2018 (1) TMI 685 - AT - Income Tax

TDS u/s 194A - assessee assessed as an AOP - non deduction of tds - responsibility for paying interest to SNFL - Liability of representative assessee - Held that - The assessee has been rightly assessed as an AOP in which status in fact it has returned its income, qua its entire income (surplus), taxing the same at the maximum marginal rate. Further, interest to SNFL is paid by the assessee and not the individual members of its member SHGs, so that there has been, without doubt, contravention of s. 194A. The assessee is, however, entitled to the saving of the second proviso to s. 40(a)(ia) inasmuch as the same has been held as curative and, thus, retrospective by the Hon ble Courts. This in fact has also been the uniform and unequivocal view of the tribunal. The said issue, accordingly, stands restored to the file of the AO for adjudication in light thereof after allowing the assessee an opportunity to present it s case. There is no reference to or discussion in the order by the tribunal as to why the surplus arising to the assessee, which is a result of a systematic and organized activity, undertaken on a continuous basis, with elaborate provisions for managing the trust, is not to be regarded as a business income. The assessee s activity is in fact akin to that of a bank. Involving the representatives of the persons needing financial assistance in the management of the trust, it thus ensures better targeting, including attending to micro level needs, besides meting out technical or other assistance, so that its activities are, rather, more comprehensive and penetrative than of a bank. Section 161(1A) is also relevant in this regard, to which again there has been no reference. The finding as to mutuality is, again, without any discussion on the essential conditions of mutuality, as well as to the precedents. We were therefore, with respect, constrained not to follow the said order and, accordingly, proceeded with our independent examination of the issues arising. Before parting with our order, we find that the income added by the AO, i.e., excluding disallowance u/s. 40(a)(ia), is ten times that returned. This appears to be by way of a mistake as the assessee has admittedly returned 1/10th of the surplus, so that the addition ought to be for the balance 9/10th. The AO shall look into this aspect as well, making necessary rectification/s, where required. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Determination of the assessee's status and the income assessable in its hands.
2. Application of Section 40(a)(ia) of the Income Tax Act, 1961 due to non-deduction of tax at source under Section 194A on interest paid to Sarvodaya Nano Finance Ltd. (SNFL).

Issue-wise Detailed Analysis:

1. Determination of the Assessee's Status and Income Assessable:

The primary issue is whether the assessee trust should be treated as a representative assessee under Section 160(1)(iv) of the Income Tax Act for the Self-Help Groups (SHGs) and taxed only on the surplus retained (10%) or as an Association of Persons (AOP) for the entire income, including the 90% surplus credited to SHGs.

The Tribunal noted that the assessee trusts are not registered under Section 12A of the Act. The trust deed does not specify the shares of individual SHGs, which are subject to change over time. Therefore, the shares of the individual SHGs are indeterminate or unknown, making the entire income of the trust assessable at the maximum marginal rate under Section 164(1).

The Tribunal also held that the assessee trusts are AOPs constituted by the member SHGs. The trust deed and the operational model indicate that the trusts are formed to manage finances and provide resources to SHGs, which are themselves AOPs. The surplus generated by the trust is the income of the member SHGs, and the shares of the surplus are determined by the Board of Trustees based on performance criteria.

Additionally, the Tribunal rejected the argument of mutuality, stating that the relationship between the assessee and its member SHGs is contractual and not mutual. The income arises from the differential interest rates on funds borrowed from SNFL and re-lent to SHGs, which constitutes business income.

2. Application of Section 40(a)(ia) Due to Non-Deduction of Tax at Source:

The second issue concerns the disallowance of interest paid to SNFL under Section 40(a)(ia) due to the assessee's failure to deduct tax at source under Section 194A. The Tribunal noted that the assessee is responsible for paying interest to SNFL and claims the same in the computation of its income. Therefore, the assessee is liable for tax deduction at source.

However, the Tribunal considered the retrospective amendment to Section 40(a)(ia) by the Finance Act, 2012, which provides that the provision will not apply if the resident payee (SNFL) has taken the interest into account in computing its income and paid tax on it. The Tribunal restored the matter to the Assessing Officer (AO) to allow the assessee an opportunity to present its case under the amended provision.

Conclusion:

The Tribunal upheld the assessment of the assessee as an AOP for its entire income, taxing it at the maximum marginal rate. The issue of disallowance under Section 40(a)(ia) was remanded to the AO to consider the retrospective amendment and provide the assessee an opportunity to present its case. The appeals were partly allowed for statistical purposes.