Dy. CIT v. India Advantage Fund

INCOME TAX ACT, 1961

--Assessment--Liability in special casesRecoverable trust vis-a-vis income-tax liability--The assessee is a trust constituted under an instrument of trust dated 25-9-2006. M/S. ICICI V Funds M Company Limited 'Settlor') by an indenture of Trust dated 25-9-2006 transferred a sum of Rs. 10,000 to M/S. The WIT and E Company Limited '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. It is a private trust to which the provisions of Indian Trust Act, 1882 would apply. For assessment year 2008-09, the assessee filed return of income declaring total income and claimed refund which is nothing but the TDS made by the assessee on the interest given to the beneficiaries. A revised return of income was filed in which the total income declared was the same but the request for refund of TDS as made in the original return of income was not made in the revised return of income. The reason as to why the revised return of income was filed are set out by the assessee in a letter addressed to the AO. The AO was of the view that the individual shares of the persons on whose behalf or for whose benefit income is received or receivable by the assessee or part thereof are indeterminate or unknown. In this regard the AO referred to the Trust Deed dated 25-9-2006 and observed that the shares of the beneficiaries are not mentioned therein. He was also of the view that the fact that the deed mentions that share of the beneficiaries would be allocated according to their investments in the fund does not make the share determinate or known. The AO was therefore, of the view that the provisions of section 164(1) of the Act would apply and the assessee would be liable to be assessed at the maximum marginal rate which was 30% plus surcharge, if any, and education cess, if any. The beneficiaries had, however, declared interest income at the applicable rates and STCG on sale of mutual fund units at 10% which is the rate as per the provisions of section 111A of the Act. There is no dispute with regard to the fact that the beneficiaries have declared income allocated by the Trust to them and have been assessed in respect of the share of their income. The AO also observed that the same income cannot be taxed twice-once in the hands of the Trust and again in the hands of the beneficiaries in view of the provisions of section 86. The AO for the above reasons brought to tax the entire income in the hands of the assessee at the Maximum Marginal Rate. The CIT(A) allowed assessee's appeal holding that the appellant trust is a revocable trust. It need not be subjected to tax as the tax obligations have been fully discharged by the beneficiaries of the appellant trust. Therefore, the AO is directed to treat the income of the appellant trust as NIL as against Rs. 3,54,10,591 determined by the AO. As the income of the appellant trust is determined as NIL the issue of disallowance of expenditure made by the AO is not considered and the appeal is allowed. Held: 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 section 63(1)(ii). Section 61 read with section 63 which mandates that income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as income of the transferor will apply to the facts and circumstances of the present case and, therefore, the assessment in the hands of the transferee/representative assessee was not proper.