The ACIT, Circle-4(1), Visakhapatnam V. M/s Waltair Club, Visakhapatnam

ITA 103/VIZ/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0631 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 17-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G S S GOPINATH

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO.103/VIZAG/2010 ASSESSMENT YEAR : 2006-07 ACIT, CIRCLE-4(1) VISAKHAPATNAM M/S. WALTAIR CLUB VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO.AAACW1956C APPELLANT BY: SHRI G.S.S. GOPINATH, DR RESPONDENT BY: SHRI G.V.N. HARI, CA ORDER PER SHRI S.K. YADAV, JUDICIAL MEMBER:- THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST T HE ORDER OF THE CIT(A) ON A SOLITARY GROUND THAT CIT(A) HAS ERRED I N DELETING THE ADDITION OF INTEREST INCOME DERIVED FROM THE FIXED DEPOSITS ON THE GROUND OF PRINCIPAL OF MUTUALITY. 2. THE FACTS BORNE OUT FROM THE RECORD ARE THAT THE ASSESSEE IS A MUTUAL CLUB INCORPORATED AS A LIMITED COMPANY IN WHICH THE PUBLIC HAS SUBSTANTIAL INTEREST. THE EXEMPTION WAS CLAIMED IN RESPECT OF NET INCOME OF INTEREST RECEIVED ON FIXED DEPOSITS WITH BANK AND OTHERS ON THE GROUND OF PRINCIPAL OF MUTUALITY. IT WAS ALSO CLAIMED THAT THE FUNDS WERE KEPT IN FDRS IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE-XXIII OF A MEMORANDUM OF ASSOCIATION ACCORDING TO WHICH THE INTEREST RECEIVE D ON CORPUS FUNDS CAN ONLY BE UTILIZED FOR RUNNING THE CLUB AND NOT FOR ANY OT HER PURPOSES. THE CLAIM OF THE ASSESSEE WAS REJECTED BY THE A.O. ON THE GROUND THAT THE PRINCIPAL OF MUTUALITY IS NOT APPLICABLE TO THE FUNDS DEPOSITED WITH THE BANK AND INTEREST DERIVED FROM SUCH FIXED DEPOSITS IS NOT EXEMPTED FR OM TAX. WHILE DOING SO, THE A.O. RELIED UPON THE JUDGEMENTS IN THE CASE OF CIT VS. ITI EMPLOYEES DEATH & SUPERANNUATION FUND (234 ITR 308), SPORTS CLUB OF GUJARAT LIMITED VS. CIT (171 ITR 504), CIT & ANOTHER VS. BANGALORE CLUB (287 ITR 89). 2 3. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT( A) WITH THE SUBMISSION THAT THE GROSS AMOUNT OF INTEREST RECEIV ED AMOUNTING TO RS.16,54,324/- HAVE BEEN CONSIDERED BY THE A.O. WIT HOUT LOOKING TO THE FACT THAT THE ASSESSEE HAS INCURRED A NET DEFICIT OF RS. 26.22 LAKHS AS PER ITS INCOME AND EXPENDITURE ACCOUNT WHICH IS NORMALLY AL LOWABLE FOR SET OFF AGAINST ANY OTHER INCOME I.E. INTEREST INCOME RECEI VED FROM BANKS WHICH RESULTED IN NET DEFICIT. THEREFORE, THERE IS NO QU ESTION OF ANY SURPLUS INCOME WHICH IS LIABLE FOR BEING SUBJECTED TO INCOME TAX. IT WAS FURTHER CONTENDED THAT BY NOT CLAIMING ANY SET OFF OF THE DEFICIT INC URRED FROM ITS ACTIVITIES FOLLOWING THE PRINCIPAL OF MUTUALITY FROM ITS INCOM E FROM INTEREST RECEIVED WHICH ALSO AROSE ONLY ON ACCOUNT OF ONLY ACTIVITY O F MUTUALITY THAT THE QUESTION OF THERE BEING ANY ASSESSABLE INCOME IN IT S HAND HAD ARISEN. IT WAS FURTHER CONTENDED THAT THE DEPOSITS WITH THE BANK H AVE ONLY BEEN MADE AS PER THE STIPULATION OF ITS MEMORANDUM OF ASSOCIATIO N AS PER ARTICLE-XXIII. THUS THE INCOME FROM THE DEPOSITS WITH THE BANK ARO SE ONLY AS PART OF ITS OBLIGATION TO MEMBERS AND IT CANNOT BE CONSIDERED A S HAVING ARISEN OUT OF THE INCOME FROM INVESTMENT OF SURPLUS FUNDS WHEN TH E ASSESSEE HAD ONLY INCURRED SUBSTANTIAL DEFICIT IN THE CURRENT YEAR. THE ASSESSEE HAS ALSO PLACED A RELIANCE UPON THE ORDER OF THE TRIBUNAL HYDERABAD BENCH IN THE CASE OF FATEH MAIDAN CLUB 81 TTJ (HYD) 831, IN WHICH AFTER CONSIDERING SEVERAL JUDICIAL PRONOUNCEMENTS ON THE ISSUE, IT HAS BEEN H ELD THAT THE INTEREST INCOME RECEIVED BY THE CLUB ON FIXED DEPOSITS WITH THE BANK IS NOT TAXABLE ON THE PRINCIPAL OF MUTUALITY AS THE PLACING OF SURPLU S FUNDS WITH THE BANK IS AS PER MEMORANDUM OF ASSOCIATION AND BYE-LAWS OF THE C LUB WHICH DOES NOT TENTAMOUNT TO MUTUAL CONSENT HAVING INDULGED IN TRA DING ACTIVITIES OR CARRYING ON ANY BUSINESS. 4. THE CIT(A) CAREFULLY EXAMINED THE ISSUE IN THE L IGHT OF AFORESAID JUDGEMENTS AND AFTER RELYING UPON THE ORDER OF THE TRIBUNAL, HYDERABAD BENCH FINALLY CONCLUDED THAT THE INTEREST INCOME FR OM FIXED DEPOSITS OUT OF SURPLUS FUNDS IS INCIDENTAL AND DOES NOT AMOUNT TO CARRY ON COMMERCIAL ACTIVITY THUS EXEMPT ON THE PRINCIPAL OF MUTUALITY. THE RELEVANT OBSERVATION OF CIT(A) ARE EXTRACTED HEREUNDER FOR THE SAKE OF R EFERENCE: 3 I HAVE GONE THROUGH THE ABOVE FACTS OF THE CASE, APPELLANTS SUBMISSION, A.OS CONTENTION AS WELL AS VARIOUS JUDICIAL PRONOUNCEMENTS CITED BY THE APPELLANT/AO. IN THIS CASE, IT HAS BEEN HELD BY THE A.O. THAT THE PRINCIPLE OF MUTUALI TY IS NOT APPLICABLE TO THE FUNDS DEPOSITED IN THE BANKS AND THE INTEREST INCOME DERIVED FROM SUCH FIXED DEPOSITS IS NOT EXEM PT FROM TAX. HE HAS RELIED ON THE FOLLOWING JUDGEMENTS: (I) CIT VS. ITI EMPLOYEES AND SUPERANNUATION FUND REPORT ED IN 234 ITR 308. (II) SPORTS CLUB OF GUJARAT LTD., VS. CIT, REPORTED IN 1 71 ITR 504. (III) CIT & ANOTHER VS. BANGALORE CLUB (HC) KARNATAKA 287 ITR 89. IT IS THE APPELLANTS CONTENTION THAT THE INTEREST R ECEIVED BY THE CLUB IS EXEMPT FROM TAX ON THE PRINCIPLE OF MUT UALITY. PRINCIPLE OF MUTUALITY IS APPLICABLE TO THE CLUB AS THE SAME IS PURELY A NON PROFITABLE ORGANIZATION SOLELY EXISTING FOR