According to the tribunal, the assets belonging to an overseas trust does not belong to the beneficiary of the trust, and a beneficiary does not control a trust even if he has the power to appoint and remove trustees – observations that many pulled by the tax office for their links with offshore trusts could use to argue their cases.
The case against Birla, pertaining to assessment years 2007-08 to 2013-24, is about 70 bank accounts and a few properties in the name of nine entities, including an overseas trust. The information was received from the Singapore offices of Credit Suisse and Barclays Bank.
While the I-T department often suspects trusts as vehicles to launder money and mask ownership of assets, the Tribunal said trusts are legal arrangements that are accepted internationally.
“Even though facts of each case differ, here the tribunal’s overarching observations on a discretionary trust and its relationship with beneficiaries will be referred in future. Many assesses would argue that till there is distribution of income from the trust to beneficiaries, the latter cannot be taxed,” said senior chartered accountant Dilip Lakhani.
While the present ruling is confined to wealth tax, the observations of the Mumbai bench of the I-T Appellate Tribunal, comprising Justice P.P.Bhatt and member S.Rifaur Rahman, would use used by beneficiaries named in HSBC Geneva, Liechtenstein bank, and other discretionary trusts set up in tax havens like Jersey and Guernsey with bank accounts in financial centres like Singapore and London.
Birla had filed a separate case before the Bombay High Court challenging a settlement commission ruling on the income tax.
The total undisclosed wealth, according to the tax department, is over Rs 125 crore – of which the predominant portion is overseas bank accounts and properties. The tribunal has struck down the wealth tax demand on overseas assets and directed the assessing officer to redo the reconciliation of the jewellery of all the family members and ascertain the correct jewellery belonging to Mr. Birla (who is the assessee and the appellant in the case).
The tribunal said that the funds lying with overseas bank accounts cannot be considered as `cash in hand’. Under tax law, cash in hand of more than Rs50,000 is treated as taxable wealth. The tax office had argued that funds lying in foreign banks are not “potentially productive” in the Indian context.
In a `discretionary’ trust distribution of funds to any or all beneficiaries happens as and when trustees decide. According to the records with the tax office, an offshore irrevocable discretionary trust was settled in the year 1989 by Late Pratap Malpani, an NRI and maternal uncle of Yash Birla, in relation to offshore assets owned by him. It was executed with offshore trustee, M/s Albany
Trustee company Ltd of Guernsey. Mr.Birla was named one of the beneficiaries of the trust.
“It is wrong to presume that the properties governed by the trustee will be considered as the properties of the individual beneficiary who exercises the appointment of trustees….We also observe that the creation and management of the discretionary trust are questioned by tax authorities by treating the same as a tool for money laundering and to hide the true owners of the assets and investments. First of all, these trusts were created by the NRI and the assets or investments were also offshore and created outside India. These arrangements are legally accepted mode of investments and tax planning by the International Community,” said the Tribunal.
Mr Birla was represented by Fereshte Sethna, Mrunal Parikh, and Mitil Chokshi.