Association of persons income allocation and fiduciary corpus interest: later profit sharing does not create diversion at source.

Project income of an association of persons, when computed on commercial principles, is not diverted at source merely because the eventual revenue share is allocated to one member under the association agreement; the allocation remains a share of profit and is excluded from diversion treatment. Interest on fixed deposits created from corpus amounts collected for a proposed society is not taxable in the developer's hands where the funds are held in a fiduciary capacity and not for its own benefit, although factual verification of transfer to the society may still be required. The article notes that the business-income issue was resolved in favour of the assessee, while the interest issue was remitted for verification.

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Issues: (i) Whether the share of gross sale proceeds allocated to one member of the association of persons was to be excluded from the business income of the assessee on the theory of diversion of income at source. (ii) Whether interest earned on fixed deposits created out of corpus amounts collected for proposed society was taxable in the hands of the assessee.

Issue (i): Whether the share of gross sale proceeds allocated to one member of the association of persons was to be excluded from the business income of the assessee on the theory of diversion of income at source.

Analysis: The revenue-sharing arrangement in the association agreement was construed in earlier years in the assessee's favour, and that view had been affirmed by the jurisdictional High Court. The profit of the association was computed on commercial principles by first determining project income after deducting project costs, and the subsequent apportionment between members did not alter the taxable income of the association. The allocation to the member was held to be a share of profit and not a diversion of income at source.

Conclusion: The exclusion of the member's share from the business income was not justified and the issue was decided in favour of the assessee.

Issue (ii): Whether interest earned on fixed deposits created out of corpus amounts collected for proposed society was taxable in the hands of the assessee.

Analysis: The corpus amounts were collected under the flat-purchase arrangements and were required to be maintained separately and applied for the designated purposes until transfer to the society. In that setting, the assessee acted only as a trustee or custodian, holding the funds in a fiduciary capacity. The real income principle supported the view that the interest did not bear the character of income in the assessee's hands, but the factual question whether the entire corpus and interest were in fact transferred to the society required verification.

Conclusion: The addition was set aside for fresh verification and the issue was allowed for statistical purposes.

Final Conclusion: The assessee obtained relief on the principal controversy relating to computation of business income, while the interest issue was remitted for verification and the revenue's appeals failed.

Ratio Decidendi: Where project income of an association of persons is computed on commercial principles, the later contractual allocation of that income among members does not amount to diversion at source; and amounts held by a developer in a fiduciary capacity for transfer to a society do not assume the character of taxable income in the developer's hands absent appropriation for its own benefit.

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