DUVVURU RL REDDY, JUDICIAL MEMBER:-This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 4, Chennai dated 30.09.2016 relevant to the assessment year 2009-10. The assessee has raised the following grounds:
“The order of the Commissioner (Appeals) is contrary to law and opposed to the facts and circumstances of the case. 1. The learned CIT(A) has erred on the facts and circumstances of the case and in law in confirming the learned AO's order that the Appellant is an indeterminate trust without considering the fact that on a combined reading of the trust deed and the contribution agreement, the names of the beneficiaries and their respective share of income in the trust are determined and ascertained at all times.
2. The learned CIT(A) has failed to take cognizance of the fact that while the learned AO verified whether tax is paid on the interest income relating to 17 beneficiaries remaining with the Appellant, the learned AO did not verify whether tax is paid on the interest income relating to the remaining 639 beneficiaries who have opted to rollover from the Appellant to TVS Shriram Growth Fund. Therefore, the learned CIT(A) ought to have held that the order passed by the learned AO was not in conformity with the directions of the Hon'ble Income-tax Appellate Tribunal, Chennai in ITA No.276/Mds/2014, dt. 2.9.2015
3. The learned CIT(A) ought to have appreciated the fact that although TVS Shriram Growth Fund is not a beneficiary in the Appellant trust, the interest income in relation to the same 639 beneficiaries who have opted to roll over of their capital commitment from the Appellant to TVS Shriram Growth Fund, has also been assessed to tax in the hands of TVS Shriram Growth Fund as its income by the learned AO vide his order dt.11.3.2016. Thus when the income is offered by the beneficiaries on which tax have already paid the taxes, taxing the same income in the hands of TVS Shriram Growth Fund and the Appellant would tantamount to triple taxation of the same income.
4. The learned CIT(A) ought to have appreciated that the interest income having been assessed in the hands of TVS Shriram Growth Fund as its income, the same income cannot be taxed in the hands of the Appellant.
5. Without prejudice to the above, the income assigned/transferred to TVS Shriram Growth Fund / beneficiaries should be excluded or allowed as a deduction in the hands of the Appellant.
6. The learned CIT(A) has erred on the facts and circumstances of the case and in law in confirming the learned AO's order that 50% of the management expenses is to be disallowed in the hands of the Appellant without considering that the entire interest income has been taxed in the hands of the Appellant.
The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.”
2. Brief facts of the case are that the assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short] was completed on 30.12.2011 and the same was confirmed by the ld. CIT(A). Against the appellate order, the assessee filed an appeal before the Tribunal and the Tribunal has remitted the matter back to the Assessing Officer with various observations. In compliance to the order of the Tribunal, the Assessing Officer required the assessee to furnish all details/evidences in support of their claims. Accordingly, the assessee has filed written submissions. After considering the submissions of the assessee as well as various clarification as sought for to substantiate the claim of the assessee, which were not furnished before the Assessing Officer at the time of original assessment proceedings, after reducing 50% of management fee paid to TVS Capital Funds Ltd. and income already offered in the hands of beneficiaries, the Assessing Officer determined the taxable business income at Rs. .95,59,780 against the total interest income of Rs. .1,38,83,203/-.
3. On being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) by raising various grounds. After considering the submissions of the assessee and facts of the case, the ld. CIT(A) the appeal of the assessee.
4. On being aggrieved, the assessee is in further appeal before the Tribunal.
5. We have heard both sides, perused the materials available on record and gone through the orders of authorities below. We have also perused the details filed in the form of paper book, as filed before the authorities below. Adverting to first ground raised in the appeal of the assessee the facts are that the assessee is an AOP Trust, which was formed to receive unit contributions from High Net worth Individuals [“HNls” in short] towards the Capital amount committed by them as per the terms of Contribution Agreements and provided return on such investments. The assessee Trust was able to mobilize an amount of Rs. .40,35,34,375/- from HNls. Subsequently, TVS Shriram Growth Fund was formed as a SEBI registered VCF. After the registration of TSG Fund with SEBI, it was felt desirable to transfer the commitments from the assessee fund to TSG Fund. The roll-over of commitments was undertaken in most of the cases based on the expression of consent. As on 31/03/2009, all but 17 investors had expressed their consent to roll-over commitment to TSG Fund. The assessee Trust, therefore, out of its earnings from bank deposits and credited the proportionate value corresponding to the 17 investors to the Profit and Loss Account and transferred the balance relating to the rolled over 639 contributors to TSG Fund and excluded the same from the income. The interest income is earned from the bank deposits in respect of the period before the roll-over was undertaken. The quantum of income also supports this finding. It was the submissions of the assessee that it had offered the proportionate value relating to the 17 contributors retained. Even this income was brought to zero, since the assessee treated itself as a Representative Assessee, by which the profits were transferred to the hands of the beneficiaries and get taxed in them. Contrary to the above, the Assessing Officer brought the entire receipt to taxation. The ITAT vide its order dated 02.09.2015 remitted the file back to the Assessing Officer for re-examination of the entire aspect involved in determining the taxable income of the assessee for the year.
