Income Tax Appellate Tribunal - Indore
Co-Ordination Committee Of Spm Unions , ... vs Assessee
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IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH, INDORE
Before Shri Joginder Singh, Judicial Member
And
Shri R.C. Sharma, Accountant Member
ITA Nos.239 to 246/Ind/2012
A.Ys. 2000-01 to 2007-08
Asstt. Commissioner of Income Tax 1(1)
Bhopal :: Appellant
Vs.
Coordination Committee of SPM Unions
Hoshangabad
PAN - AAAAC6693G :: Respondent
Co Nos. 74 to 81/Ind/2012
Arising out of ITA Nos.239 to 246/Ind/2012
Coordination Committee of SPM Unions
Hoshangabad :: Objector
Vs
Asstt. Commissioner of Income Tax 1(1)
Bhopal :: Respondent
Revenue by Shri Darshan Singh
Assessee by Shri Sumit Nema
Date of hearing 12.10.2012
Date of pronouncement 25.10.2012
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O R D E R
PER SHRI R.C. SHARMA, ACCOUNTANT MEMBER
These are the appeals filed by the Revenue and cross objections by the assessee against the order dated 27.2.2012 of the learned CIT(A) for the A.Ys. 2000-01 to 2007-08 in the matter of order passed u/s 147 read with section 143(3) of the Income Tax Act, 1961.
2. The facts, in brief, are that the employees of M/s Security Paper Mill, Hoshangabad, had formed a coordination committee of the Security Paper Mill Unions of Hoshangabad with Shri N.K. Saxena as General Secretary. There was a dispute among the management and the Employee's Unions regarding the Group Incentive Scheme. The Coordination Committee was formed for supervising and coordinating the legal proceedings on various appellant forms. Shri N.K. Saxena was orally nominated as the General Secretary/Chairman of the Coordination Committee of 3 SPM since 1979 and was looking after the work of collection and contribution from various employees and the expenditure thereof under various heads like legal exp. etc. since 1988. A total sum of Rs. 4,27,09,595/- was collected during 17.2.99 to 8.5.2002 and was deposited in an account bearing no. 01190050149 held in State Bank of India, Hoshangabad. On these deposits interest income was also earned. The sum of Rs. 4.27 Cr. Was acquired on account of the written consent of the employees of SPM after deduction of a sum of 15% out of the incentive bonus payable. The AO found that the assessee has not furnished its income tax returns within the time period specified under section 139 for the A.Ys. 200-01 to 2003-04 though it was having income chargeable to tax. On the basis of information on record, after recording reasons, notice u/s 148 of the Act was issued for filing of income tax returns. In response to the said notice, the assessee filed returns of income for the A.Ys. 2000-01 to 2003-04 declaring income at nil in the 4 status of AOP. With the various additions made by the AO, the assessed income was determined at Rs. 2,18,68,268/- for the A.Y. 2000-01; Rs. 29,46,507/- for the A.Y. 2001-02; Rs. 27,21,619/- for the A.Y. 2002-03; Rs. 27,05,577/- for the A.Y. 2003-04; Rs. 12,03,600/- for the A.Y. 2004-05; Rs. 38,99,895/- for the A.Y. 2005- 06; Rs. 23,93,183/- for the A.Y. 2006-07 and Rs. 2,82,54,285/- for the A.Y. 2007-08. The assessee's claim for exemption u/s 10(24) of the Act was declined by the AO.
3. By the impugned order, the CIT(A) confirmed the AO's action after having the following observations :-
" I am in complete agreement with the findings of the A.O. that registration under the Trade Union Act is mandatory in so far as the Trade Unions are concerned. It is incomprehensible to interpret that the association of the registered trade unions are not liable to be registered. The inadvertent 5 omission of the word "Registered" before Association of registered Trade Unions in section 10(24)(b) of the Act cannot be interpreted in such a manner to deprive the Government Exchequer of its legitimate claim of IT on the income of the appellant. For the reasons extensively enumerated above, I am of the considered view that the appellant is not entitled to the benefits of section 10(24) of the Act. The AO's conclusions in this regard are confirmed and appellant's grounds of appeal relating to the exemption claimed u/s 10(24) of the Act, are dismissed."
