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Taxation of Resident Welfare Association or Apartment Owners Association under Income Tax

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Taxation of a resident welfare association (RWA) or an apartment owners association under the Income Tax Act, 1961 is not a complex subject to understand. However, the taxability of resident welfare or an apartment owners association depends on certain factors which one should be aware of. 

Further, the income tax rate a resident welfare association or an apartment owners association depends on these factors which will be analyzed in this article. 

Once the income tax rules related to a resident welfare association or an apartment owners association is cleared, the income tax return filing of a resident welfare association or an apartment owners association also becomes easier and provides comfort.


    Introduction

    Due to modernization, people are living in complexes and townships with many other persons sharing many common areas. Gone are the days, when people were living own houses in a single piece of land. Now, a single piece of land is shared by many house owners.

    This is when the concept of Resident Welfare Association (RWA) or Apartment Owners Asociation has come into existence.

    A Resident Welfare Association (RWA) is a body that represents the interest of people living in a community or a society. The association is responsible for managing day-to-day problems of the residents, organizing events, managing facilities in the apartments and complexes and safeguarding the rights of the unitholders.

    In other words, the Resident Welfare Association (RWA) is an association of people who own houses in a particular society, which is responsible for the day-to-day functioning of the complex.

    An RWA is formed by electing members among the residents. Once members are elected and association is formed it may get it registered under the Societies Registration Act, 1860.

    Every RWA has a President, Treasurer and Secretary to carry out various roles effectively.


    Status of Resident Welfare Association (RWA) under the Income Tax Act

    The Income Tax Act, 1961 has defined the status of various categories of the assessee as 'person'.

    Section 4 is the charging section under the Income Tax Act, 1961, and it imposes a tax on the income earned by a person in the previous year. 

    'Person' has been defined in section 2(31) of the Act to include an association of persons or a body of individuals, whether incorporated or not. [Section 2(31)(v)]

    For the purpose of this clause, an association of persons, or a body of individuals or a local authority, or an artificial juridical person, shall be deemed to be a person whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, or profits, or gains.

    Analyzing its plain ordinary meaning, the Supreme Court observed in the case of CIT v IndiraBalkrishna (39 ITR 546) that the word 'associate' means according to the 'Oxford Dictionary', to join in common purpose, or to join in an action'. Therefore, an 'association of persons', must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section, which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.

    The explanation inserted in clause (31) to section 2 of the Act with effect from April 1, 2002, provides that an association of persons will be deemed to be a person whether or not it is formed with the object of deriving income. In other words, it is not essential that an AOP should necessarily produce income.

    Hence, for the aforesaid reasons Resident Welfare Association (RWA) is categorized as the 'Association of Persons' (AOP) under the Income Tax Act, 1961.


    Incomes of a Resident Welfare Association (RWA)

    An RWA receives periodic contributions, mostly monthly, from the flat owners of the complex. The contributions are collected mainly for meeting the maintenance activities of the building.

    The surplus contribution amount for a time being is parked in fixed deposits of a bank and thus also earns interest thereon. The income is accrued to the RWAs.

    Various types of income that an RWA may earn are listed below-

    Members' Contribution: Contributions received by an RWA from their members of the society for the purpose of carrying out the common activities for the society.

    Members' contribution is the primary source of funds for an RWA. All the members contribute to a common fund which will be utilized for the benefits of the members.

    Maintenance charges, Electricity charges, penalties, interest charged on outstanding maintenance charges, etc. – are the typical contribution by members of the Association. The association merely works as an agent that collects these charges and uses them for various common expenses. Any surplus during a fiscal year is carried forward to the next fiscal year

    Dividend income- If the surplus amount of collection is invested in listed equity shares of Indian Companies, then it earns dividend income on those investments.

    Interest on Bank Deposits- RWAs generally have a bank account for paying the expenses. All the money collected is not required to be spent or paid immediately and thus are invested in fixed deposits with the banks. The interest income on fixed deposits made out of the surplus collection of members contribution is the income of the association which increases the corpus of the association. The interest income is also expended towards association objectives.

