Income Tax Appellate Tribunal - Mumbai
Il & Fs Orix Trust , Mumbai vs Assessee on 13 February, 2015
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई यायपीठ 'जी' मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL "G" BENCH, MUMBAI
ी िवजय पाल राव, याियक सद य, एवं ी डी. क णाकर राव, लेखा सद य के सम ।
BEFORE SHRI VIJAY PAL RAO , JM AND SHRI D. KARUNAKARA RAO, AM
आयकर अपील सं./I.T.A. No.7499/Mum/2014
( िनधा रण वष / Assessment Year : 2010-11 )
IL & FS Orix Trust बनाम/
बनाम Income tax Officer
The IL & FS Financial Vs. Ward - 19(3)-2
Center, Plot No.C-22, G- Mumbai.
Block, Bandra Kurla
Complex, Bandra (E)
Mumbai-400 051.
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAATI 6277 K
(अपीलाथ /Appellant) ... ( यथ / Respondent)
अपीलाथ ओर से / Appellant by : Shri D.V. Lakhani
यथ क! ओर से/Respondent by : Shri R.N. D'souza - DR
सुनवाई क! तारीख / Date of Hearing : 15/01/2015
घोषणा क! तारीख /Date of 13/02/2015
Pronouncement :
आदेश / O R D E R
PER VIJAY PAL RAO, JM:
This appeal by the assessee is directed against the order dated 5/11/2014 of CIT(A) for the assessment year 2010-11. The assessee has raised the following ground in this appeal:-
"1. On the facts & circumstances of the case the order passed by the Learned Commr. of Income Tax (Appeals) is bad in law as the Learned Commr. of Income Tax (Appeals) has wrongly assumed various facts while passing the appeal order and relying upon such wrong facts has come to conclusion that provisions of Section 164(1) is applicable in the hands of the appellant and the total income is chargeable to tax in the hands of the appellant amounting to Rs.7,95,15,873/-. The conclusion reached by the Learned Commr. of Income Tax (Appeals) is erroneous and contrary to the provisions of law and the appellant prays that the said order may be set aside.2 ITA No.7499/Mum/14
2. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has held that the income is chargeable to tax in the hands of the appellant amounting to Rs.7,95,15,873/- as the maximum marginal rate. The conclusion reached by the Learned Commr. of Income Tax (Appeals) is erroneous and contrary to the provisions of law and the appellant prays that the said order may be set aside.
3. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has invoked the provisions of Section 164(1) and the Learned Assessing Officer had invoked the provisions of Section 161(1A) of Income Tax Act, 1961. On the same set of facts the different stands are taken by two different authorities. The appellant prays that on the facts & circumstances of the case neither the provisions of Section 161(1A) is applicable nor the provisions of Section 164(1) is applicable. The appellant prays that the addition made in the hands of the appellant amounting to Rs.7,95,15,873/- is not justified and be deleted.
4. On the facts & circumstances of the case the Learned Commr. of Income tax (Appeals) has erred in rejecting the claim of the appellant that this is a revocable trust and provisions of Section 61 to 63 are applicable and the income is to be taxed in the hands of the sole contributor being the sole beneficiary and the income of Rs.7,95,15,873/- is already offered for tax by single contributor being the sole beneficiary of the Trust.
5 On the facts & circumstances of the case the appellant prays that the status of the trust should be treated as Individual and not as Association of Persons. The appellant prays that the Learned Commr. of Income Tax (A) has not adjudicated on this issue while passing the order.
6. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has ignored the fact that the sole contributor to the trust, being IL&FS Financial Services Ltd., which is entitled to the income of the trust has already offered for tax the indexed capital gain of Rs.27,38,484/- (book profit of Rs.7,95,07,243/-) and interest income of Rs.8,630/- and there is double taxation of the same income in the hands of the appellant.
7. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in taxing the profit on sale of investments (book profit) of Rs. 7,95,07,243/- under the head Income from Business & Profession in the hands of the appellant trust invoking the provisions of Section 164(1). The appellant prays that the long term capital gain of Rs.27,38,484/- arising from the transaction with the book profit of Rs.7,95,07,243/- is already taxed in the hands of the sole contributor being the sole \ sole beneficiary. The appellant prays that the addition made by the Learned Commr. of Income Tax (Appeals) may be deleted. The Learned Cornmr. of Income Tax (A) has wrongly assumed that L&FS Financial Services Ltd has claimed exemption u/s 10(38) of Income Tax Act, 1961. The order passed by the Learned Commr. of Income Tax (Appeals) taxing the income in the hands of the appellant is in gross violation of the provisions of 3 ITA No.7499/Mum/14 Income Tax Act, 1961.
8. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in taxing the interest income of Rs.8,630/- under the head Income from Business & Profession in the hands of the appellant trust invoking the provisions of Section 164(1). The appellant prays that the interest income of Rs.8,630/- is already taxed in the hands of the sole contributor being the sole contributor being the sole beneficiary. The appellant prays that the addition made by the Learned Commr. of Income Tax (Appeals) may be deleted.
9. The Learned Commr. of Income Tax (Appeals) has erred in confirming the levy of interest u/s 234B at Rs. 88,09,740/-. The appellant denies the liability of payment of interest u/s 234B. On the facts & circumstances of the case the appellant submit that levy of interest u/s 234B at Rs. 88,09,740/- is not justified and be deleted."
2. The assessee trust was created by indenture of trust dated 01/02/2008 by its Settlor M/s. Infrastructure Licence & Financial Services Ltd. Under the Trust Deed, M/s. IL & FS Trust Co. Ltd. was appointed as trustee with an initial settlement of Rs.10,000/- . The trust was set up with the object of seeking contribution from qualified investors for making investment in the portfolio companies. Subsequently the assessee trust was also registered with the SEBI as a venture capital fund (VCF) vide certificate dated 21/07/2009 issued by the SEBI. The share of the contributors and beneficiaries are given in Schedule A of the Trust Deed under which there are 4 classes of contributors/beneficiaries under A,B, C and P categories of Units. The dispute in this appeal is only w.r.t. the contribution made by IL&FS Financial Services Ltd. under Class "P" Unit vide agreement dated 19/02/2008 executed between the Trustee of the assessee trust and IL & FS Financial Services Ltd. From per the contribution made by IL & FS Financial Services Ltd. under the class "P" Unit holder, the assessee trust made investment of Rs.89,35,88,387/- in the equity shares of Multi Commodity Exchange Ltd. (MCX) on 22/7/2008. During the year the assessee sold these shares of MCX on 20/8/2009 and earned the surplus of Rs.7,95,07,243/- apart from the interest income of Rs.8,630/- on fixed deposits in bank. The assessee filed its return of income on 20/07/2010 declaring nil income. The assessee claimed that the assessee earned long 4 ITA No.7499/Mum/14 term capital gain of Rs.7,95,07,243/- on sale of MCX shares which has been transferred to the beneficiaries alongwith interest income. The AO asked the assessee as to why the interest income and profit on sale of investment should not be taxed in the hand of the assessee trust/AOP in view of the CBDT Circular No.157 dated 26/12/1974. In reply the assessee contended before the AO that the assessee's case is covered under provisions of section 161 of the Act. It was further contended that the share of the beneficiaries was determinate in the private trust and the same is taxable in the hands of the beneficiaries as provided u/s. 161(1) of the Act. In sum and substance the assessee's argument before AO was that the income in a determinate trust is taxable in the hand of beneficiaries, hence it is exempt. The AO did not accept the contention of the assessee and held that the assessee is an AOP and does not fall under the provisions of section 161(1). The AO was of the view that the activity of the assessee are in the nature of business and as per the provisions of section 161(1A) the income earned by it is liable to be taxed in the hands of the assessee itself. Accordingly the AO assessed the entire amount of interest and profit on sale of shares as business income of the assessee . On appeal the CITA) held that the name of IL & FS Financial Services Ltd. claimed as sole contributor and beneficiary of "P" Units is not appearing either in the indenture of trust dated 1/2/2008 or in the supplementary indenture of trust date 13/2/2009. Therefore, CIT(A) was of the view that provisions of section 164(1) would come into play and entire income of the trust shall become liable to tax at the maximum marginal rate of Income tax Act, in its capacity as a representative assessee.
