2018 (7) TMI 58 - AT - Income Tax

Tribunal rules bank interest taxable in society's income case, upholds revenue's appeals

ACIT, Circle-I And DCIT, Circle-I, Faridabad Versus The New Vikas Co-operative House Building Society Ltd. And Vice-Versa

The Tribunal ruled against the assessee, holding that the income of the society was not governed by the principle of mutuality, making bank interest ... Exemption u/s 11 - principle of mutuality - whether profits are not income u/s 2(24) - society itself has declared its taxable income u/s 2(24) of the Act on account of bank interest etc. - Held that:- This issue is squarely covered against the assessee by the decision in case of Bangalore Club Vs. CIT [2013 (1) TMI 343 - SUPREME COURT], wherein, it has been held that the interest earned by the assessee club on certain fixed deposits kept with certain banks who are also corporate members of the assessee is not covered by the mutuality principles and would therefore, be chargeable to tax in the hands of the assessee. Enhanced compensation - taxable only when it attained finality irrespective of the remedial provision included in the income w.e.f 01.04.2004 u/s 45(5)(c) - Held that:- This issue has already been decided in case of CIT Vs. Ghanashyam (HUF)[2009 (7) TMI 12 - SUPREME COURT] wherein, it has been held that the enhanced compensation is liable to be taxed u/s 45(5) in the year of receipt and interest is also chargeable to tax in the year of receipt as interest on excess compensation u/s 28 of the land acquisition Act form part of the compensation only which is chargeable to tax u/s 45(5) in the year of receipt. However for the purposes of quantification the ld AO is directed to verify the exact amount of interest and compensation received. Credit of the tax and TDS - Held that:- Bank interest is chargeable to tax in the hands of the assessee as it is not covered by the Principles of mutuality relying on the decision of the Hon'ble Supreme Court. With respect to the chargeability of the compensation and interest thereon we have held that it is chargeable to tax in the year in which it is received. Therefore, as we have already held that, there is an income, which is chargeable to tax in the hands of the assessee; this appeal of the revenue becomes infractuous in view of the chargeability of enhanced compensation of ₹ 8.73 crores and bank interest also. In view of this the amount paid by the assessee u/s 140A and the amount of TDS is required to be adjusted against the tax liability of the assessee. Therefore, we direct the ld AO to recompute the tax liability for assessment year 2003-04 after granting credit of the tax and TDS. Changeability of tax on the bank interest - Held that:- Income by way of interest received on compensation or on enhanced compensation referred to any clause (b) of section 145A is chargeable to tax as income under the head income from other sources. Section 145A (b) the interest received by the assessee shall be deemed to be the income of the year in which it is received. Accordingly, we allow ground Nos. 1 and 2 of the appeal of the revenue holding that the compensation and interest thereon is chargeable to tax in the year in which it is received. However for the purposes of quantification the ld AO is directed to verify the exact amount of interest and compensation received . Inadmissible expenditure - Held that:- According to provision of section 57(iii), the deduction of any other expenditure laid out of expenditure wholly and exclusively for the purpose of making or earning such income is available. In the present case the expenditure are OD interest, audit expenditure, salary expenditure, legal expenditure, meeting expenditure etc. They are not capital expenditure in nature. Legal fees are incurred for the purpose of the compensation earned. In view of the above, we do not find any infirmity in the order of the ld CIT (A) in allowing the claim of expenditure of ₹ 5041804/- u/s 57(iii) of the Act. Taxation of enhanced compensation and interest thereon - Held that:- This issue is squarely covered against the assessee by the decision of the Hon'ble Supreme Court in case of Bangalore Club (supra) therefore; we hold that bank interest of ₹ 5025433/- earned by the assessee is chargeable to tax. Therefore, out of total interest income the bank interest is to be fully charged to tax without deduction of expenditure u/s 57(iv) of the Act. In view of this ground No. 2, 3, 5 and 