    Rental income from the use of the complex area: An RWA may earn rental income from letting of open space, terrace, or other facilities. from a member or a non-member of the association.

    Rental Income from Advertisement Hoardings or mobile towers: Some RWAs also earn rental income from hoardings of various business organizations allowed to install on the complex. Rentals are also received from the cell towers allowed to be installed on the roof-top of the complexes. All these income go to the kitty of the association which are again expended only for the common activities of the association.

    Parking Charges: Such charges may be collected from the member or non-members of the association.


    Taxability of Income of Resident Welfare Association (RWA)

    After discussing the various sources of income a Resident Welfare Association (RWA), the next question that comes how these incomes of an RWA is taxed. Whether the RWA is liable to pay tax on these incomes.

    Resident Welfare Association (RWA) is an Association of PErsons for income tax purposes, which is a separate person under the Income Tax Act. An AOP is liable to pay tax on its income earned during a financial year. 

    Hence, a 
    Resident Welfare Association (RWA) is also liable to pay tax on its income earned during a financial year.

    However, an RWA is not always liable to pay income tax on its income. Only those incomes which arise from non-members or non-mutual activities are subject to tax under the Income Tax Act.

    In the case of members' contributions to the association towards maintenance charges, etc. there is no question of taxability. This is because, in the case of contributions from members, the contributors and the participants who are also the beneficiaries are the same.

    RWA is a group of people who form an association and pool in funds which are referred to as common funds for the working of the association, hence, the amount generated is no longer regarded as income and therefore not subject to any income tax. 

    In legal parlance, it is called the 'doctrine of mutuality' i.e. one person cannot make income from himself. As such the contributions received by RWA from its members are not taxable at all.

    The 'Concept of mutuality' is based on the fact that one cannot trade with oneself and cannot make a profit out of oneself. A society is a mutual association and surplus from the contributions from members is not an income chargeable to tax. Thus, surplus from the contribution after deducting the housing society’s expenses are covered by the concept of mutuality. 

    Sometimes a housing society carries on some activities which are mutual and some may not be mutual. Then, the Concept of Mutuality can be considered only for those activities which are mutual. The contribution collected from non-members is income chargeable to tax.

    Dividend income from a listed company that has paid the Dividend Distribution Tax under section 115O is exempt from tax under section 10(34). Hence, if an RWA earns any dividend income, such dividend income will not be liable to tax.

    In case of rental income from usage of the complex area, then if the income is received from a member it will not be considered as income and hence there will be no tax liability. This is because of the 'doctrine of mutuality'.  In case the same is received from a non-member of the association then the income will be exigible to tax.

    Similarly, in the case of income from bank fixed deposits, the same is chargeable to tax even if the deposit is made out of the common fund of the association and the income will be polled in the common fund of the association.

    The mutuality principle provides that where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income. 

    The principle does not extend to include income that is derived from sources outside that group. Hence, interest earned on bank fixed deposits is fully taxable.

    In case the association is registered as a co-operative society and the amount is invested in a co-operative bank, then a deduction for the entire interest income can be claimed under section 80P(2)(d).

    Thus it can be said that if income is received by the RWA from a non-member then only the same is taxable.


    Income Tax Rate of Resident Welfare Association (RWA)

    After determining the taxable income of the RWA, it is necessary to ascertain what will be the tax rate applicable to the RWA.

    As stated earlier, a resident welfare association may be registered as a society under the Societies Registration Act, 1860 or under Cooperative Societies Act as a Cooperative Society.

    Alternatively, a resident welfare association may wish to remain unregistered under any of the stated laws. However, registration has certain benefits including benefits of reduced tax rates.

    Where a resident welfare association is registered as a co-operative society-

    Paragraph B of Part-I of the First Schedule of the Finance (No. 2) Act, 2019 prescribes a separate rate of taxation on total income of a co-operative society.

