Loading judgment…
Facts
The assessee, a Resident Welfare Association, filed its return of income. The Assessing Officer made additions on account of interest earned on bank deposits, disallowing a claim for deduction of interest paid to its members. The CIT(A) confirmed the additions.
Held
The Tribunal held that the interest income earned on bank deposits by the assessee, which was used to pay interest to its members, was eligible for set off against the interest income. It was also held that Section 57(iii) of the Act allows such deduction for income from other sources.
Key Issues
Whether the interest income earned by a Resident Welfare Association from bank deposits is taxable, and if the interest paid to its members can be claimed as a deduction.
Sections Cited
250, 143(2), 142(1), 57, 124(3)(a), 56, 40(ba)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘G’: NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI VIMAL KUMAR
O R D E R
PER VIMAL KUMAR, JM:
The appeals filed by the Assessee are against orders dated 13.06.2025 of the Learned Commissioner of Income Tax (Appeals)-Mumbai [hereinafter referred to as ‘the Ld. CIT(A)’] passed u/s 250 of the Income Tax Act, 1961, [hereinafter referred to as ‘the Act’] arising out of assessment orders dated 28.12.2018 and 13.11.2019 of Ld. Assessing Officer, Ward-1(5), Gurgaon for Assessment Years 2016-17 & 2017-18 respectively.
Both the appeals involve similar facts, grounds of appeal
and issues. Therefore, these appeals were taken up together and heard. All are being disposed off by this common order for the sake of convenience.
4. Brief facts of the case are that assessee had filed return of income on 27.08.2016 declaring income of Rs.20,68,030/-. The case was selected for limited scrutiny through CASS. Notice u/s 143(2) of the Act dated 08.07.2017 was issued by DCIT, Circle-1, Gurgaon. The case was transferred from DCIT, Circle-1 Gurgaon to the AO. Notice u/s 142(1) along with questionnaire was issued. Assessee filed submissions and details. Assessee was issued notice u/s 142(1) dated 23.12.2018 and show cause notice dated 23.12.2018 asking assessee to furnish details regarding deduction claimed of Rs.55,28,336/- u/s 57 of the Act. On completion of proceedings, Ld. AO vide order dated 28.12.2018 made addition of Rs.55,28,336/-. Against order dated 28.12.2018 of Ld. AO assessee filed appeal before Ld. CIT(a) which was dismissed vide order dated 13.06.2025.
5. Being aggrieved, the appellant assessee preferred present appeal on following grounds: “1. That on the facts, and in the circumstances of the case and in law, the CIT(A) erred in not declaring the assessment order passed by the ITO, Ward 1(5), Gurgaon (AO) as null and void ab-initio by relying upon the judicial pronouncements relating to the time limit specified u/s.124(3)(a) where objection is relating to territorial jurisdiction of the AO and failed to consider that jurisdiction of the AO for concluding the assessment raised by the assessee-appellant having regard to the pecuniary jurisdiction of monetary limit specified in the binding CBDT Instruction No.01/2011, dated 31/01/2011, accordingly the time limit u/s.124(3)(a) for raising objection towards the jurisdiction of the AO is not applicable to facts of the case, thus the assessee-appellant prays that the assessment order being passed by the non jurisdictional AO may kindly be quashed. (Not pressed)
2. That on the facts, and in the circumstances of the case and in law, the CIT(A) erred in confirming the addition of Rs.55,28,336/- and not allowing deduction u/s.57(iil) being the interest distributed among the resident house owners from the interest earned on bank deposits of IBMS [Interest bearing Maintenance Security) Funds, thus it is prayed that the deduction of Rs.55,28,336/- u/s.57(iii) may kindly be allowed in favour of the assessee-appellant.
That on the facts, and in the circumstances of the case and in law, the CIT (A) erred and failed to consider that the interest of Rs.7,35,719/- earned from bank deposits out of funds accumulated in sinking fund meant for capital expenditure constitutes capital receipts liable to tax under the I.T Act, 1961 [Act), thus assessee- appellant prays that the interest earned from bank deposits out of sinking fund may kindly be held as capital receipt not liable to tax under the Act. (Not pressed) 4. That on the facts, and in the circumstances of the case and in law, the CIT (A) erred and failed to appreciate that the assessee-appellant is a Resident Welfare Association [RWA] and functioning under the doctrine of mutuality, thus its entire surplus is tax free, accordingly the assessee-appellant prays that the surplus of Rs.20,68,030/- offered to tax by misconception of law may kindly be held as tax-free and to grant appropriate relief in favour of the assessee appellant.(Not pressed) 5. That without prejudice the grounds of appeal
no. 4 raised above, the CIT(A) erred in applying the Supreme Court order in the case of Goetze (India) Ltd Vs. CIT (2006) 284 ITR 323 (SC) and failed to consider that the in the case of Goetze (India) Ltd Vs. CIT (supra) is applicable to AO not to the appellate authorities, thus it is prayed that the appropriate relief may kindly be provided to the assessee-appellant for functioning under the doctrine mutuality. (Not pressed)
6. That the assessee-appellant craves the right to amend, add, delete, replace, all or any of the grounds of appeal either during the course of hearing or at any time before hearing of this appeal.
6. At the time of hearing, the Authorized Representative for appellant/assessee did not press Grounds No.1,3 to 5. Therefore, Grounds No.1.3 to 5 are dismissed as not pressed.
7. Ld. Authorized Representative for appellant assessee submitted that Ld. CIT(A) erred in confirming addition of Rs.55,28,336/- and not allowing deduction u/s 57(iii) being the interest distributed among the resident house owners from the interest earned on bank deposits of IBMS [ Interest Bearing Maintenance Security] Funds.
7.1. Original return of income filed on 27.08.2016 declaring income of Rs.20,68,025/- at page 1 of PB. IBMS Interest distributed among the resident flat owners after deduction of TDS page 6 to 10. TDS deposit challans dated 29.04.2016 page 11. Reliance was placed on following decisions: (i) Arjun Rishi Vs. ITO. [2025] 176 taxmann.com 720 (Del.Trib). (ii) Sapna Rastogi Vs ITO 28/08/2004 (Del Trib) (iii) Suman Devi Vs ITO ITA No:2817/Dell/2024 dated 25/04/2025 (Del Trib). (iv) Pr. CIT Vs Raghvendra Mohita [2025] 174 taemann.com 450 (Call HC) (v) CIT Vs. Shri Shyam Sunder Infrastructure (P) Ltd.ITA No. 236/2014, dated 04/02/2015 (Del HC) (vi) ACIT Vs. Park Place Condominium Asso. ITA No:2861 & 2865/Del/2024,dated 09/05/2025 (Del Trib). (vii) Belaire Condominium Association ITA No:655/Del/2018, dated 25/04/2018. (viii) Belvedere Tower Condominium Association VS.ITO. ITA No: 1427/Del/2018, dated 16/05/2019.”
Learned Departmental Representative relied on order of Ld. CIT(A).
From examination of record in light of aforesaid rival contention, it is crystal clear that Ld. CIT(A) vide order dated 13.06.2025 upheld the addition of Rs.55,28,336/- by not allowing deduction u/s 57(1) of the Act by Ld. AO vide order dated 28.12.2018. The assessee is a Resident Welfare Association registered as AOP under the Income Tax Act. The assessee society showed receipts from resident and expenditure incurred for the benefit of members of the society with the main objective of providing maintenance services etc. The assessee has not spent any amount of earning of interest from the bank. Interest bearing maintenance securities deposit interest has been distributed to members of deductee as is evident from page No.6 to 10 of PB. TDS deposit challan dated 29.04.2016 is at page 11 of PB. Audit financial for AY 2016-17 are at page No.12 to 20 of PB.
9.1. A Co-ordinate Bench of ITAT in the case of ACIT vs. Park Place Condominium Asso.
& 2865/Del/2024, dated 09.05.2025 held as under: “3. The Revenue in appeal has assailed the order of CIT(A) by raising following grounds:- “
2. The Ld. CIT(A) has erred in deleting the addition of Rs 2,82,98,482/- in case of the assessee which is a AOP on account of interest income cared from bank but not offered to tax u/s 56 of the Income Tax Act, 1961 without considering the fact that the distribution of interest income earned among the respective members is an outcome of the caring of interest income and not an expenditure incurred to earn interest income and so is not allowable as expenditure incurred to earn income u/s 57(iii) of the Income Tax Act, 1961. 3 That the appellant craves for the permission to add delete or amend grounds of appeal before or at the time of hearing of appeal."
4. Brief facts of the case as emanating from records are: The assessee is a Resident Welfare Association and filed its return of income in the status of AOP declaring income of Rs.43,65,420/. During the period relevant to assessment year under appeal, the assessee/respondent had received Rs.5,71,20,988/- under different heads of income including Rs.2,82,98,482/- as interest on IBMS. The assessee claimed aforesaid interest income as exempt. The Assessing Officer (AO) rejected assessee's claim and made addition of the aforesaid amount vide assessment order dated 17.12.2018 passed u/s. 143(3) of the Income Tax Act, 1961(hereinafter referred to as 'the Act'). The assessee carried the issue in appeal before the CIT(A). The CIT(A) deleted the addition following decision of Tribunal in the case of Belaire Condominium Association in decided on 25.04.2018. Hence, present appeal by the Revenue.
5. Ms. Harpreet Kaur Hansra, representing the department strongly supported findings of the AO and prayed for reversing findings of the CIT(A). The Id. DR submitted that the interest income declared by the assessee is taxable and the CIT(A) has erred in deleting the same.
6. Per contra, Shri Vaibhav Jain appearing on behalf of the assessee vehemently defended the impugned order and prayed for dismissing appeal of the Revenue. The Id. Counsel submits that the issue is squarely covered by the order of Tribunal in the case of Belaire Condominium Association (supra). The CIT(A) has followed judicial discipline and thus, allowed relief to the assessee after considering decision of the Tribunal.
7. Both sides heard, orders of the authorities below examined. The short issue in appeal is; Whether the interest received by the assessee on IBMS is exigible to tax? The assessee is a Resident Welfare Association and had filed return of income in the status of AOP. We find that identical issue was considered by the Coordinate Bench of the Tribunal in the case of Belaire Condominium Association (supra). The Coordinate Bench held that interest income of the assessee therein is not liable to tax. The Tribunal observed as under:- "10. We have considered the rival submission and perused the order passed by the lower authorities. There is no dispute to the fact that assessee is a registered society form with the basic object to provide for maintenance and repair of common arrears and facilities of the building to its members. There is no dispute about the maintenance charges being collected and utilized towards maintenance. The dispute is regarding the interest income earned by it on deposit with the Bank made out of the security deposit obtained from its members. The AO has held that the interest earned on it is not covered by the principle of mutuality after the judgment of the Supreme Court in the case of Bangalore Club (Supra). The alternative contention of the assessee that interest paid by it on such security deposit is to be set off against interest income earned on such deposit has also been rejected by the AO. After going through the facts of the case we are of the considered opinion that the AO has gone wrong in rejecting this contention of the assessee society. As rightly pointed out by the learned AR that the assessee society has obtained the interest bearing maintenance security called IBMS from the flat owners and such security deposit has been deposited with the Bank on which interest has been earned. Thus, there is a direct nexus in earning interest on such fixed deposit with Bank and payment of interest on the security deposit to the flat owners. The interest expenditure has been incurred wholly and exclusively for earning such interest income on Bank deposit. As per the Apartment buyers agreement there is an obligation on every buyer to make security deposit and there is corresponding obligation on the society to pay interest on such deposit. Thus, the contention of the learned AR that this interest expenditure has not been incurred to earn interest income is incorrect. The assessee society has paid interest each one after deducting tax at source. Thus, it is not a case of exemption on the principle of mutuality. Such interest paid by the assessee society is taxable in the hands of the Apartment owner. In view of these facts, we are of the view that interest expenditure is to be set off against the interest income. As regards the AO's contention that interest paid to member is not eligible deduction in the case of AOP under Section 40 (ba), we have perused the said Section. This clause excludes registered society from its applicability. Accordingly, this clause will not be applicable to the assessee society. Moreover, as rightly contended by the learned AR Section 40 (ba) is applicable while computing business income. This clause is not applicable while computing income from other sources. There is no prohibition in Section 57 (iii) under which deduction of interest is eligible to the assessee society.
11. Accordingly, we direct the AO to delete the addition of Rs. 1,63,77,013 made on account of the interest. In the result appeal of the assessee is allowed."