TaxTMI 
TaxTMI 
2005 (7) TMI 288
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....t from the scheme. The assessee is in appeal against that portion of interest income sustained by the CIT(A) as its income whereas the Department is in appeal against the relief allowed by the CIT(A). For the sake of convenience, all these appeals are disposed of by this common order. 2. The detailed facts for understanding the issues are as under: The assessee is a confederation of association/unions of employees of Maharashtra State Government. The objectives of the confederation are: "Aims and Objectives Aims and objects of the confederation are as under: (A) To unite District associations and of State Government employees and Department-wise and category-wise associations, to co-ordinate their works and to regularise their relations with Government. (B) To protect and grow/preserve service conditions of State Government employees and economical, social and political rights; (C) to increase feelings of co-operation and mutual help among association of the employees; (D) To obtain public approval for following rights and to attempt to bring the same in force; (1) Right to build association/union; (2) Right to negotiate; (E) To discuss and consider ab....
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....ide all matters in regard to admission of members and payments to be made by them, etc. The housing project should not be registered either as a co-operative society or as a trust or society under the Societies Act. The role of the housing project shall only be that of a facilitator. The housing project will receive payments from members by DD and shall deposit them in nationalised bank or a scheduled bank. The bank account of the housing project shall be a separate account. The accounts of the above housing project and those of the Maharashtra State Government Employees Confederation shall be maintained separately. Resolution passed unanimously Consequent to above resolution, funds were collected from members. Total amount so collected till March, 1997 amounted to about Rs. 9 crores. In the meeting of the confederation held on 25th Feb., 1996 following note was passed: Minutes of the meeting held on 25th Feb., 1996. Shri R.G. Karnik was in the chair. All other members were present. Minutes of the meeting 15th Feb., 1996 were read and passed. Funds being collected from members are very big. Nearly Rs. 3 crores have been collected so far. The said funds be invested in ti....
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....this, the committee decided as under: 1. Members who cannot be accommodated on the allotted land on the basis of their priority number, may (be) given an alternative for Kamothe and they be asked to convey their consent. 2. Those who do not give their consent for Kamothe may be given refund as under: I. Rs. 260 paid towards entrance fee and share capital. II. Amount paid by them towards construction. III. Both the above amounts be refunded with interest. IV. While making refunds as stated in I, II and III above, interest may also be paid to those who have resigned earlier (20th Jan., 2000) on the basis of the period for which the said amount was deposited. The interest earned on the time deposits kept in bank of behalf of the members is significant. The average annual interest since 1996 will be 9 to 10 per cent. This is the opinion of the chartered accountant. The calculation of interest payable to each members is laborious and time consuming. further the interest rate is changed from time to time. As such payment of interest to members is likely to be delayed for a long time. Further, it will not be proper to cause delay in interest payment. Therefore, follow....
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....is, therefore, convinced that it is impossible to secure land in greater Mumbai. The members of the co-operative housing project are requested to take note of it. In view of the facts stated above the Sanghtana has decided to make serious efforts to secure land at Kamothe (Navi Mumbai). If adequate number of members give their consent for Kamothe and the surrounding areas, it will be possible to secure land there in about six months' time. It will be advisable to give consent for this alternative at Kamothe in view of the planned and fast development of Navi Mumbai. This was conveyed to all concerned members through circular dt. 28th July, 1999. Those who cannot be accommodated on 8.17 acres of land at Andheri and Mulund were called upon to give their written consent for the alternative at Kamothe. However only about 100 members gave their clear consent. Most of the remaining members did not convey either their consent or rejection of this offer. In order not to allow any doubts in respect of the above it is decided to take action as stated below: 1. About 500 tenements can be constructed on plots on the said 8.17 acres of land at Andheri and Mulund. Information therefor been as....
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....345 Nil 11,85,345 ------------------------------------------------- 1997-98 91,83,184 5,35,000 86,48,184 ------------------------------------------------- 1998-99 1,06,22,257 22,57,500 83,64,757 ------------------------------------------------- 1999-2000 1,01,89,796 43,41,498 58,48,302 ------------------------------------------------- 2000-01 1,16,36,204 2,31,35,060 1,14,98,856 ------------------------------------------------- Total 4,28,16,786 3,02,69,058 1,25,47,732 ------------------------------------------------- Above chart also shows the interest paid back to the employees association/unions who had opted out from the housing scheme. The AO taxed the gross interest received by the confederation in the status of AOP in these five assessment years as indicated above. While taxing interest as income of the confederation, ....
