2016 (12) TMI 237 - HC - Income Tax

Taxability in hands of society - fund transferred to Distribution Pool Fund Account - respondent Society assessed to tax on its income as person as defined under Section 2(31) - entitlement to claim exemption over its profits paid to its members and claim it as expenditure in the accounts before offering the profit for tax - Held that - A combined reading of the preamble to the Bye laws and salient objects noted supra, lead to an irresistible inference that the Society was formed to save individual salt manufacturers from extinction as per the advise tendered by the Salt Expert Committee. The very fact that the Bye-laws permit the Society to recover the manufacturing expenses and other dues from its members is a sufficient and a robust indication that the ownership of the Salt to the extent of their respective share of each individual member continues to remain with the respective member himself. This inference is fortified by Clause 80 of the Bye laws, which permits the members to raise loan on the security of their proportional interest in the Agar and Salt produced . Income of the Society cannot be anything beyond the scope of Chapter XVI of the Bye laws. Therefore, logically the amount transferred to the Distribution Pool Fund Account cannot be brought within the umbrella of Chapter XVI. Hence, it is not taxable in the hands of the Society. In the premise, the substantial question of law deserves to be answered against the appellant Revenue.

Issues Involved:
1. Whether the respondent-Society, assessed as a 'person' under Section 2(31) of the Income Tax Act, 1961, is entitled to claim exemption over its profits paid to its members and claim it as expenditure before offering the profit for tax.

Detailed Analysis:

1. Claim of Exemption by Respondent-Society:
The primary issue revolves around whether the respondent-Society can claim exemption over its profits paid to its members and consider it as expenditure before offering the profit for tax. The Revenue contends that the Society, being a juristic person, undertakes the entire activity of manufacturing and selling salt. Therefore, the funds transferred to the 'Distribution Pool Fund Account' should not be treated as expenditure. The Assessing Authority held that the Society’s income should include the amount transferred to the Distribution Pool Fund Account, resulting in a higher tax liability.

2. Submissions by the Revenue:
The Revenue argued that the Society's activities, including acquiring salt manufacturing rights, installing necessary plants, and selling the salt, indicate that the Society should not deduct the amount transferred to the Distribution Pool Fund Account as expenditure. They emphasized that the Society's income should be taxed in its entirety, without deducting the distribution to members.

3. Submissions by the Respondent/Assessee:
The respondent-Society argued that it was formed based on the advice of the Salt Expert Committee to save individual salt owners from extinction. The Society's purpose is to manufacture salt on a cooperative basis, and the ownership of the salt remains with the individual members. The Society's income is derived from commission, interest on loans, rents, and service charges, not from the salt manufacturing itself. Therefore, the distribution to members should not be taxable in the hands of the Society.

4. Examination of Bye-laws:
The Court examined the Society's bye-laws, which indicate that the Society's primary aim is to acquire the right to manufacture salt on a cooperative basis and help members get a fair price for their share of salt. The Society is entitled to recover manufacturing expenses from its members, suggesting that the ownership of the salt remains with the individual members.

5. Legal Precedents:
The Court referred to several legal precedents, including the judgment of the Hon'ble Supreme Court in the case of M/s. Radhasoami Satsang, which supported the view that the income generated by the Society should not include the amount distributed to its members. The Court also considered the judgment of the Calcutta High Court in Narayan Prasad Vijaivargiya, which emphasized that the intention of the members and the purpose of forming the cooperative Society should be considered in determining the taxable income.

6. Conclusion:
The Court concluded that the Society's income, as defined in Chapter XVI of the bye-laws, includes only the commission earned on the manufacture and sale of salt, interest on loans, rents, and service charges. The amount transferred to the Distribution Pool Fund Account is not taxable in the hands of the Society. Therefore, the substantial question of law was answered against the Revenue, and the appeal was dismissed.

Final Judgment:
The appeal by the Revenue was dismissed, and the Court held that the amount transferred to the Distribution Pool Fund Account is not taxable in the hands of the Society. The earlier view taken by the Court was deemed per incuriam, and the order passed by the ITAT was upheld.

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