Ashok Monga (Adviser) (161 Points)
15 July 2014We are a Housing Society filing our returns as AOP. How should the Society treat the interest income from Banks keeping in view the landmark judgement passed by Hon’ble Supreme Court of India in the case of M/s Bangalore Club [2013] 212 Taxman 566 wherein interest income from banks was held as taxable in the hands of AOP. Has there been amendment in the relevant IT rules?
Tribhuvan Aditya Singh
(Student as well as Self-employed)
(3710 Points)
Replied 16 July 2014
Ashok Monga
(Adviser)
(161 Points)
Replied 16 July 2014
Ashok Monga
(Adviser)
(161 Points)
Replied 16 July 2014
Z
( )
(2965 Points)
Replied 17 July 2014
"Princliple of Mutuality",which envisages that no one can earn profit from himself, is applicable on both socities and clubs
Income earned by such entities from MEMBERS is exempt (in general).Interest income is taxable.
In the case you cited facts were
"Assessee-club was an unincorporated Association of Persons (AOP). In relation to the relevant assessment years, the assessee sought an exemption from payment of tax on the interest earned on the fixed deposits kept with certain banks, which were corporate members of the assessee, on the basis of doctrine of mutuality. However, tax was paid on the interest earned on fixed deposits kept with non-member banks"
"the arrangement lacks a complete identity between the contributors and participators. Till the stage of generation of surplus funds, the setup resembled that of a mutuality; the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to that extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the member banks used such deposits to advance loans to their clients.
"Hence, in the instant case, with the funds of the mutuality, member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the 'privity of mutuality', and, consequently, violating the one to one identity between the contributors and participators as mandated by the first condition. Thus, in the instant case, the first condition for a claim of mutuality is not satisfied"
Ashok Monga
(Adviser)
(161 Points)
Replied 17 July 2014
While the Andhra Pradesh, Karnataka and Delhi High Courts have taken the view in a few cases that such interest income is exempt on the grounds of mutuality, the Karnataka, Madras and Gujarat High Courts seem to have taken a contrary view in other cases.
2.8 Taking into consideration the objects of the assessee, the source of funds during the relevant years and the applicability of the funds for the benefit of its members, and keeping in mind the interest on investments and dividend earned on shares was only a small portion of the total earned by investment of the surplus funds wholly contributed by the members of the assessee, the Karnataka High Court held that the interest earned on investment and dividend received on shares was deemed income from the property of the assessee contributed by its members, and was governed by the principle of mutuality and was therefore exempt.
2.9 The Court noted with approval a similar view which had been taken earlier by the Andhra Pradesh High Court in the case of CIT v. Natraj Finance Corporation, 169 ITR 733. In that case, the assessee was a firm which lent money to its partners, and during the relevant years, received income on outstanding dues from a former partner and on amounts deposited in a savings account with a bank. The Court held that such interest, considering the quantum of such interest in relation to the total income, was also exempt on the grounds of mutuality, as it could not be said that the assessee was carrying on business in order to derive such a small amount of income.
2.10 The Court also noted that the Delhi High Court also, in the case of DIT(E) v. All India Oriental Bank of Commerce Welfare Society, 130 Taxman 575, has held that the principle of mutuality applies to interest income derived by a co-operative society from deposits made out of contributions made by members of the society. In taking this view, the Delhi High Court took a cue from the decision of the Supreme Court in Chelmsford Club v. CIT, 243 ITR 89, where the Supreme Court had laid down the principle that where a number of persons combine together to a common fund for financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus generated cannot in any sense be regarded as profits chargeable to tax.
3.2 The assessee in this case was a sports club providing various facilities to its members, such as restaurant, gymnasium, library, bar, coffee shop and swimming pool. Apart from the surplus funds derived from such activities, it also received interest income from its corporate members on the investment of surplus funds as fixed deposits with them. It claimed that such interest income was covered by the concept of mutuality and was therefore exempt from tax.
4.7 From the foregoing, relying on the views of the Courts and the commentaries on taxation, the emerging view is that the surplus from the activity of mutual benefit association of any form is exempt from taxation and such exemption is not restricted to some specific incomes.
4.14 The better view in the meanwhile seems to be that interest income of a mutual benefit association earned on its investments is exempt from tax under the doctrine of mutuality and the case for its exemption is stronger where the deployment of funds is merely a part of and incidental to the object of the association.
The issue under consideration regarding taxability of interest income has not attained finality till now. The Supreme Court judgment relates to Bangalore Club and not a Housing Society.
Z
( )
(2965 Points)
Replied 17 July 2014
I think its from BCAS article which am reading at the moment.
I agree that there have been controvercies over this issue but with this new judgement it should not be initerpretated as it will apply to Club and not the society, in the judgement consideration was on the principle of mutuality.If it is applicable on Club it shall apply to all RWAs,social/sports club,shop owners association etc.
We check this thing (different entity) when the law is substantative in respect of different entities,it is same the same principle which is governing them equally.Had it been the one which has far reaching point like say different tax treatment in any respect, then we need to think about entity.
saurabh shahu
(Audit Assistant)
(142 Points)
Replied 17 July 2014
Interest income derived from Bank is Taxable in your Case.But otherthan interest income you should get relief under section 80P......
CAclubindia
