VILAS TRANSPORT COMPANY, MUMBAI V. ITO WD 13(2)(1), MUMBAI

CO 159/MUM/2011

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8243 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 23 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-01-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Next Hearing Date: 03-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 07-09-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Source of fund
• Section: 143(3)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 6651/MUM./2011 ( &) * !+* / ASSESSMENT YEAR : 200809 ) DY. DIRECTOR OF INCOME TAX (I.T)1(2) R.NO.120, SCINDIA HOUSE, N.M. MARG BALLARD EAST, MUMBAI 400 038 .. ,- / APPELLANT ) V/S M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) AFL HOUSE, LOK BHARATI COMPLEX MAROL MAROSHI ROAD, MAROL ANDHERI (E), MUMBAI 400 059 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAFCS2907Q ./' . / C.O. NO. 159/MUM./2012 ( . 6651/MUM./2012 12# 3 ) (ARISING OUT OF ITA NO. 6651/MUM./2012 ( &) * !+* / ASSESSMENT YEAR : 200809 ) M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) AFL HOUSE, LOK BHARATI COMPLEX MAROL MAROSHI ROAD, MAROL ANDHERI (E), MUMBAI 400 059 .. ./' / CROSS OBJECTOR ) V/S DY. DIRECTOR OF INCOME TAX (I.T)1(2) R.NO.120, SCINDIA HOUSE, N.M. MARG BALLARD EAST, MUMBAI 400 038 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAFCS2907Q 4 ! 5 6 / REVENUE BY : MR. NARENDER KUMAR &) *7# 5 6 / ASSESSEE BY : MR. NITESH JOSHI M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 2 )! 5 # / DATE OF HEARING 22.01.2013 $ 8+ 5 # / DATE OF ORDER 31.01.2013 $ $ $ $ / ORDER '# $% '# $% '# $% '# $% , ,, , & & & & 9 9 9 9 / PER AMIT SHUKLA, J.M. THE APPEAL PREFERRED BY THE REVENUE AND THE CROSS O BJECTION PREFERRED BY THE ASSESSEE, ARE AGAINST THE IMPUGNED ASSESSMENT ORDER DATED 27 TH JULY 2011, PASSED BY THE LEARNED COMMISSIONER (APP EALS)XI, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 144C(3) R/W SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHO RT THE ACT ) FOR THE ASSESSMENT YEAR 200809. 2. FACTS IN BRIEF: THE ASSESSEE, IN THE PRESENT APPEA L, IS A COMPANY WHICH WAS FOUNDED IN THE YEAR 1949 IN BELGIUM. IT H AS BRANCHES IN MORE THAN 220 COUNTRIES ALL OVER THE WORLD AND IS KIND O F A SOCIETY FOR THE BENEFIT OF INTERNATIONAL AIRLINES TO PROVIDE TELECO MMUNICATION NETWORK TO ALL THE AIRLINES WHO ARE MEMBERS OF THE ASSESSEE SOCIET Y. ALL THROUGHOUT, THE ASSESSEE HAS BEEN CLAIMING THAT IT IS A MUTUAL BENE FIT SOCIETY AND ALL ITS INCOME IS EXEMPT UNDER THE PRINCIPLES OF MUTUALITY . THIS PRINCIPLES OF MUTUALITY HAS BEEN DENIED BY THE ASSESSING OFFICER. 3. BEFORE THE LEARNED COMMISSIONER (APPEALS), IT WAS P LEADED THAT THIS ISSUE HAS BEEN EXAMINED IN ASSESSEES OWN CASE STAR TING FROM ASSESSMENT YEARS 199697 TO 200708, WHEREIN THE LEARNED COMMI SSIONER (APPEALS) HAS ACCEPTED THE ASSESSEES CONTENTIONS THAT ITS IN COME IS EXEMPT ON THE PRINCIPLES OF MUTUALITY . THE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE EARLIER YEARS ORDERS, HELD THAT THE ASSESSEE I S ENTITLED FOR EXEMPTION OF ITS INCOME FROM THE TRANSACTIONS QUA THE MEMBERS . HOWEVER, THE INCOME, AS A RESULT OF TRANSACTIONS WITH NONMEMBER S, THE SAME IS NOT COVERED BY PRINCIPLES OF MUTUALITY . M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 3 4. BOTH THE PARTIES BEFORE US ACCEPTED THAT THE ISSUE INVOLVED IN THE DEPARTMENTS APPEAL AND CROSS OBJECTION OF THE ASSE SSEE IS COVERED BY THE EARLIER ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CA SE. 5. RIVAL CONTENTIONS HEARD. ON A PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THIS ISSUE HAS BEEN DISCUSSED IN DETAIL IN ASSESSEES OWN CASE IN THE ORDER FOR THE ASSESSMENT YEAR 199697 IN ITA NO.4970/MUM./2005, A ND