India: In ITAT We "Trust"

Last Updated: 18 December 2014
Article by Phoenix Legal

The Income Tax Appellate Tribunal (the Tribunal) "B" Bench, Bangalore has been making headlines across the country of late for its pro-assessee ruling in the decision in The Deputy Commissioner of Income Tax, Circle 9(1), Bangalore vs. M/s India Advantage Fund pronounced on October 17, 2014. The Tribunal has added much strength to Trusts under the Indian Trusts Act, 1882 doubling up as investment vehicles by ruling that the assessment of income tax vis-à-vis the pooling of funds into a revocable trust would be in the hands of the beneficiaries and not against the trustee in the capacity of a representative assessee.

The appeal before the Tribunal was with respect to the assessment of India Advantage Fund (the Trust/ Assessee Trust), setup as a trust under the provisions of the Indian Trusts Act, 1882 through the execution of a trust deed, with ICICI Venture Funds Management Company Limited (Settlor/ Investment Manager) acting as the Settlor and The Western India Trustee and Executor Company Limited as the Trustee. The objective of creation of the trust was to facilitate investment in certain securities called mezzanine instruments and to achieve commensurate returns to the contributors or beneficiaries. The fund collected from the contributors together with the initial corpus was to be handed over to the trustee.

Though the saga is yet to come to a close (since an appeal before the High Court and then on to the apex court still lies), Tribunal's rejection of the appeal has been welcomed by all factions of the business world. The judgment has brought much needed clarification of the repercussions of the CBDT Circular No. 13/2014 (the Circular) according to which all Alternate Investment Funds subject to the SEBI (Alternate Investment Funds) Regulations, 2012 and which are not venture capital funds and non-charitable trusts, where the names and the beneficial interest of the investors is not mentioned are to be treated to be taxed at the marginal rate of tax in the hands. The Tribunal has also discussed key concepts such as discretionary and determinate trusts, Association of Persons (AOP), revocable trusts, and the interpretation of the relevant provisions of the Income Tax Act, 1961 (the Act).

The Revenue's case for assessment

Following the decision of the Assessing Officer (AO) that the entire income of the Trust should be taxed in the hands of the representative Trustee itself as per the provisions of Section 164 (1) of the Act, the Trust preferred an appeal before the Commissioner of Income Tax – Appeals (CIT(A)) where the decision was reversed and the NIL returns filed by the Trust were deemed fit and proper and held that no income was taxable in the trustee's hands. Accordingly, the Revenue preferred an appeal before the Tribunal inter alia on the following grounds:

  • The CIT(A) has erred in holding the Trust to be a revocable trust and accordingly not liable to be taxed since the tax obligations have been fully discharged by the beneficiaries;
  • The names of the beneficiaries are not identifiable in the trust deed;
  • The shares of the beneficiaries are not mentioned in, and not determinable on the basis of the trust deed;
  • The distribution of shares is not as per the formula set out in the trust deed; and
  • The CIT(A) erred in holding the Trust not to be an AOP;

The Tribunal's rationale

The nature of the Trust, i.e. whether it is discretionary or non-discretionary would play a crucial role in deciding whether the income of the Trust would be taxed in the hands of the representative trustee or in the hands of the beneficiaries. The Tribunal noted that the concept of representative assessment vide the introduction of Section 164 of the Act was to curb unscrupulous tax avoidance. Essentially, the position that the law intended to prevent was the treatment of a trust as determinate at the time of assessment, while in truth its distribution of income was very much discretionary.

Revocable Trust:

The Tribunal observed that the Assessee Trust had submitted before the AO and the CIT(A) that the assessment of the funds is to be made in the hands of the beneficiaries in light of Section 164 of the Act since the Trust would qualify as a revocable trust in accordance with the provisions of Sections 61, 62 and 63 of the Act. On an analysis of the provisions of the trust deed and other related agreements such as the private placement memorandum and the agreement entered into by the Trust with each beneficiary, the Tribunal held that that the Trust is very much determinate in nature.

The Tribunal clarified that the law does not ordain that the individual names of each beneficiary should be specified in the trust deed and that the definition of a beneficiary in Clause 1.1.13 of the trust deed would suffice to identify the beneficiaries. With respect to the argument of the Revenue regarding the ascertainment of share of the beneficiaries, the Tribunal held that Clause 6.5 of the trust deed clearly specifies the manner in which the income of the Assessee Trust is to be distributed; the Tribunal added further that as rightly contended by the Assessee Trust, the requirement of the law is not for the trust deed to specify the percentage share of the beneficiary for the trust to be determinate.

Accordingly, for such reasons, the Tribunal held that the Trust would fall squarely within the understanding of a revocable trust as under Section 61 read with Section 63 of the Act.

Determinate trust not AOP:

In support of its submission that the Trust is to be regarded an AOP, the Revenue contended that there is no separate status of a Trust for purpose of assessment envisaged under the Act, and that the definition of person under Section 2(31) of the Act which deals with the definition of a person does not specifically refer to a "Trust".

The Tribunal, after considering the evolution of the definition of a person since the Income Tax Act of 1922, held that the definition of "person" under Section 2(31) of the Act includes Association of Persons. The Tribunal then proceeded with a threadbare analysis of the relevant provisions of the trust deed and concluded that the beneficiaries contributed their monies to the Assesee Trust, and a separate agreement was entered into between the Assessee Trust and each beneficiary. There is no inter se arrangement between one beneficiary and another as each of them entered into separate contribution arrangement with the Assessee Trust.

The Tribunal observed further, that the beneficiaries have not setup the Trust and therefore it cannot be said that the beneficiaries have come together with the object of carrying on investment in mezzanine funds, which is the object of the trust. The beneficiaries are mere recipients of the income earned by the trust. Accordingly, in this manner, the Tribunal dismissed the Revenue's argument that the Trust is an AOP.M

No retrospective effect of the Circular

Besides qualifying with elaborate reasoning that the Trust in the present case is very much revocable and determinate, and accordingly not of the sort contemplated by the Circular, the Tribunal also considered the applicability of the Circular itself. The Circular, dated July 28, 2014, was held not applicable for the reason that it was not in force at the relevant Assessment Year when the assessment of the Trust was made by the AO. Relying upon the decision of the Hon'ble Bombay High Court in BASF (India) Ltd. & Anr. vs. W. Hasan, CIT & Ors. 280 ITR 136 (Bom), the Tribunal concurred that Circulars not in force in the relevant Assessment Year cannot be relied upon and given effect to.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Shardul Amarchand Mangaldas & Co
S.C. Vasudeva & Co.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Shardul Amarchand Mangaldas & Co
S.C. Vasudeva & Co.
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions