INCOME TAX OFFICER WARD-22(1)(6), MUMBAI, MUMBAI vs. ARCIL ASSET RECONSTRUCTION FUND II TRUST, MUMBAI

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 liquidating/recovering/realizing the Non-Performing Assets (“NPAs”), taken over by the assessee. ARCIL is a registered with Reserve Bank of India u/s 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) as a Securitization Company and Reconstruction Company (“ARCs”). ARCs are regulated by the Reserve bank of India. Pursuant to SARFAESI Act and RBI Guidelines, ARCIL acquires financial assets that are classified as NPAs from the banks, financial institutions and housing finance companies operating in India. The concerned bank/financial institutions, which intend to transfer the financial assets to ARCs, must ensure that the same are classified as NPA in accordance with the guidelines of RBI in this regard. Accordingly, ARCIL acquires financial assets that are classified as NPAs from the banks/financial institutions. The stressed assets are acquired by ARCIL by setting up trusts and formulating schemes there under pursuant to section 7 of the SARFAESI Act and RBI guidelines. As per the assessee, the trusts are set up for the acquisition of the financial assets as per the RBI guidelines and are governed by the Indian Trust Act, 1882. Such trust accepts contributions from Security Receipts holders (“SR holders”) for acquisition of financial assets. The contributions are raised from Qualified Institutional Buyers (“QIBs”) as defined under SARFAESI Act, for which trusts issued Security Receipts to QIBs. These QIBs include Banks, Financial Institutions, Insurance Companies, ARCS, Mutual Funds, Eligible Non-Banking Finance Companies and Foreign Institutional Investors. The assessee derives income from assets reconstruction activity and handling of NPA of banks/financial institutions.

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 3. In the present appeals, the assessees filed their return of income declaring a total income at Rs. Nil. During the assessment proceedings, the assessees were asked to explain as to why the income/loss derived by the assessees should not be taxed in their hands as Association of Person (“AOP”). The assessees were also asked to establish that it is a proper Trust. The Assessing Officer (“AO”), vide orders passed under section 143(3) of the Act, did not agree with the submissions of the assessee and made addition on the basis, which is summarized by the AO as under: -

“Summary of Arguments: 1. Whereas in the case of the trust, settlor, contributor and beneficiaries, all have to be independent and distinct In the case of the assessee, the contributors are the beneficiaries themselves, therefore, the assessee cannot be treated as a trust, but as an AOP having members in the form of QUIs and, financial institution. 2. After its creation, the so-called trust entered into contribution assignment through offer document 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. 3) 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 Sections 61 & 63 of the Act are not applicable to the assessee's case. 4) 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. 5) 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.”

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 4. We find that in all the assessment orders passed u/s 143(3) of the Act, in the present appeals before us, the assessees claim was rejected by the AO by adopting basis as noted in foregoing paragraph. In appeals being ITA. No.2909/Mum./2023 and ITA. No. 3050/Mum./2023, the learned CIT(A), vide impugned order, allowed the appeal filed by the assessee by following decisions rendered by Co-ordinate Bench of the Tribunal in the cases of the Trust set-up by ARCIL pursuant to the provisions SARFAESI Act and RBI Guidelines to acquire the financial assets of the borrowers classified as NPAs. Thus, being aggrieved, the Revenue is in appeal before us.

“1. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in considering the assessee as a Trust which does not fall within the meaning of section 61 to 63 of the I.T. Act, 1961.” 2. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the assessee as a Trust, when the assessee, in principle, cannot be considered as a Trust as per the provisions of Indian Trust Act, 1882, in view of the Settlor and the Beneficiaries are the same and identical, as against the Settlor and Beneficiaries are different in an ideal Trust.” 3. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in ignoring the fact that in this case investors/ contributors are also the beneficiaries and at the date of creation of trust, beneficiaries were not identifiable.” 4. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in ignoring the fact and observations of the AO that the

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 beneficiaries are not specifically mentioned in the Trust deed and further, the beneficiaries keep changing year after year.” 5. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the assessee as Trust when the motive behind the creation of the trust is income earning asset reconstruction activity by coming together of two or more persons by way of contribution of funds with the sole intention to earn profits and accordingly such entity should be construed as an AOP and not Trust.” 6. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in arriving at conclusion that the contributories had paid taxes in their Returns with regard to the subject mentioned transactions with the assessee and hence, it is exonerated from its taxation.” 7. “On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in ignoring the findings of AO on details of income offered by beneficiaries and non-production of taxes paid and failure to establish income derived from the Trust.” 8. “On the facts and in the circumstances of the case and in law, the learned 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.” 9.“On the facts and the in the circumstances of the case and in law, the Ld, CT(A) has erred in considering that the assessee trust, setup and functioning in accordance with the mechanism of the SARFAES Act,2002 and under guidance of RBI whereas it is clear that it is a smoke screen and colourable device to evade taxes.”

