ITO, CHENNAI vs. TVS SHRIRAM GROWTH FUND, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

These are the cross appeals filed by the assessee and Revenue are directed against the Orders of Commissioner of Income Tax (Appeals)-4 Chennai, for the Assessment Year 2009-10 and 2010-11 in dated 16/02/2013 and in ITA No.37/2013-14 dated 11/03/2016. Facts of the case are the same for all the appeals, hence all the appeals are clubbed, heard together and disposed off in a common order as under.

2.0 & 982/2016-A.Y 2009-10 &2010-11 are the assessee’s appeals and the main issue involved in these appeals is whether the assessee is a determinate trust or indeterminate trust and the income of the assessee is allowed pass through or not u/s 161(1) of IT Act. For the sake of convenience, the facts are extracted from the record of the A.Y 2009-10.

2.1 The assessee filed the return of income declaring total income of Rs. Nil. The assessee is a Venture capital Fund, Registered with SEBI and eligible for exemption u/s 10(23FB), carrying on investment activity managing the funds of TVS investment I Fund. The AO taken up the case for scrutiny and made the following additions:

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 3 -: • Disallowances Rs. Rs.5,92,96,950/- u/s.40A(2)(b) relating to the payment made to TVS Capital • Non-deduction of tax at source on provisional fee Rs.6,77,269/- 2.1 The assessee’s total income was loss of Rs.17,26,32,448/- which was claimed as pass-through to the beneficiaries. The AO disallowed a sum of Rs.5,99,34,183/- and assessed business loss at Rs.11,26,98,263/-.

3.0 The assessee went on appeal before the CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal. However, the Ld.CIT(A) brought to tax the income in respect of income from investment in Venture Capital Undertaking (in short ‘VCU’) amounting to Rs.2,69,38,526/- stating that the assessee is an entity eligible for exemption u/s.10(23FB) and in the case of Trust registered as Venture Capital Fund under the Securities and Exchange Board of India Regulations, the income derived from the investments with VCU are alone exempted as per the Sec.10(23FB) r/w Sec.115(U) of the Income Tax Act. Hence, the Ld. CIT(A) brought to tax the interest income earned on fixed deposits with banks in the hands of the assessee. Therefore, the assessee is in appeal before us agitating that the assessee is a contributory Trust and the income of the assessee is to be allowed pass-through status in accordance with the provisions of Sec.161(1) of the IT Act.

4.0 Appearing for the assessee, the Ld.AR made the submissions as under:

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 4 -:

TVS Shriram Growth Fund (‘Appellant’) is a contributory trust organized under the Indian Trusts Act 1882 and is registered as a Venture Capital Fund (VCF) under the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 (VCF Regulations). For the purpose of the Act, the Appellant is a determinate trust with the beneficiaries being identifiable and their respective share being ascertainable as per the Trust Deed.

Section 164 of the Act warrants that in order to decide the status of a trust as determinate trust or indeterminate trust, the beneficiaries should be identifiable and their shares should be determinable/ascertainable at any point of time. The Trust Deed of the Appellant vide Clause 1.1.10 of the Trust Deed give details of the beneficiaries and description of the persons who are to be benefited from the Appellant. Clause 1.1.10 of the Trust Deed defines “Contributors or Beneficiaries” as follows:

“Contributors or Beneficiaries” means the Persons each of whom have made or agreed to make the Capital Commitment to the respective schemes in accordance with the Contribution Agreement and the respective Private Placement Memorandum and who have Beneficial Interest in the Trust Fund relating to the respective schemes and includes persons in whose favour the Beneficial Interest or part thereof are transferred or assigned by existing Contributors or Beneficiaries. Therefore, the beneficiaries could not be set to be uncertain and the beneficiaries are known and identifiable in the Trust Deed itself.

Similarly, Clause 1.1.4 of the Trust Deed of the Appellant, clearly demonstrates that the share of beneficial interest are ascertainable. Clause 1.1.4 of the Trust Deed defines “Beneficial Interest” as under:

“Beneficial interest” means the proportionate interest held by each of the Beneficiaries as evidenced by the number of Units held by the Beneficiaries form time to time on the basis of which Distribution Proceeds available will the Trust shall be distributed by the Trustee as per the provisions of the respective contribution agreement and the Private Placement Memorandum.

Clause 1.1.35 defines “Unit” as follows:

“Unit” means a unit of any class evidencing beneficial interest of the contributors/beneficiaries in the respective scheme of the Trust issued by the Trustee/Investment Manager to a Contributor/Beneficiary on the making of a Capital Contribution and includes a fraction of a unit evidencing beneficial interest in the Contribution Fund of a value less than the face value of the respective class units.

The entitlement of share of beneficial interest of each of the contributor to the Fund is ascertainable and well detailed in the Trust Deed itself vide Clause 3.5 of the Trust Deed as follows:

Clause 3.5 of the Trust Deed

All the Contributors/ Beneficiaries of various schemes under various PPMs will become the beneficial owner of the Trust Fund and the Contributors/Beneficiaries will be entitled to Beneficial Interest each and every year comprising of corpus and accretions thereto in proportion to their contribution under respective Schemes/PPMs. The Beneficial Interest of each such Contributor/Beneficiary in the Contribution Fund shall extend and be limited to the aggregate value of the Capital Contribution made by that Contributor in the Contribution Fund under ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 5 -: respective Private Placement Memorandum. All the contributors are beneficiaries under this instrument and on fulfilment of all the terms and conditions stipulated in the contribution agreement such contributors will be included as the beneficiaries of the trust. The Fund is, shall be and remain determinate at all times with details of contributors along with their respective beneficial interest in the Fund in accordance with the respective contribution agreements.

The Beneficial Interest on the income arising each year of the investments made under respective PPMs will be intimated to the Contributors/ Beneficiaries on completion of accounts to facilitate the Contributors/ Beneficiaries to include and offer the said Beneficial Interest in the return of income every year filed by each Contributors/Beneficiaries specified under each contribution agreement.

Based on the above, the beneficiaries are identifiable and their beneficial interest is ascertainable with reference to the Trust Deed. Further, the distribution of income is not at the discretion of the Appellant and is regulated as per the clauses of the trust deed, respective contribution agreement and the Private Placement Memorandum. Therefore, the Appellant satisfies the provisions of the Act to qualify as a “determinate Trust” and the decision of the Madras High Court in the case of P. Sekar Trust (321 ITR 305) squarely applies to the case of the Appellant.

On identical facts and issue, the ITAT, “B” Bench, Bangalore in dated 17.10.2014 in the case of India Advantage Fund VII, has laid down following principles on applicability of Section 164(1) of the Act: • Identification of beneficiaries • Ascertainment of share of the beneficiaries

The Bangalore ITAT has held that all that is necessary is that the beneficiary should be identifiable with reference to the instrument or trust deed on the date of such instrument or trust deed and which should clearly lay down that the beneficiaries means the persons, each of whom have made or agreed to make contributions to the trust in accordance with the contribution agreement. The above clause is sufficient to identify the beneficiaries.

