In a relief to the Vijaya Bank Employees Ho. Co-op. Society, the Bangalore Bench of Income Tax Appellate Tribunal (ITAT) ruled that the assessee entitled to claim a deduction of interest expenditure being the amount paid to its members.
The assessee is a housing co-operative society formed in the year 1974 for the purpose of meeting the housing needs of the employees of Vijaya Bank. All the members of the assessee- society are either present or ex-employees of Vijaya Bank. The activities of assessee-society is to acquire land and develop the same into sites and allot them to its members at a reasonable price. The underlying idea being that collective buying on a large scale would enable better price negotiations and also do away with intermediaries in purchasing the land and developing them into sites.
The assessee for the assessment year 2010-2011, filed the return of income declaring excess of income over expenditure at Rs.21,57,631. The assessee’s case was selected for scrutiny by the issuance of notice under section 143(2) of the Income Tax Act. The Assessing Officer during the course of assessment proceedings noted that the assessee was in receipt of interest income from the bank of Rs.5,78,37,690 and also the assessee had claimed expenditure of interest paid on sites deposits of Rs.4,75,00,000. The assessee was asked to explain the above transactions.
The assessee submitted that the interest income was shown as income in the books of account of the assessee-society and substantial interest was credited to the individual members account as interest against their advances and the same was claimed as an expenditure. The Assessing Officer disallowed the claim of interest of Rs.4,75,00,000.
The Assessing Officer also disallowed certain expenditures stating the same to be capital expenditure.
Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal to the first appellate authority. Before the first appellate authority, it was submitted that interest expenditure claimed is purely compensatory to offset cost overrun, and based on the principle of matching concept the expenditure attributable to income shall be allowed.
The coram of Judicial Member, George George K and Accountant Member, Chandra Poojari the delay in procuring the land and formation of the site was unforeseen at the initial stage when advances were collected by the assessee- society. Having parted with money and also with site allotment being delayed, the expectation of the members to be compensated by way of interest on their advances is only legitimate. In view of the foregoing reasoning, the Tribunal was of the view that even assuming that interest income is to be taxed under the head “income from other sources”, the interest expenditure that is paid to the members of the assessee-society is to be allowed under section 57(iii) of the Income Tax Act.
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