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2022 (9) TMI 1267 - AT - Income TaxIncome from other sources - Addition of interest earned on IBMS( Interest bearing maintenance security) - scope of principle of mutuality - set off of interest expenditure - AO was the opinion that deduction of the TDS on distributed interest income amongst members does not absolve the society/assessee from its taxation obligation, held that interest earned from banks on IBMS by the assessee society is liable to be taxed under the head of income from other sources - whether the interest received by the assessee on IBMS is taxable or not? - HELD THAT - The said issue has been considered by the Coordinate Bench of the Tribunal in the case of Belaire Condominium Association 2018 (5) TMI 240 - ITAT DELHI assessee society has paid interest each one after deducting tax at source. Thus, it is not a case of exemption on the principle of mutuality. Such interest paid by the assessee society is taxable in the hands of the Apartment owner. In view of these facts, we are of the view that interest expenditure is to be set off against the interest income. As regards the AO's contention that interest paid to member is not eligible deduction in the case of AOP under Section 40 (ba), we have perused the said Section. This clause excludes registered society from its applicability. Accordingly, this clause will not be applicable to the assessee society. Moreover, as rightly contended by the learned AR Section 40 (ba) is applicable while computing business income. This clause is not applicable while computing income from other sources. There is no prohibition in Section 57 (iii) under which deduction of interest is eligible to the assessee society. We direct the AO to delete the addition made on account of the interest. Appeal of assessee allowed.
Issues:
1. Taxability of interest earned on IBMS 2. Application of principle of mutuality 3. Interpretation of relevant legal precedents Issue 1: Taxability of interest earned on IBMS The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2016-17. The Revenue contended that the interest earned on IBMS by the assessee society is taxable under the head "Income from other sources." The Assessing Officer (A.O.) added an amount of Rs. 3,73,02,450/- to the return income of the assessee, which was claimed as exempt by the assessee. The CIT(A) allowed the appeal of the assessee by deleting the addition, relying on a judgment of the Coordinate Bench in a similar case. The Tribunal analyzed the facts and held that the interest income earned by the assessee on IBMS is not taxable, following the decision of the Coordinate Bench in a previous case. The Tribunal found that the interest expenditure incurred by the assessee society was directly related to earning interest income on bank deposits, and thus, the interest income was not taxable. Issue 2: Application of principle of mutuality The Revenue argued that the principle of mutuality should not apply in this case and that the interest earned on IBMS should be taxed. The Tribunal, however, disagreed with this argument and held that the interest expenditure incurred by the assessee society was for the purpose of earning interest income on bank deposits. The Tribunal found that there was a direct nexus between the interest earned on fixed deposits with the bank and the payment of interest on the security deposit to the flat owners. Therefore, the Tribunal concluded that the interest income was not taxable under the principle of mutuality. Issue 3: Interpretation of relevant legal precedents The Tribunal referred to the judgment of the Supreme Court in the case of Bangalore Club Vs. CIT (2013) 35 ITR 509 and a previous decision of the Coordinate Bench in the case of Belaire Condominium Association. The Tribunal followed the reasoning and decision of the Coordinate Bench in the Belaire Condominium Association case, where it was held that the interest expenditure incurred by the assessee society was to be set off against the interest income earned. The Tribunal found that the interest paid by the assessee society to its members was not eligible for deduction under Section 40 (ba) as it was not applicable to registered societies. Therefore, the Tribunal dismissed the Revenue's appeal and upheld the decision of the CIT(A) to delete the addition made by the A.O. In conclusion, the Tribunal dismissed the appeal filed by the Revenue, holding that the interest earned on IBMS by the assessee society was not taxable, and the principle of mutuality applied in this case. The Tribunal's decision was based on a thorough analysis of the facts, legal precedents, and the specific circumstances of the case.
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