2011 (3) TMI 1640 - AT - Income Tax

Cooperative Society's Income Exemption Upheld on Mutuality Grounds

The Cooperative Society claimed income exemption based on the principle of mutuality, which the AO initially rejected. However, the CIT(A) supported the ... - Issues Involved:1. Exemption of income on the principle of mutuality.2. Deletion of addition made by the AO on account of interest on cumulative deposits.Summary:Issue 1: Exemption of Income on the Principle of MutualityThe assessee, a Cooperative Society, claimed its income as exempt based on the principle of mutuality, arguing that it was not profit-oriented and had no share capital or profit distribution. The AO rejected this claim, stating that the assessee did not fulfill the mutuality requirement, particularly regarding the distribution of surplus assets among members upon dissolution. The AO referenced the case of CIT Vs Shree Jari Merchants Association 106 ITR 542, noting the absence of a clause for surplus distribution among members. The assessee countered by citing CIT Vs Adarsh Co-op. Housing Society Ltd. 213 ITR 677, where the Gujarat High Court upheld mutuality despite similar conditions. The CIT(A) sided with the assessee, emphasizing that Sections 114 and 115 of the Gujarat Co-operative Societies Act allowed members to decide on surplus distribution, aligning with the principle of mutuality. The CIT(A) also referenced the ITAT Cochin Bench decision in Bus Operators Association Vs ACIT (2006) 100 TTJ 904, supporting the assessee's claim.Issue 2: Deletion of Addition Made by the AO on Account of Interest on Cumulative DepositsThe AO added &8377; 24,49,026/- as interest income, arguing it should be taxed on an accrual basis. The assessee, following a cash system of accounting, contended that interest on surplus funds was exempt on the principle of mutuality and should be taxed on a receipt basis. The CIT(A) agreed, noting that the assessee's income was exempt on mutuality grounds and that the cash accounting system was permissible under section 145 of the IT Act.Resolution and RemandTo avoid further litigation, the assessee passed a resolution in its Annual General Body Meeting, adding clause No.9A to its byelaws, ensuring surplus distribution among members upon liquidation. This resolution was sanctioned by the Director of Sugar, Gujarat State. Both parties agreed to remand the matter to the AO for reconsideration in light of this new development. The Tribunal set aside the orders of the authorities below and restored the issues to the AO for fresh consideration, directing the AO to pass a reasoned order after providing the assessee with a reasonable opportunity to be heard.ConclusionAll appeals of the revenue were allowed for statistical purposes, and the matters were remanded to the AO for reconsideration in accordance with the modified byelaws.Order PronouncedOrder pronounced in the open Court on 25-03-2011.