Kalaimaghal Sabha, CHENNAI V. ITO, CHENNAI

ITA 1998/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8169 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 08-01-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 01-07-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Charitable institution
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 43; 153

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: CHENNAI . , ! , $ % BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER ./ ITA NOS.1997 & 1998/MDS/2016 & ITA NOS.1403 & 1404/MDS/2017 $! ! /ASSESSMENT YEARS: 2010-11 TO 2013-14 M/S.KALAIMAGHAL SABHA, NEW NO.17, OLD NO.48, NORTH USMAN ROAD, T.NAGAR, CHENNAI-600 017. VS. THE INCOME TAX OFFICER, NON-CORPORATE WARD-1(4), CHENNAI-34. [PAN: AAAAK 1638 B ] ( ' /APPELLANT) ( ()' /RESPONDENT) ' * / APPELLANT BY : MR.A.KANAGARAJ, CA ()' * /RESPONDENT BY : MR.N.MADHAVAN, ACIT * /DATE OF HEARING : 08.01.2018 * /DATE OF PRONOUNCEMENT : 08.01.2018 / O R D E R PER BENCH : THESE ARE APPEALS FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-2, CHENNAI, IN ITA NO.256/CIT(A)- 2/2013-14 & 119/CIT(A)-2/2014-15 DATED 11.03.2016 F OR THE AYS 2010- 11 & 2011-12, IN ITA NO.44 & 225/CIT(A)-2/2015-16 D ATED 31.03.2017 FOR THE AYS 2012-13 & 2013-14. ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 2 -: 2. SHRI N.MADHAVAN, ACIT, REPRESENTED ON BEHALF OF THE REVENUE AND SHRI A.KANAGARAJ, CA, REPRESENTED ON BEHALF OF THE ASSESSEE. 3. IT WAS SUBMITTED BY THE LD.AR THAT THERE WAS ONL Y TWO ISSUES IN THE ASSESSEES APPEALS. IT WAS A SUBMISSION THAT THE F IRST ISSUE WAS AGAINST THE ACTION OF THE LD.CIT(A) IN CONFIRMING THE ORDER OF THE AO AND NOT GRANTING THE ASSESSEE THE BENEFIT OF THE APPLICATIO N OF THE PRINCIPLES OF MUTUALITY IN RESPECT OF INTEREST INCOME RECEIVED BY THE ASSESSEE ON THE FIXED DEPOSITS WITH INDIAN BANK AND THE SECOND ISSU E WAS AGAINST THE ACTION OF THE LD.CIT(A) IN CONFIRMING THE NON-GRANT ING OF DEPRECIATION. THE LD.AR PLACED BEFORE US A NOTE IN REGARD TO THE ISSUES WHICH IS EXTRACTED AS UNDER: 1. HISTORY : M/S. KALAIMAGHAL SABHA WAS FOUNDED ON 15.01.1984 AND WAS REGISTERED AS A SOCIETY UNDER TAMIL NADU SOCIETIES REGISTRATION ACT 1975 WITH FOL LOWING OBJECTS. I. WORK FOR THE DEVELOPMENT OF EDUCATION, ART, CULT URE AND SPORTS. II. WORK FOR THE UNITY OF PERSONS BELONGING TO DIFF ERENT RELIGION, RACES AND CASTES. III. WORK FOR THE DEVELOPMENT OF THE PEOPLE WHO ARE ECONOMICALLY LOW IN STANDARDS. THE SOCIETY ADMITTED THE MEMBERS AND IMPLEMENTED CE RTAIN SCHEMES AS MEMBERS BENEFICIAL SCHEME. EACH MEMBER HAS TO CONTRIBUTE S PECIFIED AMOUNT TO THE SOCIETY AS MEMBERSHIP SUBSCRIPTION. THE SOCIETY APART FROM DOI NG ACTIVITIES IN FURTHERANCE OF ITS OBJECT FOR THE GENERAL OR THE PUBLIC WELFARE WAS ALSO COLL ECTING FUNDS FROM THE MEMBERS TO BE UTILIZED EXCLUSIVELY FOR THE BENEFIT OF ITS MEMBERS . THE ABOVE SAID FUNDS WERE COLLECTED UNDER DIFFERENT HEADS SUCH AS PURCHASE OF PROPERTY, MARRIAGE, EDUCATION, DEATH ETC., WHICH WERE KEPT IN SEPARATE FUND ACCOUNTS AND UTILIZED FO R THE SAID PURPOSE. THE SOCIETY HAS ENROLLED MORE THAN 5.75 LAKHS MEMBERS AS ON 15.01.1 998 AND ACQUIRED VALUABLE IMMOVABLE PROPERTY IN THE NAME OF MEMBERS OF KALAI MAGHAL SABHA. THE SOCIETY UNDER THE MEMBERS BENEFICIAL SCHEME WOULD DIVIDE THESE P ROPERTIES AMONGST ITS MEMBERS BY THE YEAR 2006 I.E. AT THE TIME OF DISSOLUTION OF SABHA. IN THE MEANTIME, THE GOVT. OF TAMIL NADU ON THE BAS IS OF SOME COMPLAINTS RECEIVED AGAINST THE SABHA HAS APPOINTED A SPECIAL OFFICER ON 06.11. 1998 TO ADMINISTER THE SABHA. ONE OF THE MEMBER OF THE SABHA CHALLENGED THE ORDER OF GOV T. OF TAMIL NADU AND FILED A WRIT PETITION BEFORE HONBLE HIGH COURT OF MADRAS. HONBLE HIGH COURT AS PER ITS ORDER DT. 30.03.1999 HAS APPOINTED RECEIVERS TO TAKE CHARGE OF THE PROPERTIES PURCHASED FOR THE BENEFIT MEMBERS AND FUNDS AVAILABLE FOR DISTRIBUTION AMONG THE MEMBERS. THE RECEIVERS HAVE BEEN DIRECTED TO SELL THE PROPERTIES AND DISTRIBUTE THE SALE PROCEEDS OF THE PROPERTIES TO THE MEMBERS OF THE SABHA WHO HAD CONTRIBUTED FOR THE SAME IN THE PROPORTION IN WHICH THEY HAVE CONTR IBUTED. EVEN WITH RESPECT TO THE CASH ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 3 -: WHICH IS IN BANK DEPOSIT OR ANY OTHER DEPOSIT, THE SAME HAVE TO BE DISTRIBUTED TO THE MEMBERS OF THE SOCIETY. 2. PRESENT ACTIVITIES : THE OFFICE OF THE RECEIVERS APPOINTED BY HONBLE HI GH COURT ARE FUNCTIONING FROM THE PREMISES OWNED BY THE SABHA AT DIFFERENT PLACES AND EXECUTING THE ORDERS OF HONBLE HIGH COURT BY REALIZING THE PROPERTIES PURCHASED IN THE NAMES OF MEMBERS OF THE SABHA, TEMPORARILY PARKING THE FUNDS IN FIXED DEPOSITS WIT H BANKS AND DISTRIBUTING TO THE MEMBERS IN INSTALLMENTS AFTER SUFFICIENT AMOUNT HAS BEEN RE ALIZED. IN THIS PROCESS SABHA IS GETTING INTEREST INCOME ON FIXED DEPOSITS WITH BANKS AND TH ERE IS SOME SURPLUS AFTER MEETING THE ADMINISTRATIVE EXPENSES. THE SURPLUS IS ALSO DEPOSI TED WITH BANK FOR DISTRIBUTION TO MEMBERS. THE SURPLUS IS BEING TAXED BY THE IT DEPAR TMENT WHICH IS CHALLENGED ON THE BASIS OF MUTUALITY PRINCIPLES AND DOCTRINE OF MUTUA LITY. 3. APPLICABILITY OF MUTUALITY PRINCIPLE AND DOCTRINE O F MUTUALITY :- THE FUNDS OF THE SABHA IN BANK DEPOSITS WHICH ARE M ADE OUT OF SALE PROCEEDS OF PROPERTIES IN THE NAMES OF MEMBERS BELONG TO THE MEMBERS PENDI NG DISBURSAL TO THEM AS PER HIGH COURT ORDER AND IT REPRESENTS COMMON FUND OF MEMBER S. IT IS WELL ESTABLISHED THAT AS PER PRINCIPLES OF INCOME TAX LAW, NO TAXABLE PROFIT CAN BE SAID TO EMERGE FROM OUT OF MUTUAL ACTIVITY. THERE IS COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS TO THE FUND AND RECIPIENTS FROM THE FUND, IN AS MUCH AS THE INTEREST EARNED BY THE SOCI ETY FROM THE SURPLUS FUNDS INVESTED IN FIXED DEPOSITS WITH BANKS ARE ALWAYS