The purpose of writing this blog is to take advantage of the Doctrine of Mutuality for the purpose of computation of Income Tax by Apartment Owners’ Association which is overlooked by many .
The concept of mutuality, (ie. one person cannot make income for himself) is very much relevant in the taxation of Apartment Owners’ Association (AOA).
- Normal Sources of Income & Applicability of Income Tax in the case of AOA
S No | Sources of Income | Applicability of IT | Head of Income | Remarks |
1 | Rent | Taxable only if it is received from a non-member | Income from Other Sources | Since AOA is not the owner of the building it cannot be taxed under Income from House Property and hence not eligible for 30 % deduction on rent U/S 24 |
2 | Members’ contribution | Not Taxable | – | Fully exempt based on the concept Doctrine of Mutuality |
3 | Interest on Bank Deposits | Taxable | Income from Other Sources | No deductions possible |
4 | Rental Income from Advertisements | Taxable | Income from Other Sources | Normally no deductions are possible |
5 | Parking charges for non-members | Taxable | Income from Other Sources | Normally no deductions are possible |
- Income Tax Rate for AOA
In order to find out the rate of tax applicable to an AOA it is necessary to analyse section 167 B –Charge of Tax where shares of members in AOP or BOI unknown etc.
Sec 167B (1). If the individual shares of its members are indeterminate or unknown and if it is an unregistered society under a law in force the rate of tax applicable is Maximum Marginal Rate (MMR) ie.30% + cess. If any one of the members are taxed at a rate higher than the MMR the entire income of that AOA will be taxed at that higher rate.
(2) If the AOA is not a legally registered Society and the shares of the members are determined and known it will be taxed at different rates;
That portion of the income of the AOA attributable to those members who are taxed at a rate higher than the MMR at the rate at which such members are taxed
The balance portion of the income of the AOA will be taxed at MMR +Cess
If AOAs are legally registered , the above 2 clauses are not applicable irrespective of whether the shares of its members are indeterminate or not. The rate of tax applicable to such AOAs is the slab rate for individuals below the age of 60 ie. no tax on the first Rs.2,50,000/-; 5 % for the next Rs. 2,50,000/- and so on. Higher Education Cess & Surcharge shall be applicable as per the relevant provisions.
Applicable ITR form : ITR-5
Taxable Person : Association of Persons (AOP)
- Applicability of TDS
Tax to be deducted at applicable rates if the payments such as payments to contractors U/s 194C, payments to professional U/s 194J etc. exceeding the prescribed limits. However Section 194C becomes applicable only if the Association is a registered society.
- Applicability of GST
Members shall be liable to pay GST @ 18% if the maintenance fees collected from the members by the AOA exceeds Rs 7,500/- per apartment per month and the annual turnover of the AOA exceeds Rs 20.00 lakh
However RCM under GST will be applicable in the following cases if the AOA is registered under GST:
Example
Security services
Goods Transport Agency
- Illustrations
For better understanding, please find attached a specimen computation statement for the Assessment Year 2019 20
XYZ APARTMENT OWNERS ASSOCIATION | |||
Income & Expenditure Account for the Fin/Yr ended 31-03-2019 | |||
Particulars | Expenditure | Income | |
₹ | ₹ | ||
By | Annual Subscription from Owners | 7,93,000 | |
“ | Rental Income | 3,04,000 | |
“ | Interest Income | 5,000 | |
“ | Waste Removal Charges | 1,11,000 | |
“ | Additional Maintenance Charges | 15,000 | |
To | Salary & other benefits to staff | 1,56,000 | |
“ | Repairs, Maintenance & Cleaning | 3,37,000 | |
“ | Expenses for Meetings | 15,000 | |
“ | Electricity Charges | 97,000 | |
“ | Security Expenses | 3,60,000 | |
“ | Depreciation | 28,000 | |
“ | Other Expenses | 12,000 | |
“ | Excess of Income over Expenditure | 2,23,000 | |
TOTAL | 12,28,000 | 12,28,000 |
For computing the tax liability, the ideal method would be to file the Tax Return by disclosing the total contribution from members as exempt and disallowing all the related expenses.
Accordingly the computation would be as follows:
Tax Computation Statement | ||||
A.Y. 2019-2020 | ||||
Name: XYZ Apartments Owners Association | Previous Year: 2018-2019 | |||
PAN : XXXXXXXXXX | ||||
Address : XXXXXXXX | Status: AOP | |||
Profits and gains of Business or Profession | ||||
Business-1 | ||||
Net Profit Before Tax as per Income & Expenditure A/c | 2,23,000 | |||
Add: Expenses debited to Income & Expenditure A/c to be added back | 10,05,000 | |||
12,28,000 | ||||
Less: Contribution from members totally exempt based on Doctrine of Mutuality | -9,19,000 | |||
3,09,000 | ||||
Less: Incomes to be taxed under Head “ Income from Other Sources | 3,09,000 | |||
Adjusted Profit of Business-1 | – | |||
Income from other sources | ||||
Interest income | 5,000 | |||
Rental Income from non-members | 3,04,000 | |||
Income chargeable under the head “other sources” | 3,09,000 | |||
Total Income | 3,09,000 | |||
Total income rounded off u/s 288A | 3,09,000 | |||
Tax on total income | 2,950 | |||
Add: Cess | 118 | |||
Tax with cess | 3,068 | |||
Net Tax | 3,068 | |||
TDS | 28,000 | |||
Total prepaid taxes | 28,000 | |||
Balance Tax | 24,932 | |||
Fee u/s 234F | – | |||
Refund Due | 24,930 |
Alternatively, it is possible to file the Income Tax Return by showing only” Income from Other Sources” as taxable ignoring Contribution from Members and related expenses completely. For the purpose of disclosure contribution from members and related expenses may be shown in the footnote.
Under this option, the computation will be as follows:
Income from other sources | ||||
Interest income | 5,000 | |||
Rental Income from non-members | 3,04,000 | |||
Income chargeable under the head “other sources” | 3,09,000 | |||
Total Income | 3,09,000 | |||
Total income rounded off u/s 288A | 3,09,000 | |||
Tax on total income | 2,950 | |||
Add: Cess | 118 | |||
Tax with cess | 3,068 | |||
Net Tax | 3,068 | |||
TDS | 28,000 | |||
Total prepaid taxes | 28,000 | |||
Balance Tax | 24,932 | |||
Fee u/s 234F | – | |||
n | Refund Due | 24,930 |
Author – CA. Jose Zachariah FCA