Section 54F: Eligibility Based on Physical Existence of Residential House vs. Property Classification

ORDER

Anikesh Banerjee, Judicial Member.- The instant appeal of the revenue filed against the order of the NFAC, Delhi [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Year 2016-17, date of order 03.10.2025. The impugned order emanated from the order of the Ld. Income Tax Officer Ward-21(1)(2), Mumbai (for brevity the ‘Ld. AO’) order passed under section 143(3) of the Act date of order 25.12.2018.

2. The brief facts of the case are that the assessee is a Trust created by Asset Reconstruction Company India Ltd. (ARCIL) for the purpose of liquidating / recovering / realizing the non-performing assets. The assessee has been created pursuant to the provisions of Securitization and Reconstruction of Financial Assets and Enforcement Security Interest Act, 2002 (SARFAESI Act) and the guidelines of RBI to acquire financial assets of the borrowers classified as non-performing assets (NPAs) ARCIL is registered with RBI under Sec. 3 of SARFAESI Act as a Securitization and Reconstruction Company. ARCIL acts as a trustee of the assessee in pursuance to the provisions of the aforesaid Act and the RBI guidelines. Accordingly, ARCIL acquires stressed financial assets that are classified as NPAs from the banks / Financial Institutions. The assessee derived income from asset reconstruction activity and handling of NPAs of banks and Financial Institutions. The assessee declared Nil Income in its return of income. During assessment proceedings, Ld. AO called upon the assessee to explain as to on what basis it had claimed its receipts as not liable to tax in its hand. Also, the assessee was directed to put forth an explanation as to why the income/loss derived by it may not be taxed in its hands in the status as that of a trust/AOP.

3. In reply, it was explained that ARCIL was a registered entity with RBI to acquire financial assets classified as Non-Performing Assets (NPAs) from banks, financial institutions and housing finance companies operating in India (collectively referred to as banks/FIs). The concerned bank/Fl, which intends to transfer the financial assets to ARCIL 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/Fls. 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 issued to Securitization Company and Reconstruction Company (SC/RCs). ARCIL declares the trusts and acts as a trustee of the trusts pursuant to provisions of the SARFAESI Act and RBI Guidelines. The trust accepts contributions from Security Receipt 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 issue Security Receipts (SRs) to QIBs. QIBs include Banks, Financial Institutions, Insurance Companies, SC/RCs, mutual funds, eligible Non Banking Finance Companies (pursuant to RBI Guidelines in this regard) and Foreign Institutional Investors. SRs represent contribution of such QIBs in the trust and are in the nature of undivided right, title and interest in the trust fund (essentially financial assets held in trust) evidenced by the SRs issued to it. Subscription to SRs are governed by the terms and conditions mentioned in the transaction document (trust deed etc.). The contributions of the SR holders are revocable. Therefore, the income arising from revocable transfer shall be assessed in the hands of the contributors pursuant to section 61 of the Act. As per Section 61, all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. The term ‘revocable transfer’ has been defined in Sec 63. On a conjoint reading of all the provisions of section 61 to section 63, it would be evident that in case of revocable transfer of the assets by the transferor, the income is taxed in the hands of the transferor. This is based on the reasoning that if the transferor has the right to reassume the assets or the income, then it is but natural that income should obviously be taxed in the hands of the transferor. Thus, under these sections, where a transfer of asset (in this case contribution by the Security Receipt holders) is made, but a power of re-assumption or retransfer of the assets or income is retained by the transferor (i.e. security holders), it is treated as a case of revocable transfer. In such a case, the income is to be assessed in the hands of the transferor i.e. the security receipt holders. Thus, if the trust is a revocable trust, the income is taxable in the hands of the transferor (i.e. SR holders). Hence, there is no income chargeable to tax in the hands of the trust and is taxable entirely in the hands of SR Holders. It was pointed out that the trust deed itself mentions that the SR Holders are entitled to revoke the contribution made by them. The relevant portion of the trust deed was brought to the notice of Ld. AO. On the basis of these submissions, it was submitted by the assessee that the income was to be taxed in the hands of the transferor i.e. in the hands of SR Holders. Further, the assessee was not to be considered as an ‘Association of Persons’ (AOP).

4. However, the Ld. AO considered that the assessee was to be assessed as AOP and not as a Trust. Alternatively, even if the status of the assessee was to be accepted as that of a trust, the same being in the nature of a non-revocable trust would thus not be eligible to avail the benefit of Sec. 61 to 63 of the Act. As regards the claim of the assessee that since the income distributed to the various contributors had been taxed in their hands, taxing the same in the hands of the assessee would lead to double taxation, was rejected by the Ld. AO as being totally baseless. Further, it was observed by the Ld. AO that as the shares of the beneficiaries were not specified in the trust deed, and were thus indeterminate, therefore, the provisions of Sec.164(1) of the Act would get attracted and the assessee would be liable to be assessed at the maximum marginal rate which was 30% plus surcharge, if any, and also education cess. Lastly, it was observed by the Ld. AO that the claim of the assessee that there was no inter se arrangement between one contributory/beneficiary and the other contributory/beneficiary as each of them had entered into a separate contribution agreement with the assessee trust which was just a pass through entity, was merely a facade with an ulterior motive to evade taxes. The Ld. AO was of the view that the assessee had merely relied on the form of the transaction and the artificial device created by it to generate income and avoid taxability, while for the ‘substance’ of the transaction was that the assessee had carried on business from the contributions of various beneficiaries with a common motive to earn income, which proved beyond doubt that in sum and substance the assessee was an AOP. Finally, rejecting assessee’s various submissions, the income was determined at Rs.20,20,75,340/-. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) considered that the assessee was established under SARFAESI Act following guidelines of RBI and therefore, its validly was beyond doubt. Further. Sec. 61 to 63 does not imply that the right of revocation should be without any conditions. The terms of trust deed made it clear that the contributions was revocable and therefore, the income was to taxed in the hands of SR holders as per the provisions of Sec. 61 to 63 of the Act. The assessee could not be called an AOP since there was no agreement amongst beneficiaries inter-se. The beneficiaries were mere recipients of income earned by the trust. Therefore, the income was not taxable in hands of the assessee but it was taxable in the hands of the contributors. Aggrieved as aforesaid, the revenue is in further appeal before us.

5. The Ld. DR argued and stands in favor of the order of the Ld. AO. The Ld. DR contended that the assessee is not a trust, it is an A.O.P. so assessee is not eligible for get the deduction u/sec. 61 to 63. The Ld. DR stands in favour of the impugned assessment order. The relevant paragraph of the impugned assessment order in pages 19 and 20 is reproduced as below:-

“20. The modus operandi of such schemes is that the NPAs of the beneficiary are actually written off in their books as bad debts. These are later sold to the assessee at very low price. So income is raised for the beneficiaries at this stage itself. The beneficiaries contribute in the form of Security Receipts for purchase of their own NPAs by the assessee. Here expenses are claimed by the beneficiaries on the same NPAs. In their books. The amounts of NPAs realised by the assessee through DRT, various schemes etc. minus the cost of acquisition and recovery and management costs is the surplus or profit of the assessee which is shared by all the parties concerned in different proportions and at different stages and times. Thus, bad debt is converted into profit. Whether these bad debts recovered are offered to tax by the beneficiaries or not is not ascertainable since the beneficiaries are assessed at different places all over the country. However, in the case of the assessee since the assets purchased are owned by it, the expenditure for recovery of the bad debts/NPAs is incurred by it and the profit is also earned by it, the profit should be brought to tax in its hands. The interest income and the other income is to be considered under the head ‘Income from Other Sources’ since earning of interest on FDs etcetera is not the declared business or purpose of the AOP. This income from other sources is definitely not earned by the AOP in any representative capacity and is very much the incidental income of the AOP qua AOP. Therefore the interest income and the other income is considered under the head ‘Income from Other Sources’ and brought to tax accordingly. Further, the realization of the acquired asset over its cost is part of the business income of the assessee which is not even reflected in the P & L Account. This realization of asset over cost of acquisition is therefore added to the business income of the assessee.

