TaxTMI 
TaxTMI 
2018 (1) TMI 685
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....ate beneficiary trust, settled by an individual representing the Association for Sarva Seva Firms (ASSEFA), a society registered under the Tamil Nadu Societies Registration Act, 1975 and engaged in rural development and upliftment of the rural poor, across India, by providing resources; technical assistance, etc., vide trust deed/s executed on 13/2/2003. The assessee trust/s is constituted for the benefit of Self-Help Groups operating in the area of Thellar or, as the case may be, Pernamallur, Tamil Nadu (which thus also explains their respective names). The overall objective with which the Trust/s is formed is to promote and make possible savings and credit activities among poor women jointly together in the form of the Self-Help Groups; to help improve the economic and social conditions, particularly of rural poor women. A Self-Help Group (SHG) is defined under Clause 3(f) of the Trust Deed/s to mean a women's group formed with the object of socio-economic development of women living in the neighbor-hood, engaged in thrift and credit activity for mutual benefit. The appeals raise common issues, two in number, i.e., the assessee's status and, ex consequenti, the income asses....
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.... u/s. 194A and, accordingly, liable for tax deduction at source. This is the Revenue's basis for disallowance of interest u/s. 40(a)(ia), the second issue. The Appellants' case: 3. The case of the assessee/s, which has in fact found favour with the Tribunal in the case of similar trusts (in ITA Nos.1098 & 1100 to 1104/Mds/2012, dated 05.12.2013), is that the shares of the member SHGs are determinate. The assessee is only a representative assessee therefor u/s. 160(1)(iv), and liable to tax only on the surplus retained (10 per cent.) by it, which stands duly returned. The question of the balance 90 per cent. being taxed in the assessee's hands and, further, at the maximum marginal rate (MMR) u/s. 164(1), does not arise. The appellant trust/s is in fact governed by the principle of mutuality, the surplus being nothing but the income of the SHGs themselves, with the assessee-trust being only a facilitator. The SHGs are themselves mutual concerns, and the interest burden is ultimately borne by the individual members of the SHGs. Therefore, considering de facto, the interest expenditure is paid by these individual members of the SHGs. In-as-much as their accounts are not subject t....
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....ment in writing. (2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act.' Liability of representative assessee. 161. (1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. (1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of subsection (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respec....
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....embers were mainly dependent on the settlor for their support and maintenance; or (iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund, created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession, tax shall be charged on the relevant income or part of relevant income as if it were the total income of an association of persons: Provided further that where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, the preceding proviso shall apply only if such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. (2).... (3).... Explanation 1.-For the purposes of this section,- (i) any income in respect of which the persons mentioned in clause (iii) a....
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....functioning of the trust, which exists only for the SHGs. The byelaws or the administrative rules, it may be appreciated, cannot operate to alter the intent of the Settlor in settling the amount (Rs. . 1,000 for both the trusts under reference) in establishing the trust, a legal obligation by definition, while the retention percentage would be, in its wisdom, as deemed proper or, alternatively, as deemed expedient by the BOT from time to time. Why, the same is at 95 per cent. for the similar trusts, reference to appeals in whose cases stands made by us earlier. It would have been a different matter, we may clarify, where the trust deed itself provides for a part of the surplus to be retained, as deemed fit by the BOT (subject to a cap) for the effective management of the trust, also indicating the manner in which the said surplus, as obtaining at the time of it's dissolution, is to be apportioned or as to the share, if any, of the different beneficiaries, in the said surplus. Of course, this arrangement would again have to be examined with reference to the applicable provisions, and our limited point, in stating so, is that the entire income, in the case of the assessee trusts, ....
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....o not consider it necessary to dwell on the other objection raised by the Revenue in the matter, i.e., that there is no real distribution of the surplus to the respective SHGs, for it to be regarded as received on their behalf or for their benefit. Though a credit to the account is an appropriation of the said amount thereto, the question in this regard that is relevant, and needs to be answered, is how would the SHGs withdraw the funds, or how would the distribution of funds take place. The SHGs are not incorporated bodies, so that they cannot have a bank account, to which funds could be transferred. It is the SHGs on whom the decision to withdraw the funds credited to their account should, to be relevant, lie, while they may not even be aware of the funds lying to their credit and, in any case, the extent of credit is as decided by the BOT. The funds credited to the accounts of the SHGs are thus only retained by the trust, and therefore, unless withdrawn, deployed by it for its purposes, as for meeting expenditure or even repaying the borrowings. We have already noted that it is this repayment that leads to a reduction in the interest chargeable to the assessee trust, enabling th....
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...., are themselves AOPs. The performance criteria laid down by the Board of the Trustees managing the trust, as deciding the share of each SHG for a particular year, may be a valid basis for defining the said share. Could, however, the BOT decide on the said shares. We say so as the BOT stands authorized under clause 13 of the trust deed only to make bye-laws, rules etc. for the functioning of the trust. The shares of the members of the AOP, as referred to and contemplated under the Act, is as defined/specified at the time of its formation, while in the present case the member SHGs constituting it are also not defined and, besides, subject to change in time. A change in the constituting SHGs (members) implies a different AOP, which is only defined by and in terms of its constituent members. Further, BOT is only charged with the management of the trust and cannot decide on the membership or the share of the constituting members. Even granting so, as the BOT in the present case is a representative body of the participating SHGs, it would not, in any case, imply that the shares of the member SHGs are either determinate or known and, at any rate, at the very inception, i.e., the date ....
