M/s. Vijaya Bank Employees Housing Co-operative Society Ltd. Vs ACIT (ITAT Bangalore)
Conclusion: In present facts of the case it was observed by the Hon’ble Bench that where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act.
Held: The assessee is a housing co-operative society whose activities is to acquire land and develop the same into sites and allot them to its members at a reasonable price. The assessee for the assessment year 2010-2011, filed the return of income on 13.10.2010 declaring excess of income over expenditure at Rs.21,57,631. The AO during the course of assessment proceedings, noted that the assessee was in receipt of interest income from bank of Rs.5,78,37,690 and also the assessee had claimed expenditure of interest paid on sites deposits of Rs.4,75,00,000.
The AO disallowed the claim of interest of Rs.4,75,00,000 by making following observations:-
(i) The relation of the bank with the assessee is that of an investor and banker, other than that there is no special relationship the bank had with the assessee society.
(ii) The assessee has claimed only part of the interest as exempt and part is offered for tax.
(iii) The assessee’s claim of mutuality concept in respect of interest receipt from bank cannot be accepted in view of the Supreme Court’s decision in the case of Bangalore Club and will therefore be exigible to income tax in the hands of the assessee.
The Hon’ble Tribunal after taking into consideration the submissions of both sides observed that the said issue was are covered by the order of the Tribunal in assessee’s own case for assessment years 2007-2008 to 2009-2010 and 2011-2012 to 2014-2015 (supra), wherein it was held that bylaws of the assessee-society contained the provisions that payment of dividend to its members goes to show that it is not a mutual society and commerciality is very much inherent in the activities of the assessee-society. In this regard, clause 75(6) of the Byelaws of the assessee-society is relevant. Therefore, the action of the Assessing Officer in thrusting the concept of mutuality even when the assessee-society never claimed the concept of mutuality, is bad in law and is hereby set aside.
Further, in the said Order it was held that there is a direct nexus between the contribution by the members, which was utilized for making fixed deposit to earn interest income and payment of portion of such interest income earned as compensation to members for delayed allotment of Therefore, the interest credited to the members is wholly and exclusively for the purpose of business and entitled to deduction u/s 37(1) of the I.T.Act. For claiming expenditure u/s 37(1) of the I.T.Act, there was no need for a cause and effect relationship between an item of income and expenditure as claimed by the A.O. All that would be necessary is only that it is for the “purpose of business” and not necessary for earning of the income. The Assessing Officer has taken a view that there is no obligation on the assessee-society to pay interest to its members when advance was received. Therefore, the A.O. concluded that there is no contractual obligation to pay interest. On the other hand, it was observed by the Hon’ble Tribunal that it is not the requirement under Contract Law that all terms of the contract be agreed upon upfront and there is no scope for alteration thereafter. In the instant case, the delay in procuring the land and formation of site was unforeseen at the initial stage when advances were collected by the assessee- society. Having parted with money and also with site allotment being delayed, the expectation of the members to be compensated by way of interest on their advances is only legitimate.
Accordingly, the Hon’ble Tribunal 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.
