trust, the mutual funds beneficiaries, and trustees, have worked closely together in putting up the facade of the trust and have come together to indulge in business activities for a profit and therefore have been rightly assessed as an AOP. It was also submitted that in case the transactions related to securitization had not happened, only the lending transaction of Yes Bank remains and the interest income from the loan would have been the income of the Yes Bank and it would have got deduction of expenses incurred, including the interest paid by Yes Bank on its borrowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s first signed on 15.05.2008, which provided that the standard format agreement will be signed. The standard format agreement was signed on 21.05.2008. All the procedures and documents related to the securitization process was carried out on 20.05.2008. The insistence of Revenue that only the standard format agreement has to be reckoned and not the agreement dated 15.05.2008 does not appear to be tenable. Even assuming that the agreement dated 15.05.2008 was only in the nature of a letter of intent, it cannot be disputed that the lender, Yes Bank had full knowledge of the loan and had disbursed the amount. Therefore, it is very likely that Yes Bank had initiated the securitization process, pending signing of the standard format agreement. These are all standard documents that are signed up in such transactions. The reference to the agreement in the documents related to the securitization process needs to be understood in this perspective. Even assuming that minor infirmities exist in the documents, those can at best be characterized as procedural defects and this alone is not enough to disregard the documents totally. It is a settled principle that a legal document has to be viewed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocesses and money trail cannot be disregarded, only due to the marginal mistakes in the clauses in the documents and also the timing of signing of these documents. Accordingly we hold that the assessee Trust is a valid Trust. 6.8.8 Consequently, this portion of ground of appeal No. 1 is decided in favour of the assessee by holding the assessee to be a valid trust. 7. Ground II: Holding the trust was not a revocable trust/ contribution by beneficiaries was not a revocable transfer: 7.1 In this regard, the assessee has raised the following grounds of appeal: - a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting, the applicability of sections 61 to 63 of the Act on the ground that (i) there is no contribution by the Beneficiary to the trust and (2) it is only where through artefact arrangement, the income is shifted to other than the beneficial owner, the section would come into play. b. The CIT(A) failed to appreciate and ought to have held that: i. The Mutual Funds are the transferors of funds in the Trust and they are also the beneficiaries; and ii. Therefore, the income of the Trust ought to be charged to tax in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s remaining outstanding at that time and thereupon the assessee shall stand extinguished and revoked. 7.3.3 It was submitted that these two sections in the Trust Deed show that the assessee Trust is a revocable trust and the income of the Trust would be chargeable to tax in the hands of the Beneficiaries. It was also submitted that the contributions by the PTC holders are revocable transfer as per section 63(a)(i) of the Act, as there is a provision for retransfer of the receivables, i.e. the income as well as the contributions made by the transferor/PTC holders. Therefore, the receivables collected by the assessee are taxable in the hands of the mutual fund beneficiaries, i.e. the transferor/PTC holders as per provisions of section 61 of the Act. In this regard, reliance was placed on the decision of Hon'ble Bombay High Court in the case of Behramji Sorabji Lalkaka vs. CIT 16 ITR 301 (Bom). Reliance was also placed on the following judicial pronouncements: - (a) CIT vs. Jitendra Nath Mallick 50 ITR 313 (Cal.) (b) Gadi Cheluvaraya Chetty vs. CIT 150 ITR 60 (Kar.) (c) K. Subramania Pillai vs. Agricultural ITO 53 ITR 764 (Mad.) (d) Jyotendrasinhji vs. S. I. Tripathi and Othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the transfer revocable has actually taken place. Reliance for this proposition was placed on, inter alia, the decision of the Hon'ble Calcutta High Court in case of Tarunendra Nath Tagore vs. CIT 33 ITR 492 (Cal.) and few more judicial pronouncements. 7.6.1. We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the Bangalore Bench of ITAT, in the case of DCIT vs. India Advantage Fund VII (supra) has explained the principles related to Trusts and their taxation. Even though the facts of the cited case does not pertain to securitization, as pointed out by the Revenue, the principles enunciated in that decision are universally applicable and certainly to the case on hand, as the issues raised in this case are similar to that of the cited case. 7.6.2 In para 11 of the order the ITAT, Bangalore Bench has explained the scope of sections 61 to 63 of the Act related to revocable transfer, as under: - "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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 revocable transfers". According to him, if there is a direct power or revocation under the instrument of transfer there is no need to resort to the provisions of Sec.63 of the Act. 25. He next drew our attention to Article-13 of the Trust deed which reads thus:- "13 Term and termination of the Trust 13.1 Term: The term of this Indenture shall 7 (seven) years from the date of the Initial Closing (hereinafter referred to as the "Term") 13.2 Extension of term: The Trustee may extend the Term for two additional periods of one year each upon the prior recommendation of the investment Manager and the approval of 75% of the Contributors. 