By Nidhi Bothra & Vijaylakshmi Agarwal, (firstname.lastname@example.org)
This tax update summarises a recent ruling of Chennai Income Tax Appeallate Tribunal (“Chennai ITAT”) in the case of TVS Investments iFund Vs ITO wherein the issue before Chennai ITAT was whether interest income of beneficiaries rolled over to another venture capital fund would be taxed in the hands of the iFund or in the hands of the new fund (TVS Shriram Growth Fund). While contemplating on the issue, the matter pertaining to determinacy of the trust/ fund and tests relating to the same to achieve pass-through status under the Income Tax Act was also briefly discussed.
While ITAT did not delve into the matter of opining on the trust being a determinate trust or not but the ruling did give a significant insight into the existing ambiguity on the nature of determinate, non-discretionary business trusts among the assessing officers and ITAT.
Facts of the case
M/s TVS Investments iFund – Trust (“Assessee/appellant”) is a contributed trust under the Indian Trust Act, 1882 settled by way of a Trust Deed and is registered under the Indian Registration Act, 1908. Assessee had collected Unit Contributions from 656 Contributors (classified as High Net Individuals by the Assessee) amounting to Rs 40,35,34,375/-, towards the capital amount committed by them as per the terms of the Contribution Agreements. The Assessee is an asset management company and it manages the assets of the contributors. The contributions were called up and received by the Assessee on various dates during the course of the previous year 2008 – 09.
TVS Shriram Growth Fund (“TSGF”) was formed as a SEBI registered Venture Capital Fund to act as an asset manager to Assessee. Out of the aforesaid collections amounting to Rs 40,35,34,375/- by the Assessee, an amount of Rs 39,60,84,375/- (of 639 contributors) was transferred to TSGF in 6 branches from 18.09.08 to 31.03.09 for the purpose of better synergy and higher returns and Rs 64,50,000 (of 17 contributors) was retained for Assessee’s operational activities as on 31.03.09. The rollover of commitments from Assessee to TSGF was done basis expression of consent from the contributors in most of the cases.
The Assessee had invested the contributions received from 656 members in the fixed deposits of various banks pending commencement of venture capital activities and earned interest income of Rs 1,38,83,203/- (as per the TDS certificates furnished by the Assessee). The interest income, earned on bank deposit, pertained to the period before the rollover was undertaken. The Assessee out of its earnings from bank deposits credited the proportionate value corresponding to the 17 contributors to the profit and loss account and transferred the balance, relating to rolled over 639 contributors, to TSGF and excluded the same from income.
The Assessee had offered to tax, the proportionate value of interest income relating to 17 contributors retained. This income was brought to zero, since the Assessee treated itself as representative assesse, by which the profits were transferred to the hands of the beneficiaries and got taxed on them.
Thus the appellant retained the share of Income/expenditure relating to retained contributors and apportioned the income and expenditure as per their share of beneficial interest for including the same in the return of income filed by the respective beneficiaries.
The Assessee had also obtained a loan of Rs 73,02,478/- for its operational activities. The Assessee has parked its funds amounting to Rs 1,13,70,729 in HDFC Bank current account.
TVS Investments iFund had filed its return of income by admitting nil income for the assessment year 2009 – 10 indicating the fact the income/expenditure is being offered by the respective beneficiaries in their return of income filed for the assessment year. The appellant claimed a refund of Rs.28,04,614/-on the tax deducted at source on the interest received on behalf of TVS Shriram Growth Fund since the investments were made in the name of the appellant.
The return filed by the Assessee was selected for scrutiny u/s 143(3) of the IT Act which was completed on 30.12.11. Aggrieived by the order of the Assessing Officer (“AO”) the Assessee carried the matter in appeal before the ld. Commisioner of Income Tax (Appeals) [“CIT(A)”]. CIT(A) after considering the submissions of the Assessee, confirmed the order of AO. On being aggrieved, the Assessee appealed to the Tribunal.
