Income Tax Appellate Tribunal - Chennai
Sarvodaya Mutual Benefit Trust, ... vs Ito, Vellore on 2 November, 2017
आयकर अपील य अ
धकरण, 'ए' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A', CHENNAI
ी संजय अरोड़ा, लेखा सद य एवं
ी ध!ु व"
ु आर.एल रे #डी, या%यक सद य के सम' ।
BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER
AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER
आयकर अपील सं./ITA No.1437/Mds/2016
%नधा)रण वष) / Assessment Year : 2009-10
Sarvodaya Mutual Benefit Trust, Thellar Income Tax Officer,
No.10, Reddiyar Street, Vs. Ward-I(5),
Thellar Village Post, Vellore - 632 001.
Thiruvannamalai - 604 406.
[PAN: AAETS 2748F]
(अपीलाथ /Appellant) ( यथ /Respondent)
आयकर अपील सं./ITA No.1438/Mds/2016
%नधा)रण वष) / Assessment Year : 2009-10
Sarvodaya Mutual Benefit Trust, Income Tax Officer,
Pernamallur, Vs. Ward-I(5),
No.77, Chetpet Road, Mazhiyur Village, Vellore - 632 001.
Mazhiyur - 604 505,
Vandavasi TK.
[PAN: AAETS 5150R]
अपीलाथ, क. ओर से / Appellant by : Shri K.Venkatesh Prabu, CA
01यथ, क. ओर से/Respondent by : Shri V.Sreenivasan, Jt. CIT
सन
ु वाई क. तार ख/ Date of hearing : 04.08.2017
घोषणा क. तार ख /Date of Pronouncement : 02.11.2017
आदे श /O R D E R
Per Sanjay Arora, AM:
This is a set of two appeals by two separate Assessees, directed against the respective Orders by the Commissioner of Income Tax (Appeals)-13, Chennai 2 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO ('CIT(A)' for short) dated 23.02.2016 & 29.03.2016, dismissing their appeals contesting their respective assessments u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for Assessment Year (AY) 2009-10 vide orders of even date, i.e., 26.12.2011. As the appeals raise common issues, these were posted for hearing and, accordingly, heard together, and are being disposed of by a common, consolidated order for the sake of convenience.
2. The background facts The assessee/s is a private 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 assessable in its hands and, two, the application of s. 40(a)(ia) in view of the admitted default in not deducting tax at source u/s. 194A on the interest paid by it to Sarvodaya Nano Finance Ltd. (SNFL), from which it derives financial resources by way of unsecured loans. The assessee's operational model is that it sources funds in the main from SNFL, which for the 3 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO current year is at 12 per cent. per annum on reducing balance. The same are re- lent to member Self Help Groups (SHGs) at 12 per cent. per annum flat. Thus, while the assessee obtains benefit (of interest) on the reduction in the loan amount over time, the same is not passed over to the borrower SHGs. This is the primary source of revenue for the assessee, whose accounts disclose a surplus of . 3,28,968/- ( .3,40,480/-) for the current year. The assessee, however, returned only . 32,897/- ( .34,048/-) as, as per its byelaws, 90 per cent. of the surplus is to be distributed amongst the member SHGs, whose saving accounts maintained with it are accordingly credited to the extent of the said 90 per cent. (allocating the same on the basis of the average balance outstanding in their contribution accounts), retaining the balance 10 per cent. (of the surplus) for capital expenditure, transferring it to the capital fund. Why, the repayment of the borrowing from SNFL, which only would lead to a surplus in the hands of the assessee in view of the differential manner of charging interest, would be principally from the retained funds (surplus). In the view of the Assessing Officer (AO), since endorsed by the ld. CIT(A), the shares of the individual SHGs are not determinate, so that the same is to be taxed in the hands of the assessee trust at the maximum marginal rate, treating it as an Association of Persons (AOP), under which status it was assessed. There is in fact no physical distribution of the surplus. In the absence of actual distribution, the assessee's contention that, upon credit (to the accounts of the SHGs), the funds are being held by it in a fiduciary capacity, cannot be accepted. These, then, constitute the first controversy arising in the present case. The second, as afore-stated, is the qua the application of s. 40(a)(ia), invoked as the assessee did not admittedly deduct tax at source u/s. 194A on the interest paid/credited to SNFL. The assessee-trust being an AOP, it was not excepted 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.
4ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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 applicable to them and, therefore, on the interest paid to SNFL. This sums up the assessee/s' case qua both the issues.
4. We have heard the parties, and perused the material on record. Findings The assessee-trusts are not registered u/s. 12A of the Act. The first thing therefore relevant to determine is if the assessee/s, returning its income as an AOP, is a representative assessee (u/s. 160(1)(iv) of the Act) for the SHGs, or not? We may, therefore, to begin with, reproduce the relevant provisions of the Act:
'Representative assessee.
160. (1) For the purposes of this Act, "representative assessee" means -
(i) to (iii)......
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf deed which is valid 5 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO under the Mussalman Wakf Validating Act, 1913 (6 of 1913)], receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees;
(v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees.
Explanation 1. - A trust which is not declared by a duly executed instrument in writing [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)], shall be deemed, for the purposes of clause (iv), to be a trust declared by a duly executed instrument in writing if a statement in writing, signed by the trustee or trustees, setting out the purpose or purposes of the trust, particulars as to the trustee or trustees, the beneficiary or beneficiaries and the trust property, is forwarded to the Assessing Officer,--
(i) where the trust has been declared before the 1st day of June, 1981, within a period of three months from that day; and
(ii) in any other case, within three months from the date of declaration of the trust.
Explanation 2.--For the purposes of clause (v), "oral trust" means a trust which is not declared by a duly executed instrument in writing [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)], and which is not deemed under Explanation 1 to be a trust declared by a duly executed instrument 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 sub- section (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 gains are receivable under a trust declared by any person 6 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act.' 'Charge of tax where share of beneficiaries unknown.
164. (1) Subject to the provisions of sub-sections (2) and (3), where any income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as "relevant income", "part of relevant income" and "beneficiaries", respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate:
Provided that in a case where--
(i) none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in the case of an association of persons or is a beneficiary under any other trust; or
(ii) the relevant income or part of relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or
(iii) the relevant income or part of relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the Assessing Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members 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:7
ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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 benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;
(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed.' A representative assessee could only be for a 'person', a term defined u/s. 2(31).
The same includes an Association of Persons (or body of individuals), whether incorporated or not. The SHGs are apparently only AOPs and, therefore, the assessee could be regarded as a representative assessee for the different SHGs, to which the funds are lent and the surplus credited, by it. Here it may be relevant to mention that it is not necessary, for an AOP to be regarded as a 'person', to be formed for deriving income, profit or gains (refer Explanation to s. 2(31)). So regarded, i.e., as a representative assessee, it is the entire income arising to it that would stand to fall to the share of the beneficiary SHGs, and for which it shall be regarded as a representative assessee, and not a part of it, i.e., as credited to the account of the SHGs, and which as per the extant regulations, is at 90 per cent. of the surplus. This is as the trust deed, the constituting 8 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO document, does not specify any part of the income of the trust as not for the benefit of the SHGs and, correspondingly, as also therefore, for the benefit of any other. The part (10 per cent.) thus retained is again only that received for and on behalf of SHGs, and which is considered proper and expedient by the Board of Trustees (BOT) for the time being to be retained, for capital expenditure or for the effective 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 ( . 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, 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 for the balance 90 per cent.