On the aspect of ascertainment of share of the beneficiaries, the Bangalore ITAT has held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also 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 at his discretion in the 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, then 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 of income of the beneficiaries cannot be ascertained or known from the trust deed.

The ITAT therefore, concluded that the 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 trust deed.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 6 -:

In light of the Appellant’s facts of the case and various judicial precedents, the Appellant is a determinate trust and therefore, the provisions of section 161(1) of the Act will be applicable to the Appellant,

Reference can also be drawn to Under ection 166 of the Act the department has an option to make a direct assessment in the hands of the beneficiaries or or in the hands of the trustees in their capacity as a representative assessee.

The Appellant, for the assessment year under consideration, along with the return of income, had filed a list of beneficiaries, their Permanent Account Number, amount contributed, share of beneficial interest and the income apportioned to each beneficiary. In the Memo of income, the Appellant had clearly stated that the share of income/loss will be offered by the beneficiaries in their respective return of income. All the beneficiaries have included their respective share of income in their return of income.

The beneficiaries have confirmed that income from the Appellant, a SEBI registered VCF, has been offered to tax in their respective return of income by placing reliance on Form 64 which is issued with respect to income from VCUs. As per the statement of income which is issued with respect to income from Non-VCU investments and credited to their Profit & Loss account, the same has been assessed to tax vide PAN (samples placed as part of the paper book).

Further in as much as the profits have been credited to the respective accounts of the beneficiaries, in view of decision of Supreme Court in the case of CIT Vs KamaliniKhatau (209 ITR 101), it is the beneficiaries in whose hands the income will be assessed. The above decision was reaffirmed by the Supreme Court in the case of Moti Trust Vs CIT (236 ITR 37)

The Appellant’s assessment for the AY was completed on 31.12.2011, the last date on which the scrutiny assessment has to be completed. Assessments in respect of beneficiaries have been completed prior to the completion of the assessment of the Appellant.

Further, where the Department has exercised the option to tax the beneficiaries, the same income cannot be assessed again in the hands of the Trustee of the Appellant in its capacity as the representative assessee.

The Kerala High Court in the case of CIT Vs Dr. David Joseph (214 ITR 0658) has held that once a beneficiary is assessed and his assessment is completed prior in point of time and his assessment is an element of finality, it is no more permissible for the department to assess the trust again. This is also in line with the CBDT Circular No.157, dated 26.12.1974. The decision of Karnataka High Court in the case of CIT Vs Smt. Indramma (25 Taxmann.com 259) also affirms the above findings.

On an identical facts and issue, the ITAT, “B” Bench, Bangalore in dt.17.10.2014 in the case of India Advantage Fund VII, has laid down following principles on applicability of Section 164(1) of the Act. a) Identification of beneficiaries b) Ascertainment of share of the beneficiaries

The ITAT, Bangalore has held that all that is necessary is that the beneficiary should be identifiable with reference to the instrument or trust deed on the date or such instrument or trust deed which clearly lays sown that the beneficiaries means

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 7 -: the persons, each of whom have made or agreed to make contributions to the trust in accordance with the contribution agreement. The above clause is sufficient to identify the beneficiaries.

On the aspect of ascertainment of share of the beneficiaries, the ITAT, Bangalore has held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also 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 t he 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 at his discretion in the manner not envisaged in the trust deed Even if he Trust. Even if the Trust deed authorises addition of further contributors to the trust at different points of time, in addition to initial contributors, then 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 ascertained or known from the trust deed.

The ITAT concluded that the 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 deed of trust deed

On the contention that assessment has to be made on the right person, the decision of the Supreme Court in the case of ITO Vs Ch. Atchaiah (218 ITR 239) is not applicable to the Appellant’s case as unlike 1922 Act, there is no such option available in 1961 Act. In case of a determinate trust, as discussed in pt. no. 3 above, the Trustee is assessed as representative assessee in respect of income received on behalf of the beneficiary.

The Trustee of the Appellant is therefore assessable as “representative assessee” under section 161(1) of the Act in respect of income received on behalf of the beneficiaries.

Para 3.5 of the Trust Deed clearly states that the contributors / beneficiaries are entitled to beneficial interest every year comprising of corpus and accretions thereto in proportion to their contribution. As per Para 3.5 of the Trust Deed, the beneficial interest on the income arising each year on the investments made will be intimated to the beneficiaries / contributors on completion of accounts to facilitate the beneficiaries / contributors to include and offer the said beneficial interest in the return of income every year filed by each beneficiary / contributor.

The beneficiaries of the Appellant have included the entire income earned by the Appellant in their return of income and offered to tax.

The Appellant filed a “NIL” return of income since the income was offered to tax by the beneficiaries and also filed a list of beneficiaries, their PAN, Contributions made, their beneficial interest and income & expenses apportioned to each beneficiary along with the return.

The beneficiaries have confirmed that income from the Appellant, a SEBI registered Venture Capital Fund, has been offered to tax in their respective return of income by placing reliance on Form 64 which is issued with respect to income from VCUs. As per the statement of income which is issued with respect to other income from Non-VCU investments and credited to their Profit & Loss account, the ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 8 -: same has been assessed to tax vide PAN (samples placed as part of the paper book)

The identical issue on identical set of facts was considered by ITAT, “B” Bench, Bangalore in the case of DCIT Vs India Advantage Fund VII (supra) while allowing the appeal has set the following principles to be applied to decide the status of the Trust whether a is determinate or in-determinate: a. 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. All that is necessary is that the beneficiary should be identifiable with reference to the order of the Court or instrument of trust. b. It is not the requirement of law that trust deed should actually prescribe the percentage share of each beneficiary in the 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. c. As per the Trust Deed, the Trustee have no discretion to decide the share of each beneficiary and are bound by the provisions of the trust deed is duly bound to follow the distribution mechanism specified in the trust deed. d. If the Trust deed expressly sets out 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. e. 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 deed of the Trust

The identical issue was considered by the ITAT, “B” Bench, Bangalore in the case of ICICI Emerging Sector Fund vide its order dt.13.2.2015 in and allowed the appeal following its order in the case of India Advantage Fund. ICICI Emerging Sector Fund is a SEBI registered Venture Capital Fund.

While arriving at the decisions, the ITAT, Bangalore did not distinguish between a normal Trust and a Trust which is a registered Venture Capital Fund with SEBI.

The terms of the trust deed of the appellant are identical in substance and form, the decision of the ITAT, Bangalore in the case of India Advantage Fund VII and ICICI Emerging Sector Fund squarely applies to the Appellant.

