1. Since the issues are common, these appeals are being disposed of by this common order. ITA Nos. 1624 & 1625(Mad)/1995 have been filed by the assessee against the order under s. 201(1) by which the assessee was treated in default, as it did not deduct tax at source. ITA Nos.
1626 & 1627(Mad)/1995 are against the orders under s. 201(1A), by which interest was levied.
2. The brief facts of the case are like these. The assessee-company is a company registered under the Companies Act, hereinafter referred to as the company. The company was set up with the objective of providing a number of financial services to its customers/investors including funds management and asset securitisation. The company started three types of schemes where the funds of the investors were invested, namely, (1) Bank Guaranteed Investments, (2) Viswasamrudhi, and (3) Prime Invest. The different investors, under the terms and conditions of offer memoranda, place the funds with the assessee, against which the assessee issues a certificate of investment, a specimen copy of the same has been annexed by the assessee in the paper book. Thereafter the funds go to the accounts of the scheme, namely Viswapriya Funds Management - A/c Bank Guaranteed Investments. This account will be operated by the fiduciary and custodian and/or their constituted attorneys. In the present case M/s Fraser & Ross, Chartered Accountants and M/s Price Waterhouse Associates, Chartered Accountants are acting as fiduciary and custodian of the assessee-company. These custodians invest the amount of the investors in different schemes so that it may fetch highest amount of profit having considered the security aspects of the investors. According to the assessee the funds are invested in such a way that a monthly return of not less than 1.5% can be paid to the investors. Apart from the aforesaid amount of return, i.e. 1.5% per month, the investors were entitled to the profit accumulated in each scheme. When the money of the investors are deposited in bank the fiduciary company issues a letter to the investors informing them that the investors funds have been deployed on their behalf as per the terms and conditions of the Offer Memorandum. So far as the assessee is concerned it is entitled to only management fees. All the aforesaid items and conditions are incorporated in the Offer Memorandum issued by the company, which are accepted by the investors. Copies of the Offer Memoranda finds place in the paper book. It is important to mention here that cl. XVI of the Offer Memoranda provides that the funds received from he investors are proposed to be invested in areas where the returns as per present laws are not subject to tax deduction at source. However, in the event of TDS being applicable the same will be deducted. The case of the assessee is that the assessee-company is a fund manager and is entitled to management fee for offering its services under the fund management contract. Accordingly there is no relationship of creditor and debtor between the investor and the assessee. According to the assessee the relationship between the investor and the assessee-company may be termed as a principal and agent. Therefore, in the absence of debtor and creditor relationship the amount which is paid to the investors cannot be termed as interest within the meaning of s. 2(28A) of the IT Act, 1961. Accordingly the assessee is not supposed to deduct tax at source under s. 194A of the Act.
3. At the time of assessments the AO found inter alia that the relationship between the investor and the assessee-company is not that of principal and agent. The company guarantees a fixed return to the investors. The investors have no role to play in the investments made by the company. The fiduciary and custodian appointed by the company is only an agent of the fund manager. The investor cannot identify his investment. So the relationship between the investor and the company is that of a creditor and debtor. It was held by the AO that the amount which is paid by the assessee-company to the investors is nothing but interest, as a result of which the assessee was treated to be an assessee in default. Accordingly, interest was levied under s. 201(1A).
Against the said orders the assessee moved the first appellate authority. The CIT(A) by the impugned order confirmed the orders of the AO. It was held by the first appellate authority that the relationship of debtor and creditor was established between the company and the investors and further the company could not prove that the various schemes/funds had separate existence and they were managed by independent trustees without the intervention of the appellant company.
Hence, it was held that the assessee-company is liable to deduct tax at source under s. 194A.4. Shri Ramamani, the learned counsel for the assessee, has submitted that the assessee-company rightly did not deduct tax under s. 194A of the Act. It was submitted that the benefit which the investors were getting from the assessee-company cannot be termed as interest to attract the provisions of s. 194A of the Act because there was no creditor and debtor relationship between the investors and the assessee-company. According to the learned counsel for the assessee, 'interest' has been defined in s. 2(28A) of the IT Act, according to which the question of payment of interest will arise only in the case of borrowal of money or debt incurred. It was submitted that the assessee-company was receiving funds from the investors for management of the funds on behalf of the investors acting as an agent. Funds were kept in the bank account in the respective accounts and the account was operated by the fiduciary and custodian and not by the assessee-company. It was submitted that the fiduciary and custodian has separate entity, who invest the funds according to the suitability taking into consideration the interest of the investors. Fiduciary and custodian issued certificates to the investors when funds have been invested as per the terms of the Offer Memorandum. The assessee-company in the Offer Memorandum only assures that a minimum return of 1.5% per month will be guaranteed. According to the learned counsel for the assessee the funds are accepted by the assessee-company not as a borrowal but to manage the said funds on behalf of the investors. In that view of the matter whatever is paid to the investors cannot be termed as interest. Therefore, s. 194A has no application. The learned counsel for the assessee has filed a paper book containing various documents including the Offer Memoranda, certificates of investment, subsequent letters issued by the fiduciary and custodian, etc. The memorandum and articles of association of the assessee-company also finds place in the paper book. According to the learned counsel for the assessee the Offer Memorandum is the contract between the assessee-company and the investors, which is accepted by both the parties and nowhere it has been stated in the said memorandum that the funds are accepted by the company as a debt or loan. The learned counsel for the assessee has submitted that the company has started this type of scheme having followed similar type of scheme prevailing in the United States of America and the assessee-company has tried to introduce fund management scheme in India for the first time.
Photocopies of the literature supporting the contention have also been annexed with the paper book. In support of his contention the learned counsel for the assessee has submitted that the present scheme of the assessee-company may be in a way compared with that of Mutual Fund, where tax need not be deducted from any income payable to unit-holders of mutual fund under s. 196A of the Act. On behalf of the assessee reliance was placed on the decision of the Tribunal in the case of Delhi Development Authority vs. ITO (1995) 52 TTJ (Del) 107 : (1995) 53 ITD 19 (Del).
5. On the other hand, the learned Departmental Representative has submitted that the authorities below have rightly held that tax should have been deducted at source by the assessee-company under s. 194A of the Act. It was submitted that the relationship between the investor and the assessee-company cannot be said to be principal and agent because the assessee-company is taking deposits and against the said deposits the assessee-company issues certificates of investment to the investors. The assessee-company by its memorandum of agreement guarantees a fixed return of 1.5% per month to the investors. The fiduciary and custodian is appointed by the assessee-company, who is the agent of the assessee-company. In the case of investment of the funds by the fiduciary the investors have no role to play, which is entirely left to the fiduciary, i.e., to the assessee-company.
According to the learned Departmental Representative under the aforesaid circumstances when the assessee-company is paying some return to the investors it may be termed by the assessee in any way, but it is nothing but interest under s. 2(28A) of the IT Act. The relationship between the assessee and the investors is only that of debtor and creditor. The learned Departmental Representative relied on the orders passed by the authorities below and further submitted that the decision referred to on behalf of the assessee in 52 TTJ (Del) 107 : 53 ITD 19 (supra) is not applicable on the facts of the case.
6. We have heard both the sides. After hearing both the sides and on going through the records of the case as well as the paper book submitted on behalf of the assessee we get an idea that the assessee-company wanted to innovate a new idea in the financial field following the scheme prevalent in America. The assessee-company accepts funds from the investors against which the company issues a certificate of investment to the investors. After receiving the said money the same goes to the bank account and according to the assessee the bank accounts are being operated by the fiduciary and custodian. According to the assessee since the money goes to the bank it is under the control of fiduciary and custodian who invests the money in the different schemes. It is not in dispute that the fiduciary and custodian is appointed by the assessee-company. The whole contention of the assessee is that the money which is accepted by the assessee is neither a debt nor a loan but a deposit. Therefore, whatever is paid to the investor cannot be termed as interest. There is no relationship of debtor and creditor between the assessee and the investor. In the aforesaid context let us examine the relevant law. Sec. 194A provides that any person not being an individual or HUF responsible for paying to a resident any income by way of interest..... shall at the time of credit of such income or at the time of payment thereof...... deduct income-tax thereon at the rates in force. The assessee-company is neither an individual nor an HUF. Therefore, the question of deduction of income-tax will arise if its case falls within the purview of payment of interest as provided in s. 194A. Sec. 2(28A) of the IT Act defines 'interest' as follows : "'interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred in respect of any credit facility which has not been utilised." From the aforesaid definition it is clear that the interest is payable not only in respect of moneys borrowed or debt incurred but the definition has been further extended by including a deposit, claim or other similar right or obligation and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. From Sampath Iyengar's Law of Income-tax, Eighth Edition, page 440, the following comment is quoted below : "The definition in the clause widens the scope of the expression 'interest' for the purpose of the Act. It was inserted by the Finance Act, 1976, w.e.f. 1st June, 1976. It is intended to ensure that it includes (a) not only interest on debts, properly so called, but also interest on any type of obligation, and (b) not only interest described as such but also service fee or other charges made in connection with such obligations. The definition continues in the statute, although the Choksi Committee recommended its deletion on the ground it is an entirely artificial definition." Under the aforesaid circumstances it cannot be ruled out that while the assessee-company is receiving money from the investors under the different schemes, it may not be called as a borrowal or debt in its strict sense. Nor can it be described as 'deposits' in any sense of the term. But it might partake of the nature of obligation in respect of which the investors get some benefit. Again the said benefit may be termed by the assessee-company by any suitable word other than 'interest', but that does not mean that it will lose the meaning of the term 'interest' by virtue of the extended