ITAT Ahmedabad removes 8% addition on housing society loans given to non-members

Parkland Avenue Co.Op. Housing Society Limited v ITO (ITAT Ahmedabad)

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, recently ruled in favor of Parkland Avenue Co. Op. Housing Society Limited, allowing its appeal against an addition of ₹47,85,920 made by the agent Assessment (AO) based on presumed profits from advances received from non-members. The case, which relates to the assessment year 2019-20, highlights critical issues regarding the taxation of cooperative societies and the interpretation of income-generating activities.

Background of the case

The appeal has been filed against an order of the Commissioner of Income Tax (Appeals) (CIT(A)), National Faceless Appeal Center (NFAC), Delhi, dated September 7, 2023. The main grounds of appeal were centered on the incorrect application of tax laws by both the AO and the CIT(A), particularly the alleged misuse of the percentage-of-completion method applicable to real estate transactions. The housing society, which operates on the principles of mutuality and does not engage in profit-making activities, argued that it was neither a property developer nor an entrepreneur.

Call details

In its appeal, the company raised several points, including:

1. The CIT(A) erred in upholding the AO’s application of the percentage of completion method without recognizing the non-profit status of the company.
2. The addition of ₹47,85,920 was made without any taxable income being applicable as the company operates on mutual principles.
3. The AO’s rejection of the company’s books of accounts was unfounded.
4. The CIT(A) and the AO did not take into account the repayment of loans in subsequent assessment years, thereby undermining the basis of the addition.
5. The 8% net profit estimate from non-member advances was excessive and not representative of the company’s actual revenues.

The company electronically filed its tax return on March 21, 2020, reporting zero revenue. Initially, the return was accepted, but a subsequent review led the AO to question advances totaling ₹5,98,24,000 received during the year from various non-member entities, saying 8% of this amount accounted for the company’s net profit.

Arguments presented

The company representative maintained that the advances received were unsecured loans intended to meet immediate financial needs, without obligation to allocate plots or carry out real estate transactions. He stressed that the company is registered under the Cooperative Societies Act and does not engage in activities that could be classified as real estate development. Further, he noted that the loans were repaid in the next assessment year, emphasizing that these transactions should not have been treated as income.

On the other hand, the ministry representative defended the AO’s assessment, arguing that the advances paid by the company suggested activities related to the development of plots and that the addition was justified on the basis of standard profit margins of these companies.

ITAT findings

After considering the evidence and arguments of both parties, the ITAT determined that the AO had indeed overstepped its bounds in making this addition. The Tribunal pointed out that the operations of the company and the nature of loans received were clearly described in the records, which was overlooked by the AO and the CIT(A). The Court emphasized that the advances were not linked to any commercial activity or any profit-making objective, noting the lack of basis for the 8% estimate.

The ITAT also highlighted the critical fact that the loans were repaid the following year, thereby negating any assumption of profit arising from these transactions. The Tribunal concluded that the addition made by the AO lacked substantial justification and was therefore not viable.

Conclusion

ITAT Ahmedabad’s decision to remove the addition of ₹47,85,920 from the society’s income represents an important decision regarding the treatment of cooperative societies and their financial transactions with non-members. The judgment reiterates the need for a nuanced understanding of the operations of housing societies, including distinguishing between income-generating activities and mutual fund operations. The appeal was successful, providing the company with a favorable outcome and highlighting the importance of fair consideration in tax assessments.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the assessee against the order dated 07.09.2023 passed by the CIT(A), National Faceless Appeal Center (NFAC), Delhi for the assessment year 2019-20.

2. The assessee has raised the following grounds of appeal:-

“1. The Ld. CIT(A) erred in law and fact in upholding the application of the percentage of completion method prescribed for real estate transactions without understanding that the appellant is neither a real estate developer nor an entrepreneur.

2. The Lord. CIT(A) has erred in law and fact in confirming the addition of Rs.47,85,920/- without understanding that no income will be taxable in the hands of the appellant, being a cooperative society working on the principles of mutuality and without any intention. to make a profit.

3. The Lord. CIT(A) erred in law and fact in upholding the action of Ld. AO by rejecting the books of accounts of the appellant u/s.145(3) of the Act.

4. The Lord. CIT(A) erred in law and fact in upholding the action of Ld. AO in estimating profits on advances received from third parties, excluding advances from members for the purchase of plots.

5. The Lord. CIT(A) erred in law and fact in upholding the action of Ld. AO in estimating the profit on the advances received, even if these advances were repaid in subsequent years through appropriate banking channels.

6.The Lord. CIT(A) erred in law and fact in upholding the action of Ld. AO by making an addition of Rs.47,85,920/- estimating the net profit at the rate of 8%. In the facts and circumstances of this case, such estimate is very excessive and does not reflect the actual income earned by the appellant.

7. Both the authorities below passed the orders without properly appreciating the facts and they further erred in grossly ignoring various arguments, explanations and information presented by the appellant which should have been considered before passing the contested order. This action of the lower authorities constitutes a blatant violation of the law and principles of natural justice and therefore deserves to be set aside.

8. The learned CIT(A) erred in law and on the facts of the case in upholding the action of the Id. AO by charging interest u/s. 234A/B/C/D of the Act.

9. The Lord. CIT(A) erred in law and on the facts of the case in upholding the action of the Ld. AO by imposing penalty u/s. 270A of the Act.

3. The assessee filed an e-tax return on 21.03.2020, declaring a total income of Rs. Nil. The return was processed under section 143(1)(a) of the Income Tax Act, 1961 by CPC on 13.07.2020, accepting the returned income. A notice pursuant to Article 143(2) of the Law of 28.10.2020 has been issued. Notices under Section 142(1) of the Act were issued on 19.02.2021, 01.03.2021, 19.08.2021, 26.08.2021 and 31.08.2021. The details of the explanations were submitted by the assessee and the same were verified by the assessing officer. The case of the assessee was selected under mandatory scrutiny. The assessee is a cooperative society. Housing society registered under the Registration Act. During the year, the assessee did not show any income from activities, but the Assessing Officer observed that there were certain plot development activities and he was asked to submit the same. After perusing the reply and observations of the assessee, the Assessing Officer observed that the assessee had received an advance of Rs.5,98,24,000/- during the year from Khyati Finance, Khyati Realties Limited and Nipur Ratanlal Shah. The Assessing Officer assumed 8% to be the net profit of the assessee and added Rs.47,85,920/-

4. Being aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

5. The Lord. AR submitted that the assessee is a cooperative housing society and the sum totaling Rs.5,98,24,000/- represents unsecured loans received from non-members. These unsecured loans were obtained for the purpose of meeting the immediate financial needs of the assessee and there was no corresponding obligation to effect any sale or even allot any land with these funds. The Ld. AR further contended that the underlying amount represents unsecured loans received from non-members to meet the immediate financial needs of the assessee and hence the Assessing Officer as well as the CIT(A) n were not at all justified in assuming that 8% of the unsecured loans obtained from non-members represents the net profit of the assessee for the year under consideration. The assessee has categorically contended before the authorities that it is not engaged in real estate activities and hence does not consider real estate transactions and these guidelines will not be applicable in the case of the assessee. The Ld. AR further submitted that the assessee has not declared anything about the nature and purpose of the underlying amount as the observation of the CIT(A) is factually incorrect since the said unsecured loans were obtained to meet the immediate financial needs of the assessee. The Ld. AR further contended that subsequently, the said loans were repaid during the immediate assessment year.

6. The Lord. DR contended that the assessee got advance for development of the land and therefore the Assessing Officer has rightly quantified 8% of the net profit in respect of development of the land. The Ld. DR placed reliance on the assessment order and the order of the CIT(A).

7. Heard both parties and read all relevant documents available on file. It is pertinent to note that the assessee received advances/loans from the non-members and this fact was not denied or disputed by the Revenue. The assessee is a housing society registered under the Co-operative Societies Act having a valid registration number and is not engaged in the business of plot development in any way. The assessee gave all valid details before the Assessing Officer and the same were totally ignored by the Assessing Officer as well as the CIT(A). Thus, 8% of this tax advance without giving a valid reason, the Assistant made the said addition which is not sustainable. The CIT(A) has also overlooked the fact that subsequently, during the next year, the said unsecured loans were repaid and the same is reflected in the records. Thus, the Assessor as well as the CIT(A) were not justified in making this addition. The appeal of the assessee is therefore allowed.

8. In the result, the appeal of the assessee is allowed.

Order pronounced in public hearing this 27^th August 2024.