DCIT, Hyderabad V. M/s Nizam Club, Hyderabad

ITA 1335/HYD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3233 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-10-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B V PRASAD REDDY
• Assessee Lawyers: K A SUBHA RAOJI
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO.1335/HYD/2010 ASSESSMENT YEAR : 2006-07 THE DCIT, CIRCLE 5(1), HYDERABAD VS THE NIZAM CLUB, HYDERABAD (PAN AAAAN 0366 M) APPELLANT RESPONDENT APPELLANT BY: SHRI B.V. PRASAD REDDY RESPONDENT BY: SHRI K.A. SUBHA RAOJI ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL PREFERRED BY THE REVENUE IS DIRE CTED AGAINST THE ORDER PASSED BY THE CIT(A) V HYDERABAD DATED 5/8/2010 AND PERTAINS TO THE ASSESSMENT YEAR 2006-07. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS IN ITS APP EAL: 1. THE CIT(A) JUST RELIED UPON THE EARLIER CIT(A) ORDER WITHOUT CONSIDERING THE MERITS OF THE CASE. THE CIT(A) ERRED ON RELYING CASE LAW I.E. NATRAJ FINANC E CORPORATION WHICH IS NOT HAVING SIMILAR OR IDENTICA L FACT/CIRCUMSTANCES WITH THE PRESENT CASE. 2. THE CIT(A) OUGHT TO HAVE CONFIRMED THE FINDING O F THE ASSESSING OFFICER, THAT INTEREST FROM FIXED DEPOSITS FROM BANK IS NOT ON THE PRINCIPAL OF MUTUALITY AS THE BANK IS NOT MEMBER OF THE CLUB . 3. BRIEF FACTS OF THE CASE ARE THAT FOR THE ASSESSMENT YEAR 2006-07, THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.10.,2006 DECLARING NIL INCOME AFTER CLAIMING EXEMPTION OF IN COME OF RS.27,51,587/- ON THE PRINCIPLE OF MUTUALITY. TH E INCOME ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 2 CONSISTS OF INCOME FROM HOUSE PROPERTY OF RS.11,96, 387/- (WHICH INCLUDES INCOME FROM HOARDING RENT OF RS.10, 30,375/) AND INTEREST INCOME FROM BANK ON FIXED DEPOSITS OF RS.15,55,200/-. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT DETERMINING THE TO TAL INCOME OF THE ASSESSEE OF RS.37,39,448/-. 4. ON APPEAL, INTER ALIA, THE CIT(A) HAS HELD THAT INT EREST INCOME EARNED BY THE ASSESSEE ON BANK FIXED DEPOSIT S DURING THE PREVIOUS YEAR UNDER CONSIDERATION IS NOT TAXABL E IN ITS HAND FOLLOWING THE PRINCIPLES OF MUTUALITY. AGAINST THI S, THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIALS AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE T HROUGH THE ORDER OF THE TRIBUNAL DATED 30.4.2008 IN THE CASE O F SECUNDERABAD CLUB VS. ITO IN ITA NO.356/H/2007, WHE REIN IT WAS HELD THAT: 6.6. THE CASE UNDER CONSIDERATION CENTRES AROUND INCLUSION OF INTEREST ACCRUED TO THE CLUB FROM DEPO SITS WITH BANKS AND FINANCIAL INSTITUTIONS WHICH ARE CORPORATE MEMBERS WITH NO TAINT OF COMMERCIALITY. SINCE THIS BENCH OF THE TRIBUNAL IS SITTING WITHIN THE TERRITORIAL JURISDICTION OF THE AP HIGH COURT, THIS TRIBUNAL IS BOUND BY THE DECISION OF THE AP HIGH COURT RATHER THAN THE DECISION OF THE KARNATAKA HIG H COURT. THUS, RESPECTFULLY FOLLOWING THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF NATRAJ FINANCE CORPORATION AND THE JUDGEMENT OF ITAT, HYDERABAD IN THE CASE OF FATEH MAIDAN CLUB VS. ACIT (ITA NO.937 TO 939 TO 952/H/1995 AND 716 TO 720/H/200J WE HOLD THAT INTEREST EARNED ON FIXED DEPOSITS IS INCIDENTAL AND DOES NOT AMOUNT TO CARRYING ON OF ANY COMMERCIAL ACTIVITY AND HENCE IT IS ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 3 NOT TAXABLE ON THE PRINCIPLE OF MUTUALITY. WE THEREFORE, ALLOW THIS GROUND OF THE ASSESSEE. 