ISARC-14/2010-11 TRUST,MUMBAI vs ITO 23(1)(2), MUMBAI

Income Tax Appellate Tribunal, “C”, BENCH

Before: SHRI M.BALAGANESH, AM & SHRI AMARJIT SINGH, JM

For Appellant: Shri Vipul Joshi & Shri Shubham

For Respondent: Shri Mallikarjun Utture, Shri Vipul Joshi & Shri Shubham

Hearing: 08/08/2019Pronounced: 04/09/2019

आदेश / O R D E R PER BENCH: These cross appeals in ITA No.3456/Mum/2017, ITA No.3457/Mum/2017, 3458/Mum/2017, ITA No.2705/Mum/2017 for A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-32, Mumbai in appeals Nos. CIT(A)-32/IT-219/23(1)(2)15- 16, CIT(A)-32/IT-211/23(1)(2)15-16, CIT(A)-32/IT208/23(1)(2)15-16, CIT(A)-32/IT-193/23(1)(2)14-15 & CIT(A)-32/IT-210/23(1)(2)15-16, respectively dated 08/02/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 24/03/2015 by the ld. Income Tax Officer-

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23(1)(2), Mumbai (hereinafter referred to as ld. AO). Since identical issues are involved in these appeals, they were heard together and are being disposed off by this consolidate order, for the sake of convenience.

The facts of ISARC 14/2010-2011 Trust is taken as the lead case with the consent of both the parties before us and the decision rendered thereon would apply with equal force for other assessees also hereinabove, except with variance in figures.

The assessee has raised the following grounds of appeal :- Under mentioned ground of appeal are without prejudice to one another 1. The CIT (A) Mumbai 32 erred in concluding that Section 61 to 63 of Income Tax Act does not apply to this assessee and further erred in assessing the trust at MMR of 30%. 2. The CIT (A) Mumbai 32 erred in considering that the share of beneficiaries are not specific. 3. The CIT (A) Mumbai 32 erred in rejecting the status of the assessee as Trust, which is created under the guidelines of RBI and under the provision of the SARFAESI Act 2002. 4. The CIT (A) Mumbai 32 erred in recognizing the legal position of the Trust under law of the land and erred in treating the assessee Trust as an AOP. 5. The CIT (A) Mumbai 32 erred in upholding the order of the I.T.O. WD 23 (1) (2) Mumbai dt 24.03.2015 in treating the assessee Trust as an AOP. The Appellant pray for leave to add, to amend and/or alter all or any ground of appeal.”

3.1. The assessee has raised the following additional grounds of appeal :- “6. It is submitted that in the facts and the circumstances of the case, and in law, no income accrued to the appellant as the income stood diverted in

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favour of the Beneficiaries / Security Receipt Holders on account of diversion by overriding title. 7. The appellant craves leave to add, alter, delete or modify all or any of the above ground at the time of hearing”.

3.2. The revenue has raised the following grounds of appeal :- “1. a) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that the section 167B of the IT Act is applicable on the assessee instead of section 164(1) of the IT Act. b)On the facts and circumstances of the case and in law, the Ld. CIT (A) has ignored the fact that in this case investors/contributors are also the beneficiaries and at the date of creation of trust, beneficiaries were not identifiable. (c) On the facts and circumstances of the case and in law, the Ld. CIT (A) has ignored the fact of the Circular No. 13/2014, in which CBDT has clarified that the trusts which are non-charitable trusts where the investors name and beneficial interest are not explicitly known on the date of its creation - such information becoming available only when the funds starts accepting contribution from investors, have to be treated as falling within section 164 (1) of the Act and the fund should be taxed in respect of the income received on behalf of the beneficiaries at the maximum marginal rate. 2. a) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs. Rs. 1,51,74,640/- on the ground that the AO did not consider the cost of purchases of assets sold during the year. b) On the facts and circumstances of the case and in law, the Ld. CIT (A) has ignored the fact that during the assessment proceedings the assessee has failed to submit the details of cost of purchases of the assets sold even after asked by the AO. c) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that as per the guidelines of the RBI, no upside income should be recognized till the full redemption of the entire principal security receipts and ignored the fact that as per the IT Act, the assessee has to offer for taxation any income which accrues or arises or deemed to accrue or arise in India during such year. 3. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the A.O. be restored.

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The Appellant craves leave to add, delete, alter, amend and modify any or all grounds of appeal."

We find that the additional grounds raised by the assessee is only in support of the main ground already raised by the assessee that income is not taxable in the hands of the assessee. Since the additional ground raised is purely legal in nature and goes to the root of the matter, we are inclined to admit the same and take up for adjudication.

The brief facts are that the assessee is a specific trust formed under Indian Trust Act, 1882 under the guidelines of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act in short) for the benefit of holders of Security Receipts (SRs) issued by the trust. The trust is set up in accordance with Clause 3(1)(xi) read with Clause 8(1) of The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003, issued by Notification dated 23.04.2003. As per the Offer Document issued in respect of Private Placement of Security Receipts issued by ISARC 14/2010-11 Trust (i.e the assessee herein) acting through the Trustee India SME Asset Reconstruction Company Ltd (ISARC) , it is found that ISARC is registered with the RBI as a Securitisation Company and an Asset Reconstruction Company (ARC in short) , pursuant to SARFAESI. ISARC proposed to acquire the assets by raising funds for such acquisition by the issue of Security Receipts to the prospective investors, upon contribution by them to the Trust. The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 require that any Securitisation Company or Asset Reconstruction Company proposing to acquire Financial Assets through the issue of Security Receipts should set up a Trust for this

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purpose. Accordingly, ISARC has declared a Trust in respect of the Initial Trust Fund and has executed a Trust Deed for this purpose, thereby creating the ISARC 14/2010-11 Trust. The Transaction Structure reveals that all contributions made by the prospective investors shall be paid to the Trustee and shall be utilized by the Trustee to acquire the Assets or for such other purpose as may be specified in the Offer Document and the Trust Deed, which shall be held in trust for the benefit of the Security Receipt Holders. The Trustee shall acquire all rights, title and interest of the Sellers to the Assets, by executing Assignment Agreements with the Sellers and the Confirming Party. The purchase price of each of the assets, constituting the Trust Fund, is the equivalent in cash of the fair market value of such Assets (including all unpaid interest or yield accrued thereon up to but excluding the date of acquisition of the Assets by the Trustee).

5.1. ISARC floated this scheme, in order to raise funds from the prospective investors, and the proceeds of this issue were utilized to pay the purchase consideration for the Assets which have been agreed to be assigned to the Trustee by the Seller under the Assignment Agreement with ISARC as the Confirming Party. The Trust, pursuant to this scheme, issued Security Receipts to the prospective investors , representing undivided right, title and interest in the Assets acquired, and the remaining Trust Fund . The Security Receipt Holders shall receive returns on these Security Receipts, as specified in the Offer Document.

5.2. The entire process of activities carried out are as under:- a) Banks / Financial Institutions (FIs) announce sale of Non Performing Assets (NPAs) and provides a list of the financial assets which are to be sold to ARC.

