IN THE INCOME TAX APPELLATE TRIBUNAL
`C' BENCH, CHENNAI
BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENT
AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA Nos.1100 & 1098(Mds)/2012
Assessment Years : 2007-08 & 2008-09
The Income-tax Officer, M/s.Sarvodaya Mutual
Ward I(1), Vs. Benefit Trust, Rettaivadai St.
Vellore. Vellamalai, Anakkavur,
Ukkal Post, Cheyyar Tk.
PAN AADTS6149M.
(Appellant) (Respondent)
ITA No.1101(Mds)/2012
Assessment Year : 2007-08
The Income-tax Officer, M/s.Sarvodaya Mutual
Ward I(4), Vs. Benefit Trust, Kilpennathur,
Vellore. Thiruvannamalai.
PAN AAGTS5072E.
(Appellant) (Respondent)
ITA No.1102(Mds)/2012
Assessment Year : 2007-08
The Income-tax Officer, M/s.Sarvodaya Mutual
Ward I(4), Vs. Benefit Trust, Mamandur,
Vellore. Cheyyar Tk.
PAN AADTS5991D.
(Appellant) (Respondent)
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ITA No.1103(Mds)/2012
Assessment Year : 2008-09
The Income-tax Officer, M/s.Sarvodaya Mutual
Ward I(4), Vs. Benefit Trust, 17-Kasikara
Vellore. St., Cheyyar-604 407.
PAN AAGTS5075D.
(Appellant) (Respondent)
AND
ITA No.1104(Mds)/2012
Assessment Year 2008-09
The Income-tax Officer, M/s.Sarvodaya Mutual
Ward I(4), Vs. Benefit Trust, Santhavasal,
Vellore. Polur Tk.
PAN AAETS2747L.
(Appellant) (Respondent)
Appellant by : Shri M.Rethinaswamy, IRS, CIT
Respondents by : Shri K.Venkatesh Prabhu, CA.
Date of Hearing : 5th February, 2013
Date of Pronouncement : 5th February, 2013
ORDER
PER 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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.
Orders pronounced in the open court at the time of
hearing on Tuesday, the 5th of February, 2013 at Chennai.
Sd/- Sd/-
(Vikas Awasthy) (Dr. O.K.Narayanan)
Judicial Member Vice-President
Chennai,
Dated, the 5th February, 2013.
V.A.P.
Copy to: 1. Appellant
2. Respondents
3. CIT
4. CIT(A)
5. DR
6. GF.
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