“1. The learned Commissioner of Income-tax (Appeals) erred in taxing the income in the hands of the Appellant Trust at MMR instead of taxing the same in hands of the Security Receipt holders by completely ignoring the revocable nature of the determinate trust and ignoring the provisions of Section 61 to 63 of the Income Tax Act, 1961. 2. Without prejudice to the foregoing, the learned Commissioner of Income-tax (Appeals) erred in: (i) holding the Appellant Trust as an indeterminate trust ignoring the submissions made by the Appellant in this regard, and,

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 (ii) considering the Appellant Trust as an ‘AOP’ engaged in the business of securitization of debts. 3. The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of protection, preservation, and insurance expenses of Rs.76,64,883/- by ignoring the detailed submissions made by the Appellant. 4. Without prejudice to the foregoing contention, even assuming though not conceding that the income was taxable in the hands of the Appellant Trust, the learned Commissioner of Income-tax (Appeals) erred in holding that Interest Income and Other income were taxable as Income from Other Sources instead of Business Income of the Appellant Trust. 5. The learned Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in holding that the provisions of section 40(a)(ia) are applicable to the Appellant Trust, without appreciating the fact that the payments made by the Appellant Trust were in the nature of pure reimbursements. 6. Without prejudice to the foregoing contention even assuming though not conceding that the expenses were liable to be disallowed, the learned Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in holding that the entire expenditure of Rs.76,64,883/- was to be disallowed instead of the correct amount of Rs.42,167/- (being 30% of amount as reflected in clause 21(B)(ii) of the Form 3CD at Rs. 1,40,559/-).”

“5. The Assessing Officer (“AO”) vide order dated 26/12/2018 passed u/s 143(3) of the Act did not agree with the submissions of the assessee and held that in the present case, the beneficiaries in the assessee trust are the various QIBs who contributed funds in the trust and are also the beneficiaries. Thus, in the instant case, the settlor and beneficiaries are the same and identical. The AO further held that the trust has three constituents, i.e. settlor, contributor and beneficiary and all the three constituents are independent and distinct whereas in the present case, contributors are also the beneficiaries. Thus, so called trust has been created for the sole motive to the benefit of the settlor/contributor. Therefore, the AO held that the plea of the assessee that it is a trust is completely erroneous, and in fact, the assessee is only an AOP having the QIBs as members in the form of QIB/financial institutions. Page | 7

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 Accordingly, the AO rejected the submissions of the assessee that it is a trust falling within the meaning of section 61-63 of the Act. The AO held that after the creation of the assessee trust, it has entered into contribution agreement through offer documents with QIBs for the sole purpose of acquisition of NPAs, transferring those at a profit and earning profit/income out of the same. Thus, it was held that coming together of the two or more persons by way of contribution of sufficient fund into an entity in order to invest in the specific entities with a sole intention to earn profits can only be termed as in AOP. The AO also held that the revocable clause relied upon by the assessee makes it clear that the independent contributors cannot revoke their contributions and only if the contributors holding 90% of the units consent together, then only can the contributions be revoked. Therefore, it was held that in strict terms, the provisions of sections 61 and 63 of the Act are not applicable in the case of the assessee. The AO summarised its finding in para no. 19 of the assessment order as under: - “1. Whereas in the case o the trust, settlor, contributor and beneficiaries, all have to be independent and distinct. In the case of the assessee, the contributors are the beneficiaries themselves, therefore, the assessee cannot be treated as a trust, but as an AOP having several members in the form of QIBs and financial institution. 2) After its creation, the so-called trust entered into contribution assignment through offer document 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. 3) 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 term is the provisions of Sections 61 & 63 of the ‘Act are not applicable to the assessee's case. 4) The Clause relied upon by the assessee make it clear that individual contributors cannot revoke their contribution on their own land revocation can occur only if the contributors holding 90% 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 5) 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.”

