Investments made by a foreign revocable trust to be taxable in the hands of the beneficiaries

Facts & Background of the Case:

• In a recent judgement of Mumbai High Court in the case of Abu Dhabi Investment Authority vs. Authority for Advance Ruling & Others (WP No. 770 of 2021, 132 taxmann.com 18) it was held that any income arising from a revocable transfer is chargeable in the hands of transferor. In this case, by way of deed of settlement, Abu Dhabi Investment Authority was the settlor of a trust set up in Jersey and said trust invested in India. The Assessee claimed the income of the trust as its income i.e. income of Abu Dhabi Investment Authority and by virtue of Article 24 of the India – UAE double taxation avoidance agreement, claimed it as eligible for exemption.
• As a background, the Assessee filed an advance ruling before the Authority for Advance Ruling to understand the taxability of income received by a trust which was settled by Abu Dhabi Investment Authority under a revocable deed of transfer and also being its sole beneficiary. Basis, these facts, the Authority for Advance Ruling held that the trust being a foreign trust is not governed by the provisions of the Indian Income tax act, thus being the case and in absence of India’s double taxation avoidance treaty with Jersey, it will be taxable in India accordingly. While deciding this, the Authority for Advance Ruling ignored the fact that in case of a revocable trust, the income is taxable in the hands of the transferor being Abu Dhabi Investment Authority and accordingly the provisions of India – UAE double taxation avoidance agreement shall apply.

Decision of the Court:

• The Mumbai High Court held that the provisions of Indian Income tax act do not distinguish between trusts registered in India or a foreign trust. The provisions governing the taxation of a trust are applicable to a foreign trust as well. In the instant case, where the foreign trust is having sole beneficiaries who are tax resident of UAE, the provisions of double taxation avoidance agreement between India – UAE shall be available, since, in case of revocable transfer, the income is chargeable in the hands of the transferor. Further, the Indian income tax act also do not prohibit the settlor and beneficiary to be the same person, since in this case the settlor and beneficiary is Abu Dhabi Investment Authority and the transferor is a revocable transfer, accordingly the same shall be taxable in its hands and the beneficial provisions of India – UAE treaty, if available shall apply in this case.
• Accordingly, the income of the Jersey trust was held as taxable in the hands of the beneficiary who is also settlor in this case being the Abu Dhabi Investment Authority and thus shall be governed by the provisions of India – UAE double taxation avoidance agreement. Since, such agreement provides for income of the Assessee as exempt under Article 24, therefore the same shall not be taxable in India accordingly.

Case Law: ABU DHABI INVESTMENT AUTHORITY VS. AUTHORITY FOR ADVANCE RULING & OTHERS (WP NO. 770 OF 2021, 132 TAXMANN.COM 18)

Direct Tax Team, SW India