2018 (11) TMI 1114 - AT - Income Tax

Interest from Banks Taxable as Income; Not Exempt under Mutuality Principles

The ITAT dismissed the appeal, holding that interest received from banks is taxable as income from other sources and not exempt on the principles of ... Addition towards income from other sources for interest income from bank - assessee is a Mutual benefit society - Income earned as exempt from tax on the principle of mutuality - Held that:- Even though the bank was having a corporate membership with the said club/society, the principle of mutuality does not arise. In assessee's case, the bank is not even a member of the society. The nature of the transaction between the assessee and the bank would disqualify application of the principle of mutuality. Therefore, the transactions with the bank who is not even a member of the society cannot be considered as a transaction for which principles of mutuality will apply. Not only on the principles laid down in the subject but also on the fact that the interest was received from a non-member, the principles of mutuality do not apply. The orders of the AO and CIT(A) are accordingly upheld both on facts as well as on principles of law. Thus find no merit in assessee's grounds and accordingly, the same are dismissed. - Decided against assessee. Issues Involved:1. Whether the interest received from banks is exempt on the principles of mutuality.Detailed Analysis:Issue 1: Whether the interest received from banks is exempt on the principles of mutuality.The assessee, a mutual benefit society, filed its return of income for the AY 2014-15, claiming that the income earned is exempt from tax based on the principle of mutuality. The Assessing Officer (AO) scrutinized the return and added Rs. 31,90,148/- as income from other sources, arguing that the interest earned from banks does not qualify for exemption under the principle of mutuality. The assessee contended that the society was formed with no profit motive and aimed to promote the economic and social betterment of its members through thrift, self-help, and mutual aid.The AO rejected the assessee's submissions, citing previous judicial decisions, including the Hon'ble Supreme Court's ruling in CIT Vs. M/s Bangalore Club and the Hon'ble High Court's decision in CIT Vs. M/s Secunderabad Club. The AO concluded that the interest earned from banks should be treated as income from other sources and added it to the returned income.Upon appeal, the CIT(A) confirmed the AO's addition. The assessee then appealed to the ITAT, raising the issue that the interest received from banks should be exempt on the principles of mutuality.The ITAT considered the rival submissions and reviewed the material on record. The Tribunal referenced its own decision in the assessee's case for AY 2012-13, where it was held that the interest earned from banks, which are not members of the society, does not qualify for exemption under the principle of mutuality. Citing the Hon'ble Supreme Court's judgment in CIT Vs. Bankipur Club Ltd., the Tribunal emphasized that for mutuality to apply, there must be complete identity between the contributors and the participators. The interest earned from non-members (banks) does not fulfill this criterion.Further, the ITAT referred to the Hon'ble jurisdictional High Court's decision in CIT Vs. Secunderabad Club, which stated that the nature of the transaction between the assessee and banks disqualifies the application of the principle of mutuality. The court held that the interest earned from banks is taxable as it does not arise from mutual activities.The ITAT concluded that the transactions with banks, which are not members of the society, cannot be considered mutual transactions. Therefore, the interest earned from banks is taxable, and the principles of mutuality do not apply. The Tribunal upheld the orders of the AO and CIT(A), dismissing the assessee's appeal.Conclusion:The ITAT dismissed the appeal of the assessee, holding that the interest received from banks is not exempt on the principles of mutuality and is taxable as income from other sources. The decision was pronounced in the open court on 15th November 2018.