4. The contention of the assessee that its income was not assessable under the head 'business/profession' was not accepted by the AO and the action of the AO was confirmed by the CIT(A) after having the following observations :-
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"3.3 The aforementioned submissions have been carefully considered with reference to the facts obtaining from the record. As rightly concluded by the AO, all these assertions could not absolve the income of the appellant to be charged to IT. Provisions of section 28(iii) of the Act are attracted in the case of the appellant. Income derived by a trade professional or similar association from specific services performed for its members is chargeable to tax under the head 'income from business or profession'. This is an exception to the general principle that a surplus arising to mutual association could not be regarded as income chargeable to tax. Every trade, professional or similar association which renders specific services to its own members for remuneration related to those services, in my considered view, falls within the purview of this sub-section. For this proposition, the AO correctly placed reliance on the decision in Indian Tea Planter's Association Ltd. V. CIT (1971) 82 ITR 7 322 (Cal) wherein it was held that : A trade association, rendering specific services to its own members for remuneration will come within section 10(6) of the Indian IT Act, 1922 (now section 28(iii) of the IT Act, 1961). From this, it is evident that income from a trade4 association would be chargeable if the amounts paid by its members are for specific services rendered by the association. The statute, therefore, does not require that before income of such association would be chargeable, it should have been earned because of some trade activity by the association. The ratio laid down by the Calcutta High in the aforementioned decision was followed by the P&H High Court in CIT vs. Hill Goods Truck Owners Union (1980) 124 ITR 224 (P&H). The concept behind section 28(iii) is to cut at the mutuality principle being relied on in support of a claim for exemption, when the appellant was actually deriving income for making profits as a result of rendering specific 8 services for its members in a commercial way. This clause creates a statutory fiction (CIT vs. South Indian Film Chamber of Commerce (1981) 129 ITR 22-26 (Mad.). This clause applies to income derived by a trade, professional or similar association from specific services performed for its members. A trade association is an "association of tradesmen, businessmen or manufacturers for the protection and advancement of their common interest (Webster's New International Dictionary, 2nd Edition, Page 264, referred to in CIT vs. Royal Western India Turf Club (1953) 24 ITR 551-556 (SC); Bellary District Mine Owner's Assocaition Ltd. Vs. CIT (1964) 53 ITR 632 (Mys.); Indian Tea Planteers' Association v. CIT (1971) 82 ITR 322 (Cal). Every trade, professional or similar association which renders specific services to its own members for remuneration related to those services would come within the purview of section 28(iii) (Indian Tea Planter's Association v. CIT (1971) 82 ITR 9 322 (Cal.). In order to bring an income within this clause, two essential facts have to be established viz.
That the association rendered specific services to its members and that remuneration was paid by the members for these services; and there must also be a connection between the remuneration adn the services rendered (Chagla C.J. in Ismailia Grain Merchants Association Ltd. V. CIT (1957) 31 ITR 433 - 437 (Bom); South Indian Planting and Commercial Representation Fund v. CIT (1957) 32 ITR 513-518 (Mad.) the statute does not require that before income of such association would be chargeable to tax, it should have been earned because of some trade activities by association(CIT vs. Hill Goods Truck Owners Union (1980) 124 ITR 224 (Punj.). This clause is in the nature of a charging provision. It is applicable on its own terms. Income of a trade association not falling within section 28(iii) is not 10 necessarily exempt (CIT vs. Shree Jari Merchants Association (1977) 106 ITR 542 (Guj.) 3.4 The word "specific" only means definite, distinctly formulated or stated with precision. T he words "performing specific services" in this clause means "conferring particular benefits", that is, conferring on the members some tangible benefit which would not be available to them unless they paid the specific fees charged for such benefits (CIT vs. Calcutta Stock Exchange Association Ltd. (1959) 36 ITR 222 (SC); Indian Tea Planters Association vs. CIT (1971) 82 ITR 322 (Cal.) 3.5 The AO mentioned that in the case of the assessee, employees of various SPM Unions gave their 15% incentive bonus to the coordination committee and in lieu of that the Coordination Committee made payment towards various expenses through its General Secretary, Shri N.K. Saxena. 11 Thus, as rightly concluded bythe AO, both the conditions laid down in Ismaillia Grain Merchants Association Ltd. V. CIT (1957) 31 ITR 433 (Bom) viz. The association rendered specific services to its members and remuneration was paid by the members for these services, in my considered view, were fulfilled. It is settled position that it is not necessary that business/profession must be carried on by the assessee himself. It could be carried through agent or servant. In its case, professional work of fighting litigated issues before the appellate Forums was got completed through the advocates. 