2024 (8) TMI 108 - AT - Income Tax

Co-operative Housing Society can set-off maintenance deficit against rental and interest income under Chapter VI

Sohamnagar Co-Operative Housing Society Ltd. Versus The Income Tax Officer, Ward-3 (3) (6), Ahmedabad, Gujarat

Sohamnagar Co-Operative Housing Society Ltd. Versus The Income Tax Officer, Ward-3 (3) (6), Ahmedabad, Gujarat - TMI Issues Involved:1. Addition of Rs. 14,60,191/- related to expenses claimed under Section 57 of the Income-tax Act, 1961.2. Alternative claim for expenses under Section 37 of the Income-tax Act, 1961.3. Consideration of various evidences and submissions by the assessee.4. Charging of interest under Section 234/B/C/D of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Addition of Rs. 14,60,191/- related to expenses claimed under Section 57 of the Income-tax Act, 1961:The assessee, a Co-operative Housing Society, filed its return of income declaring a total income of Rs. 23,520/-. The AO observed that the assessee's primary activity was collecting maintenance charges and spending them on common expenses without carrying out any business activity. The assessee earned interest income from FDRs, rent from letting out common terrace space, and other minor interest incomes. The AO noted that the assessee claimed deductions/expenses of Rs. 27,34,560/- under Section 57 of the Act. However, the AO disallowed Rs. 14,60,191/- of these expenses, asserting that they were not incurred wholly and exclusively for earning the interest income, as required by Section 57(iii). The AO relied on the Supreme Court decision in Bangalore Club v. CIT, determining that the interest income did not fulfill the mutuality principle and was chargeable to tax.2. Alternative claim for expenses under Section 37 of the Income-tax Act, 1961:The assessee argued that if the expenses were not allowable under Section 57, they should be allowed under Section 37. The CIT(A) dismissed this claim, emphasizing that each assessment year is separate and the assessee must establish a direct link between the expenses and the income earned. The CIT(A) cited the Supreme Court decision in CIT v. Rajendra Prasad Moody, which stated that the purpose of the expenditure must be making or earning income. The CIT(A) also referred to the ITAT Pune Bench decision in Poona Club Ltd. v. ACIT, which rejected a similar claim due to the lack of a demonstrated nexus between the expenditure and the income.3. Consideration of various evidences and submissions by the assessee:The assessee contended that it incurred maintenance expenses for the benefit of its members and collected deposits to keep maintenance charges low. The interest from these deposits was used to cover maintenance costs. The CIT(A) dismissed the appeal, stating that the assessee failed to establish a direct link between the expenses and the income. The Tribunal, however, observed that the assessee's arrangement was not a tax avoidance measure. The Tribunal noted that the assessee had a deficit in maintenance expenses when excluding rental and interest income, supporting the view that these incomes were used to cover the deficit. The Tribunal found merit in the assessee's claim, referencing the Punjab and Haryana High Court decision in CIT v. Maruti Employees Co-Operative Housing Society Building Society Ltd., which supported the assessee's position.4. Charging of interest under Section 234/B/C/D of the Income-tax Act, 1961:The Tribunal did not specifically address the issue of charging interest under Section 234/B/C/D, as the primary focus was on the allowability of the expenses claimed by the assessee.Conclusion:The Tribunal allowed the appeal filed by the assessee, finding that the deficit in maintenance expenses could be set off against the rental and interest income. The Tribunal emphasized that the decision was based on the specific facts of the case and should not be considered as having precedential value. The appeal was allowed, and the order was pronounced on 30.07.2024.