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Issues Involved:
1. Whether the promoters constitute an "association of persons" or "a body of individuals" u/s 2(31) of the Income-tax Act, 1961. 2. Application of the test for determining if the interest income is chargeable to income-tax in the hands of the promoters as an "association of persons." 3. Whether the interest income was diverted by overriding title to the shareholders before its accrual. 4. Taxability of the interest income u/s 56 of the Income-tax Act, 1961, in the hands of the promoters. Summary: Issue 1: Association of Persons or Body of Individuals The court examined whether the three promoters could be taxed as an "association of persons" or "a body of individuals" u/s 2(31) of the Income-tax Act, 1961. The promoters were appointed by an executive committee and did not come together by any express agreement to earn income. Their primary role was to facilitate the formation of the co-operative society, not to produce income. The court concluded that the promoters did not constitute an "association of persons" or "a body of individuals" as their objective was not to undertake any income-producing activity. Issue 2: Test for Determining Chargeability of Interest Income The Tribunal applied the test from CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC), which requires a common purpose or action aimed at producing income. The court upheld the Tribunal's application of this test, affirming that the promoters did not form an "association of persons" as they did not join with the common purpose of earning interest income. Issue 3: Diversion of Income by Overriding Title The Tribunal held that the promoters were agents of the shareholders and did not own the contributions. The interest income was received on behalf of the shareholders, who had a right to it before its accrual. The court agreed with this view, stating that the principle of diversion by overriding title did not apply as the income initially vested in the shareholders, not the promoters. Issue 4: Taxability u/s 56 of the Income-tax Act, 1961 Given the conclusions on the first two issues, the court held that the interest income was not chargeable to income-tax in the hands of the promoters u/s 56 of the Income-tax Act, 1961, for the relevant assessment years. Answers to the Questions: 1. Affirmative and against the revenue. 2. Affirmative and against the revenue. 3. Principle of diversion of income by overriding title is not attracted on the facts of the present case. 4. Negative and against the revenue. The revenue was ordered to pay the costs of this reference.
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