2018 (5) TMI 240 - AT - Income Tax

Interest income earned on deposit with the Bank made out of the security deposit obtained from its members - applicability of principle of mutuality - Held that - 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. 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. - Addition to be deleted - Decided in favour of assessee.

Summary

Issues:
1. Taxability of interest income earned by a Resident Welfare Association (RWA) under the Principle of mutuality.
2. Allowance of interest paid back to members as a deduction under section 57(iii) of the Income Tax Act.

Analysis:
1. The appeal challenged the order confirming the addition of interest income earned by the RWA from banks, amounting to ?1,63,77,013, on the grounds that it should be exempt under the Principle of mutuality. The RWA argued that interest income was earned on security deposits from flat owners and was utilized to pay interest back to them. The assessing officer contended that the interest income was taxable based on the Bangalore Club case judgment. The RWA further claimed that if interest income was taxable, the interest paid back to members should be allowed as a deduction under section 57(iii). The CIT(A) upheld the assessing officer's decision, leading to the appeal before the Income Tax Appellate Tribunal.

2. The RWA, through its representative, argued that the interest earned was directly linked to the interest paid to flat owners as security deposit liability, making it eligible for deduction under section 57(iii). They highlighted the Apartment buyers agreement, which specified the obligation to pay interest on security deposits. The assessing officer and CIT(A) were criticized for not considering this direct nexus between income earned and expenditure incurred. The RWA's contention that the interest expenditure was incurred exclusively for earning interest income was supported by evidence of payments made to flat owners after tax deductions. The RWA also clarified that the restriction under Section 40(ba) did not apply to registered societies like them and that the interest expenditure should be set off against interest income. The Tribunal agreed with the RWA's arguments, directing the assessing officer to delete the addition of ?1,63,77,013 made on account of interest income, thereby allowing the appeal.

In conclusion, the Tribunal ruled in favor of the RWA, emphasizing the direct link between interest income earned and interest paid to members, allowing the interest expenditure as a deduction under section 57(iii) and directing the deletion of the added interest income amount.