ITAT Lucknow sends back FD interest tax dispute for fresh evaluation of mutuality

Background of the dispute

The matter before the Income Tax Appellate Tribunal, Lucknow Bench, concerns the appeal filed by Eldeco Eden Park Apartment Owners Welfare & Maintenance Association Vs ITO for Assessment Year 2017–18. The challenge was directed against the appellate order dated 28.01.2025 passed by the Commissioner of Income Tax (Appeals), Gurugram.

The Assessing Officer had framed an assessment under the Income Tax Act 1961 on 27.11.2019, computing the total income of the assessee society at ₹8,06,784 as against a returned income of NIL. The entire difference represented interest earned on bank fixed deposits, which the Assessing Officer treated as taxable income.

The assessee claimed that, being an apartment owners’ welfare and maintenance association operating on the principle of mutuality, such interest should not be subject to tax. However, both the Assessing Officer and the CIT(A) rejected this contention, leading to the present appeal before the ITAT.

Assessment proceedings and addition made

Determination of taxable income

The Assessing Officer passed the assessment order dated 27.11.2019 determining:

  • Returned income: NIL
  • Assessed income: ₹8,06,784
  • Nature of addition: Interest income on fixed deposits with banks

The Assessing Officer treated the interest on fixed deposits as “Income from other sources” and did not accept the plea that the principle of mutuality shielded this income from tax.

Basis of the Assessing Officer’s stance

While the detailed assessment reasoning is not reproduced in the Tribunal’s order, it is clear that:

  • The Assessing Officer did not accept that bank interest on fixed deposits could be regarded as mutual income between members.
  • The amount of ₹8,06,784 earned as FD interest was fully brought to tax.
  • No detailed discussion appears in the record regarding how the mutuality principle could or could not apply in the specific factual context of this housing association.

First appeal before CIT(A)

Confirmation of the addition

The assessee’s appeal before the CIT(A), Gurugram, was dismissed vide order dated 28.01.2025. The CIT(A) agreed with the Assessing Officer and upheld the taxability of the FD interest.

Reasoning adopted by CIT(A)

In the appellate order, the CIT(A) held that once surplus funds of a mutual concern are placed in:

  • bank fixed deposits,
  • post office deposits,
  • NSC or similar instruments,

such funds are exposed to commercial banking operations, and therefore, the principle of mutuality ceases to apply in respect of the interest earned.

For this conclusion, the CIT(A) relied upon decisions of the Hon’ble Supreme Court, in particular:

  • the decision in Bangalore Club referred to as “2023 (8) TMI 925”,
  • and the decision in Secunderabad Club ETC v CIT-V ETC (2023) (Civil Appeal no. 5195-5201 of 2012), order dated 10.10.2023.

In these decisions, the Supreme Court held that:

The principle of mutuality does not extend to interest income derived from fixed deposits placed with banks by clubs, irrespective of whether the banks are corporate members of the club. Such interest stands taxable in the hands of the club.

Relying on these rulings, the CIT(A) concluded that the assessee association’s interest income from fixed deposits was squarely taxable.

Appeal before ITAT Lucknow

Filing of appeal and documents submitted

Aggrieved by the order of the CIT(A), the assessee filed an appeal before the ITAT, Lucknow, being I.T.A. No.800/Lkw/2025 for A.Y. 2017-18.

During appellate proceedings before the Tribunal, the assessee submitted a paper book, containing, inter alia: