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Income Tax Appellate Tribunal, HYDERABAD BENCH ‘A, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ‘A', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No. 1057/Hyd/2018 Assessment Year: 2013-14
Telugu Film Producers vs. Income-tax Officer, Mutually Aided Ward – 14(5), Hyderabad. Cooperative Housing Society Ltd., Hyderabad. PAN – AAATT 6759P Appellant Respondent Assessee by: Shri Pawan Kumar Chakarapani Revenue by: Shri Nilanjan Dey Date of hearing: 06/05/2019 Date of pronouncement: 10/06/2019 O R D E R PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order of CIT(A) – 6, Hyderabad, dated 01/03/2018.
Briefly the facts of the case are, the assessee is a mutually aided cooperative society which came into existence under the Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995 with the main object of constructing residential flats for its members. The Members of the society are film producers who are members of the Telugu Film Producer’s Council, Hyderabad.
2 I.T.A. No. 1057/Hyd/18 Telugu film Producers Mutually Aided Cooperative Housing Society ltd., Hyd. 2.1 For the AY, 2013-14, the assessee filed its return of income on 30/07/2013 admitting Nil income after setting of brought forward losses. Though the assessee admitted Rs. 4,92,033/- as business income, it maintained an income and expenditure a/c and the above amount was shown as excess of income over expenditure. Subsequently, the case was selected for scrutiny and notices were issued u/s 143(2) and 142(1), against which, the assessee filed the information as called for.
2.2 From the information filed, the AO noticed that the assessee had drawn up an Income and Expenditure a/c wherein interest of Rs. 24,09,065/- from Banks and Membership transfer fees of Rs. 8,50,000/- were credited. Against these receipts, expenditure towards administrative expenses, financial charges and depreciation was claimed arriving at surplus of Rs. 4,92,034/-. The expenses debited to the I & E a/c relate to the construction works. The surplus or deficit arrived at was taken to balance sheet under reserves and surplus.
2.3 The AO observed that since the assessee was a mutually aided cooperative housing society, any surplus of receipts from its members over expenditure would be covered by the principle of mutuality. However, so far as interest income is concerned, he observed that since the interest was earned on deposits kept with banks and not earned from the members, the principles of mutuality would not be applicable to this receipt. In view of the above observations, the AO relying on the decision of the Hon’ble Jurisdictional High Court in the case of Secunderabad Club [2012] 340 ITR 121 and rejecting the submissions of the assessee, held that the interest income of Rs. 24,09,065/- on FDs is taxable under
3 I.T.A. No. 1057/Hyd/18 Telugu film Producers Mutually Aided Cooperative Housing Society ltd., Hyd. the head ‘income from other sources’. Further, he held that since the interest expenditure of Rs. 1,44,39,159, was not incurred for the purpose of earning the interest income, the same will not be admissible u/s 57 of the Act.
When the assessee preferred appeal against the order of AO, the CIT(A) after discussing the issues elaborately with case law, upheld the order of AO.
Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal: “1. The order of the authorities below in so far as it is against the Appellant is opposed to law, equity, weight of evidence, probabilities and the facts and circumstances in the Appellant's case. 2. The Appellant denies himself liable to be assessed on a total income of Rs. 24,09,065/ -, as against income of Rs. NIL, returned by the Appellant, under the facts and circumstances of the case. 3. Whether the learned Authorities below are justified in bringing to tax the interest on bank deposits of Rs. 24,09,065/-, under the facts and circumstances of the case. 4. The learned Authorities below have erred in ignoring the fact that the interest from fixed deposit goes to reduce the expenditure on the project, which is the main object of the Appellant, under the facts and circumstances of the case. 5. The learned Authorities below have erred in delinking the income and expenditure which are connected to the construction which is the object of the Appellant, under the facts and circumstances of the case. 6. The learned Authorities below have erred in not setting off the interest income against the expenditure incurred by the Appellant on the project, the ratio of the Honorable Apex Court, under the facts and circumstances of the case.
4 I.T.A. No. 1057/Hyd/18 Telugu film Producers Mutually Aided Cooperative Housing Society ltd., Hyd. 7. The learned Authorities below have erred in not allowing set off under section 70 of the Act, of interest expenditure against the interest income earned by the Appellant on the fixed deposits, under the facts and circumstances of the case. 8. The learned Authorities below are not justified in relying upon the Honorable High Court judgment in the case of Secunderabad Club, as the facts in the Appellants case is difference from the facts of Secunderabad Club, under the facts and circumstances of the case. 9. The learned Authorities below are not justified in not allowing set off of carried forwarded unabsorbed losses of the assessment years 2010-2011 and 2011-2012, under the facts and circumstances of the case. 10. The learned Authorities below have erred in concluding that the Appellant, a mutual benefit society has income from bank interest ignoring the expenditure on bank interest under the facts and circumstances of the case. 11. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 12. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.”
Before us, ld. AR relied on the decision of coordinate bench of this Tribunal in the case of Film Nagar Cultural Centre Vs. DCIT in ITA Nos. 1021 to 1028/Hyd/2018, order dated 28th February, 2019, a copy of which is filed before us. He further submitted that assessee’s main object is to construct houses and the cost debited to income & expenditure relating to construction only. The interest earned by the assessee is available to set off against administrative expenses. This receipt can also be treated as capital receipt.
5 I.T.A. No. 1057/Hyd/18 Telugu film Producers Mutually Aided Cooperative Housing Society ltd., Hyd. 6. The ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that the case of Film Nagar Cultural Centre is distinguishable. The assessee cannot treat the association as mutual for taking other benefits and non- mutual for income-tax purpose.
Considered the rival submissions and perused the material on record. We noticed that AO has brought the interest income earned by the assessee from fixed deposit as income from other sources by observing as below: “1.8…………..Since the assessee was a mutually aided cooperative housing society, any surplus of receipts from its members over expenditure would be covered by the principle of mutuality. However, so far as interest income is concerned, since the interest was earned on deposits kept with banks and not earned from the members, the principle of mutuality would not be applicable to this receipt.”
7.1 The logic applied by the AO to bring this income is, since the income earned on deposits with bank and not earned from the members of the society by taking inspiration from the decision of Jurisdictional High Court in the case of Secunderabad Club (supra). If this logic is to be applied for income, then the same logic applies to the interest payment. Assessee has taken loan from bank and the payment is not to the members. So, the expenditure is eligible to be claimed as separate deduction u/s 37. This transaction also not falls within the ambit of mutuality. We cannot apply two logics, one for bringing income and other for overlooking the expenditure part. According to AO, the transactions for or within members of the society will fall under principle of mutuality and others are outside principle of mutuality. Both the types of interest i.e. interest payment against secured loan to banks and interest receipt from banks are not from the members of the society. Therefore, both has to be treated as non-mutual
6 I.T.A. No. 1057/Hyd/18 Telugu film Producers Mutually Aided Cooperative Housing Society ltd., Hyd. transaction. When you bring interest income to tax, you also allow assessee to claim interest as expenditure. In that case, assessee may ask for carry forward of loss as the interest payment is more. It will lead to absurd situation.
7.2 In our considered view, assessee is mutually aided society formed for building houses for the members of the society. This is the main object of creation of this society. Assessee has collected funds from the members of the society and taken loan from banks for building houses for the members of the society. As the assessee was asked to give bank guarantee to HUDA, it has to make fixed deposits with the bank to get bank guarantee. The deposits earned interest, that interest can only be treated as capital receipt, available for the assessee to apply the same in reducing the cost of construction or apply the same for setting off administration cost. This is not surplus, which it kept with the bank rather it is obligation to be kept. The guarantee is considerable amount, it can be said that assessee has applied the bank borrowal for this purpose. Therefore, it can also be applied against the interest expenditure.
7.3 Considering the above discussion, we are inclined to allow the grounds raised by the assessee.
In the result, appeal of the assessee is allowed. Pronounced in the open court on 12th June, 2019.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 12th June, 2019. kv
7 I.T.A. No. 1057/Hyd/18 Telugu film Producers Mutually Aided Cooperative Housing Society ltd., Hyd.