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....ot known. Whether land will be allotted or not, which members will remain as member till land is allotted is uncertain. Hence, CIT(A) did not agree with the assessee's contention that it is acting as an agent for members. When members are not certain how confederation will be acting as an agent. Similarly, according to CIT(A) there is no overriding title on income earned. The contributories are different in different years. Hence, there is also no mutuality. Thus, while confirming the action of AO for the asst. yr. 1996-97 the learned CIT(A) observed as under: "3.12 I have looked into the facts of the case, and the arguments advanced by the appellant. I find that there were 1974 members in all in the financial year 1995-96 and the number increased by 874 more in financial year 1996-97. The members were classified by the confederation into three categories, namely, A, Band C and in each of these categories a contribution of Rs. 35,000, Rs. 25,000 and Rs. 20,000, respectively, was taken towards the construction cost. The preliminary expenses amount for the 3 different categories was Rs. 10,000, Rs. 7,500 and Rs. 5,000 per member. Further, the share money was at a rate of Rs. 250 +....
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....in allotment of land, the initial contributors started withdrawing their money. The money was of course refunded to them after deducting the Sanghatana Nidhi. The outgoing persons were paid interest much later along with principal, at a rate which was lower than the rate of interest earned by the appellant during the year under consideration. The difference in the interest rate is stated to be for the purpose of meeting certain specified expenses. Under the circumstances when it is not known as to which of the contributors would ultimately remain a member of the confederation, and when they remain a member of the confederation, which of them would be the members of the society to whom the land would be allotted in future is all uncertain. The members were to form the societies and the monies were to be passed on by the confederation to the society after their formation. So, the confederation cannot be said to be agent of members or societies because such a nomenclature would amount to putting the cart before the horse. Now, what is certain is the fact that the appellant was in receipt of funds from a large number of Maharashtra State Government employees, which were invested in ban....
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....that the surcharge when paid was clearly impressed with an obligation in the nature of trust for being applied for the benefit of local charities and was by that obligation diverted before it reached the hands of the respondent and therefore, it was not part of income of the assessee. In the appellant's case, I find that they collected the funds, deposited the same in bank, etc. earned interest thereon and thereafter it was again reinvested for earning interest. The allotment of land has taken place almost 4 to 5 years subsequent to the confederation coming into existence. The facts are distinct in the case, and therefore, the decision does not apply. In the case reported at CIT vs. Tanubai D. Desai (1972) 84 ITR 713 (Bom), the Hon'ble Court was dealing with the case of solicitor holding money on behalf of his clients which was held to be in fiduciary capacity. This case is also factually different from the appellant's case because in the event of land having not been allotted, the confederation would have earned interest and at best, returned back the principal and the interest after making some ad hoc deduction to its contributors which existed at that relevant point of time. Und....
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....Addl. CIT vs. Gurjargravures (P) Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) has clearly laid down the proposition that the claims have to be before the AO. 5.2 The AO placed reliance on the decision in the case reported at ITO vs. Ch. Atchaiah (1996) 130 CTR (SC) 404 : (1996) 218 ITR 239 (SC), Meera & Co. Etc. vs. CIT (1997) 139 CTR (SC) 442 : (1997) 224 ITR 635 (SC), N. V. Shanmugham & Co. Vs. CIT (1971) 81 CTR 310 (SC) and Smt. K. Bhoomiamma VB. CIT (1991) 98 CTR (Kar) 184 : (1992) 194 CTR 723 (Kar) and came to the conclusion that the income has to be treated as the income of the AOP and not as income of the members of the AOP individual. Since the individual shares of members of the AOP are indeterminate or unknown as such on the date of formation of the AOP, the AO taxed the total income of the AOP at maximum marginal rate as per the provisions under s. 67. 5.3 In this regard, it has been urged before me that the AO has erred in giving this particular treatment for the reasons mentioned at length while deciding ground NO.2. I have already decided ground NO.2 against the appellant. For the reasons discussed above the appellant has to be assessed as AOP. The appellant has....