3. Before us, the ld. AR of the assessee has submitted that the assessee is an irrevocable trust but the AO and the CIT(A) have proceeded on the basis of wrong assumptions of facts regarding the beneficiaries of "P" units. The name of beneficiaries namely IL & FS is mentioned in the trust deed and is also the sole beneficiary having 100% share. He has further contended that the clauses of trust deed defines IL & FS services as beneficiaries being the sole contributors . The assessee trust was formed with the object of making investment to achieve long term capital appreciation primarily through private negotiated equity and equity linked investment. The trust has made 5 ITA No.7499/Mum/14 only two investment in shares of two unlisted companies namely Multi Commodity Exchange of India and Maithan Ispat Ltd. There was no other activity carried out by the trust. Out of two investments only one investment in MCX is sold during assessment year under consideration. Since the assessee trust got registration from SEBI as venture capital fund and MCX decided to list the company in the stock exchange, therefore, the investment in the shares of MCX were sold by the assessee because venture capital fund is not permitted to invest in the listed companies. The entire contribution was received from IL & FS Financial Services Ltd. which was invested in the shares of MCX. The trust has not borrowed any money nor received any contribution from any other person. He has further submitted that for assessment year 2008-09 and 2009-10 the assessee trust filed return and department has accepted the status as trust. Even for the assessment year 2008-09 and 2009-10 it was made clear that the income is taxable in the hands of IL & FS Financial Services being the sole contributor. For the assessment year 2009-10 the assessee trust earned interest income of Rs.11,434/- and dividend income of Rs.8,10,913/- which were both distributed to IL & FS Financial Services Ltd. The dividend was exempt and interest income was offered for tax by IL & FS Financial Services Ltd. The department has passed the order in case of IL & FS Financial Services Ltd. for the assessment year 2009-10 and taxed the income received from the assessee trust. The ld. AR has submitted that the provisions of section 61 to section 63 are applicable on the facts of the case . M/s. IL & FS Financial Services Ltd. being sole contributor is entitled for the income and has offered income for assessment year 2009-10 and 2010-11 which is taxed in its hands. Therefore, no income can be taxed in the hands if the assessee trust. The ld. AR has further contended that the provisions of section 164(1) are not applicable on the facts of the case as the provisions of section 164(1) can be applied only in the case of discretionary trust where the shares and names of beneficiaries are not identified or determinate. In the case of the assessee the shares and beneficiaries are identified and determinate, therefore, the provisions of section 164(1) cannot be applied. Further the provisions of section 161(1A) cannot be applied as the assessee trust is created with the intention of making 6 ITA No.7499/Mum/14 investment to achieve substantial long term capital appreciation. The only activity of the assessee trust is the investment in the unlisted company. Therefore, there is no element of the business activity in the present case. The beneficiary has included the income received for the assessment year under consideration in its total income and the said income has already been taxed in the hands of IL & FS Financial Services Ltd. as per assessment order passed u/s. 143(3). The ld. AR has filed copy of assessment order dated 12/3/2013 in case of IL & FS Financial Services Ltd.. Once the income on account of sale of shares has been taxed in the hands of the beneficiaries as long term capital gain the same cannot be assessed as business income in the hands of the assessee . Even otherwise the same income has been taxed twice once in the hands of the assessee and also in the hands of the beneficiary. He has further submitted that the AO has wrongly treated the assessee as AOP. In the case of the assessee the Settlor has settled the trust and thereafter, the Settlor has no role to play. The trustee manages the affairs of the trust and they are considered to be legal owner of the trust property. IL & FS Financial Services Ltd. is the sole contributor and beneficiary, therefore, when the beneficiary, trustee and Settlor are distinct persons/entities and the share of the beneficiary is determinate then the a trust cannot be considered as AOP. The ld. AR has referred to the relevant record and details of purchase and sale of shares and allocation of capital gains to the beneficiaries. He has also referred to the P&L Account of the beneficiary namely IL & FS Financial Services Ltd. and submitted that the beneficiary has shown long term capital gain and also paid tax @ 20% on the same. He has further submitted that the assessee submitted detailed submission before the AO, however, the AO has not considered the submissions and assumed wrong facts that the Settlor and beneficiary are the same. The assessee is a irrevocable trust and therefore the provisions of section 161(1A) or section 164(1) are not applicable. In support of his contention he has relied upon the following decisions :-
1. Dp. CIT vs. M/s. India Advantage Fund-VII ITA No.178/Bang/2012;
2. CIT vs. Marshons Beneficiary Trust 188 ITR 224(Bom.);
3. L.R. Patel Family Trust vs. Income tax Officer And Ors. 262 ITR 520(Bom.);
4. CIT vs. Babulal Grandsons Family Trust 301 ITR pg.271 (Alld.);7 ITA No.7499/Mum/14
5. CIT vs. Viners Industries 130 Taxmann pg.492 (Mad.);
6. CIT vs. Venu Suresh Sheela Trust 233 ITR 99(Mad.) and
7. CIT vs. Sinivali Trust 267 ITR 165 (Guj.) 3.1 The ld. AR has submitted that an identical issue has been considered by the Bangalore Benches of this Tribunal in the case of DCIT vs. M/s. India Advantage Fund-
VII (supra), wherein the Tribunal has held that the status of the assessee cannot be treated as AOP.