C.O. NO.67/ MUM./2006, VIDE ORDER DATED 26 TH SEPTEMBER 2012. THIS DECISION HAS BEEN FOLLOWED IN THE SUBSEQUENT YEARS ALSO UPTO THE ASSE SSMENT YEAR 200607. THE RELEVANT CONCLUSION OF THE TRIBUNAL IN APPEAL R ELATING TO ASSESSMENT YEAR 199697, ARE AS UNDER: 3.11.20. WE HAVE NOTICED IN AN EARLIER PARA OF THIS ORDER THAT IN A CASE OF A NON-MUTUAL ORGANIZATION, A FEW TRANSACTIO NS WITH THE MEMBERS DO NOT CONVERT ITS NON-MUTUAL STATUS TO MUT UAL. IN THE LIKE MANNER, THE OTHERWISE STATUS OF MUTUALITY OF A N ORGANIZATION CANNOT BE DESTROYED BECAUSE OF A FEW TRANSACTION WI TH THE NON- MEMBERS. WHAT EXTENT OF PARTICIPATION BY NON-MEMBER S DESTROYS THE OTHERWISE MUTUAL STATUS OF AN ORGANIZATION OR W HAT EXTENT OF PARTICIPATION BY MEMBERS CHANGES THE OTHERWISE STAT US OF NON- MUTUALITY DEPENDS ON THE CONSIDERATION OF THE TOTAL ITY OF FACTS AND CIRCUMSTANCES OF EACH CASE. 3.12. FOLLOWING PRINCIPLESS OF MUTUALITY CAN BE DED UCED FROM THE ABOVE DISCUSSION:- A. NO ONE CAN TRADE WITH HIMSELF AND HENCE THERE CA N BE NO PROFIT FROM SELF. B. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AN D SUCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES OR FACILI TIES ONLY TO ITS MEMBERS, THERE CAN INVARIABLY BE NO PROFIT MOTIVE. EVEN IF SOME PROFIT ENSUES TO THE ORGANIZATION FROM MEMBERS ON I TA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIO NAL DE TELECOMMUNICATION TRANSACTIONAL LEVEL, WHILE PURSUI NG THE OBJECTS OF THE ASSOCIATION IN PROVIDING GOODS AND SERVICES TO ITS MEMBERS, THERE CAN BE NO TAX ON SUCH PROFIT ON THE BASIS OF THE PRINCIPLES OF MUTUALITY. THE REASON IS THAT THE CONTRIBUTORS TO T HE PROFIT AND PARTICIPATORS IN SUCH PROFIT, ARE THE SAME PERSONS AS A CLASS. IF NO PROFIT FOLLOWS FROM THE TRANSACTIONS WITH THE MEMBE RS, OBVIOUSLY, THERE CAN BE NO TAX EVEN DE HORS THE RULE OF MUTUAL ITY. C. IF, AN ORGANIZATION OF THE NATURE AS DISCUSSED I N POINT NO. B ABOVE, APART FROM ENTERING INTO TRANSACTIONS WITH I TS MEMBERS IN FURTHERANCE OF ITS OBJECTS, INVESTS ITS FUNDS OR MA KES DEPOSIT IN BANK, THE RETURN OR INTEREST ON SUCH INVESTMENT/DEP OSITS WILL NOT BE COVERED BY THE CHARACTER OF MUTUALITY AND SUCH AN A MOUNT WILL BE M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 4 LIABLE TO TAX. IT IS SO FOR THE REASON THAT THE PRI NCIPLES OF MUTUALITY WILL LACK AS THE CONTRIBUTORS OF SUCH INTEREST INCO ME WILL NOT BE PARTICIPATING IN SUCH INCOME. HOWEVER, MUTUAL CHARA CTER OF THE ORGANIZATION IN RESPECT OF TRANSACTIONS WITH ITS ME MBERS WILL CONTINUE AND INCOME THERE FROM WILL ENJOY EXEMPTION . D. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AN D SUCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES/FACILITIE S ONLY TO PUBLIC AT LARGE, THAT IS, NON-MEMBERS, THERE MAY OR MAY NO T BE PROFIT MOTIVE. WHEN THERE IS PROFIT MOTIVE AND PROFITS ACT UALLY FOLLOWS, SUCH PROFIT IS LIABLE TO TAX. IF THERE IS NO PROFIT ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMM UNICATION MOTIVE BUT STILL PROFIT FOLLOWS, SUCH A PROFIT IS A LSO CHARGEABLE TO TAX. IF, HOWEVER THERE IS NO PROFIT MOTIVE AND NO PROFIT RESULTS, THERE WILL NOT BE ANY TAX BECAUSE OF NO INCOME AND NOT BECAUSE OF PRINCIPLES OF MUTUALITY. OBVIOUSLY IN SUCH A CASE, THE CONTRIB UTORS TO THE PROFIT, BEING THE CUSTOMERS AS A CLASS, WILL BE DIF FERENT FROM THE PARTICIPATORS IN THE PROFIT, BEING THE MEMBERS OF T HE ASSOCIATION AS A CLASS, THEREBY BREACHING THE PRINCIPLES OF MUTUAL ITY. E. IF, IN A CASE OF ASSOCIATION OF THE NATURE AS DI SCUSSED IN POINT NO.D ABOVE, THERE ARE BY AND LARGE TRANSACTIONS WIT H NON-MEMBERS, BUT THERE ARE ONLY A FEW TRANSACTIONS WITH MEMBERS AS WELL, THE NATURE OF THE ORGANIZATION AS NON-MUTUAL, WILL REMA IN AS SUCH. WHEREAS PROFITS FROM TRANSACTIONS WITH NON-MEMBERS WILL BE