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b) ARC, at its own cost, undertakes valuation, due diligence, etc. to arrive at a specified cost at which the NPAs can be acquired. c) ARC bids for acquiring NPAs after evaluating the analyzing the portfolio / NPA based on the Due Diligence report and makes an offer to the Bank / FI. d) The bank assigns the account to the highest bidder, provided the offer matches the reserve price fixed by Bank / FI. e) If offer by ARC is accepted, acquisition of NPAs can be done in two ways i.e, with or without formation of trusts : Acquisition without formation of a trust (Cash Basis) – ARC pays purchase consideration to the bank. The right of the said NPAs is vested with ARC. The NPAs acquired are shown as „Financial Assets‟ in the Balance Sheet. Any surplus amount realized i.e between the acquisition cost and the realization value is shown as profit in the Profit and Loss Statements.

Acquisition by formation of trusts (SRs Basis) –

(i) A trust is formed by a „declaration of trust‟ to acquire the NPAs from banks. (ii) Trust is set-up under Indian Trust Act, 1882 and SARFAESI. (iii) ARC acts as a Trustee of the Trust. (iv) The Trust issues offer documents to investors for subscribing to the SRs of the Trust. (v) If ARC acquires NPAs on 100% cash basis by AR, SRs are issued to ARC for the acquisition cost. (vi) ARC acquires the NPAs based on part payment of the acquisition cost, SRs are issued to ARC for the agreed part. For the balance, the seller bank receives the SRs. (vii) ARC and seller banks / FIs / QIBs subscribes SRs and pay purchase consideration to trusts, thereafter trusts pays purchase consideration to seller banks and simultaneously the NPAs are transferred by the Bank / FI to ARC by way of Assignment Agreement.

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(f) Post assignment, the assets acquired are resolved through various reovery measures like settlement with borrower, enforcement of security under SARFAESI Act, RDDBFI Act, Restructuring / Reschedulement of dues, etc. (g) As asset manager, ISARC manages and resolves the assets over a period of time. For asset management, ISARC receives management fee as an agreed % of the value of outstanding SRs. (h) The realization / recovery from resolution of the acquired NPAs are appropriated in agreed waterfall as under: (i) First to pay the expenses incurred (ii) Second to pay the accrued management fees (iii) Third to redeem the SRs (iv) Fourth to pay agreed yield, if any to SR Holders and (v) Finally, balance surplus to be shared as upside in the agreed ratio. 5.3. The details of assets taken over by each trust are as under:-

5.4. As stated above, after acquisition of financial assets, the Trust offers and then issues Security Receipts to Qualified Institutional Buyers (QIBs) as per section 7 of the SARFAESI Act. QIBs are FIs/ Insurance Companies / Banks / State Industrial Development Corporation, Trustee, SC / RC which has been granted registration u/s 3(4) of SARFAESI Act, or AMC / FII, etc. as defined in Section 2 of the SARFAESI Act. Therefore,

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all beneficiaries / investors are clearly identifiable / traceable / accountable / assessable. The details of the same are as under:-

ISARC- UBI 1/2009-10 TRUST Selling Bank : United bank of India Details of Name, Ratio and Address of Beneficiaries Name of the Beneficiaries Ratio of Beneficiaries/ Address Investments United Bank of India 95% 11, Hemanta Basu Sarant, Kolkata – 700 001 India SME Asset 5% C 11, G Block. MSME Reconstruction Company Development Centre- BKC, Limited Bandra (E)

ISARC SIDBI 2/2009-10 TRUST Selling Bank : Small Industrial Development Bank of India Name of the Beneficiaries Ratio of Beneficiaries/ Address Investments Small Industrial 95% MSME Development Centre, Development Bank of India Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 India SME Asset 5% C 11, G Block. MSME Reconstruction Company Development Centre- BKC, Limited Bandra (E)

ISARC- BOB 1/2009-10 TRUST Selling Bank : Bank of Baroda Name of the Beneficiaries Ratio of Beneficiaries/ Address Investments India SME Asset 100% C 11, G Block. MSME Reconstruction Company Development Centre- BKC, Limited Bandra (E)

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ISARC-14/2010-11/ TRUST Selling Bank : UCO Name of the Beneficiaries Ratio of Beneficiaries Address /Investments India SME Asset 100% C 11, G Block. MSME Reconstruction Company Development Centre- BKC, Limited Bandra (E)

ISARC- 12/2010-11 TRUST Selling Bank : UCO Name of the Beneficiaries Ratio of Address Beneficiaries/Investments India SME Asset 100% C 11, G Block. MSME Reconstruction Company Development Centre- BKC, Limited Bandra (E)

5.5. The details of assignment deed executed in favour of each trust , date of issue of offer document, date of issue of Security Receipts , amounts received from Security Receipt Holders and amounts paid to Selling Banks are as under:-

Name of Trust Trust Deed Assignment Offer SR Issue Amount received from SRH Amount paid Deed Document Date to selling bank ISARC Others ISARC- 30.03.2011 26.05.2011 31.03.2011 31.03.2011 05,31,09,000 - 5,31,09,000 14/2010-11/ 30.03.2011 30.03.2011 TRUST 01.06.2011 01.06.2011 16.06.2011 14.07.2011 14.07.2011 ISARC- 30,03.2011 31.03.2011 31.03.2011 31.03.2011 6,97,80,000 - 6,97,80,000 13.06.2011 10.03.2011 30.03.2011 12/2010-11 TRUST

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ISARC 31.03.2010 15.04.2010 31.03.2010 31.03.2010 19,53,35,000 8,61,65,000 28,15,00,000 16.04.2010 31.03.2010 31.03.2010 31.03.2010 SIDB1 2/2009-10 16.04.2010 TRUST 23.04.2010 03.05.2010 03.05.2010 03.05.2010 03.05.2010 04.05.2010 05.05.2010 07.05.2010 28.05.2010 03.06.2010 29.03.2011 ISARC- UBI 14.09.2009 17.09.2009 17.09.2009 2,77,60,000 8,30,61,000 11,08,21,000 1/2009-10 14.09.2009 14.09.2009 14.09.2009 TRUST ISARC- BOB 29.03.2010 23.04.2010 5,45,57,000 - 5,45,57,000 04.05.2010 29.03.2010 29.03.2010 1/2009-10 TRUST 05.05.2010 14.05.2010 28.05.2010

5.6. The assessee Trust (i.e ISARC -14/2010-11 Trust) acquired 16 NPA accounts of Seller (i.e UCO Bank) for a lumpsum consideration of Rs 5,31,09,000/-. The Trust issued Security Receipts to ISARC, who is 100% investor in the Trust.

The assessee trust offered Nil income for the Asst Year 2012-13 in its computation of total income with the following note attached thereon:-

“Trust is set up under Indian Trust Act, 1882 and SARFAESI Act by India SME Asset Reconstruction Company Limited, a company duly registered under section 3 by Reserve Bank of India under SARFAESI Act. It is also the Trustee of the Trust. The object of the Trust is acquisition of non- performing assets / distressed financial assets for the purpose of reconstruction and realization. The investors in Security Receipts (SR) issued by the Trust have invested the amounts which transfer is revocable under the provisions of the Trust Deed and the Offer Document. In view of this, under the provisions of section 61 of the Income Tax Act, 1961, income / loss of the Trust is includible in the total income of the

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transferors i.e investors in Security Receipts. The realization from the non-performing / stressed assets is first utilized for redeeming the Security Receipts . Amount realized in excess of amount of Security Receipts will be recognized as income. During the year, the excess of expenditure over income amounted to Rs 14,22,346/- . This has been allocated to the investors in Security Receipts in proportion to their investment i.e revocable transfer made by them. Accordingly, the Trust has filed Nil return.” 6.1. The assessee Trust also reflected the same under the head ‘Profits and Gains of Business and Profession ‘ as under:-

Net Profit as per Profit & Loss Account -1422346 Add: Items disallowable / considered separately - Expenses related to Exempted income 1422346 --------------- Taxable Business Income NIL ---------------

6.2. The financial statements of ISARC -14/ 2010-11 Trust (i.e assessee trust) as at 31.3.2012 is as under:- ISARC-14/2010-11 Trust Balance Sheet as at 31st March, 2012 Amount (In Rs.) LIABILITIES AS AT AS AT ASSETS AS At As At 31.03.2012 31.03.2011 31.03.201 31.03.2012 CAPITAL FUND Financial 39,385,559 53,334,086 Assets (Sch 2) Corpus Fund Bank Balance 10,108 {Security Receipts) (Sen 1) ISARC Ltd. 40,527,880 53,109,000 (53109 Security Receipts of '763/- each) (P.Y.53109 Security Receipts of 1,000/- Each) Unsecured Loan 46,572 .