    The income-tax rate of a Co-operative Society for the assessment year (AY) 2020-21 is given below-


    Table-1
    Category of Taxpayer
    Co-operative Society
    Residential Status
    Resident

    Total Income
    Income-Tax Rate
    Up to Rs. 10,000
    10%
    Rs. 10,001 to Rs. 20,000
    20%
    Above Rs. 20,000
    30%
    Important:
    Surcharge on Income-tax for Co-operative Society:
    Cases covering Table-1
    Where Total Income exceeds Rs. 1,00,00,000
    12%

    Health & Education Cess on Income-tax and Surcharge for Co-operative Society:
    Cases covering Table-1
    Health & Education Cess
    4%


    Marginal Relief on Surcharge
    Where Total Income exceeds Rs. 1,00,00,000
    Total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

    Where a resident welfare association is registered as a Society-

    In this case, the slab rates as applicable to an Individual shall be applicable to an RWA. The RWA will be subject to tax rates as an AOP.

    Paragraph A of Part-I of the First Schedule of the Finance (No. 2) Act, 2019 prescribes a slab based rate of taxation on the total income of an AOP.


    Applicable Income Tax Slab Rates for AY 2020-21 for Individuals/HUF/AOP/BoI/AJP:

    Table-2
    Category of Taxpayer
    Individual/HUF/AOP/BoI/AJP
    Residential Status
    Resident and Non-Resident
    Age of the Taxpayer
    Under 60 years of age

    Total Income
    Income-Tax Rate
    Up to Rs. 2,50,000
    Nil
    Rs. 2,50,001 to Rs. 5,00,000
    5%
    Rs. 5,00,001 to Rs. 10,00,000
    20%
    Above Rs. 10,00,000
    30%


    Important:
    Surcharge on Income-tax for Individuals:
    In all cases covering Table-2
    Where Total Income is up to Rs. 50 Lakh
    Nil
    Where Total Income exceeds Rs. 50 Lakh but does not exceed Rs. 1 crore
    10%
    Where Total Income exceeds Rs. 1 crore but does not exceed Rs. 2 crore
    15%
    Where Total Income exceeds Rs. 2 crore but does not exceed Rs. 5 crore
    25%
    Where Total Income exceeds Rs. 5 crore
    37%

    Health & Education Cess on Income-tax and Surcharge for Individuals/ HUF/AoP/BoI/AJP:
    In all cases covering   Table-2
    Health & Education Cess
    4%


    Marginal Relief on Surcharge levied on Individuals/ HUF/ AoP/BoI/AJP
    Where Total Income exceeds Rs. 50,00,000
    Total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of Rs. 50,00,000 by more than the amount of income that exceeds Rs. 50,00,000.
    Where Total Income exceeds Rs. 1,00,00,000
    Total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.
    Where Total Income exceeds Rs. 2,00,00,000
    Total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of Rs. 2 crore by more than the amount of income that exceeds Rs. 2 crore.
    Where Total Income exceeds Rs. 5,00,00,000
    Total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of Rs. 5 crore by more than the amount of income that exceeds Rs. 5 crore.


    Note: There is no basic exemption limit available to a co-operative society whereas AOP (or a registered society) gets a basic exemption limit of Rs. 2,5 Lakh. However, do note that certain incomes of a co-operative society are eligible for deduction u/s 80P.

    Where a resident welfare association is unregistered-

    When the association is not registered under any of the mentioned Acts then not only the tax rate gets higher but the computation of tax liability also gets a bit complex.

    Since this article is not about taxation of AOPs, thus to keep the discussion simple, it is sufficient to understand that the tax rate of unregistered RWAs is the Maximum Marginal Rate of Tax applicable to the members of the RWA. Since in RWAs all the members are individual, the tax rate of unregistered RWAs is at a flat rate of 30 percent without any basic exemption limit.

    Since in most cases the individual members are unrelated individuals, no member would ideally like to disclose or reveal his tax status. They would hesitate to state whether he is filing any income tax return or not and whether he is paying tax at 30 percent.

    Hence, registering an RWA as a society is highly recommended.

    CBDT Circular No. 320/1982 dated 11-01-1982 also fortifies this. Read the full text of the circular below in the 'References'.


