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TMI Blog2022 (1) TMI 1467X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. With regard to the signatory powers and bank records of the Trust Vehicle, the matter is clearly settled in the case of Yashovardhan Birla [ 2021 (10) TMI 158 - ITAT MUMBAI ] also in the matter of Kamal Galani [ 2020 (10) TMI 1077 - ITAT MUMBAI ] and Shri Jatinder Mehra [ 2021 (7) TMI 325 - ITAT DELHI ] and where they have concluded inter alia that bank accounts in foreign jurisdictions pertaining to offshore entities cannot, merely because the assessee is declared as beneficial owner for anti-money laundering, purposes be treated as belonging to the assessee. Therefore, on the basis of declaration of beneficial ownership in the bank account opening form, it cannot be concluded that the bank account belongs to the Assessee and therefore the credits to the bank account cannot be taxable in the hands of the Assessee. As not disputed that the Assessee, a resident Indian, who accepted the obligation associated with the office of trustee, arising out of an abiding familial relationship with the Settlor, which was revoked at the discretion of the Settlor six years later in 2012. AO has not brought out any evidence of the Assessee having international transactions relating to the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of beneficial ownership . In our view, the additions made u/s 68 / 69 fail the test of taxability under those sections and therefore cannot be upheld. Thus, we hold that the credit to the bank account belonging to Eagle Ridge Services Limited, an independent entity registered outside India and income as well as the assets of that company cannot be brought within the purview of income tax in India in the case of the Assessee particularly when the assessee was acting as a trustee holding one share of the company again holding the shares in the capacity of trustee. All the additions made in the capacity of holding as trustee of offshore trust and nominee shareholder are hereby deleted. Appeal filed by the assessee is allowed. - Shri S. Rifaur Rahman, Hon'ble Accountant Member And Shri Pavan Kumar Gadale, Hon'ble Judicial Member For the Assessee : Shri Freshthe Sethna Shri Mrunal Parekh Shri Hasmukh Ravaria. For the Department : S.N. Kabra. ORDER PER S. RIFAUR RAHMAN (AM) 1. The present Four appeals have been filed by the Assessee against the different orders of Learned Commissioner of Income Tax (Appeals)-49, Mumbai [hereinafter in short Ld. CIT(A) ] dated 27.09.2018 for A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al owner of Eagle Ridge Services Limited and its account 804439 and has also signed the same as authorised signatory. v. Risk Disclosure Statement sated 9.3.2006 related to Duetsche Bank account No. 804439 of Eagle ridge Services limited. The same has name and signature of Shri Vilas Waman Katre as authorised signatory. vi. Security Agreement - First Party dated 9.3.2006 related to Duetsche bank account No. 804439 of Eagle Ridge Services Limited. The same has your name and signature of Shri Vilas Waman Katre as authorised signatory. vii. Resolution of Eagle Ridge Services Limited dated 10.10.2007 wherein Shri Vilas Waman Katre is made the sole authorised signatory for account no 804439 for unlimited amount. The communication also has his name and specimen signature. viii. Board Resolution of Eagle Ridge Services Limited, having its registered office Portcullis Trust Net Chambers, P O Box 3444, Road Town , Tortola, BVI dated 9.3.2006 in respect of account number 804439. The resolution shows Shri Vilas Waman Katre authorised signatory and has his signature. Account application of Duetsche bank wherein the name of the account holder is shown as M/s Eagle Riege Services Ltd, having its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee submitted as under: - (a) The evidence brought on record does not support the view that any income has accrued to or has been received by him. (b) The bank account belongs to a company registered outside India s tax jurisdiction; and (c) there is no evidence that amounts deposited in the bank account have accrued or arisen in India or that such funds have been remitted from India, by the Assessee or anyone else. (d) The Assessee has neither infused any funds into the company or its bank account and neither has he received any funds from the account. (e) It was further clarified that the Assessee was being shown as a beneficial owner of one share of the company held by Sharecrop Ltd, only in fiduciary capacity, to one Shri Dilip Haji Sarabhai of Singapore, for familial reasons. (f) Even this beneficial ownership of the share of M/s Eagle Ridge Services Ltd was terminated on 6.2.2012, and the de facto and de jure ownership of the share was transferred to Haji Dilip Sarabhai from that date onwards. (g) The Assessee did not receive any amount from the said account, nor did the money