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ISARC CURRENT 18,637 6,881 Excess Of 1,445,772 23,426 LIABILITIES: Expenditure over Income Sundry creditors Audit fees payable 23,596 16,545 „ TDS Payable 194J 23,594 ' Expenses Payable 201,160 225,086 TOTAL : 40,841,439 53,357,512 TOTAL 40,841,439 53,357,512 ISARC-14/2010-11 Trust Income and Expenditure Account for the Year ended 31st March 2012

Particulars Amount Amount Particulars Amount Amount 31.03.2012 31.03.2011 To Management Fees 1,050,415 6,881 By Excess To Audit Fees 23,596 16,545 of To Professional Fees 74,074 Expenditure 1,422,346 23,426 To Conveyance 23,452 over income To Travelling Expenses 231,687 To Miscellaneous Expenses 19,122 TOTAL 1,422,346 23,426 TOTAL 1,422,346 23,426

SR Position As on 31st March 2012 Particulars SR’s No. of SR NAV Per SR SR Amount % (Amount in Rs.) 2011-12 2010-11 2011- 2010-11 2011-12 2010-11 12 Opening Balance 53,109 53,109 1,000 1,000 53,109,000 53,109,000 Less: Partial 53,109 - 237 - 12,581,120 - Redemption during the year Closing Balance 100 53,109 53,109 763 1,000 40,527,880 53,109,000

Balance of Financial Asset as at 31st March 2012 (F.Y. 2011-12) (Amount in Rs) Particulars AS AT AS AT 31.03.2012 31.03.2011

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Opening Balance of Financial Asset 53,334,086 - Add Purchase of Financial Assets - 53,334,086 Acquisition Expenses during year 2,627,751 - Commission on Recovery 20,708 - 55,982,545 53,334,086 Less Receipt / Recovery during the year 16,596,986

Closing Balance of Financial Assets 39,385,559 53,334,086 6.3. In the Significant Accounting Policies and Notes to the Financial Statements of the assessee trust as at 31.3.2012 with regard to revenue recognition is as under:- A. Significant Accounting Policies 3. Revenue Recognition a) Income on realization of financial assets is recognized on realization of entire block of financial assets. b) Interest income on bank deposit is recognized on accrual basis.

B. Notes to the Financial Statements

Trust is set-up under Indian Trust Act, 1882 and SARFAESI Act by India SME Asset Reconstruction Company Limited, a company duly registered under section 3 by Reserve Bank of India under SARFAESI Act. It is also the Trustee of the Trust. The object of the Trust is acquisition of non-performing assets/ distressed financial assets for the purpose of reconstruction and realization. 2. The investors in Security Receipts issued by the Trust have invested the amounts which transfer is revocable under the provisions of the Trust Deed and the Offer Document. In view of this, under the provisions of section 61 of the Income Tax Act, 1961 income / loss of the Trust is includible in the total income of the transferor‟s i.e investors in Security Receipts.

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The realization from the non-performing / stressed assets is first utilized for redeeming the Security Receipts. Amount realized in excess of amount of Security Receipts will be recognized as income. During the year, the excess of expenditure over income amounted to Rs 14,28,751/- . This has been allocated to the investors in Security Receipts in proportion to their investment i.e revocable transfer made by them. Accordingly, the Trust has filed nil return.

6.4. The above notes to the financial statements is also endorsed by the tax auditor in Question No. 7 to Form 3CD , wherein it had been specifically stated that the investors in Security Receipts issued by the Trust have invested the amounts which is a revocable transfer under the provisions of Trust Deed and Offer Document and accordingly, as per section 61 of the Income Tax Act, 1961, the income / loss of the Trust is includible in the total income of the investors in Security Receipts and not in the hands of the assessee trust.

The assessee submitted before the ld AO the following documents and submissions :-

a) Copy of Trust Deed b) Copy of financial statements for Asst Years 2011-12 & 2012-13 together with the computation of total income thereon. c) Brief history of the activity carried out by the trust. d) Details of NPAs taken over by the trust. e) Details of Name and address of Beneficiaries of the trust. f) Specific reasoning for non-taxability of income of the trust since the shares of beneficiaries are known and accordingly the same is taxable only in their hands and not in the hands of the trust. g) Submission that no interest is received or paid during the year. h) Copy of Bank Statement and Bank Book.

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i) Specific submission that assessee trust is only a pass through entity and as such the receipt is not at all an income of the trust. j) Specific submission that since the beneficiaries of the Trust are definite and identifiable with definite shares, the question of making the trust liable for tax, does not arise. The assessee submitted that it being a specific trust with specified shares of each beneficiary, the beneficiaries are liable to income tax for the gains made and not the assessee. k) Details of income tax assessment particulars together with the PAN of the beneficiaries. l) The assessee requested the ld AO to make enquiries with the beneficiaries of the assessee trust, as to whether they had declared income in their returns or not with regard to the transactions with the assessee trust. m) The assessee again reiterated that India SME Asset Reconstruction Company Ltd is the 100% beneficiary of the assessee trust. n) The assessee furnished the Guidelines issued by Reserve Bank of India under SARFAESI Act.

The ld AO observed that the assessee has declared itself as a Private Trust created through a Trust Deed dated 30.3.2011 by its Trustee ISARC. The ld AO observed that as per the deed of declaration of trust, ISARC has been appointed as a Settlor as well as Trustee. The beneficiaries in this Trust are the various QIBs / persons who contributed funds in the trust. The ld AO observed that as per the provisions of Indian Trust Act, 1882 , the fundamental principle of a trust is that the Trustees of the Trust act in a fiduciary capacity for the benefit of the beneficaries. In an ideal condition Trusts are created by a Settlor and the Settlor ought to contribute its assets / property in the Trust called the Trust Property for the benefits of the persons, referred to as the

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beneficiaries. Here there is no trust property to which the trustee needs to manage. A trustee is appointed to manage the affairs of the trust. Thus in the case of a real trust, the Settlor, Trustee and the beneficiaries would never be the same persons. In the instant case, the settler and the beneficiaries are the same and identical. This so called trust has been created for the sole motive to the benefit of the settler / contributor. The ld AO observed that the investors comprising of two or more persons had come together for contribution of sufficient funds into an entity in order to invest in the specific entities with a sole intention to earn profits and accordingly the said entity should be construed as an ‘Association of Persons (AOP)’ and not Trust. Hence the ld AO observed that the assessee is not entitled for exemption from tax.

8.1. The ld AO observed that the trust created herein is a special purpose vehicle for doing commercial transactions and further observed that the trust is not a revocable trust within the meaning of sections 61 to 63 of the Income Tax Act. Accordingly, the ld AO invoked the provisions of section 161(1A) of the Act by treating the assessee as an AOP as against the status of ‘Trust’ claimed by the assessee. The ld AO observed that merely because the contributors had paid taxes in their returns with regard to the subject mentioned transactions with the assessee trust cannot exonerate the assessee trust from its taxation. The ld AO further observed that the assessee had not shown that the income earned by the beneficiaries have been offered for taxation by each of the beneficiaries in their respective returns of income at the correct rates.

8.2. The ld AO summarized his various observations in para 8 of his order as under:- a)Whereas in the case of the trust , settler , contributor and beneficiaries, all have to be independent and distinct. In the case of the assessee, the

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contributors are the beneficiaries themselves, therefore, the assessee cannot be treated as a trust, but as an AOP having 19 members in the form of QIBs and financial institution. b) After its creation, the so-called trust entered into contribution assignment through offer document dated 30.03.2011 for the sole purpose of taking NPAs for sale at a profit. Such an entity can be at best be classified as an AOP created jointly by several persons for earning profits. c) Capital contribution is a revocable transfer by the transferors, but the income arising out of the activities of the fund is an ascertained income and the contributors have no control over it, and in the strict sense of the terms, the provisions of section 61 & 63 of the Act are not applicable to the assessee‟s case. d) The Clause relied upon by the assessee makes it clear that individual contributors cannot revoke their contribution on their own and revocation can occur only if the contributors holding 75% of the units consent together, then only can the contributions be revoked. Such restrictions point out to the fact that the entity is not a „revocable trust‟. The members lack any direct power or revocation under the instrument of transfer. e) Any claim of assessee to the effect that the income has been taxed in the hand of the beneficiaries would not help. Income has to be taxed in the right hands, at the right rates of taxation. The sums earned by the assessee on account of various investment/ activities has been shown as its income, therefore, it is rightly and appropriately taxable in its own hands and the trust is legally bound to include in the same in the computation of its income.

8.3. With these observations, the ld AO treated the gains in the hands of the assessee by treating it as AOP and as per section 161(1A) of the Act taxed the gains at maximum marginal rate in the sum of Rs 1,51,74,640/- under the head ‘Income from Business and Profession’.

The assessee reiterated the various submissions made as above before the ld CITA. It was specifically pleaded before the ld CITA with facts and figures as under:-

(1) Purchase Consideration Rs 5,31,09,000/-

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(2) Realisation till AY 2012-13 Rs 1,65,96,986/- (3) Expenses for AY 2012-13 Rs 14,22,346/- (4) Expenses till AY 2011-12 Rs 23,426/- (5) Realisation net off expenses for AY 2012-13 [ (2) – (3) ] Rs 1,51,74,640/- (6) Realisation net off total expenses till AY 2012-13 [ (2) – (3)- (4) ] Rs 1,51,51,214/- (7) Excess / (shortfall) recovery over purchase Consideration till AY 2012-13 [ (6) – (1) ] (Rs 3,79,57,786/-)

It was pleaded that the assessee trust had a shortfall in recovery of Rs 3,79,57,786/- till Asst Year 2012-13. Instead of taking this figure into consideration, the ld AO had wrongly taken the figure mentioned at serial number 5 above i.e Rs 1,51,74,640/-. It was pleaded that there was no income during Asst Year 2012-13 which could be chargeable to tax.

9.1. The ld CITA reiterated the observations of the ld AO and held that the ld AO was right in treating the assessee as an AOP and not a trust. The ld CITA observed that the provisions of section 164 of the Act cannot be applied in the present case in as much as taxability of AOP are governed by the provisions of section 167B of the Act. He observed that as per section 167B of the Act, where shares of members in AOP is indeterminate or unknown, in which case the tax is levied at maximum marginal rate. On the other hands, where the share of members in AOP is determinate or known, such income is computed in the hands of members of AOP as per provisions of section 67A of the Act. In the present case, the assessee has explained the basis of distribution of income as under:- “ The Trust is not expected to retain the sales proceeds or the amounts recovered from NPAs, but distribute the same as per agreed priorities

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mentioned above, i.e for meeting expenses, payment of management fee, redemption of SRs, and distribution of surplus if any as profit in the form of „yield‟ or „upside‟ to the SR holders pro-rata of their holdings. Thus the Trust is never left with any funds after distribution.”

The ld CITA observed that the above basis of distribution of income cannot tantamount to the share of members to be determinate or known. The SR holders i.e banks / FIs who sell NPAs to the assessee in auction are allotted the SRs in their capacity as creditors, and not in the form of their capital contribution. Hence, any upside given to such SR holders cannot be treated as distribution of profits to AOP members. Therefore, the provisions of section 167B would apply for charge of tax in assessee’s hands.

9.2. The ld CITA however agreed with the contention of the assessee that it is eligible for deduction of purchase consideration of Rs 5,31,09,000/- of acquired NPAs .

9.3. The ld CITA after verification of RBI Circular No. RBI/2013-14/571 DNBS(PD) CC.No. 38/SCRC/26.03.001/2013-14 dated 23.04.2014, observed that the same is regarding Uniform Accounting Standards applicable to ARCs. The RBI has given the following guidelines by way of said circular :- “Revenue Recognition (i) Yield should be recognized only after the full redemption of the entire principal amount of Security Receipts. (ii) Upside income should be recognized only after full redemption of Security Receipts. (iii) Management fees may be recognized on accrual basis…….”

The ld CITA observed that though the aforesaid circular was issued by RBI after the relevant financial year, the same could be referred to understand the guiding principle for ARCs for revenue recognition. He

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held that ARCs as per the aforesaid circular are supposed to recognize upside income only after full redemption of Security Receipts and since in the present case, the redemption of relevant SRs had not taken place till 31.03.2012, hence no upside income can be recognized in the hands of the assessee.

9.4. The ld CITA finally held that the assessee is to be treated as an AOP and there is no upside income accrued to the assessee during the year and hence the assessee’s income is to be assessed at Nil.

10.

Aggrieved by the order of the ld CITA, both the assessee as well as the revenue are in appeals before us on the grounds reproduced hereinabove.

11.

We have heard the rival submissions and perused the materials available on record. We find that the assessee is a specific trust formed under Indian Trust Act, 1882 under the guidelines of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act in short) for the benefit of holders of Security Receipts (SRs) issued by the trust. The trust is set up in accordance with Clause 3(1)(xi) read with Clause 8(1) of The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003, issued by Notification dated 23.04.2003. As per the Offer Document issued in respect of Private Placement of Security Receipts issued by ISARC 14/2010-11 Trust (i.e the assessee herein) acting through the Trustee India SME Asset Reconstruction Company Ltd (ISARC) , it is found that ISARC is registered with the RBI as a Securitisation Company and an Asset Reconstruction Company (ARC in short) , pursuant to SARFAESI. ISARC proposed to acquire the assets

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by raising funds for such acquisition by the issue of Security Receipts to the prospective investors, upon contribution by them to the Trust. The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 require that any Securitisation Company or Asset Reconstruction Company proposing to acquire Financial Assets through the issue of Security Receipts should set up a Trust for this purpose. Accordingly, ISARC has declared a Trust in respect of the Initial Trust Fund and has executed a Trust Deed for this purpose, thereby creating the ISARC 14/2010-11 Trust.