6. WE HAVE ALSO GONE THROUGH THE ORDER DATED 11.9.2009 IN ITA NO. 341/HYD/09 IN ASSESSEES OWN CASE FOR THE A SSESSMENT YEAR 2005-06 ALONG WITH THE JUDGEMENT OF JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT VS. NATRAJ FINANCE CORPORA TION (169 ITR 732) (AP HC) AND IN THAT CASE, THE FACTS ARE TH AT : THE ASSESSEE WHICH DESCRIBED ITSELF AS A FIRM LENT MONEY TO ITS PARTNERS. IT DID NOT CARRY ON ANY OTH ER BUSINESS. THE FIRM CONSISTED OF NINETEEN PARTNERS IN THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 1997-98. THE FIRM FILED A RETURN DECLARING WHICH INCLUDED INTEREST RECEIVED ON OUTSTANDING DUE FROM A FORMER PARTNER AND ON AMOUNTS DEPOSITED IN THE SAVINGS ACCOUNT WITH THE CANARA BANK. THE ASSESSEE CLAIMED THAT ITS INCOME WAS NOT TAXABLE AS IT WAS A MUTUAL BENEFIT ASSOCIATION. ITS CLAIM WAS REJECTED BY THE ITO BUT ACCEPTED BY THE APPELLATE ASSISTANT COMMISSIONER AND THE TRIBUNAL. SINCE THE ASSESSEE DID NOT CARRY ON ANY BUSINESS, I T COULD NOT BE TREATED AS A FIRM. IT WOULD BE MORE APPROPRIATE TO CONSIDER THE ASSESSEE TO BE AN ASSOCIATION OF PERSONS. THERE WAS NOTHING ON RECOR D TO SHOW THAT THE ASSESSEE HAD BEEN LENDING MONEYS TO ANY PERSONS OTHER THAN ITS NINETEEN MEMBERS. TH E TWO OTHER PERSONS FROM WHOM INTEREST WAS RECEIVED WERE NOT REALLY THIRD PERSONS TO WHOM AMOUNTS HAD BEEN ADVANCED. ONE OF THEM WAS A FORMER PARTNER AND THE OTHER WAS THE BANK WITH WHICH MONEYS HAD BEEN KEPT IN SAFE DEPOSIT. THE INTEREST RECEIVED B Y THE ASSESSEE WAS DISTRIBUTED AMONG THE MEMBERS FORMING THE ASSOCIATION AND HENCE THE ASSESSEE WAS A MUTUAL BENEFIT ASSOCIATION. ITS INCOME WAS NOT LIABLE TO BE TAXED. 7. IN OUR OPINION, THE RATIO OF THE ABOVE JUDGEMENT OF JURISDICTIONAL HIGH COURT AND THE TRIBUNAL ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THE CASE BEFORE THE HIGH COURT, THE ASSESSEE HAD BEEN LENDING MONEY TO ONLY ITS 19 MEMBERS, ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 4 AND NOT LENDING MONEY TO ANY OTHER PERSON AND THE I NTEREST RECEIVED BY THE ASSESSEE ARE DISTRIBUTED AMONG THE MEMBERS FOR MUTUAL BENEFIT AND THEREFORE, THE CONCEPT OF MUTUAL ITY WAS FULFILLED. IN THE PRESENT CASE, THERE HAS BEEN NO APPLICATION OF MUTUALITY. HERE THERE IS NO MUTUAL DEALING BETWEEN THE MEMBERS INTER SE IN THE NATURE OF BANKING BUSINESS AND THE BANK WHERE THE DEPOSIT WAS MADE IS AN INDEPENDENT ORGANISATION ENGAGED IN THE BANKING BUSINESS AND NO REFUND OF SURPLUS TO THE MEMBER. THERE BEING NO MUTUAL DEALI NG, THE QUESTION HAS TO BE COMPLETE IDENTITY OF THE CONTRIB UTOR AND THE PARTICIPATORS CANNOT BE RAISED OR CONSIDERED. SUFF ICE AS TO SAY THAT IN THE ABSENCE, AS THERE IS IN THE PRESENT CAS E, OF ANY DEALING BETWEEN THE MEMBERS INTER SE IN THE NATURE OF MAKING DEPOSITS, THE PRINCIPLES LAID DOWN IN THE CASE OF N ATRAJ FINANCE CORPORATION CITED SUPRA HAVE NO APPLICATION HERE. T HE PRINCIPLES THAT NO ONE CAN MAKE A PROFIT OUT OF HIMSELF IS TRU E ENOUGH BUT MAY IN ITS APPLICATION EASILY LEAD TO CONFUSION. T HERE IS NOTHING PER SE TO PREVENT THE ASSESSEE FROM MAKING A PROFIT FROM ITS OWN MEMBERS. 7.1 FOR EXAMPLE, A RAILWAY COMPANY WHICH EARNS PROFIT B Y CARRYING PASSENGERS MAY ALSO MAKE A PROFIT BY CARRY ING ITS SHARE HOLDERS OR A TRADING COMPANY MAY MAKE A PROFI T OUT OF ITS TRADING WITH ITS MEMBERS. BESIDES, THE PROFIT IT M AKES FROM THE GENERAL PUBLIC WHICH DEALS WITH IT BUT THAT PROFIT BELONGS TO THE MEMBERS AS SHARE HOLDERS AND DOES NOT COME BACK TO THEM, AS PERSONS WHO HAD CONTRIBUTED THEM. WHETHER A COMPAN Y COLLECTS MONEY FROM ITS MEMBERS AND APPLIES IT FOR THEIR BENEFIT NOT AS SHARE HOLDERS BUT AS PERSONS WHO PUT THE FUN DS IN THE COMPANY AND THE COMPANY MAKES NO PROFIT. IN SUCH C ASES, WHETHER THERE IS IDENTITY IN THE CHARACTER OF THOSE WHO CONTRIBUTE AND ALL THOSE WHO PARTICIPATE IN THE SUR PLUS, IN FACT ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 5 ALL INCORPORATION MAY BE IMMATERIAL AND INCORPORATE D COMPANY MAY WELL BE REGARDED AS A MERE INSTRUMENT, A CONVEN IENT AGENT FOR CARRYING OUT WHAT THE MEMBERS MIGHT MORE LABORI OUSLY DO FOR THEMSELVES. BUT IT CANNOT BE SAID THAT THE INC ORPORATION WHICH BRINGS INTO BEING A LEGAL ENTITY SEPARATE FRO M ITS CONSTITUENT MEMBERS IS TO BE DISREGARDED ALWAYS AND THAT THE LEGAL ENTITY CAN NEVER MAKE A PROFIT OUT OF ITS OWN MEMBERS. 8. IN INCOME TAX ACT WHAT IS TO BE TAXED IS THE INCOME OR PROFITS OF GAINS EARNED OR ARISING , ACCRUING TO A PERSON. WHERE A NUMBER OF PERSONS COMBINE TOGETHER AND CONTRIBUTE TO A COMMON FUND FOR THE FINANCING OF SOME REVENUE OR OB JECT AND IN THIS RESPECT HAVE NO DEALINGS OR RELATIONS WITH AN Y OUTSIDE BODY, THEN ANY SURPLUS RETURNED TO THOSE PERSONS CA NNOT BE REGARDED IN ANY SENSE AS PROFIT . THERE MUST BE CO MPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND THE PARTICIPA TORS. IF THESE REQUIREMENTS ARE FULFILLED, IT IS IMMATERIAL WHAT P ARTICULAR FOR THE ASSOCIATION TAKES. TRADING BETWEEN PERSONS ASS OCIATED TOGETHER IN THIS WAY DOES NOT GIVE RISE TO PROFITS WHICH ARE CHARGEABLE TO TAX. WHERE THE TRADE OR ACTIVITY IS MUTUAL, THE FACT THAT, AS REGARDS CERTAIN ACTIVITIES, CERTAIN M EMBERS ONLY OF THE ASSOCIATION TAKE ADVANTAGE OF THE FACILITIES WH ICH IT OFFERS, DOES NOT AFFECT THE MUTUALITY OF THE ENTERPRISE. T HE LAW RECOGNISES THE PRINCIPLE OF MUTUALITY EXCLUDING THE LEVY OF INCOME TAX FROM THE INCOME OF SUCH BUSINESS TO WHIC H THE ABOVE PRINCIPAL IS APPLICABLE. A PERUSAL OF SECTIO N 2(24) OF THE INCOME TAX ACT, 1961 SHOWS THAT THE ACT RECOGNISES THE PRINCIPLE OF MUTUALITY AND HAS EXCLUDED ALL BUSINES SES INVOLVING SUCH PRINCIPLE FROM THE PURVIEW OF THE ACT. EXCEPT THOSE MENTIONED IN CLAUSE (VII) OF THAT SECTION. THE THR EE CONDITIONS, THE EXISTENCE OF WHICH ESTABLISHES THE DOCTRINE OF MUTUALITY ARE (1) THE IDENTITY OF THE CONTRIBUTORS TO THE FUND AN D THE RECIPIENTS ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 6 FROM THE FUND (2) THE TREATMENT OF THE COMPANY, THO UGH INCORPORATED AS A MERE ENTITY FOR THE CONVENIENCE O F THE COMPANY, THOUGH INCORPORATED AS A MERE ENTITY FOR T HE CONVENIENCE OF THE MEMBERS IN OTHER WORDS, AS AN IN STRUMENT OBEDIENT TO THEIR MANDATE, AND (3) THE IMPOSSIBILIT Y THAT CONTRIBUTORS SHOULD DERIVE PROFITS FROM CONTRIBUTIO NS MADE BY THEMSELVES TO A FUND WHICH COULD ONLY BE EXPENDED O R RETURNED TO THEMSELVES. 9. THE ASSESSEE HEREIN IS A RECREATION CLUB MADE A DEP OSIT WITH THE BANK AND EARNED INTEREST INCOME AND THAT I NCOME CANNOT BE SAID TO BE EARNED BY THE DOCTRINE OF MUTU ALITY. THAT INCOME DID NOT COME WITHIN THE CONCEPT OF MUTUALITY AND IT IS TO BE TAXABLE AS INCOME FROM OTHER SOURCES. 