Case Law Details
ITAT CHENNAI BENCH ‘C’
Income-tax Officer, Ward I (1), Vellore
Versus
Sarvodaya Mutual Benefit Trust
IT Appeal Nos.1098 & 1100 to 1104 (MDS.) of 2012
[ASSESSMENT YEARS 2007-08 & 2008-09]
FEBRUARY 5, 2013
ORDER
Dr. O.K. Narayanan, Vice-President
This is a bunch of six appeals. Three appeals relate to the assessment year 2007-08. The remaining three appeals relate to the assessment year 2008-09. All the appeals are filed by the Revenue. The respondents are trusts constituted at different places under a common name “Sarvodaya Mutual Benefit Trust” (SMBT for short). In the case of SMBT at Anakavoor the Revenue has filed two appeals for the assessment years 2007-08 and 2008-09. In the cases of SMBT at Kilpennathur and Mamandur (Vembakkam) the Revenue has filed one appeal in each case for the assessment year 2007-08. In the cases of SMBT at Cheyyar and Santhavasal, the Revenue has filed one appeal in each case, relating to the assessment year 2008-09.
2. All the appeals are directed against the orders passed by the Commissioner of Income-tax (Appeals)-IX at Chennai on 29-2-2012. The appeals arise out of the assessments completed under section 143(3) of the Income-tax Act, 1961.
3. The assessee is a prominent NGO working among the rural folk in different parts of India, with the aim of raising the living standard of poor villagers, especially scheduled casts, tribes and other backward communities. The assessee trusts are registered, in these cases in Tamil Nadu, to manage Self-Help-Groups (SHGs for short). These SHGs are group of villagers and their families numbering around ten to fifteen and they undertake a particular programme of generating income for the benefit of the members of that SHG. The assessee trust SMBT is leading and managing about ten to twenty SHGs in their activities. The assessees SMBT, around twenty to thirty in numbers, working in Tamil Nadu, are under the common umbrella of M/s. Sarvodaya Nano Banking Finance Company Limited (SNBFCL for short). SNBFCL is approved by the Reserve Bank of India for carrying out the activities of micro financing. SNBFCL obtains loans from statutory corporations like SIDBI and nationalized banks. SNBFCL obtains loans from the above stated sources and distributes to different SMBTs, like the assessees. The assessee SMBTs, in turn, lend the money to different 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). ASSEFA is a national level trust formed for the upliftment of poor villagers who had received in the past, parcels of land distributed by Boodhan Movement initiated by Acharya Vinoba Bave. The Boodhan Movement had collected good extent of land in different parts of India. Those lands were allotted to landless poor villagers. But, the villagers were not in a position to raise resources to carry on agricultural and other related activities in the land allotted to them. It created a situation that inspite of land allotted to them, the poor people were not in a position to make a livelihood out of the land. ASSEFA was formed in the above context. They made out a programme for the sustainable growth of Boodhan land allottees. On the security of the Boodhan land, ASSEFA will arrange funds from nationalized banks for distributing among the Boodhan land allottees, so that they can indulge in different activities including agricultural, for creating an environment of sustainable growth. ASSEFA is a national nodal agency engaged in the upliftment of rural people through programmes designed for sustainable development. In that way, the national apex body ASSF is a charitable institution by the nature of the work carried on by it. Needless to say, it is a non-profit organization.
6. It is under the overall guidance and policy formulation of ASSEFA that field organizations like SNBFCL, the assessee-trusts and individual SHGs are working. SHGs are working at grassroot level in villages. The assessee-trusts arrange finance to these grassroot level SHGs by availing funds from SNBFCL. As already stated, SNBFCL arranges the finance from statutory institutions and nationalized banks.
7. The issues involved in all these appeals, which are common, arise out of the scenario of activities explained in the above paragraphs.
8. As already stated, because of the differential plans of charging of interest, the assessee trusts are generating surplus in their hands. They are distributing 95 per cent of the surplus to member SHGs, as mandated by the by-laws of the assessee-trusts, and they retain 5 per cent of the surplus.
9. In the course of the assessments of these assessee-trusts, the Assessing Officer held that the assessee trusts are in the status of Association of Persons (AOP for short) and they are liable for taxation on the surplus income at the maximum marginal rate. The 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 assessee trusts.
11. When these two issues were taken in first appeals before the Commissioner of Income-tax (Appeals), he found that only 5 per cent of the surplus retained by the assessee trusts are liable for taxation. After examining the organizational model of assessee-trusts, SNBFCL and SHGs, the Commissioner of Income-tax (Appeals) came to a finding that the assessees are not Association of Persons, as held by the Assessing Officer, but they are all mutual concerns. All the activities are meant for the benefit of the members of SHGs and, therefore, these are all clear cases of mutuality. As 95 per cent of the surplus is distributed by the assessee-trusts to member SHGs, that distribution is absorbed by the principles of mutuality and, therefore, such distributed income cannot be treated as taxable. He accordingly deleted the addition made by the assessing authority, treating 95 per cent of the surplus distributed to member SHGs as income of assessee-trusts. The Commissioner of Income-tax (Appeals) anyhow confirmed the taxing of 5 per cent of surplus retained by the assessee trusts.
