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Interest on FDs earned by a club is not taxable - ITAT

Posted Date : 10-Mar-2016 , 07:34:00 am | Posted By CASANSAAR print Print
Interest on fixed deposits (FDs) earned by the Chembur-based Bombay Presidency Golf Club was held as non-taxable by the income-tax appellate tribunal (ITAT) in its recent judgement. The club is registered as a charitable trust.

During financial year 2008-09, it earned Rs 2.17 crore as bank interest from fixed deposits, which it claimed as exempt under Section 11 of the Income-Tax (I-T) Act. The entrance fees received from its members were invested as fixed deposits with scheduled banks and the interest earned was spent towards the trust's objective of promoting golf. Even after earning an interest income, the club had a deficit of Rs 10.97 crore during this particular year.

Under Section 11 of the I-T Act, a charitable trust claiming I-T exemption is required to utilize at least 85% of its income in a given financial year. The balance income (of up to 15% of the total), though, even if not utilized during the year, are not taxable. These can be invested in eligible investments. FDs with scheduled banks are one of the eligible investment specified by the I-T Act.

The club did not claim such interest income to be exempt based on the "principle of mutuality" but under provisions of Section 11 of the I-T Act. By investing in bank deposits, the ITAT observed that the Bombay Presidency Club did not fall foul of the tax laws. Thus, the ITAT, in its order dated February 29, held that "interest income should be tax exempt in the hands of the club".

This ruling will benefit several clubs and associations that are registered as charitable trusts, carrying on activities for advancement of general public utility, such as promotion of sports, animal welfare, arts or culture.

In this case, the tax authorities, on various grounds, had sought to tax the bank interest in the club's hands. Their key contention was that the investments made with banks was "an activity in the nature of trade, commerce or business". Thus, the bank interest was not eligible for I-T exemption.

Their other contention was that bank interest was not received from club members, but from a third party--the bank. Thus, the principle of mutuality, which says that one cannot make profit out of itself, did not apply, thus rendering the bank interest taxable. Consequently, Bombay Presidency Club had filed an appeal with the ITAT--the first level of appeal at the judicial level available to the tax payer. According to experts, tax authorities raise similar objections during assessment of clubs and associations. The recent ITAT order should help mitigate future litigation. (TNN  - Times of India)

Category : Income Tax | Comments : 0 | Hits : 499

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