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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI LALIET KUMAR
O R D E R
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee and the same is directed against the order of ld. CIT (A)-4, Bangalore dated 27.03.2018 for Assessment Year 2013-14.
The grounds raised
by the assessee are as under. “1. The order of the learned AO passed under section 143 [3] of the Act dated 30/03/2016 and the order of the CIT(A)passed under section 250 dated 27/03/2018 in so far as it is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case.
2. The AO and CIT(A)are not justified in making addition of Interest Income by stating that the same do not get shelter of Principle of Mutuality, as the appellant has not claimed the Principle of Mutuality for any of its income in the Income Tax return.
3. The act of AO in adding the Interest Income in the assessment order results in adding an income already declared and offered for tax in the Income Tax return.
4. The AO has relied on the Hon'ble Supreme Court judgment in Bangalore Club case while making the addition, which is not applicable to the case of the appellant as the appellant has earned interest on funds from Maintenance Deposits and in the Bangalore Page 2 of 6 Club's case interest was earned on surplus funds invested as Fixed Deposits.
5. The AO and CIT(A)have ignored the fact that the interest is arising out of the funds collected from members as Maintenance Deposits and the income arising from them has to be first adjusted to maintenance expense and balance alone is taxable.
The Hon'ble Income Tax Appellate Tribunal, Ahmedabad in the case of Gulmarg Association &Anr. Vs. ITO (90 TTJ 184) has upheld that interest income out of investment of the funds from Maintenance Deposits are to be set-off against the Maintenance expense which is squarely applicable to the case of the appellant.
7. The learned assessing officer ought to have brought to tax only the net income as per the financial statements, of Rs. (-) 32,241/- on the facts and circumstances of the case.
8. In 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.”
Although the assessee has raised as many as 8 grounds of appeal
as reproduced above, the only issue involved is regarding taxability of interest income arising from the investment in banks and in builders’ corpus.
4. It was submitted by ld. AR of assessee that the issue in dispute is decided by CIT (A) as per Para 6.3 of his order and hence, we reproduce the same hereinbelow for ready reference. “6.3 Now coming to the issue of taxability of interest income arising from the investment in banks and in builder's corpus, there is no doubt that the appellant has disclosed the amounts of interest in its Income and Expenditure account. However, the interest income is not the income arising from the members, and represents theincome from the unspent and unutilized contributions collected from the membersover the years for site allotment, and deposited with banks for earning interestincome. There are several judgments of High Courts holding that incomes from asource other than the members of a mutual association, will be taxable. Usefulreference could be made to the Hon'ble Madras High Court decisions in case ofMadras Cricket Club (2011) 334 ITR 238, and that of Madras Gymkhana Club (2010)3241TR 348. • In case of Madras Cricket Club, the following substantial question of law wasconsidered by the High Court:- “Whether the Income-tax Appellate Tribunal was right in law in holding thatthe principle of mutuality and 'no man can trade with himself is not applicableto the interest income from fixed deposit earned by the appellant from bankout of the surplus funds raised Page 3 of 6 from contribution of several members of theappellant-club even when the benefit or interest derived is utilized by severalmembers of the appellant-club?” It is not the case of the appellant that having regard to the objects ofthe association, the funds contributed by members which were essentially tomeet the cost of maintenance and kept with the Banks and investment withthe builder, were in the course of advancing such objects and activities of thesociety. At the time of receiving the instalments / or maintenance-fee / non-refundable amounts, there was no obligation to pay interest on such amounts.It was not a deposit for the purpose of earning interest to the members orotherwise provide any financial assistance to them. In view of the aforesaiddecision of the Hon'ble Court, it is held that the interest incomes earned fromBank / builders, aggregating to Rs. 51,12,725/-, has no nexus with the objectsand activities of the appellant society, not covered by the principle ofmutuality, and hence liable to the taxed in the hands of appellant society. TheAssessing Officer is directed accordingly.”
Thereafter he submitted that copy of audited accounts of the assessee for the present year is available on pages 30 to 42 of paper book and in particular, our attention was drawn to page no. 32 of paper book where the balance sheet is available and thereafter, our attention was drawn to page no. 35 of the paper book where the details of Current Liabilities and Provisions are available. It was pointed out that an amount of Rs. 4.80 Crores was received by the assessee from its members as Maintenance Deposits and out of this, investment was made with banks and from such investment, interest income was earned which is in dispute. It was submitted that such interest income is not taxable in view of principle of mutuality because the interest income earned has been used for maintenance of the society building. Reliance was placed on the Tribunal order rendered in the case of Gulmarg Association &Anr. Vs. ITO as reported in 90 TTJ 184 and in particular, our attention was drawn to Para no. 7 of this Tribunal order. Reliance was also placed on the judgment of Hon’ble Delhi High Court rendered in the case of DIT(E) Vs. All India Oriental Bank of Commerce Welfare Society as reported in 184 CTR 274. The ld. DR of revenue supported the orders of authorities below.
6. We have considered the rival submissions. We have already reproduced Para no. 6.3 from the order of CIT (A). We find that ld. CIT(A) has followed Page 4 of 6 the judgment of Hon’ble Madras High Court rendered in the case of Madras Cricket Club as reported in (2011) 334 ITR 238 and in the case of Madras Gymkhana Club as reported in (2010) 324 ITR 348. In the case of Madras Cricket Club (supra), the Hon’ble Madras High Court has followed another own judgment in the case of Madras Gymkhana Club (supra) and para 3 of this judgment in Madras Cricket Club (supra)is relevant which is reproduced hereinbelow. The same is as under. “3. The very same common order of the Tribunal, which is the subject- matter of the present appeal has been considered by this court in respect of other assessment years in Tax Case Nos. 928, 1067 to 1069 of 2009, wherein this court dismissed the appeal by holding as follows: “The very question came up for consideration before this court in a batch of cases rendered in Madras Gymkhana Club v. Deputy CIT reported in [2010] 328 ITR 348 (Mad.) ; [2009] 28 DTR Judgments page 9. (T.C. Nos. 397 to 404 of 2008 dated July 30, 2009). The Division Bench, after a detailed analysis of the question involved took the view that investment of surplus funds by such clubs with some of the member banks and institutions in the form of fixed deposits and securities not with a definite idea of using the same in any specific projects for further development of the infrastructural facilities of the clubs failed to satisfy the concept of mutuality and therefore the benefit of exemption cannot be extended to the interest income.””
From the above para of this judgment of Hon’ble Madras High Court, it is seen that it was held in this case that investment of surplus funds by such clubs with some of the member banks and institutions in the form of fixed deposits and securities not with a definite idea of using the same in any specific projects for further development of the infrastructural facilities of the clubs failed to satisfy the concept of mutuality and therefore the benefit of clubs failed to satisfy the concept of mutuality and therefore, the benefit of exemption cannot be extended to the interest income. In the present case also, the surplus is out of deposit received by the assessee from its members and such surplus is deposited in bank and interest income is earned from such bank and therefore, this judgment of Hon’ble Madras High Court is squarely applicable in the facts of present case because this not shown that there is any definite idea about user of this fund but there was Page 5 of 6 no query raised on this aspect. Hence, before taking any view, we feel that query should be raised on this aspect.
Now we discuss and examine the applicability of judgments cited by ld. AR of assessee. The first judgment cited before us is the Tribunal order rendered in the case of Gulmarg Association &Anr. Vs. ITO (supra). In this case, the decision given by the Tribunal is this that interest income is never distributed to members and because of this reason, it was held that there is no justification in taxing interest income. It is also noted by the Tribunal in this case that assessee has established fund for maintenance of property, the interest income was directly charged for maintenance expenses. In the present case, it is seen that the maintenance deposit received shown as on 31.03.2013 is sum of Rs. 4.80 Crores and it was same as on 31.03.2012 as per page no. 35 of the paper book. As per page no. 36 of the paper book, the assessee has realized during present year maintenance charges of Rs. 92,36,115/- in addition to other income of Rs. 7,40,185/- and interest income of Rs. 54,99,168/- total Rs. 1,54,75,468/-. Total maintenance expenses as per page no. 38, it is seen as Rs. 29,50,569/- and in addition to that there is further expenses of Rs. 1,04,51,716/- out of which only a part amount is incurred by the assessee of Rs. 54,25,849/- and the balance amount of Rs. 50,25,867/- is paid by Sobha. But the assessee has claimed total amount as its own expenses. Hence it is seen that the assessee has not been able to establish this aspect that interest income was directly used for maintenance expenses but there is neither any query nor any finding on this aspect. There is no finding on this aspect also as to what will happen to the funds at the time of dissolution as per the bye laws, in our considered opinion, all relevant facts should be examined before deciding about the applicability of this Tribunal order but these are not available before us.
The second judicial pronouncement cited by ld. AR of assessee is the judgment of Hon’ble Delhi High Court rendered in the case of DIT (E) Vs. All India Oriental Bank of Commerce Welfare Society (supra). In this case, the Hon’ble Delhi High Court has followed the judgment of Hon’ble Apex Court rendered in the case of Chelmsford Club v. CIT (2000) 243 ITR 89 (SC). As per the facts noted in that case by Hon’ble Apex Court, it is noted that Page 6 of 6 assessee club provided recreational and refreshment facilities exclusively to its members and their guests and its facilities are not available to non- members and the Club is run on no profit no loss basis and the members pay for all their expenses and are not entitled to any share in the profits. In the present case, this is not shown that the members are not entitled to any share in the profits by showing that even on dissolution, the members are not entitled to share in the surplus existing with the assessee at that point of time. In fact, there is no finding on this aspect and Bye laws are not available before us.
In our considered opinion, the issue in dispute should be decided after examining the byelaws of the assessee society on this aspect as to what will happen to the surplus fund lying with the assessee society at the time of dissolution. Hence we consider it proper to set aside the order of CIT (A) and restore the matter back to the file of CIT (A) for fresh decision for examining all relevant aspects as discussed above after providing adequate opportunity of being heard to both sides.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on the date mentioned on the caption page.