12. Regarding deduction of tax at source and application of section 40(a)(ia), the Commissioner of Income-tax (Appeals) held that interest expenses in the hands of the assessee trusts are deductible under section 28 itself and, therefore, section 40(a)(ia) does not apply, as that section covers only the expenses claimed by an assessee under sections 30 to 38. He accordingly deleted those disallowances made by the assessing authority under section 40(a)(ia) of the Act.
13. These two modifications granted by the Commissioner of Income-tax (Appeals), stated in the above paragraphs, are the two issues raised by the Revenue in all these appeals presented before us. The first issue is whether 95 per cent of the surplus distributed by the assessee trusts to SHGs is taxable or not. The second issue is whether the assessee trusts are bound to deduct tax at source while making payments of interest to SNBFCL.
14. The circumstances of all these cases are similar and the issues are common. Therefore, the grounds raised by the Revenue in all these appeals are exactly similar.
15. Shri M. Rethinaswamy, the learned Commissioner of Income-tax appearing for the Revenue, argued the case at length. The learned Commissioner of Income-tax contended that when the distribution of 95 per cent 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) as well. Therefore, the legal proposition made out by the Commissioner of Income-tax (Appeals) is not sustainable in law. Accordingly, the learned Commissioner of Income-tax contended that the orders of the Commissioner of Income-tax (Appeals) in these cases may be set aside on these two issues.
16. Shri K. Venkatesh Prabhu, chartered accountant, who appeared for the assessees, relied on the orders passed by the Commissioner of Income-tax (Appeals) and on those case laws referred to by the Commissioner of Income-tax (Appeals) in his orders.
17. First we will consider the question of treating 95 per cent of the surplus distributed to the member SHGs, as income liable for taxation or not.
18. We have broadly stated the organizational model of the assessee trusts working under the guidance of a national apex NGO. On the grassroots level, SHGs are working, for whom the assessee trusts are arranging funds availed from the umbrella organization SNBFCL. Every SHG contains ten to fifteen members. The details of every member belonging to a SHG are available on record. The details of loans availed by the various SHGs are properly recorded and further distribution of funds by SHGs to their individual members are also properly documented. It is on the basis of these documentations and details that interest is computed and paid off. The assessee trusts are returning back 95 per cent of the surplus to the various SHGs working under them for the purpose of ultimately distributing among the members. There cannot be a case, in such circumstances, that the share of every SHG, or the share of every individual member is indeterminate. That is a finding of fact arrived at by the assessing authority without any basis. The assessee trusts are not distributing the 95 per cent of the surplus to a large crowd at their own whims and fancy. The assessee trusts are distributing the 95 per cent of surplus on the basis of proper accounts, formula and procedure. Every beneficiary is identified. The share of every beneficiary is quantified. Therefore, we find that the Commissioner of Income-tax (Appeals) is justified in coming to the conclusion that the assessee trusts and the SHGs are inter-related and they are all concerns governed by the principles of mutuality. The 95 per cent surplus distributed by the assessee trusts to the various SHGs working under them is nothing but the income 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 section applies only to those expenses covered by sections 30 to 38. Section 28, provided under Chapter IV, deals with the nature of income that will be treated as profits and gains of business or profession. Section 28 does not provide any mechanism to compute the profits and gains of business or profession. It is an explanatory section which describes on various types of receipts of income which are to be included under the head ‘Profits and gains of business or profession’. Apart from this general description, section 28 does not provide for deduction of any expenditure incurred by an assessee in earning profits and gains of business or profession. This position is made very clear in section 29. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. When section 29 specifically provides that there are different sections provided after sections 28 and 29 for the purpose of computing profits and gains of business or profession, it means that different expenses that may be claimed by an assessee shall be considered for deductions under those respective sections arranged in between sections 30 to 43D. Section 36 specifically provides for other deductions allowable to an assessee. Section 36(1)(iii) provides for deduction of interest paid by an assessee. Section 37 provides a residuary provision for deducting other expenditure incurred in carrying on of the business, but not specified elsewhere. All these things show that law has provided a comprehensive system for deciding what are profits and gains of business or profession and how profits and gains of business or profession will be computed. When such an exhaustive provision is made in the Act, it is not possible to hold that section 28 itself provides for expenditure and, therefore, the assessee can claim the expenditure of interest payment as an expenditure deductible at source itself under section 28. We disagree with the legal proposition laid out by the Commissioner of Income-tax (Appeals) and his legal conclusion on that point is set aside.
21. Now, coming to the facts of the case, we agree with the Commissioner of Income-tax (Appeals) that the assessees are not liable to deduct any tax on payment of interest to SNBFCL. The assessees are availing loans from SNBFCL and passing over the loans to various SHGs working 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 find that the Commissioner of Income-tax (Appeals) is justified in holding that the assessees are not bound by the law stated in section 194A. Therefore, there is no need of deducting any tax at source while making the interest payments to SNBFCL. Accordingly, we uphold the order of the Commissioner of Income-tax (Appeals) in deleting the additions made by the assessing authorities under section 40(a)(ia) of the Income-tax Act, 1961.
23. This issue is also decided against the Revenue.
24. In result, these appeals filed by the Revenue are partly allowed.