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....nd the AO is directed to reduce the interest paid to the outgoing members from the income earned by the appellant." 6. Before us the learned counsel for the assessee submitted as under: (1) The assessee is not an AOP but is only a voluntary organization with no profit motive, acting in a fiduciary capacity as a representative, agent and facilitator to its contributing members. The share of the members of the assessee confederation is determinate inasmuch as they will take back what is deposited by them in addition to interest earned by them on their deposits. Therefore, confederation cannot be taxed on interest receipt. (2) There is an overriding title in respect of accretion on deposits held on members' account. The appellant did not earn interest on its own account but is under obligation to refund/transfer interest to co-operative housing societies on members' account. Accordingly, the confederation has credited bank interest to members' account taken to balance sheet. (3) The appellant can also be treated as a mutual concern having a complete identity between contributors and participators. The interest accrued on members' fund is used in reducing the cost of housin....
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....ad) (8) The share of the members are determined which is defined by the money deposited by them. Each member had contributed as under: Particulars Category Category Category A B C (opting (opting (opting 800 sq. 650 sq. 450 sq. ft. flat) ft. flat) ft. flat) Capital 35,000 25,000 20,000 towards land) Share money 260 260 260....
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....TR 60 (SC) (iv) CIT vs. Tollygunge Club Ltd. 1977 CTR (SC) 195: (1977) 107 ITR 776 (SC) (v) Poona E1ectric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC) (vi) CIT vs. A. Tosh & Sons (P) Ltd. (1987) 59 CTR (Ca1) 272 : (1987) 166 ITR 867 (Cal) (vii) CIT vs. Kamal Co-operative Sugar Mills Ltd. (2000) 161 CTR (SC) 241 : (2000) 243 ITR 2 (SC) (viii) CIT vs. Thakar Das Bhargava (1960) 40 ITR 301 (SC) 7. On the other hand, learned Departmental Representative supported strongly the order of the AO and submitted that CIT(A) has wrongly allowed the relief. In brief, the central point of submissions of learned Departmental Representative were as under: (1) The assessee has himself filed the return of income in the status of AOP showing nil income. Now, it cannot go back to say that it is not assessable to tax. (2) Shares of the members are indeterminate inasmuch as there is no fixed list of members, anyone can join at any time and leave at any time leaving the shares of others as indeterminate. Therefore, entire interest income is taxable in its hands. (3) The housing co-operative societies had not come into existence nor they were formed. The formation of societies....
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....ble in its hands. Regarding the claim that it is a registered society and it is entitled to exemption under s. 10(24) of the Act, we are of the view that this provision will not be applicable in the present case as the confederation was registered as a trade union only on 6th Dec., 2000 as per certificate obtained under Trade Union Act, 1926. The availability of exemption to the income earned by an assessee has to be examined from year to year. Income was earned in assessment years prior to 2000-01. Sec. 10(24) reads as under: (24) any income chargeable under the heads "Income from house property" and "Income from other sources" of a registered union within the meaning of the Indian Trade Unions Act, 1926 (16 of 1926), formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen; During these periods the confederation was not a registered trade union. Further, the assessee has also not challenged the reopening on this ground. If assessee was entitled to exemption under s. 10(24) in earlier years by virtue of it being a registered trade union, reopening would have been bad in law. Notwithstanding that such ground is ....
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....is contention that assessee is acting only in a fiduciary capacity following decisions were cited: (1) CIT vs. Y.S. Desale In this case a co-operative society was to be promoted to manufacture sugar. Out of 54 members, 7 members formed an executive body while 3 out of them were appointed as promoters. There was a considerable delay in the formation of the society as license to erect sugar factory was not forthcoming. The promoters had collected a large amount from the members of the co-operative society and the amount was deposited in the bank, which earned interest It was held that, object of appointing the promoters was not to carryon any business or earn any income in the form of interest from the deposits, which was made out of the deposits collected from members by way of contribution of share capital. The activity of depositing funds into bank did not amount to an income producing activity. Further, when income is received by an agent, he received it for and on behalf of the principal. The promoters received income as agent of shareholders. They did not have any title over the income which really vested in the shareholders. The title to the income proportionate to the cont....
