2013 (11) TMI 1270 - AT - Income Tax

Differential Plans of Charging of Interest - Because of the differential plans of charging of interest, the assessee trusts are generating surplus in their hands - Sarvodaya Mutual Benefit Trust (SMBT) providing loans to Self-Help-Groups (SHGs) - Whether treating 95 per cent of the surplus distributed to the member SHGs, as income liable for taxation or not - Held that - The Commissioner of Income-tax (Appeals) is justified in coming to the conclusion that the assessee trusts and the SHGs are inter-related and they are all concerns governed by the principles of mutuality - The 95 per cent surplus distributed by the assessee trusts to the various SHGs working under them is nothing but the income of those SHGs themselves - It is not something that those groups are getting from outside by way of income - It is the fruit of their efforts - After finalising the accounts and computing the surplus, the profits are divided among those members, whose shares are determinate and whose roles are well defined. All the SHGs working under the assessee trusts are concerns governed by the principles of mutuality and accordingly the 95 per cent of surplus distributed among them are not in the nature of income - The Commissioner of Income-tax (Appeals) has rightly held that 95 per cent of the surplus distributed by the assessee trusts cannot be brought to tax. Tax Deducted at Source and Applicability of u/s 40(a)(ia) Held that - The Commissioner of Income-tax (Appeals) is justified in holding that the assessees are not bound by the law stated in section 194A - there is no need of deducting any tax at source while making the interest payments to SNBFCL - the order of the Commissioner of Income-tax (Appeals) was upheld in deleting the additions made by the assessing authorities under section 40(a)(ia) of the Income-tax Act, 1961 - interest expenditure is directly covered by section 28 thus section 40(a)(ia) will not apply for the reason that the section applies only to those expenses covered by sections 30 to 38 The individuals, not being liable for audit under section 44AB, the provisions of section 194A are not applicable to them - What is not applicable to the members, will not apply to representative assesses - Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Taxability of 95% of the surplus distributed by the assessee trusts to Self-Help Groups (SHGs).
2. Applicability of Tax Deducted at Source (TDS) under section 194A and disallowance under section 40(a)(ia) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability of 95% of the Surplus Distributed to SHGs
The primary issue is whether the 95% of the surplus income distributed by the assessee trusts to SHGs is taxable. The Assessing Officer (AO) held that the assessee trusts are in the status of Association of Persons (AOP) and liable for taxation on the surplus income at the maximum marginal rate. The AO argued that the distribution of 95% of the surplus to member SHGs is indeterminate and should be treated as the income of the respective trusts.

However, the Commissioner of Income-tax (Appeals) found that only 5% of the surplus retained by the assessee trusts is liable for taxation. The Commissioner concluded that the assessee trusts and SHGs are mutual concerns, and the 95% surplus distributed is absorbed by the principles of mutuality, thus not taxable. The Tribunal upheld this view, noting that the distribution is based on proper accounts, formula, and procedure, with identifiable and quantifiable shares for each beneficiary. Therefore, the 95% surplus distributed to SHGs is not considered income and is not taxable.

Issue 2: Applicability of TDS under Section 194A and Disallowance under Section 40(a)(ia)
The second issue concerns whether the assessee trusts are bound to deduct tax at source under section 194A while making interest payments to SNBFCL. The AO held that the assessees failed to deduct TDS and thus attracted disallowance under section 40(a)(ia).

The Commissioner of Income-tax (Appeals) ruled that interest expenses in the hands of the assessee trusts are deductible under section 28, and hence section 40(a)(ia) does not apply. The Tribunal disagreed with this legal proposition, clarifying that section 28 does not provide a mechanism to compute profits and gains of business or profession, which is covered under sections 30 to 43D. However, the Tribunal agreed with the Commissioner on the factual aspect that the assessees are not liable to deduct TDS. It was noted that the loan amounts are utilized by SHGs, not the assessee trusts, making the SHGs the ultimate payers of the interest. As the SHGs are mutual concerns and their individual members are not liable for audit under section 44AB, section 194A does not apply to them or their representative assessees (the trusts).

Conclusion:
The Tribunal concluded that the 95% surplus distributed by the assessee trusts to SHGs is not taxable, affirming the Commissioner of Income-tax (Appeals)'s decision. Additionally, the Tribunal upheld that the assessee trusts are not required to deduct TDS under section 194A, thus rejecting the Revenue's grounds on both issues. The appeals filed by the Revenue were partly allowed.