Maintenance Charges received from Corporate Members are Governed by Principle of Mutuality Exempted from Tax: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the maintenance charges received from corporate members are governed by principle of mutuality and are exempted from tax.

The Assessee Park Place Condomonium was a resident welfare association registered as AOP Group Housing Society consisting of 1282 members at Gurgaon. The Assessee society has received interest bearing maintenance security deposits from its members, which was utilised by placing fixed deposits with banks. The Assessee paid interest on this interest-bearing maintenance security deposits to its members.

The Assessee pleaded before the AO that this interest payment made to members would be squarely allowable as deduction under Section 57(iii) of the Income Tax Act against the interest income received from the bank. The AO however did not heed to this contention of the Assessee and held that this interest income received from bank would be taxed on gross basis under the head income from other sources without following the reliance placed by the assessee on the coordinate bench decision of the Delhi Tribunal in the case of Belaire Condominium Association Vs. ITO.

The case was remanded by the CIT(A) to the file of AO just to make enquiry as to whether the interest-bearing maintenance security deposits received from members were utilised by the Assessee society to make investment in FDs and whether interest was actually paid to the members of the Assessee. In the report, the AO confirmed the fact that members of the association were indeed paid interest by the Assessee society and the same were also duly subjected to deduction of tax at source by the Assessee under Section 194A of the Income Tax Act.

It was also confirmed that the said interest income had been duly credited in the account of the members. The AO however, observed that there was no documentary evidence which will conclusively prove that maintenance of security deposits received from the members were interest bearing. The Assessee filed its rejoinder to the said remand report. The CIT(A) by following the decision of the Delhi Tribunal referred to the deduction towards interest payment made to the members under Section 57(iii) of the Income Tax Act.

Further, the CIT(A) observed that Assessee has received an amount from corporate members towards maintenance charges to the association and these corporate members had deducted tax at source while making payment of maintenance charges to the Assessee association. Since TDS was done by the corporate members, the CIT(A) concluded that the said receipt would not be covered by the principle of mutuality.

Ved Jain, appeared on behalf of the assessee and Vivek Vardhan, appeared on behalf of the revenue.

The two-member Bench of C. M. Garg, (Judicial Member) and M. Balaganesh, (Accountant Member) the maintenance charges received from the corporate members would be governed by the principle of mutuality. As long as money was not received from 3rd parties, the benefit of the principle of mutuality could not be denied to the Assessee society.

 In the instant case, as stated (supra), the maintenance charges received by the Assessee association from its corporate members would be exempt from tax on the basis of principle of mutuality. Merely because the same had been subjected to deduction of tax at source by the payer, the receipt would not partake the character of the taxable receipt. The receipt of said maintenance charges from corporate members would be still exempt in the hands of the Assessee and the Assessee would be eligible to claim refund of TDS on filing the returns.

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