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TMI Blog2018 (1) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable in its hands and, two, the application of s. 40(a)(ia) in view of the admitted default in not deducting tax at source u/s. 194A on the interest paid by it to Sarvodaya Nano Finance Ltd. (SNFL), from which it derives financial resources by way of unsecured loans. The assessee s operational model is that it sources funds in the main from SNFL, which for the current year is at 12 per cent. per annum on reducing balance. The same are relent to member Self Help Groups (SHGs) at 12 per cent. per annum flat. Thus, while the assessee obtains benefit (of interest) on the reduction in the loan amount over time, the same is not passed over to the borrower SHGs. This is the primary source of revenue for the assessee, whose accounts disclose a surplus of ₹ . 3,28,968/- (₹ .3,40,480/-) for the current year. The assessee, however, returned only ₹ . 32,897/- (₹ .34,048/-) as, as per its byelaws, 90 per cent. of the surplus is to be distributed amongst the member SHGs, whose saving accounts maintained with it are accordingly credited to the extent of the said 90 per cent. (allocating the same on the basis of the average balance outstanding in their contribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir accounts are not subject to audit u/s. 44AB, the provision of s. 194A is not applicable to them and, therefore, on the interest paid to SNFL. This sums up the assessee/s case qua both the issues. 4. We have heard the parties, and perused the material on record. Findings The assessee-trusts are not registered u/s. 12A of the Act. The first thing therefore relevant to determine is if the assessee/s, returning its income as an AOP, is a representative assessee (u/s. 160(1)(iv) of the Act) for the SHGs, or not? We may, therefore, to begin with, reproduce the relevant provisions of the Act: Representative assessee. 160. (1) For the purposes of this Act, representative assessee means ( i ) to ( iii ) ( iv ) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)], receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees; ( v ) in respect of income which a trustee appointed under an oral trust receives or is entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le at the maximum marginal rate: Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. (2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act. Charge of tax where share of beneficiaries unknown. 164. (1) Subject to the provisions of sub-sections (2) and (3), where any income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed; (ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed. A representative assessee could only be for a person , a term defined u/s. 2(31). The same includes an Association of Persons (or body of individuals), whether incorporated or not. The SHGs are apparently only AOPs and, therefore, the assessee could be regarded as a representative assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances, no scope for considering the assessee-trust as an AOP for 10 per cent. of the surplus arising to it, and as a representative assessee for the different SHGs for the balance 90 per cent. The next question in the matter is whether the shares of the individual SHGs are determinate or known. Without doubt, there is no specification of the shares in the trust deed, which we have perused in its entirety. These shares have to be decided/specified only by the settlor of the trust. It could not but be otherwise, where the assessee trust/s is, as contended, constituted for the benefit of these Self-Help Groups. The income in the present case, instead of being received for and on behalf of, or for the benefit of, the defined (specific) SHGs, i.e., at the time of the execution of the trust deed (as required by law refer Explanation 1 to s. 164), is allocated to the SHGs registered with the assesseetrust for the time being. These SHGs are subject to change from time to time, as one group may become dysfunctional over time or otherwise breakup in time. The whole purpose is to enable access to resources and providing other assistance to the women of the area, who may organi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithdrawn by or for distribution to the SHGs. While this may be by itself of little consequence; the credit (to their account) reserving their right of the respective SHGs to withdraw the same, there is nothing to exhibit or suggest that the non withdrawal by them is on account of a conscious decision on their part, with we further observing them as being unincorporated and, therefore, if unable to contract, cannot maintain a bank account. The foregoing notwithstanding, we have already found that considering the assessees to be representative assessees for the respective SHGs u/s. 160(1)(iv), i.e., as contended, does not help the assessee s case, and they are, nevertheless, liable to be taxed at MMR on their entire surplus. Without prejudice, in our view, the assessee-trusts are not the representative assessees for the respective SHGs. This, in fact, would be apparent from the non identification of the SHGs, or their respective shares, in the trust deed. The assessee-trust/s is only an Association of Persons (AOP) constituted by the member SHGs . This would be apparent from the intent and purpose of the settlor from the trust deed, the relevant part of which we reproduce for ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion we may reproduce as under: Charge of tax where shares of members in association of persons or body of individuals unknown, etc. 167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a cooperative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate: Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate. (2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under sub-section (1)],- (i) the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SHGs are themselves un-incorporated AOPs, with their income (shares of surplus) being itself earned or received for the benefit of their individual members. The argument, attractive on its face, is without substance. We have already clarified that an AOP, even if unincorporated, so that it is not a legal person, is a person under the Act. A ready example, to clarify further, is of a partnership firm, which again represents a contractual relationship between the partners constituting it for the time being, and therefore though not a legal entity, yet, for the purposes of the Act, is a different person, separate and distinct from its partners, who are themselves persons, liable to tax on their income under the provisions of the Act. The AOP is similarly not a representative assessee for its members, as being contended, but a different person, separate and distinct from its members (for the time being). Its income assessable under the Act, as for any other entity, is to be computed having regard to the general and specific provisions, viz. s. 40(ba), s. 167B, s. 174A, s. 177. Sections 67A and 86 provide the manner of computation of the income of a member of the AOP (or body of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to two separate contracts. The first is with SNFL, from which borrowings are made as unsecured loans. The second is with the SHGs, to whom funds are again re-lent, on unsecured basis, albeit at a higher effective rate of interest, resulting in a surplus to the assessee-trust. There is no privity of contract between SNFL and SHGs. SNFL, therefore, shall have no recourse to a SHG, or its individual members , in case of a default. It may be stated that SHGs are also AOPs, and being not legal persons, incompetent to contract. That is, enter into a legally enforceable contract. There is nothing on record to show that the SHGs are, in fact, AOPs. There could, for all we know, be a contract (even if oral) amongst the individuals comprising the SHG, to honour the commitment/obligation of the SHG, for which it may, acting through a representative, be required to issue an undertaking, etc., to the assessee-trust. Such an understanding, even if informal, has the elements of a contract, which may not necessarily be in writing; the (principal) terms being in fact borne out by conduct. The SHGs are self regulating bodies, and would in their own interest, as else their membership is liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus is not withdrawn, that provides funds with the assessee to repay SNFL, reducing its loan liability thereto and, thus, a saving in the cost of funds, which is pegged to the average balance in-as-much as it is on the reducing balance. Continuing further, the funds for lending to the SHGs emanate not from the SHGs themselves, as a set of contributors, but from outside sources , as a loan from SNFL, which is to be repaid and, further, carries a cost, and for which the borrower trust is contractually bound. Again, as it appears, it is the members of a SHG who, per an inter se agreement, seek to prevent loss, contributing thereto, and surely not the other SHGs. Further, the funds are utilized by the SHG not for any common purpose of the Group itself, but for their individual purposes by the members (for the time being) of the Group. These purposes may be both personal and/or income generating, viz. setting up or operationalizing an undertaking, etc. The liability of each individual member is defined on the basis of his withdrawal. That is, though it is the Group that transacts with the assessee trust, and is liable to pay interest and principal thereto, the inter se arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in repaying the loan to SNFL inasmuch as it is this that has the effect of enlarging the difference between the interest received and paid and, thus, results in a surplus (income) to the assessee. In fact, the Hon'ble Court had earlier in CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC) held that where an entity was found to be set up for trading purposes, as for banking activity being pursued by the assessee-company as its object, it would not imbue it with a mutual character even where limited to its members only in-as-much as the arrangement was essentially a profit making arrangement. It is this similarity of facts that prompted the Hon'ble Court in Bangalore Club (supra) to refer to its earlier decision in Kumbakonam Mutual Benefit Fund Ltd. (supra). We may, to clarify the point further, and with profit, extract from the decision in Thomas v. Richard Evans Co. [1927] 11 TC 790 (HL) (at pgs. 822-823), reproduced, in this context, by the Apex Court in Bangalore Club (supra) while referring to the third condition of mutuality, which it explains as elucidated in Style v. New York Life Insurance Co . [1889] 2 TC 460 (HL) and Kumbakonam Mutual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the assessee-AOP and its member SHGs is a mutual arrangement. It would be, continuing further, therefore, incorrect to say that it is not the assessee, but the individual members of the SHGs, who are responsible for paying interest to SNFL, i.e., u/s. 194A, and that therefore the application of the said section is to be examined with reference to them. And, further, it is they who are entitled to the deduction in respect of the said interest, though s. 40(a)(ia) shall not apply as they are outside the ambit of s. 194A in view of the non audit of their accounts u/s. 44AB. It is, clearly, the assessee who is responsible for paying interest to SNFL, and claims the same in the computation of its income. Accessing and providing funds on a systematic, organized and continuing basis, if not other technical assistance, etc., to others for their purposes, predominantly economic activity, is only a business and the income arising there-from, business income. Section 40(a)(ia) has, however, witnessed amendments since, and which have been held by the Hon'ble Courts, as in CIT v. Ansal Land Mark Township (P.) Ltd. [2015] 377 ITR 635 (Del), as retrospective. The relevant amendment (p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions, with reference to (all of) which only the issue/s arising is to be decided. Section 164 provides that the beneficiary/s is to be specified per the instrument of trust and is to be identifiable as on the date of such instrument, as also his (respective) share ( Explanation 1 to s. 164). That is, conditions which are admittedly not met in the present case. Again, the second proviso to s. 164(1) carves a specific consideration where the income arising to the representative assessee consists of, or includes, profit and gains of business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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