COMMISSIONER OF INCOME TAX Vs. DESALE Y S

JUDGEMENT

(1.) THIS is a reference made under s. 256(1) of the IT 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 BOI 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. S. 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 were 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.) 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 BOI 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 BOI, it was not assessable on the interest income as, in truth, the interest income never reached it as its income.