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 by the learned CIT(A) and held that the assessee trust is revocable trust, and therefore, the provisions of section 61 to 63 of the Act would be applicable to it. The relevant findings of the clauses are as under: - “We have given a thoughtful consideration to the observations of the lower authorities, and concur with the view taken by the CIT(A) that the assessee trust is a revocable trust, and thus, the provisions of Sec. 61 to 63 of the Act would be applicable to it. On a perusal of Sec. 61 of the Act, we find that the same therein provides that an income arising to a person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. However, if the transfer is irrevocable for a specified period, then as per Sec. 62 of the Act, the provisions of Sec. 61 would be rendered unworkable. As for the definition of the terms “transfer” and “revocable transfer”, the same is provided in Sec. 63 of the Act. Sec. 63 provides, that (a) a transfer shall be deemed to be revocable if, viz. (i) it contains any provisions for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor; or (ii) it in any way gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets; (b) “transfer” includes any settlement, trust, covenant, agreement or arrangement. On a literal interpretation of the aforesaid statutory provision, we find that it is nowhere stated that if the transfer is explicitly revocable, the provisions of Sec. 61 and 63 would not apply. As observed by the CIT(A), we find that Clause 5 of the trust deed makes it clear beyond any scope of doubt that the contribution made by the SR holders is „revocable‟. Accordingly, we have no hesitation in observing that the income therein arising has to be brought to tax in the hands of the SR holders, i.e as per the provision of Sec. 61 to 63 of the Act. Insofar, the view taken by the A.O, that as the revocation of the contributions is conditional upon the consent of the contributors holding 75% of the units, we are afraid that the same would not render the contributions as irrevocable. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of Behramji Sorabji Lalkaka Vs. CIT (1948) (16 ITR 301) (Bom). In the aforesaid case, it was observed by the Hon‟ble High Court that the words “revocable transfer” are well understood in law and a transfer does not cease to be revocable because the power of revocation cannot be exercised by the settlor without the consent of the named individuals or any of them. As observed by the Hon‟ble High Court, a transfer is nonetheless revocable even if it can be revoked only with the consent of any named person or persons. As such, on the basis of our aforesaid observations we are persuaded to subscribe to the view taken by the CIT(A), who had rightly concluded that the assessee trust is a revocable trust, and thus, the provisions of Sec. 61 to 63 of the Act would be applicable to it.”

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 treated as an AOP. The relevant findings of the Co-ordinate Bench are reproduced as under: - “We have given a thoughtful consideration to the observations of the lower authorities in context of the aforesaid issue under consideration before us. Admittedly, the meaning of an “Association of Persons” (for short “AOP”) had witnessed a change, vide the Finance Act, 2002 w.e.f. 01.04.2002. As per the amended definition of the term AOP as contemplated in Sec. 2(31)(v) of the Act, the requirement as was earlier laid down by the Hon‟ble Supreme Court in its various judgments that the various person as per their volition should have associated with the object of deriving income, profits or gains, had been dispensed with by the legislature, vide the “Explanation” to Sec. 2(31) of the Act, as had been made available on the statute vide the Finance Act, 2002, w.e.f 01.04.2002. As per the “Explanation” to Sec. 2(31) of the Act, an AOP shall be deemed to be in existence, whether or not it was formed or established with the object of deriving income, profits or gains. However, in the case before us, we find, that the CIT(A) had rightly observed that there is nothing on record which would suggest that the beneficiary had agreed to associate for any common objective. In fact, the beneficiaries who do not have any control over the activities carried on by the trustee in managing the trust, had made their respective investments based on the offer documents, and on the basis of their investments made in the trust were allotted the SRs which represented their undivided and proportionate interest in the corpus of the trust. We are unable to comprehend as to on what basis the A.O had concluded that the motive behind creation of the trust was the income earning asset reconstruction activity and handling of NPAs. On a perusal of the records, we find that the two beneficiaries viz. (i) ARCIL; and (ii) ICICI Bank Ltd., had made investments based on the offer document separately, and not jointly, on the basis of which they had been allotted the security receipts (SRs) representing their undivided and proportionate interest in the corpus of the trust. In our considered view, as the A.O had failed to place on record any material which would even remotely suggest that there was a concerted effort by the beneficiaries to earn income jointly, therefore his unsubstantiated view that the assessee was to be treated as an AOP cannot be sustained and has rightly been vacated by the CIT(A).”

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 (ii) ITA. No. 7353/Mum./2019, ITO Vs. ARCIL AARF-I – 1 Trust, vide order dated 15/09/2021 (III) ITAs. No. 2701/Mum./2017 and Ors, M/s. ISARC 14/2010-11 Trust Vs. ITO, vide order dated 04/09/2019

ARCIL Retail Loan Portfolio 001 J Trust and Others. ITA no.4199/Mum/2023 ITA no.2909/Mum/2023 ITA no.3050/Mum/2023 its appeal, i.e. grounds no. 4 - 6, are rendered academic in nature, and therefore, are left open.

Sd/-- Sd/-/- SANDEEP SINGH KARHAIL NARENDRA KUMAR BILLAIYA JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 07/06/2024 Vijay Pal Singh, (Sr. PS)

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order

Assistant Registrar ITAT, Mumbai