THE COMMISSIONER OF INCOME TAX, COCHIN vs. THE MEMBERS FUND TRUST

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ITA/737/2009HC KeralaKLHC01025498200928 February 2012Bench: HONOURABLE MR. JUSTICE BABU MATHEW P.JOSEPH,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR4 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal's orders were upheld, and the appeals filed by the Revenue were dismissed. The Tribunal found that the Members Fund Trust was not actually created. Crucially, the funds were not transferred to the Trust but were retained by the Cochin Stock Exchange and invested by it, with the interest earned being assessed as the Stock Exchange's income. The Tribunal also noted that the Assessing Officer himself had found that 75% of these funds were utilized for charitable purposes, leading to exemption under Section 11(1)(a) of the Income Tax Act for the Stock Exchange. The High Court found no justification to interfere with the Tribunal's orders, given the contradictory positions the department seemed to be taking by assessing the same income in the hands of both the Stock Exchange and the Trust, to which the funds were not actually transferred. The ratio decidendi is that income cannot be assessed in the hands of a non-existent entity when the actual recipient and beneficiary of the funds and income are demonstrably different and already assessed.

What were the facts?

The Commissioner of Income Tax (Revenue) filed appeals challenging the orders of the Income Tax Appellate Tribunal (Tribunal) for assessment years 1992-93 to 1995-96. The respondent is the Members Fund Trust, created by the Cochin Stock Exchange. A trust deed was executed on May 3, 1991, for a 'Members Fund' funded by contributions from members based on turnover. The fund was intended for settling member defaults. The Revenue sought to assess the Trust, treating contributions and interest as its income. The Trust contended it had no legal existence due to lack of SEBI approval and non-transfer of funds. The Tribunal found that the Trust was not actually created, funds were retained by the Stock Exchange and invested, with interest earned being assessed as the Stock Exchange's income. The Assessing Officer had also noted that 75% of these funds were utilized for charitable purposes, making the Stock Exchange's income exempt under Section 11(1)(a).

What were the issues?

1. Whether the Tribunal erred in holding that the respondent Trust had no legal existence for assessment of income tax for assessment years 1992-93 to 1995-96, and consequently, had no income to be assessed. Assessee's Contentions (as understood from the judgment): - The Trust had no legal existence as SEBI had not granted approval. - The funds were not actually handed over by the Cochin Stock Exchange to the Trust. Revenue's Contentions (as understood from the judgment): - The Revenue sought to assess the Trust, treating contributions and interest as its own income. - The Revenue's argument appears to be that the Trust should be assessed, despite the factual findings by the Tribunal regarding fund retention and assessment in the hands of the Stock Exchange.

Which sections of the Income-tax Act were involved?

Section 11(1)(a)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HON'BLE MR. JUSTICE BABU MATHEW P.JOSEPH TUESDAY, THE 28TH DAY OF FEBRUARY 2012/9TH PHALGUNA 1933 ITA.No. 737 of 2009 ( ) ------------------------------- ITA.186/COCH/2003 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .......... APPELLANT(S)/APPELLANT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT ---------------------------------------------- THE MEMBERS FUND TRUST C/O.COCHIN STOCK EXCHANGE LTD, COCHIN. BY SRI.JOSEPH KODIANTHARA (SR.) BY SRI.V.ABRAHAM MARKOS BY SRI.MATHEWS K.UTHUPPACHAN BY SRI.BINU MATHEW BY SRI.TERRY V.JAMES BY SRI.B.J.JOHN PRAKASH BY SRI.TOM THOMAS (KAKKUZHIYIL) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 28-02-2012,

ALONG WITH ITA. 747/2009, ITA. 1178/2009, ITA. 1221/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: tss

C.N. RAMACHANDRAN NAIR & BABU MATHEW P. JOSEPH, JJ. ----------------------------------------------------------------------- I.T. Appeal Nos. 737, 747,1178 & 1221 of 2009 ---------------------------------------------------------------------- Dated this the 28th day of February, 2012 JUDGMENT Ramachandran Nair, J. The connected appeals are filed by the revenue challenging the orders of the Income Tax Appellate Tribunal declaring that the respondent Trust had no legal existence for assessment of income tax for the assessment years 1992-93 to 1995-96. We have heard Senior Counsel Sri. P.K.R.Menon for the revenue and Senior Adv. Sri. Joseph Marcose appearing for the respondent. 2. After hearing both sides and on going through the Tribunal's order, what we notice is that a Trust was created by the Cochin Stock Exchange by a deed executed on 3.5.1991 creating 'Members Fund' which is by way of contribution from every member at the rate of 0.05% of the turnover. The Fund

I.T. Appeal Nos. 737, 747, 1178 & 1221 of 2009 2 was intended to be utilised for settling default account of the members. The Fund swelled and the deposits made earned substantial interest. The department tried to assess the Trust treating the contributions and interest as its own income. However, respondent resisted the same by stating that the Trust has no legal existence because SEBI has not granted approval and further the funds were not in fact handed over by the Cochin Stock Exchange to the Trust. In the appeal, appellate authority cancelled the assessment stating that the respondent has no valid existence and has no income to be assessed. In the second appeal by the revenue, the Tribunal verified the factual position and noticed that the Trust was not actually created. The finding of the Tribunal is that funds were not transferred to the Trust and the entire funds were retained by the Cochin Stock Exchange and the funds were invested by the Stock Exchange on which it received interest. The Tribunal clearly found by referring to the assessments of the Stock Exchange for the very same years that the entire contributions and interest generated were considered for assessment of the Stock Exchange as their income. In fact, the finding of the Assessing Officer is that Stock Exchange utilised 75% of the funds for charitable purposes and therefore

I.T. Appeal Nos. 737, 747, 1178 & 1221 of 2009 3 its income is fully exempt under Section 11(1)(a) of the I.T. Act. We do not know how the department can blow hot and cold by assessing income in the hands of the Stock Exchange as their income and then assessing the Trust treating the same income as that of the Trust to which funds were really not transferred. The Trust-funds were stated to be fully utilised for settlement of default by members. In view of these findings of the Tribunal, we do not find any justification to to interfere with Tribunal's orders. Consequently, we dismiss all the Appeals. Sd/- C.N. RAMACHANDRAN NAIR, JUDGE

Sd/- BABU MATHEW P. JOSEPH, JUDGE. krs.

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