    Which ITR is required for an RWA and how to file ITR of an RWA

    The applicable ITR for a resident welfare association is ITR-5. ITR-5 has to be compulsorily filed online with or without a digital signature.

    The filing of a return of income in ITR-5 is similar to other ITR forms except for a few relevant information.

    The most tricky part of ITR-5 is filling the 'Status' and 'Sub Status' in the 'Personal Information' column in 'Part-A General'.

    An RWA should select status as "AOP/BOI".

    In the sub status, select the appropriate sub-status based on the followings-


    (1) If the RWA is registered as a co-operative society
    Other Co-operative Society
    (2) If the RWA is registered as a Society
    Society registered under Societies Registration Act, 1860 or any law corresponding to that state
    (3) If the RWA is unregistered
    Any Other AOP/BOI

    In the case (3), the column-D ( Whether total income of any member of the AOP/BOI or executor of AJP (excluding his share from such association or body or Executor of AJP) exceeds the maximum amount which is not chargeable to tax in the case of that member?) in the tab namely 'Partner's or Member's or Trust Information' in 'Part-A General' gets activated.

    In the other two cases, it remains disabled. It means the utility does not want this information for a registered RWA.

    Check the screenshots below-
    taxation-of-resident-welfare-association-or-apartment-owners-association-under-income-tax


    taxation-of-resident-welfare-association-or-apartment-owners-association-under-income-tax

    Note: The screenshots were taken from the java-based ITR-5 utility released vy the Income Tax Department on the e-filing portal for AY 2019-20.

    Is PAN mandatory for RWA

    PAN is not only required to file a return of income, but it is also required to carry on certain high-value financial transactions. Further, opening a bank account a PAN is asked for. So even if legally an RWA is not required to obtain PAN under the Income Tax Act, it is advisable to get a PAN of the association for the smooth functioning of the society.

    Further, to get the credit of TDS on the interest income from bank deposits, PAN is required.

    Is filing of return of income or ITR filing mandatory for an RWA

    Section 139(1) mandates every person to file a return of income within the prescribed due date if the total income exceeds the basic exemption limit.

    In case the total income of the RWA does not exceed the basic exemption limit, then an RWA is not under a legal obligation to file a return of income. It is advisable to file a return of income even in such cases, being an association of a group of people.

    Further, if the bank deducts TDS on the interest income then the refund thereof can be claimed only by filing a return of income.

    Is an RWA is liable to deduct TDS on payments

    Normally, an RWA makes the payment to contractors and professionals (engineers, etc.) since the activity of an RWA is confined to maintenance activity.

    A person when makes a payment to a contractor or a professional above the prescribed threshold limit then he is liable to deduct income tax or TDS from such payments.

    TDS on Contractor: The provisions related to the deduction of income tax from payment to contractors are contained in section 194C of the Income Tax Act. 

    It is a myth that TDS is applicable only to business persons. In some cases, the provisions of TDS are applicable to non-business persons also.

    Section 194C requires deduction of tax from the payment to resident contractors including advertising contract at the rate of -

    > 1 percent on the payment amount if the contractor is an individual or Hindu Undivided Family

    > 2 percent on the payment amount in any other case.

    Threshold limit - No income tax deduction is required under section 194C if the payment to a contractor-

    > under a single bill/transaction does not exceed Rs. 30,000, or

    > in aggregate in a financial year does not exceed Rs. 1,00,000.

    For example, if a registered society engages an electrical contractor to carry out certain electrical work in the complex and the value of contract work is more than Rs. 30,000 then the society is liable to deduct TDS @ 1% or 2%, as the case may be, on the amount paid to the contractor.

    TDS on Professionals: The provisions related to the deduction of income tax from payment to professionals for professional services or technical services are contained in section 194J of the Income Tax Act.

    Section 194J requires deduction of income tax from the payment to resident professionals at the rate of 10 percent if the payment to such professional exceeds Rs. 30,000 in a financial year, whether singly or in aggregate.

