IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER&

SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No. 4252/Mum/2025 (Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

(Assessment Year: 2016-17)

Assessee by ShriJeet Kamdar Revenue by ShriRajesh Kumar Yadav (CIT-DR)

Date of Hearing 13.01.2026 Date of Pronouncement 22.01.2026

आदेश / ORDER

PER MAKARAND VASANT MAHADEOKAR, AM:

This appeal by the Revenue is directed against the order dated 03.04.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”], under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for Assessment Year 2016–17, arising out of the assessment order dated 27.12.2018 passed by the Income Tax Officer, Ward 21(1)(2), Mumbai [hereinafter referred to as “Assessing Officer or AO”], under section 143(3) of the Act.

2. Facts of the Case

2.1 The assessee filed its return of income for A.Y. 2016–17 on 29.09.2016 declaring total income at Rs. NIL. The assessee claimed exempt income of Rs. 27,63,75,223/- under section 61 read with section 63 of the Act and also claimed credit of TDS of Rs. 1,39,587/-. The return was processed under section 143(1)

and the case was selected for complete scrutiny under CASS.

2.2 During the course of assessment proceedings the Assessing Officer noted that the assessee was constituted as a trust by Asset Reconstruction Company (India) Ltd. (ARCIL) pursuant to the provisions of the SARFAESI Act, 2002 and RBI Guidelines, for the purpose of acquisition and resolution of Non-Performing Assets. Funds were raised by issuance of Security Receipts (SRs) to Qualified Institutional Buyers. ARCIL functioned as settlor, trustee and asset manager of the trust. From the financial statements, the AO recorded that during the year the assessee had earned interest income of Rs. 14,11,256/- and surplus on realization of NPAs amounting to Rs. 30,19,34,691/-, against which protection, preservation and insurance expenses of Rs. 2,69,70,724/- were claimed. The net surplus of Rs.

27,63,75,223/- was claimed as exempt by the assessee.

2.3 The assessee submitted before the AO that it was a revocable determinate trust, that the income was taxable only in the hands of the SR holders in terms of sections 61 to 63 of the Act, and that the trust was merely a pass-through entity. It was further contended that the trust could not be assessed as an Association of Persons and that the principle of diversion of income by overriding title was applicable.

2.4 The Assessing Officer rejected the contentions of the assessee. He held that the assessee could not be regarded as a trust for the purposes of sections 61 to 63 of the Act and that, on the facts, the contributors and beneficiaries had joined in a common purpose of earning income. According to the AO, the assessee constituted an Association of Persons within the meaning of section 2(31) of the Act. The AO further held that the trust was neither revocable nor determinate, that the provisions of section 164 were attracted, and that even otherwise the assessee was liable to be assessed as an AOP. The claim of exemption under sections 61 to 63 was denied. The AO also disallowed the claim of protection, preservation and insurance expenses of Rs. 2,69,70,724/- and treated interest income as income from other sources. Accordingly, the AO assessed the total income of the assessee at Rs. 30,33,45,950/- and initiated penalty proceedings under sections 271(1)(b) and 271(1)(c) of the Act.

2.5 Aggrieved, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A), the assessee reiterated that it was a trust constituted strictly in accordance with t