BOMBAY HIGH COURT
UTI MUTUAL FUND VS. INCOME TAX OFFICER
DATED : 06.03.2013
Summarised
Judgement (Scroll for Complete Judgement)
The Hon’ble Court
observed that the caution which was addressed by the Division Bench in the case
of Coca Cola India Pvt. Ltd. has again not been followed.
==============================================
Complete Judgement
BOMBAY HIGH COURT
UTI MUTUAL FUND VS. INCOME TAX OFFICER
DATED : 06.03.2013
IN THE HIGH
COURT OF JUDICATURE AT BOMBAY
ORDINARY
ORIGINAL CIVIL JURISDICTION
WRIT PETITION
(LODG.) NO.523 OF 2013
UTI
Mutual Fund,
Through
its Trustees UTI Trustee
Company
Pvt. Ltd., Mumbai ..Petitioner.
Versus
Income
Tax Officer -19(3)(2),
Mumbai
and others ..Respondents.
Mr.
S.E. Dastoor, Senior Advocate with Mr. Madhur Agarwal and Mr. Atul K.
Jasani
for the Petitioner.
Mr.
P.C. Chhotaray with Ms. Padma Divakar for the Respondents.
6
March 2013.
ORAL
JUDGMENT :
1. Rule, by consent returnable
forthwith. With the consent of counsel and at their request, the petition is
taken up for hearing and final disposal.
3. The Petitioner is registered as a
mutual fund with the Securities and Exchange Board of India (SEBI) and has
contributed to the funds of nine trusts :
1. Indian Corporate Loan Securitization
Trust 2008 - Series 24,
2. Indian Corporate Loan Securitization
Trust 2008 - Series 22,
3. Indian Corporate Loan Securitization
Trust 2008 - Series 27,
4. Indian Corporate Loan Securitization
Trust 2008 - Series 28,
5. Indian Corporate Loan Securitization
Trust 2008 - Series 38,
6. Indian Corporate Loan Securitization
Trust 2008 - Series 40,
7. Indian Corporate Loan Securitization
Trust 2008 - Series LVI,
8. Indian Corporate Loan Securitization
Trust 2008 - Series LX and
9. Indian Commercial Loan Trust Series
VIII 2008;
4. The trust issued Pass Through
Certificates (PTCs) to which the Petitioner has contributed. The Petitioner is
a beneficiary of the trusts. Regulation 43 of the SEBI (Mutual Funds)
Regulations 1996 categorizes the investments which mutual funds such as the
Petitioner are permitted to make. Among them are securitized debt instruments,
which are either asset backed or mortgage backed securities. The Reserve Bank
issued guidelines on 2 February 2006 on securitization of standard assets. The
guidelines stipulate that banks and other financial institutions can securitize
debts by assigning the debts to a bankruptcy-
remote Special Purpose Vehicle (SPV) for
immediate cash payment. The cash flow from the underlying pool of assets is
used to service the securities issued by the SPV. Securitization under the
guidelines follows a two stage process which is as follows :
"In the first stage there is sale
of single asset or pooling and sale of pool PNP 3/14 WPL523-6.3 of assets to a
'bankruptcy remote' special purpose vehicle (SPV) in return for an immediate
cash payment and in the second stage repackaging and selling the security
interests representing claims on incoming cash flows from the asset or pool of
assets to third party investors by issuance of tradable debt securities."
5. The first trust was declared by IL
& FS Trust Company Limited for the securitization of loans of Rs.80 Crores
granted to Tata Capital Limited by Yes Bank. The first trust issued PTCs in two
series, A1 and A2 which were subscribed to by the Petitioner. The beneficial
interest of the Petitioner in the trust is proportionate to the PTCs
subscribed. The Petitioner subscribes to the PTCs issued by the trust from
separate funds of specified schemes and interest income earned is credited to
the scheme from which the PTC investment is made by the Petitioner. Yes Bank
Limited has assigned the loans due to it from Tata Capital Limited to the
trust. The other trusts are stated to be similar to the trust declared by IL
& FS Company Limited.
6. During the financial year relevant to
Assessment Year 2010-11 the trusts received interest from the borrower on
account of the loans assigned to the trusts. This was distributed to the
beneficiaries including the Petitioner which has been reflected as income in
the Profit & Loss Account of the Petitioner. The trusts filed returns of
income for Assessment Year 2010-11. On 31 October 2012 the First Respondent
passed orders of assessment under Section 143(3) in respect of the trusts, to
treat the trusts as Associations Of Persons (AOP) and held the interest income
to be income earned under the head "income from business and
profession". According to the Assessing Officer, the trusts were a
smokescreen whose entity should be disregarded since the trust is an AOP having
members in the form of mutual funds. The Assessing Officer inter alia held that
even if the assessee were to be regarded as a trust, the assessment PNP 4/14
WPL523-6.3 would be under Section 161(1A) as the trusts are engaged in business
and would be chargeable at the maximum marginal rate of tax. The trusts have
filed appeals before the CIT(A) which are pending.