    Which RWAs are liable to deduct TDS under section 194C or 194J

    In the context of a resident welfare association, the followings are liable to deduct TDS under section 194C-

    (i) If the resident welfare association is registered as a co-operative society; or

    (ii) If the is registered as a society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India.

    In case the association is an unregistered one, the TDS obligation does not arise.

    On the contrary, any resident welfare association, whether registered or not under any Act, is liable to deduct income tax under section 194J.

    Illustration

    Let us understand the computation of income and tax computation of a resident welfare association and its disclosure in ITR-5 with the help of an illustration.

    Neha Flat Owners Association is a resident welfare association formed by the owners of the 'Neha Complex'. The members are the flat owners in the complex. During the Year 2019-20, the association received maintenance charges from the members amounting to Rs. 30,00,000. It has incurred expenditure of Rs. 24,00,000 towards maintenance activities. Besides, it earned interest income of Rs. 1,39,000 from the fixed deposit held with the State Bank of India. It has also earned an income of Rs. 30,000 from letting of the terrace of the complex to outsiders/non-members.
    Compute the total income of the association and tax liability for the AY 2020-21.

    Computation of total income and Tax liability

    Particulars
    Association is registered as a society
    Association is unregistered
    Income from maintenance Charges
    Gross Receipts
    30,00,000
    30,00,000
    Less: Expenses
    24,00,000
    24,00,000
    Net Surplus from maintenance receipts
    6,00,000
    6,00,000

    Income from Other Sources
    Rental Income
    30,000
    30,000
    Interest income from bank fixed deposit
    1,39,000
    1,39,000
    Total Income
    1,69,000
    1,69,000
    Tax Payable
    Nil
    50,700



    Disclosure in ITR:


    Status
    AOP/BOI
    AOP/BOI
    Sub-status
    Society
    Any other AOP/BOI


    Notes:

    1. The net surplus from maintenance receipts of Rs. 6,00,000 is not liable to be taxed due to the concept of mutuality. It is not income per se. The same can be disclosed in ITR as 'Exempt Income' in Schedule-EI of ITR-5. [In Column 4 'Other exempt income, (including exempt income of minor child) (please specify)' under 'Details of Exempt Income (Income not to be included in Total Income or not chargeable to tax)']

    It may be noted that the ITR utility does not take cognizance of the concept of mutuality, hence, disclosure of income/receipt as exempt income is the best option.

    2. In the case of a registered society, the slab based rate of tax as applicable to an Individual applies to an AOP. Since the basic exemption limit is Rs. 2,50,000, no tax is payable.

    3. In the case of unregistered society, the tax rate is applied at the Maximum Marginal Rate of 30 percent.

    4. The rental income from letting of the terrace will be taxed under the head 'Income from other sources' and not under the head 'Income from house property' since the association is not the owner of the building.




    References

    Full text of the CBDT Circular No. 320/1982 dated 11-1-1982


    SECTION 167A
    ASSESSMENT WHERE SHARES OF MEMBERS UNKNOWN

    911. Whether the section is applicable to income received by trustees on behalf of provident funds created exclusively for the benefit of employees

    1. A reference is invited to paragraph 15.1 to 15.7 of the Ex­planatory Notes on the provisions relating to direct taxes in the Finance Act, 1981 [Circular No. 308, dated 29-6-1981] which explain the scope and ambit of section 167A, as inserted by the Finance Act, 1981.

    2. A question has been raise whether the provisions of section 167A of the Income-tax Act which provide for charging of tax at the maximum marginal rate on the total income of an association of persons where the individual shares of members in the income of such association are indeterminate or unknown would also apply to income receivable by trustees on behalf of provident funds, superannuation funds, gratuity funds, pension funds, etc., creat­ed bona fide by persons carrying on business or profession exclu­sively for the benefit of the persons employed in such business. The Board have been advised that cases where income received by the trustees on behalf of a recognised provident fund, approved superannuation fund and approved gratuity fund is governed by section 10(25) of the Income-tax Act, the question of their being charged to tax does not arise. So far as cases where income is receivable by the trustees, on behalf of an unrecognized provi­dent fund or an unapproved superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession are concerned, they will continue to be charged to tax in the manner prescribed by section 164(1)(iv) of the Income-tax Act, as hitherto. Simi­larly, in the cases of registered societies, trade and profes­sional associations, social and sports clubs, charitable or religious trusts, etc., where the members or trustees are not entitled to any share in the income of the association of per­sons, the provisions of new section 167A will not be attracted and, accordingly, tax will be payable in such cases at the rate ordinarily applicable to the total income of an association of persons and not at the maximum marginal rate.