11.1. It would be pertinent to reiterate the entire process of activities carried out as under for better clarity :- a) Banks / Financial Institutions (FIs) announce sale of Non Performing Assets (NPAs) and provides a list of the financial assets which are to be sold to ARC. b) ARC, at its own cost, undertakes valuation, due diligence, etc. to arrive at a specified cost at which the NPAs can be acquired. c) ARC bids for acquiring NPAs after evaluating the analyzing the portfolio / NPA based on the Due Diligence report and makes an offer to the Bank / FI. d) The bank assigns the account to the highest bidder, provided the offer matches the reserve price fixed by Bank / FI. e) If offer by ARC is accepted, acquisition of NPAs can be done in two ways i.e, with or without formation of trusts : Acquisition by formation of trusts (SRs Basis) –

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(v) If ARC acquires NPAs on 100% cash basis by AR, SRs are issued to ARC for the acquisition cost. (vi) ARC acquires the NPAs based on part payment of the acquisition cost, SRs are issued to ARC for the agreed part. For the balance, the seller bank receives the SRs. (vii) ARC and seller banks / FIs / QIBs subscribes SRs and pay purchase consideration to trusts, thereafter trusts pays purchase consideration to seller banks and simultaneously the NPAs are transferred by the Bank / FI to ARC by way of Assignment Agreement. (f) Post assignment, the assets acquired are resolved through various reovery measures like settlement with borrower, enforcement of security under SARFAESI Act, RDDBFI Act, Restructuring / Reschedulement of dues, etc. (g) As asset manager, ISARC manages and resolves the assets over a period of time. For asset management, ISARC receives management fee as an agreed % of the value of outstanding SRs. (h) The realization / recovery from resolution of the acquired NPAs are appropriated in agreed waterfall as under: (i) First to pay the expenses incurred (ii) Second to pay the accrued management fees (iii) Third to redeem the SRs (iv) Fourth to pay agreed yield, if any to SR Holders and (v) Finally, balance surplus to be shared as upside in the agreed ratio.

11.1.1. The process of activities carried out as detailed hereinabove are not in dispute. We find from the Trust Deed and its various clauses together with the process of activities carried out as detailed above that the assessee trust and ISARC are two different entities. Thus it could be safely concluded that the assessee cannot be treated as an AOP and is an independent trust formed for a specific purpose as detailed hereinabove.

11.2. We find that the predominant object of the trust is acquisition of non-performing assets / distressed financial assets for the purpose of

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reconstruction and realisation thereon. We find that the assessee trust is created by an ARC under the guidance of Reserve Bank of India and the trust is the Special Purpose Vehicle permitted under the guidelines of RBI and SARFAESI Act to address the issues of non-performing assets /distressed assets faced by banks. Hence the entire observation made by the ld AO that the trust was created as a colourable device to evade tax is to be ignored as there is no malign intent in the minds of the assessee trust herein, in as much as the assessee was created pursuant to statutory guidelines and statutory Acts.

11.3. The next issue to be decided as to whether the Trust is a revocable trust or not. In this regard, it would be pertinent to reproduce the following Clauses in the Trust Deed :-

a) The term ‘Contributions’ is defined in the Trust Deed as under:- Contributions means, collectively, the contributions paid to the Trust by all the Security Receipt Holders, from time to time, in accordance with the terms and provisions of the Offer Documents issued by the Trust for this purpose, such contributions being revocable in accordance with the terms set forth herein and Contribution means individually each of such revocable contributions, paid by each Security Receipt Holder to the Trust, in accordance with the relevant Offer Document.

b) The term ‘Offer Document’ is defined in the Trust Deed as under:- Offer Document means an ofer document(s) issued by the Trustee, from time to time, pursuant to which the Trustee proposes to issue Security Receipts to Qualified Institutional Buyers, by way of private placement, in accordance with this Deed, on the terms and conditions contained in such offer document and in this Deed.

c) The term ‘Security Receipt Holders’ is defined in the Trust Deed as under:- Security Receipt Holders means the holders, from time to time, of the Security Receipts issued by the Trustee pursuant to this Deed and the

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relevant Offer Document and includes the Original Security Receipt Holders and the New Security Receipt Holders.

d) The term ‘Transaction Documents’ is defined in the Trust Deed as under:- Transaction Documents means this Deed, the Assignment Agreements, the relevant offer documents and any other documents that are executed by or in favour of the Trustee, in its capacity at Trustee.

e) The term ‘Trust’ is defined in the Trust Deed as under:- Trust means the trust declared, and accepted by the Trustee, pursuant to the terms and conditions contained in this Deed.

f) The term ‘Trust Account’ is defined in the Trust Deed as under:- Trust Account means the bank account established by the Trustee in accordance with Section 2.4 (Trust Account) below.

g) The term ‘Trust Fund’ is defined in the Trust Deed as under:- Trust Fund means the Initial Trust Fund, the Contributions, the Loans and other Financial Assets relating to the Borrower acquired by the Trust from time to time, the Trust Account and all sub accounts of the same, all investments of the Trust , all income and realizations including any Resolution Services Revenue and any other assets or property of the Trust.

Clause 2.1. Declaration of Trust (a) The Declarant hereby declares, agrees, assures and confirms that the Declarant shall hereinafter HAVE AND HOLD a sum of Rs 1000/- (Rupees One thousand only) (hereinafter referred to as the „Initial Trust Fund‟) together with all additions or accretions thereto and the investments representing the same IN TRUST and subject to the powers, provisions, agreements and declarations herein contained, the receipt of which the Trustee hereby admits and acknowledges and which Initial Trust Fund together with all additions or accretions thereto and the investments representing the same have to be applied and governed by the terms and conditions of this Deed and the Trustee has consented to act on the terms and conditions set out herein.

(b) The Trustee hereby further declares and confirms that the Trust Fund shall be held and possessed by the Trustee, in trust for the Security Receipt Holders upon acceptance of the Contributions from the Security Receipt

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Holders and in whose favour Security Receipts shall be issued by the Trustee.

Clause 2.2. Acceptance of Trust 2.2.1. The Trustee hereby declares and confirms that it shall hold and stand possessed of the Initial Trust Fund together with all additions or accretions thereto and the investments representing the same in trust for the benefit of the Security Receipt Holders and subject to the powers, provisions, agreements and declarations herein contained.

2.2.2.. ………………

Clause 2.3. Contributions of the Trust The Trustee may accept Contributions from time to time from investors pursuant to an Offer Document issued by the Trustee for this purpose. Upon the acceptance of such Contributions from the investors, the Trust shall issue one or more Security Receipts in favour of such investors, on the terms and conditions mentioned in the Offer Document, the Security Receipts or in any agreement that the Trustee may (in its sole discretion and in accordance with the terms of this Deed) enter into with the Security Receipt Holders in accordance with the terms and conditions stipulated in the Offer Document.

Clause 2.7. Date of Termination of the Trust 2.7.1. The Trust will stand terminated on such date as the Security Receipt Holders holding more than 75% of the outstanding Security Receipts in consultation with the Trustees may determine having regard to the maximization of returns on the Security Receipts issued pursuant to this Deed, which shall, in no event, be later than the period specified under the SARFAESI in this regard. The Trust may also be terminated by the Trustee on any prior date when all Financial Assets forming part of the Trust Fund have been liquidated/realized , including by transfer of such Financial Assets to any other trust / scheme, in accordance with the terms of this Deed.

2.7.2. ……………….