The next question in the matter is whether the shares of the individual SHGs are determinate or known. Without doubt, there is no specification of the shares in the trust deed, which we have perused in its entirety. These shares have to be decided/specified only by the settlor of the trust. It could not but be 9 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO otherwise, where the assessee trust/s is, as contended, constituted for the benefit of these Self-Help Groups. The income in the present case, instead of being received for and on behalf of, or for the benefit of, the defined (specific) SHGs, i.e., at the time of the execution of the trust deed (as required by law - refer Explanation 1 to s. 164), is allocated to the SHGs registered with the assessee- trust for the time being. These SHGs are subject to change from time to time, as one group may become dysfunctional over time or otherwise breakup in time. The whole purpose is to enable access to resources and providing other assistance to the women of the area, who may organize themselves into another group or, that apart, another such group may similarly seek assistance or get itself enlisted with the trust. The identity of the beneficiary SHGs is not constant over time, much less crystallized as on the date of the trust deed, as also their respective shares, which in the present case are being defined on the basis of the balance outstanding (for the relevant year). Not only are the shares thus not defined at the time of execution of the trust deed, i.e., the formation of the trust, the same are liable to change from time to time on the basis of the performance of the individual SHGs participating for the time being. Why, the said formula, not forming a part of the trust deed, is itself subject to change over time. The individual shares of the beneficiary SHGs, as in fact the SHGs themselves, cannot therefore be regarded, in the facts of the case, as indeed in law, as determinate or known. Ex consequenti, the entire income of the trust is assessable in its hands at the maximum marginal rate, as assessed by the Revenue. We, in our this view of the matter, do 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, 10 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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 withdraw the same, there is nothing to exhibit or suggest that the non withdrawal by them is on account of a conscious decision on their part, with we further observing them as being unincorporated and, therefore, if unable to contract, cannot maintain a bank account. The foregoing notwithstanding, we have already found that considering the assessees to be representative assessees for the respective SHGs u/s. 160(1)(iv), i.e., as contended, does not help the assessee's case, and they are, nevertheless, liable to be taxed at MMR on their entire surplus.
Without prejudice, in our view, the assessee-trusts are not the representative assessees for the respective SHGs. This, in fact, would be apparent from the non identification of the SHGs, or their respective shares, in the trust deed. The assessee-trust/s is only an Association of Persons (AOP) constituted by the member SHGs. This would be apparent from the intent and purpose of the settlor from the trust deed, the relevant part of which we reproduce for reference as under:
'Whereas, now it is thought fit to widen the scope of activities of the Trust to enable it to better manage the finances, access a higher amount 11 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO of credit from other financial institutions and to provide other financial services such as insurance, and technical assistance and support services for promoting livelihoods for the poor women members of the Self-Help Groups constituting the membership of this Trust.' This is also the unequivocal view that arises from a holistic reading of the trust deed, read as a whole, which envisages a General Body, which is, albeit indirectly, the ultimate authority over the affairs of the trust, including selection of members of the BOT. The SHGs are, thus, the members of the assessee-AOP. This also explains, or provides scope for, varying membership over time, as indeed it is in practice and, further, non-specification of the respective shares, i.e., in the trust deed, which in fact also flows from the former. The surplus generated by the assessee-trust is, therefore, only the income of the member SHGs, who, as afore-stated, 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 of the trust deed or the formation of the 12 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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 an association of persons or body of individuals (other than a company or a co- operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate:
Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.
(2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under sub-section (1)],--
(i) the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rate;
(ii) any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members at such higher rate or rates, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate.
Explanation.--For the purposes of this section, the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of income) are indeterminate or unknown on the date of formation of such association or body or at any time 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 13 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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 substance. We have already clarified that an AOP, even if un- incorporated, so that it is not a legal person, is a 'person' under the Act. A ready example, to clarify further, is of a partnership firm, which again represents a contractual relationship between the partners constituting it for the time being, and therefore though not a legal entity, yet, for the purposes of the Act, is a different person, separate and distinct from its partners, who are themselves persons, liable to tax on their income under the provisions of the Act. The AOP is similarly not a representative assessee for its members, as being contended, but a different person, separate and distinct from its members (for the time being). Its' income assessable under the Act, as for any other entity, is to be computed having regard to the general and specific provisions, viz. s. 40(ba), s. 167B, s. 174A, s. 177. Sections 67A and 86 provide the