3.2 On the other hand the ld. DR submitted that the assessee trust was created with the object of making available financial assistance to portfolio companies and operating with the investment purpose of trust. Thus the object of the assessee trust was to provide financial assistance to the portfolio companies which is in the nature of business activity. In the case in hand the Settlor has settled with amount of Rs.10,000/- whereas all that activities are carried out by trust by receiving contribution for investment and for the benefit of the persons called beneficiaries. He has relied upon the orders of the authorities below and submit that as per trust deed the purpose and objective of the trust is carrying out the activity of investment through funds received from various parties which shows that the contributors and beneficiaries have a common objective of investment through the assessee and therefore, the assessee was rightly treated as AOP. The assessee is also earning interest income from lending of money which is a clear activity of business and profession. He has relied upon the judgment of Hon'ble High Court of Madras in the case of 260 ITR 433 CIT vs. ECC Holding and submitted that as per provisions of section 161(1A) the income received by the trust is assessable as representative assessee and liable at the maximum marginal rate of tax. He has further submitted that there was no scrutiny assessment in the earlier assessment year and therefore, the return of income filed by the assessee in the earlier assessment years cannot operate as resjudicata. Even there was no activity in the earlier assessment years and therefore, there was no question of assessment.
8 ITA No.7499/Mum/144. We have considered the rival submissions as well as perused the relevant material on record. As we have mentioned in the foregoing paras the assessee trust was created by the indenture of trust dated 01/02/2008 by the Settlor M/s. Infrastructural Licensing & Financial Services Ltd. appointing IL & FS Trust Co. Ltd. as trustee under the said trust deed. The object and purpose of creating the trust is given in recital of the trust deed as under :-
"The Settlor desires to establish a contributory trust called 'IL&FS-ORIX Trust' (hereinafter referred to as the "Trust" under the provisions of the Indian Trusts Act, 1882, for the purpose of making available financial assistance to Portfolio Companies (as defined below) and operating within the investment focus of the Trust and to achieve substantial long term capital appreciation, primarily through privately negotiated equity and equity-linked investments in these Portfolio Companies."
4.1 Thus, it is clear that the purpose of creating the trust was for making available financial assistance for portfolio companies and to achieve long term capital appreciation primarily through privately negotiated equity and equity-linked investment in portfolio companies. From the impugned orders of the authorities below it appears that there was a confusion of the Settlor, beneficiary and trustee because all these entities are having identical names to some extent. For the sake of convenience we refer the names of Settlor, trustee and beneficiaries as under :-
I Settlor - Infrastructure Leasing & Financial Services Ltd.
II Trustee - IL & FS Trust Co. Ltd.
III Beneficiary - As per schedule A as under :-
SCHEDULE A
THE BENEFICIARIES
Contributors / Beneficiaries
Class A Beneficiaries
Name Percentage:
9
ITA No.7499/Mum/14
ORIX Corporation 90%
IL & FS 10%
Class B Beneficiary
Name: Percentage:
ORIX Corporation 90%
IL&FS 10%
Class C Beneficiary
Name: Percentage:
IL & FS Investment Managers Limited 100%
Class P Beneficiary
Name: Percentage:
IL & FS 100%
Both the AO and CIT(A) proceeded on the understanding that the Settlor and the beneficiary is the same.
4.2. Further, the CIT(A) has given more emphasis on two aspects viz. (i) IL & FS Financial Services Ltd. is not appearing in the deed of trust dated 01/02/2008 as well as in supplementary indenture of trust dated 13/02/2009 and the Settlor and beneficiary of "P" units is same. In support of its finding the CIT(A) has made reference of schedule-A (supra). The controversy is only regarding the beneficiary under clause "P" in schedule A as IL & FS. At the first look it appears that IL & FS is the short form of Infrastructural Leasing & Financial Services Ltd. which is the Settlor of the assessee trust. Therefore, the confusion is not baseless but the same is due to the manner in which the name of the beneficiary appears in schedule-A. The ld. AR of the assessee has pointed out that the name of the beneficiary appearing in schedule A is IL & FS meaning IL & FS Financial Service Ltd. as per definition clause of the indenture of trust. It appears that the Settlor and beneficiary are two separate entities though having similar confusing 10 ITA No.7499/Mum/14 names in the deed of trust. (ii) The second factual controversy is regarding the beneficiary has offered its income to tax as long term capital gain . The assessee claimed that this amount has been offered by IL & FS Financial Services Ltd. to tax as long term capital gain whereas CIT(A) has held that though the said amount was shown in the return of income but it was claimed as exempt under section 10(38). The relevant finding of the CIT(A) in para -6, is as under :-
"6. ...
6.1.....
i) ....
ii) ...
iii) ...
iv) ...
v) ...
vi) ..
vii) ...
viii) The appellant vide letter dated 20.05.2013 filed during the course of appellate proceedings, vide para no. 9 of the letter has stated that in the assessment order passed for A.Y. 2010-11 in its case, i.e. IL & FS Financial Services Ltd, the AO has taxed the long term capital gain of Rs. 27,38,484/- received from the appellant Trust u/s 143(3) of the Act, and, when the income has already been taxed in the hands of the sole beneficiaries, the said income is once again taxed by the AO in the hands of the appellant's Trust. As discussed, the above income has been claimed exempt by the appellant u/s 10(38) of the Act, in the return of income filed in the case of IL & FS Financial Services Ltd and the AO has also not taxed the above income in the assessment completed vide order dated 12.03.2013. As seen above, the claim made by the IL & FS Financial Services Ltd. regarding the above income being exempt u/s. 10(38) of the Act, is not bonafide and if there was any mistake, the appellant never rectified it by filing revised return of income or pointing out the same to the AO during the course of assessment proceedings that the above amount is taxable in the hands of IL & FS Financial Services Ltd."
4.3 To controvert the finding of the ld. CIT(A), the ld. AR referred to the P&L Account of IL & FS Financial Services Ltd. as well as the assessment order passed under section 143(3) for the assessment year 2010-11 in the case of IL & FS Financial Services Ltd. and submitted that the finding of CIT(A) are factually incorrect. He has forcefully contended that in the case of irrevocable trust where the share of the beneficiary is determinate the provisions of section 161(1A) or section 164 are not applicable. In support of his contention he has relied upon the decision of Bangalore 11 ITA No.7499/Mum/14 Bench of this Tribunal in the case of India Advantage Fund-VII (supra). It is pertinent to note that when the CIT(A) has held that the provisions of section 164 are applicable then the issue of treating the assessee as AOP under section 161(1A) is no more exist and accordingly, the decision of the Bangalore Bench of this Tribunal to the extent, of finding on the point of treating the trust as AOP, becomes irrelevant. As far as the question of applicability of section 164(1) is concerned, the CIT(A) has proceeded on the basis of fact that the name of IL & FS Financial Services is not appearing either in the deed of trust or in the supplementary deed of the trust. Further, there was also confusion about the fact that the Settlor and beneficiary are one and the same. This is a crucial factual aspect of the case and requires a proper verification by considering the relevant evidences as well as contentions of the assessee. Another crucial confusion as emerging from the records is regarding income arising from sale of shares by the assessee trust and distributed to the beneficiaries was offered to tax by IL & FS Financial Services Ltd. and assessed accordingly. Since these two factual aspects requires a clear and proper verification and examination as well as a clear finding, therefore in the facts and circumstances of the case we set aside this issue to the record of CIT(A) for deciding the same denovo after verification of the facts, consideration of the contentions as well as decisions relied upon by the assessee. Needless to say the assessee may be given appropriate opportunity of hearing before passing the fresh order.
5. Appeal of the assessee allowed for statistical purposes.
Order pronounced in the open court on 13/02/2015.
आदेश क! घोषणा खुले यायालय म* +दनांकः 13/02/2015 को क! गई ।
Sd/- Sd/-
(D. Karunakara Rao) (Vijay Pal Rao )
लेखा सद य / ACCOUNTANT MEMBER याियक सद य / JUDICIAL MEMBER
मुंबई Mumbai; +दनांक Dated 13/02/2015
व.िन.स./ Jv, Sr. PS
12
ITA No.7499/Mum/14
आदेश क ितिलिप अ िे षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु/(अपील) / The CIT(A)-
4. आयकर आयु/ / CIT
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR,
ITAT, Mumbai
6. गाड2 फाईल / Guard file.
आदेशानुसार/
ार BY ORDER,
स यािपत ित //True Copy//
उप/सहायक
उप सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई / ITAT, Mumbai.