7. On 17 January 2013 the trusts filed
applications under Section 220(6) for holding recovery in abeyance. The First
Respondent on 20 February 2013 rejected the applications for stay of demand. On
21 February 2013 applications were stated to be filed before the CIT-19 for
stay of the recovery of the demand.
The CIT-19 by an order dated 5 March
2013 has declined to hold the demand in abeyance, thereby rejecting the applications
filed by the trusts.
8. The First Respondent has issued a
notice dated 25 February 2013 to the Petitioner stating that (i) The assessment
of the trusts was completed under Section 143(3); (ii) The trusts failed to
make payment; and (iii) The Assessing Officer was informed that the trust is
not in existence as on date and therefore no recovery can be made. By his
communication the Assessing Officer has called upon the Petitioner in its
capacity as a contributor and beneficiary of the trusts to pay the outstanding
demand to the extent of its share of the investment in the trusts under the
provisions of Section 177(3) of the Income Tax Act of 1961. Before the Court it
is not in dispute that no order of assessment has been passed against the
Petitioner since the income of the Petitioner is exempt under the provisions of
Section 10(23D). The demand as against the trust is sought to be enforced in
the hands of the Petitioner on the ground that it is a contributory and
beneficiary and to the extent of its share of investment in the trust.
9. A similar issue pertaining to
Assessment Year 2009-10 and relating to the PNP 5/14 WPL523-6.3 Petitioner came
up for consideration before this Court. On 14 March 2012 the Division Bench of
this Court rendered judgment in UTI Mutual Fund v. Income Tax Officer1. In that
case the issue was whether the Revenue should be permitted to take coercive
steps under Section 226(3) in the form of a garnishee notice which had been
issued to the bankers of the Petitioner. At that stage the Court, while
clarifying that it was not called upon to adjudicate upon the merits of the
rival contentions and was dealing only with the issue of whether the demand
could be enforced in the hands of the Petitioner pending the disposal of the
appeal before the CIT (A) held as follows :
"From the record before the Court
however it now emerges as an admitted position that the demand against the
Trust is sought to be enforced against the petitioner on the basis of the
provisions of Section 177(3). The Petitioner has not been independently
assessed and the issue which falls for determination is whether the petitioner
has made out a substantial prima facie case to seek protection against coercive
proceedings at this stage pending an appeal filed by the Trust against the
assessment made in respect of the Trust. Sub-section (3) of Section 177
provides that where a business which has been carried on by an association of
persons has been discontinued, every person who was at the time of such
discontinuance or dissolution a member of the association of persons, shall be
jointly and severally liable for the amount of tax, penalty or other sum
payable and all the provisions of the Act, so far as may be, shall apply to any
such assessment or imposition of penalty, or other sum. Prima facie, the
submission of the petitioner that the Trust itself cannot be regarded as being
an association of persons finds support from a judgment of a Division Bench of
this Court in CIT v.
Marsons Beneficiary Trust [1991] 188 ITR
224/[1990] 52 Taxman 454 (Bom.). The Division Bench of this Court in that case
held that the beneficiaries of a trust cannot be construed as having set up the
trust nor had they authorised the trustees to carry on business. The
beneficiaries who are named in the trust as recipients of the income of the
trust cannot be considered as an association of persons. Therefore, ruled the
Division Bench, the trustees also cannot take on the character of an
association of persons. The judgment of the Division Bench was followed
subsequently by another Division Bench of this Court in L.R. Patel Family Trust
v. ITO [2003] 262 ITR 520/ 129 Taxman 720 (Bom.). We are indicating the nature
of the controversy making it expressly clear that we are not rendering any
conclusive determination of the Court on the merits of the issue which will
arise in the appeal which has been filed by the trust and which, the Court is
informed, is pending before the Commissioner (Appeals). The second submission
which has been urged on behalf of the petitioner, based on the provisions of
Section 61, is equally a matter which 1 (2012) 345 ITR 71 (Bom) PNP 6/14
WPL523-6.3 would require careful consideration at the appellate stage. As we
have noted earlier, the submission of the petitioner is that under Section 61,
all income arising to a person by virtue of a revocable transfer of assets is
chargeable to income tax as the income of the transferor. Under Section
63(a)(i) a transfer is deemed to be revocable if it contains any provision for
the re-transfer directly or indirectly of the whole or any part of the income
or assets to the transferor. The submission of the petitioner is that if at
all, an assessment could have only been made in the hands of the petitioner as
the transferor of a revocable trust, in which event the income would be exempt
under Section 10(23D). Whether the submission should be accepted is again a
matter which would have to be determined in the course of the appellate
proceedings arising from the order of assessment. The petitioner has intervened
before the appellate authority. In our view, the Revenue has made an
unfortunate and hasty attempt to make a recovery of the demand which has been
imposed on the trust pursuant to the order of assessment, against the
petitioner without enabling the petitioner to take reasonable recourse to the
remedies available in law."
10. Consequently, this Court held that
the Petitioner had a serious issue to urge as regards the legitimacy of the
demand which had been raised upon it by a notice dated 29 February 2012
including in regard to the applicability of Section 177(3) on which the demand
had been founded. The Petitioner having intervened in the appeal by the trust
before the CIT (A), this Court directed that pending the disposal of the appeal
and for a period of six weeks thereafter the Revenue shall not take any
coercive steps against the Petitioner for enforcing the demand. During the
course of the judgment, this Court has enunciated guidelines consistent with
the earlier Division Bench judgments of this Court in KEC International Ltd. v.
B.R. Balakrihanan 2 and in Coca Cola India P. Ltd.
v. Addl. CIT3. Instead of following the
judgment of the jurisdictional High Court, the Revenue has once again issued
notices to the Petitioner under Section 177(3) for A.Y.2010-11. The appeals of
the trust for the earlier year continue to remain pending.
11. Counsel appearing on behalf of the
Revenue, however, submits that the 2 (2001) 251 ITR 158 (Bom).
3 (2006) 285 ITR 419 (Bom).
PNP 7/14 WPL523-6.3 judgment which was
delivered by this Court on 14 March 2012 is distinguishable since the Assessing
Officer has in the course of the assessment of the trust carefully evaluated
the provisions of law. Learned counsel submitted that :-
(i) The explanatory memorandum to the
Finance Bill, 2013 indicates that with effect from 1 June 2013, it is proposed
to amend Section 10 and to insert Chapter XII EA for providing a special tax
regime to govern trusts formed for the purpose of undertaking securitization
activities.
Consequently, for the period prior
thereto to which this proceeding relates the income would be exigible to tax;
(ii) If the income represents an income
of an association of persons in law, it is well settled that the AOP alone has
to be taxed and the members of the AOP cannot be taxed individually on the
income of the AOP;
(iii) Alternately, under Section
161(1A), where the income of a representative assessee consists of and includes
profits and gains of business, tax is liable to be charged on the whole of the
income in respect of which such person is so liable at the maximum marginal rate.
Sub-section (1A) overrides Section 161(1) and therefore in any event, the fact
that the income of the Petitioner is exempt under Section 10(23D) would be of
no consequence.
12. At this stage it is necessary for
the Court to indicate that we are not called upon to adjudicate finally upon
the merits of the rival contentions. All that the Court has to consider is
whether the Petitioner has, prima facie, a serious triable case to urge on the
basis of which a stay can be sought on the enforcement of PNP 8/14 WPL523-6.3
the notice dated 25 February 2013 pending disposal of the appeals by the CIT
(A); these appeals being preferred by the trusts who have been assessed under
Section 143(3). Now at the outset it is necessary to note that the foundation
of the notice dated 25 February 2013 is Section 177(3). Section 177(1) provides
that where any business or profession carried on by an association of persons
has been discontinued or where an association of persons is dissolved, the
Assessing Officer shall make an assessment of the total income of the
association of persons as if no such discontinuance or dissolution had taken
place. Under sub-section (3) every person who was at the time of such
discontinuance or dissolution a member of the association of persons shall be
jointly and severally liable for the amount of tax, penalty or other sum
payable.
As the previous judgment of this Court
in UTI Mutual Fund (supra) notes there are two Division Bench judgments in CIT
v. Marsons Beneficiary Trust 4 and L.R. Patel Family Trust v. ITO 5 in which it
has been held that a beneficiary of a trust cannot be construed as having set
up the trust or having authorized the trustees to carry on the business. As the
Court noted in the previous judgment, the law laid down by the Division Bench,
prima facie, indicates that the beneficiaries who are named in the trust as
recipients of the income of the trust cannot be considered as an association of
persons. If that be the position, prima facie, the question as to whether
Section 177(3) would apply to the Petitioner raises a serious issue for
consideration.