lying in the account belong to him. (h) The Assessee hence submitted that such amount cannot be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Vilas Waman Katre. C. In Establishment of Beneficial Owners Identity for private investment Corporations of Duetsche Bank relating to account number 8044349. In the said form Shri Vilas Waman Katre has declared himself as the beneficial owner of Eagle Ridge Services Limited and its account 8044349 and has also signed the same as authorised signatory. D. In Risk Disclosure statement dated 9.3.2006 related to Duetsche bank account no 8044349 of Eagle ridge Services limited. The same has your name and signature of Shri Vilas Waman Katre as authorised signatory. E. Security Agreement - First Party dated 9.3.2006 related to Duetsche bank account No. 804439 of Eagle Ridge Services Limited. The same has assessee s name and signature of Shri Vilas Waman Katre as authorised signatory. F. The assessee has opened the bank account in A Y 2006-07. The total of transactions / credits and portfolio investment during the previous year relevant to A Y 2009-10 were in US $ the value of which in Indian currency is Rs. 67,14,88,587/-. G. Board Resolution of Eagle Ridge Services Limited shows the Assessee as authorised signatory. 9. On the basis of above reasoning, the Assessing Officer concludes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic information in order to form an opinion that income has escaped assessment before issue of notice under section 148. (d) Reopening proceedings cannot be issued based on any report of Investigation wing but same has to be done only after careful and independent enquiry and verification by the Assessing Officer. (e) Notice under section 148 cannot be issued mechanically but only after proper application of mind on the documents available. (f) The Assessing Officer is required to form prima facie opinion based on tangible material which provides the nexus or the link having reason to believe that income has escaped assessment. vi. All the documents relied upon by the Assessing Officer pertain to a private limited company viz Eagle Ridge Services Limited which is incorporated outside India. These do not establish that these documents belong the Assessee and therefore addition on the basis of these documents cannot be made. The income, if any belongs to a limited company incorporated outside India and not to the Assessee. vii. The assessing officer has at no point of time established that the said company is a fictitious company or a bogus company and the transactions although in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company for a certain period, it cannot be held that the said financial transactions of the company actually belong to the Assessee and that the income belongs to the Assessee. xi. The Assessing Officer could not produce any evidence that the Assessee had infused any funds in to M/s Eagle Ridge Services Limited or received any funds from M/s Eagle Ridge Services Limited or received any funds for transferring the alleged interest in M/s Eagle Ridge Services Limited. As submitted earlier, the role of Assessee in M/s Eagle Ridge Services Limited was fiduciary in nature, which also ceased later and the Assessee had neither invested any amount nor received any amount from it or for it. In such scenario, no amount can be taxed in the hands of Assessee under provisions of Income tax law. xii. There is no evidence with the Assessing Officer that the moneys deposited in the bank account has any nexus with the Assessee. The Assessee has income mainly from investment and salary from sources in India and has been filing annual income tax returns for more than last thirty years. The Assessing Officer has not established in any manner whatsoever that the Assessee has undertaken business operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edits in the bank account and the activities of the company. But surprisingly the assessee is not at all forthcoming on these subjects. As already mentioned the learned counsel for the assessee had appeared for hearing on 12.3.2018 and sought time to file further submissions on 1.7.2018. However, even after a lapse of six months no further submissions were filed by the learned counsel. It is therefore presumed that the learned counsel has got nothing more to submit on these issues. From the material available on record and in view of the above discussion, it can be concluded that the assessing officer was justified in making the aforementioned additions in the hands of the assessee. The same are therefore upheld. These grounds of appeal are DISMISSED 12. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal: 1.1 Ground no.1: On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals) erred in holding that notice under section 148 has been validly issued by the Assessing Officer. 