ACIT, Gurgaon V. M/s. Oakwood Estate Condominium Associations, Gurgaon

ITA 4502/DEL/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 2843 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-01-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 09-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 29-07-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: P DAM KANUNJNA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: E NEW DELHI BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDI CIAL MEMBER ITA NO: 4502/DEL/2013 ASSTT. YEAR 2009-10 ACIT VS. M/S. OAKWOO D ESTATE CONDOMINIUM ASSOCIATIONS CIRCLE-2, DLF C ITY, PHASE-II, GURGAON AKASHEEN MARG GURGAON (PAN AAAJ00033B) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI TUSHAR JARWAL, ADVOCATE SHRI RAHUL SATEEJA, ADVOCATE RESPONDENT BY : SHRI P.DAM KANUNJNA, SR.DR DATE OF HEARING : 09.10.2015 DATE OF PRONOUNCEMENT : 01.01.2016 O R D E R PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE DEPART MENT AGAINST THE ORDER DATED 27.5.2013 PASSED BY THE LD. CIT (A) -2, FARIDABAD FOR AY 2009-10. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE AS SESSEE IS A RESIDENTIAL CONDOMINIUM ASSOCIATION OF MEMBERS OF M/S. OAK WOOD ESTATE COND OMINIUM AND DERIVES INCOME FROM CONTRIBUTION FROM MEMBERS, INTEREST ON DEPOSIT S WITH BANKS, INTEREST ON INTEREST BEARING MONEY SECURITY DEPOSITS RECEIVED F ROM MEMBERS, VISITOR PARKING ITA NO.4502/DEL/2013 ACIT VS. OAKWOOD ESTATE CONDOMINIUM ASSOCIATIONS 2 'V* ' INCOME, ELEVATOR USAGES CHARGES, GARBAGE COLLECTION CHARGES, SCRAP SALES AND MISC. INCOME ETC. THE RETURN DECLARING AN INCOME OF RS. 2,53,630/- WAS FILED ON 30.9.2009 WHICH WAS PROCESSED U/S 143(1) OF THE ACT AT THE RETURNED INCOME. THE CASE WAS LATER SELECTED UNDER COMPULSORY SCRUTINY I N VIEW OF BOARDS DIRECTIONS. DURING THE COURSE OF SCRUTINY PROCEEDINGS U/S 143(3 ), THE AO NOTICED THAT THE ASSESSEE HAD RECEIVED INTEREST FROM BANK ON INTERES T BEARING MAINTENANCE SECURITY (IBMS) .THE INTEREST ACCRUED ON IBMS FOR THE YEAR WAS RS. 25,27,684/-. ALTHOUGH THE ASSESSEE HAD CLAIMED THIS ACCRUED INTEREST AS I NCOME EXEMPT ON THE PRINCIPLE OF MUTUALITY, IT WAS THE AOS OPINION THAT THE INCOME HAD BEEN EARNED FROM THIRD PARTY I.E. NON MEMBERS AND THEREFORE THE PRINCIPLE OF MUT UALITY WAS NOT APPLICABLE TO THE INTEREST INCOME EARNED FROM DEPOSITS WITH THE BANKS . THE AO, ACCORDINGLY, ADDED THE AMOUNT OF RS. 25,27,684/- AND COMPLETED THE ASS ESSMENT AT A TOTAL INCOME OF RS. 25,81,317/-. BEFORE THE LD. CIT (A) IT WAS SUBM ITTED BY THE ASSESSEE THAT INITIALLY THE MAINTENANCE OF THE BUILDING WAS LOOKED AFTER BY DLF. HOWEVER, SUBSEQUENT TO THE FORMATION OF THE ASSESSEE SOCIETY, THE MAINTENA NCE OF THE CONDOMINIUM WAS TAKEN UP BY THE SOCIETY AND THE