LIABLE TO TAX, PROFIT FROM TRANSACTIONS WITH THE MEMBERS W ILL CONTINUE TO ENJOY EXEMPTION. F. WHEN THE ORGANIZATION PROVIDES FACILITIES AND SE RVICES BOTH TO ITS MEMBERS AND NON-MEMBERS, THE FOLLOWING CONSEQUENCES FLOW:- (I) IF THE `OBJECT OF SUCH AN ORGANIZATION IS `TO EARN PROFIT, THERE IN NO MUTUALITY IN RESPECT OF TRANSACTIONS WITH MEM BERS. (II) WHEN THE `OBJECT OF THE ORGANIZATION IS `NOT TO EARN PROFIT BUT PROFIT EMERGES FROM TRANSACTIONS WITH MEMBERS AND N ON-MEMBERS, THE RULE OF MUTUALITY WILL NOT APPLY TO THE EXTENT OF TRANSACTIONS WITH MEMBERS UNLESS TRANSACTIONS WITH MEMBERS ARE P HENOMENALLY MINIMAL. (III) IN BOTH THE ABOVE CASES COVERED UNDER (I) AND (II), PROFIT FROM TRANSACTIONS WITH NON-MEMBERS IS ALWAYS TAXABLE. 3.13. NOW WE WILL TEST THE FACTS OF THE INSTANT CAS E ON THE TOUCHSTONE OF THE BROADER PRINCIPLESS OF MUTUALITY AS FIGURED OUT BY US IN PRECEDING PARA. IT IS OBSERVED THAT THE ASSES SEE EXTENDED FACILITIES TO AIRPORT AUTHORITIES, UNITED NATION, I FC, UNESCO AND EQUANT CUSTOMERS. IT IS EVIDENT FROM PAGE 27 PARA 7 4 OF THE `STATEMENT OF FACTS FILED BY THE ASSESSEE BEFORE T HE LEARNED CIT(A) THAT THE ASSESSEE-COMPANY AND EQUANT SHARED NETWORK OUTSIDE INDIA IN ORDER TO ACHIEVE ECONOMIES OF SCALE. UNDER THIS ARRANGEMENT, THE COSTS INCURRED BY EACH PARTY WERE SHARED ACCORDING TO USAGE AND THESE COSTS RECHARGED WERE S HOWN IN ITS INCOME AND EXPENDITURE ACCOUNT. THE FACT THAT THE A SSESSEE RENDERED SERVICES TO EQUANT CUSTOMERS IS ALSO BORNE OUT FROM ITS M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 5 LETTER DATED 25.03.2004, A COPY OF WHICH IS PLACED ON PAGE 29 ONWARDS OF THE PAPER BOOK. FROM PARA (IVC), IT CAN BE NOTICED THAT : SITA AND EQUANT SHARED NETWORK RESOURCES IN CERTAI N COUNTRIES OUTSIDE INDIA, IN ORDER TO MAXIMIZE SUCH ECONOMIES OF SCALE. UNDER THOSE ARRANGEMENTS, THE COSTS INCURRED BY EACH PART Y WERE SHARED ACCORDING TO USAGE. IT SHOWS THAT NON-MEMBERS DID AVAIL THE FACILITIES EXTENDED BY THE ASSESSEE. 3.14. NOW LET US SEE THE VOLUME OF TRANSACTIONS WIT H SUCH NONMEMBERS. THE ASSESSEES CONTENTION IS THAT IT WA S SIMPLY RECOVERING COSTS FROM ITS MEMBERS AND NON-MEMBERS F OR RENDERING SERVICES AND THERE WAS NO PROFIT MOTIVE. THE TOTAL OF COST RECOVERIES FROM GOVERNMENT, INTERNATIONAL ORGANIZATIONS AND EQ UANT CUSTOMERS, CONSTITUTING NON-MEMBERS AS A GROUP, IS 0.07% OF THE TOTAL COST RECOVERIES. IT SHOWS THAT THE ASSESSEE P ROVIDED SERVICES TO ITS MEMBERS AT 99.93% OF ITS TOTAL OPERATIONS. T HIS FACT EVIDENCES THAT NON-MEMBERS AVAILED THE FACILITIES P ROVIDED BY THE ASSESSEE TO A VERY LIMITED EXTENT, LESS THAN EVEN 0 .1% OF TOTAL. 3.15. AT THIS MOMENT, WE WILL TRY TO ASCERTAIN IF T HE ASSESSEE WAS SET UP WITH A PROFIT MOTIVE. WE HAVE PERUSED ARTICL ES OF ASSOCIATION OF THE ASSESSEE, A COPY OF WHICH IS PLACED AT PAGE 116 ONWARDS OF THE PAPER BOOK. OBJECTS OF THE ASSESSEE ARE CONTAIN ED IN ARTICLE 3. MAIN OBJECT OF THE ASSESSEE AS PER CLAUSE A) OF ART ICLE 3 IS :`TO FOSTER ALL COMMUNICATION AND INFORMATION PROCESSING , MATTERS DIRECTLY OR INDIRECTLY CONNECTED WITH THE TRANSMISS ION AND PROCESSING OF ALL CATEGORIES OF INFORMATION REQUIRE D IN THE OPERATION OF THE AIR TRANSPORT INDUSTRY AND TO STUDY THE PROB LEMS RELATING TO THEM WITH THE AIM OF PROMOTING IN AL COUNTRIES SAFE AND REGULAR AIR TRANSPORT. OTHER OBJECTS OF THE ASSESSEE ARE ON TH E SAME LINES. THERE IS NO REFERENCE TO ANY PROFIT MOTIVE IN SUC H OBJECTS. IT HAS BEEN CONSISTENTLY CLAIMED BY THE ASSESSEE THAT IT H AS NOT EARNED ANY PROFIT FROM ITS TRANSACTIONS AND THE CONSIDERAT ION SO RECEIVED REPRESENTS ONLY COST RECOVERIES. 3.16. THE ABOVE FACTS INDICATE THAT PRIMARILY, THE ASSESSEE IS NOT SET UP WITH A `PROFIT MOTIVE. SECONDLY, THE NON-ME MBERS AVAILING THE FACILITIES EXTENDED BY THE ASSESSEE ARE VERY IN SIGNIFICANT, NOT EVEN 1% OF THE TOTAL. 