The Hon’ble HC vide its order dated 1.2.2017 in and ITA No.446 to 450/2015 while confirming the order of the ITAT, Bangalore in the case of India Advantage Fund VII and ICICI Emerging Sector Fund has reaffirmed the following principles: f. The contention that on the date of execution of the Trust Deed, the shares should specifically come in existence with the quantification and it need not depend upon future share of benefits or upon any future contingency is wholly misconceived.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 9 -: g. By no interpretative process, the explanation to Section 164 of the Act, can be read for determinability of the share of the beneficiary with the quantum on the date when the trust deed is executed. h. The real test is the determinability of the shares of the beneficiary and is not dependent upon the date on which the trust deed was executed. i. The real test is whether shares are determinable even when or after the Trust is formed or may be in future when the Trust is in existence. j. Beneficiaries are to share the benefit in proportion to the investment made. k. 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. l. Once the shares are determinable amongst the beneficiaries, it would meet the requirement of the law to come out from the applicability of Section 164 of the Act. m. Once the shares are determinate, the income is to be taxed of that respective sharer or the beneficiaries in the hands of beneficiary and not in the hands of the trustee.

Section 115U provides special benefits to certain SEBI registered entities (Trust & Company) which does not fall under the purview of Section 160 of the Act.

Hence, operations of Section 160 will not get affected because of introduction of Section 115U which is applicable only for specific category of assessees.

Once one of the beneficiaries has offered the income from trust to tax and is also assessed to tax, the tax authorities cannot assess the Appellant.

Thus, once the beneficiaries are identifiable as a class and their share are determinable at any point of time from the Trust Deed, the Trust is a specific Trust and it does not matter if the actual beneficiaries alter over a period

(CWT Vs Trustees of H.E.H.Nizam’s Family (Remainder wealth Trust) 108 ITR 555 (SC). 2. The terms of the Trust deed of the Assessee is identical with the terms of the trust deeds considered in the following cases, wherein it has been held that such trusts are specific and revocable Trusts, whose beneficiaries are specified and share of their benefits are specified. Hence the income of the Trust is taxable only in the hands of the Beneficiaries.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 10 -:

Without prejudice, the Apex court and other High Courts have held that even in the case of discretionary trust, if the beneficial interests have been offered for tax by the Beneficiaries or the Beneficiaries’ share have been credited to the accounts of the beneficiaries (as has been done in this case), then the Trust is not taxable. a) KamaliniKhatau -209 ITR (101) (SC) b) Moti trust – 236 ITR 37 (SC) c) Indramma - 25 Taxmann.com 259 (Kar) d) David Joseph – 214 ITR 658 (Ker)

5.0 On the other hand, the Ld. DR argued that the assessee is a registered Venture Capital Fund and is a pass through Trust, such pass through status can be extended only to the extent of income earned on VCU investments since the assessee being a SEBI registered VCU is squarely covered by the provisions of Sec.10(23FB) r/w Sec.115(U) of the act. According to the Ld.AR the assessee is not a ‘determinate Trust’ and it cannot be categorized so, since the conditions laid down in Explanation-1 of Sec.164 are totally absent. In order to classify as a determinate Trust, the shares of the beneficiaries should be expressly stated in the order of the instrument of the Trust and identifiable as such on the date of such instrument or the deed.

5.1 The Ld. DR referring to Page Nos. 87 & 107 of Paper Book stated that the beneficiaries are totally unknown and the beneficiaries of VCF are identified by the contribution agreement in the assessee’s case that is Private Placement Memorandum(PPM). The Ld. DR also brought to our

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 11 -: notice that the list of contributors for the AY 2009-10 (i.e. beneficiaries) were 664 in number and for the AY 2010-11, list of contributors increased to 675. The percentage of share of beneficiaries has undergone a change and the Ld.DR brought to our notice specifically the case of TVS Electronics which was 5.22% as on 31.03.2009 and increased to 6.00% as on 31.03.2010 accordingly the DR stated that No. of beneficiaries and the shares of the beneficiaries are not constant and volatile. The Ld. DR was of the opinion that the claim of the assessee that the assessee’s Trust is a ‘determinate Trust’ is incongruous. According to the Ld. DR, the shares of the beneficiaries need to be determined in the Trust Deed in which case the shares of the beneficiaries would be constant and in such situation, the Trust should be categorized as determinate Trust. Since the parameters of consistency is lacking, the Ld. DR argued that the assessee’s claim of application of provisions of Sec.161(1) is incorrect.

Further, the Ld. DR also argued that even if the assessee’s argument is accepted that the assessee’s case is covered by Sec.161(1) of IT Act as representative assessee, the assessee is a registered VCF specifically allowed the exemption u/s.10(23FB) r/w Sec.115(U) of IT Act and accordingly the assessee is not allowed to pass through status in the case of the income earned on the interest on deposits. If pass through status is allowed for interest income, there is no need for Sec.10(23FB) of IT Act.

The Revenue is not objecting the pass through status of the assessee in the case of Sec.10(23FB), the bone of contention of the Revenue is a pass through status is only in respect of VCU income and not in respect of ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 12 -: non-VCU income. The Ld. DR further argued that Form No.64 a statement of income paid or credited by Venture Capital Company(VCC) or VCF to the assessee is to be furnished u/s.115(U) of IT Act and r/w Rule 12C of IT Rules the information required to be reported with regard to other income from non VCU investments and the same cannot be passed on to the beneficiaries.

5.2 The Ld. DR also relied on the decision of ITAT ‘D’ Bench in the case of DHFL Venture Capital Fund dated 08.01.2016, the Hon’ble Supreme Court decision in the case of ITO v. Ch. Atchaiah 218 ITR 239 and the Hon’ble Special Bench of the ITAT, Delhi in the case of Pradeep Agencies joint venture reported in (2007) 111 TTJ Delhi 346.

5.3 The Ld. DR made further submissions that the assessee’s investment manager M/s.TVS Capital Ltd., a company incorporated under the Indian Companies Act had published the FAQs and note on taxation of income earned by the beneficiaries from the TSGF. In the said document in page no.11 to 15 of paper book, it had categorized the distinction and non-VCU income. It had also narrated the principle by which the respective head of income, be it dividend or interest or capital gains that has to be offered to tax in the hands of the beneficiaries. The investment manger had stated that the interest income has to be included as income from other sources and pay tax at the applicable rates in the hands of the beneficiary. On the contrary, Form No.64 issued by the ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 13 -:

TSGF has misdirected the beneficiaries and thus beneficiaries have consolidated the income under the different heads into one head and offered the loss to tax. TSGF has not forwarded a single document wherein, the beneficiary had offered the interest income to tax as such.

This contention is affirmed by the contents of Form No.64 being the net beneficial interest being loss was debited to the accounts of the beneficiaries and a Certificate issued to the beneficiaries to include the same in their return of income. The Ld.DR further argued that the interest income offered to be taxed in the hands of the beneficiaries has to be taxed as such and cannot be set off against other heads so as to include the net loss, it has to be bifurcated and treated separately. From the Form No.64 issued by the assessee, it can be seen that for the AYs 2009-10 to 2014-15, the VCU loss and non-VCU Income has been clubbed and the net loss is passed on to the beneficiaries. Only in AY 2015-16 after the discrepancy being highlighted by the Department, the assessee came forward to segregate the income between VCU and non-VCU income. By this process, neither the TSGF pays tax legitimately to the exchequer on non-VCU interest income nor to the beneficiaries in their heads.

Therefore, the plea that income is offered to tax in the hands of the beneficiaries is in reality misrepresentation of the facts. It is under such circumstances, the provisions of Sec.161(1) comes into being since the beneficiaries have failed to pay tax on non-VCU interest income TSGF is liable to be taxed in its representative capacity. The Ld. DR summed up his argument that TSGF is covered by section 10(23FB) r/w 115(U) and ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 14 -: pass through entitlement is restricted to the extent of income earned from VCU activity and by no stretch of imagination it can be extended to non- VCU interest. Even if it is presumed that that assessee is covered by section 161(1) of the IT Act, the income of the beneficiaries is liable to be taxed in the hand of the assessee, since the assessee failed to intimate the interest income separately as required under section 10(23FB).

6.0 We have heard both the parties. Ld. Sr. Counsel Mr.J.P.Pardiwalla argued elaborately that the assessee is a determinate trust and the income of the assessee is taxable in the hands of the beneficiaries under 161(1) of IT Act. Whether the income is from investment in Venture Capital Undertaking or not makes no difference in the case of determinate trust. Once the trust is determinate and the shares of the beneficiaries are known the entire income of the trust has to be taxed in the hands of the beneficiaries but not in the hands of the assessee. According to him it is immaterial regarding the changes of share holdings of the beneficiaries and their shares bound change with the pace of increase in number of beneficiaries. The Ld.Sr.Counsel has relied on the host of judicial pronouncements specifically invited our attention to the decision of DCIT v. India Advantage Fund, ITAT Bangalore, DCIT v. Emerging Sectors Funds ITAT Bangalore, CIT v. Dr.David Joseph 214 ITR 658 Kerala, CIT v.

Smt. Indiramma 25 taxmann.com 259 Karnataka and CIT v. P. Sekhar Trust 321 ITR 304 (Mad).

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 15 -:

6.1 Shri Gopala Srinivasan S/o. Late T.A.Srinivasan has created a a contributory trust in the name of TVS Shriram Growth Funds under the provisions of Indian Trust Act, 1882 and registered as Venture Capital Fund (VCF) under the Securities and Exchange Board of India Venture Capital Funds (Regulations), 1996. The IL & FS Trust Co. Ltd., a company incorporated under Companies Act, 1956 having registered office at Mumbai has been appointed as Trustee as per the indenture of the Trust dated 01.02.2008. The objectives of the Trust was to carry on through various schemes, the activity of VCF as permissible under the VCF regulations and for the purpose of raising resources to make available venture capital assistance to investment companies so as to achieve long term capital appreciation for contributors/beneficiaries under respective schemes. The Trust shall invest in all securities including equity, quasi equity and equity related investment and would include other investments, such as preference warrants for equity conversion date instruments both convertible and non-convertible property, options and other instruments of like nature. In a nutshell, the objectives of the Trust are to make investments in Venture Capital Undertaking to certain kind of securities and to achieve commensurate returns to the contributors. The beneficiaries of the Trust are the contributors as per the Clause No.1.1.10 of Trust, the beneficiaries or contributors or defined as under:

1.1.10. “Contributors” or “Beneficiaries” means the Persons, each of whom have made or agreed to make Capital Commitment to the respective Schemes in accordance with the Contribution Agreement and the respective PPM (as defined hereinafter) and who have Beneficial Interest in the Trust Fund relating to the respective scheme and includes persons in whose favour the Beneficial Interest or part thereof are transferred or assigned by existing Contributors or Beneficiaries.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 16 -:

6.2 Contribution to the Trust fund is aggregation of capital contributions of respective schemes including addition thereto and also defined in Clause No.1.1.4 of the Trust Deed (Page No.5 red marking). The unit is defined in Clause No.1.1.35 Page No.009 as under:

1.1.35. “Unit” means a unit of any class evidencing beneficial interest of the contributors / beneficiaries in the respective Scheme of the Trust issued by the Trustee / Investment Manager to Contributor / beneficiary on the making of a Capital Contribution and includes a fraction of a unit evidencing beneficial interest in the Contribution Fund of a value less than the face value of the respective class of units. The management and terms of the Trust are spell out in Clause No.3.5 of the Trust Deed (Page No.11) as under:

3.5. Management and terms of the Trust - The Trust will be organized, administered and managed by the Trustee in accordance with this deed, the respective Investment Management Agreement, Contribution Agreements, the PPM and other ancillary documents/agreements as may be considered by the Trustee.

All the Contributors / Beneficiaries of various schemes under various PPMs will become the beneficial owner of the Trust Fund and the Contributors Beneficiaries will be entitled to the Beneficial Interest each and every year comprising of corpus and accretions thereto in proportion to the their Contribution under the respective schemes and PPMs. The Beneficial Interest of each such Contributor / Beneficiary in the Contribution Fund shall extend to and be limited to the aggregate value of the Capital Contribution made by that Contributor in the Contribution Fund under respective Private Placement Memorandums. All the contributors are the beneficiaries under this instrument and on fulfillment of all the terms and conditions stipulated in the contribution agreement such contributors will be included as the beneficiaries of the trust. The Fund is, shall be and remain determinate at all times with details of contributors along with their respective beneficial interest in the Fund in accordance with the respective contribution agreements.

The Trust shall keep separate accounts in respect of the Capital Contribution including accretions thereto under each PPMs such that the Beneficiaries and their Beneficial Interest under each and every PPMs are determinate at all points of time. Thus, the Beneficial Interest of all the Beneficiaries / Contributors shall be determinate at all points of time.

The Beneficial Interest on the income arising each year out of the investments made under respective PPMs will be intimated to the Contributors / Beneficiaries on completion of the accounts to facilitate the Contributors / Beneficiaries to include and offer the said Beneficial Interest in the return of income every year filed by each Contributors / Beneficiaries specified under each contribution agreement.

6.3 The investment Manager invites offer for capital commitments from the prospective contributors for the subscriptions and purchase of units of the respective schemes on private placement basis. The PPM is deemed to be formed as an integral part of Trust Deed. As per the Clause No.3.6 of the Trust Deed, the Trust fund shall not be applied for directly or ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 17 -: indirectly for any other objects other than set out in the objects clause in clause-2 of the Trust Deed. Clause -2 deals with the investment discussed in the preceding paragraph No.6.1. The management of the Trust fund is spelt out in clause No.3.7 of the Trust Deed in Page No.12 as under:

3.7 Management of the Trust Fund: The Settlor hereby declares that henceforth The Trust Fund shall be managed by the Trustee in accordance with and subject to this Indenture. The Trustee shall appoint an Investment Manager to manage and administer the Trust Fund and shall for this purpose execute the Investment Management Agreement. Each Scheme will additionally be governed by its respective PPM and the contribution agreement to the extent applicable, which is deemed to be incorporated by reference herein. The Trustee shall pay to the Investment Manager, from the Contribution Fund, a Management Fee in accordance with the terms set out in the Investment Management Agreement and the PPM, In addition, the investment Manager would also be entitled to a carried interest at such rate and on such terms as set out in the PPM.