5.1 The income of Alternate Investment Funds [AIFs in short], other than Venture Capital Funds, will not be exempt under section 10(23FB) of the IT Act, and there is no specific provisions in the IT Act for such other AIFs. Therefore, taxation of such funds, like that of the assessee, would depend on the legal status of the fund i.e. company, limited liability partnership or trust. If the Fund is setup as a trust, then it will be taxed on the principles of taxation of trusts. The income of a Trust would be subject to tax as per the principles of taxation of trusts under sections 161 to 164 of the IT Act. For a Trust to be taxed under these sections, there are certain tests to be satisfied, such as, the trust has to be an irrevocable and determinate trust. It should further be a non-discretionary trust.
5.2 Section 164 of the IT Act reads as "Charge of tax where share of beneficiaries unknown" lays down the conditions to give "pass through" status to a Trust. As per Explanation 1 to the section, the trust shall be considered to be a 'determinate trust', if it fulfils two conditions:
(i) name of the beneficiaries are specified in the trust; and
(ii) the individual share of the beneficiaries are ascertainable on the date of the trust.
Therefore, it is essential that the Deed of Trust itself specifies the category of the Beneficiaries therein and prescribes the methodology for determination of share of each Beneficiary; such trust shall be a determinate trust.
5.3 As per section 164(1), if the trust does not satisfy the above test of determinacy, then the income of trust would be chargeable to Maximum Marginal Rate (MMR), subject to certain exceptions as laid down in the section. However, if the trust satisfies the test, then the trust will be treated as "pass through" conduit subject to the provisions of section 160 of the IT Act. By virtue of section 160 of the IT Act, the ITD has an option to assess the tax in the hands of the beneficiary or in the hands of the trustee, as the case may be. Section 160 lays down the meaning of representative assessee who shall be deemed to be an assessee for the purposes of the IT Act. Section 160(1)(iv) states that trustee(s) appointed under a trust will be treated as representative assessee, in respect of income received or income which the trustee is entitled to receive on behalf of any of the beneficiaries under a trust.
5.4 Further, section 161 read with section 160 (1) (iv) of the IT Act, a trustee of a trust is treated as a representative assessee, and the representative assessee is liable to pay tax on the income in respect of which he is a representative assessee, "in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him".
5.5 For getting a "pass through" treatment, the trust should be a determinate and non-discretionary trust. In order to form a determinate trust, the beneficiaries should be known and the individual share of those beneficiaries should be ascertainable as on the date of trust deed. But in the case under consideration the beneficiaries are not incorporated in the Trust deed. The investment manager gathers the funds from the contributors and the benefit is passed on to the contributors based on their proportion of investments in the assessee Trust. The exception to this rule, and providing "pass through" status to a Trust, even though the contributing beneficiaries are not mentioned in the Deed of Trust, is only extended to AIF (VCF) which are Registered with SEBI and eligible for exemption under section 10(23FB) r.w.s. 115U of the Act.
5.6 In the second round of litigation, the Assessing Officer has concluded that the assessee is not a Determinate Trust and when not found eligible for deduction under section 10(23FB) of the Act as an alternate, cannot be extended the benefit of section 164 of the Act. The "pass through" status has been denied since the assessee is neither determinate trust nor non-discretionary trust and therefore, the income gets taxed in the hands of the Representative assessee and not in the hands of the beneficiaries.
5.7 Since on the date of institution of the Trust deed, the identities of the contributors/beneficiaries are not known, the ld. CIT(A) held that the assessee trust cannot be categorised itself as a Determinate Trust so as to gain pass through status. Further, pass through status is available only when the trust is an approved fund under section 10(23FB) of the Act. When the assessee is not a SEBI approved Alternate Investment Fund, it cannot claim pass through status. If every trust were to become eligible for pass through status automatically, then there is no need for an enactment under the Act in the form of 10(23FB) r.w.s. 115U of the Act. When this section 10(23FB) finds a firm placed in the statute, it construes that all other trusts/funds cannot enjoy pass through status unless it complies with the provisions of section 10(23FB) of the Act. In view of the above, the ld. CIT(A) upheld the findings of the Assessing Officer that the assessee is an indeterminate trust.
5.8 Admittedly, on the date of institution of the Trust deed, the identities of the contributors/beneficiaries are unknown. Therefore, the assessee trust cannot be held as a Determinate Trust. Further, before the Assessing Officer, the assessee’s AR, vide his letter dated 09.12.2015, has emphasized the assessee is not governed by the provisions of section 10(23FB) of the Act. Therefore, the assessee cannot get “pass through” status. Therefore, the ld. CIT(A) has held the assessee is an indeterminate trust.
5.9 The decision of the Madras High Court in the case CIT v. P. Sekar Trust dated 15th April, 2009 is not applicable to the facts of the present case, because, in it, the beneficiaries are incorporated on the day of institution of the trust deed and moreover, they did not receive any income in that year. Further the individual share of the beneficiaries is ascertainable on the date of the trust. When the beneficiaries have no income to be taxed, then how will the representative assessee become taxable? But in the present case, the names of the beneficiaries are not specified in the trust and the individual shares of the beneficiaries are not ascertainable on the date of the institution of the trust. Therefore, the assessee cannot be categorised itself as a determinate trust and find no reason to interfere with the orders of the ld. CIT(A) on this issue. The other case law filed in the paper book have no application to the facts of the present case. Accordingly, the first ground raised by the assessee is dismissed.