3.17. THESE FACTS ARE DEFINITE POINTER TOWARDS THE ASSESSEE BEING A MUTUAL ORGANIZATION. UNDER SUCH CIRCUMSTANCES WE AR E OF THE CONSIDERED OPINION THAT THE PRINCIPLES OF MUTUALITY CANNOT BE DENIED IN ENTIRETY EVEN IN RESPECT OF TRANSACTIONS BY THE ASSESSEE WITH ITS MEMBERS. ACCORDINGLY, THE VIEW TAKEN BY THE LEARNED CIT(A) CAN NOT BE FAULTED WITH INSOFAR AS IT ACCEPTS THE RULE OF MUTUALITY QUA THE TRANSACTIONS WITH MEMBERS AND DENIES THE SAME Q UA THE TRANSACTIONS WITH NON-MEMBERS. 3.18. THE NEXT ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IN SUPPORT OF HIS CONTENTION THAT TH E MUTUALITY SHOULD BE REJECTED IN ENTIRETY WAS WITH REFERENCE T O ARTICLES 20 AND 50 OF THE ARTICLES OF ASSOCIATION OF THE ASSESSEE. IT WAS SUBMITTED THAT SINCE THE RETIRING OR RESIGNING MEMBERS ARE NO T ENTITLED TO PARTICIPATE IN THE RESERVES TO SOME EXTENT, THE MUT UALITY WAS LOST. M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 6 IT WAS ARGUED THAT THE CONTRIBUTOR TO AND PARTICIPA TOR IN THE SURPLUS FUND SHOULD BE CONSIDERED ON THE LEVEL OF INDIVIDUA L PERSONS. FOR THIS PROPOSITION, HE RELIED ON THE JUDGMENT IN THE CASE OF WANKANER JAIN SOCIAL WELFARE SOCIETY (SUPRA). IN THIS CASE T HE HONBLE MADRAS HIGH COURT CONSIDERED THE FACTS IN WHICH THE OBJECT OF THE SOCIETY WAS TO CREATE AND CULTIVATE THE HABIT OF SAVING AND THRIFT AMONG THE MEMBERS OF THE SOCIETY TO HELP BY WAY OF LOAN OR OT HER ASSISTANCE TO MEMBERS IN CASE OF A BONA FIDE NEED. THE RULES A ND REGULATIONS OF THE SOCIETY MADE IT COMPULSORY FOR EVERY MEMBER TO PARTICIPATE IN THE SCHEME OF DEPOSIT. THE ASSESSING OFFICER DEN IED THE MUTUALITY ON THE GROUND THAT EVERY DEPOSITOR WAS NO T NECESSARILY BORROWER AND THEREFORE, THE INTEREST PAID BY THE BO RROWERS AND DISTRIBUTED AMONGST THE NON-BORROWER MEMBERS DENTED THE MUTUALITY. THE HONBLE MADRAS HIGH COURT UPHELD THI S PRINCIPLES BY HOLDING THAT SINCE THE INTEREST INCOME WAS AVAILABL E FOR BEING DISTRIBUTED AMONGST ALL THE MEMBERS INCLUDING THOSE WHO HAD NOT BORROWED MONEYS, THE IDENTITY BETWEEN THE CONTRIBUT ORS AND PARTICIPATORS WAS LOST AND HENCE THE PRINCIPLES OF MUTUALITY WAS NOT SATISFIED. 3.19. THE QUESTION WHICH, THEREFORE, ARISES FOR OUR CONSIDERATION IS WHETHER THE MUTUALITY IS LOST BY REASON OF A MEMBER RESIGNING OR RETIRING FROM THE SOCIETY AND NOT GETTING ANY SHARE IN THE RESERVES. IN OTHER WORDS, THE LARGER QUESTION IS WHETHER THE CONTRIBUTORS TO THE FUND AND PARTICIPATORS IN THE FUND SHOULD BE TH E SAME PERSONS ON AN INDIVIDUAL LEVEL OR A CLASS LEVEL. THE HONBL E JURISDICTIONAL HIGH COURT IN THE CASE OF SIND CO-OPERATIVE HOUSING SOCIETY (SUPRA) CONSIDERED THE QUESTION OF MUTUALITY ON THE TRANSFER FEES RECEIVED BY THE CO-OPERATIVE SOCIETY FROM ITS MEMBE RS. IN THIS CASE, THE HONBLE JURISDICTIONAL HIGH COURT RECOGNI ZED `CLASS OF MEMBERS AS PARTICIPATORS AS WELL AS CONTRIBUTORS F OR MUTUALITY, INSTEAD OF THE `INDIVIDUAL MEMBERS. IT HAS BEEN HE LD IN THIS CASE THAT THE FACT THAT ONLY SOME MEMBERS FROM THOSE WHO CONTRIBUTED MAY PARTICIPATE IN THE SURPLUS, IS IRRELEVANT AS LO NG AS THE CLASS IS SAME. 3.20. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F KUMBAKONAM MUTUAL BENEFIT FUND LTD. (SUPRA) TO CONT END THAT THE PRINCIPLES OF MUTUALITY FAILS IF THE PERSONS WHO CO NTRIBUTE TO THE INCOME ARE NOT THE SAME PERSONS WHO PARTICIPATE IN THE SURPLUS OF THE ORGANIZATION. IN THIS CASE THE ASSESSEE CARRIED ON A BANKING BUSINESS RESTRICTED TO ITS SHAREHOLDERS, THAT IS, T HE SHAREHOLDERS WERE ENTITLED TO PARTICIPATE IN VARIOUS RECURRING D EPOSITS SCHEMES OF THE ASSESSEE OR TO OBTAIN LOANS OF SECURITIES. THES E RECURRING DEPOSITS CONSTITUTED THE MAIN SOURCE OF FUNDS OF TH E ASSESSEE FOR ADVANCING LOANS. OUT OF THE INTEREST REALIZED BY TH E ASSESSEE ON THE LOANS, INTEREST ON RECURRING DEPOSIT WAS PAID AND T HE BALANCE WAS DIVIDED AMONGST THE MEMBERS ACCORDING TO THEIR SHAR EHOLDING. THE ITO DENIED THE PRINCIPLES OF MUTUALITY AND ASSESSED THE ENTIRE PROFIT TO TAX, WHICH VIEW HAS BEEN UPHELD BY THE HONBLE S UPREME COURT. 3.21. WE ARE UNABLE TO SEE AS TO HOW THIS JUDGMENT ADVANCES THE CASE OF THE REVENUE. THE ASSESSEE IN THAT CASE RECE IVED RECURRING DEPOSITS AND MADE ADVANCES TO CERTAIN MEMBERS. THE SURPLUS WAS M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 7 DISTRIBUTED AMONGST MEMBERS ACCORDING TO THEIR SHAR EHOLDING AFTER MAKING A PROVISION FOR RESERVES ETC. THE SHAREHOLDE RS WHO WERE ENTITLED TO PARTICIPATE IN THE SURPLUS NEED NOT HAV E EITHER TAKEN LOANS OR MADE RECURRING DEPOSITS. FROM THESE FACTS, IT IS PALPABLE THAT THE SHAREHOLDERS WERE DIFFERENT AS A CLASS FRO M THE PERSONS WHO AVAILED THE LOAN FACILITY AS A CLASS. IT WAS NO T NECESSARY FOR A SHAREHOLDER EITHER TO TAKE LOAN OR TO MAKE A RECURR ING DEPOSIT. THUS THE CONTRIBUTORS TO THE FUNDS WERE DIFFERENT A S A GROUP FROM THE PARTICIPATORS, BEING, THE SHAREHOLDERS OF THE C LUB AS A GROUP. 3.22. IN VIEW OF THE FACT THAT ARTICLES 20 AND 50 D EBAR THE RETIRING OR RESIGNING MEMBERS FROM PARTICIPATING IN THE RESE RVES AVAILABLE, CANNOT BE CONSIDERED AS A FACTOR ECLIPSING THE PRIN CIPLES OF MUTUALITY. IT IS SO FOR THE REASON THAT THE PERSONS WHO ARE ENTITLED TO SHARE AND PARTICIPATE IN THE RESERVES OF THE SOC IETY CONTINUE TO REMAIN THE SAME AS A GROUP OR CLASS OF PERSONS. THE MERE FACT THAT A PERSON AT THE TIME OF RESIGNATION OR RETIREMENT I S NOT ENTITLED TO SHARE IN THE RESERVES OF THE ORGANIZATION, WOULD NO T DAMAGE THE MUTUALITY SO LONG AS THE PERSONS WHO ARE ENTITLED T O SHARE SUCH RESERVES CONTINUE TO BE THE MEMBERS AS A CLASS. 3.23. BE THAT AS IT MAY, IT IS OBSERVED THAT THIS F ACT HAS BEEN CONSIDERED BY THE TRIBUNAL WHILE DECIDING THE PRINC IPLES OF MUTUALITY IN RELATION TO ASSESSMENT YEARS 1974-75 AND 1975-76 . THE TRIBUNAL HAS ELABORATELY REPRODUCED AND DISCUSSED THESE TWO ARTICLES IN ITS ORDER AND THEREAFTER RECORDED A POSITIVE CONCLUSION GRANTING THE STATUS OF MUTUAL ORGANIZATION TO THE ASSESSEE. SAME IS TRUE IN RESPECT OF THE CREATION OF RESERVES AS WELL. THE LE ARNED AR HAS POINTED OUT THAT THE RESERVES SO REFERRED TO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE WERE CREATED MANY YEARS AGO IN ACCORDANCE WITH THE BELGIAN STATUTORY REQUIREMENTS OR AROSE DUE TO REVALUATION OR REFURBISHMENT COST OR DUE TO CAPITAL IZATION OF REFURBISHMENT COST. THE QUESTION OF RESERVES HAS AL SO BEEN DISCUSSED IN THE ORDER FOR ASSESSMENT YEARS 1974-75 AND 1975-76. IN VIEW OF THE CONCLUSION ARRIVED AT BY THE TRIBUNA L IN EARLIER YEARS HOLDING THAT THE MUTUALITY IS NOT DISTURBED BY REAS ON OF ARTICLE 20 AND 50 OF THE ASSESSEE OR THE CREATION OF RESERVES, WE DO NOT DEEM IT NECESSARY TO DIVE DEEP INTO THE ARGUMENTS OF THE LD. DR WITH A VIEW TO BRING OUT ANY DECISION CONTRARY TO WHAT HAS ALREADY BEEN TAKEN BY THE TRIBUNAL IN EARLIER YEARS ON THE SAME FACTS AND CIRCUMSTANCES. 3.24. WE, THEREFORE, SUM UP OUR CONCLUSION ON GROUN D NO.1 TAKEN BY THE REVENUE IN ITS APPEAL BY HOLDING THAT THE AS SESSEE IS COVERED BY THE PRINCIPLES OF MUTUALITY TO THE EXTEN T OF ITS TRANSACTIONS WITH THE MEMBERS. INCOME FROM TRANSACT IONS WITH NON-MEMBERS IS OUTSIDE THE PURVIEW OF MUTUALITY. 6. THUS, RESPECTFULLY FOLLOWING THE EARLIER YEARS PRE CEDENCE WE HOLD THAT THE INCOME OF THE ASSESSEE IN RELATION TO THE TRANSACTIONS ENTERED WITH THE MEMBERS ARE COVERED BY THE PRINCIPLES OF MUTUALITY AND, HENCE, THE SAME IS EXEMPT FROM TAXATION AND ONLY THE INCOME FR OM THE TRANSACTION OF M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 8 NONMEMBERS IS OUTSIDE THE PURVIEW OF PRINCIPLES OF MUTUALITY. ACCORDINGLY, ALL THE GROUNDS RAISED BY THE DEPARTME NT STAND DISMISSED. 7. 7 #: 4 ! 5 74 5 4# ;< = 7. IN THE RESULT REVENUES APPEAL IS DISMISSED. WE NOW TAKE UP ASSESSEES CROSS OBJECTION NO.159/MU M./2012. 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT THE ISSUE RAISED IN THE CROSS OBJECTION HAS BEEN DECIDE D AGAINST THE ASSESSEE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 199697 AND IN THE ASSESSMENT YEAR 200607, DECIDED BY THE TRIBUNAL, V IDE ORDER DATED 14 TH NOVEMBER 2012. THE RELEVANT FINDINGS GIVEN BY THE T RIBUNAL IN RELATION TO GROUNDS NO.1 AND 2 OF THE CROSS OBJECTION ARE AS UN DER: 7 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE FACTS REGARDIN G THE ISSUE RAISED BY THE ASSESSEED IN THE CO ARE IDENTICAL. 7.1 THE ISSUE RAISED IN GROUND NO.1 AND 2 OF THE CO HAS BEEN DEALT BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 1996-97 IN PARAS 5.4 & 5.5 AS UNDER: 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THERE CAN BE NO DISPUTE ABOUT T HE FACT THAT ANY AMOUNT RECEIVED BY WAY OF REIMBURSEMENT, NOT CONTAI NING ANY ELEMENT OF PROFIT, IS NOT LIABLE TO TAX. THIS PRINC IPLES HAS BEEN LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN CI T V. SIEMENS AKTIONGESELLSCHAFT [(2009) 177 TAXMAN 81 (BOM.)] AN D THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA AND M AHINDRA LTD. V. DCIT [(2009) 313 ITR (AT) 263 (MUM) (SB)]. IN THESE CASES, IT HAS BEEN HELD THAT WHEN A PARTICULAR AMOUNT OF EXPENDIT URE IS INCURRED AND THE SAME SUM IS REIMBURSED AS SUCH, THAT CANNOT BE CONSIDERED AS HAVING ANY PART OF IT IN THE NATURE O F INCOME. THIS BRINGS US TO THE PRINCIPLES THAT IF THERE IS CERTAI N REIMBURSEMENT OF EXPENSES AS SUCH, WITHOUT THERE BEING ANY MARK UP I NCLUDED IN SUCH REIMBURSEMENT, THERE CANNOT BE ANY QUESTION OF EARNING ANY INCOME LIABLE TO TAX FROM SUCH REIMBURSEMENT. WE AG REE WITH THE LEARNED AR ON THIS PRINCIPLES THAT THE REIMBURSEMEN T OF EXPENSES DOES NOT LEAD TO ANY INCOME AND IN SUCH A SITUATION THERE CAN BE NO QUESTION OF ANY INCOME EMBEDDED IN SUCH REIMBURSEME NT. 5.5. HOWEVER WE FIND THAT THIS PRINCIPLES IS NOT AP PLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. IT IS OBSERVED FROM THE STATEMENTS OF SHRI S.GOPALAKRISHNAN AND MR.ANDREW C LEAK RECORDED AT THE TIME OF SURVEY THAT THE BASIS OF ALLOCATION OF COSTS TO DIFFERENT COUNTRIES BY THE HO WAS NOT KNOWN. IT WAS ADMITTED THAT M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 9 THE HO ALLOCATES A PROPORTION OF ITS GENERAL ADMINI STRATIVE AND FINANCING COST TO OTHER BRANCHES TO EXACTLY MATCH T HE TOTAL COST INCURRED IN EACH COUNTRY IN EACH MONTH. IT WAS ALSO ADMITTED THAT THERE WAS NO VERIFICATION OF THE EXPENSES ALLOCATED BY THE HO BECAUSE THE BASIS OF CHARGE WAS KNOWN TO HO ALONE A ND THE DETAILS OF SUCH COMPUTATION WERE NOT PROVIDED TO THE INDIAN BRANCH. ON A QUESTION ABOUT THE RECORDING OF REVENUES, IT WAS AD MITTED THAT THE ENTRY WAS PASSED ON THE RECEIPT OF INTIMATION FROM HO AND HOW SUCH REVENUES ARE DETERMINED, WAS NOT KNOWN. IN RESPONSE TO QUESTION NOS.12 AND 13, SHRI GOPALAK RISHNAN ADMITTED THAT ACCOUNTS WERE FINALIZED BY THE HO AND AFTER FINALIZATION OF SUCH ACCOUNTS, A SIGNED COPY OF THE BALANCE SHEET WAS SENT TO THE BRANCH OFFICE IN INDIA. THE LEARNED AR HAS INVITED OUR ATTENTION TOWARDS ITS LETTER DATED 5.02.2005 AD DRESSED TO THE LD. CIT(A) ABOUT THE BASIS OF ALLOCATION. FROM THIS LETTER IT IS CRYSTAL CLEAR THAT THE ASSESSEE STATED BEFORE THE LEARNED C IT(A) THAT THE GLOBAL COST RECOVERIES MADE BY THE SITA HO ARE ALLO CATED TO ALL OF THE SITA BRANCHES WORLDWIDE SO AS TO MATCH THE COST S BORNE BY THOSE BRANCHES. THUS, THE OVERALL EFFECT OF ALLOCAT