6.4 The Ld.AR argued that the Trust Deed has identified the beneficiaries by capital contribution agreements as per the Private Placement Memorandum. The beneficiaries and the description of the persons who are to be benefitted from the Trust is defined in the Trust Deed as contributors or beneficiaries. By clause No.1.1.4 of the Trust Deed explains the beneficial interest which means the proportionate interest held by each of the beneficiaries (as defined hereinafter) as evidenced by the number of units held by the beneficiaries from time to time on the basis of which Distribution proceeds available with the trust shall be distributed by the trustee as per the provisions of the respective contribution agreement and the PPM. Based on the above clauses of the Trust Deed, the Ld.AR argued that beneficiaries are identifiable, beneficial interest is ascertainable w.r.t. the Trust Deed. Further, the distribution of income is not at the discretion of the assessee and is required as per the clause of the Trust Deed respective contribution agreement and PPM.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 18 -:

Hence, the Ld.AR contended that the assessee satisfies all the requirements of the Act to qualify as determinate trust and the Hon’ble High Court in the case of P.Sekar Trust squarely applies to the assessee.

On identical facts, ITAT ‘B’ Bench Bangalore in dated 17.10.2014 has held that the Trust is determinate trust and the decision of Hon’ble ITAT Bangalore was followed by the ITAT Bangalore in M/s. ICICI Emerge Sector fund v. Director of IT in ITA No.179/Bang/2012 for the AY 2008-09 and held that the Trust is a determinate Trust. The order of the Hon’ble ITAT Bangalore is affirmed by the Hon’ble Karnataka High Court. The Hon’ble ITAT Bangalore in the order cited supra considered all the issues raised by the Ld. DR with regard to identification of the beneficiaries in the Trust Deed their shares applicability of the provisions of Sec.60, 61, 63, 160, 161,164 & 166 and held that the trust 6.5 For the sake of convenience and clarity, we re-produce here under Para Nos.43 to 72 to relevant paragraphs order of the Hon’ble ITAT, Bangalore in India Advantage Fund which reads as under:

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 19 -:

(i) naming or describing the person or persons or class of persons to be added as beneficiaries; (ii) specifying the date (not being earlier than the date of the deed but during the trust period) from which such person or persons to be thereby added as beneficiaries; and (c) It is hereby clarified that such beneficiaries will be entitled to only such share that is in proportion to the contribution made by them and in accordance with the Contribution Agreement."

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(citing O.P. Agarwalla on Trust, p. 220-2), he also expressed his willingness to modify cl. 7(a) as follows in order to obviate any kind of objection :- "7.(a) The trustee shall during the trust period, have the power at their discretion to admit as beneficiary any institutional investor which agrees to enter into a contribution agreement." and, consequent on the above, to insert a definition of the expression "institutional investor" in cl. 1 to the following effect : "(1) 'Institutional Investor' means any entity other than an individual, being a natural person including but not limited to financial institution, company or corporation, Government, State or Political sub-division or local authority, that trustees may consider a reputable investor." After a little discussion he was willing also to drop the last seven words which were considered to be somewhat vague.

beneficiaries. The beneficiaries have no interest in possession under the trust. There are various reasons why a settlor prefers to establish a discretionary trust rather than a fixed trust. Some of the important one's being - to protect the beneficiary against creditors; to continue to exercise control over young or improvident beneficiaries; to make adjustment according to circumstances. "When a trust is set up, there is no way of knowing how the beneficiaries will fare in the future; which of them will be most in need, which will be deserving, which spendthrift, which inebriate, which will marry millionaires and which missionaries". The trustee can take all these factors into consideration in making their decisions.

"49. ** ** ** (iv) Under the existing provisions, the flat rate of 65% is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the Court or wakf deed. This provision has been misused in some cases by giving discretion to the trustees to decide the allocation of the income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 22 -: to a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiaries and their shares are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed, the trust will be regarded as a discretionary trust and assessed accordingly."

and the facts of the present case. The issue raised in grounds No.1 is general, calling for no specific adjudication. The issue raised by the Revenue in Ground No.2 is with regard to the applicability of the provisions of Sec.60, 61 and 63 of the Act to the facts and circumstances of the present case. In this regard it needs to be clarified that the Assessee in its reply dated 15.12.2010 to the AO in the course of assessment proceedings pointed out the above provisions and submitted that it is only the beneficiaries who have to be assessed to tax in respect of income arising from a revocable transfer. The AO in the order of assessment did not consider the above argument nor has he given any reasons why the same are rejected. The submission made by the Assessee before CIT(A) on this aspect have been accepted by the CIT(A) but he has not discussed or given any reasons as to how the submissions are being accepted. The basic scheme of section 61 r/w section 62 and section 63 is as follows : where under a settlement any income arises to the settlor, it has to be assessed in the hands of settlor, whether the settlement is revocable or irrevocable. If under a settlement any income arises to any other person apart from the settlor such income can still be assessed in the hands of the settlor provided the settlement is revocable. Even if a settlement on the face of it is stated to be irrevocable, if the same provides for direct or indirect retransfer of income or assets of the settlement to the settlor or gives the settlor a right to resume power directly or indirectly over such income or asset, the settlement should be deemed to be revocable.

54. In Chapter X of the private placement memorandum issued by the investment manager inviting contribution from investors, the tax considerations in making investments as understood by them have been set out. The contents thereof in brief are that the contribution by the contributors are akin to "revocable transfer" u/s.61 of the Act read with Sec.63 of the Act and therefore income arising from the transfer are assessable in the hands of the contributors. The contributors are therefore informed that in respect of their pro-rata share of income received by the Fund it is the contributors who will be liable to tax and not the Trust/Fund. The nature of income that is likely to arise from the revocable transfer has also been set out therein and the same is referred to as (1) Dividend declared by companies whose shares are held by the Trust, are exempt in the hands of the shareholders and therefore the dividend earned by the Trust from investment would be exempt from tax and therefore there would be no tax implications in the hands of the beneficiary. (2) Interest on loans given by the Trust/Fund to companies would suffer tax deduction at source. Nevertheless the beneficiaries have to declare interest income and pay tax thereon but claim refund of tax paid or credit for taxes already paid. (3) Gain on sale of Portfolio Investments would be subjected to tax either as Long Term Capital Gain or Short Term Capital Gain. There is also a reference to the fact that in case the gain on sale of securities of companies held/invested by the Trust/Fund are held to be in the nature of business income then such business income would be taxable in the hands of the beneficiaries at the relevant applicable rates. (4) Gain on redemption premium of debentures/bonds will also suffer tax either as long term or short term capital gain depending on the period of holding.

55. Under clause-2 of the contribution Agreement, the contributor/beneficiary/investor agrees to contribute a specified sum to the trust/fund. Clause-2.6 of the contribution agreement specifies that the contributor/investor/beneficiary shall not have any right to demand the return of his/her/its fund contributor, other than upon dissolution of the fund. Clause-2.6.2 provides that the trustee may refund the fund contributor to the contributor, without interest, within a period of 3 months from the date hereof, in the event the minimum fund commitment is not received. Clause2.9 of the contributor agreement also ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 23 -: lays down that the redemption of units by the beneficiary shall be at the sole discretion of the Trustees in consultation with the investment manager.