6. The next ground raised in the appeal of the assessee is that the ld. CIT(A) ought to have held that the order passed by the Assessing Officer was not in conformity with the directions of the ITAT in its order dated 02.09.2015 with regard to verification of interest income of 639 beneficiaries before transfer to TVS Shriram Growth Fund [TSGF]. With regard to the above issue, in the second round of litigation, the Assessing Officer has held as under:
“8.2 Undoubtedly, the interest is earned on Fixed Deposits, during the period of holding the contributions from 656 Members, before being transferred to TSGF. This is also confirmed by the fact that the amount of contribution from 17 retained members cannot derive the magnitude of Interest income reported by the assessee Trust. So it is the income of the assessee Trust only. So it requires to be taxed in the hands of the assessee only.
8.3 The shifting of funds of 639 members is accomplished subsequent to the interest earning period and thus cannot be the income of TSGF. The interest is earned while the assessee held the funds as its own before transfer to TSGF. Hence the income passed on to TSGF is only application of income earned by the assessee Trust and therefore cannot be allowed as expenditure.
8.4 Even on assuming but not accepting that the Assessee is a Determinate Trust, the Income shifted to the TSGF requires to be taxed in the hands of the assessee only, because TSGF is not the beneficiary/contributor to the assessee Trust, but its successor.”
6.1 The assessee has collected unit contributions from 656 contributors amounting to Rs. .40,35,34,375/- and they are classified as High Net Individuals by the assessee. This contribution has been called-up and received by the assessee on various dates during the course of the relevant previous year. Out of the amount collected above, an amount of Rs. .39,60,84,375/- (639 Contributors) was transferred by the assessee to TVS Shriram Growth Fund in 6 branches from 18.09.2008 to 31.03.2009 for the purpose of better synergy and higher returns. The assessee has retained an amount of Rs. .64,50,000/- (17 Contributors) for its operational activities as on 31.03.2009. In the first round of litigation, the assessee has contended before the Tribunal that whatever interest income received by the assessee has already been transferred to the beneficiaries and therefore, the entire interest income of the 639 beneficiaries should not be taxed in the hands of the assessee. Accordingly, the Tribunal remitted the matter to the file of the Assessing Officer for verification. Admittedly, the assessee has transferred 639 beneficiaries to TSGF from 18.09.2008 to 31.03.2009. Since the Assessing Officer has observed that the above beneficiaries have been transferred to TSGF subsequent to the interest earning period and therefore, the interest income cannot be the income of TSGF. The Assessing Officer has further observed that the interest was earned while the assessee held the entire funds as its own before transfer to TSGF. Hence, the income passed on to TSGF was only application of income earned by the assessee and therefore, the same cannot be allowed as expenditure. The assessee has not filed any details of having transferred the interest income to TSGF so that the assessee cannot be tax on the interest income, which were not retained by it. Under the above circumstances, we are of the opinion that the Assessing Officer has rightly brought to tax the interest income in the hands of the assessee since the transfer of 639 beneficiaries to TSGF was accomplished subsequent to the interest earning period and therefore, interest income cannot be taxed in the hands of TSGF.
7. With regard to next ground raised in the grounds of appeal in Ground No. 3, 4 & 5, the taxability of any income of any other assessee is not subject matter of present appeal preferred by the assessee. Thus, the grounds raised by the assessee are dismissed. 8. The last ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in confirming the disallowance of 50% of the management expenses. The Investment Manager, M/s. TVS Capital Funds Limited had played the crucial role in obtaining Capital Commitments from HNls and it is because of this act, that the assessee could garner funds from the contributors. The funds deposited are out of these capital commitments and not on account any surplus. The investment manager is eligible for a Management fee of 2% on the quantum of such capital commitments of Rs. . 40,35,34,375/- and thus the corresponding expenditure is allowable. The value of Management fee that pertains to the capital commitment obtained by the Investment Manager computed @ 2% works out to Rs. .80,70,685/-.
8.1 However, by the shifting of substantial portion of the funds to TSGF, during the year, TSGF is also equally benefitted. Hence, in all fairness 50% of such expenses pertain to TSGF and hence the balance portion of 50% of the Management fee of Rs. . 40,35,344/- is allowed as expenditure in the hands of the assessee and the balance was brought to tax. Since the expenses required to be shared and therefore, the ld. CIT(A) has observed that the disallowance made by the Assessing Officer is quite reasonable. The Assessing Officer has given proper reason for making the disallowance, which was confirmed by the ld. CIT(A). Before us, the ld. Counsel for the assessee could not controvert the above findings of the Assessing Officer with valid reason to take different view. Thus, the ground raised by the assessee is dismissed.
9. In the result, the appeal filed by the assessee is dismissed.