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....e thereafter.' Why, not only the shares would be different for each member for each year, the same crystallize only at the end of the relevant year (on the basis of relevant performance over the years, which is what gets reflected in the average balance outstanding in their contribution accounts), with in fact the membership (of the assessee-trust) itself subject to change over time. There are in fact specific provisions in the rules and regulations of the trust for termination (by BOT) of the membership of a SHG or it withdrawing from the trust. In fact, to continue further, the General Body is itself comprised of member Self-Help Groups for the time being. It is the general body which elects the trustees and accepts the nomine trustees, which comprise the BOT, which is further charged with the overall responsibility over the affairs of the trust. In other words, the beneficiary SHGs are themselves, through their representatives, charged with the management of the trust. The SHGs are thus only members of the assessee-AOP, as indeed the trust deed (the defining document) makes clear. Sec. 167-B shall, accordingly, apply, and the income of the assessee-trust is assessable in its ....
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..../s, whether credited to its capital account or to that of its member SHGs, being only its income, assessable in its hands, though, legally belongs to its members, as in the case of a partnership, and even where the same is not credited to their respective accounts but to the capital account (say), and, which proportion may vary from time to time, as in fact the formula adopted for the purpose actually yields, and which formula may itself change over time. Further on, that the members are themselves AOPs, as the SHGs are stated to be, is again of no moment; an AOP being a separate person under the Act. The next question is if mutuality governs the relationship between the assessee and its member SHGs, in which case no part of the income, including that returned, would be liable to tax in-as-much as there can be no income in case of a mutual arrangement. That is, 'income' and 'mutuality' are mutually contradictory, and inasmuch as income is admitted - which only forms part of the larger income accruing in the present case, the issue of mutuality gets ousted at the threshold. Continuing further, income arises to the assessee on account of an effective differential rate of intere....
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..... In case of a default by a SHG, it is the assessee, as opposed to either SNFL or all other member SHGs, that shall bear the loss or have legal recourse there-against. Why, the sharing amongst the SHGs could again only be on the basis of a contract. The inter se agreement may well provide for the loss to be borne by the individual members, with a view to prevent a default by the Group. The arrangement between the assessee and the SHGs, rather than a mutual arrangement, is only one of business/trading relationship, i.e., contractual in nature. As afore-stated, there could be no 'income', or basis therefor, otherwise. That the surplus of such business is liable to the shared, in some ratio, between the SHGs comprising the assessee-AOP for the time being, would not make it any less a business, or the surplus arising there-from to the assessee as not income. In fact, it is the SHG which draws more funds that contributes more to the surplus (of the trust), which arises on account of the differential rate of interest, while the allocation criteria of the surplus is the average outstanding in its saving account, so that the 'allocation' of the surplus is apparently skewed in favour of the....
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.... SHG constituting a separate ecosystem, whose members would on the basis of their efforts earn income, on a personal or collective basis, using funds extended to them. How does this, we wonder, be regarded as a mutual arrangement, which requires, as a pre-requisite, satisfaction of the three essential conditions, as listed, once again, by the Hon'ble Apex Court in Bangalore Club v. CIT [2013] 350 ITR 509 (SC), as follows: a) complete identity between contributors and participants (of course, reckoned as a class); b) the actions of the participants must be in furtherance of the mandate of the society - which is a matter of fact, to be determined from the memorandum and articles of association, rules of the membership, rules of organization, etc.; and c) there must be no scope of profiteering by the contributors from the fund made by them, which could only be expended on or returned to them.' In fact, the facts of the case in Bangalore Club (supra) are only also strikingly similar, where interest accrues on the surplus deposited by the club, like in the case any other deposit made by an account holder with the bank. It may be noted that earning of in....
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....em makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand it, is the effect of the decision in the New York case.' (Emphasis supplied) Further, we are conscious that a company, the assessee in Kumbakonam Mutual Benefit Fund Ltd. (supra), is a separate legal entity, distinct and separate from its members, while the assessee/s in the present case is an AOP, which is only defined by its constituent members (for the time being). We have in this regard already explained that, even so, an AOP, even if unincorporated, is a separate person under the Act, i.e., from its members, and subject to tax on its income. This aspect would therefore be of little significance/relevance. Not only does the assessee earn a surplus from its transactions with SNFL and the SHGs, so do the individual members of the SHGs by drawing funds made available to the SHGs, of which they are a part, earning income, liveli....
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....: 5. In view of the foregoing, in our clear view, the assessee has been rightly assessed as an AOP - in which status in fact it has returned its income, qua its entire income (surplus), taxing the same at the maximum marginal rate. Further, interest to SNFL is paid by the assessee and not the individual members of its member SHGs, so that there has been, without doubt, contravention of s. 194A. The assessee is, however, entitled to the saving of the second proviso to s. 40(a)(ia) inasmuch as the same has been held as curative and, thus, retrospective by the Hon'ble Courts. This in fact has also been the uniform and unequivocal view of the tribunal. The said issue, accordingly, stands restored to the file of the AO for adjudication in light thereof after allowing the assessee an opportunity to present it's case. We are conscious that our view is at variance with that by the tribunal, which endorses the assessee's case (refer para 3 of the order). The other two orders by the tribunal, also referred to by the assessee (enclosed in the paper-book), only follow this order, and do not issue any independent finding. As regards the parent order, the same does not, with respect, r....