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TMI Blog2013 (11) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SHGs under them. SNBFCL is charging interest at the rate of 12 per cent on the net balance method for the amount advanced by it to different SMBTs, like the assessees. SMBTs like the assessees, in turn, advance these loans to their SHGs at a flat rate of 12 per cent. At the last point of SHGs, it is for the group to decide the interest rate chargeable on the individual members of that SHG. The assessee SMBTs are getting funds from SNBFCL at 12 per cent rate on net balance, whereas they are advancing amounts to SGHs at a flat rate of 12 per cent. This differential method generates surplus income in the hands of SMBTs like the assessees in the present appeals. The by laws of assessee trusts provide that 95 per cent of such surplus will be distributed among the members of SHGs working under them and 5 per cent of the surplus is to be retained by the assessee-trusts for their own maintenance and other administrative overheads. 4. These SMBTs are operating in the above-stated operational model in helping the villagers. 5. All these institutions mentioned above are the field organizations of an All India National Apex Body called "Association of Sarva Seva Farms" (ASSEFA for short). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reason pointed out by the Assessing Officer is that the distribution of 95 per cent made by the assessee trusts to member SHGs is not determinate with reference to individual recipients. In other words, the distribution of 95 per cent of surplus is indeterminate. Therefore, he held that 95 per cent of surplus distributed by the assessee trusts to their member SHGs has to be treated as income of the respective trusts. It is to be seen that the assessee trusts have already offered for taxation 5 per cent of the surplus retained by them. The dispute is only with reference to 95 per cent of the surplus distributed to member SHGs. 10. Another issue pointed out by the Assessing Officer in the course of assessments is that the assessee trusts are paying interest to SNBFCL without deducting tax at source. The Assessing Officer held that the assessees are bound to deduct tax at source under section 194A of the Income-tax Act, 1961. But, tax was not deducted. The Assessing Officer, therefore, held that section 40(a)(ia) is attracted. Accordingly, he disallowed the payments of interest made by the assessee trusts to SNBFCL and treated those disallowances as income in the hands of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the surplus to SHGs are indeterminate, there cannot be a case of mutuality persisting between the members of SHGs and as such the Commissioner of Income-tax (Appeals) has erred in holding that all these assessee trusts are mutual organizations. Regarding deduction of tax at source, the learned Commissioner of Income-tax explained that only individuals and Hindu undivided families are exempted from deducting tax at source while making payments of interest, subject to certain conditions, and the assessees, being in the status of AOPs, are liable for making TDS under section 194A. He argued that the finding of the Commissioner of Income-tax (Appeals) that the interest expenditure is deductible under section 28 itself is against the scheme of the Act. The learned Commissioner of Income-tax explained that section 36(1)(iii) specifically provides for deducting interest payments in computing the business profits for the purpose of section 28 and, therefore, the issue of interest payment is to be considered under section 36(1)(iii) itself. Section 40(a)(ia) covers those expenses provided under sections 30 to 38 and, therefore, obviously section 40(a)(ia) applies to section 36(1)(iii) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Therefore, we endorse the view of the Commissioner of Income-tax (Appeals) that all these 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. His orders on this point are confirmed and the grounds raised by the Revenue on this point are rejected. 19. Next is the question of TDS and application of section 40(a)(ia) of the Act. 20. First of all, we have to state that we do not agree with the legal proposition made by the Commissioner of Income-tax (Appeals) that interest expenditure is directly covered by section 28 and, therefore, section 40(a)(ia) will not apply for the reason that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking under them. In fact, the loan amounts are not utilized by the assessee trusts. They are utilized by the SHGs working under the trusts. The ultimate payer of the interest is not the assessee trusts, but the SHGs. Therefore, we have to see that the interest by way of expenditure is incurred in the cases of SHGs and not in the hands of the assessee trusts. The assessee trusts are facilitators. They are to be treated as representative assessees of the SHGs, who are ultimately utilizing the loan and incurring interest by way of expenditure. The SHGs are mutual concerns and ultimately the interest burden is shared by the individual members of the group. Therefore, de facto speaking, the expenditure by way of interest is incurred by the members of the SHGs and in fact the interests are paid by those members of SHGs to SNBFCL. These 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 assessees. In the present case, all the assessee trusts are representative assessees of the members constituting the self help groups. 22. Therefore, on facts, we f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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