THE MUT UAL BENEFIT OF ITS MEMBERS AND IS NOT CARRYING ON ANY COMMERCIAL ACTIV ITY. IT IS FURTHER SUBMITTED THAT THE APPELLANTS SUBMISSION I S SQUARELY COVERED BY THE PROPOSITION LAID DOWN BY THE HONBLE ITAT, HYDERABAD BENCH IN THE CASE OF FATEH MAIDAN CLUB VS . ACIT, 81 TTJ 831 IN WHICH AFTER CONSIDERING THE HONBLE SUPR EME COURT JUDGEMENT IN THE CASE OF CIT VS. CAWNPORE CLUB LTD. AND COMMISSIONER OF INCOMETAX VS. NATARAJ FINANCE CORPO RATION, IT WAS HELD THAT INTEREST BY THE CLUB ON FIXED DEPOSITS WI TH BANKS IS NOT TAXABLE ON THE PRINCIPLE OF MUTUALITY. PLACING OF SURPLUS FUNDS WITH BANKS AS PER MEMORANDUM OF ASSOCIATION AND BYE LAWS OF THE CLUB DOES NOT TENTAMOUNT TO MUTUAL CONSENT HAVING INDULG ED IN TRADING ACTIVITY OR CARRYING ON OF BUSINESS. IN THE INSTANT CASE, IT MAY BE SEEN THAT THE DEPOSIT S WITH BANKS HAVE BEEN MADE AS PER THE STIPULATION OF ITS MEMORANDUM OF ASSOCIATION AS PER ARTICLE-XXIII, WHICH HAVE BEEN MAD E ONLY FOR THE PURPOSE OF MAINTAINING ITS OBLIGATIONS TO THE MEMBE RS AS PER THE SPECIFIC PROVISIONS OF THE MEMORANDUM OF ASSOCIATIO N. THE APPELLANTS CASE IS THEREFORE SQUARELY COVERED BY T HE PROPOSITION LAID DOWN BY THE HONBLE ITAT, HYDERABAD BENCH IN T HE CASE OF FATEH MAIDAN CLUB (SUPRA). IT MAY ALSO BE NOTED HER E THAT ALL THE CASE LAWS RELIED ON BY THE A.O. ARE DISTINGUISHABLE ON FACTS AS DISCUSSED IN THE FOREGOING PARAGRAPH. THEREFORE, T HEY ARE NOT APPLICABLE TO THE FACTS OF THE CASE UNDER CONSIDERA TION. UNDER THE CIRCUMSTANCES AND FACTS OF THE CASE AND RESPECTFULL Y FOLLOWING THE ABOVE JUDGEMENTS, I HOLD THAT THE INTEREST INCOME FR OM FIXED DEPOSITS OUT OF SURPLUS FUNDS IS INCIDENTAL AND DOE S NOT AMOUNT TO CARRY ON OF COMMERCIAL ACTIVITY AND THUS EXEMPT ON THE PRINCIPLE OF MUTUALITY. SINCE THE MAIN GROUND OF APPEAL IS DEDI CED IN APPELLANTS FAVOUR, THEREFORE, WITHOUT PREJUDICE GR OUND, IS NOT REQUIRED TO BE COMMENTED UPON. 4 5. NOW THE REVENUE HAS PREFERRED AN APPEAL BEFORE T HE TRIBUNAL WITH THE SUBMISSION THAT THE SURPLUS FUNDS WERE KEPT IN FDRS ON WHICH INCOME WAS GENERATED TO THE CLUB. THEREFORE, THIS INTEREST IN COME IS AN INCOME FROM OTHER SOURCES AND CANNOT BE EXEMPTED ON THE GROUND OF PRINCIPAL OF MUTUALITY. HE HAS ALSO PLACED A RELIANCE UPON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF COIMBATORE COSMOPOLITAN CLUB V S. ACIT 229 CTR 414 AND JUDGEMENT OF THE JAMMU & KASHMIR HIGH COURT IN THE CASE OF AMAR SINGH CLUB VS. UNION OF INDIA 229 CTR 447. 6. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HA ND BESIDES PLACING A HEAVY RELIANCE UPON THE ORDER OF THE CIT(A) HAS REL IED UPON THE JUDGEMENT OF THE HIGH COURT OF KARNATAKA IN THE CASE OF CANARA B ANK GOLDEN JUBILEE STAFF WELFARE FUND VS. DCIT 308 ITR 202 WITH THE SUBMISSI ON THAT THE ASSESSEE HAS NO OTHER OPTION BUT TO DEPOSIT ITS FUND WITH TH E BANK IN FDRS AS PER THE REQUIREMENT OF THE ARTICLES OF MEMORANDUM OF ASSOCI ATIONS. AS PER THE ARTICLES OF ASSOCIATION THE INTEREST GENERATED THER EON ARE TO BE SPENT ON THE CLUB ACTIVITIES. THE CLUB IS BEING RUN ON THE CONT RIBUTION OF THE MEMBERS AND NONE OF THE MEMBER WILL GET A PERSONAL BENEFIT OUT OF THE INTEREST INCOME GENERATED ON THE FDRS. 7. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CA REFUL PERUSAL OF THE RECORD, WE FIND THAT UNDISPUTEDLY THE FUNDS WERE KE PT BY THE ASSESSEE WITH THE BANK IN FDRS AS PER THE REQUIREMENT OF THE ARTI CLES OF ASSOCIATIONS. THE JUDGEMENTS REFERRED TO BY THE REVENUE IN THE CASE O F COIMBATORE COSMOPOLITAN CLUB AND AMAR SINGH CLUB, THERE WAS NO STATUTORY OBLIGATION ON THE PART OF THE ASSESSEES TO MAKE THE DEPOSITS IN B ANKS AND IN FDRS. THEREFORE, IN THOSE CASES, THE ASSESSEE HAS PUT ITS SURPLUS FUNDS IN BANK IN FDRS TO EARN AN INTEREST INCOME. THEREFORE, THE IN TEREST INCOME WAS CONSIDERED TO BE THE INCOME FROM OTHER SOURCES AND WAS NOT EXEMPTED ON PRINCIPLES OF MUTUALITY. 8. BUT IN THE INSTANT CASE, THE ASSESSEE HAS NO OTH ER OPTION BUT TO DEPOSIT THE FUNDS IN FDRS WITH THE BANK AS PER THE REQUIREMENT OF BYE-LAWS OF THE CLUB. THE CIT(A) HAS TAKEN INTO ACCOUNT ALL THESE FACTS BEFORE 5 ACCEPTING THE CLAIM OF THE ASSESSEES. THE IDENTICA L ISSUE WAS EXAMINED BY THE HYDERABAD BENCH IN THE CASE OF FATEH MAIDAN CLU B AND CAME TO THE CONCLUSION THAT WHEREVER THE FUNDS WERE KEPT IN FIX ED DEPOSITS AS PER THE REQUIREMENT OF THE BYE-LAWS OF THE CLUB, THE INTERE ST INCOME GENERATED THEREON IS EXEMPTED ON THE PRINCIPLE OF MUTUALITY A ND CANNOT BE ASSESSED TO TAX AS AN INCOME FROM OTHER SOURCES. SINCE THE TRI BUNAL HAS TAKEN A PARTICULAR VIEW IN A SIMILAR SET OF FACTS, WE FIND NO REASON TO TAKE A CONTRARY VIEW IN THIS APPEAL. WE ACCORDINGLY FOLLOWING THE SAME CONFIRM THE ORDER OF THE CIT(A). 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMI SSED. PRONOUNCED IN THE OPEN COURT ON 2.7.2010 SD/- SD/- (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM, DATED 2 ND JULY, 2010 COPY TO 1 ACIT, CIRCLE-4(1), VISAKHAPATNAM 2 M/S. WALTAIR CLUB, D.NO.10-50-20, WALTAIR UPLANDS , NEAR CIRCUIT HOUSE, VISAKHAPATNAM 3 THE CIT, VISAKHAPATNAM 4 THE CIT(A), VISAKHAPATNAM 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM