Trust covered u/s 61 & 63 of Income tax Act does not necessarily mean ‘Indian trust’ falling under Indian Trust Act: Bombay HC

Read Judgment: ABU DHABI INVESTMENT AUTHORITY & Anr. vs. AUTHORITY FOR ADVANCE RULING & Ors. 

Pankaj Bajpai

New Delhi, November 2, 2021: The Bombay High Court has opined that there is no provision in Income tax Act which stipulates that Section 61 & 63 of Income tax Act would apply only to those trust which fall under Indian Trust Act 1882, and neither there is any provision under the Indian Trust Act which debars the settlor from being beneficiary. 

A Division Bench of Justice K.R. Sriram & Justice Abhay Ahuja therefore observed that Income tax Act does not stipulate that only trustee who is resident of India can be an agent u/s 160 of the Income tax Act, and thus, income derived from direct investment made by UAE resident taxpayer, would be exempted from tax under Article 24 of India-UAE Double Taxation Avoidance Agreement (DTAA).  

Going by the background of the case, assessee (ADIA), a public institution owned by and subject to the supervision of the Emirate of Abu Dhabi, filed its return in India, disclosing therein income that falls within the scope of Section 5(2) of the Income Tax Act, but in view of the exemption available in terms of the India-UAE DTAA, reports NIL taxable income in the ROI. 

The assessee under present petition had challenged the order/ruling passed by AAR, denying assessee the benefit of India-UAE DTAA read with relevant provisions of the Act in respect of the income accruing on the investments made or proposed to be made by Green Maiden A 2013 Trust, which was established by assessee as settlor and trustee, respectively. 

The AAR was, however of the opinion that the income from investment in debt portfolios in India was received and accrued to the Trust in India and was taxable u/s 5 r/w/s 9(1)(i) of the Act. Further, since there was no treaty between India and Jersey, income received or accrued or arising in India to the Trust registered in Jersey was taxable in India. Also, the India-UAE Treaty did not apply to the Trust or the Trustee. 

After considering the arguments, the High Court found that as regards to the reasoning given by AAR that the trust is registered in Jersey, there is no treaty between India and Jersey and Section 61 and 63 of the I-T Act would apply only to those trust which fall under the Indian Trust Act 1882. 

The High Court noted that Revenue’s counsel himself agreed that there is no provision in the Act which provides that these provisions shall apply only to Indian Trust. 

The Deed of Settlement and particularly clauses from the Deed of Settlement quoted earlier, show that there is a revocable transfer by settlor, i.e., ADIA to trustee ETL and as such any income arising to the trustee should be chargeable in the hands of ADIA. Nothing in Section 61 requires involvement of a trust in revocable transfer, added the Division Bench. 

The Bench observed that a settlement or a trust are merely instances of what could amount to transfer for the purposes of Section 61, and so long as the conditions provided in Section 63 (a) are fulfilled, any transfer whether connected with the trust or not will be a revocable transfer. 

“The word trust is defined u/s 3 of the Indian Trust Act to be an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another, or of another and the owner. A trust can be an Indian Trust or a Foreign Trust”, observed the Division Bench.

The High Court made it clear that in the case at hand, if ADIA had invested the amount directly, the income derived from such investment would be exempted under Article 24 of India-UAE DTAA. However, ADIA has not created the trust to avoid tax and that is not AAR’s case either. 

As regards the ground that Section 160(1)(i) or 160(1)(iv) of the Act, provides that trustee can be representative assessee but in this case trustee being a resident of Jersey cannot be an agent of ADIA, that is not sustainable as the Act does not provide anywhere that only trustee who is resident of India can be an agent u/s 160 of the Act, explained the Court. 

“As the ADIA has settled the trust on the terms mentioned in the Deed of Settlement, the contribution made by it to the trust would be a transfer as defined in Section 63 of the Act. As Section 63 does not anywhere specify that a trust covered by it must necessarily be a trust falling under the Indian Trust Act 1882 and as per Section 63(b) of the Act, any settlement or trust is included within the meaning of ‘transfer’ and Section 63(b) does not provide that the trust described therein needs to be an Indian Trust, the provisions of Sections 61 to 63 of the Act are applicable to the case at hand”, observed the High Court.

Therefore, the High Court analyzed that when the provisions of the Trust Deed provided that ADIA has right to re-assume power over the entire income arising on the investments made by the trust in the portfolio companies, the entire income arising therefrom has to be in terms of Section 61 of the Act to be assessed in the hands of ADIA. 

This would mean the exemption under Article 24 of India-UAE DTAA would be attracted. Therefore, even if the income is taxed in the hands of the trustee in terms of Section 161(1), it will be taxed in the “like manner and to the same extent” as the beneficiary, added the Court.