TaxTMI 
TaxTMI 
TaxTMI 
2018 (1) TMI 685
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.... 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 assessable in its hands and, two, the application of s. ....
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....on 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 to audit u/s. 44AB, the provision of s. 194A is not appl....
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....ility 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 respect of which such person is so liable at the maximum marginal rate: Provided that the provisions of this sub-section shall not apply where such profits and gai....
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....und 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) and clause (iv) of sub-section (1) of section 160 are liable as representative assessee or any part thereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose ben....
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....st, 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, is for the benefit of the SHGs and not excluding that retained by the trust. There is, under the circumstances, no scope for considering the assessee-trust as an AOP for 10 per cent. of the surplus arising to it, and as a representative assessee for the different SHGs f....
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....count 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 the surplus. The surplus funds in case of such repayment would in fact not be available for being withdrawn by or for distribution to the SHGs. While this may be by itself of little consequence; the credit (to their account) reserving their right of the respective SHGs to wit....
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....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 of the trust deed or the formation of the association, as the law mandates (s. 167-B), which section we may reproduce as under: 'Charge of tax where shares of members in association of persons or body of individuals unknown, etc. 167B. (1) Where the individual shares of the members of....
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....sessee-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 hands at the maximum marginal rate or, as the case may be, a higher rate (refer proviso to s. 167B(1)). It may be argued that the SHGs are themselves un-incorporated AOPs, with their income (shares of surplus) being itself earned or received for the benefit of their individual members. The argument, attractive on its face, is without sub....
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.... 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 interest at which funds are borrowed (say X%), and at which they stand further relent (at Y%, say) by it. The assessee thus enters into two separate contracts. The first is with SNFL, from which borrowings are made as unsecured loans. The second is with the SHGs, to whom funds are again re-lent, on unsecured basis, albeit at a higher effective rate o....
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.... 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 SHG that draws less. Again, the allocation is not without logic as it is the higher retention - as where the share in surplus is not withdrawn, that provides funds with the assessee to repay SNFL, reducing its loan liability thereto and, thus, a saving in the cost of funds, which is pegged to the average balance in-as-much as it is on the reduci....
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....'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 interest is similar or pari materia to saving of interest (on borrowing), as in the present case by deployment of funds in repaying the loan to SNFL inasmuch as it is this that has the effect of enlarging the difference between the interest received and paid and, thus, results in a surplus (income) to the assessee. In fact, the Hon'ble Court had earlier in CIT v. Kum....
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.... 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, livelihood, there-from. We are, for the foregoing reasons, clearly unable to subscribe to the view that the relationship between the assessee-AOP and its member SHGs is a mutual arrangement. It would be, continuing further, therefore, incorrect to say that it is not the assessee, but the individual members of the SHGs, who are responsible for paying interest to SNFL, i.e., u/s. 194A, and that theref....
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....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, refer to the terms of the trust deed; the management of the trust; or even to the relevant statutory provisions, with reference to (all of) which only the issue/s arising is to be decided. Section 164 provides that the beneficiary/s is to be specified per the instrument of trust and is to be identifiable as on the date of such instrument, as also his (respective) share (Explanation 1 to s. 164). That i....