1.2 Ground no.2: On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of treatment of the Appellant as the beneficial owner of the nonresident entity and/or of the income or investments of such nonresident entity. 1.7 Ground no.7: On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) has erred in not passing a speaking order in that the main ground raised by the Appellant, namely the income of a foreign company, Eagle Ridge Services in Singapore cannot be assessed in the hands of the Appellant, has been omitted to be judicially considered. 1.8 Ground no.8: On the facts and circumstances of the case and in law, the Lower Authorities erred in overlooking that escapement (s. 147/148) proceedings were not initiated against Appellant in the capacity of a representative appellant or agent of the non-resident entity, and in any event, there was no scope for taxability in the hands of the Appellant in relation to a non-resident entity forming part of an offshore trust structure settled by a nonresident. 1.9 Ground no.9: On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) erred in confirming the additions made by the Assessing Officer on basis of bank state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, in letters dated 4 November 2015 and 8 December 2015, along with supporting documents, have been overlooked by the Lower Authorities, both the AO and CIT(A). The Assessee has, in writing, specifically explained in detail that: (A)during late 2005 the Assessee was approached by Mr. Haji Dilip Sarabhai, non-resident, residing in Singapore for over 30 (thirty) years (Settlor), with a request to act as trustee, maintaining this fiduciary obligation in strict confidence, in the Settlor s best interests; (B) owing to the Assessee being well-acquainted with Mr. Haji Dilip Sarabhai, in view of a long-standing familial relationship, and on being explained that health and family concerns had led Mr. Haji Dilip Sarabhai to consider settling assets into a revocable discretionary trust, which would remain in operation for such duration as the Settlor considered appropriate, the Assessee signified consent to act as trustee, taking into consideration the fact that no restrictions exist under Indian law to a resident individual being nominated as trustee of an offshore trust established by a non-resident; (C) accordingly, in December 2005, steps were adopted by Mr. Haji Dilip Sarabhai, in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters, have at no time been received by the Assessee, and as such are matters beyond the knowledge of the Assessee and not liable to be explained by the Assessee, but in any event, there is adequate material on record in relation to revocation of the Trust settlement, including prompt steps adopted by the Settlor to induct his son Mr. Nirav Haji Sarabhai, also a non-resident and citizen of Singapore, as beneficial owner of the Trust Vehicle jointly with Mr. Haji Dilip Sarabhai [Paper Book @ page 253]. Among diverse documents constituting record of revocation of the Trust by Mr. Haji Dilip Sarabhai, acting in his capacity as Settlor, are the letter of Share Corp dated 6 February 2012 to Mr. Haji Dilip Sarabhai confirming it holds shares in the Trust Vehicle on behalf of Mr. Haji Dilip Sarabhai [Paper Book @ page 250], a Board Resolution dated 6 February 2012 of the Trust Vehicle recording that Mr. Haji Dilip Sarabhai is authorized signatory of the bank account [Paper Book @ page 251], a subsequent letter dated 13 February 2012 recording joint beneficial ownership of both Mr. Haji Dilip Sarabhai and his son Mr. Nirav Haji [Paper Book @ page 253], followed by a Board Resolution dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity of trustee, to maintain books of accounts of the Trust in India, much less to file a return of income in relation to the Trust under the Act. Offshore trust structures are governed by laws of incorporation, in this case, the laws of British Virgin Islands. In Yashovardhan Birla v. DCIT, Central Circle-4(1), WTA No. 2 to 8/Mum/2020 (AYs 2007-08 to 2013-14, order dated 24.12.2020, Para 32), it has been held that offshore trusts / entities incorporated in offshore jurisdictions are liable to be taxed in their respective offshore jurisdictions, and as such, it must follow that the Trust Vehicle is liable to tax in the country of its incorporation. 9. As to mere signatory powers and/or bank records of the Trust Vehicle maintained within the ambit of their governance frameworks, including in relation to anti-money laundering compliances, the Mumbai Bench of this Hon ble Tribunal, in the case of Yashovardhan Birla v. CIT(A)-51, Mumbai (order dated 3 September 2021 in BMA No. 01/Mum/2021, Para 39), and the Delhi Bench of the Hon ble Tribunal in ACIT v. Shri Jatinder Mehra (order dated 7 July 2021 in BMA No. 01/Del/2020, Para 37 to 41), relying inter alia upon the ruling of the Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh the (beneficial) ownership particulars of the non-resident Trust Vehicle, lay strictly upon the Revenue. Attempts by the Revenue to shift the onus upon the Assessee, including through calling upon an assessee to offer negative proof, has been denounced by the Hon ble Supreme Court and this Hon ble Tribunal. Reliance is placed on Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC) - Pg. No. 4 5; Late Shri Bhushan Lal Sawhney, through L.R / Wife Smt. Sneh Lata Sawhney v. DCIT Mumbai ITAT order dated 01.06.2021 - Para 6.1.12; Kamal Galani v. ACIT-23(3), Mumbai (Mumbai ITAT order dated 10.09.2020 in ITA Nos. 138 to 142/Mum/2019) - Para 12 14; DCIT (IT), Mumbai v. Hemant Mansukhlal Pandya [2018] 100 taxmann.com 280 (Mumbai - Trib.) - Para 17; Biren V. Savla v. ACIT [(2006) 155 Taxman 270 (Mum)] - Para 25 26. 12. Information received and/or data gathered by the Investigation Wing was bound to have been duly enquired into by the Assessing Officer, who instead failed to analyze the detailed explanation offered supported by documentary material furnished by the Assessee, and instead based the assessment order on mere conjecture and surmise, along with legally untenable conclusions. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of source or residence . Further, under s. 68, cash credits warrant explanation where an assessee is the recipient of cash credits, but not to cash credits in the hands of a third person. The framework of s. 68 requires: (i) credit of amounts in the books maintained by an assessee; (ii) credit of a sum during the previous year; and (iii) the assessee offers no explanation about the nature and source of such credit found in the books; or where the explanation offered by the assessee in the opinion of the AO is not satisfactory. Explanations about the nature and source of sum so credited can properly only be offered by the non-resident entity in whose books/bank accounts such cash credit occurs. The AO erred in purporting to invoke s. 68 qua sums lying to the credit of the bank account of a non-resident entity as cash credit in the hands of the Assessee, (para 5.7 @ pg. 137). In any event, without prejudice, the opening balance of sums lying to the credit of the non-resident entity cannot be taken into account for computing taxable income of the Assessee under s. 68. Reliance is placed on rulings in: ITO v. Meghna A. Modi (order dated 31.07.2015 in ITA No. 1611/Ahd/2011) - Para 4 5; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIAL OWNER 6. HSBC Bank (Mauritius) Ltd. v. DCIT (Int. Tax) [2017] 78 taxmann.com 174 (Mumbai - Trib.) Para 9 CORPORATE DISTINCT JURIDICAL ENTITY FROM SHAREHOLDER 7. Calcutta Tramways Co. Ltd. v. CWT [1972] 86 ITR 133 (SC) Pg. 6 OFFSHORE ENTITY TAXABLE IN JURISDICTION OF SOURCE OR RESIDENCE 8. Yashovardhan Birla v. DCIT, Central Circle-4(1), WTA No. 2 to 8/Mum/2020 (AYs 2007-08 to 2013-14, order dated 24.12.2020) Para 32 STRICT INTERPRETATION OF S. 68, 69, S. 139 - EXPLN 4/5: INCOME-TAX ACT 9. PCIT v. Aarham Softronics [2019] 102 taxmann.com 343 (SC) Para 20 SCOPE OF SECTION 69 OF INCOME-TAX ACT 10. Biren V. Savla v. ACIT, Central Circle-11 [2006] 155 TAXMAN 270 (MUM.) (MAG.) Para 25 26 ONUS ON REVENUE UNDER S. 68/69 TO ESTABLISH BENEFICIAL OWNERSHIP OF INCOME OR INVESTMENT IS THAT OF ASSESSEE 11. Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC) Pg. No. 4 5 12. Late Shri Bhushan Lal Sawhney, through his L.R / Wife Smt. Sneh Lata Sawhney v. DCIT Mumbai ITAT order dated 01.06.2021 Para 6.1.12 13. Kamal Galani v. ACIT-23(3), Mumbai (Mumbai ITAT order dated 10.09.2020 in ITA Nos. 138 to 142/Mum/2019) Para 12 14 14. DCIT (IT), Mumbai v. Hemant Mansukhlal Pandya [2018] 100 taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust Vehicle), formed part of the trust structure; the Trust was governed under the laws of BVI, and managed out of Singapore; iii. the Assessee was neither shareholder, nor director of the Trust Vehicle; iv. the Assessee accepted office of trustee in December 2005, as claimed by the assessee that it is without consideration or obligation for contribution, v. beneficial ownership of assets/corpus of the Trust remained exclusively with the beneficiaries, until revocation; vi. in consonance with the office of trustee, the Assessee was constituted as authorized signatories to the bank account of the non-resident company, which neither conferred exclusive signatory power nor vested beneficial ownership or management over the Trust Vehicle to the Assessee; vii. by virtue of revocable trust and the Settlor reserving signatory rights in parallel with directors of the nonresident company, Assessee is one among the other authorised signatories. viii. in exercise of powers of revocation reserved to the Settlor, the corpus of the Trust reverted to the Settlor in 2012 (relevant documents submitted in the paper book); ix. during late 2005, the Assessee was approached by Mr. Haji Dilip Sarabhai, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship in relation to assets of the trust, unless the trustee were among the nominated class of beneficiaries in a specific trust D. Upon the exercise of power of revocation in relation to a Trust, the trust stands extinguished. 