D.C. Agrawal, A.M.
1. This is a bunch of nine appeals, five filed by the assessee and four filed by the Department. The fact matrix is common and issues raised are also common, i.e., whether interest income earned on fixed deposits will be taxable in the hands of the assessee who is a confederation of various unions/associations of Maharashtra State Government employees. Each of these employees deposited funds ranging from Rs. 20,000 to Rs. 35,000 with the confederation for the purposes of house building and such funds were deposited by the confederation in the bank which fetched interest. The AO had taxed entire interest received in the hands of the confederation in various assessment years treating it as an AOP. The CIT(A) had allowed relief of the interest paid back to the members who had opted out from the scheme. The assessee is in appeal against that 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 suggest modifications/amendments in Government workings/affairs to make the same speedy and capable;
(F) To publish one or more periodicals either in Marathi or in English language,
(G) To take all necessary actions for achieving any one or all the above objects;
Its membership as described in art. 1 of its constitution is as under :
Any State level Department or association of category of the employees of Government of Maharashtra may connect/join with the confederation subject to following condition. Executive committee of confederation shall have right to grant affiliation;
(A) Membership subscription of the association/union willing to affiliate should be at least Rs. 10 per annum;
(B) At least 50 per cent employees out of the employees coming within its scope should be its members;
(C) Its audited accounts should be published within three months every year from audit and copy thereof should be submitted to confederation;
(D) It should grant permission for getting examined its account;
(E) District level branch of the said association/union will be affiliated to District association according to conditions of the said association;
(f) Employees of the jurisdiction of the said association/union will pay membership subscription and other funds of the District association;"
By a resolution dt. 26th July, 1995, the confederation decided to launch a project for co-operative housing society at Bombay. The resolution states as under :
Maharashtra State Government Employees Confederation
Dt. 26th July, 1995
The working committee of the Maharashtra State Government Employees
Confederation in its meeting held today resolved that in view of the grave problem of availability of housing units particularly in Bombay city, a project for co-operative housing be started in Bombay exclusively for Government employees posted in Bombay.
The above project be entrusted for execution to a committee consisting of the following members.
1. Shri R.G. Karhik, Chairman.
2. Shri G.S. Shete, Member
3. Shri Sunil Joshi, Member
4. Shri C.J. Mandlik, Member
5. Shri B.D. Sapte, Treasurer
6. Shri S.S. Wagle, Economic Adviser.
The above committee will be known as managing committee for the above housing project. The committee shall decide all matters in regard to admission of members and payments to be made by them, etc.
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 six months and not more. Further, the funds be invested in banks which will give maximum interest. However no risk could be taken for that purpose. The investment should be in nationalised and scheduled banks. Further, the investment may be made in reputed foreign banks.
As the members of the project will get the interest earned or on such investment the Sanghatana will have not to pay income-tax. This advice was given by Dr. Wagle. It was however decided that we should obtain the opinion of our chartered accountant on this aspect.
M/s S. Gupta & Co. are the chartered auditors of the R.S.K.M. Sanghatana. It was decided that the same auditors be appointed for the Co-operative housing project. And that audit will be done every year.
After securing land from Government it will be handed over to the Co-operative housing society of the members. As the interest belongs to the members it was decided to pass it on to their Co-operative housing society.
The State Government put the query to the confederation vide its letter dt. 25th March, 1997, as to where the funds collected from the members are kept, in whose name the said bank account stands, and whether refund of deposit with interest would be made if the employee asks for refund. The letter seems to have been received by the confederation on 11th Sept., 1997 and its reply is placed on pp. 31-32 of assessee's paper book. According to this, it was reported to the State Government that a sum of Rs. 10,29,70,783 was collected from the members/association/unions. It was informed to the Government that fund so collected will be handed over with interest to the proposed co-operative societies.
3. The minutes of the meeting of confederation held on 20th Jan., 2000 provided inter alia, for the following :
Dt.: 20th Jan., 2000
Minutes of meeting held on 20th Jan., 2000 under the chairmanship of R.G. Karnik.
All members were present.
Minutes of meeting held on 15th Sept., 1999 were read out and passed.
The committee took into account the fact it was impossible to obtain Government land. Besides that allotted at (Arnbivali) (Andheri) and Mulund because all Government land was occupied by slums. The committee, therefore, observed that it was impossible to get additional land. In view of this, the committee decided as under :
1. Members who cannot be accommodated on the allotted land on 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 on funds deposited by members by way of entrance fee, share capital and construction expenditure.
2. Members, who resigned or who have died, be paid interest equivalent to the sum of money contributed by them towards preliminary expenses.
3. Shri Sapte stated that the chartered accountant has confirmed that average interest earnings annually payable to each member will be 9 to 10 per cent.
It was declared that interest payment as above be made to those who have resigned or died on or before 20th Jan., 2000.
Members who cannot be accommodated at Ambivali on the basis of their priority number, will also get interest as above.
Those who have opted for Kamothe and have given written consent will not be eligible for interest as above.
However, the interest payable to them will be credited to their account for the project at Kamothe.
Decision in regard to those members who are expecting to be accommodated at Mulund as and when land is allotted, will be taken in due course.
Sd/- Mr. Bapat
Chief Treasurer & Interpreter
High Court, Bombay (Retd.)
Similarly, Circular dt. 10th Feb., 2000, also provided, inter alia as under : Rajya Sarkari Karamchari Madhyawarti Sanghatan.
10th Feb., 2000
Ref.: Circular dt. 28th July, 1999
Government has not so far issued orders for allotment of land at Andheri and Mulund to co-operative housing societies. It is learnt from the Revenue Department that the letter of intent will be sanctioned by the Chief Minister himself. Further action will immediately begin as soon as aforesaid orders are received.
The Sanghtana was successful in prevailing upon Government to reduce the sale price of Government land and thereafter made persistence efforts to secure more land in greater Mumbai. Efforts in regard to this were also made with the new Government. The union made a pressing demand to secure maximum possible land out of the 75 acres reserved for staff quarters at Ghatkopar.
The union represented that the some portion of the land be assigned for cooperative housing of Government employees. However the Government has firmly rejected Sanghtana representation, and is determined not to make any change in the reservation of the said land which is for staff quarters and Government offices. The Sanghtana is, therefore, convinced that it is impossible to secure land in greater Mumbai. The members of the co-operative housing 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 Karnothe 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 Kamothe for the remaining members. They are, therefore, requested to give their consent or rejection in the prescribed letter by 30th April, 2000.
3. Members who cannot be accommodated on land in greater Mumbai and those who have not given their consent for Kamothe will be refunded their contribution towards construction and preliminary expenditure with interest.
4. Those members who have obtained refund during the last four years will also be paid interest for the period for which they are eligible for interest payment.
5. Members who have consented for Kamothe will continue to hold their priority number and new applications will be invited from May, 2000, for Kamothe.
7. Action as above will be completed by April, 2000.
Sd/- Sd/- Sd/-
Sunil Joshi G.S. Shete R.G. Karnik
Genl. Secretary President General Secretary
Rajya Sarkari Karamchari
Greater Mumbai State Employees
From the above documents it is clear that funds were collected by the confederation from the member associations/unions of Maharashtra State Government employees for the purposes of housing scheme. These schemes were to be executed through co-operative societies. Till the land is allotted from Maharashtra Government, the funds were parked in savings account in Kalbadevi branch of Corporation Bank. It fetched interest to the confederation as under :
M/s Maharashtra State Government Employees Confederation
Statement of interest receipt/paid
Asst. yr. Interest received Interest paid Balance interest
1996-97 11,85,345 Nil 11,85,345
1997-98 91,83,184 5,35,000 86,48,184
1998-99 1,06,22,257 22,57,500 83,64,757
1999-2000 1,01,89,796 43,41,498 58,48,302
2000-01 1,16,36,204 2,31,35,060 1,14,98,856
Total 4,28,16,786 3,02,69,058 1,25,47,732
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 to them. No guidelines are formulated about this transfer. Hence, there is no diversion of income by overriding title.
(5) The principle of mutuality does not apply as it is not a transaction between the members. The AOP has earned income from bank which is not a member of AOP.
(6) The assessee-AOP is not registered during relevant time as trade union. It was registered only on 27th Dec., 2000. Hence Section 10(24) would not be applicable.
(7) Income is taxable under Sections 4 and 5 of the Act as assessee-AOP has derived income in its own name.
