By TIOL News Service

MUMBAI, FEB 24, 2015: THE issue before the Bench is - Whether matter requires afresh consideration when there exists confusion about the fact that the Settlor and beneficiary are one and the same and further no verification has been done regarding the income being taxed in the hands of the ultimate beneficiary. YES is the answer.

Facts of the case

The assessee trust was created by indenture of trust 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. 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. From the contribution made by IL & FS Financial Services Ltd. under the class "P" Unit holder, the assessee trust made investment in the equity shares of Multi Commodity Exchange Ltd. (MCX). During the year the assessee sold these shares of MCX and earned the surplus apart from the interest income on fixed deposits in bank.

The assessee filed its return of income declaring "nil" income after claiming that the assessee earned long term capital gain 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 was 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 was not appearing either in the indenture of trust or in the supplementary indenture of trust. 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. Aggrieved, the assessee has filed this appeal.

Having heard the parties, the Tribunal held that,

++ 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 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 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);

++ to controvert the finding of the CIT(A), the 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 Bench of this Tribunal in the case of India Advantage Fund-VII. 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 de novo after verification of the facts, consideration of the contentions as well as decisions relied upon by the assessee.

(See 2015-TIOL-200-ITAT-MUM)