10. IN THE CASE OF CIT VS WELLINGTON GYMKHANA CLUB (46 DTR 22) (MAD.) WHEREIN IT WAS HELD THAT : 3. THE QUESTIONS OF LAW RAISED BY THE REVENUE ARE COVERED BY THE JUDGEMENT OF THIS COURT IN MADRA S GYMKHANA CLUB VS. DY. CIT (2009) 226 CTR (MAD) 176 : (2009) 28 DTR (MAD) 9 WHEREIN THIS COURT HAS HELD THAT INASMUCH AS THE SURPLUS FUND ACCRUED FROM THE INVESTMENTS MADE BY THE ASSESSEE WITH ITS MEMBER BANK AND OTHER INSTITUTIONS CANNOT BE HELD TO SATISFY THE PRINCIPLE OF MUTUALITY. IT WAS FURT HER HELD THAT THE PRINCIPLE OF MUTUALITY IS CONFINED TO THE INCOME EARNED BY THE CLUB OUT OF THE CONTRIBUTIONS RECEIVED BY THE CLUB FROM ITS MEMBERS, BUT HAS NO APPLICATION IN RESPECT OF THE INTEREST EARNED FROM THE DEPOSITS OF SURPLUS FUNDS IN THE BANKS BY WAY OF INCOME. IT WAS HELD THAT THE VERY FACT THAT THE BAN K CONCERNED WAS ALSO AN INSTITUTION MEMBER OF THE ASSESSEE, CANNOT BE A GROUND TO HOLD THAT THE PRINCIPLE OF MUTUALITY WOULD BE APPLICABLE. THIS COURT IN PARA NOS. 27 AND 37 OF THAT JUDGEMENT HAS OBSERVED AS FOLLOWS: ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 7 (27) THE ABOVE PROVISIONS CONTAINED IN THE RULES, N O DOUBT, ENABLES THE CLUB TO INVEST ITS SURPLUS FUNDS IN THE MANNER PROVIDED THEREIN WITH THE FINANCIAL INSTITUTIONS WHO ARE MEMBERS OF THE CLUB. BUT WHEN THE OBJECT OF THE CLUB AND THE PROVISIONS MADE UNDE R THE RULES FOR MAKING THE INVESTMENTS ARE READ TOGETHER, THE POSITION THAT EMERGES IS THAT THE INVESTMENT OF SURPLUS FUNDS HAS NOTHING TODO WITH THE OBJECTS OF THE CLUB. IT IS TRUE THAT SUCH INVESTMENTS CAN BE MADE IN THE GOVERNMENT SECURITIES OR ITS BANKING INSTITUTION MEMBERS OR IN THE FORM OF SECURITIES WHICH CAN BE ONLY WITH ITS CORPORATE MEMBERS. THE CONTENTION OF THE ASSESSEE CLUBS ARE THAT WHEN ENORMOUS SURPLUS AMOUNT IS GENERATED, SUCH AMOUNTS CANNOT BE KEPT IN HOT CASH OR EVEN IN THE REGULAR ACCOUNT WHICH ARE BEING OPERATED FOR THE DAY-TO-DAY ADMINISTRATION AND THEREFORE SUCH AMOUNTS HAD TO BE NECESSARILY KEPT I N FIXED DEPOSITS OR IN THE FORM OF SECURITIES OR LONG ER DURATION, WHICH FUNDS ULTIMATELY ARE MEANT TO BE UTILISED FOR THE IMPROVEMENT OF THE FACILITIES OF T HE CLUB. AT THE RISK OF REPETITION, IT WILL HAVE TO BE HELD THAT INVESTMENT OF SURPLUS FUND WITH SOME OF THE MEMBER BANKS AND OTHER INSTITUTIONS IN THE FORM OF FIXED DEPOSITS AND SECURITIES WHICH IN TURN RESULT IN EARNING OF HUGE SURPLUS AMOUNTS BY WAY OF INTEREST CANNOT BE HELD TO SATISFY THE MUTUALITY CONCEPT. A S HELD IN THE DECISION OF KARNATAKA HIGH COURT REPORTED IN CIT VS. ITI EMPLOYEES DEATH AND SUPERANNUATION RELIEF FUND THE PRINCIPLE OF MUTUALITY COULD BE CONFINED IN RESPECT OF THE INCOM E EARNED BY THE CLUB OUT OF THE CONTRIBUTIONS RECEIVE D BY THE CLUB FROM ITS MEMBERS BUT IT WILL HAVE NO APPLICATION IN RESPECT OF THE INTEREST EARNED FROM THE DEPOSITS OF SURPLUS FUNDS IN THE BANKS BY WAY OF INCOME. 11. IN THE CASE OF CIT VS. ITI EMPLOYEES DEATH AND SUPERANNUATION RELIEF FUND (234 ITR 314) (KARNATA KA HIGH COURT) WHEREIN IT WAS HELD THAT: THE ANDHRA PRADESH HIGH COURT CONSIDERED THE PRINCIPLE OF MUTUALITY IN CIT V. NATARAJ FINANCE ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 8 CORPORATION [1988] 169 ITR 732. IN THAT CASE (SOMEWHAT UNUSUAL AS OBSERVED BY THE BENCH) THE ASSESSEE CARRIED ON BUSINESS IN LENDING MONEY TO IT S PARTNERS. THE ASSESSEE HAD BEEN CARRYING ON THE SAID BUSINESS FOR QUITE SOME TIME. FOR THE ASSESSMENT YEAR 1977-78 SOME CHANGES OCCURRED IN THE CONSTITUTION OF THE FIRM WITH THE RESULT THAT A DEED OF PARTNERSHIP WAS EXECUTED ON APRIL 15, 1976, AMONG 19 PARTNERS. THE FIRM FILED A RETURN DECLARIN G AN INCOME OF RS. 48,310. IT WAS SAID TO REPRESENT INTEREST RECEIVED ON LOANS ADVANCED BY THE FIRM TO ITS PARTNERS EXCEPT SOME INTEREST AMOUNT RECEIVED FROM A FORMER PARTNER AND ALSO ON MONEYS DEPOSITED IN A SAVINGS ACCOUNT WITH THE CANARA BANK WHICH