13. The next point to consider is the
alternative hypothesis under which, under Section 160(1)(iv) a representative
assessee is defined to mean, in respect of the income which a trustee appointed
under a trust declared by a duly 4 (1991) 188 ITR 224 (Bom).
PNP 9/14 WPL523-6.3 executed instrument
in writing receives or is entitled to receive on behalf or for the benefit of
any person, such trustee. Section 161(1) provides that every representative
assessee, as regards the income in respect of which he is a representative
assessee, shall be subject to the same duties, responsibilities and liabilities
as if the income were income received by or accruing to or in favour of the
beneficiary and shall be liable to assessment in his own name in respect of
that income; but any such assessment shall be deemed to be made upon him in his
representative capacity only and the tax shall be levied upon and recovered
from him "in like manner and to the same extent as it would be leviable
upon and recoverable from the person represented by him". The contention
of the Petitioner is that under Section 161(1) tax is to be levied on the
representative assessee in the like manner and to the same extent as would be
leviable upon the person represented by him and since the income of the
Petitioner is exempt under Section 10(23D), no tax can be levied or recovered
under Section 161(1).
The contention of the Revenue, however,
is that sub section (1A) of Section 161 has a non obstante provision under
which, where any income in respect of which a person mentioned in Section
160(1)(iv) is liable as a representative assessee consists of or includes
profits and gains of business, tax shall be charged on the whole of the income
in respect of which such person is so liable at the maximum marginal rate. The
issue which would fall for determination is as to whether Section 161(1A) lays
down only the rate of tax without affecting the basic principle underlying
Section 161(1) viz. that tax would be levied upon and recovered from the
representative assessee in the like manner and to the same extent as would be
leviable upon the person represented by him or whether the non-obstante
provision would over ride sub Section 1 in its entirety. We have adverted to
the nature of the controversy in the present case in order to elucidate PNP
10/14 WPL523-6.3 that the questions on which there is a controversy, which is
still to be resolved, involves serious triable issues. The contention of the
Petitioner, prima facie, cannot be rejected out of hand particularly having
regard to the fact that the earlier judgment of this Court for Assessment Year
2009-10 also took the same position. Moreover, the issue as to whether the
income in question is business income is a matter which would have to be
determined. Finally, on this aspect of the matter, it may be necessary also to
note the submission of the Petitioner with reference to the provisions of
Section 61 which stipulate that all income arising to any person by virtue of a
revocable transfer of assets shall be chargeable to income.
income tax as the income of the
transferor and shall be included in his total Section 63(a)(i) stipulates when
a transfer shall be deemed to be revocable and the contention of the Petitioner
is that in the case of a revocable transfer of assets, the income as in the
present case would be income in the hands of the transferor which is exempt
under Section 10(23D).
14. In assessing as to whether a stay of
demand should be granted to the Petitioner for the year in question, it would
also be necessary to take note of the fact hat the Finance Bill, 2013 has
proposed to set up a new dispensation in the form of Chapter XII EA with a view
to providing a special tax regime to facilitate the securitization process. The
explanatory memorandum accompanying the Finance Bill has adverted to the
rationale for the proposed amendment as follows :
"Taxation of Securitisation Trusts
Section 161 of the Income-tax Act provides that in case of a trust if its
income consists of or includes profits and gains of business then income of
such trust shall be taxed at the maximum marginal rate in the hands of trust.
The special purpose entities set up in
the form of trust to undertake securitisation activities were facing problem
due to lack of special PNP 11/14 WPL523-6.3 dispensation in respect of taxation
under the Income-tax Act. The taxation at the level of trust due to existing
provisions was considered to be restrictive particularly where the investors in
the trust are persons which are exempt from taxation under the provisions of
the Income-tax Act like Mutual Funds.
In order to facilitate the
securitisation process, it is proposed to provide a special taxation regime in
respect of taxation of income of securitisation entities, set up as a trust,
from the activity of securitisation. It is proposed to amend section 10 and
also insert a new Chapter XII-EA for providing a special tax regime. The
salient features of the special regime are :-
(i) In case of securitisation vehicles
which are set up as a trust and the activities of which are regulated by either
SEBI or RBI, the income from the activity of securitisation of such trusts will
be exempt from taxation.
(ii) The securitisation trust will be
liable to pay additional income-tax on income distributed to its investors on
the line of distribution tax levied in the case of mutual funds. The additional
income-tax shall be levied @ 25% in case of distribution being made to
investors who are individual and HUF and @ 30% in other cases. No additional
income tax shall be payable if the income distributed by the securitisation
trust is received by a person who is exempt from tax under the Act.