6 of the appeal of the assessee are decided accordingly. Issues Involved:1. Principle of mutuality and its applicability to the income of the society.2. Taxability of interest on enhanced compensation.3. Admission of additional evidence and procedural compliance.4. Deduction of expenses related to earning interest income.5. Taxability of bank interest under mutuality principles.6. Quantification of compensation and interest received.Issue-wise Detailed Analysis:1. Principle of Mutuality and Applicability to Income:The primary issue was whether the income of the New Vikash Cooperative House Building Society Ltd., Faridabad, was governed by the principle of mutuality, thus making it non-taxable under section 2(24) of the Income Tax Act, 1961. The Tribunal found that this issue was covered against the assessee by the Supreme Court's decision in Bangalore Club Vs. CIT, where it was held that interest earned on fixed deposits kept with banks, even if they are corporate members, is not covered by mutuality principles and is chargeable to tax. Consequently, the Tribunal dismissed the assessee's claim of mutuality for bank interest income.2. Taxability of Interest on Enhanced Compensation:The second major issue was whether compensation and enhanced compensation received by the society were taxable only when they attained finality. The Tribunal referred to the Supreme Court's decision in CIT Vs. Ghanashyam (HUF), which held that enhanced compensation and interest thereon are chargeable to tax in the year of receipt under section 45(5). The Tribunal directed the Assessing Officer (AO) to verify the exact amount of interest and compensation received for accurate taxation.3. Admission of Additional Evidence and Procedural Compliance:The Tribunal addressed the issue of additional evidence admitted by the CIT(A) without granting the AO an opportunity to examine it. The Tribunal noted that the additional evidence was part of the assessment record and supplementary submissions based on the Land Acquisition Officer's statement of account. Therefore, the Tribunal found no procedural lapse and dismissed the revenue's objections on this ground.4. Deduction of Expenses Related to Earning Interest Income:The Tribunal examined the disallowance of expenses claimed by the assessee under section 57(iii) for earning interest income. The Tribunal upheld the CIT(A)'s decision that expenses like legal fees, audit fees, salary, and other administrative expenses were necessary for maintaining the establishment and were allowable deductions under section 57(iii).5. Taxability of Bank Interest Under Mutuality Principles:The Tribunal consistently held that bank interest earned by the society is not covered by the principles of mutuality, referring to the Supreme Court's decision in Bangalore Club. This applied to all assessment years under consideration, and the Tribunal dismissed the assessee's claims for exemption of bank interest under mutuality principles.6. Quantification of Compensation and Interest Received:For accurate taxation, the Tribunal directed the AO to verify the exact amounts of interest and compensation received by the society. This was necessary to ensure proper computation of taxable income, especially for enhanced compensation and interest thereon, which were to be taxed in the year of receipt as per the Supreme Court's ruling in CIT Vs. Ghanashyam (HUF).Separate Judgments Delivered:- For Assessment Year 2002-03 (ITA No. 2217/Del/2008), the Tribunal dismissed the assessee's appeal on mutuality and allowed the revenue's appeal on the taxability of enhanced compensation.- For Assessment Year 2003-04 (ITA No. 2218/Del/2008 and ITA No. 3413/Del/2009), the Tribunal allowed the revenue's appeals, directing the AO to verify the exact amounts of interest and compensation.- For Assessment Year 2007-08 (ITA No. 1679/Del/2010), the Tribunal allowed the revenue's appeal, holding that bank interest is chargeable to tax.- For Assessment Year 2008-09 (ITA No. 3596/Del/2011 and ITA No. 3791/Del/2011), the Tribunal dismissed the assessee's appeal on mutuality and allowed the revenue's appeal on the taxability of enhanced compensation and interest.- For Assessment Year 2010-11 (ITA No. 6051/Del/2011), the Tribunal partially allowed the assessee's appeal, directing the AO to verify the exact amounts of interest and compensation for proper taxation.Order Pronounced:The Tribunal pronounced the order in the open court on 29/06/2018.