13.3 Pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arry 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 the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to carry out the object should not involve an activity for profit. That is not the mandate of the newly added words. What these words require is that the object should not involve the carrying on of any activity for profit. The emphasis is on the object of general public utility and not on its accomplishment or attainment. The decisions of the Kerala and A.P. High Courts in CIT vs. Cochin Chamber of Commerce and Industry (1973) 87 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 honour investment commitments previously made by the Fund; (ii) The Fund will continue for such period of time as may be necessary to liquidate existing investments in an orderly manner; and (iii) The Management Fee will continue to be payable until the Fund terminates based upon the total Capital Commitments without regard to any termination thereof." 29. The above power of the transferor/beneficiary to revoke the transfer though 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the trustee/representative Assessee. It was his submission that once the trust is accepted to be revocable then there is no question of assessing the transferee and it is only the transferor who can be assessed. It was his submission that Sec.61 mandates that income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as income of the transferor and therefore the assessment in the hands of the transferee/representative assessee is not proper. 33. The learned counsel for the Assessee then drew our attention to Gr. Nos. 4 to 7 raised by the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Deed also provided that in the event of death of a beneficiary what should be done. The Hon'ble High Court having regard to the terms of the trust deed, held that the deed clearly prescribes the beneficiaries and the shares they are entitled to and other terms relevant to the share of interest in the corpus on determination or termination of the trust and therefore Sec.164 was not attracted. (2) CIT Vs. Manilal Bapalal 321 ITR 322 (Mad) wherein the Hon'ble High Court had to deal with a case where the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Bangalore Bench of ITAT in India Advantage Fund - VII (supra), in our view, it emerges that: - (i) It is the power to revoke the transfer that has to be seen and not the person at whose instance such revocation can be done. (ii) The provisions of section 63 of the Act defining "revocable transfer" will apply and consequently income has to be brought to tax only in the hands of the beneficiary/transferor. iii) The section does not say the deed of transfer must confer or vest an unconditional or an exclusive power of revocation in the transferor. What emerges from out of the above discussion is that the beneficiaries need to be identifiable and the Trust Deed must contain provisions that vest the power of revocation. There is nothing in the section to read that such a power should be unconditional. As mentioned earlier, the Trust Deed and the Deed of Assignment contain clauses which indicate that the power of revocation has been granted. Incidentally, we find that these principles on revocable transfer have been followed by the Coordinate Bench of Mumbai Tribunal in the case of M/s. Milestone Army Navy Trust, ITA No. 4067/Mum/2014, dated 23/12/2015. 7.6.5 In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust Property, consisting of the Loan, Interest and other benefits, which is clear evidence that charge is created as the PTC holders have a direct interest in the property, which are the receivables from Yes Bank. Therefore, there it is a clear case of diversion at source by overriding title. The Recital A of the Deed of Assignment also states that the PTC's represent undivided interest of the holder of the PTC in the receivable. (ii) As per clause (ie) of Securities Contract (Regulation) Act, 1956, a PTC is an instrument issued by a SPV (assessee, in this case) which possesses any receivable (in Loan of Yes Bank) assigned to the assessee and acknowledging the beneficial interest of the investor (Mutual Funds) in the receivables. This indicates a direct interest of the PTC holder in the receivables which proves that in the case on hand there is a diversion of income by overriding title. (iii) As per RBI Guidelines, the counter party for the investor (PTC holders) is the receivables and not the assessee which has issued the PTC, which indicate a direct relation between the investor PTC holder and the receivables and, therefore, there is a diversion of income by overriding tit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rriding title, but one of application of the income and therefore, the income cannot be said to be diverted at source. In support of this contention, the learned Senior Counsel of Revenue referred to the 'Information Memorandum' showing the inflow and outflow of funds and the bank statements reflecting the receipts credited in the accounts of the assessee and then given to the PTC holders. Reference was also made to the return of income for A.Y. 2009-10 to argue that the assessee had added distribution to beneficiaries as a line item and the full amount of Profit before Tax was shown as distribution. On this basis, it was argued by Revenue that the assessee got the income and thereafter applied the same by making it over to the PTC holders. If it was not the income of the assessee, then the assessee should not have shown it in its return of income at all. Revenue, therefore, contended that the above facts establish it to be a case of application of income by the assessee and not a case of diversion of income by overriding title. 8.4.1 In rejoinder to the above contentions of Revenue, learned Senior Counsel for the assessee argued that merely because the interest has come to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing title on the specific wording of the document that the amount was to be paid by the assessee from the income of the assessee and therefore the cited decision is not applicable in the present case on hand. (v) CIT vs. Sunil J. Kinariwala 259 ITR 10 (SC) This decision turned on its peculiar facts and is not applicable to the case under consideration. (vi) Associated Power Co. Ltd. vs. CIT (218 ITR 195) (SC) In this case the Hon'ble Apex Court held that there was no diversion of income as the assessee is in control of the money and merely because restriction was put on use of the money could not make any difference. Since this case is factually different from that of the case on hand, it is not applicable. (vii) Vellore Electric Corpn. Ltd. vs. CIT (SC) 227 ITR 557 Follows Associated Power Co. Ltd. (viii) Performing Right Society Ltd & Another vs. CIT (SC) 106 ITR 11 In this cited case the Hon'ble Apex Court held that this was a case of application of income and not diversion of income on the peculiar facts of the case and therefore the same would not be applicable to the case on hand. (ix) CIT vs. Madras Race Club (Mad.) 255 ITR 98 The facts of the cited case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys are received by the assessee trust and then passed on to the PTC holders. As held by the Hon'ble Apex Court in the case of CIT vs. Tollygunge Club Ltd. (supra) every receipt in the hands of the assessee need not be its income and it is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax. In the case on hand, even at the initial stage, even before the money flows to the assessee, it was always clearly intended to be passed on to and only to the beneficiaries, i.e., the PTC holders in proportion to their interest in the receivables (underlying assets). Therefore, merely because the moneys flow through the assessee, it cannot be automatically inferred that it is income in the hands of the assessee. The money was always intended to be passed on to the PTC holders and therefore, it can be said that only the PTC holders had a claim on the money, if not an absolute charge. Hence, in our considered view, the principle of diversion of income at the source by overriding title is attracted in this case. In view of the above finding of fact rendered by us, we are of the considered opinion that by the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual contract. (iii) The contributors wishing to subscribe to the PTCs have to make an application to the assessee and the allotment of PTC is at the discretion of the assessee. Therefore, there can be no question of mutual funds "coming together", since even after making an application there is no certainty of being allotted a PTC. (iv) The fact that the mutual funds can transfer the PTCs would show that they have not come together to join in common purpose, but each one has individually decided to invest and can transfer the PTC's of its own accord in so far as reference to other PTC holders. On the other hand, in case of an AOP, an AOP member cannot independently transfer its shares in the AOP. As the PTCs are purchased by the PTC holders, there can be no question of an AOP, as the transactions would be separate purchase transactions between each of the mutual funds and assessee trust and there is no coming together by the mutual funds. (v) Since Yes Bank and the beneficiary Mutual Funds have no common share in the income or interest in the PTCs of the alleged AOP, the question of their constituting an AOP does not arise. (vi) It was submitted that the burden is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual funds had only to decide whether the rate of interest of 9.18% was a reasonable rate of return for their investment or not. On the issue of the activity being in the nature of business, it was submitted that in the present case, none of the attributes of trade is present. The assessee (i) receives fixed income, akin to bank interest; (ii) the assessee is holding on to the asset till maturity, with no intention what so ever to resell the asset; (iii) the interest received is immediately paid over to the contributors (Mutual Funds) as mandated in the Assignment Deed and cannot be utilised for doing any further activity. Therefore, the activity of the assessee is akin to holding debentures/bank fixed deposits and cannot be called business. 9.5 Both the parties relied on certain judicial pronouncements and tried to distinguish the judicial pronouncements relied on by the other party, on merits. 9.6.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. A common purpose or common action is a sine qua non for constitution of an AOP, to earn common income and profit. The assessee contends that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the status of the appellant as AOP is invalid. It is submitted that the assessment order holding the assessee to be an AOP is invalid, when the return of income filed by the assessee was not in the status of AOP. Assailing the action of the AO and learned CIT(A) in holding the assessee as "AOP" and assessing it in such status, the learned senior counsel of the assessee contended that the AO and learned CIT(A) do not have the jurisdiction and powers to change the characterization of the head of income of the assessee as "AOP" when the assessee has filed its return of income in the capacity of "Trust". It is submitted that the return of income for A.Y. 2009-10 was filed in Form ITR-5, which enables the following to file returns under: 1 - Firm, 2 - A local authority, 3 - cooperative bank, 4 - co-operative society, and 5 -Any other AOP / BOP, artificial juridical person (residual category). The PAN issued to the appellant and recorded in the return had the fourth letter as "T" indicating that the status was returned as "Trust". The return is signed by the Trustee ('ITCL') as "trustee of the trust". This shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contra, on the change of status of the assessee by the AO, the learned standing counsel for Revenue contends that the return must be treated as filed, i.e. in the status of AOP. It was submitted that if there was no ITR Form available for the status of Trust then the assessee should not have filed return of income. It was further contented that if the status of the trust is that of its beneficiary, then the Form applicable to beneficiary should have been filed. It was also submitted that the status of the assessee cannot be of individual, as the status of trust depends on status of beneficiary. 10.3.2 On the learned CIT(A) changing the constitution of AOP, Revenue contends that it is not open to the assessee to argue that the CIT(A) should have quashed the order. Power of CIT(A) is coterminous with that of AO. With respect to Ashok Kumar Bharati's (supra) decision, it was contended that the issue in that case was issue of jurisdiction under section 148 of the Act and has no relevance in this case". 10.4.1 In Rejoinder, the ld. Sr. Counsel for the assessee relied on the following decisions of the jurisdictional High Court wherein it has been held that a Trust is assessab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 23456003/- be deleted." 11.2.1 In the course of appellate proceedings, the learned CIT(A) observed that the interest receipts have not been accounted for as per the accrual concept, due to which the interest income accruing in March, 2009 has not been accounted for. The learned CIT(A) issued an enhancement notice and added the interest income pertaining to the period March 2 to March 31, 2009 amounting to ₹ 23,84,493/-. 11.2.2 Before us, the learned Senior Counsel for the assessee submitted that under the terms of the loan advanced by Yes Bank to HPCL, HPCL was liable to pay monthly interest on the first day of the succeeding month. Under the Deed of Assignment executed by Yes Bank in favour of the assessee, the assessee was entitled to received the inflows (interest) from Yes Bank on such 1st day of the next succeeding month. The assessee was accordingly entitled to receive relevant inflows (interest) on 1st April, 2009; being the interest for March 2009. The interest for March 2009 accrued on 1st April, 2009, as income accrues when there is a right to receive the same. The same was not treated as accrued in the relevant assessment year. However, the learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... averments by Revenue, the learned senior counsel for the assessee countered the claims of Revenue, stating that the concerned para 3.5 of the Loan Agreement has been misunderstood. It was submitted that this para only gives the basis to compute the interest and it does not say anywhere that interest would accrue on day to day basis. The import of para 3.5 which stipulated that interest was to be computed on the number of days basis using 365 days as a year basis was that interest for different months would be different depending on the number of days in month, i.e. interest for the month of January or March (31 days) will be higher than for February (28 days) or April (30 days) as opposed to equal for each month. The assessee also referred to the Deed of Assignment under which the assessee is entitled to receive the amount clearly provides that the assessee is entitled to receive the amounts on the 1st of the next month. 