• Tax on interest on corpus fund under mutuality concept

Ours is an apartment owners association  registered under Societies Registration Act 1975. The corpus paid by members lies  permanently deposited with SBI and interest earned is used for maintenance of the common property.
Our IT returns are filed under mutuality concept. 

Is such interest taxable? If so or otherwise, kindly forward  any relevant decision of HC/SC.
Asked 2 years ago in Income Tax from Chennai, Tamil Nadu
12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from31 property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

In my opinion interst on corpus fund is not taxable
Shiv Kumar Agarwal
CA, Delhi
248 Answers
58 Consultations

5.0 on 5.0

Dear Sir,

The interest earned by association will be taxable in the hands of association.

In this regards, please find the judgement below:

A Landmark Judgement passed by Supreme Court on 14-January-2013, gives great clarity on “Principles of Mutuality”, under which the Tax Exemption of Societies is also justified.

The Case

M/s Bangalore Club vs. Commissioner of Income Tax (CIT)

The Bangalore Club (an Association of People, AOP) created Fixed Deposits with Banks which are also Members of the Club. It claimed that the Interest earned on these Fixed Deposits should be exempt from Income Tax, as the Income is subject to the Principle of Mutuality. Commissioner of Income Tax claimed to the contrary.

The Verdict

“In our opinion, unlike the surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee  (Bangalore Club) from the member banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club.

The surplus funds in the hands of the assessee (Bangalore Club) were placed at the disposal of the corporate members viz. the banks, with the sole motive to earn interest, which brings in the commerciality element and thus, the interest so earned by the assessee has to be treated as a revenue receipt, exigible to tax. It was pleaded that transaction between the assessee and the member banks concerned was in the nature of parking of funds by the assessee with a corporate member and was nothing but what could have been done by a customer of a bank and therefore, the principle that “no man could trade with himself” is not applicable.”  – D.K. JAIN AND JAGDISH SINGH KHEHAR, JJ

Feel free to revert in case of any further queries.

Thanks and Regards,
CA Abhishek Dugar
Abhishek Dugar
CA, Mumbai
2774 Answers
112 Consultations

5.0 on 5.0

Dear Sir,

You can claim deduction u/s 80P if there is a mutuality concept. But in your case its State Bank Of India and not a Co Operative Bank, so the concept of mutuality does not apply. 

Hence, the amount receivable is taxable. 

Trust this clarifies your query. 

Feel free to get back/ call back in case of further details. 

Thanking You. 

Rohit R Sharma
Rohit R Sharma
CA, Mumbai
2089 Answers
90 Consultations

5.0 on 5.0

There are certain types of cooperatives, like housing cooperatives, who collects monthly subscription from the members and spends the same to meet the various joint expenses of the society to give service to members like maintenance, security etc. 
In this process even if any surplus is generated, it is not chargeable to tax as it is exempt based on the ‘concept of Mutuality’. There should be complete identity between the contributors and the participators.’ Thus if the cooperative earns interest from bank or parking income from non-members or rental income by letting roof for mobile towers, then all these incomes are chargeable.
Shyam Sunder Modani
CA, Hyderabad
1408 Answers
95 Consultations

5.0 on 5.0

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