21. The deduction of TDS on the claim of expenses is mandatory and non-deduction thereof makes the expenses liable to be disallowed u/s.40(a)(ia) of the Act. It is pertinent to mention that the Asset Manager is ARCIL who is also the so claimed trustee and the assessee has claimed to have reimbursed Rs.13344547/- to the trustee ARCIL for payment of Protection, Preservation and Insurance Expenses and Management charges, to the asset manager i.e. ARCIL itself. The assessee claims that ARCIL the trustee has deducted TDS on these payments made to itself qua asset manager ARCIL. This argument is neither backed by any evidence nor logic. There is also no proof submitted by the assessee regarding deduction of TDS by any person other than the assessee on these payments when they were actually made. Rather there is no proof regarding the said amount ever having been paid. Hence the claim of expenses on account of Protection, Preservation and Insurance Expenses at Rs.13344547/- is hereby disallowed.

6. The Ld. AR argued and submitted the trust deed related dated 31.12.2018 executed by Asset Reconstruction Company India Ltd.(ARCL). The Ld. AR stated that the identical issue is already settled by the Coordinate Bench of ITAT-Mumbai. The Ld. AR respectfully relied on the order of the Coordinate Bench ITAT, Mumbai in the case of ITO 22(1)(6), Mumbai v. ARCIL Retail Loan Portfolio- 001-A-Trust, (Mumbai – Trib.) ITA No.4252/Mum/2025 date of order 22.01.2006.

“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 insuranceexpenses 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.

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27. The legislative intent to treat securitisation trusts as pass-through entities is further reinforced by later amendments and CBDT clarifications. The Finance Bill, 2016 expressly recognisedsecuritisation trusts, including those set up by ARCs, as vehicles through which income is to be taxed in the hands of investors and not the trust. These amendments are clarificatory in nature, explaining the manner of taxation rather than altering the character of such trusts. They fortify the conclusion that, even prior to the amendments, the law recognised the trust as a conduit and not as a separate taxable entity in respect of such income.

In view of the foregoing discussion, we hold as under:

28. Accordingly, the order of the learned CIT(A) is affirmed, and the appeal filed by the Revenue is dismissed.”

7. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee is a trust constituted under the provisions of the SARFAESI Act and governed by the RBI Guidelines for securitisation and reconstruction companies. The core issue for adjudication is whether the income arising in the hands of the assessee trust is liable to be taxed in its hands or in the hands of the SR holders. On careful consideration, we find that the identical issue has already been adjudicated by the Coordinate Bench of the ITAT, Mumbai in the case of ARCIL Retail Loan Portfolio-001-A-Trust (supra), wherein it has been categorically held that such trusts are in the nature of revocable trusts within the meaning of Sections 61 to 63 of the Act, and accordingly, the income arising there from is taxable in the hands of the contributors/SR holders and not in the hands of the trust. It has further been held that such trusts cannot be assessed as an Association of Persons (AOP), and the provisions of Section 164 are not applicable. During the course of hearing, the Ld. DR could not bring on record any contrary decision of any higher judicial forum nor could distinguish the facts of the present case from those decided by the Coordinate Bench. In absence of any distinguishing feature or contrary binding precedent, we are bound to follow the judicial discipline and respectfully rely upon the aforesaid decision of the Coordinate Bench. Accordingly, following the ratio laid down in the aforesaid decision, we uphold the findings of the Ld. CIT(A) and hold that the income in question is not taxable in the hands of the assessee trust but is liable to be taxed in the hands of the SR holders. Consequently, the additions made by the Ld. AO are hereby deleted.

In the result, the appeal of the revenue is dismissed.

8. In the result, the appeal of the revenue bearing ITA No.8415/Mum/2025 is dismissed.