The department believed that the income from securitized instruments, also known as Pass Through Certificates (PTC), were taxable.
Companies such as UTI MF, SBI Mutual Fund, HSBC AMC, Birla Sun Life MF, Reliance Mutual Fund, moved to the court challenging the order of the tax authorities and avert the possibility of bank accounts being freezed.
Mutual Funds are exempted from taxes on the income earned from their investments, but as per I-Tax allegations, PTCs could be taxed as they are completely different investment instruments. PTCs are instruments issued by Special Purpose Vehicles (SPVs) that entitles the passing of the interest and principal amounts from underlying loans or other assets to holders of the instrument.
The fund managers said that the aftermath of freezing bank accounts could be very dangerous as it would block investment redemptions. While on the other hand, the tax authorities also looked firm on their stand, amidst efforts to boost their books as the fiscal year stands to end.
In a plea to the court, UTI MF said "The income of beneficiary mutually fund is exempt from the tax under Section 10 (23) (d) of the Act. Therefore, if the income tax is exempted in the hand of beneficiary there is no question of assessing the same in the hand of trust".