2018 (7) TMI 808 - AT - Income Tax

Entitled for benefit of mutuality - distinction between ordinary members and nominal members and all the members are having equal rights - Held that - In this case even a nominal member is also admitted to the membership as per clause-9 and he has all the rights of any other member. The ordinary members are those members who are available at the time of registration and that cannot be considered as a restriction because at the time of formation of any society or an organization only few members join at the time of incorporation whereas the by-laws permit admission of further members in the course of its activity be it a business or not business. There is no deference between the transaction of members and nominal members and only when the transactions are with non-members the principles of mutuality can be invoked or denied. A nominal member cannot be treated as a non-member and so the transactions of nominal members cannot be treated as transactions of non-members. Distinction sought to be made by the AO and CIT(A) is arbitrary and artificial. Therefore we agree that assessee is covered by the principle of mutuality and its income will be exempt on that concept Disallowance of honorarium - TDS u/s 194J - Held that - The director referred to therein is not equivalent to the director of the assessee-society. The director manager or managing agent in relation to a company have the meaning respectively assigned to them in the Companies Act 1956. A company is different from a co-operative society as they are defined U/s. 2(17) and 2(19) separately. Just because the person administering the society is also referred to as director provisions of Section 194J cannot be attracted to the payment of honorarium made to the director of assessee-society. In view of that we are of the opinion that there is no violation U/s. 194J so as to attract disallowance U/s. 40(a)(ia). Since assessee has adduced the evidence to the respective person have paid/filing returns of income and AO has not initiated any proceedings U/s. 201 for violation of TDS provisions under any other provisions of the Act the disallowance U/s. 40(a)(ia) cannot be sustained. Interest on bank deposits - Held that - The nature of interest is to be examined before coming to a conclusion. Only in the event of interest earned on deposits is from the surplus funds not used regularly in the business the amounts can be assessed under the head other sources . Just because assessee the earned interest on deposits it cannot be straight away categorized as income from other sources. These aspects are not examined by the AO however since assessee itself is getting exemption on the principle of mutuality this issue becomes academic. We are not giving any clear direction or finding on the issue. However AO is advised to examine this aspect if at all at any point of time principle of mutuality is not allowed to assessee by any of the orders of the higher judicial forum. Since the principles of mutuality are applicable to the society we consider that income cannot be brought to tax on the activities of the Society. Grounds are considered allowed.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Entitlement to the benefit of mutuality.
3. Disallowance under Section 40(a)(ia) for non-deduction of TDS on honorarium paid to directors.
4. Treatment of interest earned on bank deposits as income from other sources.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was filed with a delay of 11 days. The reason for the delay was that the appeal papers were initially sent to the old address of the Tribunal and were returned. Upon ascertaining the correct address, the papers were sent again. The Tribunal found sufficient cause for the delay and condoned it, admitting the appeal to be heard on merits.

2. Entitlement to the Benefit of Mutuality:
The assessee, a mutually aided co-operative society, claimed deduction under Section 80P of the Income Tax Act. The Assessing Officer (AO) denied the benefit, arguing that transactions with nominal members (considered non-members) do not qualify for mutuality. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the society's activities did not align with mutuality principles due to arbitrary membership classification and suspicious cash deposits.

The Tribunal disagreed, stating that the principle of mutuality cannot be denied solely due to the classification of members as ordinary and nominal. It emphasized that the class of contributors and participators are identical and that nominal members are admitted under the society's by-laws, having the same rights and duties as ordinary members. Consequently, the Tribunal concluded that the society's transactions with nominal members do not breach the mutuality principle, allowing the assessee's claim for mutuality.

3. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Honorarium Paid to Directors:
The AO disallowed the honorarium paid to directors under Section 40(a)(ia) for non-deduction of TDS, treating it as professional fees under Section 194J. The CIT(A) upheld this disallowance. The Tribunal, however, found that the honorarium paid is not professional fees and that the directors of the society are not equivalent to company directors as defined under the Companies Act. Therefore, Section 194J does not apply, and the disallowance under Section 40(a)(ia) is not warranted.

Additionally, the Tribunal noted that the members receiving the honorarium had filed their returns of income, and the AO had not initiated any proceedings under Section 201 for TDS violations. Thus, the disallowance was not sustainable, and the Tribunal allowed the assessee's ground on this issue.

4. Treatment of Interest Earned on Bank Deposits as Income from Other Sources:
The AO treated the interest earned on bank deposits as income from other sources, relying on the Supreme Court's decision in the Totgars Co-operative Sale Society case. The CIT(A) upheld this view. The Tribunal, however, noted that there was no finding that these funds were surplus and not used in the business. It referenced the Andhra Pradesh High Court's decision in the Andhra Pradesh State Co-operative Bank case, which distinguished between interest on deposits as part of business income and as income from other sources.

The Tribunal concluded that the nature of interest needs to be examined to determine if it arises from surplus funds not used in business. However, since the society was granted exemption based on mutuality principles, this issue became academic. The Tribunal advised the AO to examine this aspect if the mutuality exemption is not allowed in future.

Conclusion:
The Tribunal allowed the appeal, granting the benefit of mutuality to the assessee and ruling that the disallowance under Section 40(a)(ia) was not warranted. The treatment of interest on bank deposits as income from other sources was deemed academic due to the mutuality exemption.