1. This is a reference made under s. 256(1) of the I.T. Act, 1961, and the basic question required to be decided is whether the promoters of a co-operative society can be taxed as an association of persons or a body of individuals in respect of the interest earned on the contribution of share capital of the members deposited by the promoters in co-operative banks.
2. The agriculturists of Sakri Taluka decided to form a co-operative society to manufacture sugar under the name of Panzara Kan Sahakari Sakhar Karkhana Ltd. A body of 54 members was formed to take the necessary steps and this body was known as Karyakari Mandal. Seven out of the 54 persons were elected to what was known as an executive body and out of these 7 persons, 3 persons, namely, Y. Desale, P. B. Patil and R. S. Patil were appointed as promoters. Desale was the chief promoter and was given authority to sign documents, etc. Though the decision to form the co-operative society was taken on 20th November, 1959, there was considerable delay in the actual formation of the society as the necessary licence to erect a sugar factory could not be obtained from the Govt. of India. The licence was obtained on 21st March, 1966, and then the society was registered on 14th May, 1966. The promoters had already collected a large amount towards the share capital of the persons who was to become members of the co-operative society and this amount was deposited with the West Khandesh District Co-operative Bank Ltd. and the Dhulia District Co-operative Bank Ltd. Interest was earned on these amounts.
3. The total amount of interest received by the promoters on the fixed deposits and the deposits in the savings bank account after deduction of expenses was assessed in the hands of the Chief promoter in the status of an association of persons. Though the assessee objected to the status of association of persons before the AAC, the appeals were dismissed. The assessee then filed appeals before the Income-tax Appellate Tribunal. The Tribunal took the view that under the relevant provisions of law, it was necessary for the chief promoter to set apart specific amounts for purchasing shares of the society and for the sake of convenience of the collection of such amount for keeping accounts thereof, three promoters were named for carrying out this work. The promoters were required by s. 146 of the Maharashtra Co-operative Society Act to invest the amounts with the banks named therein and failure to do so could have exposed them to prosecution. The Tribunal found that the members had made their individual contributions not with a common purpose of depositing the same with the bank and earning interest thereon, but they had contributed the amounts as it was a necessary preliminary step for the formation of the society. Thus, according to the Tribunal, it was impossible to hold that the members who exceeded 2,000 in number had joined with the common purpose and object of depositing their money with the banks to earn interest. The Tribunal thus found that the test laid down by the Supreme Court in CIT v. Indira Balkrishna : 39ITR546(SC) was not satisfied and the promoters could not, therefore, be assessed in the status of an association of persons.
4. The Tribunal then considered the alternative contention on behalf of the revenue that the promoters could be assessed in the status of a body of individuals. The Tribunal held that the 2,000 persons who intended to form a society formed a body of individuals, but with regard to the three promoters, the Tribunal held that they were not the owners of the contributions but merely received the contributions and held the same for and on behalf of the contributors without claiming any interest therein for enabling them to proceed with the formation of the society. The Tribunal found that instead of each contributor appointing a separate agent for the purpose, all the contributors appointed the same set of agents for the sake of convenience and that the promoters held the funds not in their own rights but for and on behalf of the individual contributors. The Tribunal, therefore, took the view that the interest received by the promoters could not be treated as their income and could not be charged to tax in their hands in the status of a body of individuals.
5. Alternatively the Tribunal took the view that a constructive trust had resulted under ss. 81, 90 and 94 of the Indian Trusts Act, 1882, in favour of individual contributors to the extent of funds contributed by them and the promoters who were constructive trustees were by reason of s. 95 of that Act subject to the same duties, liabilities and disabilities as if they were trustees of the money for the individual members for whose benefit they held it. The Tribunal further held that whether the promoters or body of individuals represented by the promoters were held to be agents of the members or were held to be constructive trustees for the members, the interest income was diverted from them, by an overriding title and a legal obligation, before its accrual and did not reach them. The Tribunal, therefore, held that though the correct status of the assessee was that of body of individuals, it was not assessable on the interest income as, in truth, the interest income never reached it as its income.
6. Arising out of this order of the Tribunal, the following four questions have been referred to this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the three promoters who collected share money from the persons who were desirous of becoming members of the proposed co-operative society to be named Sakri Taluka Sahakari Sakhar Karkhana did not constitute 'an association of persons' and/or 'a body of individuals' within the meaning of section 2(31) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and and in the circumstances of the case, the Tribunal justified in law in applying the test, viz., 'whether the intending shareholders joined with the common purpose of depositing their share money in the banks to earn interest income', for determining whether the interest amount which accrued on the share money which was deposited by the said promoters in the prescribed co-operative banks was income chargeable to income-tax in the hands of the said promoters in their status of 'an association of persons' ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income of interest amount referred to in (2) above did not accrue to the three promoters but was, before its accrual, diverted by overriding title to the intending shareholders who had contributed to the said share money and, as such, not chargeable to income-tax in the hands of the said promoters in their status of 'a body of individuals' ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the income of interest amount referred to in (2) above which accrued during the years relevant to assessment years 1963-64 to 1967-68, was chargeable to income-tax under section 56 of the Income-tax Act, 1961, in the hands of the said promoters in their status as an association of persons and/or 'a body of individuals' for the assessment years 1963-64 to 1967-69 ?'
7. In so far as question No. 1 is concerned, Mr. Joshi appearing on behalf of the revenue has, firstly, argued that the three promoters must be considered as persons who have associated themselves to make the deposit of the contributors of the several persons, who proposed to become members of the co-operative society, and, they must, therefore, be considered as an association of persons and in any case, according to the learned counsel, the three promoters were liable to be treated as a body of individuals and the income arising by way of interest from the deposits made by the three promoters must be treated as their income.
8. Now, so far as the concept of an 'association of persons' is concerned, it is well established that it means an association in which two or more persons joint with a common purpose or in a common action and in the context of the purpose for which those words are used in the I.T. Act, the association must be one the object of which is to produce income, profits or gains. [See CIT v. Indira Balkrishna : 39ITR546(SC) ]. The question as to whether the three promoters can be treated as an association of persons must, therefore, be considered in the light of the test laid down by the Supreme Court in Indira Balkrishna's case. The first requirement required to be satisfied before a group of persons can be treated as an association of persons is that they must have joined in a common purpose or in a common action and the second requirement is that the association must have the object of producing income.
9. Now, when we consider the manner in which these three promoters came to be appointed, we find that initially the proposed shareholders nominated a body called 'Karyakari Mandal' consisting of 54 members. Literally translated, the body could be called a working committee. Then these 54 persons constituted a smaller body of 7 persons called executive body or executive committee and these 7 members then appointed three promoters. The promoters, therefore, owed their status not to any agreement among themselves, but they became promoters as such by virtue of being nominated by the executive committee which was intended to look after the affairs of the proposed co-operative society. Further, the object of appointing the three persons as promoters was not to carry on any business or earn any income, but they were to function as promoters for the limited purpose of doing everything that was necessary for the purposes of registration of the society and once the society was registered, then its affairs would be regulated by the provisions of the Maharashtra Co-operative Societies Act. It is obvious that no only the promoters did not come together by any express agreement among themselves, but they had also not come together with a view to earn income in the form of interest from the deposits which were made out of the funds collected by way of contribution of share capital of the proposed co-operative society. It would be difficult, therefore, to accept the argument of the revenue that these three promoters could be called an association of persons and were, therefore, liable to be treated as such for the purposes of taxability as such under s. 4 of the I.T. Act, 1961.
10. It is also difficult for us to accept the alternative argument that they are a body of individuals. Undoubtedly, when under the definition of 'person' given in the Act in s. 2(31), a 'person' is defined as including 'an association of persons or a body of individuals, whether incorporated or not', that definition was intended for the purposes of treating a body of individuals as a taxable unit for the purposes of s. 4 of the I.T. Act. It is not possible, by its very nature, to lay down any exhaustive definition of 'a body of individuals', but one thing which is clear is that the 'body of individuals' contemplated by the definition of 'person' in s. 2(31) must be a body which has the object of undertaking an income-producing activity. Unless that element is present, however wide the meaning and scope of 'a body of individuals' may be, as compared with the limited concept of 'an association of persons', it will be difficult to treat a given number of persons as 'a body of individuals' as contemplated by the definition of 'person' in s. 2(31) of the Act. As pointed out by the Gujarat High Court in CIT v. Harivadan Tribhovandas : 106ITR494(Guj) , the words 'body of individuals' occurring in the I.T. Act in the definition of the word 'person' in s. 2(31) mean a conglomeration of individuals who carry on some activity with the object of earning income and the body of individuals must be carrying on an activity with a view to earn income because it is only with such a body of individuals that the I.T. Act is concerned and it was further pointed out that the words 'body of individuals' derive its colour from the context in which they occur, namely, an association of persons. Therefore, assuming for a moment that the three promoters, having regard to their number being more than two, may or could be generally described s a body of individuals, that would be of no assistance unless they had undertaken any activity to produce income.
11. Apart from this, if the true character of the three promoters is considered in the right perspective, it would appear that they were really nominees or agents of the entire body of the proposed shareholders entrusted with the task of taking the necessary steps for the formation and registration of the proposed co-operative society. If they were agents and there was a statutory obligation on them to deal with the funds of the proposed society in the manner prescribed by the Maharashtra Co-operative Society. If they were agents and these was statutory obligation on them to deal with the funds of the proposed society in the manner prescribed by the Maharashtra Co-operative Societies Act, it would be impossible to treat the deposit made in the banks as made expressly with the object of earning income. If the promoters had not acted in the manner that they have done, then they would have exposed themselves to the penal provisions of the Maharashtra Co-operative Societies Act as will be clear from the provisions of s. 146 thereof. Clauses (d) and (e) of s. 146, which are relevant, read as follows :
'It shall be an offence under this Act, if -
(d) any person collecting share money for a society in formation, does not within a reasonable period deposit the same in the State Co-operative Bank, or a Central Co-operative Bank, or an Urban Co-operative Bank, or a Postal Savings Bank; or
(c) any person, collecting the share money for a society in formation, makes use of the funds so raised for conducting any business or trading in the name of a society to be registered or otherwise.'
12. These provisions will, therefore, show that if the promoters had chosen to use the funds of the proposed society in any other manner for the purpose of conducting any business or otherwise, the penalty provision in s. 146 would have been attracted. Under s. 147 contravention of the provisions of s. 146, cl. (d), is made punishable with fine which may extend to 500 rupees and contravention of the provisions in cl. (e) is made punishable with imprisonment for a term which may extend to one year, or with fine or with both. Thus, the promoters were merely fulfilling the statutory obligation when they deposited the moneys in the banks as required by law and it would be too much to hold that this amounted to income-producing activity. Consequently, in our opinion, the Tribunal was right in taking the view that the three promoters were neither an association of persons nor a body of individuals and the answer to the first question has to be in the affirmative.
13. So far as the second question is concerned, it is clear that the test which was applied by the Tribunal was the test laid down in Indira Balkrishna's case : 39ITR546(SC) , and it was only after the application of that test that the Tribunal took the view that the three promoters could not be called in association of persons. That was the only test which the Tribunal could have applied in order to decide the contention advanced on behalf of the revenue that the three promoters formed an association of persons. The answer to question No. 2 must, therefore, be in the affirmative.
14. So far as question No. 3 is concerned, it arises out of the view of the Tribunal that the income by way of interest is not the income of the three promoters at all, but to that income the shareholders had a right even before the income was received by the promoters. The Tribunal seems to have held-and, in our view, correctly-that the three promoters 'were not the owners of the contributions, but merely received the contributions and held the same for and on behalf of the contributors without claiming any interest therein for enabling them to proceed ahead with the formation of the society' and they were thus in possession of the funds as agents of the individual contributors within the meaning of s. 182 of the Contract Act. The Tribunal has further found that instead of each contributor appointing a separate agent for the purpose, all the contributors appointed the same set of agents for the sake of convenience and the promoters held the fund not in their own right but for and on behalf of the individual contributors. The Tribunal further has taken the view that the contribution made by each member was known and the interest received by each was also know and the promoters, therefore, received the interest not in their own right but as agents of the different members. Having taken this view, the Tribunal further took the view that the promoters were clearly under a legal obligation to pay to each member the interest received by them in respect of the contribution made by him and this legal obligation arose simultaneously with the receipt of the money and observed further : 'The legal obligation diverted the income, before its accrual and receipt, to the individual members.' It appears to us that, on these facts, the question of diversion of income by an overriding title does not arise at all. As a matter of fact, once it is held that the promoters received income as agents of the shareholders and the promoters did not, therefore, have any title to the income, which really vested in the shareholders, there was no question of any overriding title of the shareholders because even initially the title to the income proportionate to the contribution of share capital vested on the shareholders themselves and the promoters were merely acting as agents. Where income is received by an agent, he receives it for and on behalf of the principal and there is no question of any overriding title. Consequently, question No. 3 must be answered by holding that the principle of diversion by overriding title was not applicable in the instant case.
15. Having regard to the discussion on the first two questions, the answer to question No. 4 has to be in the negative.
16. The four questions are accordingly answered as follows :
Question No. 1 : In the affirmative and against the revenue.
Question No. 2 : In the affirmative and against the revenue.
Question No. 3 : Principle of diversion of income by overriding title is not attracted on the facts of the present case.
Question No. 4 : In the negative and against the revenue.
17. The revenue to pay the costs of this reference.