manner of computation of the income of a member of the AOP (or body of individuals) and income tax 14 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO thereon. That, therefore, the income of an AOP is allocable to its members is no ground for holding it to be not assessable in it's hands. As a reading of s. 167B shall show, the share of the members of an AOP being indeterminate or unknown, in whole or any part of the income of the said AOP, shall only impact the rate/s at which its (total) income is to be taxed, and does not operate to exclude the income - share in respect of which is not specified, from being taxed in its hands. The share of the income of a member of an AOP, though forming part of his total income (except where the income of the AOP is taxable at MMR or higher), no tax is payable thereon, save where no tax is chargeable on the total income of the AOP (s. 86). In the present case, the assessee itself admits to its income being chargeable to tax, the only question is of its quantum, claiming that falling to the share of the SHGs as not forming part of the total income of the assessee-trust. We find no legal basis for the same; the entire income of the assessee/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 15 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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 of interest, resulting in a surplus to the assessee-trust. There is no privity of contract between SNFL and SHGs. SNFL, therefore, shall have no recourse to a SHG, or its individual members, in case of a default. It may be stated that SHGs are also AOPs, and being not legal persons, incompetent to contract. That is, enter into a legally enforceable contract. There is nothing on record to show that the SHGs are, in fact, AOPs. There could, for all we know, be a contract (even if oral) amongst the individuals comprising the SHG, to honour the commitment/obligation of the SHG, for which it may, acting through a representative, be required to issue an undertaking, etc., to the assessee-trust. Such an understanding, even if informal, has the elements of a contract, which may not necessarily be in writing; the (principal) terms being in fact borne out by conduct. The SHGs are self regulating bodies, and would in their own interest, as else their membership is liable to be terminated, stand to their commitment. Clause 3(f) of the trust deed clearly provides that a Self-Help Group shall be deemed valid only if its members have signed an inter se agreement as prescribed. Clause 5(c) again provides for the deposit of a copy of the said inter se agreement, duly executed, by the SHG with the trust on its admission as a member of the latter. Why, the monies withdrawn from or deposited with the assessee by the SHG would only be through the agency of a representative. Without going into the question of the exact status of the SHGs, clearly, a contractual relationship underpins the transactions between the assessee and the SHGs, acting understandably through authorized persons. Merely because the SHGs are members of the assessee-AOP does not imply that 16 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO it could not be, i.e., the two cannot have a contractual relationship, which, rather, forms the very basis of their financial transactions. To suggest so would be the same as stating that a company cannot transact business with its members, or for that matter, a firm with its partners. 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 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 reducing balance. Continuing further, the funds for lending to the SHGs emanate not from the SHGs themselves, as a set of contributors, but from outside sources, as a loan from SNFL, which is to be repaid and, further, carries a cost, and for which the borrower trust is contractually bound. Again, as it appears, it is the members of a SHG who, per an inter se agreement, seek to 17 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO prevent loss, contributing thereto, and surely not the other SHGs. Further, the funds are utilized by the SHG not for any common purpose of the Group itself, but for their individual purposes by the members (for the time being) of the Group. These purposes may be both personal and/or income generating, viz. setting up or operationalizing an undertaking, etc. The liability of each individual member is defined on the basis of his withdrawal. That is, though it is the Group that transacts with the assessee trust, and is liable to pay interest and principal thereto, the inter se arrangement binds its individual members to repay the loan contracted as well as interest thereon, as also to, as it appears, not to, by way of financial discipline, borrow from outside sources. Again, a contractual arrangement binds the individual members, who draw resources to generate income for themselves in the main. It is this income, generated through personal enterprise, that enables them not only to earn their livelihood, but also to repay the loan as well as meet the cost of borrowing. That there could also be a collective enterprise (by all or some of the members of a self-help group) would not, in any manner, detract from the basic premise that the SHGs are independent and separate entities, and that a contractual relationship defines their transactions with the assessee-AOP. The money borrowed is repaid, along with interest, through the trust, to SNFL, enabling it to recycle those funds, i.e., lending to other such trusts, or for any other purpose deemed proper by its management for its defined objectives. That is, the money goes out of the system, with in fact each 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:
18ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO
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. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC) held that where an entity was found to be set up for trading purposes, as for banking activity being pursued by the assessee-company as its object, it would not imbue it with a mutual character even where limited to its members only in-as-much as the arrangement was essentially a profit making arrangement. It is this similarity of facts that prompted the Hon'ble Court in Bangalore Club (supra) to refer to its earlier decision in Kumbakonam Mutual Benefit Fund Ltd. (supra). We may, to clarify the point further, and with profit, extract from the decision in Thomas v.