ING HEAD OFFICE COSTS TO THE SITA BRANCHES WORLDWIDE IS TO INCREASE BOTH THE BRANCH COSTS AND ALSO THE CORRESPONDING COST RECOVERIES WH ICH ARE ALLOCATED TO EACH BRANCH TO MATCH THOSE COSTS. FROM THIS LETTER IT IS ALSO OBSERVED THAT THE BASIS OF ALLOCATION OF COSTS AMONGST VARIOUS BRANCHES IS KNOWN ONLY AT THE HO LEVEL WITH NO INTIMATION TO THE INDIAN BRANCH ABOUT SUCH BASIS . AT THIS STAGE, WE WOULD LIKE TO HIGHLIGHT THAT INDIA IS CONCERNED ONLY WITH THE TAX REVENUES RELATING TO INDIAN OPERATIONS. UNLESS IT I S PROPERLY ESTABLISHED THAT ALL THE EXPENSES CLAIMED BY THE IN DIAN BRANCH REPRESENTS THE ASSESSEES SHARE IN A PROPER MANNER, IT CANNOT BE ACCEPTED SOCIETE INTERNATIONAL DE TELECOMMUNICATION S AERONAUTI QUES THAT THE ALLOCATION WAS MADE ON SOME RATIONAL BASIS. HERE IS A CASE IN WHICH BOTH THE SIDES OF THE ASSESSEES INCO ME AND EXPENDITURE ACCOUNT ARE TALLYING PAISA TO PAISA. TH E LEARNED AR SUBMITTED THAT THE COST AND REVENUES ARE MATCHED AN D IF THERE IS ANY NET OVER-RECOVERY OR NET UNDER-RECOVERY, THE SA ME IS CARRIED FORWARD AND AT THE END OF THE YEAR THE AUDITED ACCO UNTS REFLECT CUMULATIVE UNDER-RECOVERY OR OVER-RECOVERY FOR THE YEAR. THIS SUBMISSION WAS MADE BY READING FROM THE ASSESSEES AFORESAID LETTER DATED 05.02.2005 ADDRESSED TO THE CIT(A). ON A SPECIFIC QUESTION AS TO WHAT IS THE AMOUNT OF UNDER-RECOVERY OR OVER- RECOVERY IN THE ACCOUNTS OF THE ASSESSEE FOR THIS Y EAR OR ANY EARLIER OR LATER YEAR, THE LEARNED AR FAILED TO POINT OUT A NY SUCH AMOUNT. WE HAVE PERUSED THE INCOME AND EXPENDITURE ACCOUNT AND BALANCE SHEET OF THE ASSESSEE. IT IS OBSERVED THAT BOTH THE SIDES OF THE ASSESSEES INCOME AND EXPENDITURE ARE MATCHING PAIS A TO PAISA AND THERE IS NO UNDER-RECOVERY OR OVER-RECOVERY SHO WN AS AN ASSET OR A LIABILITY IN ITS BALANCE SHEET. FURTHER, WHEN WE CONSIDER THE FACT THAT THE ACCOUNTS OF THE ASSESSEE WERE MAINTAINED A T THE HO LEVEL, THERE REMAINS NOTHING TO DOUBT THE CORRECTNESS VIEW TAKEN BY THE LEARNED CIT(A) THAT THE ACCOUNTS OF THE ASSESSEE DO NOT DIVULGE THE CORRECT INCOME. NOT ONLY THE BASIS OF ALLOCATION OF EXPENSES BUT ALSO THAT OF THE REVENUE, AS DONE BY THE HO IS NOT KNOWN TO THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, THE CONTENTION THAT THE M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 10 ASSESSEE WAS ONLY RECOVERING COSTS FROM ITS NON-MEM BERS AND THERE WAS NO PROFIT ELEMENT IN IT, IS NOT OPEN FOR VERIFICATION. 7.2 WHEN THE TRIBUNAL HAS DECIDED THIS ISSUE AFTER CONSIDERING THE RIVAL CONTENTION AND RELEVANT FACTS, THEN IN THE AB SENCE OF ANY NEW FACTS OR MATERIAL, WE DO NOT FIND ANY SUBSTANCE IN THE CONTENTION OF THE LD SR COUNSEL FOR THE ASSESSEE REGARDING THE RE MARKS OF THE TRIBUNAL IN THE EARLIER YEAR. MOREOVER, THE SAME DO ES NOT EFFECT THE FINDINGS OF THE TRIBUNAL ON THIS ISSUE. 7.3 AS REGARDS GROUND NO.2 TO 9 OF THE CO ARE CONCE RNED, THE TRIBUNAL HAS CONSIDERED THE SAME IN PARA 5.6 & 5.7 AS UNDER: 5.6. THE LEARNED AR ALSO PRESSED INTO SERVICE THE PROVISIONS OF SECTION 44C TO CONTEND THAT WHERE THE BASIS OF ALLOCATION OF HO EXPENDITURE IS NOT KNOWN, DEDUCTION FOR SUCH HO EXPENSES HAS TO BE MADE IN TERMS OF SECTION 44C. IN THE LIGHT OF THIS SECTION, THE LEARNED AR CONTENDED THAT ONLY A SMALL PORTION OF T HE HO EXPENSES OUGHT TO HAVE BEEN DISALLOWED BY THE LD . CIT(A) INSTEAD OF COMPUTING INCOME AT 5% OF THE GROSS RECEIPTS. 