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2021 (4) TMI 1077 - AT - Income TaxConcept of mutuality - Payment of interest / compensation to the members - members unanimously opined that they need to be compensated on account of delay in implementation of project failing which they may be forced to withdraw from the project and demand refund of advance paid to the assessee-society - Whether the assessee can be thrust upon the status of a mutual society? - HELD THAT - In the instant case, the members even after obtaining site / plot from assessee-society once, is entitled to continue to retain his membership. Therefore, there is no contribution from his side though he is entitled to participate in the profits earned by the assessee-society, which can be distributed in the form of dividend. The very fact that bylaws of the assessee-society contained the provisions that payment of dividend to its members goes to show that it is not a mutual society and commerciality is very much inherent in the activities of the assessee-society. In this regard, clause 75(6) of the Byelaws of the assessee-society is relevant. Therefore, the action of the Assessing Officer in thrusting the concept of mutuality even when the assessee-society never claimed the concept of mutuality, is bad in law and is hereby set aside. Whether the interest expenditure can be allowed as a deduction u/s 37 or u/s 36(1)(iii) of the I.T.Act ? - Income Tax Authorities failed to appreciate that the money contributed by the members was invested in FD s and the portion of the interest earned thereon was credited to the account of the members way of compensation for delay in allotment of sites to the members. Therefore, the interest paid on advances from members is chargeable on interest income earned from depositing the same with the bank by the assessee. In other words, there is a direct nexus between the contribution by the members, which was utilized for making fixed deposit to earn interest income and payment of portion of such interest income earned as compensation to members for delayed allotment of sites. Therefore, the interest credited to the members is wholly and exclusively for the purpose of business and entitled to deduction u/s 37(1) of the I.T.Act. For claiming expenditure u/s 37(1) of the I.T.Act, there was no need for a cause and effect relationship between an item of income and expenditure as claimed by the A.O. All that would be necessary is only that it is for the purpose of business and not necessary for earning of the income. In this context, reliance is placed on the judgment of the Hon ble Apex Court in the case of Sassoon J David Co. Pvt. Ltd. v. CIT 1979 (5) TMI 3 - SUPREME COURT Even assuming that interest income is assessed as income from other sources, whether the interest expenditure ought to be allowed as a deduction u/s 57(iii) of the I.T.Act.? - AO has taken a view that there is no obligation on the assessee-society to pay interest to its members when advance was received. Therefore, the A.O. concluded that there is no contractual obligation to pay interest. On the other hand, we are of the view that it is not the requirement under Contract Law that all terms of the contract be agreed upon upfront and there is no scope for alteration thereafter. In the instant case, the delay in procuring the land and formation of site was unforeseen at the initial stage when advances were collected by the assessee-society. Having parted with money and also with site allotment being delayed, the expectation of the members to be compensated by way of interest on their advances is only legitimate. In view of the foregoing reasoning, we are of the view that even assuming that interest income is to be taxed under the head income from other sources , the interest expenditure that is paid to the members of the assessee-society is to be allowed u/s 57(iii) of the I.T.Act. It is ordered accordingly.
Issues Involved:
1. Validity of reopening of assessment. 2. Whether interest expenditure paid to members can be allowed as a deduction. 3. Whether the assessee can be considered a mutual society. 4. Taxability of interest income earned from fixed deposits. 5. Deductibility of interest expenditure under sections 37, 36(1)(iii), and 57(iii) of the I.T. Act. Detailed Analysis: 1. Validity of Reopening of Assessment: The assessee challenged the reopening of assessments for the years 2007-2008 to 2009-2010. The CIT(A) upheld the reopening, noting that the assessee participated in the assessment proceedings. The Tribunal did not adjudicate this issue as no arguments were made by the assessee's representative during the hearing. 2. Deductibility of Interest Expenditure: The core issue was whether the interest expenditure paid to members could be allowed as a deduction. The assessee argued that the interest was compensatory for the delay in allotment of sites and should be deductible. The Assessing Officer (A.O.) rejected this, stating the interest credited was compensatory, there was no contractual obligation to pay interest, and it was an appropriation of income, not an expenditure. 3. Status as a Mutual Society: The A.O. considered the assessee a mutual society, exempting surplus from member activities but taxing non-mutual income. The Tribunal disagreed, noting that the assessee did not claim mutuality and filed returns like any commercial undertaking. The Tribunal emphasized that the A.O. cannot impose mutuality status when not claimed by the assessee, especially when commerciality is inherent in the assessee's activities. 4. Taxability of Interest Income: The interest income from fixed deposits was acknowledged as taxable. The Tribunal noted that the interest earned from unutilized funds was offered to tax by the assessee, and there was no dispute regarding its taxability. 5. Deductibility under Sections 37, 36(1)(iii), and 57(iii): The Tribunal analyzed whether the interest expenditure could be allowed under sections 37, 36(1)(iii), or 57(iii) of the I.T. Act: - Section 37: The Tribunal held that the interest expenditure was compensatory and should be allowed based on the matching principle, citing the Supreme Court's judgments in J.K. Industries v. UOI and CIT v. Lakshmi Machine Works. - Section 36(1)(iii): The Tribunal did not specifically address this section in detail but implied that the interest expenditure was for business purposes. - Section 57(iii): The Tribunal stated that even if the interest income was assessed under "income from other sources," the interest expenditure should be allowed as it was inextricably linked to earning the interest income. They cited the Delhi High Court's decisions in CIT v. Sasan Power Limited and Taj International Jewellers. Conclusion: The Tribunal concluded that the interest expenditure paid to members was allowable as a deduction. The grounds on the merits were allowed, but the validity of reopening the assessment was not adjudicated. The appeals filed by the assessee were partly allowed. Order Pronouncement: The order was pronounced on April 1, 2021.
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