The Tribunal vide order ITA No. 276/Mds/2014 dated 02.09.15 remitted the case back to the AO to consider the issue afresh. In compliance with the order of the Tribunal, the AO reassessed the case and determined the taxable business income at Rs 95,59,780 against total interest income of Rs 1,38,83,203. 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) dismissed the appeal of the assessee.
Present appeal was filed by Assessee to Chennai ITAT against the order of Commissioner of Income Tax (Appeals) 4, Chennai dated 30th September, 2016 relevant to the assessment year 2009-10.
- The Assessee is an indeterminate trust and hence not eligible for pass-through status.
- The interest income on fixed deposits was earned by the Assessee during the period of holding the contributions from 656 members, before being transferred to TSGF. Hence the same is the interest income of the Assessee trust and should be taxed in its hands.
- Interest income passed on to TSGF is only application of income earned by the Assessee and therefore cannot be allowed as an expenditure. Income shifted to TSGF requires to be taxed in the hands of the Assessee only because TSGF is not the beneficiary/contributor to the Assessee but its successor.
- Assessee contended that it is not an indeterminate trust because 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.
- In reference to the order of the Chennai ITAT in ITA No.276/Mds/2014 dated 02.09.2015, the main contention before the ITAT was that whatever interest income was received by the Assessee was already transferred to the beneficiaries and hence the same cannot be taxed in the hands of the Assessee. Chennai ITAT vide its aforementioned order had remitted back the case to the AO to consider the issue afresh particularly in regard to whether the Assessee had transferred the income earned by it to the beneficiaries or not. Now it was the contention of the Assessee that CIT(A) has failed to take cognizance of the fact that while the AO verified whether tax is paid on the interest income relating to 17 beneficiaries remaining with the Appellant, the 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 Hence the order passed by the AO was not in conformity with the directions of the Hon’ble Chennai ITAT in ITA No.276/Mds/2014, dated 02.9.2015.
- Assessee contended TSGF 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 TSGF, has also been assessed to tax in the hands of TSGF as its income by the AO vide his order dated 11.3.2016. Thus when the income is offered by the beneficiaries on which tax have already been paid, taxing the same income in the hands of TSGF and the Appellant would tantamount to triple taxation of the same income.
- The interest income having been assessed in the hands of TSGF as its income, the same income cannot be taxed in the hands of the Appellant.
- The income assigned/transferred to TSGF/ beneficiaries should be excluded or allowed as a deduction in the hands of the Appellant.
Availability of pass through status
While contending on the issue of taxability of interest income, the tribunal also discussed on the nature of the assessee fund and whether the fund was a determinate fund for pass-through status.
As contended by the assesse, the fund was a determinate fund, non-discretionary with the share of the beneficiaries provided for in the trust deed and the contribution agreement, put together.
The tribunal did not agree that the trust was a determinate trust and the relevant extract of the ruling is as below –
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.
While the assessment year in question for the ruling was 2009-2010, the ruling was pronounced in 2017 after the ruling of India Advantage Fund of Bangalore ITAT and the CBDT Circular of 28th July 2014.
In the India Advantage Fund ruling it was discussed in detail that a trust will be a determinate trust if the beneficiaries were named in the trust deed or if the beneficiaries can be ascertained with the help of the trust deed if added later. Irrespective of the percentage share of the beneficiaries being prescribed, the business trust would be considered as determinate and eligible for pass-through.
Chargeability of interest income in the hands of the Assessee
The transfer of interest income of 639 contributories was subsequent to the interest earning period and therefore the same cannot be taxed in the hands of TSGF.
Disallowance of 50% of the management expenses to the Assessee
Because of shifting of the substantial portion of the funds to TSGF, during the year, TSGF also stands to benefit equally from the services offered by the investment manager viz. TCFL. Hence the AO was correct in disallowing 50% of the management expenses of Rs 80,70,685/- incurred by the Assessee.
In light of the established rulings and CBDT circular, this stray even though brief mention from the Chennai ITAT on the determinacy of the business trust creates ambiguity on tax clarity on the pass-through nature of the trusts and tests relating to attaining pass-through.
The Chennai Tribunal has reiterated the basic criteria as to when a trust could be regarded as a determinate trust to be eligible for the pass through status.
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