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2010 (1) TMI 849 - AT - Income TaxAssessee was granted loan by the Rural Electrification Corporation of India Ltd. (REC) and interest was payable at the specified rate to M/s REC by the assessee. M/s REC has issued guide lines and instructions on the constitution and administration of a special fund created out of the interest payable by the assessee society to M/s REC on the amount of remittances granted by REC - As per these rules, the amount payable on account of interest on the remittances granted by M/s REC, a special savings fund account in a nationalized/cooperative bank with the specific provision with the bank that it shall permit withdrawal from the said account by the assessee society of such amount as may be authorized by M/s REC - whether the ownership of the amount in special fund account so created was of the assessee society or M/s REC and whether the interest thereon accrues to the assessee society - Held that - utilization of up to 40% of the amount available on special fund only with the permission of M/s REC for specific purposes detailed therein and these purposes merely improved the efficiency of the assessee society directly or through its members but in our considered opinion, it does not confirm the ownership right over the said fund amount to the assessee society and accordingly it could not be said that the interest on such special fund has accrued to the assessee society. Merely because the management of the special fund has been assigned to the assessee society with the previous prior written permission from REC, it could not be said that the ownership of the special fund vest in the assessee society, power company was the owner of the fund and income thereof Whether there was any diversion of income by overriding title - income from the Special Fund has not accrued to the assessee - Held that - assessee could not be taxed thereon , interest accrued on the special fund amount including the FDs made there from does not accrue to the assessee society and the assessee is accordingly not liable to pay tax thereon. Accordingly, the grounds of appeal taken by the assessee in its appeals are allowed, appeals preferred by the assessee are allowed.
Issues Involved:
1. Legality and sustainability of the CIT(A) order. 2. Ownership and control over the Special Fund. 3. Whether the Special Fund constitutes income for the assessee. 4. Application of Section 4 of the IT Act, 1961. 5. Diversion of income by overriding title. Detailed Analysis: 1. Legality and Sustainability of the CIT(A) Order: The assessee argued that the CIT(A)'s order was "perverse, illegal and against the provisions of the Income Tax Act, 1961" and therefore unsustainable in law. The CIT(A) and the Assessing Officer concluded that the Special Fund was created on the instructions of the Rural Electrification Corporation (REC), New Delhi, and that the interest accruing from such investments was credited to the Special Fund. The CIT(A) failed to appreciate that the operation and management of the Special Fund required the approval of the REC, indicating that the appellant had no control over the fund. 2. Ownership and Control Over the Special Fund: The assessee, a Cooperative Society, contended that it was merely a custodian/trustee of the Special Fund created from the interest payable to REC, and not the owner. The CIT(A) concluded that the ownership of the amount in the reserve fund was with the assessee society. However, the Tribunal found that the rules framed by REC for the administration of the Special Fund clearly established that the assessee was merely a custodian, with REC having the first charge over the fund. The fund could not be withdrawn or paid without specific written permission from REC. 3. Whether the Special Fund Constitutes Income for the Assessee: The CIT(A) held that there was an accrual of income on the investments made by the assessee society out of the reserve fund. The Tribunal, however, found that the Special Fund's ownership remained with REC and the interest on such a fund did not accrue to the assessee society. The Tribunal noted that the management of the Special Fund by the assessee society did not confer ownership rights over the fund. 4. Application of Section 4 of the IT Act, 1961: The assessee argued that the provisions of Section 4 of the IT Act, 1961, did not apply as the issue was not whether REC could override these provisions. The Tribunal agreed, stating that merely because the Special Fund was shown on the asset side of the balance sheet, it did not imply ownership by the assessee society. The assessee was merely a custodian of the fund, and REC had the first charge over it. 5. Diversion of Income by Overriding Title: The Tribunal applied the tests laid down in Nuclear Power Corporation of India V/s. JCIT to determine whether there was a diversion of income by overriding title. The Tribunal found that the income from the Special Fund did not accrue to the assessee and thus could not be taxed. The income was retained by REC and was available for use as per its directions. The Tribunal concluded that there was no diversion of income at source by overriding title by REC in favor of the assessee society. Conclusion: The Tribunal allowed the appeals preferred by the assessee, holding that the interest accrued on the Special Fund amount, including the FDs, did not accrue to the assessee society. Consequently, the assessee was not liable to pay tax on this interest. The ownership and control over the Special Fund remained with REC, and the assessee was merely a custodian of the fund.
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