Share-money deposits by society promoters were not taxable in their hands; agency and no common income-producing purpose controlled.

Promoters who collected share money for a proposed co-operative society were found not to constitute an association of persons or body of individuals because they acted only for a limited formation purpose and not with a common income-producing intent. The interest on the deposited funds was also not treated as diverted by overriding title, since the contributors retained the beneficial entitlement through an agency relationship rather than any post-accrual diversion from the promoters. On that basis, the interest income was not assessable in the promoters' hands under section 56 of the Income-tax Act, 1961, and the reference was answered against the revenue.

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Issues: (i) Whether the three promoters who collected share money for a proposed co-operative society constituted an association of persons or a body of individuals liable to tax on the interest earned on the deposited amounts. (ii) Whether the interest income was diverted before accrual by overriding title in favour of the contributors and therefore did not accrue to the promoters as their income. (iii) Whether the interest income was chargeable to tax in the hands of the promoters under section 56 of the Income-tax Act, 1961.

Issue (i): Whether the three promoters who collected share money for a proposed co-operative society constituted an association of persons or a body of individuals liable to tax on the interest earned on the deposited amounts.

Analysis: The concept of an association of persons requires a common purpose or common action directed to producing income, profits or gains. The promoters were nominated to perform a limited preliminary function for the formation and registration of the society and did not come together by agreement for earning income. The deposits were made to comply with the statutory requirements governing share money collected for a society in formation, and the activity was not an income-producing venture. The broader expression body of individuals also requires a nexus with an income-producing activity, which was absent here.

Conclusion: The promoters did not constitute either an association of persons or a body of individuals, and this issue was decided in favour of the assessee.

Issue (ii): Whether the interest income was diverted before accrual by overriding title in favour of the contributors and therefore did not accrue to the promoters as their income.

Analysis: The contributors had appointed the promoters merely as agents to hold and place the funds as required for the proposed society. Since the promoters never had beneficial ownership of the contributions or of the proportionate interest, the question of any superior title operating to divert income after accrual did not arise. The legal relationship was one of agency, so the income was attributable to the contributors from the outset rather than diverted from the promoters.

Conclusion: The doctrine of diversion of income by overriding title was not applicable, and this issue was decided in favour of the assessee.

Issue (iii): Whether the interest income was chargeable to tax in the hands of the promoters under section 56 of the Income-tax Act, 1961.

Analysis: Once the promoters were found not to be an association of persons or body of individuals, and the interest was held to belong to the contributors through the agency relationship, the amount could not be assessed as income of the promoters under the residuary head of income. The statutory context governing collection and deposit of share money also supported the conclusion that the promoters were acting under legal compulsion rather than carrying on an income-yielding activity.

Conclusion: The interest income was not chargeable to tax in the hands of the promoters under section 56, and this issue was decided in favour of the assessee.

Final Conclusion: The reference was answered against the revenue on all substantive questions, and the interest on the deposited share money was held not assessable in the hands of the promoters.

Ratio Decidendi: Persons entrusted with collecting and depositing share capital for the formation of a society, and acting only under a statutory and agency relationship without a common income-producing purpose, do not form an association of persons or body of individuals, and interest on such funds is not taxable in their hands.

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