2014 (4) TMI 304 - AT - Income Tax

Nature of income Principle of Mutuality - Exemption to income from house property - Whether exemption to income from house property is to be allowed on the principle of mutuality or to be taxed under that head Held that - As decided in assessee s own case for the earlier assessment years, it has been held that, The main reason for rejecting the claim of the assessee was that the assessee has not fulfilled the condition regarding distribution of surplus assets only amongst the members of the association on its dissolution - In the absence of clear cut provisions for distribution of surplus, claim of the assessee on both the grounds of appeal was rejected - The assessee has however, modified the bye-laws by adding clause 9 (A) referred to above which was accorded sanction by Director of Sugar, Gandhinagar and accordingly it was put in form No.4 also the papers were not before the AO for consideration The issue of mutuality is primarily restored to the file of AO for Asst. Years 2003-04 to 2005-06 - then following the same the issues arising in Asst. Year 2006-07 are required to be remitted back to the AO for fresh adjudication after considering the amendment in the constitution, whether it is a retrospective and accordingly it would be applicable to earlier years Decided in favour of assessee.

Issues:
1. Taxability of interest income under the principle of mutuality.
2. Treatment of rest house expenses and rental income under the principle of mutuality.
3. Allowance of depreciation on rest house and dead stock items.
4. Deduction of research and development expenses.
5. Applicability of principle of mutuality based on the amendment in the constitution.
6. Exemption of interest income and income from house property under the principle of mutuality.

Analysis:

1. The appeal raised concerns regarding the taxability of interest income under the principle of mutuality. The CIT(A) held that the interest income would not benefit from the principle of mutuality and thus should be taxable. The Tribunal, considering a similar case for the Assessment Year 2006-07, decided to restore the matter back to the Assessing Officer for fresh adjudication following the Tribunal's directions from the previous year.

2. Regarding the treatment of rest house expenses and rental income under the principle of mutuality, the CIT(A) partially granted relief on rest house expenses but added rental income as taxable property income. The Tribunal agreed to set aside the orders of lower authorities and send the matter back to the Assessing Officer for reconsideration based on the directions given for the Assessment Year 2006-07.

3. The issue of allowing depreciation on rest house and dead stock items was raised by the assessee. The Tribunal decided to restore the matter back to the Assessing Officer for fresh adjudication in light of the directions provided for the previous assessment year.

4. The deduction of research and development expenses amounting to Rs. 5,68,000 was also disputed. The Tribunal directed the Assessing Officer to reconsider this expense for allowance in the current assessment year based on previous decisions.

5. The amendment in the constitution of the mutual association was highlighted by the assessee to support the applicability of the principle of mutuality. The Tribunal emphasized the need for the Assessing Officer to decide on the retrospective application of the amendment and its impact on the earlier years to determine the mutual concern status.

6. Lastly, the exemption of interest income and income from house property under the principle of mutuality was a crucial issue. The Tribunal directed the Assessing Officer to decide afresh on the applicability of the principle of mutuality to determine the tax treatment of interest income and income from house property.

In conclusion, the Tribunal allowed the appeals for both the Revenue and the assessee for statistical purposes, emphasizing the need for the Assessing Officer to reconsider the issues in light of the directions provided, particularly focusing on the principle of mutuality and the impact of the constitutional amendment on the tax treatment of various incomes.

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