2012 (9) TMI 472 - AT - Income Tax

Assessee's Appeal Allowed, Revenue's Partially: Mutuality Principle Upheld, Income Exemptions Clarified

The appeal filed by the assessee was allowed, and the appeal filed by the revenue was partly allowed. The Tribunal upheld the principle of mutuality for ... Addition on account of membership subscription from its members by society – Held that:- As the assessee meets all the three conditions which are that the assessee is a registered society, the members of which has come together for fulfillment of a common cause, secondly the appellant exists for the benefit of members only and thirdly there is prohibition on distribution of profit to any past or current members and on winding up, the surplus remains the properly of its members. Therefore assessee’s society is covered by the doctrine of mutuality and this amount was not taxable in view of judgment by Bombay High Court in case of Willingdon Sports Club (2008 (3) TMI 134). Decided in favour of Assessee. Addition on account of Grant received from Govt. of India – Capital Grant which is 50% of cost of project, received by society towards cost of setting up integrated waste management facility for all the members – Held that:- In the case of mutual concern, income received from the members is exempt and the income received from nonmembers is taxable. The amount is a capital receipt and is not liable to tax. Taxability depends upon whether it was received from members or nonmembers is not correct because as per the provisions of Income tax charging of tax comes into picture only when the nature of receipt is revenue and no capital receipts are taxed. Decision in favour of assessee. Addition on account of interest income – Assessee had claimed that it is following cash system of accounting - Booked income as and when it is received - Held that - In view of existence of concept of mutuality and in view of various judicial pronouncements relied upon by assessee, the interest income whether booked on cash basis or on receipt basis is exempt in the case of assessee is a society. Decision in favour of assessee. Issues Involved:1. Taxability of interest income on accrual basis vs. cash basis.2. Applicability of the doctrine of mutuality to the assessee society.3. Tax treatment of capital subsidy received under the ASIDE Scheme.4. Validity of assessment under section 144 of the Act.5. Alleged double addition of miscellaneous income.Detailed Analysis:1. Taxability of Interest Income:The assessee contended that the interest income of Rs. 270,619/- should be taxed on a cash basis as it follows the cash system of accounting. However, the Ld CIT(A) agreed with the Assessing Officer (AO) that interest income is always taxable on an accrual basis. The CIT(A) upheld the addition of Rs. 2,47,113/- and Rs. 23,506/- as interest income from City Bank and OBC Bank, respectively, based on the accrual system. The Tribunal found the CIT(A)'s judgment contradictory, as he deleted interest income of Rs. 1,34,234/- but upheld other interest income. The Tribunal concluded that, given the concept of mutuality and various judicial pronouncements, the interest income is exempt whether booked on a cash or accrual basis.2. Applicability of the Doctrine of Mutuality:The assessee argued that it is a mutual concern with complete identity between contributors and participators, thus exempt from tax under the principle of mutuality. The Ld CIT(A) agreed, stating that the assessee society is a mutual concern and covered by the concept of mutuality. The Tribunal upheld this view, noting that the assessee is a cooperative society with a common purpose, benefiting its members only, and prohibiting profit distribution to past or present members. The Tribunal concluded that the concept of mutuality squarely applies to the assessee society.3. Tax Treatment of Capital Subsidy:The assessee received a grant of Rs. 2 crores from the State Government under the ASIDE Scheme, which it claimed as a capital receipt to be reduced from the cost of the asset. The Ld CIT(A) treated the subsidy as a revenue receipt, arguing that in a mutual concern, income from non-members is taxable regardless of whether it is capital or revenue. The Tribunal disagreed, stating that capital receipts are not taxed, and the nature of the subsidy as a capital receipt was not in doubt. The Tribunal held that the addition of Rs. 20,00,0000/- should be deleted.4. Validity of Assessment under Section 144:The assessee claimed that the assessment under section 144 was unwarranted as the notices were not properly served, and the final notice was received after the assessment was completed. The Ld CIT(A) upheld the assessment under section 144, stating that the assessee did not cooperate with the AO. The Tribunal did not specifically address this issue in detail but focused on the substantive tax issues.5. Alleged Double Addition of Miscellaneous Income:The AO added Rs. 3,57,681/- as miscellaneous income, which the assessee claimed was added twice. The Ld CIT(A) held that the amount was indeed added twice and ordered its deletion. However, the Tribunal found that the AO had added the amount to the income and then reduced it at the end, making no difference. Thus, the Tribunal agreed with the Ld DR that there was no double addition, and this ground of the revenue's appeal succeeded.Conclusion:The appeal filed by the assessee was allowed, and the appeal filed by the revenue was partly allowed. The Tribunal upheld the principle of mutuality for the assessee society, exempted the interest income, and treated the capital subsidy as non-taxable. The alleged double addition of miscellaneous income was found to be incorrect. The judgment was pronounced on July 6, 2012.