Poser– Whether the interest income from FDR of AOP (Flat owners Association) is taxable? If yes, on gross basis or net (after deducting flat maintenance expenses) basis?
Probable Answer: Section 167B(2)(i) of Income Tax Act, 1961 says that where share of each member in income of AOP is indeterminate or unknown and the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rate.
Now, suppose that share in income of AOP is determinate but condition in other part is satisfied then whether the income is chargeable to tax at MMR? Gross or Net Income?
Various authorities have given rulings in this matter which contravenes one another mostly. So, coming to the simple logic as under.
One thing is final in spite of any of the rulings that we must have to follow Section 167B. It means taxability is there and that is also at MMR or even at higher rate in case of Section 167B(2)(ii). Now coming to the matter whether gross income or net income is chargeable to tax at such rate?
We have 5 heads of income, out of which, this interest income on FDR will certainly go to the income under the head of other sources. It comprises section 56 to section 59. Section 57(iii) allows deduction towards any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.
Now based on discussion in above para, can we say that expenses towards flat maintenance are deductible u/s 57(iii)? One view is – as the flat maintenance expenses are not incurred to earn interest income on FDR, such expenses are not deductible (it means even if no expense is incurred towards flat maintenance, FDR will earn interest). Another view is – such expenses are deductible because only for of flat maintenance expenses, the flat owners have given the deposits and because of that purpose only, FDRs are created and AOP is getting interest on such FDRs. So, nexus is there between flat maintenance expenses and interest income on such FDRs. Further, if second view is not accepted then how the interest expenses incurred by banks can be deductible against their interest income (though it will be under the head of business income, but base is same)? It can be said that even if bank do not pay interest on deposits, still it can earn interest on loans granted. But this is very absurd logic. Because, as soon as bank stops paying interest on deposits, depositors will demand back their money which will ultimately affect the interest income on loans granted. In same way, once flat maintenance expenses are stopped, flat owners may demand back their deposits which will ultimately affect the interest income on FDRs of such AOP. So, nexus is clearly established.
Conclusion: So based on above logic, one can conclude that interest income from FDR of AOP (Flat owners Association) is taxable on net basis and tax rate will be subject to section 167B. Further the deduction under section 57 is also subject to disallowance under section 58 of Income Tax Act, 1961. So, consider that also.
Disclaimer: It is not any legal opinion to anyone and author is not responsible to anyone who directly or indirectly takes action based on this article.