Income Tax Act, 1961, Section 57(iii)

Income from other sources--Set off of interest paid to members of AOP on their IBMS against Interest earned on bank deposit--Allowability of

Conclusion: Where a Resident Welfare Association obtained Interest Bearing Maintenance Security (IBMS) from its members and earned interest income by depositing the same with Bank, payment of interest on such IBMS to members would be allowed to set off against such interest income.

Facts- Assessee was Resident Welfare Association. It obtained Interest Bearing Maintenance Security (IBMS) from its members and deposited with Bank. It earned interest income from these deposits and claimed the same as exempt. AO rejected the claim by treating this interest income as taxable. CIT(A) allowed the claim of assessee. Revenue contended that distribution of such interest income among the respective members of assessee was an outcome of the caring of interest income and was not an expenditure incurred to earn the interest income and thus, was not allowable as expenditure incurred to earn income under section 57(iii). Held: There was an obligation on every member to make security deposit and there was corresponding obligation on the assessee to pay interest on such deposit. Thus, there was direct nexus in earning of interest from bank deposit and payment of interest on the IBMS to members. The assessee had paid interest each one after deducting tax at source and the same was taxable in the hands of its members. Accordingly, interest expenditure would be set off against the interest income of assessee. Thus, the contention of revenue was incorrect. Further, AO's contention that interest paid to members is not eligible deduction in the case of AOP under section 40 (ba) is not applicable while computing income from other sources. Therefore, the contention raised by revenue was devoid of merits.

Decision: In assessee's favour

Relied: Belaire Condominium Association [ITA No. 655/Del/2018, 25-4-2018:2018 TaxPub(DT) 2293 (Del-Trib)

IN THE ITAT DELHI BENCH

VIKAS AWASTHY, J.M.  & AVDHESH KUMAR MISHRA, A.M.

Asstt. CIT v. Park Place Condominium Association

ITA No. 2861 and 2855/DEL/2024

9 May, 2025

Assessee by: Vaibhav Jain, Advocate

Department by: Harpreet Kaur Hansra, Sr. DR

ORDER

Vikas Awasthy, J.M.

These two appeals by the Department for assessment year 2016-17 and 2017-18 are directed against the orders of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as 'the Commissioner (Appeals)'), for respective assessment years. Both impugned orders are of even date i.e. 29-2-2024. Since identical issues are involved in both the appeals, these appeals are taken up together for adjudication and are decided by this common order.

ITA No. 2861/Del/2024 for assessment year 2016-17

2. The appeal of Revenue time barred by 37 days. The Revenue has filed petition for condonation of delay in filing of appeal. After perusal of the same we are satisfied that delay in filing of appeal is not intentional but is for the reason stated in petition which appears to be bona fide. Thus, delay of 37 days in filing of appeal is condoned and appeal is admitted for adjudication on merits.

3. The Revenue in appeal has assailed the order of Commissioner (Appeals) by raising following grounds:-

“2. The learned Commissioner (Appeals) has erred in deleting the addition of Rs 2,82,98,482 in case of the assessee which is a AOP on account of interest income cared from bank but not offered to tax under section 56 of the Income Tax Act, 1961 without considering the fact that the distribution of interest income earned among the respective members is an outcome of the caring of interest income and not an expenditure incurred to earn interest income and so is not allowable as expenditure incurred to earn income under section 57(iii) of the Income Tax Act, 1961.

3. That the appellant craves for the permission to add delete or amend grounds of appeal before or at the time of hearing of appeal.”

4. Brief facts of the case as emanating from records are: The assessee is a Resident Welfare Association and filed its return of income in the status of AOP declaring income of Rs. 43,65,420. During the period relevant to assessment year under appeal, the assessee/respondent had received Rs. 5,71,20,988 under different heads of income including Rs. 2,82,98,482 as interest on IBMS. The assessee claimed aforesaid interest income as exempt. The Assessing Officer (assessing officer) rejected assessee's claim and made addition of the aforesaid amount vide assessment order dated 17.12.2018 passed under section 143(3) of the Income Tax Act,1961(hereinafter referred to as 'the Act'). The assessee carried the issue in appeal before the Commissioner (Appeals). The Commissioner (Appeals) deleted the addition following decision of Tribunal in the case of Belaire Condominium Association in ITA No. 655/Del/2018, decided on 25-4-2018 : 2018 TaxPub(DT) 2293 (Del-Trib). Hence, present appeal by the Revenue.