3.6 Shri P.S. Nair was an eminent legal professional, representing the impugned disputes before the MP High Court and Supreme Court. According to Report M. Jackson and John I, Powell, the occupations which are regarded as professions have four characteristics viz. (i) the nature of the work which is skilled and 12 specialised and a subsequential part is mental rather than manual (ii) commitment to moral principles which go beyond the general duty of honesty and a wider duty to community which may transcend the duty to a particular client or patient (iii) Professional association which regulates admission and seeks to uphold the standards of the profession through professional codes on matters of conduct and ethics and (iv) high status in the community (Indian Medical Association v. V.P. Santha AIR (1996) (SC) 550-558 (1338). Viewed in this perspective, the aforementioned judicial pronouncements relied upon by the learned counsel for the appellant, enumerated in Paras No. 3.3 above squarely supports the conclusions arrived at by the AO against the appellant. Having given thoughtful consideration to all the relevant facts obtaining from the record, I am in complete agreement with the conclusions of the AO that all the receipts received by the Coordination 13 Committee from employees of the SPM were professional receipts and after deduction of expenses, net receipts were chargeable to tax as income under the head 'income from business or profession'. Since the High Court in WP No. 5696/98 directed payment of 50% of the incentive to the workers, after discussion with employees, all the employees gave in writing to the management to recover 15% of the incentive, that is being paid to them, to be given to the Coordination Committee, for meeting expenses and in the presence of this written authority letter, the AO was of the view that there is no provision for balance, if any, to be refunded to employees. On the basis of individual applications made by all the employees, management of SPM deducted 15% of incentive and paid to the Coordination Committee of SPM Union. The claim of the appellant that the impugned sums were deposits to be refunded to the employees after meeting all the incidental expenses, in the absence of 14 formal or third party evidence, was not accepted by the AO.
3.7 For the reasons extensively enumerated in subsequent paras, the contention of the appellant that its income was not assessable either under the head 'business' or under the head 'profession', is only academic and the grounds relating to this issue, raised by the appellant in all the appeals, under consideration, are accordingly dismissed."
5. The AO also made addition on the plea that the assessee was maintaining books of accounts on mercantile basis. Accordingly, interest income was added under the head 'income from other sources' on the basis of its accrual not-with-standing the fact that the amount was not actually received by the assessee. The action of the AO was confirmed by the CIT(A) after having the following observations :-
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"The rival submissions have been carefully considered with reference to the facts obtaining from the record. In his depositions recorded on 30.10.2003 and 09.05.2007, Shri N.K. Saxena, General Secretary of the appellant Coordination Committee affirmed in specific terms that whenever he issued cheques for payment, he recorded the same as expenditure incurred and cheques received from SPM management, deposited in bank account, were accounted for and entered as income in the cash book. Since the entries for the income and expenditure, on the basis of issuance and receipt of cheques, without clearance of the same, were made in the so called cash book, it is evident that the appellant regularly followed mercantile system of accounting. Viewed in this perspective, the aforementioned assertion of the appellant that it was following cash system and not mercantile method in 16 my considered view was rightly rejected by the AO and hence the AO's action in this regard is upheld.
5. The next issue raised, common for all the assessment years, under consideration, was with regard to taxation of interest income received from bank. The appellant had received interest on deposits in its account held in State Bank of India, Hoshangabad, during the previous years, relevant to the assessment years, under consideration. This was not offered for tax, as according to the learned counsel for the appellant the same was claimed as exempt u/s 10(24) of the Act. For the reasons extensively enumerated above, it was already held in unambiguous terms that the claim of the appellant for exemption u/s 10(24) was not maintainable and that the income of the appellant was not entitled for exemption under the said section. Therefore, I am in complete agreement with the conclusions of the AO 17 that the impugned interest income was clearly taxable in each of the assessment years, under consideration. The addition made by the AO bringing to tax the interest income in each of the assessment years, under consideration, is upheld and the grounds raised against the said addition for all the assessment years, under consideration, are accordingly dismissed. "
6. The AO also made addition in respect of interest income from M/s Kachnar Builders. By the impugned order, the CIT(A) partly confirmed the addition by observing as under :-
"In this view of the matter, I am of the considered view that taxation of interest on the said loan in each of the assessment years, under consideration, should not have been more than that credited by the debtor viz. Kachhnar Builders. For these reasons, the addition made by the AO in each of 18 the assessment years, under consideration, is reasonably restricted to the sums of interest credited by the debtors. The AO is directed to work out and allow relief to the appellant, on this basis, for each of the assessment years, under consideration."
