Interest on FDs Received by a Society from a Non-Member is Taxable, Principle of Mutuality does not apply: ITAT Hyderabad [Read Order]

Interest

In The Gujarati Social Welfare Society v. ITO, the ITAT, Hyderabad held that the interest on Fixed Deposits received by a society from Bank is Taxable under the provisions of the Income Tax Act.

The bench, based on settled judicial pronouncements, also held that the interest received by the society from a non-member is taxable under the Act since the Principle of Mutuality does not apply in such cases.

Assessee, in the present case is an AOP carrying on the activities for the mutual benefit of the members. Its principle activity is to collect money from the members and provide it to the needy members. The income of the society is considered exempt from tax on the principle of mutuality. However, the Assessing Officer (AO) noticed that assessee has deposited its funds in Fixed Deposits with the bank and the interest earned on such FDs are taxable under the Income Tax Act. On appeal, the CIT(A) sustained the addition.

The assessee contended that as per the Memorandum of Association, objectives- surplus funds are to be deposited in banks towards security of the amounts and the main source of these deposits are from members only. Since the dividends are distributed only amongst the members and as assessee is doing business of finance amongst the members only, the principles of mutuality will apply to the interest received also. It was submitted that banker is not a member of the society, therefore, the interest on Fixed Deposits with the bank cannot be treated as ‘income assessable to tax’.

In view of the High Court decisions, the bench observed that the interest received from non-members does not come within the purview of mutuality.

The bench further noticed the decision of the jurisdictional High Court in the case of CIT Vs. 1. Secunderabad Club, Picket; 2. Armed Forces Officers’ Co-operative Housing Society Ltd., [340 ITR 121] (AP) wherein it was held that the nature of transaction between assessee and banks would disqualify application of principle of mutuality. It was held that interest earned was taxable.

“In the above referred case of Secunderabad Club, the Hon’ble High Court has held even though the bank was having a corporate membership with the said club/society, the principle of mutuality does not arise. In assessee’s case, the bank is not even a member of the society. The nature of the transaction between the assessee and the bank would disqualify application of the principle of mutuality. Therefore, the transactions with the bank who is not even a member of the society cannot be considered as a transaction for which principles of mutuality will apply. Not only on the principles laid down in the subject but also on the fact that the interest was received from a non-member, the principles of mutuality do not apply.”

Read the full text of the Order below.

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