TMI Blog2005 (7) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... at portion of interest income sustained by the CIT(A) as its income whereas the Department is in appeal against the relief allowed by the CIT(A). For the sake of convenience, all these appeals are disposed of by this common order. 2. The detailed facts for understanding the issues are as under: The assessee is a confederation of association/unions of employees of Maharashtra State Government. The objectives of the confederation are: "Aims and Objectives Aims and objects of the confederation are as under: (A) To unite District associations and of State Government employees and Department-wise and category-wise associations, to co-ordinate their works and to regularise their relations with Government. (B) To protect and grow/preserve service conditions of State Government employees and economical, social and political rights; (C) to increase feelings of co-operation and mutual help among association of the employees; (D) To obtain public approval for following rights and to attempt to bring the same in force; (1) Right to build association/union; (2) Right to negotiate; (E) To discuss and consider about structure and method of work and burden of works and to sugge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The housing project should not be registered either as a co-operative society or as a trust or society under the Societies Act. The role of the housing project shall only be that of a facilitator. The housing project will receive payments from members by DD and shall deposit them in nationalised bank or a scheduled bank. The bank account of the housing project shall be a separate account. The accounts of the above housing project and those of the Maharashtra State Government Employees Confederation shall be maintained separately. Resolution passed unanimously Consequent to above resolution, funds were collected from members. Total amount so collected till March, 1997 amounted to about Rs. 9 crores. In the meeting of the confederation held on 25th Feb., 1996 following note was passed: Minutes of the meeting held on 25th Feb., 1996. Shri R.G. Karnik was in the chair. All other members were present. Minutes of the meeting 15th Feb., 1996 were read and passed. Funds being collected from members are very big. Nearly Rs. 3 crores have been collected so far. The said funds be invested in time deposits of bank. However, the time deposits could be for the duration of one month to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of their priority number, may (be) given an alternative for Kamothe and they be asked to convey their consent. 2. Those who do not give their consent for Kamothe may be given refund as under: I. Rs. 260 paid towards entrance fee and share capital. II. Amount paid by them towards construction. III. Both the above amounts be refunded with interest. IV. While making refunds as stated in I, II and III above, interest may also be paid to those who have resigned earlier (20th Jan., 2000) on the basis of the period for which the said amount was deposited. The interest earned on the time deposits kept in bank of behalf of the members is significant. The average annual interest since 1996 will be 9 to 10 per cent. This is the opinion of the chartered accountant. The calculation of interest payable to each members is laborious and time consuming. further the interest rate is changed from time to time. As such payment of interest to members is likely to be delayed for a long time. Further, it will not be proper to cause delay in interest payment. Therefore, following decisions were taken in regard to payment of interest. 1. Interest be paid at the rate 4.5 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g project are requested to take note of it. In view of the facts stated above the Sanghtana has decided to make serious efforts to secure land at Kamothe (Navi Mumbai). If adequate number of members give their consent for Kamothe and the surrounding areas, it will be possible to secure land there in about six months' time. It will be advisable to give consent for this alternative at Kamothe in view of the planned and fast development of Navi Mumbai. This was conveyed to all concerned members through circular dt. 28th July, 1999. Those who cannot be accommodated on 8.17 acres of land at Andheri and Mulund were called upon to give their written consent for the alternative at Kamothe. However only about 100 members gave their clear consent. Most of the remaining members did not convey either their consent or rejection of this offer. In order not to allow any doubts in respect of the above it is decided to take action as stated below: 1. About 500 tenements can be constructed on plots on the said 8.17 acres of land at Andheri and Mulund. Information therefor been asked from those who can be accommodated on those plots of land. 2. More of efforts are being made to secure land at Kam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Above chart also shows the interest paid back to the employees association/unions who had opted out from the housing scheme. The AO taxed the gross interest received by the confederation in the status of AOP in these five assessment years as indicated above. While taxing interest as income of the confederation, the AO gave following reasons: (1) The investments in FDRs/TDRs are made in the assessee's name, the interest was received in its name. The interest was further invested in the name of the assessee-AOP. (2) The shares of members (in) AOP are indeterminate. This is evident from the fact that whenever members have opted out of the project (they) have been returned only their deposit after some deductions from the original investment. Some interest was paid on their deposits. Whereas FD earned interest ranging from 7 per cent to 13 per cent per annum, the members were paid only 4.5 per cent interest per annum. (3) Neither the terms and conditions nor the circular/voucher give any clear direction about the members' share. (4) The proposed housing societies are not in existence. Only when they will be formed assessee-AOP will pay the expenses and interest thereon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C and in each of these categories a contribution of Rs. 35,000, Rs. 25,000 and Rs. 20,000, respectively, was taken towards the construction cost. The preliminary expenses amount for the 3 different categories was Rs. 10,000, Rs. 7,500 and Rs. 5,000 per member. Further, the share money was at a rate of Rs. 250 + Rs. 10 per member for each of the three categories. In addition to this, in all the three categories, the confederation collected Sanghathana Nidhi which was a rate of Rs. 1,000 for category C, a at rate of Rs. 2,000 for category B and a rate of Rs. 3,000 per member for category A. From the chart furnished during the course of the appellate proceedings, I find that there were no refunds, in asst. yr. 1996-97 and that appellant had refunded in the later years to members who opted out in different categories. I find that when the members started withdrawing, the entire first instalment was refunded to the members opting out and likewise the entire preliminary expenses and the share capital and entrance fee referred above were refunded in category A. Similar was the position in category Band C. However, I find that there was no refund of Sanghatana Nidhi in any of the thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration cannot be said to be agent of members or societies because such a nomenclature would amount to putting the cart before the horse. Now, what is certain is the fact that the appellant was in receipt of funds from a large number of Maharashtra State Government employees, which were invested in banks, etc. for earning interest. Under the circumstances, it is clear that the decisions relied upon by the appellants do not come to their rescue. 3.14 In the case reported at CIT vs. YS. Desale (1982) 28 CTR (Bom) 237 : (1982) 137 CTR 117 (Bom), the agriculturists decided to form a co-operative society to manufacture sugar. Three persons were appointed as promoters and there was delay in formation of the society. The promoters collected money from persons who were to become the members of the proposed society and during the period of delay the amounts were deposited with the bank and earned interest. It was on these facts that it was held that when the income was received by the agent, he received it on behalf of the principal and there is no question of overriding title, the promoters did not have title to the income which really vested with the shareholders. On the contrary, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly different from the appellant's case because in the event of land having not been allotted, the confederation would have earned interest and at best, returned back the principal and the interest after making some ad hoc deduction to its contributors which existed at that relevant point of time. Under the circumstances, when certain set of people has come together to form upon a confederation and to begin with, taken a decision to put the money in interest bearing funds, it is clear that the decision reported at CIT vs. Tanubai D. Desai is not applicable. Similarly, I find that the decisions in the cases reported at CIT vs. Sita1das Tirathdas (1961) 41 ITR 367 (SC) and that in the case of CIT vs. A. Tosh Sons (P) Ltd. (1987) 59 CTR (Ca1) 272 : (1987) 166 ITR 867 (Ca1) are different on facts. 3.16 There is no question of there being any overriding title on the income earned by the assessee AOP. As already discussed, the number of contributories to the said confederation in different assessment years are different. The contributories have withdrawn in different assessment years and they have been paid the principal as well as the portion of interest much later. It is not a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been urged before me that the AO has erred in giving this particular treatment for the reasons mentioned at length while deciding ground NO.2. I have already decided ground NO.2 against the appellant. For the reasons discussed above the appellant has to be assessed as AOP. The appellant has failed to bring anything on record to show that the individual shares of the constituents were determinate or known, the co-operative societies, which were to be formed on the allotment of land had not come in existence and so it was not known as to who would be their members and therefore, I am of the view that the members' share has to be treated as indeterminate and that the AO was fully justified in treating the shares as indeterminate and taxing the income at maximum marginal rate for the year under consideration. Ground NO.4 is thus decided against the appellant. 6. In ground No.5, the appellant has challenged the levy of interest under ss. 234A, Band C. The learned representative for the appellant did not argue on this ground during the course of appellate proceedings. I find from the assessment order that the AQ had given specific directions and, therefore, I see no reasons to int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confederation has credited bank interest to members' account taken to balance sheet. (3) The appellant can also be treated as a mutual concern having a complete identity between contributors and participators. The interest accrued on members' fund is used in reducing the cost of housing crediting members' fund. (4) The assessee is also a trade union registered on 6th Dec., 2000 and hence it is entitled to exemption under s. 10(24). The learned AO had also allowed exemption w.e.f. asst. yr. 2001-02. Even otherwise when assessments of earlier years, now in appeal before Tribunal, were reopened, the confederation was granted