ENTIRE AMOUNT OF IN TEREST BEARING SECURITY MAINTENANCE DEPOSITS OF RS. 2 CRORES WAS TRANSFERRE D BY THE DLF TO THE SOCIETY AS CORPUS FOR CARRYING OUT MAINTENANCE WORK OF THE SOC IETY. THE CORPUS FUND OF THE SOCIETY RECEIVED ON TRANSFER WAS DEPOSITED IN FIXED DEPOSIT IN A SCHEDULED BANK AND INTEREST WAS EARNED ON SUCH FIXED DEPOSIT. IT WAS A LSO SUBMITTED THAT THE SOCIETY WAS REQUIRED TO CARRY OUT ROAD REPAIRS AND OTHER RE PAIR WORKS AND IT WAS FOUND THAT THE MAINTENANCE CHARGES RECEIVED FROM THE MEMBERS W OULD NOT BE SUFFICIENT TO COVER THESE EXPENSES. THEREFORE, SOCIETY PASSED A R ESOLUTION IN 2006-07 WHEREBY IT ITA NO.4502/DEL/2013 ACIT VS. OAKWOOD ESTATE CONDOMINIUM ASSOCIATIONS 3 'V* ' WAS DECIDED THAT THE INTEREST RECEIVED ON FDRS WOUL D NOT BE CREDITED TO EACH MEMBER ACCOUNT, BUT WOULD BE CREDITED TO A SPECIAL RESERVE ACCOUNT CALLED RENEWAL AND REPLACEMENT ACCOUNT FUND. IT WAS, THEREFORE, SU BMITTED THAT THE INTEREST RECEIVED BY THE SOCIETY WAS ON BEHALF OF THE MEMBER S AND WAS EXEMPT ON THE PRINCIPLE OF MUTUALITY. THE LD. CIT(A) PLACING RELI ANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHELMSFORD CLUB VS. C IT 243 ITR 89 (SC), CIT VS. SCOPE (ITA NO. 1409 OF 2008) OF HONBLE DELHI HIG H COURT, DIT (EXEMPTION) VS. ALL INDIA ORIENTAL BANK OF COMMERCE WELFARE SOCIETY 184 CTR 274 (DELHI) DELETED THE ADDITION AND HELD THAT THE INTEREST INCOME EAR NED BY THE SOCIETY WAS APPROPRIATED TO THE RENEWAL AND REPLACEMENT FUND F OR PROVIDING AMENITIES AND OTHER SERVICES TO THE MEMBERS OF THE SOCIETY AND WA S HENCE COVERED BY THE PRINCIPLE OF MUTUALITY AND ACCORDINGLY EXEMPT. 3. IN THE PRESENT APPEAL BEFORE US THE DEPARTM ENTS SOLE GRIEVANCE IS THAT THE LD. CIT (A) HAS ERRED AND HOLDING THAT THE DOCTRINE OF MUTUALITY APPLIED TO THE INTEREST INCOME DERIVED BY SOCIETY FROM THE BANK. L D. DR SUBMITTED THAT THE INCOME IN FORM OF INTEREST HAD BEEN EARNED FROM THIRD PART Y I.E. FROM NON MEMBERS AND HENCE IT COULD NOT BE SAID THAT THE SAME WAS EXEMPT ON THE PRINCIPLE OF MUTUALITY. THE LD. DR SUPPORTED THE ORDER OF THE AO AND CONTEN DED THAT THE LD. CIT (A) HAD WRONGLY ALLOWED THE APPEAL OF THE ASSESSEE. 4. LD. AR ON THE OTHER HAND SUBMITTED THAT THE ISSUE WAS COVERED BY THE DECISION RENDERED BY THE DELHI E BENCH IN THE ASSES SEES OWN CASE FOR AY 2007-08 IN ITA NO. 5846/DEL/2010 WHEREIN VIDE ORDER DATED 9 TH DECEMBER, 2011 , THE E BENCH FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH CO URT IN THE CASE OF CIT VS. DELHI ITA NO.4502/DEL/2013 ACIT VS. OAKWOOD ESTATE CONDOMINIUM ASSOCIATIONS 4 'V* ' GYMKHANA CLUB LTD. 339 ITR 525 (DELHI) HAD HELD THA T INCOME EARNED BY THE SOCIETY IN THE FORM OF INTEREST BY KEEPING THE FUNDS GENERA TED FROM THE MEMBERS IN THE BANK WILL NOT BE TREATED AS INCOME LIABLE