2012 (7) TMI 309 - AT - Income Tax

Principle of mutuality - assessee is a cooperative society engaged in the construction of flats - Held that - The assessee has failed to satisfy the basis of mutuality on various grounds which inter-alia included that proper bye laws were not furnished to demonstrate the existence of complete identity between the cooperative society and the members. The affairs of the society were not carried out in the manner as prescribed under the Act. In the absence thereof, it cannot be ascertained as to whether there is complete identity between the members and the assessee. Besides, the provisions about distribution of surplus in the event of dissolution of cooperative society cannot be examined or verified For quantum addition CIT(A) held that AO has erred in adding both credits and debits in the profit & loss account as income of the assessee alongwith the surplus income Officer had not brought anything so as to treat the expenditure as bogus or out of the undisclosed sources, the double additions were deleted. Interest income has been earned by the assessee by deposit of the surplus funds and there is no doubt that the interest income is to be treated as income from other sources . No borrowed funds have been used for earning this interest in various years. Dis allowance of expenditure - Held that - It will be a distorted view to disallow all the expenditure only because the record is seized. Since a fair and reasonable estimate of income has to be made, the reasonable expenditure is to be allowed to the assessee in all these years Claim of exemption u/s 54F - LTCG received by the assessee on acquisition of land from GDA - Held that - As assessee s claim of exemption u/s 54 is devoid of merits as the concept of mutuality has not been extended to the assessee besides the constructed houses or the properties of the respective members cannot be deemed to be purchased or construction of the houses belonging to the society - set aside the issue back to the file of the AO to allow the assessee benefit of long term capital gains by indexation of cost as per law

Summary

Issues:
Cross-appeals for AY 1999-2000 to 2004-05 involving the applicability of the principle of mutuality, quantum additions, and long term capital gains exemption under section 54F.

Applicability of Principle of Mutuality:
The assessee, a cooperative society, claimed exemption from tax based on the principle of mutuality, arguing that surplus would be distributed among members. However, the IT authorities appointed a Special Auditor who reported discrepancies in the society's financial documents. The Assessing Officer rejected the claim of mutuality, stating that the society's affairs were not conducted as per laws. The CIT(A) upheld this decision, emphasizing the lack of evidence demonstrating complete identity between the society and members. The Tribunal concurred, holding that the burden to prove mutuality rested on the assessee, who failed to provide complete bye laws or rules, leading to the rejection of the mutuality claim for all assessment years.

Quantum Additions:
Regarding quantum additions, the CIT(A) found the Assessing Officer erred in adding both credits and debits in the profit & loss account as income. The Tribunal partially allowed the appeals, deleting double additions as the Assessing Officer failed to prove expenditure as undisclosed or bogus. Interest income earned from surplus funds was deemed taxable under "income from other sources." Due to seized records, an estimate of income and expenditure was required, with reasonable expenditure allowed, resulting in other income being estimated at nil for all years.

Long Term Capital Gains Exemption (Section 54F):
In AY 2004-05, the assessee claimed exemption under section 54F for long term capital gains on land acquisition. The CIT(A) rejected the claim, stating that the concept of mutuality did not apply, and compensation received was taxable based on actual receipt. The Tribunal upheld the denial of section 54 benefits but remanded the issue of capital gains computation back to the Assessing Officer for indexation as per the Supreme Court's judgment.

In conclusion, the Tribunal partly allowed all appeals, upholding the denial of mutuality benefits, taxing interest income, estimating other income at nil, and remanding the computation of long term capital gains for further assessment.