Clause 3.7. Distribution of Amounts Received by the Trustee 3.7.1. All amounts deposited in the Trust Account shall be utilized by the Trustee to make the following payments in the following order:-

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(a) Firstly, for payment of all statutory and regulatory dues, if any. (b) Secondly, for the servicing of any debt incurred by the Trust. (c ) Thirdly, for payment of Reimbursable Costs and Expenses incurred by the Trustee and Chargeable Interests thereon, in accordance with Section 3.6. (Expenses Chargeable to the Trust Fund) on the date on which the Trustee makes a claim on the Trust Fund for such Reimbursable Costs and Expenses incurred by the Trustee and Chargeable Interests thereon, and any fees or remuneration of the Trustee in accordance with Section 4.9. (Trustees Remuneration) , when due; and

(d) Finally, on each Payment Date, for payment of the amounts to be distributed amongst the Security Receipt Holders, listed in the Register of Security Receipt Holders, as on the Record Date corresponding to such Payment Date, in accordance with the terms of the respective Security Receipts, this Deed and the relevant Offer Document.

(Emphasis supplied by us) Provided that ………………

3.7.2. The Trustee shall have the power to alter the priority or manner of distribution , as set out above, if the Trustee , in its sole discretion determines such an amendment to be necessary provided that no such alteration shall be made which is , in the opinion of the Trustee, detrimental to the interests of the Security Receipt Holders. The Trustee shall intimate the Security Receipt Holders of any such alteration that it has made.

3.7.3. Notwithstanding anything mentioned above or contained in this Deed, the actual distribution of monies and the frequency of distribution of the monies to the Security Receipt Holders , is provisional on and shall entirely depend on the actual realisation of the Loans or other Financial Assets which form part of the Trust Fund. It is hereby clarified and confirmed that there shall be no obligation on the Trustee to make any payments to the Security Receipt Holders unless and until such realizations have been made by the Trustee.

Clause 5.1. Contributions 5.1.1. Upon the making of the Contribution, and within a period of ninety (90) days from the date of closure of the respective issue of Security Receipts under the relevant Offer Document, the Trustee shall credit the

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Depository Account of each Security Receipt Holder with, or issue physical certificates in the form prescribed in the relevant Offer Document, the Security Receipts as are issued to such Security Receipt Holder in accordance with the terms of this Deed and the relevant Offer Document , which shall be credited as fully paid, and the Trustee shall enter the Security Receipt Holder‟s name in the Register of Security Receipt Holders as the holder of these Security Receipts.

5.1.2. Upon the making of the Contribution, each Security Receipt Holder shall be entitled to the undivided right, title and interest in the Trust Fund evidenced by the Security Receipts issued to it, on the terms and conditions contained in the Security Receipts and the relevant Offer Document. (Emphasis provided by us)

5.1.3. The Trustee shall accept Contributions under this Deed, only from Persons who are Qualified Institutional Buyers for the purpose of SARFAESI and only upon the following conditions precedent being satisfied: (a) All the Transaction Documents are duly and validly executed ; and (b) The Trust Account is duly established.

5.1.4. This Deed shall take effect on the Commencement Date and continue in full force and effect until full redemption / extinguishment of all the Security Receipts issued pursuant to this Deed, in accordance with their terms.

Clause 5.2. Revocation of Contributions

5.2.1. The Security Receipt Holders shall be entitled to revoke the Contributions made by them, at any time during the term of this Deed, in accordance with the terms and conditions contained herein, for any reason, including but not limited to circumstances resulting from any adverse tax consequences (for either the Trust or the Security Receipt Holders) or any direction of any Statutory Authority, provided that no such revocation shall take effect unless the consent of the Security Receipt Holders holding Security Receipts representing not less than 75% of the total face value of the then outstanding Security Receipts, issued pursuant to this Deed has been obtained. In this behalf, provided that a notice of

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not less than 60 days of the intention to revoke the contribution is given to the Trustee.

5.2.2. In the event that the Trustee, at any time during the term of this Deed, faces any adverse tax consequences or upon any direction of any Statutory Authority, the Trustee shall have the right to call upon the Security Receipt Holders to revoke their Contributions and thereupon the Security Receipt Holders shall be obliged to revoke their Contributions.

5.2.3. In the event that the Contributions are revoked in terms of this Section 5.2. the Trust Fund shall automatically stand transferred and shall automatically and without any further act, deed or writing, operate as an assignment vesting the Trust Fund jointly in favour of each of the Security Receipt Holders (in proportion to their Contributions) or to any Person designated by the Security Receipt Holders in this behalf provided that the Trustee has received payment of all amounts due or accrued to the Trustee in full, in accordance with the terms of this Deed. Upon such transfer all the provisions of the relevant Financing Documents and the Assignment Agreements shall apply mutatis mutandis to the Security Receipt Holders or their designee, and the Security Receipt holders or their designee shall be entitled to all rights and remedies of the Trustee and shall be obliged to perform all its duties and obligations under the relevant Financing Documents and the Assignment Agreements, as if the Security Receipt Holders or their designee were party to the Financing Documents and the Assignment Agreeements as of the date thereof.

(Emphasis provided by us)

11.4. From the perusal of the aforesaid clauses in the Trust Deed and more particularly, the Clauses 5.2. and 5.3. together with the audited annual accounts attached with the return of income which clearly show that ISARC is the sole investor (Security Receipt Holder) in the Trust and entitled to certain rate of interest on investment, upside income and / or profit on the Security Receipts. The entire profit / (loss) of the Trust, on complete realisation of the acquired NPAs, belongs to the said investor. We find that the investors are either public sector banks or financial instituitions or RBI registered ARCs or QIBs and hence it is very easy for

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the ld AO to find out whether these investors had paid tax on their full income or not including the transactions with the assessee trust. We are inclined to appreciate the arguments of the ld AR that the investors had also paid their taxes in their respective returns and again taxing the same in the hands of the assessee trust would amount to double taxation. The Security Receipt Holders have invested in Security Receipts issued by the trust which is a revocable transfer under the provisions of the Trust Deed and Offer Document. In view of this, under the provisions of Section 61 of the Act, income / loss of the trust is includible in the total income of the Security Receipt Holders and that the trust is only a pass through entity.

11.5. We find that the assessee had explained the basis of distribution of income as under:- “ The Trust is not expected to retain the sales proceeds or the amounts recovered from NPAs, but distribute the same as per agreed priorities mentioned above, i.e for meeting expenses, payment of management fee, redemption of SRs, and distribution of surplus if any as profit in the form of „yield‟ or „upside‟ to the SR holders pro-rata of their holdings. Thus the Trust is never left with any funds after distribution.”

It is not in dispute that the full realisation of NPAs acquired by the assessee had not happened as on 31.3.2012 and that the same had happened in subsequent years. Accordingly, in the year of redemption of Security Receipts, the income / loss that is remaining, would be distributed by the assessee to its Security Receipt Holders / Beneficiaries. Hence it could be safely concluded that no income would ever accrue to the assessee as the income stood diverted in favour of the Beneficiaries / Security Receipt Holders.

11.6. We find that all the beneficiaries / investors are clearly identifiable / traceable / assessable with their respective shares being determinate and

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known. In this regard, the ld AR submitted the details of income offered by the investors in their returns of income for various years as under:- INCOME OFFERED BY ISARC ( Security Receipts Holders) FOR TAXATION YEILD BOOKED IN THE BOOKS OF ISARC FY 2012-13 Dates Amount Specified yield India SMF, Asset 2,06,09,735 Refer Annexure 1 Reconstruction Co. ltd. ISARC- UBI 1/2009- 31-12-2012 11,48,087 10 TRUST ISARC 31-12-2012 51,82,050 SIDBI 2/2009-10 31-03-2013 1,42,79,598 1,94,61.648 2,06,09,735 TRUST

- Difference

FY 20 13-1 4 Dates Amount Specified Refer Annexure 1 yield India SME Asset 5,70,85,199 Reconstruction Co. ltd. ISARC SIDBI 2/2009- 29-06-2013 1,31,46,260 10 TRUST 30-09-2013 1,49,55,802 31-12-2013 2,30,94,141 ISARC 13/2010-11 31-03-2014 20,31,743 5,32,27,946 Trust 38,57,253 5,70,85,199 Difference -

FY 20 14-1 5 Dates Amount Yield / Refer Annexure 2 Probable India SME Asset Yield Reconstruction Co. ltd. 1,65,70,760 ISARC SIDBI 2/2009- 10 TRUST 14-01-2015 4,55,212 ISARC Axis 3/2012-13 31-03-2015 1,34,651 5,89,863 Trust ISARC FA 30 25,16,724 1/2012-13 Trust 1,34,64,173 1,65,70,760 Difference Difference -

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FY 20 15-16 Dates Amount Yield / Probable India SME Asset Yield Reconstruction Co. ltd. 2,98,02,837 Refer ISARC SIDBI 2/2009-10 30-06-2015 1,31,526 Annexure 2 TRUST 31-12-2015 16,732 31-03-2016 39,020 ISARC 13/2010-11 Trust 31-03-2016 1,42,697 3,29,975 31-03-2016 1,96,09,870 31-03-2016 98,62,992 2,98,02,837

Difference -

FY 20 16-17 Dates Amount Yield / Refer Annexure 3 Probable India SME Asset Yield Reconstruction Co. 2,98,02,837 ltd. ISARC SIDBI 30-06-2016 8,90,979 2/2009-10 TRUST 30-09-2016 15,14,246 31-12-2016 2,59,346 ISARC 13/2010-11 31-03-2017 11,37,776 38,02,347 Trust 80,93,246 1,18,95,593

Difference -

FY 20 16-17 Dates Amount Yield / Probable India SME Asset Yield Reconstruction Co. ltd. ISARC SIDBI 31-12-2017 1,30,74,409 Refer Annexure 3 2/2009-10 TRUST 30-06-2017 87,73,837 4,18,300 30-09-2017 18,90,998 ISARC 13/2010-11 31-12-2017 11,18,074 Trust 31-03-2018 8,73,200 1,26,56,109 1,30,74,409

Difference -

We find from the details of income offered by ISARC (Security Receipt Holders) for taxation as detailed in the table hereinabove during the

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financial years 2012-13 to 2017-18, that those Security Receipt Holders had duly considered the gains arising from realisation of acquired NPAs as their income / gains in their respective returns in the year of redemption of Security Receipts.

11.7. In view of the aforesaid observations, it could be safely concluded that the trust is revocable and hence the observations made by the lower authorities contrary to this is dismissed.

11.8. In any case, we find that the ld AO had not even bothered to deduct the purchase consideration of acquired NPAs in the sum of Rs 5,31,09,000/- while determining the income, which had been rightly granted relief by the ld CITA.

11.9. We find that the similar issue had arose before the co-ordinate bench of Bangalore Tribunal in the case of DCIT vs Indian Advantage Fund –VII reported in (2015) 67 SOT 5 (Bangalore-Trib.) . In that case, the assessee was an investment management entity formed under the Trust Deed. The Trustee was empowered to call for contributions from the contributors which will be invested by the Trustee in accordance with the objects of the Trust. The objective of creation of the trust was to invest in certain securities called mezannine instruments and to achieve commensurate returns to the contributors. The fund collected from the contributors together with the initial corpus was to be handed over to the trustees under the provisions of the Indian Trust Act, 1882. The trust was to facilitate investment by the contributors who should be resident in India and achieve returns to such contributors. The trust deed provides that the contributors to the fund will also be its beneficiaries. The initial contribution was Rs 10,000/-. The trustee had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the Settlor as investment manager are

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set out in an investment management agreement dated 25-9-2006 between the assessee represented by the Trustee and Settlor. The Settlor as investment manager issued memorandum to prospective investors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fund enters into a separate and individual contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his capacity as investment manager. In the return of income, income was declared at Rs 1.84 crores. However, by way of note, it was mentioned that in pursuance to the provisions of sections 61 to 63 of the Act, the income has been included in the return of income of the beneficiaries and offered to tax directly by them as short term capital gain. Consequently, the effective income taxable in the hands of the Fund is to be considered as NIL. Since, the provisions of the Act mandate that the income arising from revocable transfers are to be taxed in the hands of the transferors i.e contributors, the Fund has not offered the same to tax again in its hands. The Assessing Officer taxed that assessee as an AOP levying tax at maximum marginal rate. The Commissioner (Appeals) after calling for remand report, allowed the appeal of the assessee by holding that :- a) The trust is a revocable trust b) The trust cannot be taxed as AOP c) Trust should not be subjected to tax, as the tax obligations have been discharged by the beneficiaries of the trust d) The issue of disallowance of expenditure made by the AO is not considered as the appeal is allowed on the first issue

The Department preferred appeal against this order of CITA.

Held as under:- 64. On the aspect of identification of the beneficiaries, it is the plea of the learned counsel for the Assessee that so long as the trust deed gives the details of the beneficiaries and the description of the person who is to be benefited, the beneficiaries cannot be said to be uncertain. 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

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provisions of Expln.-1 to Sec.164 of the Act regarding identification of beneficiaries has been explained to the effect that for identification of beneficiaries it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the Court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the Court or the instrument of trust or wakf deed on the date of such order, instrument or deed. We find that Clause 1.1.13 of the Trust Deed clearly lays down that beneficiaries means the Persons, each of whom have made or agreed to make contributions to the Trust in accordance with the Contribution Agreement. We are of the view that the above clause is sufficient to identify the beneficiaries.

65.

On the aspect of ascertainment of share of the beneficiaries, we find that Article 6.5 of the Trust Deed clearly specifies the manner in which the income of the Assessee is to be distributed. The said clause details formula with respect to the share of each beneficiary. As rightly contended on behalf of 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 Companies Incorporated in Maurities 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 are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate. The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time, in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed. In view of the aforesaid decision of the AAR, with which we respectfully agree, we hold that the provisions of Sec.164(1) of the Act would not be attracted in the present case. We also find that the Hon'ble Madras High Court in the case of P.Sekar Trust (supra)and Manilal Bapalal (supra)has taken a view that identity by reference to the terms of the trust deed is sufficient and it is not necessary that the beneficiaries should be specifically named in the

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deed of trust. Consequently Grounds 4 to 7 raised by the Revenue are held to be without merit.

66.

