Associations can avoid TDS, if they are exempt

Q: I am the President of the Apartment Owners Association of a large multi-storeyed building. The association does not carry out any commercial activity whatsoever. The income of the association is only from subscriptions of members and from interest on surplus receipts parked in a bank as fixed deposit. The bank owns an apartment in the building and hence is a member of the association. From a study of your columns dated August 19, 1998 and September 2, 1998 I understand that on grounds of mutuality (a) subscription from members are not taxable; (b) surplus resulting from transactions with members is also not taxable; and (c) interest earned from fixed deposits out of surplus from subscription is incidental and does not amount to commercial activity and hence interest earned from fixed deposits is not taxable even if the bank is not a member of the association.

In this case the interest earned comes under (b) above and is clearly not taxable. The bank has however deducted TDS during the year 2002-03 on the interest. The association would like to ensure that the bank does not deduct TDS during the current year and also get back the amount already deducted. Can you advise how to go about it? Is there a prescribed certificate for avoiding deduction? Can you also kindly enlighten me whether the Income-tax Department has issued any instructions on this subject based on the decisions of the Tribunals/Courts referred to by you?

A: The reader has correctly understood the law on the subject. Such associations, which are not formally registered, are also eligible for exemption on incomes arising to them, if their activity is limited to members as in the case of clubs or such associations formed for mutual benefit. But the person who pays interest or any other tax deductible item of income of such associations is not obliged or even authorised to judge, whether such income is taxable in the hands of the recipients, because the only circumstance, when he is permitted to avoid tax deduction is on recipient filing Form 15G or 15H as the case may be, or on authorisation from the assessing officer in Form 15HAA. Form 15G, as now revised can be filed by an individual and person (not being a company or a firm) whether he is a resident or non-resident, but right to avoid deduction for non-resident is only in respect of all interest (whether from securities or otherwise), income from units from mutual funds or drawings from National Saving Scheme 1987 falling under Sec. 193, 194A or 194K. Residents can avoid tax deduction in addition to income from dividends (if taxable), if they have no taxable income. An association can file such Form, if it is not liable to tax, since the prescribed Form 15G provides for a declaration by any person not being a company or a firm. However, it must be ensured that there is clearly no liability in the sense that there are no transactions giving rise to any possible income from any source other than with members, so that the entire income could be exempt under the income-tax law. Only in that case, the declaration in the form to the effect that the income does not exceed the maximum amount, which is not chargeable to income tax would be correct. Where the income is considerable, it will be a matter of caution, if the association applies in Form 13 (revised) for a certificate in Form 15AA from the assessing officer for deduction at nil rate of tax or tax at lower rate as may be specified in the certificate.

S. Rajaratnam

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