    Circular : No. 320 [F. No. 131(31)/81-TP(Pt.)], dated 11-1-1982.


    JUDICIAL ANALYSIS

    EXPLAINED IN - In Asstt. CWT v. Club of Mahabaleshwar [1993] 44 ITD 520 (Pune - Trib.) it was observed that Circular No. 320, dated 11-1-1982, supports the view that assessee, a members’ club, is AOP and not an ‘individual’ and hence is not an assessable entity liable to wealth-tax.

    EXPLAINED IN - In Lodge Hamilton 26 v. ITO [1998] 66 ITD 609 (Ahd.) it was observed that Circular No. 320, dated 11-1-1982, issued by the Board does not deviate from the provisions of law or in any manner override the provisions of section 167A.


    Suggested Readings:

    CBDT notifies ITR-1 and ITR-4 for Assessment Year 2020-21

    Analysis of Changes in notified ITR 1 and ITR 4 for AY 2020-21

    Roll Back of Changes in ITR Forms notified for AY 2020-21

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    11 Comments

    1. One of the best article as I ever read. Great explanation with complete in depth analysis.

      ReplyDelete
    2. Very helpful. Absolute detailed analysis. Could you let me know if we are supposed to fill in the entire ITR P&L in the return. Also if gross receipts cross 2 Crore, would tax audit be applicable under section 44AB?

      ReplyDelete
      Replies
      1. You may fill entire P&L with the relevant data applicable for your RWA. Tax Audit is applicable only for income from business activities. If the RWA is carrying on business, then audit provisions will apply otherwise not.

        Delete
    3. its very helpful and details analysis of every aspect. I have one query as follows:-

      Receipt from Members = 20 Lakhs
      Interest from FD = 5 lakhs

      Total Expenses = 23 lakhs

      How to show the above in the ITR.

      ReplyDelete
      Replies
      1. Truly speaking, only the interest income is required to be offered to tax as income from other sources. Members contribution is not income.
        But may Associations shows the receipt of contribution as Income in P&L and claim the expenses. the loss of Rs. 3 Lakh, as given in your case, is set-off with the interest income. This is wrong since RWAs do not carry on any business and thus there cannot be any business loss for an RWA.

        Delete
      2. Sir thanks writing this article.
        Indeed it is very informative. But comig back to this particular question. In this case if we use 3 lacs from the interest income then are we liable to pay tax on 5 lacs (2.5 lacs after deduction) or balance 2 lacs ( Which would then be 2.5 lacs - 3 Lacs). Thanks

        Delete
    4. Just came across this article and found it very detailed and useful. However, what I was searching on Google was different and has not been mentioned in this article.

      Can you please tell me the tax impact of donations or charitable contribution? A plumber in our building who had his daughter diagnosed with a critical illness and we the residents would like to contribute and help. The problem is that there are non residents in our building who would also like to help and the RWA is considering accepting the donation into the RWA's account. Will this have a tax impact.

      There is also a suggestion that everything that is collected is not disbursed immediately but be disbursed little by little so that the plumber does not spend it for other purposes. Also, it is possible that part of the receipts is kept for future donations. How would this affect tax on the association?

      Thank you for your input.

      ReplyDelete
      Replies
      1. Every receipt is not income. There is no tax implication for the said collection

        Delete
    5. wonderful article. detailed explanation and in depth analysis

      ReplyDelete
    6. Very good compilation of law and practical issues.

      ReplyDelete