Trusts can be classified as revocable under the Income Tax Act even if beneficiaries and settlors overlap, affecting taxation responsibilities.

ORDER

PER SANDEEP SINGH KARHAIL, J.M.

The present appeals have been filed by the Assessee and the Revenue challenging the separate orders passed u/s 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], details of which are tabulated below: -

2. In the present appeals, the assessees are in the business of Asset Reconstruction – securitization of debts and processing of such debts of banks and institutional lenders. The assessees are created by Assets Reconstruction Company India Limited (“ARCIL”) for the purpose of liquidating/recovering/realizing the Non-Performing Assets (“NPAs”), taken over by the assessee. ARCIL is a registered with Reserve Bank of India u/s 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) as a Securitization Company and Reconstruction Company (“ARCs”). ARCs are regulated by the Reserve bank of India. Pursuant to SARFAESI Act and RBI Guidelines, ARCIL acquires financial assets that are classified as NPAs from the banks, financial institutions and housing finance companies operating in India. The concerned bank/financial institutions, which intend to transfer the financial assets to ARCs, must ensure that the same are classified as NPA in accordance with the guidelines of RBI in this regard. Accordingly, ARCIL acquires financial assets that are classified as NPAs from the banks/financial institutions. The stressed assets are acquired by ARCIL by setting up trusts and formulating schemes there under pursuant to section 7 of the SARFAESI Act and RBI guidelines. As per the assessee, the trusts are set up for the acquisition of the financial assets as per the RBI guidelines and are governed by the Indian Trust Act, 1882 . Such trust accepts contributions from Security Receipts holders (“SR holders”) for acquisition of financial assets. The contributions are raised from Qualified Institutional Buyers (“QIBs”) as defined under SARFAESI Act, for which trusts issued Security Receipts to QIBs. These QIBs include Banks, Financial Institutions, Insurance Companies, ARCS, Mutual Funds, Eligible Non-Banking Finance Companies and Foreign Institutional Investors. The assessee derives income from assets reconstruction activity and handling of NPA of banks/financial institutions.

3. In the present appeals, the assessees filed their return of income declaring a total income at Rs. Nil. During the assessment proceedings, the assessees were asked to explain as to why the income/loss derived by the assessees should not be taxed in their hands as Association of Person (“AOP”). The assessees were also asked to establish that it is a proper Trust. The Assessing Officer (“AO”), vide orders passed under section 143(3) of the Act, did not agree with the submissions of the assessee and made addition on the basis, which is summarized by the AO as under: -

“Summary of Arguments:

1. Whereas in the case of the trust, settlor, contributor and beneficiaries, all have to be independent and distinct In the case of the assessee, the contributors are the beneficiaries themselves, therefore, the assessee cannot be treated as a trust, but as an AOP having members in the form of QUIs and, financial institution.

2. After its creation, the so-called trust entered into contribution assignment