Richard Evans & Co. [1927] 11 TC 790 (HL) (at pgs. 822-823), reproduced, in this context, by the Apex Court in Bangalore Club (supra) while referring to the third condition of mutuality, which it explains as elucidated in Style v. New York Life Insurance Co. [1889] 2 TC 460 (HL) and Kumbakonam Mutual Benefit Fund Ltd. (supra), as under (at pg. 525):
'But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a 19 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO railway company makes a profit by carrying its shareholders, or if a trading company, by trading with the shareholders - even if it limited to trading with them - makes a profit, that profit belongs to the shareholders, in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers. It comes back to them as shareholders, upon their shares. Where all that a company does is to collect money from a certain number of people - it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them 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, 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 therefore the application of the said section is to be examined with 20 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO reference to them. And, further, it is they who are entitled to the deduction in respect of the said interest, though s. 40(a)(ia) shall not apply as they are outside the ambit of s. 194A in view of the non audit of their accounts u/s. 44AB. It is, clearly, the assessee who is responsible for paying interest to SNFL, and claims the same in the computation of its income. Accessing and providing funds on a systematic, organized and continuing basis, if not other technical assistance, etc., to others for their purposes, predominantly economic activity, is only a business and the income arising there-from, business income. Section 40(a)(ia) has, however, witnessed amendments since, and which have been held by the Hon'ble Courts, as in CIT v. Ansal Land Mark Township (P.) Ltd. [2015] 377 ITR 635 (Del), as retrospective. The relevant amendment (per second proviso to s. 40(a)(ia) - inserted by Finance Act, 2012 w.e.f. 01.04.2013) provides that the assessee shall not deemed to be in default where the resident payee (SNFL, in the instant case) has taken the relevant income (interest) into account in computing his income, and has paid tax on the income, so returned, and to which effect the assessee-payer furnishes a certificate in the form as prescribed. And, consequently, the provision to s. 40(a)(ia) shall not 'apply' inasmuch as it shall be deemed that the assessee has deducted and paid the tax deductible at source on such income (interest) on the date of furnishing of his return of income by the resident-payee. We, accordingly, only consider it fit and proper that the matter, to enable an opportunity to the assessee to present its case with reference to the second proviso of s. 40(a)(ia), be restored to the file of the AO, who shall, after allowing a reasonable opportunity to the assessee to present its case in the matter, adjudicate per a speaking order on the basis of the material on record.
Conclusion:
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 21 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO 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, 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 is, conditions which are admittedly not met in the present case. Again, the second proviso to s. 164(1) carves a specific consideration where the income arising to the representative assessee consists of, or includes, profit and gains of business. There is no reference to or discussion in the order by the tribunal as to why the surplus arising to the assessee, which is a result of a systematic and organized activity, undertaken on a continuous basis, with elaborate provisions for managing the trust, is not to be regarded as a business income. The assessee's activity is in fact akin to that of a bank. Involving the representatives of the persons needing financial assistance in the management of the trust, it thus ensures better targeting, including attending to micro level needs, besides 22 ITA Nos. 1437 & 1438/Mds/2016 (AY 2009 -10) Sarvodaya Mutual Benefit Trust, Thellar, Pernamallur v. ITO meting out technical or other assistance, so that its activities are, rather, more comprehensive and penetrative than of a bank. Section 161(1A) is also relevant in this regard, to which again there has been no reference. The finding as to mutuality is, again, without any discussion on the essential conditions of mutuality, as well as to the precedents. We were therefore, with respect, constrained not to follow the said order and, accordingly, proceeded with our independent examination of the issues arising.
Before parting with our order, we find that the income added by the AO, i.e., excluding disallowance u/s. 40(a)(ia), is ten times that returned. This appears to be by way of a mistake as the assessee has admittedly returned 1/10th of the surplus, so that the addition ought to be for the balance 9/10th. The AO shall look into this aspect as well, making necessary rectification/s, where required.
We decide accordingly.
6. In the result, the assessee's appeals are partly allowed for statistical purposes.
Order pronounced on November 02, 2017 at Chennai
Sd/- Sd/-
(ध!ु व"
ु आर.एल रे #डी) (संजय अरोड़ा)
(Duvvuru RL Reddy) (Sanjay Arora)
या%यक सद य/Judicial Member लेखा सद य/Accountant Member
चे नई/Chennai,
4दनांक/Dated, November 02, 2017.
EDN
आदे श क. 0%त6ल7प अ8े7षत/Copy to:
1. अपीलाथ,/Appellant 2. 01यथ,/Respondent 3. आयकर आय9
ु त (अपील)/CIT(A)
4. आयकर आय9
ु त/CIT 5. 7वभागीय 0%त%न
ध/DR 6. गाड) फाईल/GF