7. The addition made by the AO on account of estimated undisclosed income presumed to have been earned from investment made outside the books of accounts was deleted by the learned CIT(A) after observing as under :-
7.5 In the given facts and circumstances of the case, the Assessing Officer was not entitled to make pure guess and make the impugned assessment, without reference to any evidence or material at all. If the Assessing Officer presumed that the appellant had in fact suppressed the impugned income, from being 19 disclosed to the department, then, it was incumbent upon the Assessing Officer, to have conducted the needed investigation to bring corroborative evidence on record, to substantiate such allegations. Record evidences the fact that this needed exercise was not carried out. In Dhakeswari Cotton Mills Ltd. v.
CIT (1954) 26 ITR 775 (SC), it was held that:
The AO is not entitled to make a pure guess and make estimated adhoc additions/disallowances to the income returned, without reference to any evidence or any material at all. The rule of Law on this subject has been fairly and rightly stated by the Lahore HC in Seth Gurmukh Singh v. CIT (1944) 12 ITR 393 (Lah.). It was observed by the SC in Dy. Commissioner of Agricultural Income-tax and Sales Tax v. Travancore Rubber and Tea Co. (1967), 20 STC 520 that "In all 20 cases of taxation the burden of proving necessary ingredients laid down by law to justify taxation is upon the authorities." Since this was not proved against the appellant 'on the strength of evidence, the AO's action in this regard is opposed to the legal standards enumerated above. The Hon'ble SC has reaffirmed its earlier stand in CIT v. K.Y. Pilliah & Sons (1967) 64 ITR 411 (SC) wherein it was decided that any lump sum add backs to the income shown, if found justified, must be done in proper exercise of discretion objectively and judiciously on the basis of relevant material evidence. In the case of the appellant, under consideration, no evidence whatsoever was brought on record by the AO, to justify the impugned addition. Hence, for the reasons aforementioned, the impugned addition made by the AO. on mere suspicions, unsubstantiated 21 on the strength of corroborative evidence, brought by the AO on record against. the appellant, cannot be sustained. The same is, therefore, deleted. The appellant accordingly gets relief of Rs.15,00,000/- for each of the assessment years 2000-01 to 2003-04."
8. For the A.Y. 2000-01 the AO also estimated and made addition presuming the same to be undisclosed income earned from professional receipts. According to the AO, as a result of the litigation, the employees won the case and got about Rs.30 crores from the management of SPM as incentive bonus; that the amount received by the employees during the period from 17.02.1999 to 08.05.2002 represented only 50% of the incentive bonus decreed in favour of the employees and balance 50% was to be paid later on after the final disposal of the case. An amount of Rs.4,27,09,595/- @ 15% of the amount received by the employees) was deducted from the payments made to individual 22 employees and handed over to the Co-ordination Committee as per the consent of the employees on the direct ion of the MP High Court. This amount was treated as professional receipt received as consideration for the services rendered by the Coordination Committee to the employees for fighting their cases. The excess of income over the expenditure, for the AY 2000-01, was worked out by the AO from Page Nos.20 to 25/Para No.6.4 of the assessment order appealed against and such excess income over expenditure was brought by the Assessing Officer to tax in the assessment year 2000-01. According to the Assessing Officer, in subsequent assessment years i.e. from AY 2001-02 to 2003-04, the excess income over expenditure comes in negative. Since the appellant had not filed returns of income u/s 139 of the Act, the Assessing Officer held that the appellant was not entitled for the benefit of losses.