In ground No.8, the Revenue has challenged the order of the CIT(A) whereby the CIT(A) held that the Assessee cannot be assessed as an "AOP". In Ground No.9 the Revenue has contended that there is no separate status of Trust for making assessment envisaged under the Act. In this regard the definition of person u/s. 2(31) of the Act which does not specifically refer to "Trust" is being highlighted in the grounds raised by the Revenue. These grounds can be conveniently dealt with together. 68. It can thus be seen that the beneficiaries contributed their money to the Assessee and a separate agreement was entered into between the Assessee and each beneficiary. There is no inter se arrangement between one contributory/ beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the Assessee. Therefore it cannot be said that two or more 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 return of income by a "Trust" in the status other than AOP. The CBDT realised this difficulty faced by 'private discretionary trusts' having total income exceeding ten lakh rupees facing problem in filing their return of income electronically in cases where they are filing their return in the status of an individual because status of a private discretionary trust has been held in law as that of an 'individual' gave instructions 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. Ground No.9 raised by the Revenue is therefore held to be without any merit.

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11.10. We find that the ld DR placed heavy reliance on the Circular No. 13/2014 dated 28.7.2014 in support of his contentions. We find that this Circular has been duly considered in the aforesaid Bangalore tribunal decision in Para 72 of its order. Hence the reliance on the said circular does not advance the case of the revenue.

11.11. We find that the aforesaid decision of Bangalore Tribunal has been subsequently approved by the Hon’ble Karnataka High Court in the case of CIT and Another vs India Advantage Fund –VII and ICICI Emerging Sectors Fund reported in (2017) 392 ITR 209 (Kar) , wherein the question raised before the Hon’ble Karnataka High Court was as under:- "Whether, the Tribunal, on the facts and in the circumstances of the case was right in holding that the assessee trust cannot be assessed as on AOP even though the requirements of section 164(1) were not met, inasmuch as the shares of the beneficiaries were indeterminate/unknown and hence the assessing officer was justified in invoking the provisions of section 164(1) of the Act and make the assessee liable to be assessed at the maximum marginal rate in the status of AOP. Hence, it is not relevant whether the necessary ingredients for formation of an AOP are fulfilled by the assessee or not?"

Held as under:- 6. As such, in our view the matter should rest as the finding of fact for the simple reason that whether the Trust Deed provides for shares of the beneficiaries which are determinable or non-determinable would vary from facts to facts of each Trust including that of the deed of trust etc. Such finding of fact can be arrived at after interpretation of the terms and conditions of the Trust Deed as well as the other facts and circumstances which may be germane to reach the conclusion on the finding of fact. If the matter is to rest on the question of finding of fact, in our view, such question of finding of fact would be outside the scope of judicial review in the present appeals which would be limited to substantial questions of law.

10.

In our view, the contention is wholly misconceived for three reasons. One is that by no interpretative process the Explanation to Section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust deed is executed and the second reason is that the real test is the determinability of the shares of the

40 ITA No.3456/Mum/2017 and other appeals ISARC SIDBI 2/2009-10 Trust

beneficiary and is not dependent upon the date on which the trust deed was executed if one is to connect the same with the quantum. The real test is whether shares are determinable even when even or after the Trust is formed or may be in future when the Trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be shared by the beneficiaries in proportion to the investment made, any person with reasonable prudence would reach to the conclusion that the shares are determinable. Once the shares are determinable amongst the beneficiaries, it would meet with the requirement of the law, to come out from the applicability of Section 164 of the Act. 11. Under the circumstances, we cannot accept the contention of the Revenue that the shares were non-determinable or the view taken by the Tribunal is perverse. On the contrary, we do find that the view taken by the Tribunal is correct and would not call for interference so far as determinability of the shares of the beneficiaries are concerned. 12. Once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the Trustees which has already been shown in the present case. 13. Under the circumstances, in any case, it cannot be said that the Tribunal has committed error. Accordingly, the question is answered in affirmative against the Revenue and in favour of the assessee. 14. If the assessment under Section 164(1) of the Act is not maintained in the hands of the Trustees, the other question raised by the Revenue, in our view, would not arise. The examination of such questions inspite of our answer to the above referred question would only be a mere academic exercise which Court would not undertake and Court would rather decide the questions which are really required to be decided. Hence, we find that the other questions which are raised in the appeals, as such, would not arise nor would be required to be considered. 15. In view of the above, all appeals are dismissed.

11.12. We also find that the Hon’ble Jurisdictional High Court in the case of PCIT vs M/s Milestone Army Navy Trust in ITA No. 1826 of 2016 dated 27.2.2019 had subsequently followed the aforesaid decision of Hon’ble Karnataka High Court, wherein the entire order is reproduced hereunder:- 1 The Revenue is in Appeal against the order dated 23/12/2015 of the Income Tax Appellate Tribunal (in short “the Tribunal”), raising the following questions for our consideration:

41 ITA No.3456/Mum/2017 and other appeals ISARC SIDBI 2/2009-10 Trust

“( i) Whether on the facts and circumstances of the case and in Law, the Hon'ble ITAT erred in holding that the income of the assessee is taxable in the hands of contributors and not in the hands of the AOP? (ii) Whether on the facts and circumstances of the case and in Law, the Hon'ble ITAT erred in holding that activities of the assessee are not commercial in nature even though the assessee has not carried out any activity in the spirit of Trust?” 3 The Respondent Assessee is a Trust. This Appeal arises out of the income tax returns filed for the assessment year 2009-2010. Perusal of the impugned order of the Tribunal shows that while deciding the Appeal in favour of the Respondent-Assessee, the Tribunal had placed reliance on a detailed judgment of the Bangaluru Bench of Karnataka High Court in the case of M/s. India Advantage Fund VII dated 17/10/2014 in which undisputedly these questions were involved. 4 The learned counsel for the parties brought to our notice the fact that such a judgment of the Bangaluru was carried in Appeal by the Revenue before the Karnataka High Court in case of Commissioner of Income Tax and Another v/s India Advantage FundVII reported in (2017) 392 ITR 209 (Karn). The Karnataka High Court had dismissed the Appeal of the Revenue. The High Court in a detailed judgment while dismissing the Appeal of the Revenue had concluded as under :“ “11 Under the circumstances, we cannot accept the contention of the Revenue that the shares were non-determinable or the view taken by the Tribunal is perverse. On the contrary, we do find that the view taken by the Tribunal is correct and would not call for interference so far as determinability of the shares of the beneficiaries are concerned. 12 Once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the trustees which has already been shown in the present case.” 5 In the result the Appeal is dismissed.”

11.13. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that the assessee cannot be taxed as an AOP and that the shares of each beneficiaries are determinate and known and accordingly the income shall

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be taxed only in the hands of such beneficiaries and not in the hands of the assessee trust. Accordingly, the grounds raised by the assessee in this regard are allowed and grounds raised by the revenue in this regard are dismissed.

11.14. In view of our aforesaid finding, the adjudication of additional ground raised by the assessee becomes academic in nature.

11.15. In the result, the appeal of the assessee i.e ISARC-14/2010-11 Trust in ITA No. 2701/Mum/2017 is partly allowed and appeal of the revenue in ITA No. 3459/Mum/2017 is dismissed.

12.

The decision rendered hereinabove is for the assessee ISARC - 14/2010-11 Trust and the same would apply for other assessees also listed in the cause list hereinabove except with variance in figures and in the name of beneficiaries.

13.

To sum up, all the appeals of the assessee are partly allowed and all the appeals of the revenue are dismissed.

Order pronounced in the open court on this 04/09/2019

Sd/- Sd/- (AMARJIT SINGH) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 04/09/2019 KARUNA, sr.ps

43 ITA No.3456/Mum/2017 and other appeals ISARC SIDBI 2/2009-10 Trust

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. 6. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai

ISARC-14/2010-11 TRUST,MUMBAI vs. ITO 23(1)(2), MUMBAI