19. At the same time, we observe that the Income Tax Act does acknowledges the existence of oral trusts within the framework of Section 160(1)(v) read with section 164A, as well as the Indian Trusts Act, 1882. Offshore trust structures are governed by laws of incorporation of the respective countries in which they are incorporated, which in this case, are governed by the laws of British Virgin Islands. The coordinate Bench in the case of Yashovardhan Birla v. DCIT, Central Circle-4(1), WTA No. 2 to 8/Mum/2020 (A.Ys 2007-08 to 2013-14, order dated 24.12.2020, Para 32), has held that offshore trusts / entities incorporated in offshore jurisdictions are liable to be taxed in their respective offshore jurisdictions. It therefore follows that the Trust Vehicle is liable to tax in the country of its incorporation. The relevant extract is reproduced below: 29. In our considered view, a private discretionary trust is created and few trustees were appointed to look a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para 13, 14), and the Delhi Bench of the Tribunal in ACIT v. Shri Jatinder Mehra (order dated 7 July 2021 in BMA No. 01/Del/2020, Para 37 to 41), and where they have concluded inter alia that bank accounts in foreign jurisdictions pertaining to offshore entities cannot, merely because the assessee is declared as beneficial owner for anti-money laundering, purposes be treated as belonging to the assessee. The extract of the decision is given below: 37. We notice from the record that the bank balance are in the name of offshore companies, trusts and joint accounts of the family members. As far as the bank balance in the offshore companies and trusts are concerned, they are separate taxable entities and the companies which are having bank accounts are governed by the trustees of the irrevocable discretionary trusts in which assessee is one of the beneficiaries. As discussed in the earlier para nos. 22 to 35, these bank accounts are running accounts of these entities and can never be the bank accounts belonging to the assessee, even though for the purpose of KYC norms and Anti Money Laundering provisions, the assessee was declared as the beneficiary, it does not take away the ownershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 24. Similar views were denounced by the coordinate bench in the case of Late Shri Bhushan Lal Sawhney, through L.R / Wife Smt. Sneh Lata Sawhney v. DCIT dated 01.06.2021; in the case of Kamal Galani v. ACIT23(3) dated 10.09.2020 in ITA Nos. 138 to 142/Mum/2019); in the case of DCIT (IT), Mumbai v. Hemant Mansukhlal Pandya [2018] 100 taxmann.com 280 (Mumbai - Trib.); Biren V. Savla v. ACIT [(2006) 155 Taxman 270 (Mum)]. 25. With regard to the nature of additions that have been made under section 56, 68 and 69 of the Income Tax Act, the Hon ble Supreme Court has clearly laid out the Principles of strict interpretation of a taxing statute in the case of PCIT v. Aarham Softronics [2019] 102 taxmann.com 343 (SC) [Para 20] and therefore arbitrary invocation of ss. 56(1), 68 and 69 of the Act cannot be resorted to. 28. The decision of this Court in Punjab Land Development and Reclamation Corpn. Ltd. v. Labour Court [Punjab Land Development and Reclamation Corpn. Ltd. v. Labour Court, (1990) 3 SCC 682 :1991 SCC (L S) 71], made the said distinction, and explained the literal rule: (SCC p. 715, para 67) 67. The literal rules of construction require the wording of the Act to be constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in relation to treatment of income in the hands of a non-resident in the absence of source or residence . 27. The structure of section 68 requires the following conditions to be fulfilled: (i) credit of amounts in the books maintained by an assessee; (ii) credit of a sum during the previous year; and (iii) the assessee offers no explanation about the nature and source of such credit found in the books; or where the explanation offered by the assessee in the opinion of the AO is not satisfactory. 28. In the case of the Assessee, the explanations about the nature and source of sum so credited can proper only be offered by the non-resident entity in whose books/bank accounts such cash credit recorded. The Assessing Officer has applied Section 68 to sums lying to the credit of the bank account of a non-resident entity as cash credit in the hands of the Assessee. The Assessee has also pointed out that in any event, without prejudice, the opening balance of sums lying to the credit of the nonresident entity cannot be taken into account for computing taxable income of the Assessee under s. 68 for assessment years 2009-10. Under Section 69 of the Act, investments not recorded in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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