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.... case, the assessee was a firm of solicitors. Clients of the assessee used to advance money to the assessee in connection with cases entrusted to the assessee. After final adjustments of bills, small balances were continued to be carried forward in the accounts of the assessee. Finally, the assessee closed the said accounts and transferred the balance to its own P&L ale. The question arose whether the said balance transferred to the P&L ale of the assessee was assessable as income in the hands of the assessee. On these facts, it was held by a Division Bench of this Court that the said balance was not a revenue receipt in the hands of the assessee liable to income-tax. The amounts received by the assessee from its clients were not trading receipts but were received by the assessee as an agent and in a fiduciary capacity. The assessee remained liable to account for the money to its clients. It was held further that even though the remedy of some of the clients of the assessee had become barred by limitation, the amounts representing the claims did not become the income of the assessee." We find what the confederation was doing was not a business activity. It was not authorized by ....
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....rs. As the interest belongs to the members it was decided to pass it on to their co-operative society." By their minutes of the meeting held on 20th Jan., 2000, it was held by the confederation that interest shall be paid at the rate of 4.5 per cent on the funds deposited by members. The balance will be used for entrance fee, share capital and initial construction expenditure. Interest will also be paid to those who have resigned earlier than 20th Jan., 2000. On the basis of the period for which the said sum was deposited the interest will also be paid to those who have died on or before 20th Jan., 2000. However those who have opted for Kamothe Project will not be paid interest but interest (earned on their deposit) payable to them will be credited to their account for the project at Kamothe. In the circular dt. 10th Feb., 2000, issued by the confederation, item NO.4 is significant. It reads: "Those members who have obtained refund during the last four years will also be paid interest for the period for which they (are) eligible to interest payment." It shows the intention of the confederation to make payment to old retirees from the project even though there may not be any clai....
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.... contributors to the common fund are entitled to participate in 'the surplus, thereby creating an identity between the participants and the contributors. Once such identity is established, the surplus income would not be exigible to tax on the principle that no man can make a profit out of himself. The principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character. The principle of mutuality can, in such cases, be confined to transactions with members. The two activities can, in appropriate cases, be separated and the profits derived from non-members can be brought to tax. Sec. 44A of the IT Act, 1961. which begins with a non obstante clause applies to any trade, professional or similar association and but for the use of the words 'other than an association or institution referred to in cl. (23A) of s. 10', even the professional associations referred to in s. 10(23A) would have derived the advantage of s. 44A. The intention of the legislature was to give the benefit of s. 44A to all professional associations other than those referred to in s. 1O(23A). They are clearly words of limitation not intended to enlarge the scope of the expression ....
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....ete identity between participators and contributors. If interest is charged from the members and paid back to other members, then there will be a complete identity between contributors and participators. But where source of interest receipt is a third party, i.e., bank, which is not a member of the group, the concept of mutuality would not be applicable and hence interest income received from the bank will not be exempt, if otherwise taxable. 14. Similarly, we are of the view that there is no overriding title in favour of the members because there is neither statutory obligation nor an agreement with the members for depositing their fund with the bank and pass on the interest to them. The confederation did it at its own as a trustee of the fund of the members. And it also decided voluntarily, at its own, to pass on the interest to the retiring members or to those who have already retired four years ago, prior to February, 2000 and also to pass on the interest to the housing co-operative societies as project cost on behalf of the members. This cannot be said to be equivalent to an overriding title. Our view is supported by the decision of Hon'ble Allahabad High Court in Addl. CIT....
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.... the shares are indeterminate. Merely on the ground that some new members can come in or some old members can walk out from the confederation, the shares of the existing members, which are determined on the basis of their deposits cannot become indeterminate. Hence, this ground of Revenue is rejected. 16. Regarding the argument that formation of housing society is a contingent event, depending upon allotment of land, we are of view that it will not affect the taxability of interest income. In either situation, whether housing society is formed on allotment of land or not formed if land is not allotted, the fiduciary capacity of the confederation cannot be undermined. Similarly, fluctuation of members cannot in any way affect the status of the confederation as an agent of the members. The constitution of the federation makes it an agent of the members who are on the members list at a given point of time. It is an agent of those members whose funds are entrusted to it for housing project. 17. So far as the argument of the learned Departmental Representative that CIT(A) has wrongly allowed deduction for the interest paid to the outgoing members is concerned, we are in agreement ....