11.4.2 In rejoinder by the learned counsel of the assessee to the judicial pronouncements relied upon by the Revenue, submitted that the decisions in the case of Goverdhan Ltd. (supra) and Morvi Industries Ltd. (supra), relied by the Revenue have been referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of interest / return on investment payable to the PTC holders on the same basis as applied by him for charging to tax the interest income on receivables. b. The CIT(A) failed to appreciate and ought to have held that: i. Whatever income is receivable by the Trust is all payable by the Trust to the beneficiaries; and ii. There cannot be double standards for charging of income and for allowance of expense. c. The Appellant prays that if enhancement of income by way of interest on receivables is upheld, then the corresponding expense be also allowed as a deduction." 12.2 In this ground, the assessee has raised an alternate ground that if the enhancement to the income is allowed, then the corresponding outgo (expenditure) for March, 2009 be allowed. Since we have already held that the enhancement of the assessee's income on the interest income made by the learned CIT(A) is not tenable, the claim for disallowance of expenses on actual basis is now rendered infructuous, as it does not survive for consideration. The ground of appeal No. VII being infructuous is accordingly dismissed. 13. Ground No. VIII - Charge of interest under section 234B & 234C of the Act 13.1 In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the IT Rules. (2) Without prejudice to the above, the Ld. CIT(A) grossly erred in allowing deduction of ₹ 48,86,795/-, comprised in the sum of ₹ 20,61,55,310/- on the ground that the same represented premium allowable as an expense even though it formed part of total consideration of ₹ 300,55,82,700/- paid for purchasing loan of ₹ 300 crores from Yes Bank Ltd. as capital asset. (3) Without prejudice to the above, the Ld. CIT(A) grossly erred in allowing deduction of ₹ 20,12,68,515/- comprised in the sum of ₹ 20,61,55,310/- as allowable expenses as investor payouts even though the said sum represented distribution and application of accrued interest income of ₹ 23,84,28,493/- and not a sum incurred in earning the said accrued interest income and also without noting that the expenses is also disallowable u/s 40(ba) of the Act, since the CIT(A) has held the assessee as an association of person. (4) Without prejudice to the above, on the facts and in the circumstances of the case and in law, even if the trust is held to be valid, as claimed by the assessee, whether, still, is the income liable to be taxed at the maximum marginal rate, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 pronounced on 30.05.2014 examined the issue of admission of additional ground in detail vide para Nos. 3.1, 3.2 and 3.3 of the order. In paragraph No. 3.1, it is held that the power of the Tribunal to allow an additional plea/additional evidence originates from the principle that substantial justice should not suffer because of non consideration of an additional ground or an additional evidence. The Hon'ble Tribunal vide para 3.3 concluded as under: "We would like to sum up the discussion by holding that both on principle and on precedent, there is no reason why the Tribunal must be precluded from handling a point, whether of law or fact _ which relate to an assessment, which appertains to the assessee's assessment merely because nobody else had handled it before or because it had not occurred either to the assessee or to the Department to raise and urge that point at earlier stages of the proceedings. In the matter under appeal it is not the case of the DR that necessary facts for deciding the controversy involved in the additional plea are not available on record. It is also not a case where facts are to be investigated rather it/s a pure legal issue that has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h further modifications made in ink after the verification by the Assessing Officer. RA also urged that he wants to press the G. No. 2 which he had submitted as not pressed on 28th September, 2016. 8 4th October, 2016 RA urged to press G. No. 1 of the Department appeal which he had submitted as not pressed on 28th September, 2016. 9 5th October, 2016 RA filed an application dated 5th October, 2016 stating the series of different stands taken by the Revenue as set out at S. No. 1 to 8 above, annexing the consolidated grounds of department appeal. 10 25th October, 2016 RA filed a separate application dated 24th October, 2016 praying for admission of additional grounds of appeal. In the application, Department has sought admission of the Additional G. No. 3 as originally filed and not re-modified Additional G. No. 3." 16.3. At the outset of the hearing the learned senior counsel for the assessee submitted that, even assuming that the additional grounds raised by Revenue are admitted, if grounds No. II, III or IV or the assessee's appeal are decided in its favour, then the Departmental appeal will not survive for adjudication. 16.4.1 We have heard the rival contentions and p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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