2021 (7) TMI 636 - AT - Income Tax

Tribunal allows interest deduction, rejects mutual benefit status, upholds capital expenditure disallowance.

The Tribunal partly allowed the appeal, permitting the deduction of interest expenditure paid to members but upholding the disallowance of capital ... Concept of mutuality - Payment of interest / compensation to the members - Enhancing the assessed income u/s 251(2) - Interest income earned from bank by holding that the assessee is a mutual society and that non-mutual income is to be taxed in its entirety - assessee-co-operative society is essentially a mutual benefit society with close identity of contributors and beneficiaries - HELD THAT:- As decided in own case [2021 (4) TMI 1077 - ITAT BANGALORE] we hold that the assessee is entitled to the claim of deduction of interest expenditure being the amount paid to the members of the assessee-society. Allowability of capital expenditure - HELD THAT:- The learned AR fairly conceded that the expenditure enumerated above are capital in nature. In view of the submission of the learned AR, the expenditure is held to be capital in nature. Accordingly, this issue is decided against the assessee. Issues Involved:1. Whether the Commissioner (Appeals) is justified in holding that the assessee is a mutual benefit society.2. Whether the Commissioner (Appeals) is justified in upholding the disallowance of the interest expenditure and other expenditure.3. Whether the Commissioner (Appeals) is justified in not allowing deduction of interest expenditure under section 57(iii) of the Act.4. Whether the Commissioner (Appeals) is right in confirming disallowance of Rs. 37,00,941 made by the A.O. as capital expenditure.Detailed Analysis:1. Mutual Benefit Society Status:The Tribunal examined whether the Commissioner (Appeals) was justified in treating the assessee as a mutual benefit society. The Tribunal noted that the assessee did not claim any exemption under the mutuality concept and filed returns like any other commercial undertaking. The Assessing Officer (A.O.) had wrongly applied the mutuality concept, despite the assessee not claiming it, which was deemed inappropriate. The Tribunal concluded that the A.O. cannot impose a mutual status on the assessee when it was not claimed, especially when commerciality was inherent in the assessee's activities. This was supported by the Supreme Court's judgment in Kumbakonam Mutual Benefit Fund Limited, which denied mutuality due to commerciality.2. Disallowance of Interest Expenditure:The Tribunal addressed whether the interest expenditure claimed by the assessee could be allowed as a deduction under sections 37 or 36(1)(iii) of the I.T. Act. The interest expenditure was compensatory for the delay in project implementation, aligning with the matching principle, which allows expenses incurred to produce revenue. The Supreme Court's judgment in J.K. Industries v. UOI supported this principle. The Tribunal found a direct nexus between the members' contributions, the interest earned from fixed deposits, and the compensatory interest paid to members. Therefore, the interest expenditure was deemed allowable under section 37(1) of the I.T. Act.3. Deduction under Section 57(iii):The Tribunal considered whether the interest expenditure could be allowed as a deduction under section 57(iii) if the interest income was assessed under 'income from other sources.' The Tribunal noted that the interest paid to members was directly linked to the interest earned from fixed deposits, making it an expenditure laid out wholly and exclusively for earning the interest income. The Delhi High Court's judgments in CIT v. Sasan Power Limited and Taj International Jewellers supported the allowance of such expenditure under section 57(iii). The Tribunal concluded that the interest expenditure should be allowed as a deduction under section 57(iii).4. Disallowance of Rs. 37,00,941 as Capital Expenditure:The Tribunal addressed the disallowance of Rs. 37,00,941 by the A.O., which was deemed capital expenditure. The assessee's representative conceded that the expenditure was capital in nature. Consequently, the Tribunal upheld the disallowance, agreeing with the A.O.'s classification of the expenditure as capital.Conclusion:The Tribunal partly allowed the appeal, granting the assessee's claims for deduction of interest expenditure paid to members while upholding the disallowance of Rs. 37,00,941 as capital expenditure. The order was pronounced on July 15, 2021.