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The Income-tax Officer, Ward I(1),Vellore. Vs. M/s.Sarvodaya Mutual Benefit Trust, Rettaivadai St. Vellamalai, Anakkavur, Ukkal Post, Cheyyar Tk
February, 13th 2013
         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)
                            -2-         ITA1100 to 1104 & 1098 of 2012


                   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
                               -3-         ITA1100 to 1104 & 1098 of 2012


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
                              -4-        ITA1100 to 1104 & 1098 of 2012


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
                                 -5-     ITA1100 to 1104 & 1098 of 2012


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
                              -6-        ITA1100 to 1104 & 1098 of 2012


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
                              -7-        ITA1100 to 1104 & 1098 of 2012


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
                             -8-       ITA1100 to 1104 & 1098 of 2012


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
                              -9-         ITA1100 to 1104 & 1098 of 2012


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
                              -10-      ITA1100 to 1104 & 1098 of 2012


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
                              -11-         ITA1100 to 1104 & 1098 of 2012





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
                              -12-       ITA1100 to 1104 & 1098 of 2012


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
                                 -13-     ITA1100 to 1104 & 1098 of 2012


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
                                -14-      ITA1100 to 1104 & 1098 of 2012


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
                             -15-      ITA1100 to 1104 & 1098 of 2012


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
                              -16-      ITA1100 to 1104 & 1098 of 2012


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
                             -17-      ITA1100 to 1104 & 1098 of 2012


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,
                             -18-        ITA1100 to 1104 & 1098 of 2012


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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