MONIES WERE KEPT IN DEPOSITS FOR SAFE KEEPING. RS. 48,310 DID NOT INCLUDE THE INTEREST FROM ANY PERSON OTHER THAN THE ABOVE. THE ASSES-SEE SET UP A CLAIM THAT I T WAS A MUTUAL BENEFIT ASSOCIATION AND ITS INCOME WAS DERIVED WHOLLY FROM MEMBERS AND, CONSEQUENTLY, THE PRINCIPLE OF MUTUALITY WAS APPLICABLE AND THE INCOM E CANNOT BE TAXED. THE PLEA OF THE ASSESSEE WAS REJECTED BY THE INCOME-TAX OFFICER. THE ASSESSEE FI LED AN APPEAL BEFORE THE APPELLATE ASSISTANT COMMISSIONER OF INCOME-TAX WHICH WAS ACCEPTED AND THE CLAIM OF THE ASSESSEE WAS UPHELD. THE APPEAL CARRIED BY THE REVENUE BEFORE THE TRIBUNAL WAS REJECTED. IN OTHER WORDS THE CLAIM REGARDING MUTUALITY WAS ACCEPTED BY THE APPELLATE AUTHORITIES . THE REVENUE WENT UP IN REFERENCE BEFORE THE HIGH COURT SEEKING OPINION OF THE HIGH COURT AS TO WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE APPELLATE TRIBUNAL WAS RIGHT IN HOLDING T HAT THE PRINCIPLE OF MUTUALITY WAS SATISFIED AND CONSEQUENTLY THE INCOME OF RS. 48,310 WAS NOT TAXABLE. THE QUESTION REFERRED WAS ANSWERED IN THE AFFIRMATIVE, I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE AND IT WAS HELD (PAGE 735) : 'WE HAVE ALREADY REFERRED TO THE RELEVANT FACTS. THERE IS NOTHING ON RECORD TO SHOW THAT THE ASSESSE E HAS BEEN CARRYING ON THE BUSINESS ACTIVITY OF LENDI NG MONEYS TO ANY PERSONS OTHER THAN ITS 19 MEMBERS. THE TWO OTHER PERSONS REFERRED TO, FROM WHOM INTEREST WAS RECEIVED, ARE NOT REALLY PERSONS TO WHOM MONEYS WERE ADVANCED. ONE PERSON IS A FORMER PARTNER WHO IS PAYING INTEREST ON THE MONEYS OWED BY HIM AT THE TIME OF HIS RETIREMENT AND THE OTHER PERSON IS THE CANARA BANK WITH WHICH MONEYS ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 9 ARE KEPT IN SAFE DEPOSIT. IT IS NOT POSSIBLE TO SAY THAT ANY BUSINESS TRANSACTIONS ARE CARRIED ON BY THE ASSESSEE WITH THE FORMER PARTNER OR THE CANARA BANK. THERE IS ALSO NO INDICATION FROM THE RECORD T O THE EFFECT THAT IN THE PAST YEARS, THE ASSESSEE HAD CARRIED ON THE ACTIVITIES OF LENDING MONEYS TO ANY PERSON OTHER THAN THE MEMBERS CONSTITUTING THE ASSOCIATION. WE, THEREFORE, PROCEED ON THE ASSUMPTION THAT THE ASSESSEE'S CLAIM THAT IT CONFIN ES ITS MONEY-LENDING ACTIVITY ONLY TO ITS MEMBERS AND TO NO OUTSIDERS, HAS TO BE ACCEPTED. IF THAT BE SO, IT FOLLOWS AUTOMATICALLY THAT THE INTEREST RECEIVED BY THE ASSESSEE IS DISTRIBUTED AMONG THE MEMBERS FORMING THE ASSOCIATION AND THUS THE PRINCIPLE OF MUTUALITY GOVERNS.' 12. IN THE CASE OF SPORTS CLUB OF GUJARAT LTD. V. CIT ( 117 ITR 504), THE ASSESSEE-SPORTS CLUB WAS INCORPORATED AS A COMPANY. ITS MAIN OBJECT WAS TO PROMOTE SPORTS. THE OBJECTS CLAUSE IN THE MEMORANDUM AND ARTICLES OF ASSOCIATION EMPOWERED TH OSE IN THE MANAGEMENT OF THE CLUB TO INVEST AND DEAL WITH MONIES OF THE CLUB NOT IMMEDIATELY REQUIRED TILL SUCH MANNER AS MAY FROM TIME TO TIME BE DETERMINED BY THEM. THE ASSESSEE CL AIMED EXEMPTION FROM INCOME-TAX FOR THE YEARS 1966-67, 19 67-68, 1968-69 AND 1969-70. BUT THE INCOME-TAX OFFICER REJ ECTED THE CLAIM. THE TRIBUNAL HELD THAT INCOME ASSESSABLE UND ER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' WOULD NOT BE EXIGIBLE TO TAX ON THE PRINCIPLE OF MUTUALITY SINCE THE CONTRIBUTORS AND THE PARTICIPANTS REPRESENTED ONE I DENTICAL BODY. IT, HOWEVER, REJECTED THE ASSESSEE'S CONTENTI ON THAT THE ENTIRE SURPLUS SHOULD BE EXEMPTED ON THE GROUND OF MUTUALITY. IT WAS HELD THAT WHERE AN ASSOCIATION RECEIVES INCO ME BY INDULGING IN MUTUAL ACTIVITY AND