2019 (5) TMI 1004 - AT - Income Tax

Taxability of interest on FDRs along with interest on SB accounts - mutually aided co-operative society - mutual concept application - addition as Income from other sources - distinction between mutual and non-mutual transactions - assessee is a registered cooperative society under Andhra Pradesh Cooperative Societies Act, 1964 with the primary object to build houses for its members - HELD THAT - This society is established with the purpose of providing house for the cine workers for a reasonable and affordable cost. No doubt the property is developed with the mutual contribution. Important is, not all the members of the society are participating in the particular project, only the investor-cum-beneficiary of the project. Once the project is complete, the allottees will get the respective houses. The participation of the same member in the other project is very remote. This is basically charitable activity with mutual concept to carry on the object of providing affordable houses for the members. This activity is carried on continuously by the governing council. The capital contribution collected from members are applied exclusively for the project. Till the project is completed, the additional funds are kept in the banks for future application. Some times, kept in bank for complying with the court direction or for guarantee. As soon as the purpose of the society is complete, the funds are withdrawn from bank. AO applied the principle of mutuality by relying on case Secunderabad Club 2011 (8) TMI 752 - ANDHRA PRADESH HIGH COURT but there are considerable differences in both type of associations - in the present given case, the funds are not surplus, but, additional funds which are required for completion of the project. These funds collected from the members are in the nature of capital. The capital required for the project are kept in the bank as a necessity not for the sole aim of making any profit. The interest earned by the society are surplus, which can be applied for the main purpose of the society or it may reduce the cost of the project. Therefore, applying the ratio of Secunderabad Club, in the present case, is not proper. The assessee has not collected any charges from the participants of the project to carry out the project, the participants/members have only contributed for the project, all the relevant cost has to be absorbed from the project investment. The project capital has earned certain income i.e. interest, which can only be applied for the project and society never claimed anyway as they are functioning as mutual concern. They exist because of mutual object of providing affordable houses for the members but the activities are restricted to complete the housing project. The earning of interest is incidental, not the purpose to earn additional income. The interest earned by the society can only be treated as capital receipt, can be applied for the purpose of meeting administration cost of the project or can reduce the capital cost of the project. Therefore, in our opinion, applying the mutual concept relying on the decision of Secunderabad Club and Bengaluru Club 2013 (1) TMI 343 - SUPREME COURT is farfetched. Therefore, the grounds raised by the assessee are allowed and the addition made by the assessee is deleted.- Decided in favour of assessee.

Summary

Issues:
1. Taxability of interest income on fixed deposits and savings account under the principle of mutuality.
2. Allowance of set off of expenditure against interest income.
3. Application of mutuality principle in the context of a cooperative society.

Analysis:
1. The case involved the taxability of interest income on fixed deposits and savings account under the principle of mutuality for a cooperative society. The Assessing Officer (AO) assessed the interest income as Income from Other Sources, excluding it from the principle of mutuality due to deposits with outside banks. The CIT(A) upheld this decision, citing relevant case law. However, the ITAT Hyderabad disagreed, noting the society's charitable activity and the nature of funds kept in banks for project completion. The ITAT held that the interest earned was surplus and could be applied for the society's main purpose, thus allowing the appeal and deleting the addition.

2. The issue of allowing set off of expenditure against interest income was raised by the assessee. The CIT(A) dismissed this claim, stating that losses from mutual activities cannot be set off against regular income. The ITAT Hyderabad considered the real link between interest earned and expenditure incurred, emphasizing the society's sole source of income as interest. The ITAT allowed the set off under Section 70 of the Income Tax Act, highlighting the society's eligibility to claim such set off against income from other sources.

3. The application of the mutuality principle in the context of a cooperative society was crucial. The ITAT analyzed the society's objectives, membership criteria, and operational model to determine the nature of its activities. Drawing distinctions from previous case law, the ITAT emphasized the society's charitable purpose and the incidental nature of interest income. By recognizing the society's mutual concept and the restricted activities aimed at providing affordable housing, the ITAT concluded that the interest earned was a capital receipt and not taxable income. Consequently, the ITAT allowed the appeal, emphasizing the society's mutual objective and the utilization of interest income for project-related purposes.

In conclusion, the ITAT Hyderabad allowed both appeals, emphasizing the mutual nature of the cooperative society's activities and the utilization of interest income for project purposes. The judgments highlighted the society's charitable objectives, the real link between interest income and expenditure, and the incidental nature of interest earnings in the context of providing affordable housing for members.