5. Ms. Harpreet Kaur Hansra, representing the department strongly supported findings of the assessing officer and prayed for reversing findings of the Commissioner (Appeals). The learned Departmental Representative submitted that the interest income declared by the assessee is taxable and the Commissioner (Appeals) has erred in deleting the same.

6. Per contra, Shri Vaibhav Jain appearing on behalf of the assessee vehemently defended the impugned order and prayed for dismissing appeal of the Revenue. The learned counsel submits that the issue is squarely covered by the order of Tribunal in the case of Belaire Condominium Association (supra). The Commissioner (Appeals) has followed judicial discipline and thus, allowed relief to the assessee after considering decision of the Tribunal.

7. Both sides heard, orders of the authorities below examined. The short issue in appeal is; Whether the interest received by the assessee on IBMS is exigible to tax? The assessee is a Resident Welfare Association and had filed return of income in the status of AOP. We find that identical issue was considered by the Coordinate Bench of the Tribunal in the case of Belaire Condominium Association (supra). The Coordinate Bench held that interest income of the assessee therein is not liable to tax. The Tribunal observed as under:-

“10. We have considered the rival submission and perused the order passed by the lower authorities. There is no dispute to the fact that assessee is a registered society form with the basic object to provide for maintenance and repair of common arrears and facilities of the building to its members. There is no dispute about the maintenance charges being collected and utilised towards maintenance. The dispute is regarding the interest income earned by it on deposit with the Bank made out of the security deposit obtained from its members. The assessing officer has held that the interest earned on it is not covered by the principle of mutuality after the judgment of the Supreme Court in the case of Bangalore Club (supra). The alternative contention of the assessee that interest paid by it on such security deposit is to be set off against interest income earned on such deposit has also been rejected by the assessing officer. After going through the facts of the case we are of the considered opinion that the assessing officer has gone wrong in rejecting this contention of the assessee society. As rightly pointed out by the learned Authorised Representative that the assessee society has obtained the interest bearing maintenance security called IBMS from the flat owners and such security deposit has been deposited with the Bank on which interest has been earned. Thus, there is a direct nexus in earning interest on such fixed deposit with Bank and payment of interest on the security deposit to the flat owners. The interest expenditure has been incurred wholly and exclusively for earning such interest income on Bank deposit. As per the Apartment buyers agreement there is an obligation on every buyer to make security deposit and there is corresponding obligation on the society to pay interest on such deposit. Thus, the contention of the learned Authorised Representative that this interest expenditure has not been incurred to earn interest income is incorrect. The assessee society has paid interest each one after deducting tax at source. Thus, it is not a case of exemption on the principle of mutuality. Such interest paid by the assessee society is taxable in the hands of the Apartment owner. In view of these facts, we are of the view that interest expenditure is to be set off against the interest income. As regards the assessing officer's contention that interest paid to member is not eligible deduction in the case of AOP under section 40 (ba), we have perused the said section. This clause excludes registered society from its applicability. Accordingly, this clause will not be applicable to the assessee society. Moreover, as rightly contended by the learned Authorised Representative section 40 (ba) is applicable while computing business income. This clause is not applicable while computing income from other sources. There is no prohibition in section 57 (iii) under which deduction of interest is eligible to the assessee society.

11. Accordingly, we direct the assessing officer to delete the addition of Rs. 1,63,77,013 made on account of the interest. In the result appeal of the assessee is allowed.”

8. We find no infirmity in findings of the Commissioner (Appeals), in deciding the issue in line with the decision rendered by Tribunal. Therefore, solitary ground raised by the Revenue in appeal is devoid of any merit, hence, dismissed.

9. In the result, appeal of the Revenue for assessment year 2016-17 is dismissed.

ITA No. 2855/Del/2024 for assessment year 2017-18

10. The Revenue has assailed the findings of Commissioner (Appeals) in impugned assessment year on identical issue as was raised in appeal for assessment year 2016-17, that is with regard to deleting of interest income Rs. 2,87,89,936. Both sides unanimously stated that the issue raised in present appeal is identical to the one raised in assessment year 2016-17, hence, the submissions made for assessment year 2016-17 would equally hold good for assessment year 2017-18.

11. Since, the issue is identical in both appeals, the findings given by us while adjudicating appeal of Revenue for assessment year 2016-17 would mutatis mutandis apply to present appeal as well as. For parity of reasons, appeal of the Revenue for assessment year 2017-18 is dismissed.

12. To sum up, appeal of the Revenue for assessment year 2016-17 and 2017-18 are dismissed.

Order pronounced in the open court on Friday the 9-5-2025.