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9. By the impugned order, the CIT(A) deleted the addition after having following observations :
"8.2 The rival submissions have been carefully considered with reference to the facts obtaining from the record. There is no dispute with regard to the fact that the MP High Court in WP No.5696/98 directed for payment of 50% of the incentive to the workers and after discussion with employees, all the employees had given in writing to the management to recover 15% of the incentive that was being paid to them to be deposited with the Co-ordination Committee for meeting the expenditure and balance, if any, to be refunded to employees: On the basis of individual applications made by all the employees, management of SPM deducted 15% of incentive and deposited the same with Co-ordination Committee of SPM Union. This amount, in my considered view, was not income of 24 the Co-ordination Committee but the same was a mere deposit. It is undisputed fact that the impugned deposit was meant for meeting expenditure for defending/prosecuting various cases of employees. Record evidences the fact that several thousands of cases were filed, prosecuted and defended by the Co-ordination Committee on behalf of the employees. The fact, that amount recovered from employees was a deposit, and it was made clear, to the General Secretary of the Co- ordination Committee in January 1999 that the workers had deposited 15% of the amount and to treat this merely as a deposit with a view to meet all sorts of expenditure including lawyer's fees, TA/DA, typing, stenography, court fees and all other incidental expenses and balance, if any, be refunded to the deserving employees. Facts obtaining from the record evidences the fact that substantial amount was already refunded to employees in the years 1999 and 25 2000 after meeting the expenditure. Had the impugned deposits made by the workers were in the nature of income, as erroneously presumed by the AO, then, in my considered view, there would have been absolutely no question or justification for refunding any amount to the workers.
8.3. Facts obtaining from the record, also demonstrate that nearly 2500 employees were working in the Security Paper Mill and incentives were to be paid to the employees. During the pendency of the disputes, on the basis of settlement in June I 973 and award dated 02.09.1998 several thousand cases were filed before various courts such as under Payment of Wages Act, under 33(c)(1) and 33 (c)(2) of ID Act before various Authorities. Coordination committee used the services of several lawyers and mediators for bringing about the settlement and to lend the disputes. During the pendency of Writ Petition No 5696/98, the MP High Court directed payment of 50% of the incentive. 26 Management flied repeated SLI~s before the Supreme Court. These SLPs were dismissed. The Supreme Court in SLP No. 12189/99 by order dated 08.10.1999 directed that the workmen will have to give an undertaking to refund the amount if the petition of the management of SPM is allowed. On the strength of documentary evidence available on record, the appellant established the fact that various amounts were paid by the management from 1999 as per the direction of the MP High Court and Supreme Court and after hearing the arguments at length, the Supreme Court dismissed the SLP on 08.12.2006. From the sequence of facts enumerated above, the impugned deduction of 15% of the incentive and depositing the same with the Co-ordination Committee of SPM Union, could by no stretch of imagination, be construed and presumed as income of the appellant. In my considered view, that was only a deposit meant for meeting expenditure for defending/prosecuting various 27 disputes of the employees.
10. The disallowance was made by the AO out of expenses claimed : Disallowance of Rs. 9,83,000 for the AY 2000-01; Rs. 10,000/- for the AY 2005-06; Rs. 20,000/- for the A.Y. 2006-07 and Rs. 10,000/- for the A.Y. 2007-08. According to the AO, the expenses claimed to have been incurred under the heads 'miscellaneous expenses' and 'other expenses' was not supported by any details/evidence and since the sums received from the employees were held as professional receipts, received as consideration for the services rendered by the Coordination Committee to the employees for fighting their cases, the said expenditure according to the AO, was not allowable. Hence, the same was disallowed and added to the income of the assessee.
11. By the impugned order, the CIT(A) gave part relief after having the following observations :- 28
"For the reasons extensively enumerated in the immediately preceding paragraph, I have already held that the impugned deposit received from the employees constituted remuneration for the professional services rendered by the appellant, through its team of legal professionals and the same, after meeting the incidental expenditure, was refundable to the employees. In this view of the matter, although the impugned receipt was held as deposit and not income of the appellant, the expenditure incidental for highting the cases of the appellant, which was to be met from these deposits, was not disallowable, particularly when the impugned deposits made by the employees with the appellant federation was only for fighting their cases and for meeting the expenditure incidental thereto. Since in the preceding paras 8.8, it has been concluded that the amounts received by the Coordination Committee was a deposit which cannot 29 be treated as professional receipt, there remains no professional income and as such remains no ground for disallowance of expenses since any disallowance require income in the profit and loss account. Thus, the disallowance of Rs. 9,83,000/- made by the AO in the AY 2000-01; Rs.10,000/- in AY 2005-06, Rs. 20,000/- for AY 2006-07 and Rs. 10,000/- for AY 2007-08 are deleted. The appellant accordingly gets relief of Rs. 10,23,000/- for these assessment years."
12. In the A.Ys. 2005-06, 2006-07 and 2007-08 the AO had made disallowance u/s 40(a)(ia) of the Act. The AO disallowed Rs. 26,85,000/- for the A.Y. 2005-06; Rs. 11,55,000/- for the AY 2006-07; and Rs. 2,69,90,000/- for the AY 2007-08. According to the AO huge amount was paid by the appellant to Shri P.S. Nair and the members of his family in the assessment years 2005-06 to 2007-08. Shri N.K. Saxena, the General Secretary of the appellant Coordination Committee, when confronted 30 by the AO, was not able to explain why these payments were made to the family members of Shri P./S. Nair. The AO was of the view that, if the amount paid to Shri P.S. Nair represents his professional fee, then the appellant was liable to deduct tax at source u/s 194F of the Act and substantial payments made to various lawyers were without deduction of tax at source. When confronted by the AO to explain reasons for non-deduction of tax at source, it was submitted that provisions of section 490(a)ia) of the Act were not applicable in the present case because there was no business income of the appellant; the receipts were in respect of deposits made by the members and these deposits were not income; since there was no business income, there could be no question of allowing or disallowing any expenditure.
13. By the impugned order, the learned CIT(A) deleted the addition after having the following observations :- 31
"10.5 As such, I am of the considered view that provisions of section 40(a)(ia) of the Act are not applicable to the impugned payments made by the appellant to the legal professional named in the assessment orders, under consideration. The disallowance, if any, required to be made should have been restricted to the extent of the sum shown in the balance sheet as "payable" at the end of the year i.e. on the balance sheet dates. However, this was not the case in the case of the appellant, under consideration, since the impugned sums were undisputedly paid by the appellant and nothing was shown as payable as on the balance sheet date. For holding as above, I place reliance on the decision in K. Srinivas Naidu v. ACIT (2010) 131 TTJ (Hyd.) (UO) 17. In Jaipur Vidyut Nigam Ltd. V. Dy. CIT (2009) 123 TTJ (Jaipur) 888 also it was held that section 40(a)(ia) applies only when the amount is payable and not 32 where the expenditure was paid. Word 'payable' is not defined but the word 'paid' is defined in section 43(2) to mean actually paid or incurred. Hence, by implication the word 'payable' does not include 'paid'. In any case, since the appellant had made actual payment to the legal professionals and the same having been subjected to tax in the case of the recipients, since the genuineness of the impugned transactions were proved beyond all shadows of doubt and the same having not been proved by the AO as bogus transactions, respecting the intention of the law framers in enacting section 40(a)ia) on the Statute Book, the impugned additions made by the AO for the assessment years 2005-06 to 2007-08 in my considered view, are unsustainable. My findings in this regard are fortified from te decision of the Supreme Court in Hindustan Coca Cola Beverages (P) Ltd. (supra) wherein it has been held in 33 unambiguous terms that the payee/recipient of income having already paid the taxes due on the payments received by it from the appellant/payer, tax could not be recovered once again from the appellant/payer. To reiterate at the risk of repetition, the recipients were explained to have paid the tax due on the aforementioned payments received from the appellant and since the tax had already been paid by the recipient, in my considered view, the same sum, which stood suffered tax, in the hands of the recipient, could not once again be brought to tax in the hands of the payer viz. the appellant. This issue stands clarified by the Circular No. 275/201/95-IT(B) dated 29.01.1997 issued by the CBDT. It is undisputed that the circulars issued by the CBDT are binding on all the tax administrators coming within the jurisdiction of CBDT.34
10.6 The impugned section seeks to deduct the income of the payee in the hands of the payer. By virtue of the said disallowance provided u/s 40(a)(ia) of the Act, the entirety of the expenses incurred by way of payment to the aforementioned parties, was disallowed on which the appellant failed to deduct TDS but even the income which was received by the aforementioned third party, was treated as the income of the appellant. An outgoing from the appellant's books, which was offered for tax as receipt in the hands of the recipient, before close of the relevant previous year, could by no stretch of imagination, be construed as the income assessable in the hands of the appellant. Section 2(24) of the Act defined the term "income". It included only profits or gains of business or profession and the disallowance provided u/s 40(a)(ia) of the Act is indisputably an expenditure in the hands of the appellant and in 35 the absence of deeming such expenditure as income of the appellant falling under section 2(24) of the Act, no tax liability could be fastened on the appellant."
14. Against the above order of the CIT(A), the revenue is in appeal before us and the assessee is in cross objection.
15. Rival contentions have been considered and record perused. We have also gone through the orders of the lower authorities and find from record that the assessee is an association of registered trade union wherein deduction of 15% of incentive bonus payable to workers of security paper mill was deposited with the assessee. The assessee was coordinating the deposit of the workers and was also incurring expenses of litigation in connection with cases of the management of SPM management Vs. Employees of SPM. The assessee was also distributing the claim of workers in accordance with 36 the directions of M.P. High Court. Thus, we find that the assessee was not doing any business or profession and was merely coordinating the receipts and payments on behalf of the registered trade unions and their members. Following observations of CIT(A) fully support our view :-
"8.2 The rival submissions have been carefully considered with reference to the facts obtaining from the record. There is no dispute with regard to the fact that the MP High Court in WP No.5696/98 directed for payment of 50% of the incentive to the workers and after discussion with employees, all the employees had given in writing to the management to recover 15% of the incentive that was being paid to them to be deposited with the Co-ordination Committee for meeting the expenditure and balance, if any, to be refunded to employees: On the basis of individual applications made by all the employees, management of SPM deducted 15% of incentive and deposited the 37 same with Co-ordination Committee of SPM Union. This amount, in my considered view, was not income of the Co-ordination Committee but the same was a mere deposit. It is undisputed fact that the impugned deposit was meant for meeting expenditure for defending/prosecuting various cases of employees. Record evidences the fact that several thousands of cases were filed, prosecuted and defended by the Co- ordination Committee on behalf of the employees. The fact, that amount recovered from employees was a deposit, and it was made clear, to the General Secretary of the Co- ordination Committee in January 1999 that the workers had deposited 15% of the amount and to treat this merely as a deposit with a view to meet all sorts of expenditure including lawyer's fees, TA/DA, typing, stenography, court fees and all other incidental expenses and balance, if any, be refunded to the deserving employees. Facts obtaining from the record evidences the fact that substantial amount was already refunded to employees in the years 1999 and 38 2000 after meeting the expenditure. Had the impugned deposits made by the workers were in the nature of income, as erroneously presumed by the AO, then, in my considered view, there would have been absolutely no question or justification for refunding any amount to the workers.
8.3. Facts obtaining from the record, also demonstrate that nearly 2500 employees were working in the Security Paper Mill and incentives were to be paid to the employees. During the pendency of the disputes, on the basis of settlement in June I 973 and award dated 02.09.1998 several thousand cases were filed before various courts such as under Payment of Wages Act, under 33(c)(1) and 33 (c)(2) of ID Act before various Authorities. Coordination committee used the services of several lawyers and mediators for bringing about the settlement and to lend the disputes. During the pendency of Writ Petition No 5696/98, the MP High Court directed payment of 50% of the incentive. Management flied repeated SLI~s before the 39 Supreme Court. These SLPs were dismissed. The Supreme Court in SLP No. 12189/99 by order dated 08.10.1999 directed that the workmen will have to give an undertaking to refund the amount if the petition of the management of SPM is allowed. On the strength of documentary evidence available on record, the appellant established the fact that various amounts were paid by the management from 1999 as per the direction of the MP High Court and Supreme Court and after hearing the arguments at length, the Supreme Court dismissed the SLP on 08.12.2006. From the sequence of facts enumerated above, the impugned deduction of 15% of the incentive and depositing the same with the Co-ordination Committee of SPM Union, could by no stretch of imagination, be construed and presumed as income of the appellant. In my considered view, that was only a deposit meant for meeting expenditure for defending/prosecuting various disputes of the employees." 40
Under the provisions of section 10(24)(b) income of an association of registered union as referred to in sub- clause (a) of section 10(24) which is in the nature of "income from house property" or "income from other sources" is exempt from income tax. In the instant case, the assessee falls under clause (b) which has been clearly explained by the CBDT in its Circular No. 762 dated 18.2.1988 which provides as under :-
"Income tax exemption to associations of registered trade unions, 18.1 Under the existing provisions of clause (24) of section 10, any income of a registered union within the meaning of the trade Union Act, 1926 (16 of 1926) under the heads "income from house property" and "Income from other sources" is exempt from income tax if such trade union is formed primarily for the purpose of regulating the relations between workmen and employer or between workmen and workmen. 18.2 The Finance (No.2) Act, 1996, in line with the above, provide similar exemption to an association of trade unions of the nature specified under the existing provisions of clause (24) of section 10"
16. After perusing the various documents filed before the AO, we find that since 4.12.1979 SPM management, 41 Union of India, Ministry of Labour, Ministry of Law, have all treated SPM Coordination Committee as an association of registered trade union. Furthermore, the Court orders also indicate the assessee as coordination committee of SPM Union. We also find that when the Union of India through their management challenged the award of the Tribunal dated 2.9.1998 in the High Court inW.P. No. 5698/1998, only coordination committee was made a party.
17. In view of the above facts, we are inclined to agree with the learned counsel for the assessee, Shri Sumit Nema, that the assessee as a coordination committee was an association of trade union, therefore, eligible for claim of exemption u/s 10(24) in respect of its income falling under the heads of "income from other sources". We direct accordingly.
18. Once it is held that the assessee is eligible for exemption u/s 10(24), the income earned by the assessee 42 in the form of interest from bank deposits as well as other interest from Kachnar Builders will also qualify for exemption u/s 10(24) insofar as interest income is liable to tax under the head "income from other sources".
19. As we have already held that the interest income earned by the assessee is also liable for exemption u/s 10(24) of the Act, we are not going in deep with regard to interest income earned by the assessee from Kachnar Builders which has been partly brought to tax by the CIT(A) to certain extent.
20. From the record we find that 15% of incentive bonus payable to workers was contributed by them to the association. This amount was deposited with the association to meet all sorts of expenditure including lawyers' fee, TA/DA, typing, stenographic charges, court fee and all other incidental expenses. The balance out of such contribution was to be refunded to the deserving employees. From record we find that substantial amount 43 received from the employees was refunded to them in the years 1999 and 2000 after meeting the expenditure. Thus, the amount received from the workers for meeting such expenditure was not in the nature of income in the hands of the assessee being a coordination committee but was merely in the nature of deposit which was meant for meeting expenditure for defending/prosecuting various cases of employees. From record we find that the assessee was not merely representing its workers but in fact a party to all the litigation either as a petitioner or respondent. The management of SPM, Hon'ble High Court and Supreme Court accepted the status of the assessee as an association consisting of workers and, therefore, allowed it to contest in its own name instead of putting up the names of individual workers. There was a clear concept of mutuality. No-one can make profit out of himself. When a member agrees to contribute funds for a common purpose, the amount of funds not so required for common purpose and refunded to such 44 individual, cannot be treated as income in their hands liable to tax. Thus, the general principle applicable to the mutual concern is that the surplus accruing to it cannot be regarded as income, profits or gains for the purpose of income tax.
21. As discussed hereinabove, the amount received by the assessee was not in the nature of income and the assessee was not doing any business activity and as such the application of provisions of section 40a(ia) was not justified. For application of section 40a(ia) firstly there must be some business/professional income against which an expenditure has been claimed. In the instant case before us, since there is no business or professional income in the hands of the association, the AO was not justified in invoking the provisions of section 40a(ia) of the Act.
22. In view of the above discussion, we modify the order of the CIT(A) and in the result the grounds taken 45 by the assessee are allowed in terms indicated hereinabove whereas the grounds taken by the Revenue are dismissed.
Order pronounced in open Court on 25th October, 2012.
Sd sd (JOGINDER SINGH) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated - 25th October, 2012
Copy to : Appellant/Respondent/CIT/CIT(A)/DR Dn/-