NON-MUTUAL ACTIVIT Y, THEN THE PRINCIPLE OF MUTUALITY IS NOT DESTROYED BY THE PRES ENCE OF TRANSACTIONS WHICH ARE NON-MUTUAL IN CHARACTER. THE PRINCIPLE OF MUTUALITY IN SUCH CASES CAN BE CONFINED TO TRANS ACTIONS WITH MEMBERS AND THE INCOME EARNED FROM NON-MEMBERS WOUL D NOT ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 10 BE EXEMPTED ON THE PRINCIPLE OF MUTUALITY. THE VIEW EXPRESSED BY THE TRIBUNAL WAS AFFIRMED AND IT WAS HELD THAT S O MUCH OF THE INCOME RECEIVED BY THE ASSESSEE-CLUB BY WAY OF INTEREST IS EXIGIBLE TO TAX. IT WAS OBSERVED (PAGE 512) : 'WE NOW REVERT TO THE QUESTION WHETHER THE INCOME DERIVED BY WAY OF INTEREST ON FIXED DEPOSITS FROM BANKS IS EXIGIBLE TO TAX NOTWITHSTANDING THE FINDIN G THAT THE PRINCIPLE OF MUTUALITY APPLIES TO THE ASSESSEE-CLUB. WE HAVE ALREADY POINTED OUT EARLIER THAT ONE OF THE ESSENTIALS OF MUTUALITY IS THAT THE CONTRIBUTORS TO THE COMMON FUND ARE ENTITLED TO PARTICIPATE IN THE SURPLUS, THEREBY CREATING AN IDENTITY BETWEEN THE PARTICIPATORS AND THE CONTRIBUTORS. ONCE SUCH AN IDENTITY IS ESTABLISHED, THE SURPLUS INCOME WOULD NOT BE EXIGIBLE TO TAX ON THE PRINCIPLE THAT NO MAN CAN MAKE A PROFIT OUT OF HIMSELF. HOWEVER, AS POINTED OUT EARLIER, THE OBJEC TS CLAUSE IN THE MEMORANDUM AND ARTICLES OF ASSOCIATION EMPOWERS THOSE IN THE MANAGEMENT OF THE ASSESSEE-CLUB TO INVEST AND DEAL WITH MONEYS OF THE CLUB NOT IMMEDIATELY REQUIRED IN SUCH MANNER AS MAY FROM TIME TO TIME BE DETERMINED BY THEM. UNDER THIS CLAUSE, THE INVESTMENT NEED NOT BE CONFINED TO INVESTMENT BY WAY OF FIXED DEPOSITS WITH BANKS. IT CAN TAKE ANY OTHER FORM OR SHAPE, SUCH AS INVESTMENT IN SHARES, REAL ESTATE, ETC. WHEN INCOME IS DERIVED FROM SUCH INVESTMENT, WHETHER BY WAY OF INTEREST, DIVIDEND OR RENT, IT IS DERIVED FROM A TH IRD PARTY AND IS NOT BY WAY OF CONTRIBUTION FROM THE MEMBERS OF THE CLUB. WE HAVE ALSO NOTICED THAT CLAUSE (VII) OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION PROVIDES THAT IN THE EVENT OF WINDING-U P OR DISSOLUTION OF THE CLUB, IF THERE REMAINS ANY SURPLUS AFTER SATISFYING ALL THE DEBTS AND LIABILIT IES, THE SAME SHALL BE PAID OR DISTRIBUTED AMONGST THE MEMBERS IN EQUAL SHARES. IF THE INCOME DERIVED FROM INVESTMENTS OVER A PERIOD OF TIME IS ADDED TO THE SURPLUS, THERE CAN BE NO DOUBT THAT WHEN THE SURPLU S IS DISTRIBUTED, A COMPONENT OF RETURN ON INVESTMENT WOULD GO TO THE MEMBERS IN EQUAL SHARES. THIS COMPONENT OF RETURN WHICH THE MEMBERS WILL RECEIVE WILL NOT BE BY WAY OF A PLOUGH BACK OF THEIR OWN CONTRIBUTIONS BY WAY OF FEES, ETC., TO THE CLUB. AN ASSOCIATION WHICH RECEIVES SUCH INCOME CAN BE SAID ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 11 TO BE INDULGING IN BOTH MUTUAL ACTIVITY AS WELL AS NON-MUTUAL ACTIVITY.' 13. IN THE CASE OF CIT V. RANCHI CLUB LTD. [1992] 196 I TR 137 (PATNA) [FB], THE QUESTION BEFORE THE FULL BENCH OF THE PATNA HIGH COURT WAS WHETHER THE RANCHI CLUB WAS A MUTUAL CONCERN AND THE INCOME DERIVED BY THE CLUB FROM ITS HOUSE P ROPERTY LET OUT TO ITS MEMBERS AND THEIR GUESTS IS NOT CHARGEAB LE TO TAX AND WHETHER THE INCOME DERIVED BY THE ASSESSEE-CLUB FRO M THE SALE OF LIQUOR, ETC., TO ITS MEMBERS AND THEIR GUESTS IS NOT TAXABLE IN ITS HANDS. IT WAS HELD THAT IF AN ASSESSEE IS FOUND TO BE INDULGING IN BOTH MUTUAL ACTIVITIES AS WELL AS NON- MUTUAL ACTIVITIES THAT DECIDES WHETHER IT CAN STILL CLAIM EXEMPTION IN RESPECT OF RECEIPTS RELATING TO MUTUAL ACTIVITIES. RELIANCE WAS PLACED UPON THE JUDGMENT