2022 (10) TMI 294 - AT - Income Tax

Addition of interest income - assessee is a resident welfare association (RWA) having status of association of persons (AOP) under the Income-Tax Act - HELD THAT - The issue is squarely covered by the decision of the Tribunal in case of Belaire Condominium Association 2018 (5) TMI 240 - ITAT DELHI there is a direct nexus in earning interest on such fixed deposit with Bank and payment of interest on the security deposit to the flat owners. The interest expenditure has been incurred wholly and exclusively for earning such interest income on Bank deposit. As per the Apartment buyers agreement there is an obligation on every buyer to make security deposit and there is corresponding obligation on the society to pay interest on such deposit. Thus, the contention of the learned AR that this interest expenditure has not been incurred to earn interest income is incorrect. The 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. Assessee appeal allowed.

Summary

Issues:
Appeal against addition of interest income in assessment year 2014-15.

Analysis:
The appellant, a resident welfare association (RWA) functioning as an association of persons (AOP) under the Income-Tax Act, 1961, contested the addition of interest income totaling Rs.23,67,508 in their return of income for the relevant assessment year. The assessing officer discovered interest income of Rs.27,34,215 from various banks in Form 26AS, which the appellant had not declared for taxation. The appellant argued that the interest income stemmed from security deposits received from members for maintenance charges, which were then deposited in banks to earn interest, subsequently passed on to the members. The appellant claimed a direct connection between interest income and expenditure, justifying its allowance under Section 57(iii) of the Act. However, both the assessing officer and the Commissioner (Appeals) rejected this argument, leading to the appeal.

During the appeal, the appellant's counsel referenced a Tribunal decision in a similar case and a past favorable ruling in the appellant's own case for a subsequent assessment year. The Departmental Representative relied on departmental authorities' observations. The Judicial Member reviewed the submissions and evidence on record and noted the similarity of the current case to the precedent cited by the appellant. The Tribunal's earlier decision in the Belaire Condominium Association case emphasized the direct link between interest income earned on bank deposits from security funds and interest paid to members, qualifying the interest expenditure for set-off against interest income.

Consequently, the Judicial Member, in alignment with the Tribunal's previous ruling, annulled the addition of Rs.23,67,508 to the appellant's income. The decision was based on the principle that interest expenditure incurred for earning interest income from bank deposits out of security funds was justifiable and not subject to taxation under the principle of mutuality. As a result, the appeal was allowed, and the addition was deleted, following the Tribunal's decision in the Belaire Condominium Association case.