meaning assigned to it in the definition in s. 2(28A) of the IT Act. The nomenclature of a term is not the final word to decide the actual nature of transaction. As found by the AO, we are of the view that the fiduciary who is managing the funds on behalf of the assessee-company, is an agent appointed by the assessee-company. The fiduciary has no direct relationship with the investors. The investors have no direct access to the funds nor they know about the actual investments made by the fiduciary. Although the assessee-company is entitled to the fund management fees only, but since the company is receiving the funds from the investors it is the obligation of the company, against which the company is paying 'interest' within the meaning of the term as defined in s. 2(28A) of the Act to the investors from which, in our opinion, tax should have been deducted by the assessee-company. In view of the extended definition of 'interest' under s. 2(28A) it cannot be said that debtor and creditor relationship is sine qua non for the purpose of attracting s. 194A. The contention of the assessee is that the present scheme is similar to mutual fund cannot be accepted in view of the fact that in the case of mutual fund the legislature has specifically provided under s. 196A of the IT Act not to deduct tax from any income payable to the unit-holders of mutual funds. The decision of the Tribunal reported in 52 TTJ (Del) 107 : 53 ITD 19 (Del) (supra) relied on by the assessee is, in our opinion, distinguishable on the facts of the present case.
In the said case the Delhi Development Authority paid some amount to the allottees under the SFS Scheme on account of compensation for delay in construction and handing over possession of dwelling units. Under the said circumstances the Tribunal held that the compensation amount cannot be termed as interest within the meaning of s. 2(28A). Hence, tax cannot be deducted. The facts of the present case are quite distinguishable.
7. We have already held that the assessee should have deducted tax at the time of credit or payment of interest to its investors. We find that the assessee-company wanted to innovate a new scheme following the western countries. We find support for the same from the fact that in the Offer Memorandum the assessee has inserted cl. XVI, wherein it has been provided that the funds received from the investors are proposed to be invested in areas where return is not subject to tax deduction at source. But in the event of TDS being applicable the same shall be deducted by the assessee-company. The aforesaid provision of the Offer Memorandum has been accepted by the investors of the assessee-company.
Therefore, in our opinion, the conduct of the assessee cannot be said to be mala fide. The assessee as bonafidely believed that in terms of Offer Memorandum and the manner of investing and fund management assisted by qualified Chartered Accountant firms, it was only acting as agent of investors and as such there was no liability on its part to deduct tax. In such circumstances it cannot be said that the assessee has innovated a new idea only to frustrate the applicability of the provisions of the IT Act, as held by the CIT(A). It was argued before us that the assessee before initiating the present scheme has obtained legal opinion. May be the opinion was born of a mistaken view of law.
The whole issue has been viewed in a short compass - namely, whether the assessee is liable to deduct tax at source or not. Shri Ramamani, without prejudice to his stand, pleads that no enquiry has been made whether the investors who have received the 'interest' from the assessee have paid tax on such receipts and in such a case whether the assessee is still liable to deduct tax. There is substantial force in this contention. The Kerala High Court in the case of CIT vs. Kannan Devan Hill Produce Co. Ltd. (1986) 161 ITR 477 (Ker) and also in the case of Kannan Devan Hill Produce Co. Ltd. vs. CIT (1986) 161 ITR 489 (Ker), has held that if ultimately it is found that the assessment of the employee is completed and tax payable has been quantified, the employer is not required to deduct tax again. Similar view was taken by the Madhya Pradesh High Court in the case of CIT vs. M. P. Agro Morarji Fertilizers Ltd. (1989) 176 ITR 282 (MP) and also the same High Court decisions in the case of CIT vs. Life Insurance Corporation (1987) 166 ITR 191 (MP) and in the case of CIT vs. Shri Synthetics Ltd. (1985) 151 ITR 634 (MP). This aspect of the matter was not considered by the authorities below. Until this question is considered, in our opinion, the levy of interest under s. 201(1A) does not arise. Accordingly, we set aside the orders of the authorities below by which interest was levied and remit the matter back to the file of the AO to find out the actual liability of tax to be deducted by the assessee in respect of the payments made by it. While doing so the AO shall take into consideration the payment of tax already made by the different investors in respect of their receipts of interest, or the claim for exemption under s. 80L by the investors for which we hope that the assessee will cooperate with the AO. As we have already held that the assessee-company should have deducted tax at source, the appeals against the orders under s. 201(1) are dismissed. So far as the appeals against the orders under s. 201(1A) are concerned the appeals are set aside and remitted back to the AO as mentioned above.