IN THE CASE OF CIT V. MADR AS RACE CLUB ; CARLISLE AND SILLOTH GOLF CLUB V. SMITH [191 2] 6 TC 48 (KB) AND THE JUDGMENT OF THE GUJARAT HIGH COURT IN SPORTS CLUB OF GUJARAT LTD. V. CIT . IT WAS HELD (PAGE 145) ; 'THEREFORE, BY APPLYING THE PRINCIPLE OF MUTUALITY MEMBERS' CLUBS ALWAYS CLAIM EXEMPTION IN RESPECT OF SURPLUS ACCRUING TO THEM OUT OF THE CONTRIBUTIONS RECEIVED BY THE CLUBS FROM THEIR MEMBERS. BUT THIS PRINCIPLE CANNOT HAVE ANY APPLICATION IN RESPECT OF THE SURPLUS RECEIVED FROM NON-MEMBERS. IT IS NOT DIFFICULT TO CONCEIVE OF CASES WHERE ONE AND THE SA ME CONCERN MAY INDULGE IN ACTIVITIES WHICH ARE PARTLY MUTUAL AND PARTLY NON-MUTUAL. TRUE, KEEPING IN VIEW THE PRINCIPLE OF MUTUALITY, THE SURPLUS ACCRUING TO A MEMBERS' CLUB FROM THE SUBSCRIPTION CHARGES RECEIVE D FROM ITS MEMBERS CANNOT BE SAID TO BE INCOME WITHIN THE MEANING OF THE ACT. BUT, IF SUCH RECEIPTS ARE F ROM SOURCES OTHER THAN THE MEMBERS, THEN STILL CAN IT B E SAID THAT SUCH RECEIPTS ARE NOT TAXABLE IN THE HAND S OF THE CLUB ? THE ANSWER IS OBVIOUS. NO EXEMPTION CAN BE CLAIMED IN RESPECT OF SUCH RECEIPTS ON THE P LEA OF MUTUALITY. TO ILLUSTRATE, A MEMBERS' CLUB MAY HA VE INCOME BY WAY OF INTEREST, SECURITY, HOUSE PROPERTY , CAPITAL GAINS AND INCOME FROM OTHER SOURCES. BUT SUCH INCOME CANNOT BE SAID TO BE ARISING OUT OF THE SURPLUS OF THE RECEIPTS FROM THE MEMBERS OF THE CLU B.' ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 12 14. IN THE CASE OF CIT V. KUMBAKONAM MUTUAL BENEFIT FUN D LTD. [1964] 53 ITR 241, THE SUPREME COURT EXAMINED THE QUESTIONS AS TO WHETHER A COMPANY LIMITED BY SHARES WHICH CARRIED ON BANKING BUSINESS RESTRICTED TO ITS SHARE HOLDERS RECEIVED MONTHLY CONTRIBUTIONS BY WAY OF RECURRING DEPOSITS FROM THE SHAREHOLDERS AND AT THE END OF A FIXED PER IOD RETURNED AN AMOUNT COVERING THE DEPOSITS AND GUARANTEED INTE REST THEREON FOR THAT PERIOD WAS EXEMPTED FROM PAYMENT O F TAX ON THE PROFITS DERIVED FROM THE TRANSACTIONS WITH ITS SHAREHOLDERS. IT WAS HELD THAT COMPANY WAS NOT ENTITLED TO EXEMPT ION FROM PAYMENT OF TAX ON THE PLEA OF MUTUALITY. IT WAS HEL D (PAGE 249) : 'IT SEEMS TO US THAT IT IS DIFFICULT TO HOLD THAT S TYLES' CASE [18891 2 TC 460 (HL), APPLIES TO THE FACTS OF THE CASE. A SHAREHOLDER IN THE ASSES-SEE-COMPANY IS ENTITLED TO PARTICIPATE IN THE PROFITS WITHOUT CONTRIBUTING TO THE FUNDS OF THE COMPANY BY TAKING LOANS. HE IS ENTITLED TO RECEIVE HIS DIVIDEND AS LO NG AS HE HOLDS A SHARE. HE HAS NOT TO FULFIL ANY OTHER CONDITION. HIS POSITION IS IN NO WAY DIFFERENT FROM A SHAREHOLDER IN A BANKING COMPANY, LIMITED BY SHARES. INDEED, THE POSITION OF THE ASSESSEE IS NO DIFFERENT FROM AN ORDINARY BANK EXCEPT THAT IT LEND S MONEY TO AND RECEIVES DEPOSITS FROM ITS SHAREHOLDERS. THIS DOES NOT BY ITSELF MAKE ITS INCO ME ANY THE LESS INCOME FROM BUSINESS WITHIN SECTION 10 OF THE INDIAN INCOME-TAX ACT.' 15. FROM THESE JUDGMENTS IT GETS ESTABLISHED THAT NO TA XABLE PROFIT CAN BE SAID TO EMERGE FROM OUT OF MUTUALITY ON THE GROUND THAT 'NO MAN CAN TRADE WITH HIMSELF'. THE ES SENCE OF MUTUALITY LIES IN THE RETURN FOR WHAT ONE HAS CONTR IBUTED TO A COMMON FUND. THE FUND SHOULD FULFIL THE ESSENTIAL R EQUIREMENTS THAT ALL THE CONTRIBUTORS TO THE COMMON FUND MUST B E ENTITLED TO PARTICIPATE IN THE SURPLUS AND THAT ALL THE PARTICI PATORS IN THE SURPLUS SHOULD BE CONTRIBUTORS TO THE COMMON FUND. THERE MUST BE COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS TO THE FUND ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 13 AND THE PARTICIPATORS IN THE SURPLUS. IT DOES NOT M EAN THAT EACH MEMBER SHOULD CONTRIBUTE TO THE COMMON FUND OR THAT EACH MEMBER SHOULD PARTICIPATE IN THE SURPLUS OR GET BAC K FROM THE SURPLUS PRECISELY WHAT HE HAD PAID. THE PRINCIPLE O F MUTUALITY IS NOT DESTROYED BY THE PRESENCE OF TRANSACTIONS WH ICH ARE NON- MUTUAL IN CHARACTER AND THE PRINCIPLE OF MUTUALITY CAN, IN SUCH CASES BE CONFINED TO TRANSACTIONS WITH MEMBERS. THE TWO ACTIVITIES IN APPROPRIATE CASES CAN BE SEPARATED AN D THE PROFITS DERIVED FROM NON-MEMBERS, CAN BE BROUGHT TO TAX. 16. IF THE FACTS OF THE PRESENT CASE ARE EXAMINED IN TH E LIGHT OF THE PRINCIPLES APPLICABLE TO THE CONCEPT OF MUTUALI TY, THEN IT HAS TO BE HELD THAT THE INGREDIENTS OF MUTUALITY ARE MI SSING IN THE PRESENT CASE. APART FROM THE CONTRIBUTIONS MADE BY THE MEMBERS THERE ARE OTHER SOURCES OF FUNDING OF THE C LUB FUND. THE CLUB FUND CAN BE AUGMENTED BY CONTRIBUTION MADE BY THE MEMBERS; DONATIONS ; INTEREST OR OTHER INCOME ACCRU ED OR EARNED FROM THE SAID FUNDS OR ANY INVESTMENT THEREO F AND INVESTMENT MADE FROM OUT OF THE FUNDS. THE OBJECT O F THE CLUB IS TO INVEST THE FUNDS OF THE CLUB IN BANKS AND SECURI TIES FOR EARNING INTEREST TO DISCHARGE THE LIABILITIES AND O BLIGATIONS CREATED UNDER THE ARTICLES OF THE CLUB. IT IS NOT A CASE OF SURPLUS FROM THE CONTRIBUTIONS MADE BY THE MEMBERS. IT IS A LSO NOT A CASE WHERE THE ASSESSEE HAD ADVANCED ITS FUNDS TO I TS MEMBERS AND HAD EARNED INTEREST OF THOSE LOANS. AS ALREADY OBSERVED THE INCOME WAS EARNED BY MAKING DEPOSITS BY WAY OF INVE STMENT IN THE BANK. IT IS A CASE WHERE THE ASSESSEE INVESTED ITS SURPLUS FUNDS IN VARIOUS BANKS AND EARNED INTEREST ON THE D EPOSITS. AS WAS HELD IN CIT V. RANCHI CLUB LIMITED [1992] 196 I TR 137 (PATNA) [KB] BY THE PATNA HIGH COURT, THE PRINCIPLE OF MUTUALITY COULD BE CONFINED IN RESPECT OF SURPLUS ACCRUED TO THE CLUB OUT OF THE CONTRIBUTIONS RECEIVED BY THE CLUB FROM ITS MEMBERS. BUT ITA NO.1335 OF 2010 NIZAM CLUB, HYDERABAD ================== 14 THIS PRINCIPLE WOULD HAVE NO APPLICATION IN RESPECT OF SURPLUS RECEIVED FROM NON-MEMBERS. IN THE CASE ON HAND, THE TAX SOUGHT TO BE LEVIED IS NOT ON THE SURPLUS FROM OUT OF THE CONTRIBUTIONS MADE BY THE MEMBERS OR FROM THE INTER EST EARNED ON THE MONEY ADVANCED TO ITS MEMBERS. THE DEPOSITS IN THE BANKS WERE MADE FOR EARNING INTEREST BY WAY OF INCO ME. THE PRINCIPLE THAT NO PERSON CAN TRADE WITH HIMSELF DOE S NOT ARISE IN THIS CASE AS THE MONIES HAD BEEN INVESTED BY THE AS SESSEE WITH THE BANK TO EARN INCOME TO ENABLE THE ASSESSEE TO D ISCHARGE ITS OBLIGATIONS CREATED UNDER THE TRUST. IT IS CLEAR TH AT INCOME EARNED FROM OUTSIDE AGENCY ON INTEREST OR SECURITIE S FROM THE BANK WOULD NOT BE COVERED ON THE PRINCIPLES OF MUTU ALITY FOR CLAIMING EXEMPTION FROM TAX AND, THEREFORE, IT COUL D NOT BE EXCLUDED FROM THE ARENA OF TAXATION. 17. FOR THE REASONS STATED, IT IS HELD THAT THE ASSESSE E WAS NOT ENTITLED TO EXEMPTION FROM TAX ON THE PRINCIPLE OF MUTUALITY. THE ISSUE HEREIN IS DECIDED IN FAVOUR OF THE REVENU E AND AGAINST THE ASSESSEE. 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 17TH_JUNE, 20 11 SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER HYDERABAD, DATED THE _17 JUNE, 2011 COPY FORWARDED TO: 1. THE DY. CIT, CIRCLE 5(1), HYDERABAD 2. THE NIZAM CLUB, 5-9-5 & 6 SAIFABAD, HYDERABAD 3. THE CIT(A) V, HYDERABAD 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP