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TMI Blog2021 (4) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-society. In this regard, clause 75(6) of the Byelaws of the assessee-society is relevant. Therefore, the action of the Assessing Officer in thrusting the concept of mutuality even when the assessee-society never claimed the concept of mutuality, is bad in law and is hereby set aside. Whether the interest expenditure can be allowed as a deduction u/s 37 or u/s 36(1)(iii) of the I.T.Act ? - Income Tax Authorities failed to appreciate that the money contributed by the members was invested in FD s and the portion of the interest earned thereon was credited to the account of the members way of compensation for delay in allotment of sites to the members. Therefore, the interest paid on advances from members is chargeable on interest income earned from depositing the same with the bank by the assessee. In other words, there is a direct nexus between the contribution by the members, which was utilized for making fixed deposit to earn interest income and payment of portion of such interest income earned as compensation to members for delayed allotment of sites. Therefore, the interest credited to the members is wholly and exclusively for the purpose of business and entitled to deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from merits. The solitary common issue argued by the learned AR on merits for all the assessment years is whether interest expenditure being amounts paid to the members of assessee-society can be allowed as deduction. 4. The facts pertaining to assessment year 2008-2009 is narrated below. The assessee is a co-operative society formed in the year 1974 by the employees of Vijaya Bank. The main object of the assessee-society is buying of land and developing the same into sites to allot them to its members at a reasonable price. It is a non-profit making organization. For the assessment year 2008-2009, the return of income was filed on 30.09.2008 and the assessment u/s 143(3) was completed on 30.09.2010. Subsequently, the case was reopened by issuance of notice u/s 148 of the I.T.Act. 5. During the course of reassessment proceedings, the Assessing Officer noticed that the assessee had offered interest income of ₹ 4,98,19,140 earned on deposits and claimed interest expenditure of ₹ 36,385 as interest paid to members on withdrawal of site advance and ₹ 4,00,37,240 as interest payment to the members. The assessee was asked to explain the details of the interest expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces by members, there is no direct link between members and the interest earned as the members did not contribute the money to earn the interest or for depositing in Fixed Deposits. (vi) Interest income is non-mutual income and is taxable in the hands of the society based on the following decisions: (a) Madras Cricket Club (2011) 334 ITR 238 (Mad.) (b) Madras Gymkhana Club (2010) 324 ITR 348 (Mad.) (c) Bangalore Club (2013) 350 ITR 509 (SC) 7. The A.O. had made similar additions for the other assessment years, as well. 8. Aggrieved by the additions made by the Assessing Officer for assessment years 2007-2008 to 2009-2010, 2011-2012 to 2014-2015, the assessee preferred appeals to the first appellate authority on legal issue of reopening of assessment as well as on merits. In the course of appellate proceedings, the assessee also filed additional grounds concerning the validity of assessment order passed in the status of a mutual society. On the legal issue the CIT(A) held that the assessee had participated in the assessment proceedings, therefore, the validity of reopening of assessment is to be upheld. As regards the issue on merits, the CIT(A) had listed out the issues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erative society, incorporated in the year 1974 for the purpose of meeting housing needs of the employees of Vijaya Bank. All the members of the society are either present or ex-employees of Vijay Bank. The activities of the assessee-society is to acquire land, convert it into residential sites by developing infrastructure such as roads, streetlights, providing water supply, drainage and allot the same to its members on a no profit no loss basis. The assessee had undertaken a project for creation of layouts at Bangalore-Mysore High Court in the year 2005. At the time of starting of the project, the members of the assessee-society were informed that the site shall be handed over to them within a period of 12 months. As there was delay in implementation of the project, the unutilized funds or idle funds from out of advances collected towards allotment of sites from members were deposited in fixed deposits. The interest earned from the same was offered to tax by the assessee. Therefore, there is no dispute with regard to the taxability of the interest income earned. 12.1 However, since the project was delayed for more than one year, the members expressed anxiety that advances paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be assessed as income from other sources, whether the interest expenditure can be allowed as deduction u/s 57(3) of the I.T.Act. (i) Whether the assessee can be thrust upon the status of a mutual society: 12.3 It is an undisputed fact that the assessee did not claim any exemption under the concept of mutuality for any of its income. The returns of income have been filed for all the relevant assessment years, like any other commercial undertaking. The Assessing Officer was of the view that the assessee is a mutually benefit society and surplus, if any, from its activities with its members is exempt from tax. Further, the Assessing Officer held that non-mutual income arising from sources other than members is liable to be taxed. Thereby the A.O. held that surplus as reflected in the income and expenditure account is to be ignored and gross income of the interest are liable to taxed. We are of the view that the A.O. cannot on his own decide to grant the benefit of mutuality when it is not claimed by the assessee. The Assessing Officer's cannot force the assessee to follow a method detrimental to the assessee, more so, when alternative method is not prohibited by law. In the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court had held as follows:- "The object of incurring expenses is to produce revenue. In measuring the income for a period, revenue is to be adjusted against expenses incurred for producing that revenue. This concept of adjusting / offsetting the expenses against revenue is the matching principle." 12.6 The above proposition further draws strength from the judgment of the Hon'ble Apex Court in the case of CIT v. Lakshmi Machine Works reported in 290 ITR 667 (SC), wherein the Hon'ble Supreme Court had held as follows:- "The tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under section 2(24) the word `income' includes profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. However, subject to special requirements of the income tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income-tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the interest income. The Hon'ble Delhi High Court in the case of CIT v. Sasan Power Limited reported in 18 taxmann.com 182 (Delhi) had held that when interest income and interest expenditure are inextricably linked and there was commonality in nature and purpose, the expenditure is allowable as deduction u/s 57(iii) of the I.T.Act. In the case of Taj International Jewellers reported in 335 ITR 144, the Hon'ble Delhi High Court had held that when there is no dispute that money obtained on loan was converted and made into fixed deposit receipts, the interest on loan was an allowable deduction against the interest income earned from fixed deposit. 12.9 The Assessing Officer has taken a view that there is no obligation on the assessee-society to pay interest to its members when advance was received. Therefore, the A.O. concluded that there is no contractual obligation to pay interest. On the other hand, we are of the view that it is not the requirement under Contract Law that all terms of the contract be agreed upon upfront and there is no scope for alteration thereafter. In the instant case, the delay in procuring the land and formation of site was unforeseen at the initial st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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