2018 (4) TMI 77 - AT - Income Tax

Applicability of the principles of mutuality - registered society for the benefit of its members - receipt from the non- Member - Held that - One of the primary conditions for the applicability of the principles of mutuality is that no person can make a profit from himself the participants must be Members once the funds of the society are given for the business purposes of a non-Member and the assessee receives any compensation either in the form of profits or in the form of interest from such non-Member the principles of mutuality cannot be applied to that receipt from the non- Member. This being so we are of the view that the findings of the Ld.CIT(A) on this issue are on right footing and does not call for any interference. Depreciation claim to assessee society - Held that - It is an undisputed fact that the properties of the assessee are used for carrying out the activities of the society as directed by the Hon ble High Court. Once the properties of the society are used for the purpose of activities of the assessee the same would have to be treated as being used in the business of the assessee. If this is so the income under the head business in the hands of the assessee would have to be considered and depreciation liable to be allowed. Admittedly if depreciation is allowed and the income of the assessee becomes negative or loss the same is available for set off against the income from the other heads representing income from other sources. This being so the findings of the Ld.CIT(A) in respect of the non-granting of the depreciation is allowed and the AO is directed to grant the assessee the benefit of depreciation as claimed.

Issues Involved:
1. Application of the principles of mutuality to interest income received from fixed deposits.
2. Non-granting of depreciation on the properties owned by the society.

Issue-wise Detailed Analysis:

1. Application of the Principles of Mutuality to Interest Income Received from Fixed Deposits:

The primary issue raised by the assessee was whether the interest income received from fixed deposits with Indian Bank should be exempt under the principles of mutuality. The assessee, a society registered under the Tamil Nadu Societies Registration Act, 1975, argued that the funds in the fixed deposits were derived from the sale proceeds of properties owned by its members and were to be distributed back to the members as per the High Court's order. The society claimed that these funds represented a "Common Fund of Members" and that the interest earned should not be treated as taxable income, citing various legal precedents supporting the principle of mutuality.

The principle of mutuality, as argued by the assessee, implies that there is complete identity between the contributors to the fund and the recipients from the fund. The society contended that any surplus from the mutual activities should not be considered income or taxable. They referenced several case laws, including CIT Vs West Godavari District Rice Millers Association and CIT Vs JK Organisation Ltd, to support their claim that the surplus accruing to a mutual association is not considered taxable income.

However, the Revenue countered that the Indian Bank, where the fixed deposits were maintained, was not a member of the society. Therefore, the principles of mutuality could not be applied to the interest received from a non-member. The Tribunal agreed with the Revenue's argument, stating that one of the primary conditions for the applicability of the principles of mutuality is that no person can make a profit from himself. Since the funds were given for business purposes to a non-member (Indian Bank), the principles of mutuality did not apply. Consequently, the Tribunal upheld the findings of the CIT(A) and ruled that the interest income from the fixed deposits was taxable.

2. Non-granting of Depreciation on the Properties Owned by the Society:

The second issue was the non-granting of depreciation on the properties owned by the society. The assessee argued that the properties were used for carrying out the activities of the society as directed by the Hon'ble High Court, including maintaining accounts, collecting member details, identifying and auctioning properties, and distributing funds to members. The society claimed that depreciation should be allowed as per the provisions of the Income Tax Act, even when the income is from other sources.

The Revenue opposed this claim, stating that the properties were not used in relation to earning the income brought to tax under the head "income from other sources," and therefore, depreciation was not applicable.

The Tribunal considered the rival submissions and concluded that the properties were indeed used for the activities of the society as directed by the High Court. Since the properties were used for the society's activities, they should be treated as being used in the business of the assessee. Consequently, the Tribunal ruled that depreciation should be allowed, and if the depreciation results in a loss, it should be available for set-off against income from other heads. Therefore, the Tribunal directed the AO to grant the assessee the benefit of depreciation as claimed.

Conclusion:

The appeals filed by the assessee were partly allowed. The Tribunal upheld the CIT(A)'s decision on the issue of mutuality, confirming that the interest income from fixed deposits with Indian Bank was taxable. However, the Tribunal allowed the assessee's claim for depreciation on the properties used for the society's activities, directing the AO to grant the benefit of depreciation as claimed.

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