4. The argument of the assessee that it is only a conduit pipeline and income is diverted at source or that assessee is a mutual society of its members and concept of mutuality will be applicable and hence income received from, the fixed deposits will not be taxable in its hands, or that it is acting in a fiduciary capacity to its members did not find favour with the AO, who taxed the interest income accrued on FDRs/TDRSs in the hands of the confederation in respective years. The CIT(A) held that the objective of the confederation was to hold the funds as an agent on behalf of the members, and ultimately pay the surplus with principal, after deducting the expenses, as land cost to the societies constituted of the members. The co-operative societies had not come into existence. The formation of societies was a future event contingent to allotment of land. Membership at the time when co-operative societies for construction of flats will be formed is not known. Whether land will be allotted or not, which members will remain as member till land is allotted is uncertain. Hence, CIT(A) did not agree with the assessee's contention that it is acting as an agent for members. When members are not certain how confederation will be acting as an agent. Similarly, according to CIT(A) there is no overriding title on income earned. The contributories are different in different years. Hence, there is also no mutuality. Thus, while confirming the action of AO for the asst. yr. 1996-97 the learned CIT(A) observed as under :
"3.12 I have looked into the facts of the case, and the arguments advanced by the appellant. I find that there were 1974 members in all in the financial year 1995-96 and the number increased by 874 more in financial year 1996-97. The members were classified by the confederation into three categories, namely, A, B and 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 B and C. However, I find that there was no refund of Sanghatana Nidhi in any of the three categories. Thus, insofar as the refund of contribution is concerned, the position is very clear that the outgoing members of different categories in different assessment years were refunded amounts, in full except the Sanghatana Nidhi, which was not refunded. Similarly, where refunds did take place in subsequent years, the interest component on the refund was worked out at 4.5 per cent. Though, the members withdrew in different years, but, the refunds were made only in subsequent years. Insofar as asst. yr. 1996-97 is concerned, there were no refunds.
3.13 The facts as they emerge from the above discussion are that the appellant confederation of State Government employees collected funds and in asst. yr. 1996-97, invested the same in various term deposits, etc. on which it has earned interest. No doubt, the objective was to hold the funds as an agent on behalf of the societies and ultimately pass on the surplus after deducting the land cost to the societies constituted of the members but for the year under consideration, the entity in question was merely an AOP who was holding the funds on receipt from its various constituents and earning income thereon. The societies had not come into existence nor were they were formed. The formation of societies was a future event contingent to the allotment of land. Which of the members would be a member of any specified society in the subsequent years is also not known. Right from the period relevant to asst. yr. 1996-97, sensing delay in allotment of land, the initial contributors started withdrawing their money. The money was of course refunded to them after deducting the Sanghatana Nidhi. The outgoing persons were paid interest much later along with principal, at a rate which was lower than the rate of interest earned by the appellant during the year under consideration. The difference in the interest rate is stated to be for the purpose of meeting certain specified expenses. Under the circumstances when it is not known as to which of the contributors would ultimately remain a member, of the confederation, and when they remain a member of the confederation, which of them would be the members of the society to whom the land would be allotted in future is all uncertain. The members were to form the societies and the monies were to be passed on by the confederation to the society after their formation. So, the confederation 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 v. Y.S. Desale , 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 the appellant's case, a confederation was formed by State Government employees and the size of the confederation, i.e., the number of members in different assessment years kept fluctuating till the time the land was allotted. The fluctuation was on account of the fact that the members withdraw from the confederation realizing the delay in allotment of lands. So it is not a case, where some people have been appointed as promoters but it is a case where, certain set of people decided to coalese together with a view to extract a certain advantage from the Government and when some of them realized that there may be delay in extracting a beneficial deal, they withdrew. Their contributions were also refunded to a substantial extent. It is noticed that when the land was to be allotted, certain societies were to be formed and these societies were to comprise of those members who wanted to opt for them. The funds were to flow from the confederation to the said co-operative societies after those societies had come in existence. Under the circumstances, it is clear that the appellant's case is distinct from that reported at (supra).
