Interest on deposits under Collective Investment Schemes cannot be treated as revenue: ITAT

The brief facts of the case pertaining to this issue are: For the year under consideration, the assessee filed its return of income on 29/12/2010 declaring a total income of Rs.44,34,122. Pursuant to the search and seizure action conducted under section 132 of the Act in the case of the assessee along with the other associated persons and companies, the assessment in the case of the assessee was concluded under section 143(3) r/w section 153A of the Act assessing the total income at Rs.69,13,670 after making certain disallowances. Subsequently, on the basis of the order dated 21/08/2015 passed by the SEBI and the information received from the office of DCIT(TDS)- 2(1), Mumbai, the Assessing Officer (“AO”) initiated reassessment proceedings under section 147 in the case of the assessee and issued notice dated 30/03/2016 under section 148 of the Act. In the reasons recorded while reopening the assessment, it was mentioned that the SEBI has concluded that the assessee is operating a CIS through its various plans and schemes involving holiday points and their accrual as well as redemption. Since the scheme has been devised so as to provide an investment avenue with assured returns, therefore the assessee has concealed the true nature of its operation. Accordingly, it was alleged that the funds invested with the assessee by various customers are actually in the nature of unsecured loans and the return awarded in case of redemption by the customers is in the nature of interest on such unsecured loans. It was also mentioned that only 2% of the members/investors have availed of the holiday facilities offered in the various plans by the assessee and an overwhelming 98% of the members are investors who had invested the money with the sole motive of receiving assured returns in the form of interest. Since the assessee did not deduct TDS under section 194A of the Act, therefore, it was alleged that income chargeable to tax within section 40(a)(ia) had escaped assessment within the meaning of provisions of section 147 of the Act. In response to the notice issued under section 148 of the Act, the assessee submitted that the return original filed may be treated as filed in response to the aforesaid notice. During the reassessment proceedings, the assessee explained its modus operandi and submitted that the deposits received from its members/customers are accounted as “sales” in its books of accounts and the NAC paid to the members was booked as revenue expenses. The AO vide order dated 26/12/2016 passed under section 143(3) r/w section 147 of the Act did not agree with the submissions of the assessee and by placing reliance on the aforesaid order passed by the SEBI held that the assessee is engaged in the business of banking activity, wherein it is taking deposit from its clients and paying them the interest in the garb of various schemes of availing Hotel facilities or discounting the same. The AO further held that the amount paid or incurred by the assessee by way of entitlement for scheme benefits and facilities or discounts to the members, who are not availing of the hotelling facilities provided by the assessee, is in the nature of interest. Since the assessee did not deduct the TDS under section 194A on the said interest, the AO disallowed an amount of Rs.1,48,41,755 under section 40(a)(ia) of the Act. The AO excluded the return of the principal amount and interest amount below Rs.5000, while calculating the aforesaid disallowance. As regards the submission of the assessee that since part of deposits have been offered as income in the profit and loss account, therefore the same should be excluded from the income, the AO rejected the same on the basis that the assessee is simultaneously claiming the deduction on account of repayment of principal amount by debiting it under the head Non-Availing Compensation.

The learned CIT(A) vide impugned order dated 28/11/2017 upheld the findings of the AO in treating NAC as interest and accordingly, affirmed the disallowance of Rs.1,48,41,755 under section 40(a)(ia) of the Act. Further, as regards the alternative plea of the assessee regarding the removal of such deposits from sale proceeds, the learned CIT(A) held that the entire amount collected by the assessee has been diverted to the associate, subsidiary companies, and concerns owned by directors and other family concerns in the form of investments and long-term advances and loans, therefore the character of deposits from the members and its utilisation gives it a character of assessee’s own income. Being aggrieved, the assessee is in appeal before us.

We have considered the rival submissions and perused the material available on record. In the present case, the assessee is engaged in the business of selling holiday membership plans to its customers/members. The amount received from the members was apportioned over the tenure of the membership, which differs from scheme to scheme offered by the assessee. Out of the apportioned receipts, the amount pertaining to the year was considered as “sales” and the balance amount was considered as “advances sales” over the tenure of the membership. Once the membership is accepted and confirmed, a member is entitled to avail of facilities as per terms and conditions related to the entitlement certificate. If the members do not avail entitlements fully or partially during the membership tenure, then the assessee reimburses for the non-utilisation portion of the entitlements, which is called NAC, and the same is charged to the profit and loss account under the same head. The members are also entitled to exercise the option of premature termination/encashment of membership at any point in time. The assessee, in case where the scheme has reached maturity (or completed its term), also repays the initial deposit along with compensation and the whole amount is booked as revenue expenditure. There is no dispute regarding these basic facts. The AO vide assessment order, inter-alia, on the basis of an order dated 21/08/2015 passed by the SEBI, wherein the business conducted by the assessee was held to be in the nature of CIS, treated the NAC paid by the assessee to its customers/members as interest on deposits and since the assessee did not deduct tax under section 194A of the Act while making the aforesaid payment, disallowed the expenditure under section 40(a)(ia) of the Act after excluding the principal amount returned and the interest payment below Rs.5000. It is the plea of the assessee that since the business of the assessee is considered to be in the nature of CIS and the NAC paid by the assessee is treated as interest on deposits by members, therefore the amount received from the members cannot now be treated to be in the nature of income, since the same qualifies as capital receipt, and therefore, should accordingly be reduced while calculating the total income of the assessee.

During the hearing, the learned AR placed reliance upon the decision of the Hon’ble Supreme Court in Peerless General Finance and Investment Company Limited vs CIT, [2019] 416 ITR 1(SC), wherein it was held that the subscription received from the public at large under a collective investment scheme is in the nature of capital receipt and not income. It is pertinent to note that in the facts of this case, the taxpayer had floated various schemes which require subscribers to deposit certain amounts by way of subscriptions in its hands, and, depending upon the scheme in question, these subscribed amounts at the end of the scheme are ultimately repaid with interest. Further, the taxpayer, in this case, has also shown the sum as income in its books of accounts. However, the Hon’ble Supreme Court by referring to the various judicial pronouncements agreed with the submission of the taxpayer that it would not be possible to go only by the treatment of such subscriptions in the accounts of the assessee itself.

In the present case, it is no doubt true that the amount received from members and apportioned to the year is considered as “sales” by the assessee in its books of account, however, in view of the fact that subsequently the schemes floated by the assessee were held to be in the nature of CIS and therefore, the NAC paid by the assessee to its members was considered as interest on deposits, such deposits by the members cannot be treated as revenue in the hands of the assessee. It is pertinent to note that the NAC was paid in relation to the holiday membership schemes sold by the assessee when the members did not avail of the holiday facilities as per the entitlement under the scheme. Thus, we are of the considered opinion that the approach of the Revenue, on one hand treating the NAC paid by the assessee to its members as interest and on the other hand treating the amount received from the members as the income of the assessee is self-contradictory since only when the deposits are considered as a loan, which was one of the allegations in the reasons recorded while reopening the assessment, the interest can be charged on it. Thus, when the assessee’s business was considered to be in the nature of CIS, all the consequences in relation thereto must follow. Further, as noted above, it is trite law that entries in the books of account are not decisive or determinative of the true nature of the entries. Therefore, the amount received by the assessee from its members, to the extent the same is treated as income in its books of account, is directed to be reduced while calculating the total income of the assessee, since the same is in the nature of capital receipt. We find that in the present case, the NAC paid to the members also includes the repayment of membership amount collected from the members and the same has been claimed as a deduction by the assessee. Since the said repayment has already been claimed as a deduction, therefore the said amount need not be again reduced while calculating the total income of the assessee for the year under consideration.

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