56. In the light of the aforesaid clauses in the contribution agreement, can it be said that transfer of funds by the beneficiary to the trust/fund is a revocable transfer? 57. The answer to the above question cannot be given by merely reading the clauses in the contribution agreement alone. The contention of the learned counsel for the Assessee before us was that the Contribution agreement has to be read along with the Trust Deed as well as the Investment Management agreement and offer document for private placement issued by the Investment Manager. Article-13 of the Trust Deed provides for termination of the Trust. Though such a power is not with the beneficiary/transferor, it is not the requirement of Sec.61 that the power of revocation must be at the instance of the beneficiary/transferor. The power of revocation under Clause13 of the Deed of Trust is a general power of revocation and the same would be sufficient for construing the transfer in the present case as a revocable transfer. As rightly contended by the learned counsel for the Assessee it is not necessary that the power of revocation should be at the instance of the contributors/beneficiaries/ transferor and it can be at the instance of any person either settlor, trustee, transferee or the beneficiaries. Provisions of Sec.61 of the Act do not contemplate a power of revocation only at the instance of the transferor. In this regard the reliance placed by the learned counsel for the Assessee on the observations of the Hon'ble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) support the plea taken by him. As rightly contended by him the existence of a power to revoke the transfer that has to be seen and not the manner in which/ or at whose instance such revocation is brought about.

58. The alternative submission of the learned counsel for the Assessee that the provisions of Sec.63(a) of the Act, which deems existence of power of revocation in certain circumstances, are also acceptable. In this regard prospectus inviting contribution from contributors clearly lay down in certain circumstances 75% of the contributors can revoke their contribution to the fund at any point of time and the trustees shall then terminate the fund. Though the above power of the transferor/beneficiary to revoke the transfer is not in the instrument of transfer but by virtue of the power conferred in a document by which the investment manager appointed by the trust by virtue of powers conferred under the trust deed, would be sufficient to conclude that the transferor/beneficiary had deemed powers of revocation. In this regard the reliance placed by the learned counsel for the Assessee on the ration laid down in the decision of the Hon'ble Supreme Court in the case of Jyothendrasinhji (supra)is squarely applicable to the present case. In the aforesaid decision the Hon'ble Supreme Court held that Sec. 63(1) of the Act does not say that the deed of transfer must confer or vest an unconditional or an exclusive power of revocation in the transferor. It was further held that the fact that concurrence of the trustee had to be obtained by the transferor/settler for revocation will not make the trust an irrevocable transfer. In such circumstances it must be held that the deed contains a provision giving the transferor a right to re-assume power directly or indirectly over the whole or any part of income or assets within the meaning of s. 63(a)(ii) of the Act.

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(i) is not specifically receivable on behalf or for the benefit of any one person; or (ii) where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as "relevant income", "part of relevant income" and "beneficiaries", respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Explanation 1 to Sec.164 lays down that any income or part thereof to which Section 164(1) applies shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed."

(a) Under s. 161(1A), this rule of apportionment and determination of proportionate tax attributable to the beneficiary will not apply to any income earned by the trustee as profits and gains of a business. The whole of such income shall be taxed at the "maximum marginal rate". A similar proviso occurs also in s. 164(1) restricting benefits where business income is involved. (b) Under s. 164(1), if the beneficiaries are not identifiable or the individual shares of the persons on whose behalf and for whose benefit the income is receivable are indeterminate or unknown, such income, again, will be taxed at the "maximum marginal rate". (c) In certain other circumstances, set out in the proviso to s. 164(1), the relevant income will be assessable not at the maximum rate but at the rate applicable to it as if it were the total income of an AOP.

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.

by the Revenue. These grounds can be conveniently dealt with together.

67. Sec.2(31) of the Act defines the term "Person". The definition includes "Association of Persons"(AOP). There is no definition of the expression AOP occurring in the 1922 Act. By a series of decisions, the meaning of this expression was precisely defined and tests were laid down in order to find out when a conglomerate of persons could be held to be an AOP for the purposes of section 3 of the 1922 Act. While interpreting this expression occurring in section 3 of the Indian IT Act, 1922, the Supreme Court in CIT v. Indira Balkrishna (supra) held "an AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains". The Supreme Court, however, administered the following caution : ''There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an AOP within the meaning of section 3; it must depend on the particular facts and circumstances of each case as to whether the ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 26 -: conclusion can be drawn or not''. To the above judicial exposition of what constitutes AOP, there has been a statutory rider added. The Finance Act, 2002 has inserted w.e.f. 1st April, 2003 an Explanation to clarify that object of deriving income is not necessary for AOP, BOI, local authority or an artificial juridical person in order that such entity may come within the definition of "Person" in section 2(31). If income results than they are liable to be taxed as AOP if the other conditions laid down by judicial decisions are satisfied. In the light of the above definition of AOP, let us examine the facts of the present case.

(i) The Assessee is a trust constituted under an instrument of trust dated 25/9/2006. M/S.ICICI Venture Funds Management Company Limited (hereinafter referred to as "Settlor") by an indenture of Trust dated 25.9.2006 transferred a sum of Rs.10,000/- to M/S. The Western India Trustee and Executor Company Limited (hereinafter referred as the "Trustee") as initial corpus to be applied and governed by the terms and conditions of the indenture dated 25.9.2006. 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 mezzanine 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 contributors to the fund are its beneficiaries. (ii) The trustees had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the settlor as investment manager are set out in an investment management agreement dated 25.9.2006 between the Assessee represented by the Trustee and Settlor. (iii) 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 contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his capacity as investment manager.

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.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 28 -: held that unlike under s. 3 of the 1922 Act, the ITO did not have an option under s. 4 of the IT Act, 1961, to assess either the AOP or the individual members thereof. If the ITO has assessed a wrong person, say individual instead of AOP, he is not precluded, in contradistinction to the 1922 Act, to seek to assess the right person under the 1961 Act. The Hon'ble Court made it clear that wherever such on option is given under the 1961 Act, it has been specifically provided, as in s.183 and that under the 1961 Act, tax has to be levied on the right person, irrespective of benefit to Revenue. In the present case, however, we are concerned with a case of assessment of representative assessee or the person in respect of whom some other person is considered as representative assessee. Sec.161(1) by implication permits assessment of either the beneficiary or the Trustee. When the Trustee is assessed as representative assessee in respect of income received on behalf of the beneficiary, the section provides that tax shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. In our view, therefore, the decision of the Hon'ble Supreme Court in the case of Ch. Atchaiah (supra)will not be of any assistance to the plea of the revenue in the present case.

6.6 The Hon’ble Karnataka High court confirmed the order the tribunal in the above case reported in[2017] 78 taxmann.com 301 (Karnataka).Honble high court in the cited case held as under:

6.7 In the instant case, the assessee has created a trust which was registered and the beneficiaries have been identified by the contribution

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 29 -: agreement(PPM) and their shares are also ascertainable with respect to contributions and the units. The Hon’ble High court considered the issue regarding identification of beneficiaries at the time of formation of the Trust and expressed view that even after execution of the trust deed if the beneficiaries are identifiable and their shares are ascertainable it is sufficient compliance to hold the trust as determinate Trust. In the assessee’s case the beneficiaries are identifiable with PPM and their shares are ascertainable as discussed earlier in this order. The facts of the case are similar to that of “India advantage Fund” Supra and the decision rendered by the Hon’ble ITAT Bangalore squarely applies in this case.

Respectfully following the decision of the Co-ordinate Bench of Bangalore and Hon’ble Karnataka High court Supra we hold that the assessee’s Trust is a determinate trust and the appeal of the assessee is on this issue is allowed.

7.0 The second issue in this appeal raised by the assessee having determinate trust, the interest income of the trust should be assessed in the hands of the beneficiaries but not in the hands of the assessee.

Sec.161(1),provides for assessment of income in the hands of the beneficiary and in certain circumstances in the hands of the trust in representative capacity, If the shares are unknown as per Sec.164 the income required to be assessed in the hands of the trust at maximum marginal Rate.

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7.1 We have decided that the assessee is determinate trust in the earlier paragraphs. Having held the trust as determinate trust we hold that the income of the trust required to be assessed in the hands of the beneficiaries or in the hands of the Trust in the representative assessee u/s.161(1) of IT Act. However, the assessee is trust registered as Venture Capital Fund and any income of a venture capital company or venture capital fund [from investment] in a venture capital undertaking is exempt u/s 10(23FB) and taxable in the hands of the beneficiaries u/s 115U.Chapter XII-F and section 115U have been introduced in the statute vide Finance Act 2000 for making VCF/VCC as a pass through vehicle and taxing investors as if they had received income directly from the Venture Capital undertaking. This section has been introduced corresponding to the insertion of new clause (23FB) in section 10 being an enabling provision for taxing investors, who receives the income from VCC/VCF because, as per the provisions of section 10(23FB) any income of VCC or VCF is exempt. Sec. 115U is intended to grant tax concession to the recipient of income from a VCC/VCF and such income in the hands of the investor shall be chargeable to tax as if it were income from investment in Venture Capital undertaking made directly by such person. Thus, section 115U stipulates that the income received by a person from VCC/VCF shall be deemed to be of same nature and the same proportion accruing to the VCF/VCF. However, the concession in tax is in the shape that the provisions of Chapter XII-D or XII-E or XVII-B shall not apply to the income paid by the VCC or VCF. This mean that no tax shall be payable

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 31 -: u/s 115-0 or section 115R and no tax deduction at source shall be made under the provisions contained in Chapter XVII-B from the income paid by the VCC or VCF to an investor. As per sub.-sec (2) of section 115U, it is mandatory on the part of the VCC or VCF to furnish a statement in the prescribed form and verify in the prescribed manner giving the details of nature of income paid during the previous year. Form 64 is provided for making the statement of income distributed by VCC or VCF to be furnished u/s 115U of the IT Act. It makes clear that VCC or VCF has to furnish the details of the nature of income received by the investor from VCC or VCF.

Specific details requiring the income/amount paid under long term capital gains, short term capital gains, dividend or other income such as interest etc. Thus, section 115U mandates that the nature of income which is received by the VCC or VCF from the Venture Capital undertaking and further distributed to the investor shall be taxable in the hands of the investor by treating the same nature of income like long term capital gain, short term capital gains, dividend or other income such as interest etc., and accordingly be taxed as per the provisions as applicable under different heads of the income. Hence, section 115U prescribes the principle of pass through by treating the VCC or VCF as a pass through vehicle and further, grants some concession in the shape of non- applicability of provisions of Chapter XIV-D, XII E or XVII B.

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7.2 The assessee is duty to bound to furnish the correct information regarding the income paid or credited to the beneficiary from each source which required to be included by the beneficiary under the same head as if the beneficiary has derived income from investment in venture capital under taking as per Rule 12C and Sec.115U of IT Act. The assessee has issued the Form 64 showing the dividend income, Income from interest and the loss from the fund as follows:

State Bank of India Form No.64 Dividend Rs.7,837/- Interest Rs.24,99,979/- Less Expenditure Rs.1,85,28,645/- Net loss from the sources of Fund (-)1,60,28,666/- The above information indicates that the net loss of Rs. 1,60,28,666/- was related to the income from other sources which may be claimed as set off against other sources or from current year income as per the set off provisions of Income tax Act and results in to understatement of income by the beneficiaries. Thus, the argument of the Ld.AR that beneficiaries have considered the income under the different heads in to one and offered the loss to tax has merit. In fact the interest income required to be taxed as such in the hands of beneficiary under the head other sources. The loss is relating to the activity of Venture capital undertaking and the entire expenditure debited to profit and loss account is also relating to the activity of venture capital income barring the expenditure relating to earning the interest income. In the above case dividend income alone represent venture capital income which is being

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 33 -: exempt in the hands of the beneficiary and logical conclusion is no other expenditure is allowable or claimed to be set off against other income in the hands of the beneficiary and the net income of other source required to be brought to tax. Thus, Form No.64 required to be issued by the assessee indicating the net loss of VCU income and net profit of other sources. It is also not clear whether the beneficiaries claimed the entire expenditure in this case Rs. 1,60,28,666/- (loss) from the taxable income instead of admitting the interest income as such in the hands of beneficiaries and claiming set off of loss in respective source of income.

The assessee in the P&L account did not apportion the expenditure relating to other income and the income relating to venture capital income. It is necessary to bifurcate the expenditure incurred for various sources of income to include in the hands of the beneficiaries to club under the various heads correctly since expenditure relating to exempt income is not allowable. Therefore, the entire issue requires further verification from the assessing officer to compute the correct income under the head Interest income which required to be assessed as income from other sources and the dividend income and Long term capital gains.

Therefore we set aside the entire matter back to the file of the assessing officer to examine the issue in the light of the above discussion and decide the issue afresh on merits. The assessee is also directed to collect information from the beneficiaries regarding the inclusion of income relating to the TSGF and submit the same to the AO for early completion of the assessment. On completion of the enquiries the Assessing Officer

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 34 -: directed to allow pass through of the income, if the same is admitted correctly and in case of non-admission or incorrect admission, it may be assessed in the hands of the assessee in representative depending on facts. Accordingly, the appeal of the assessee set aside and is is allowed for statistical purposes.

8.0 In Ground No.1.8, the assessee has raised the issue with regard to set off of the proportionate amount of expenditure relating to interest income, in case the pass through status is not allowed with regard to interest income. The assessee was argued that the assessee is eligible for pass through of entire income irrespective of Venture Capital income or income from other sources as per Sec.161(1) of IT Act. In case, the assessee is liable for taxing the other income separately, the proportionate expenditure required to be allowed. We have set aside the issue of determining the income from other sources and allocation of expenses with regard to venture capital income in the earlier paragraphs.

Therefore this issue also stands remitted to be file of the Assessing Officer to decide the correct income under the head Income from other sources to be passed on to the beneficiaries or to assessee in the hands of the assessee in the representative capacity. Therefore, this ground of appeal is allowed for statistical purposes.

9.0 Ground No.2 is related to the grant of credit for taxes deducted at source. It is the duty of the AO to allow the credit for taxes paid or ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 35 -: collected by the Department. In this case, it appears that the AO has not allowed the credit for the taxes deducted at source. We direct the AO to allow the credit for taxes paid. This ground of appeal is allowed.

10.0 In the result, the assessee’s appeal for the AYs 2009-10 & 2010-11 are partly allowed.

11.0 This is the appeal filed by the assessee against the order u/s.154 by the Ld.CIT(A) for the AY 2009-10.

12.0 Against the Assessment Order dated 31.12.2011, the assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) in the Appeal Order dated 16.03.2006 in Para Nos.1 to 8 allowed the assessee’s appeal holding that the assessee is a determinate trust with the beneficiaries known and the provisions of Sec.161(1) are applicable, however taxed the interest income in the hands of the assessee trust. Subsequently, the assessee filed petition u/s.154 on 30.03.2016. The petition u/s.154 is disposed off by Ld.CIT(A) by a Modification Order dated 05.04.2016 and in the rectification order Ld.CIT(A) held that the Trust is indeterminate Trust and dismissed the assessee’s petition on application of Sec.161(1) to allow pass through of entire income to the beneficiaries. The assessee filed

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 36 -: appeal before this Tribunal challenging the order of the Ld.CIT(A). The Ld.Counsel appearing for the assessee argued that in the original appeal, the Ld.CIT(A) given a finding that the assessee’s Trust is a determinate trust and the beneficiaries are identifiable and the provisions of Sec.161(1) is applicable in the assessee’s case and accordingly, the income of the assessee required to be taxed in the hands of the beneficiaries but not in the hands of the assessee. The assessee is liable to be taxed only in the representative capacity as provided u/s.161(1).

The above finding given by the Ld.CIT(A) in the order passed u/s.250(6) of the IT Act is reversed in the order u/s.154 which is not permissible.

The issue with regard to the determinate and indeterminate trust involves lot of debate and analysis of facts and law and lengthy discussion and revisiting the issue. Therefore, the debatable issue cannot be decided u/s.154.

On the other hand, the Ld. DR argued that the Ld.CIT(A) has made clear in the Appellate Order that the assessee is a determinate Trust and the income of the assessee is taxable as per the provisions of Sec.1023(FB) and Sec.115U of IT Act. Ld.CIT(A) though held that the assessee is a determinate Trust but clearly held that the other income of the assessee is taxable in the hands of the assessee. There is no change in the stand of the Ld.CIT(A) regarding taxation of income. Therefore, the Ld. DR argued that there was no mistake in the order u/s.154 which require the interference by the Tribunal.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 37 -:

13.0 We heard the rival submissions and perused the material placed before us. We have already decided the issue in the main Appeal Nos.981 & 982 holding that the assessee is a determinate trust and the income of the assessee is to allowed to be pass through in the hands of the beneficiaries u/s.161(1) and set aside the issue for determining the income correctly under various heads and to pass through the income.

The Ld.CIT(A) has changed the determinate trust to indeterminate trust by u/s.154. The debatable issues which require verification and legal interpretation are not permissible to decide under section 154 and only the mistakes apparent from the record are permitted to decide under section 154. The issue on hand is not mistake apparent from record and the issue of law which require verification of several aspects both on law and facts. Therefore, we set aside the order of the Ld CIT(A) and allow the assessee’s appeal. However, the issue relating to pass through of correct income is stands remitted to the file of the AO as discussed in earlier paragraphs.

14.0 In the result, the appeal of the assessee is partly allowed.

15.0 Common grounds in both the appeals are relating to the disallowance u/s.40A(2)(b). During the assessment proceedings, the AO

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 38 -: disallowed a sum of Rs.5,92,56,914/- for the AY 2009-10 and Rs.6,51,95,795 for the AY 2010-11 u/s. 40A(2)(b) of IT Act. The assessee is a trust carrying on the business of Venture Capital Fund and appointed the TVS Investments Capital Funds Ltd. as the manager, and paid the above amount to TVS Capital Fund Investment, which is a sister concern of the assessee. The AO observed that the amount paid by the assessee to the investment manager is nearly 64% of the funds deployed as investment. Therefore, the AO disallowed the 50% of expenditure u/s.40A(2)(b) of Income Tax Act. The Ld.CIT(A) deleted the addition stating that incomes of the assessee are governed by provisions of Chapter-III of the IT Act as under:

“7. With regard to the disallowances made u/s.37 r.w.s. 40A(2)(b), it is seen that the Investment Manager is not a related enterprise as defined u/s.40A(2)(b). Further, in respect of the expenditure disallowed u/s.37 and 40(a)(ia), while the income of the assessee is governed by provisions of Chapter III of the Income tax Act, 1961, being ‘Incomes which do not form part of total income’ as it has been affirmed earlier that the assessee is eligible for exemption u/s. 10(23FB), disallowances contemplated under Chapter IV of the Income tax Act, 1961 cannot be undertaken. Therefore, the disallowance of expenditure to the tune of Rs,5,99,34,183/- is deleted and thus, the appellant succeeds on grounds of appeal (d) and (e), as well and the same is allowed.

16.0 We heard both the parties and perused the material placed before us. Sec.40A(2)(b) deals with the expenses or payments not deductible under the head profits and gains of business or profession. In the assessee’s case, the income is only from three segments income from other sources, dividend income and capital gains. There is no income to be computed under the head profits and gains of business or provision.

Therefore, we are of the considered opinion that the Ld.CIT(A) rightly held

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 39 -: that the disallowance contemplated under Chapter-III of IT Act cannot be under taken while computing the income under Chapter-IV of the IT Act.

Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The Revenue’s appeal on this ground for the AYs 2009-10 & 2010-11 are dismissed.

17.0 The next issue for the AY 2009-10 was disallowance u/s.40(a)(i) of IT Act.

18.0 The AO disallowed a sum of Rs.6,77,269/- paid towards legal and professional fee for non-deduction of tax at source u/s.40(a)(ia) of IT Act.

The addition for non-deduction of tax at source is applicable for the expenditure debited u/s.30-37 of IT Act. Sec.40(a)(ia) contemplates the disallowances for non deduction of tax under the head profits and gains or business or Profession. As decided by us in the earlier paragraph, the AO cannot make disallowances contemplated by the Chapter-III of IT Act while computing the income under Chapter–IV of IT Act or in the income which does not form part of total income. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The appeal of the Revenue on this ground is dismissed.

ITA Nos.1345 & 1401/Mds/2016 & 981 & 982/Mds/2016 :- 40 -:

19.0 In the result, the Appeal of the assessee is partly allowed and the Revenue’s appeals dismissed.

Order pronounced in the Open Court on 7th June, 2017, at Chennai.