2021 (10) TMI 553 - AT - Income Tax

Undisclosed income from commercial activities and non members - Addition of interest on FDR, interest on SB account and interest from Clarion Properties - assessee stated at the time of handing over of possession the builder executed with each owner a maintenance agreement as per which the owners were requested to pay one time Interest Free Maintenance Deposit (IFMD) towards maintenance of the society for which the builder was entitled to use income from the said deposit at the rate of 6% per annum towards the provision of maintenance service - As contended reimbursement received by the association was not taxable in the hands of the association as IFMD was not a voluntary deposit made by the apartment owners with the object of earning an income but was a compulsory condition for receiving possession of the apartment HELD THAT - In the light of this judgment of the Hon'ble Supreme Court in the case of Bangalore Club 2013 (1) TMI 343 - SUPREME COURT find that the first appellate authority has examined the relevant part of the agreement between Clarison property, the owners/users, the legend Condominium Association, M/s. Ajanta Builder Pvt. Ltd. The relevant findings of the agreement has been extracted elsewhere in the findings of the CIT(A). Considering the relevant part of the agreement in the light of the decision of the Hon'ble Supreme Court (supra). I do not find any error or infirmity in the findings of the CIT(A). - Decided against assessee.

Summary

Issues:
- Appeal against CIT(A) order confirming addition of interest amounts
- Explanation for income from non-members
- Interpretation of maintenance agreement and interest-free maintenance deposit
- Application of mutuality principle in taxation

Analysis:

1. Appeal against CIT(A) order confirming addition of interest amounts:
The appellant filed two separate appeals against the CIT(A) order dated 08.01.2018. The first appeal, ITA No. 471/CHANDI/2018, challenged the addition of ?41,71,334 made on account of interest on FDR, interest on SB account, and interest from Clarion Properties. The appellant contested that the CIT(A) erred in confirming these additions.

2. Explanation for income from non-members:
During the scrutiny assessment, the Assessing Officer (AO) observed that the appellant received interest amounts from non-members. The AO required an explanation as to why this income should not be taxable, citing the judgment in CIT Vs. Bangalore Club. The appellant's response was deemed unsatisfactory, leading to the addition of ?41,71,334 to the taxable income.

3. Interpretation of maintenance agreement and interest-free maintenance deposit:
The appellant argued that the Interest Free Maintenance Deposit (IFMD) was a mandatory payment towards maintenance services, not aimed at earning income. The appellant contended that the reimbursement received should not be taxable, as the IFMD was a condition for receiving possession of the apartment. However, the authorities disagreed, emphasizing the commercial nature of the transactions and the lack of mutuality.

4. Application of mutuality principle in taxation:
The Tribunal referred to the judgment of the Hon'ble Supreme Court in the case of Bangalore Club, outlining the conditions for the mutuality principle to apply. The Tribunal found that the transactions did not meet the criteria for mutuality, as there was no complete identity between contributors and participators, and the funds were used in commercial operations outside the scope of mutuality. Consequently, the appeal was dismissed based on the lack of error or infirmity in the CIT(A)'s findings.

In conclusion, the Tribunal upheld the addition of interest amounts to the appellant's taxable income, emphasizing the commercial nature of the transactions and the inapplicability of the mutuality principle. The judgment serves as a reminder of the stringent conditions required for the mutuality principle to exempt transactions from taxation, as outlined by the Hon'ble Supreme Court.