3.15 Similarly in the case reported at CIT v. Tollygunge Club Ltd. , I find that there also, the decision was given on facts, where pursuant to a resolution, the assessee collected certain surcharge in addition to the admission fees for the races and the Hon'ble Court held that the surcharge when paid was clearly impressed with an obligation in the nature of trust for being applied for the benefit of local charities and was by that obligation diverted before it reached the hands of the respondent and therefore, it was not part of income of the assessee. In the appellant's case, I find that they collected the funds, deposited the same in bank, etc. earned interest thereon and thereafter it was again reinvested for earning interest. The allotment of land has taken place almost 4 to 5 years subsequent to the confederation coming into existence. The facts are distinct in the case, and therefore, the decision does not apply. In the case reported at CIT v. Tanubai D. Desai , the Hon'ble Court was dealing with the case of solicitor holding money on behalf of his clients which was held to be in fiduciary capacity. This case is also factually 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 v. Tanubai D. Desai (supra) is not applicable. Similarly, I find that the decisions in the cases reported at CIT v. Sitaldas Tirathdas and that in the case of CIT v. A. Tosh & Sons (P) Ltd. 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 where there can be any mutuality. Under the circumstances, I am of the view that the AO was fully justified in taking Rs. 11,85,345 as the income of the appellant after carefully appreciating the facts of the case.
4. In ground No. 3, the appellant has raised the issue that the ITO was not justified in not allowing deduction in respect of interest paid to the retiring members. This ground seems to have been raised without looking into facts by the appellant itself. No member in fact was paid interest during asst. yr. 1996-97 and therefore, there is no occasion for the ITO to have considered the same. The ground is, therefore, not been adjudicated. For statistical purpose, the ground is treated as decided against the appellant.
5. In ground No. 4, the appellant has challenged the action of the AO in treating the appellant as an AOP and holding individual shares as indeterminate and unknown and that he had credit in taxing the income of maximum marginal rate.
5.1 In this connection, I find that the appellant has filed the return itself in the status of AOP. It is a case of changing track during the appellate proceedings where the appellant has challenged the action of the AO in treating as AOP, when in the return, the said status was claimed by the assessee itself. The jurisdictional High Court in the case of Jivatial Purtapshi v. CIT held that concession on a point creates estoppel against its re-agitation. Further, the Hon'ble Supreme Court in Add]. CIT v. Gurjargravures (P) Ltd. has clearly laid down the proposition that the claims have to be before the AO.
5.2 The AO placed reliance on the decision in the case reported at ITO v. Ch. Atchaiah , Meera & Co. Etc. v. CIT , N.V. Shanmugham & Co. v. CIT and Smt. K. Bhoomiamma v. CIT and came to the conclusion that the income has to be treated as the income of the AOP and not as income of the members of the AOP individual. Since the individual shares of members of the AOP are indeterminate or unknown as such on the date of formation of the AOP, the AO taxed the total income of the AOP at maximum marginal rate as per the provisions under Section 67.
5.3 In this regard, it 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 Sections 234A, B and 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 AO had given specific directions and, therefore, I see no reasons to interfere the same.
7. In the result, the appeal is dismissed."
5. However, when claim for allowing deduction of interest paid to the retiring members was made by the assessee, the CIT(A) allowed the same by observing as under [vide orders of CIT(A) for the asst. yr. 1997-98] :
"Insofar as ground No. 3 is concerned, the appellant is aggrieved that no deduction has been allowed in respect of interest paid to retiring members. During the course of appellate proceedings, my attention has been drawn to the fact that the appellant had made repayment of the principal as well as the interest which was worked out @ 4.5 per cent in the case of the retiring members. The AO in the order passed for the year under consideration has treated the entire amount of Rs. 91,83,184 as income from the other sources without allowing any deduction for the interest paid to the outgoing members. No reasons whatsoever, have been given for this treatment. I find that the appellant's contention that the interest repaid to the retiring members should be deducted from the interest earned does have merit for the simple reasons that while the appellant had earned a higher rate of interest, on the amounts parked with them and invested in banks, etc., it had to pay a lesser amount to those of the members who opted out of the arrangement. Under the circumstances, the interest paid to the retiring members is clearly deductible and should be netted out. This ground is decided in favour of the appellant and the AO is directed to reduce the interest paid to the outgoing members from the income earned by the appellant."
6. Before us the learned Counsel for the assessee submitted as under :
(1) The assessee is not an AOP but is only a voluntary organization with no profit motive, acting in a fiduciary capacity as a representative, agent and facilitator to its contributing members. The share of the members of the assessee confederation is determinate inasmuch as they will take back what is deposited by them in addition to interest earned by them on their deposits. Therefore, confederation cannot be taxed on interest receipt.
(2) There is an overriding title in respect of accretion on deposits held on members' account. The appellant did not earn interest on its own account but is under obligation to refund/transfer interest to co-operative housing societies on members' account. Accordingly, the 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 Section 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 members. Retained nothing for itself.
(6) The appellant is a voluntary organization and does not have a profit motive. It is not formed with an object to produce income nor has carried on the business of housing and/or investment activities. It has been formed to resolve the basic housing needs of its members. It is incorrect to treat the confederation as an AOP. For this proposition the learned Counsel relied on CIT v. Y.S. Desale .
(7) The learned Counsel submitted that it was impossible to open separate and independent bank account in the names of all the members to whom the money belonged and hence it opened bank account in its name. It had never any ownership or dominion over either the fund or the interest. It had authority only to divert the funds including interest for the housing project or return it to the members. It could not have diverted the funds for any other purposes. The interest belonged to the members. Each member has submitted the declaration to the effect that interest income is taxable in his hands though deduction under Section 80L is claimed to which they are individually entitled. On the above proposition, learned Counsel relied on following decisions :
(i) CIT v. Tanubai D. Desai ,
(ii) CIT v. Y.S. Desale (supra),
(iii) CIT v. Marsons Beneficiary Trust and Ors.
(iv) CIT v. Mecca Trust (2003) 130 Taxman 384 (Mad)
(8) The share of the members are determined which is defined by the money deposited by them. Each member had contributed as under : Particulars Category-A Category-B Category-C
(opting 800 sq. ft. (opting-650 sq. (opting 450 sq.
flat) ft. flat) ft. flat)
Capital (towards land) 35,000 25,000 20,000
Share money 260 260 260
Preliminary expenses fund 10,000 7,500 5,000
Sangathana Nidhi fund 3,000 2,000 1,000
Since the members are entitled to their own sum plus interest, the shares could not be held to be indeterminate rather determinate in proportion to their contribution. In view of this the confederation cannot be taxed. Further the confederation returned the money to those members who did not want 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) v. All India Oriental Bank of Commerce Welfare Society (2003) 130 Taxman 575 (Del)
(ii) Chelmsford Club v. CIT (2000) 243 ITR 89 (SC)
(iii) Walkeshwar Triveni Co-operative Housing Society Ltd. v. ITO (2003) 80 TTJ (Mumbai) 673 : (2004) 88 ITD 159 (Mumbai)
(11) Finally, summarizing his arguments the learned Counsel relied on some more decisions as under :
(ii) CIT v. Sitaldas Tirathdas
(iii) CIT v. Bijli Cotton Mills (P) Ltd.
(iv) CIT v. Tolly gunge Club Ltd.
(v) Poona Electric Supply Co. Ltd. v. CIT
(vi) CIT v. A. Tosh & Sons (P) Ltd.
(vii) CIT v. Karnal Co-operative Sugar Mills Ltd.
(viii) CIT v. Thakar Das Bhargava
7. On the other hand, learned Departmental Representative supported strongly the order of the AO and submitted that CIT(A) has wrongly allowed the relief. In brief, the central point of submissions of learned Departmental Representative were as under :
(1) The assessee has himself filed the return of income in the status of AOP showing nil income. Now, it cannot go back to say that it is not assessable to tax.
(2) Shares of the members are indeterminate inasmuch as there is no fixed list of members, any one can join at any time and leave at any time leaving the shares of others as indeterminate. Therefore, entire interest income is taxable in its hands.
(3) The housing co-operative societies had not come into existence nor they were formed. The formation of societies was a future event, contingent upon allotment of land.
(4) It was not known as to who will remain a member and who will opt out and ultimately to whom the land will be allotted. So the confederation could not be said to be an agent of members of societies as the names of the members were not certain. What is certain is that the confederation had funds, which were invested in the bank and which earned income.
(5) The confederation cannot take advantage of Section 10(24) and thus claim exemption to the interest income earned because at the point of time when interest income was earned the confederation was not registered as a trade union. If an income is earned before that, by the confederation, then that will not be exempt as Section 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 its name. For bank the confederation is the owner of the fund. The bank has paid interest to the confederation. Legally only the confederation is entitled to claim interest from the bank. Hence it is the right person to whom interest has accrued and hence it is taxable in its hands.
8. We have considered the rival submissions perused the material placed on record and also the authorities cited before us in support of the claim. The appellant-confederation has raised several alternative grounds to claim that interest income earned on the FDRs are not taxable in its hands. Regarding the claim that it is a registered society and it is entitled to exemption under Section 10(24) of the Act, we are of the view that this provision will not be applicable in the present case as the confederation was registered as a trade union only on 6th Dec., 2000 as per certificate obtained under Trade Union Act, 1926. The availability of exemption to the income earned by an assessee has to be examined from year to year. Income was earned in assessment years prior to 2000-01. Section 10(24) reads as under :
(24) any income chargeable under the heads "Income from house property" and "Income from other sources" of a registered union within the meaning of the Indian Trade Unions Act, 1926 (16 of 1926), formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen;
During these periods the confederation was not a registered trade union. Further, the assessee has also not challenged the reopening on this ground. If assessee was entitled to exemption under Section 10(24) in earlier years by virtue of it being a registered trade union, reopening would have been bad in law. Notwithstanding that such ground is not taken, we are of the view that as the confederation was not a registered trade union in the assessment years before us, it cannot claim the benefit of Section 10(24). Even otherwise, no authority or statutory provision has been cited in support of the proposition that registration granted under Trade Union Act, 1926, will have retrospective effect. Further, to avail exemption under Section 10(24) one has to go with the presumption that interest income on FDR belonged to the confederation. Question of exemption arises only when the income belonged to the assessee. The assessee himself denies that income belongs to him. Its claim is that interest 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 the house. At no point of time, individual member's dominion or ownership over the money advanced by them reduced or extinguished in quality or in quantity. Equally, the confederation also did not assume or acquire at any point of time ownership or dominion over the fund to the exclusion of the members. The facts emerging from the minutes of the meeting/resolution of the confederation, as referred above, are unequivocal in their assertion that fund belonged to the members and the confederation is acting only on behalf of the members.
9. In support of this contention that assessee is acting only in a fiduciary capacity following decisions were cited :
(1) CIT v. Y.S. Desale (supra)
In this case a co-operative society was to be promoted to manufacture sugar. Out of 54 members, 7 members formed an executive body while 3 out of them were appointed as promoters. There was a considerable delay in the formation of the society as license to erect sugar factory was not forthcoming. The promoters had collected a large amount from the members of the co-operative society and the amount was deposited in the bank, which earned interest. It was held that, object of appointing the promoters was not to carry on any business or earn any income in the form of interest from the deposits, which was made out of the deposits collected from members by way of contribution of share capital. The activity of depositing funds into bank did not amount to an income producing activity. Further, when income is received by an agent, he received it for and on behalf of the principal. The promoters received income as agent of shareholders. They did not have any title over the income which really vested in the shareholders. The title to the income proportionate to the contribution of share capital vested in the shareholders themselves and the promoters were merely acting as agents.
(2) CIT v. Tanubai D. Desai (supra)
Money received by a solicitor from and on behalf of his clients is in the capacity of a trustee and he holds such money in a fiduciary capacity and the income or interest derived from such money is equally held in a fiduciary relationship existing between the solicitor and his clients. The income from such deposits with solicitor is not liable to be taxed in the hands of solicitor.
Other case laws such as CIT v. Marsons Beneficiary Trust (supra), cited by learned Counsel for the assessee are not directly on the point. Where the trustees are authorized to carry on business under the provisions of the trust deed then they are assessable not as AOP but as representative assessee under Section 161(1). However in CIT v. A. Tosh & Sons (P) Ltd. (supra), 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 v. 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 interest earned on deposits and the difference between the interest charged and the interest allowed to clients on money lent claiming that the same were earned income. On these facts, it was held by the House of Lords that the taxpayer was not entitled to earned income (relief) as the interest in question did not belong to him but to his clients. The taxpayer being in a fiduciary position was not authorized to keep the interest or any part thereof by custom or by implied agreement.
(b) CIT v. Sandersons & Morgans : In this case, the assessee was a firm of solicitors. Clients of the assessee used to advance money to the assessee in connection with cases entrusted to the assessee. After final adjustments of bills, small balances were continued to be carried forward in the accounts of the assessee. Finally, the assessee closed the said accounts and transferred the balance to its own P&L a/c. The question arose whether the said balance transferred to the P&L a/c of the assessee was assessable as income in the hands of the assessee. On these facts, it was held by a Division Bench of this Court that the said balance was not a revenue receipt in the hands of the assessee liable to income-tax. The amounts received by the assessee from its clients were not trading receipts but were received by the assessee as an agent and in a fiduciary capacity. The assessee remained liable to account for the money to its clients. It was held further that even though the remedy of some of the clients of the assessee had become barred by limitation, the amounts representing the claims did not become the income of the assessee."
We find what the confederation was doing was not a business activity. It was not authorized by the members to carry on any business. The funds were collected from the Government employees to get the houses constructed through co-operative societies. Since there was a delay in allotment of land, the funds were deposited in the bank and in the process it earned interest. The funds were not collected to earn interest. The resulting interest was only incidental. If the land would have been allotted in time, there would not have been any necessity to deposit funds in the bank. Therefore, it cannot be said that the confederation was authorised to carry on any business or to earn interest primarily on the funds. Secondly, original money belonged 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 referred above clearly speak that funds for housing project will be kept separately in nationalized bank/scheduled bank and that funds of the housing project will not be mingled with the own funds of the confederation, reveal clear intention on the part of federation to act only in fiduciary capacity.
10. It is further fortified by the intention expressed by the office-bearers of the confederation in their meeting on 25th Feb., 1996, that :
"After securing land from the Government, it will be handed over to the cooperative housing society of the members. As the interest belongs to the members it was decided to pass it on to their co-operative society."
By their minutes of the meeting held on 20th Jan., 2000, it was held by the confederation that interest shall be paid at the rate of 4.5 per cent on the funds deposited by members. The balance will ,be used for entrance fee, share capital and initial construction expenditure. Interest will also be paid to those who have resigned earlier than 20th Jan., 2000. On the basis of the period for which the said sum was deposited the interest will also be paid to those who have died on or before 20th Jan., 2000. However those who have opted for Kamothe Project will not be paid interest but interest (earned on their deposit) payable to them will be credited to their account for the project at Kamothe. In the circular dt. 10th Feb., 2000, issued by the confederation, item No. 4 is significant. It reads :
"Those members who have obtained refund during the last four years will also be paid interest for the period for which they (are) eligible to interest payment."
It shows the intention of the confederation to make payment to old retirees from the project even though there may not be any claim for interest by such members. This voluntary act by the confederation clearly expresses an intention of an agent who is acting in trust for the members and such intention is apparently bona fide as there is no contrary material to say otherwise. There is another facet of the issue. Had the members given the money to the confederation with the intention of earning some income like money deposited in the bank earns interest, i.e., if the confederation is acting as a non-banking financial institution, directly or indirectly, and collecting funds from the members, then certainly the interest income so earned by the confederation would have been 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 complete identity between participators and contributors is missing. In the present case, the interest is earned from the bank, which is not a participator in the surplus. The concept of mutuality is destroyed to this extent. Our view is supported by Hon'ble Gujarat High Court which has held in Sports Club of Gujarat Ltd. v. CIT that interest derived from a third party, i.e., bank goes against the concept of the mutuality. It observed as under :
"One of the essentials of mutuality is that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participants and the contributors. Once such identity is established, the surplus income would not be exigible to tax on the principle that no man can make a profit out of himself. The principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character. The principle of mutuality can, in such cases, be confined to transactions with members. The two activities can, in appropriate cases, be separated and the profits derived from non-members can be brought to tax.
Section 44A of the IT Act, 1961, which begins with a non obstante clause applies to any trade, professional or similar association and but for the use of the words 'other than an association or institution referred to in Clause (23A) of Section 10', even the professional associations referred to in Section 10(23A) would have derived the advantage of Section 44A. The intention of the legislature was to give the benefit of Section 44A to all professional associations other than those referred to in Section 10(23A). They are clearly words of limitation not intended to enlarge the scope of the expression 'similar association' beyond its meaning in Section 28(iii).
The assesses, the Sports Club of Gujarat, was incorporated as a company. Its main object was to promote the game of cricket and other games and sports. The objects clause in the memorandum and articles of association empowered those in the management of the club to invest and deal with moneys of the club not immediately, required in such manner as may, from time to time be determined by them. The assessee claimed exemption from income-tax for the asst. yrs. 1966-67 to 1969-70, but the ITO rejected the claim. The Tribunal held that income assessable under the head 'Profits and gains of business 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 Section 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. v. 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 that the confederation will not get exemption from taxation of interest income merely on the basis of mutuality as contributor to the interest is not those who will be participating in it. There is a lack of complete identity between contributors and participators so far as interest received from bank is concerned.
13. In the other case laws cited by learned Counsel for the assessee in support of concept of mutuality are not applicable to the facts of the present case. We are of the view that they would be applicable when there is a complete identity between participators and contributors. If interest is charged from the members and paid back to other members, then there will be a complete identity between contributors and participators. But where source of interest receipt is a third party, i.e., bank, which is not a member of the group, the concept of mutuality would not be applicable and hence interest income received from the bank will not be exempt, if otherwise taxable.
14. Similarly, we are of the view that there is no overriding title in favour of the members because there is neither statutory obligation nor an agreement with the members for depositing their fund with the bank and pass on the interest to them. The confederation did it at its own as a trustee of the fund of the members. And it also decided voluntarily, at its own, to pass on the interest to the retiring members or to those who have already retired four years ago, prior to February, 2000 and also to pass on the interest to the housing co-operative societies as project cost on behalf of the members. This cannot be said to be equivalent to an overriding title. Our view is supported by the decision of Hon'ble Allahabad High Court in Addl. CIT v. Rani Pritam Kunwar wherein it is held that for diversion of income at source through an overriding title, it is necessary that payment or diversion should be under some legal obligation which should be attached with the source of income. In other words, for such a payment there should be an overriding charge, which is exacted under any law for the time being in force, or by virtue of any Court's decree by an agreement or by a voluntary settlement, or the obligation should be such which can be enforced in a Court of law. In the instant case, these facts are not present and hence it cannot be 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 for new entrants in a social welfare scheme like housing project. Share of each member is fixed and determined by the amount deposited by them. They are neither entitled to more nor less than what principal sum they have contributed. There may be fluctuation of shares inter se when new members enter or some old members walk out but at a given point of time, the number of the members is fixed or determinate and so their shares. It is not a case of Revenue that some members were entitled for more than their deposit or less than that and hence the shares are indeterminate. Merely on the ground that some new members can come in or some old members can walk out from the confederation, the shares of the existing members, which are determined on the basis of their deposits cannot become indeterminate. Hence, this ground of Revenue is rejected.
16. Regarding the argument that formation of housing society is a contingent event, depending upon allotment of land, we are of view that it will not affect the taxability of interest income. In either situation, whether housing society is formed on allotment of land or not formed if land is not allotted, the fiduciary capacity of the confederation cannot be undermined. Similarly, fluctuation of members cannot in any way affect the status of the confederation as an agent of the members. The constitution of the federation makes it an agent of the members who are on the members list at a given point of time. It is an agent of those members whose funds are entrusted to it for housing project.
17. So far as the argument of the learned Departmental Representative that CIT(A) has wrongly allowed deduction for the interest paid to the outgoing members is concerned, we are in agreement with learned Departmental Representative that such payment of interest is not an expenditure to earn bank interest hence it could not be allowed as a deduction. But question of deduction would arise only when interest income is taxable in the hands of confederation. We have already held that the principal as well as the interest belong to the members and the confederation is acting only in fiduciary capacity. Therefore this issue is only academic as nothing out of interest on FDRs/TDRs made out of fund of the members is taxable in the hands of the confederation.
18. The last argument of learned Departmental Representative that confederation decided 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 Section 10(24) because first requirement of invoking Section 10 is that an income should belong to the assessee and then exemption under Section 10(24) can be claimed. It is held that need for invoking provision of Section 10(24) would not arise as the interest income does not belong to the confederation.
(4) The confederation is acting in a fiduciary capacity only. The capital contribution as well as the interest earned thereon belonged to the members in their own right. It is not shown that the confederation was either authorised or otherwise had any motive for carrying on any business or earning income. Therefore, the confederation cannot be taxed on the interest income earned on the FDRs/TDRs, only the individual members can be taxed on the portion of the interest income relatable to their deposit.
20. In view of the above, no addition of interest income from FDRs/TDRs made out of funds of members can be made in the hands of confederation. It is not taxable in its hands.
21. In the result, the appeals of the assessee are allowed and those of the Revenue are dismissed.