registration. Hence, assessment could not have been validly reopened. (5) The appellant is acting only in fiduciary capacity representing its members. It is only in this capacity it has accepted the funds from the members for housing societies and when there was a delay in allotment of land from Government, they were parked in the bank and earned interest thereon. Neither the federation is owner of the fund nor of the interest earned thereon. The members are owner of the funds and interest as well. The confederation was there only as a conduit pipe for its m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to continue 'with the housing scheme, equal to the sum received from them and interest thereon. (9) The State Government is monitoring the entire scheme and activities of confederation. It had submitted to the State Government, the list of members who have deposited the money, those who have withdrawn money, preliminary expenses incurred, interest earned, etc. Thus the State Government is seized with all material and is closely monitoring all the details because the confederation is holding funds in a fiduciary capacity, as the interest and welfare of large number of State Government employees are involved. (10) The appellant is a mutual concern also the interest accrued to the members has to go to the members or it will go to reduce the cost of houses which will be built for the members by the housing co-operative societies. There is a direct link between members' deposit and accretion thereto. There is also a complete identity between the contributors and participators. Hence, the surplus is not taxable in the hands of confederation. He relied on following decisions: (i) Director of IT (Exemptions) vs. All India Oriental Bank of Commerce Welfare Society (2003) 184 CTR (Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trade union. If an income is earned before that, by the confederation, then that will not be exempt as s. 10(24) cannot be invoked. (6) The confederation is also not a mutual concern because it is earning income from third party, i.e., bank. For mutuality the concern should earn income from the members only and only then it will not be taxable. (7) The CIT(A) wrongly allowed deduction of interest paid to the outgoing members, because it is not the expenditure incurred to earn the interest income from bank. (8) There is also no overriding title because there is no agreement with the members and confederation to the effect that interest earned by confederation will be passed on to the members. In any case, only ad hoc interest, practically half of the interest earned by the confederation, has been passed on to the outgoing members. This is therefore only an application of income and not passing on of income before it is accrued. (9) Confederation is the entity, which is holding this fund, which in its own wisdom decided to deposit the funds in bank and earned interest. It is the first person to whom interest has accrued. In the register of the bank the money is deposited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest belongs to the members as the funds belong to them. Second alternative argument of the learned counsel of the assessee is that it is acting only in a fiduciary capacity for its members. As a fact we find that the confederation received funds from the members (individual Government employees) through their respective association/unions/federation at specified rates based on the type of house/flat the employee wanted. For type A flat, the deposit required was of Rs. 35,000 for type B flat Rs. 25,000,and for type C flat Rs. 20,000. The requirement of fund was for specific purpose, i.e., getting the flats constructed for the Government employees. Thus, it was not a donation or in any way was an extinguishment of any right of member, or any relinquishment of right in favour of confederation. The members had continued to hold an ownership over the fund deposited with the confederation. It was either refundable to them or was to be adjusted against the cost of the house to be constructed through the co-operative housing societies to be floated under the control/supervision of the confederation. The money given to the confederation was in fact an advance against the cost price of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly on the point. Where the trustees are authorized to carryon business under the provisions of the trust deed then they are assessable not as AOP but as representative assessee under s. 161(1). However in CIT vs. A. Tosh Sons (P) Ltd., following decisions were cited to support the argument that the interest earned on fixed deposit made out of surplus left with the assessee out of the taxes and rebate raised on behalf of foreign buyers and paid to the Government is not taxable in its hands: "(a) Brown vs. IRC (1965) 57 ITR 729 (HL) : In this case, the taxpayer was a solicitor. In the course of his practice, the taxpayer received large amounts of money on his client's behalf which remained deposited with his firm. From the said account, amounts were put in deposit with banks in the name of the firm from time to time and the taxpayer retained the interest arising therefrom and used it for his own benefit. Money out of this fund was also lent by the firm to other clients and earned interest. Interest was paid to the clients who owned the amounts at a lower rate and the difference was utilised by the firm. In its assessment to income-tax, the taxpayer claimed relief in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longed to the members and hence interest thereon would also belong to the members. As already discussed above, the ownership over the amount deposited for housing activity never passed on to the confederation whether by contract or by operation of law; the only capacity in which money could be held by the confederation would be a fiduciary relationship between members on one hand and the confederation on the other. The confederation is liable to answer and to account for the funds raised, and the interest earned on such fund. In fact, the State Government is consistently and on regular basis monitoring the collection, application/utilization and disbursement of the fund. There is also no time-limit upto which the funds have to be compulsorily kept with the confederation. Option is available to the members to walk, any time, out of it, if they wished so, along with their money and interest. It is clearly mentioned in the resolution dt. 26th July, 1995 of the confederation that the role of the confederation in the housing project is only that of a facilitator which is another form of fiduciary relationship showing no pecuniary interest in the funds. The facts that resolutions referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en taxable in its hands. But this is not the claim of the AO nor there is any material on record to support this inference. 11. Thus, we hold that the confederation has acted in a fiduciary capacity for its members. It never had any ownership over the funds received as deposit from the members for housing project. It also did not have any authority or intention to carry out any business activity or an activity to earn interest. The accrual of interest on FDs was only incidental, not related to any income-earning activity. It was incidental to the intention of keeping the money of the members safe. Therefore, the confederation also cannot have ownership on the interest earned from the bank on the deposits made. 12. Now we come to the next question as to whether the confederation was acting as a mutual concern for the members. The objection of the Revenue has been that the interest was not earned from the members but was earned from the bank, which is a third party. Hence there is no complete identity between contributors and participators We are in agreement with this contention because, where contributor to the funds is a third party and is not out of the participators then a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or profession' would not be exigible to tax on the principle of mutuality, since there was complete identity between the contributors and the participants but income derived by way of interest on the fixed deposits with banks minus 10 per cent, allowed under s. 57(iii) was exigible to tax. On a reference: Held (i) that the assessee's income from interest was not from a mutual activity and as such it was exigible to tax;" This decision was also followed in Rajpath Club Ltd. VS. CIT (1995) 211 ITR 379 (Guj) : "The assessee-club was incorporated as a company. Its main objects were maintaining and carrying on a club house or houses with all the usual or suitable accommodation and conveniences and to promote and provide facilities for sports and games. In 1974 and 1975, the assessee derived interest income of Rs. 11.638 and Rs. 24,492, respectively, on the amounts deposited by it in the banks. On the question whether these amounts were assessable and if so whether the expenditure incurred in earning the interest was deductible: Held (i) that the assessee's income from interest was not from a mutual activity and as such it was exigible to tax;" In view of this we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said that there was diversion at source through an overriding title. No charge has been created on the interest income in favour of the members either by an agreement, or by a Court's decree, or by operation of law or by a settlement. Hence, the case laws cited by the learned counsel for the assessee on this aspect are not applicable. 15. Now coming to some of the argument taken by learned Departmental Representative. Regarding filing voluntary return, in the status of AOP, we are of the view that this compliance of law will not be enough to tax the interest income earned from the bank on the money deposited by the members with the confederation. In our view the claim of the confederation is that it is not liable to be taxed on the interest income on the funds of the members and not that it is not at all liable to be taxed on its other income. Regarding submissions of the learned Departmental Representative that the share of the members is indeterminate, we are of the view that it is not correct. Shares are determinate which are in the ratio of money deposited by each member. It is not necessary that percentage of share should be fixed in advance and, therefore, closing the door ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to deposit funds at its own volition hence ownership of interest would be with it, is devoid of any merit. The confederation has a right to take decision in its fiduciary capacity to safeguard the money of the members. It is already held that earning of interest is only incidental and not arising out of any business activity or from profit motive. 19. In view of the above discussion we hold that: (1) Concept of mutuality is not applicable here as interest was received from third party. The contributors and participators are not the same so far as the interest from bank is concerned. (2) There is no overriding title between members and confederation as there is no legal obligation or contractual agreement or Court's order to this effect. (3) The interest cannot be taxed in the hands of the confederation as its income on the ground that it is not covered under s. 10(24) because first requirement of invoking s. 10 is that an income should belong to the assessee and then exemption under s. 10(24) can be claimed. It is held that need for invoking provision of s. 10(24) would not arise as the interest income does not belong to the confederation. (4) The confederation is actin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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