5.7. WE ARE NOT CONVINCED WITH THIS CONTENTION FOR THE REASON THAT SECTION 44C ONLY TALKS OF HO EXPENSES, WHICH MEAN EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA INCLUDING EXPENDITURE IN RESPECT OF RENT, RATES, RE PAIRS ETC. IT IS ONLY THE ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES WHICH IS COVERED WITHIN THE PURVIEW OF ITA NO. 572/MUM/2010 & CO NO.159/ MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNI CATIONS AERONAUTIQUES SECTION 44C. ON THE CONTRARY, WE ARE CONSIDERING A CASE IN WHICH NOT ONLY THE BAS IS OF ALLOCATION OF EXPENSES IS NOT KNOWN, BUT THE BAS IS OF ALLOCATION OF INCOME IS EQUALLY UNKNOWN AT INDIA LE VEL. THIS BRINGS US TO A SITUATION WHERE NEITHER THE INC OME SIDE NOR THE EXPENDITURE SIDE OF THE ASSESSEES INC OME AND EXPENDITURE ACCOUNT IS FULLY CAPABLE OF VERIFIC A TION. IT IS IN SUCH CIRCUMSTANCES THAT RULE 10 OF INCOME-TAX RULES, 1962 COMES TO THE RESCUE OF THE REVENUE FOR DETERMINATION OF INCOME IN THE CASE OF NON-RESIDENTS. IT IS THIS VERY RULE WHICH HAS BEEN INVOKED BY THE ASSESSING OFFICER AND ALSO APPLIED B Y THE LEARNED CIT(A) IN ESTIMATING THE INCOME OF THE ASSESSEE. IN OUR CONSIDERED OPINION THE LEARNED CIT (A) WAS MORE THAN JUSTIFIED IN ESTIMATING THE INCOME AT 5% OF THE GROSS RECEIPTS FROM NON-MEMBERS. THESE GROUNDS TAKEN BY THE ASSESSEE ARE NOT ALLOWED. 8. FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL, WE FIND NO MERIT IN THE GROUND NO 1 TO 9 OF THE CO RAISED BY THE ASSESS EE; ACCORDINGLY, THE SAME ARE DISMISSED. M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 11 9. THUS, RESPECTFULLY FOLLOWING THE EARLIER YEARS ORD ER OF THE TRIBUNAL, WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH FIND INGS AND THE GROUNDS NO.1 AND 2 OF THE CROSS OBJECTION STAND DISMISSED. 10. IT HAS BEEN ADMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT GROUNDS NO.3 TO 8, WILL RENDER ACADEMIC IN VIEW OF THE FINDINGS GIVEN IN GROUNDS NO.1 AND 2. CONSEQUENTLY, THESE GROUNDS ARE ALSO TREATED AS DISMISSED. 11. IN GROUND NO.9, THE ASSESSEE HAS CHALLENGED THAT TH E INTEREST INCOME COMPRISING OF BANK INTEREST AND INTEREST ON INCOME TAX REFUND RECEIVED BY THE ASSESSEE IS ALSO COVERED BY THE PRINCIPLES OF MUTUALITY . 12. AS ADMITTED BY BOTH THE PARTIES, THIS ISSUE ALSO ST ANDS DECIDED AGAINST THE ASSESSEE IN VIEW OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S COMMON EFFLUENT TREATMENT PLANT, (THANE-BEL APUR) ASSOCIATION, [2010] 328 ITR 362 (BOM.) , WHEREIN IT HAS BEEN HELD THAT INTEREST RECEIVED FROM F.D. WITH THE BANK DOES NOT POSSESS THE SAME CHARACTER OF MUTUALITY AND THE INTEREST INCOME WOULD, THEREFORE, BE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES . IN THE LATEST JUDGMENT, THE HON'BLE SUPREME COURT IN BANGALORE CLUB V/S CIT, [2013] 29 TAXMAN.COM 29 (SC) , HAD SETTLED THIS ISSUE AND HELD THAT THE AMOUNT OF INTEREST EARNED BY THE ASSESSEE ON THE DEPOSITS MADE IN THE BANK WILL NOT FALL WITHIN THE AMBIT OF PRINCIPLES OF MUTUALITY AND IS EXIGIBLE TO TAX IN THE HANDS OF THE ASSESSEE. THUS, IN VIEW OF THE LAW SETTLED BY THE HON'BLE SUPREME COURT CITED SUPRA, GROUND NO.9 RAISED BY TH E ASSESSEE STANDS DISMISSED. 13. GROUNDS NO.10 AND 11, BEING GENERAL IN NATURE, HENC E, NO SEPARATE ADJUDICATION IS REQUIRED. 14. 7 #: &) *7# 5 ./' 74 5 4# ;< = 14. IN THE RESULT, ASSESSEES CROSS OBJECTION IS DI SMISSED. M/S. SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES (SITA) 12 15. &) *> $ !?, 4 ! 5 ! &) *7# 5 ./' 74 5 4# ;< = 14. TO SUM UP, REVENUES APPEAL AND ASSESSEES CROS S OBJECTION ARE DISMISSED. $ 5 + @ A): 31 ST JANUARY 2013 5 B = ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY 2013 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, A) A) A) A) DATED: 31 ST JANUARY 2013 $ 5 .&#'C DC+# / COPY OF THE ORDER FORWARDED TO : (1) &) *7# / THE ASSESSEE; (2) 4 ! / THE REVENUE; (3) E () / THE CIT(A); (4) E / THE CIT, MUMBAI CITY CONCERNED; (5) C!HB .&#&) , , / THE DR, ITAT, MUMBAI; (6) BI* J / GUARD FILE. /C# .&# / TRUE COPY $) / BY ORDER . 4. KL / PRADEEP J. CHOWDHURY !7M &)4 K! / SR. PRIVATE SECRETARY 1 / ; 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI