Taxability of Resident Welfare Associations under Income Tax Act

Taxability of Resident Welfare Associations under Income Tax Act

Resident welfare association (RWAs) is categorized as Association of Persons (AOP) under Income Tax Law. They act as the voice of their members and not only take care of ensuring good maintenance of the place but also represent members when and where needed on matters related to the place.

Theses associations run on subscriptions obtained from members and this is exempt on the mutuality basis in the view that no one can make income out of himself. The principle of mutuality derives from the concept that income earned by a person from external sources is taxable. Thus income derived from oneself cannot be treated as income and thus cannot be taxed.

So question here is which income of RWA is TAXABLE and which is NOT TAXABLE?

1. Member’s Contribution- RWA collects contribution from members and is incurred for the welfare of members. Amount collected is spent for maintenance of common area, electricity charges etc. It acts as agent of members and thus no income tax is charged on such contributions.

2. Rental Received from Members- Rental received from members for common facilities is not taxable due to Concept of Mutuality.

“Concept of Mutuality” does not apply to this Rental and it is fully taxable under the head Income from House Property.

3. Interest Earned From Co-operative Banks- Interest earned from co-operative bank qualifies for deduction u/s 80P (d).

But one thing has to be kept in mind interest earned from investment in other banks or financial institution is chargeable to tax. Also one must take guidance from judgment of Hon’ble Supreme Court in the case of M/s Bangalore Club vs. CIT. In the given case Supreme Court held that three conditions have to be satisfied for receipt to be exempt on principles of mutuality.

• There must be a complete identity between the contributors and participators.
• Actions of the participators and contributors must be in furtherance of the mandate of the association.
• That there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves.
  

4. Dividend from Indian Companies- Dividend received from Indian companies is also exempt u/s 10(34).

5. Rental Income from Advertisement Hoardings- This is fully taxable as income from other sources. However expenses can be claimed against such Income.

Thus to conclude with we can say that if Income received by RWA from Non Member exceeds the taxable limit then only RWA is liable to file the Income Tax Return in Form ITR-5. Most of the RWAs got TDS deducted on interest income from banks thus they should file ITR to claim refund of their TDS dues. Tax rates applicable to AOP are same as that of applicable to Individuals.