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Facts
The assessee, a resident welfare association, earned interest income on FDs, which was distributed among members. The AO invoked Section 56 and taxed this income, relying on the Bangalore Club case. The lower appellate authority affirmed the AO's order.
Held
The Tribunal held that the interest expenditure incurred by the assessee for paying interest on security deposits to flat owners should be set off against the interest income earned. The Tribunal also noted that Section 40(ba) is not applicable for computing income from other sources.
Key Issues
Whether interest income earned by a resident welfare association on fixed deposits, from security deposits collected from members, is taxable, or if the interest paid to members can be set off against it.
Sections Cited
57(iii), 56, 194A, 40(ba)
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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’: NEW DELHI
Before: SHRI SATBEER SINGH GODARA
PER BENCH This appeal filed by the revenue is directed against the order dated 28.03.224 passed by NFAC, Delhi is directed against the order dated 23.09.2022 passed by Assessing Officer for A.Y. 2020-21. 2. The only issue raised through its ground of appeal, in the present case by the assessee is the addition of Rs.
2,47,54,352/- made by the Ld. AO invoking provisions of section 57(iii) of the Act. The Ld. Council for the assessee submitted that it is a resident welfare association registered as society under the laws of Haryana. During the year assessee had earned interest income of Rs. 2,47,54,352/- on FD’s with banks, which, as per its by- laws, was distributed amongst the members. The Ld. AO, analyzing,the principles of mutuality, premised that the impugned address was liable to be taxed as income of the assessee as under section 56 as income from other sources of Act. While doing so the Ld. AO relied upon the decision of Bangalore Club vs CIT of the Hon’ble apex court, 350 ITR 509. The Ld. First Appellate Authority relying upon the decision of Bangalore Club supraand past history of assessee case, affirmed the order of the Ld. AO, though allowing the claim of TDS u/s 194A qua the said interest income. The Ld. Council for the assessee submitted that this tribunal in the case of Belaire Condominium Association in for A.Y. 2014-15 have after considering the decision of Bangalore club supra, ruled that the interest income is not to be taxed in case of similarly placed resident welfare association. The Ld. DR would like to rely upon order of lower authorities.
We have heard rival submission on the matter in the light of material available on records. We have noted that this tribunal in the case of Belaire Condominium Association supra have analyzed the facts of the case in the light of the decision of Bangalore Club supra to conclude non availability of provision of section 56. The Ld. Council for the assessee submitted that as its facts are identical to those of Belaire Condominium Association, the decision taken there is squarely applies in its case. The revenue could not establish that the facts of the present case are distinguished when compared with those of Belaire Condominium Association supra. We have noted the following decision of the tribunal.
“….5. During the year under consideration the society earned interest from banks and such interest was paid to the flat owners after deduction tax at source. The details of interest received as under :- 4 ITA No. 655/Del./2018 Belaire Condominium Association IBMS interest received from bank for F.Y. 2013-14 Interest Received during the F.Y. 2013- 14 From ICICI Bank on FD 61,15,418/- From Kotak Mah. Bank on FD 99,83,136/- From ICICI Bank on Saving A/c 1,27,869/- From Kotak Mah. Bank on Saving A/c 2,15,710/- Total interest Received for the F.Y. 2013-14 1,64,42,133/-.
The assessing officer during the course of the assessment raised the issue that the interest received by the assessed, society is not exempt as the same is not covered by the Principle of mutuality in view of the judgment of the Supreme Court in the case of Bangalore Club vs. CIT (2013) 350 ITR 509 (SC). In this explanation, it was contended by the assessee that the interest income is otherwise not taxable as deduction of interest paid to flat owners and their security deposit is to be allowed in view of provisions of section 57(iii) of the Income Tax Act, 1961. The ld. AO was not satisfied from the explanations submitted by the assessee and added to the income of the assessee by Rs. 1,63,77,013/- ……………………………………………………………… ……………………………………………………………… ……………………………………………………………… ……………………………………………………………… …………………………….
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 utilised 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 7 ITA No. 655/Del./2018 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.
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………………………………”
Accordingly, in respectful compliance to the decision of the Hon’ble coordinate bench of this tribunal supra, we set aside the order of lower authorities and order the Ld. AO to delete the impugned addition of Rs. 2,47,54,352/-. All the grounds of appeal
raised by the assessee are therefore allowed.
5. In the result the appeal of the revenue is dismissed.