(iii) Consequent to the levy of
distribution tax, the distributed income received by the investor will be
exempt from tax.
(iv)The securitisation trust will be
liable to pay interest at the rate of one percent. for every month or part of the
month on the amount of additional income-tax not paid within the specified
time.
(v) The person responsible for payment
of income or the securitisation trust will be deemed to be an assessee in
default in respect of amount of tax payable by him or it in case the additional
income-tax is not paid to the credit of Central Government.
This amendment will take effect from 1st
June, 2013."
15. The Revenue urged before the Court
that the proposed amendment which is to take effect from 1 June 2013, would in fact
indicate that Parliament took heed of the problems which were faced by special
purpose entities formed for undertaking securitization activity and sought to
bring about a change in the law.
Hence, it was urged that this would
indicate that for the previous Assessment Years, the income would be subject to
tax.
16. The effect of the proposed amendment
once the Finance Bill is enacted into legislation in respect of periods prior
to the date of the enforcement of the amendment is something which will fall
for serious consideration. Prima facie, at this stage, the setting up of a
special purpose vehicle in the form of a trust for carrying out securitization
activities cannot be regarded as a smokescreen.
Mutual Funds such as the Petitioner are
governed by the regulatory provisions of the Mutual Fund Regulations made by
SEBI. As we have noted earlier, the guidelines issued by the Reserve Bank of
India on the securitization of assets in fact contemplate the setting up of
special purpose vehicles as an intrinsic element of the securitization process.
17. The Appeals for Assessment Year
2009-10 are pending; the Court being informed that the Appeals are in the
course of being heard. In this view of the matter, and for the reasons which we
have indicated already in the earlier judgment of this Court in UTI Mutual
Funds (supra) and for the reasons indicated in this judgment, we are of the
view that a prima facie case raising serious triable issues has been made out
for stay of the enforcement of the demand in the hands of the Petitioner in
pursuance of the impugned notices dated 25 February 2013.
18. Counsel appearing on behalf of the
Revenue has sought to rely upon an order of the Karnataka High Court in ITA 31
of 2013 dated 4 February 2013 taking the view that in a revenue matter an
interim order should be passed only in the case of genuine financial hardship
and not otherwise. With respect, the order of the Karnataka High Court cannot
be read to mean that consideration of whether an assessee has made out a strong
prima facie case for stay of PNP 13/14 WPL523-6.3 enforcement of a demand is
irrelevant. Nor is the law to the effect that the absent a case of financial
hardship, no stay on the recovery of a demand can be granted even though a
strong prima facie case is made out. In considering whether a stay of demand
should be granted, the Court is duty bound to consider not merely the issue of
financial hardship if any, but also whether a strong prima facie raising a
serious triable issue has been raised which would warrant a dispensation of
deposit. That is a settled position in the jurisprudence of our revenue
legislation. In CEAT Limited v. Union of India6, the Division Bench of this
Court has held as follows :
"If the party has made out a strong
prima facie case, that by itself would be a strong ground in the matter of
exercise of discretion as calling on the party to deposit the amount which
prima facie is not liable to deposit or which demand has no legs to stand upon,
by itself would result in undue hardship of the party is called upon to deposit
the amount."
Where a strong prima facie case has been
made out calling upon the Petitioner to deposit, would itself occasion undue
hardship. Where the issue has raised a strong prima face case which requires
serious consideration as in the present case, a requirement of predeposit would
itself be a matter of hardship. Finally, we express our serious disapproval of
the manner in which the Revenue has sought to brush aside a binding decision of
this Court in the case of the assessee on the issue of a stay on enforcement
for the previous year. The rule of law has an abiding value in our legal
regime. No public authority, including the Revenue, can ignore the principle of
precedent. Certainty in tax administration is of cardinal importance and its
absence undermines public confidence.
19. For these reasons, we direct that
pending the disposal of the appeals which have been filed by the trusts for
Assessment Year 2010-11 and for a 6 2010 (250) E.L.T. 200 (Bom).
PNP 14/14 WPL523-6.3 period of six weeks
thereafter, no coercive steps shall be taken against the assessee for the
recovery of the demand in pursuance of the impugned notices dated 25 February
2013.
20. Before concluding, we clarify that
the observations in the present judgment are confined only to the disposal of
the application for stay of the recovery of the demand against the Petitioner
and shall not prejudice the rights and contentions of the assessees, the
Petitioner and the Revenue in the pending appeals.
The Petition is accordingly disposed of.
There shall be no order as to costs.
No comments:
Post a Comment