FOR TAX. HE ACCORDINGLY SUBMITTED THAT THE ASSESSEE IS ENTITLED EXEMPTION OF INTEREST FROM BAN K ON ACCOUNT OF PRINCIPLE OF MUTUALITY. THE LD. AR ALSO SUBMITTED THAT THE ORDER OF THE TRIBUNAL HAD REACHED FINALITY SINCE THE REVENUE DID NOT CARRY THE MATTER ANY FURTHER. ON A QUERY FROM THE BENCH, THE LD. AR ALSO MADE A REFERENCE TO THE DECI SION OF HONBLE APEX COURT IN THE CASE OF BANGALORE CLUB VS. CIT 350 ITR 509 A ND SUBMITTED THAT THE CASE OF THE ASSESSEE SOCIETY WAS DIFFERENT FROM THE FACTS OF TH E CASE OF THE BANGALORE CLUB AS THE ISSUE IN THE BANGALORE CLUB WAS WITH RESPECT TO THE INTEREST EARNED FROM THE FINANCIAL INSTITUTIONS WHICH WERE MEMBERS OF THE AS SESSEE CLUB WHEREAS IN CASE OF THE ASSESEE THE ISSUE WAS WITH RESPECT TO INTEREST EARNED FROM BANKS WHICH WERE NOT THE MEMBERS OF THE ASSESSEE SOCIETY. LD. AR FUR THER SUBMITTED THAT IN CASE OF THE ASSESEE ALTHOUGH THE INTEREST WAS RECEIVED FROM THE BANK, IT WAS ACTUALLY RECEIVED ON ACCOUNT OF MEMBERS OF THE ASSOCIATION W HO HAD CONTRIBUTED TO THE FUNDS CONSTITUTING THE INTEREST BEARING MAINTENANCE SECUR ITY (IBMS) AND HENCE THE PRINCIPLE OF MUTUALITY DID APPLY. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFUL LY PERUSED THE MATERIAL AVAILABLE ON RECORD. THE DECISION OF THE TRIBUNAL IN THE ASSE SSEES OWN CASE (SUPRA) WAS RENDERED FOLLOWING THE JUDGMENTS OF THE HONBLE HIG H COURT OF DELHI IN CIT VS. DELHI GYMKHANA CLUB LTD. (SUPRA) WHEREIN IT WAS HELD THAT THE INCOME FROM FIXED DEPOSITS IN THE BANK, DIVIDEND INCOME, INCOME FROM GOVT. SEC URITIES AND PROFIT ON SALE OF INVESTMENTS ETC. WOULD ALSO ATTRACT THE DOCTRINE OF MUTUALITY. HOWEVER, NOW IN THE ITA NO.4502/DEL/2013 ACIT VS. OAKWOOD ESTATE CONDOMINIUM ASSOCIATIONS 5 'V* ' PRESENT SITUATION THE HONBLE APEX COURT IN THE CAS E OF BANGALORE CLUB (SUPRA) HAS CATEGORICALLY HELD THAT THE INTEREST EARNED BY THE ASSESSEE FROM THE FINANCIAL INSTITUTIONS WHO ARE MEMBERS OF THE ASSESSEE CLUB W ILL NOT FALL WITHIN THE AMBIT OF MUTUALITY PRINCIPLE AND THEREFORE WILL BE LIABLE TO CHARGE OF INCOME TAX IN THE HANDS OF THE ASSESSEE CLUB. THIS DECISION OF THE HONBLE APEX COURT HAS BEEN RENDERED ON 9 TH DECEMBER 2011 AND THE CO-ORDINATE BENCH OF THIS TR IBUNAL DID NOT HAVE NOTICE OF THE DECISION OF THE HONBLE APEX COURT AT THE TIME OF PRONOUNCING THE ORDER ON 9 TH DECEMBER 2011 IN THE ASSESSEES OWN CASE FOR AY 200 7-08 IN ITA NO. 5846/DEL/2010. SO THE POSITION OF LAW, AS IT STANDS TODAY, SUBSEQUENT TO THE DECISION OF HONBLE APEX COURT IN THE CASE OF BANGALORE CLUB VS. CIT (SUPRA) IS THAT INTEREST EARNED FROM THE FINANCIAL INSTITUTIONS WILL NOT FAL L WITHIN THE AMBIT OF THE MUTUALITY PRINCIPLE. IN BANGALORE CLUB CASE, THE ASSESSEE WAS AN ASSOCIATION OF PERSONS. IT SOUGHT EXEMPTION FROM PAYMENT OF INCOME TAX ON THE INTEREST EARNED ON FIXED DEPOSITS KEPT WITH CERTAIN BANKS WHICH WERE CORPORA TE MEMBERS OF THE ASSESSEE, ON THE PRINCIPLE OF MUTUALITY. THE ASSESSEE HOWEVER, P AID TAX ON INTEREST EARNED ON FIXED DEPOSITS KEPT WITH NON MEMBERS BANK. IT WAS IN THIS BACKGROUND THAT THE HONBLE APEX COURT HELD THAT FOR APPLICATION OF PRI NCIPLE OF MUTUALITY, THERE HAS TO BE A COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND TH E PARTICIPATORS. AS PER THE OBSERVATIONS OF THE HONBLE APEX COURT , FIRSTLY, THE ARRANGEMENT LACKED COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND PART ICIPATORS. TILL THE STAGE OF GENERATION OF SURPLUS FUNDS, THE FLOW OF M ONEY, TO AND FRO, WAS MAINTAINED WITHIN THE CLOSED CIRCUIT FORMED BY THE BANKS AND THE CLUB, AND TO THAT EXTENT, NOBODY WHO WAS NOT PRIVY TO THI S MUTUALITY, BENEFITED ITA NO.4502/DEL/2013 ACIT VS. OAKWOOD ESTATE CONDOMINIUM ASSOCIATIONS 6 'V* ' FROM THIS ARRANGEMENT. HOWEVER, AS SOON AS THESE FU NDS WERE PLACED IN FIXED DEPOSITS WITH BANKS, THE CLOSED FLOW OF FUNDS BETWEEN THE BANKS AND THE CLUB SUFFERED FROM DEFLECTIONS DUE TO EXPOSURE TO COMMERCIAL BANKING OPERATIONS. DURING THE COURSE OF THEIR BANKING BUSI NESS, THE MEMBER BANKS USED SUCH DEPOSITS TO ADVANCE LOANS TO THEIR CLIENTS. HENCE, WITH THE FUNDS OF THE MUTUALITY, MEMBER BANKS ENGAGED IN COMMERCIAL OPERATIONS WITH THIRD PARTIES OUTSIDE OF THE MUTUAL ITY, AND CONSEQUENTLY, VIOLATING THE ONE TO ONE IDENTITY BETWEEN THE CONTR IBUTORS AND THE PARTICIPATORS AS MANDATED BY THE FIRST CONDITION. ( B) THE SURPLUS FUNDS WERE NOT USED FOR ANY SPECIFIC SERVICE, INFRASTRUCT URE, AND MAINTENANCE OR FOR ANY OTHER DIRECT BENEFIT FOR THE MEMBERS OF THE CLUB. WHEN THE MEMBER BANKS PLACED THEM AT THE DISPOSAL OF THIRD P ARTIES, AN INDEPENDENT CONTRACT BETWEEN THE BANK AND THE CLIEN TS OF THE BANK, A THIRD PARTY, NOT PRIVY TO THE MUTUALITY, WAS INITIA TED. THIS CONTRACT WAS NOT AN ACTIVITY OF THE CLUB IN PURSUIT OF ITS OBJECTIVE S... IN THE CASE BEFORE US, THE SITUATION IS MUCH WORSE BECAUSE THE RELATION BE TWEEN THE ASSESSEE SOCIETY AND THE BANK IS ONLY THAT OF THE CLIENT AND CUSTOMER AN D THERE IS NO SCOPE OF MUTUALITY EXISTING BETWEEN THEM. THEREFORE, RESPECTFULLY FOLL OWING THE ORDER OF THE HONBLE APEX COURT, WE HOLD THAT THE BENEFIT OF PRINCIPLE O F MUTUALITY WILL NOT BE AVAILABLE TO THE ASSESSEE SOCIETY FOR INTEREST ACCRUED/EARNED ON FIXED DEPOSITS MAINTAINED WITH BANKS. ITA NO.4502/DEL/2013 ACIT VS. OAKWOOD ESTATE CONDOMINIUM ASSOCIATIONS 7 'V* ' 6. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 01. 01.2016. SD/- SD/- (INTURI RAMA RAO) (SUD HANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 1 ST JANUARY, 2016 VEENA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER DY. REGISTRAR