AVAILABLE AND ARE USED FOR THE BENEFIT OF MEMBERS OF THE SOCIETY IN AS MUCH AS THE SAID INTEREST MERGED WITH THE COMMON FUND OF THE SOCIETY. THE CONCEPT OF MUTUALITY HAS BEEN EXTENDED TO DEFIN ED GROUPS OF PEOPLE WHO CONTRIBUTE TO A COMMON FUND, CONTROLLED BY THE GROUP FOR A COMMON BENEFIT. ANY AMOUNT OF SURPLUS TO THAT NEEDED TO PURSE THE COMMON PURPOSE IS SAID TO BE SIMPLY AN INCREASE OF THE COMMON FUND AND AS SUCH NEITHER CONSIDERED INCOME NOR TAXA BLE. ONE OF THE EARLIEST MODERN JUDICIOUS STATEMENTS OF T HE MUTUALITY PRINCIPLE IS BY LORD WATSON IN THE HOUSE OF LODS IN 1989 IN STYLES (SURV EYOR OF TARA) VS NEW YORK INSURANCE COMPANY WHERE IT HAS BEEN HELD:- ... WHEN NUMBER OF INDIVIDUALS AGREE TO CONTRIBUTE FUNDS FOR A COMMON PURPOSE.... AND STIPULATE THAT THEIR CONTRIBUTIONS, SO FAR AS N OT REQUIRED FOR THAT PURPOSE SHALL BE REPAID TO THEM. I CANNOT CONCEIVE WHY THEY SHOUL D BE REGARDED AS TRADERS OR WHY CONTRIBUTION RETURNED TO THEM SHOULD BE REGARDE D AS PROFIT. IN THE CASE OF THE APPELLANT, THE AMOUNT REALIZED F ROM THE SALE OF PROPERTIES WHICH HAS TO BE RETURNED TO THE MEMBERS AS PER HIGH COURT ORDER HAVING REGARD TO THE FACT THAT IT RUNS TO SEVERAL CRORES, THE SAME COULD NOT BE RETAINED I N THE SOCIETY PREMISES AND HAD TO BE NECESSARILY KEPT IN SOME SECURED MANNER TILL SUCH F UNDS COULD BE UTILIZED FOR THE BENEFIT OF ITS MEMBERS AND THEREFORE THEY WERE KEPT IN FIXED D EPOSITS WITH BANKS. THE FUNDS ARE KEPT IN THE BANK NOT WITH PRIME OBJEC T OF EARNING INTEREST BUT TO KEEP IT IN SAFE CUSTODY AND THE INTEREST EARNED HAS BEEN USED ONLY FOR THE ULTIMATE BENEFIT OF MEMBERS OF THE SOCIETY TO BE DISTRIBUTED AMONGST TH EM. THE FUNDS WHICH WERE INVESTED IN THE FORM OF FIXED DEPOSITS WERE KEPT IN SUCH DEPOSITS WITH A DEFINITE IDEA OF USING THE SAME FOR THE SPEC IFIED PURPOSE OF RETURNING TO THE MEMBERS AS PER HIGH COURT ORDER IN A PHASED MANNER AND COULD BE DRAWN FOR THAT PURPOSE AS AND WHEN THE NEED ARISES. ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 4 -: CASE LAWS : IN THE CASE OF CIT VS WEST GODAVARI DISTRICT RICE M ILLERS ASSOCIATION (150 ITR 395), THE A.P.HIGH COURT HELD THAT IT IS WELL SETTLED THAT TH E SURPLUS ACCRUING TO A MUTUAL ASSOCIATION IS NO INCOME OR PROFIT AT ALL FOR PURPOSES OF INCOM E TAX, THE TEST OF MUTUALITY BEING COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND PART ICIPANTS. IN THE CASE OF CIT VS JK ORGANISATION LTD (279 ITR 5 03) (ALL), THE ALLAHABAD HIGH COURT HELD THAT THE ORGANIZATION HAS BEEN FORMED TO PROMO TE AND PROTECT THE INTEREST OF ITS MEMBERS AND IT ALSO PROVIDED THAT UPON DISSOLUTION, THE SURPLUS WILL BE DISTRIBUTED AMONGST THE MEMBERS OF THE ORGANIZATION ON THE BASIS OF THE CONTRIBUTION. HENCE ORGANIZATION IS A MUTUAL ORGANIZATION AND THE INCOME OF THE ASSESSEE ASSOCIATION OF PERSONS WAS EXEMPT FROM TAX ON THE GROUND OF MUTUALITY. A MUTUAL ASSOCIATION IS AN ASSOCIATION OF PERSON WH O AGREE TO CONTRIBUTE FUNDS FOR SOME COMMON PURPOSE MUTUALLY BENEFICIAL AND RECEIVE BACK THE SURPLUS LEFT OUT IN THE SAME CAPACITY IN WHICH THEY HAVE MADE THE CONTRIBUTION. THEREFORE THE CAPACITY AS CONTRIBUTORS AND PARTICIPANTS REMAIN SAME. THEY CONTRIBUTE NOT W ITH AN IDEA TO TRADE BUT WITH AN IDEA OF RENDERING MUTUAL HELP. THEY RECEIVE BACK THE SURPLU S WHICH IS LEFT AFTER MEETING THE EXPENDITURE OF THE ASSOCIATION WHICH IS INCURRED FO R THE COMMON PURPOSE IN THE SAME CAPACITY IN WHICH THEY HAVE CONTRIBUTED. THUS THEY RECEIVE BACK WHAT WAS REALLY THEIR OWN. THE RECEIPT IN THEIR HANDS IS NOT REALLY A PROFIT A S NO MAN CAN MAKE A PROFIT OUT OF HIMSELF SUCH AS HE CANNOT ENTER INTO A TRADE OR BUSINESS WI TH HIMSELF. THUS THE MAIN TEST OF MUTUALITY IS COMPLETE WITH THE IDENTITY OF CONTRIBU TORS WITH THE RECIPIENTS. THIS VIEW WAS CONFIRMED BY SUPREME COURT IN THE CASE OF CIT VS BA NKIPUR CLUB (226 ITR 97) AND IN THE CASE OF CHELMSFORD CLUB VS CIT (243 ITR 89). SIMILAR VIEW WAS TAKEN BY MADRAS HIGH COURT IN THE CASE OF CIT VS MADRAS RACE CLUB AND ALSO HEL D THAT IT IS ENOUGH IF THE MEMBERS HAD A RIGHT OF DISPOSAL OVER THE SURPLUS TO SHOW THAT T HEY ARE PARTICIPANTS. THE SAME PRINCIPLE WAS ENUNCIATED IN ADDL CIT VS SECUNDARABAD CLUB (15 0 ITR 401 (APPX)). SIMILAR VIEW WAS TAKEN BY BOMBAY HIGH COURT IN THE CASE OF CIT VS CE MENT ALLOCATION AND CO-ORDINATION ORGANIZATION (236 ITR 553). A MUTUAL ASSOCIATION ARISES WHEN A CERTAIN CLASS OF PEOPLE JOIN OR ASSOCIATES TO CONTRIBUTE MONEY TO ACHIEVE AN OBJECT FOR THE BENEFIT OF ONE A NOTHER AND DIVIDE THE SURPLUS BETWEEN THEMSELVES ON THAT CHARACTER, NAMELY IN THE CHARACT ER OF PERSONS WHO CONTRIBUTE IT. THE CARDINAL REQUIREMENT IS THAT ALL THE CONTRIBUTORS T O THE COMMON FUND MUST BE ENTITLED TO PARTICIPATE IN THE SURPLUS AND ALL THE PARTICIPATOR S OF THE SURPLUS MUST BE CONTRIBUTORS TO THE COMMON FUND. IN OTHER WORDS, THERE MUST BE COMPLETE IDENTITY BETWEEN CONTRIBUTORS AND THE PARTICIPATORS. THIS PRINCIPLE IS FOLLOWED IN CI T VS JAM MERCHANTS ASSOCIATION 106 ITR 542 (GUJ) AND CIT VS DARJEELING CLUB 153 ITR 676 (CA L). IN THE CASE OF KALAIMAGHAL SABHA THE IDENTITY IS PROVED. THE PARTICIPATION IN THE SU RPLUS NEED NOT BE IMMEDIATE, THAT IS IT MAY NOT ARISE AS SOON AS THE SURPLUS IS DISCERNED, BUT MAY ARISE MUCH LATER, EVEN ON A WINDING UP OR ON DISSOLUTION (FALCONBRIDGE VS NATIO NAL EMPLOYEES MUTUAL GENERAL INSURANCE ASSOCIATION (33 TC 103). IN THE CASE OF THE PRESIDENCY CLUB VS CIT, THE MADR AS HIGH COURT HAS OBSERVED THAT ANY PROFIT THAT AROSE TO A MUTUAL ASSOCIATION IS INCIDE NTAL TO THE ACTIVITIES WHICH ARE MUTUAL IN NATURE AND HENCE THE RECEIPT FROM LETTING OUT THE R OOMS WAS HELD AS NOT TAXABLE. MUTUALITY PRINCIPLE HAS BEEN UPHELD IN THE FOLLOWIN G CASES ALSO:- A) WANKANER JAM SOCIAL WELFARE SOCIETY VS CIT (260 I TR 241 (MAD) B) CIT VS MERCHANT NAVY CLUB (96 ITR 261 (AP) C) CIT VS NATARAJ FINANCE CORPN (169 ITR 732 (AP) D) CIT VS J.K.ORGANISATION LTD (279 ITR 503 (ALL) E) CHELMSFORD CLUB VS CIT (243 ITR 89 (SC) F) CIT VS RAYAL WESTERN INDIA TURB CLUB LTD (24 ITR 551) G) CIT VS I.T.I. EMPLOYEES (234 ITR 308 KAR) H) CIT VS CAWNPORE CLUB (140 TAXMAN 378) ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 5 -: THE CASE LAWS WHERE IT HAS BEEN HELD THAT INTERESTS ON FIXED DEPOSITS ARE ALSO EXEMPTED ON MUTUALITY PRINCIPLE ARE AS UNDER: A) CIT VS DELHI GYMKHANA CLUB LTD. (339 ITR 525, DEL HI). B) DIT VS ALL INDIA ORIENTAL BANK OF COMMERCE WELFARE SOCIETY (130 TAXMAN 575, DELHI). C) CIT VS TALANGANG CO- OPERATION GROUP HOUSING SOCI ETY LTD. (339 ITR 518, DELHI). D) CIT VS STANDING CONFERENCES OF PUBLIC ENTERPRISES (SCOPE) (319 ITR 179, DELHI). E) CHELMSFERD CLUB VS CIT (243 ITR 89-SC). IT HAS BEEN HELD BY KARNATAKA HIGH COURT THAT A SOC IETY IS ELIGIBLE FOR EXEMPTION EVEN IN RESPECT OF INTEREST INCOME FROM TERM DEPOSITS WITH BANKS AND DIVIDEND INCOME FROM SHARES.(CANARA BANK GOLDEN JUBILEE STAFF WELFARE FU ND VS DEPUTY CIT (308 ITR 202). IT HAS ALSO BEEN HELD BY DELHI HIGH COURT THAT INTE REST ON FD, DIVIDEND INCOME, PROFIT ON SALE INVESTMENT ETC ARE NOT CHARGEABLE TO TAX ON MU TUALITY PRINCIPLE. IT HAS ALSO BEEN HELD IN MANY CASES THAT INTERESTS ON FIXED DEPOSITS WITH BANKS ARE TAXABLE SINCE THE BANK IS NOT A MEMBER AND IT AMOUNTS TO DE ALING WITH OUTSIDERS. BUT IN ALL THESE CASES, THEY ARE RUNNING CLUBS I ASSOCIATIONS. WHERE AS IN THE CASE OF THE APPELLANT, THE SOCIETY IS UNDER THE CONTROL OF HONBLE HIGH COURT AND IS IN THE PROCESS OF RETURNING THE AMOUNT CONTRIBUTED BY THE MEMBERS AS PER COURT ORDE R AND HENCE THE INTEREST EARNED BELONG TO MEMBERS. THE SOCIETY HAS TO ACCUMULATE FU NDS BEFORE DISTRIBUTION SINCE HUGE AMOUNT IS NEEDED FOR DISTRIBUTION OF EVEN RS.1000 P ER MEMBER AS THE NUMBER OF MEMBERS RUN INTO ABOUT 6 LAKHS. IN VIEW OF THIS, THE APPELLANTS CASE SHOULD BE DIS TINGUISHED FROM OTHERS. 4. DEPRECIATION CLAIM : THE APPELLANT HAS CLAIMED DEPRECIATION ON BUILDINGS AND OTHER ASSETS OWNED BY THE SABHA. THE ASSETS OF THE SABHA HAVE BEEN TAKEN OVER BY THE JOINT RECEIVERS OF KALAIMAGAL SABHA IN 1999-00 TO CARRY OUT THE ORDERS OF HONBLE HIGH COURT OF MADRAS. THE BUILDINGS AND OTHER ASSETS WERE USED BY THE SABHA TO CARRY OUT THE DIRE CTIONS OF HIGH COURT OF MADRAS TO REALIZE THE ASSETS OF THE SABHA AND REFUND THE AMOU NT DUE TO THE MEMBERS. SOME BUILDINGS HAVE BEEN LET OUT DURING THE PERIOD PRIOR TO TAKE OVER BY JOINT RECEIVERS WHICH ARE CONTINUED TO BE LET OUT. ALL OTHER BUILDINGS ARE UN DER THE OWN USE OF KALAIMAGAL SABHA IN WHICH OFFICE OF THE RECEIVERS AND OTHER STAFF UNDER THE CONTROL OF RECEIVERS ARE ACCOMMODATED. THE BUILDINGS AT VARIOUS PLACES ARE U SED TO CARRY OUT THE ACTIVITIES OF THE SABHA AS DIRECTED BY THE HIGH COURT SUCH AS MAINTEN ANCE OF ACCOUNTS AND RECORDS OF MEMBERS, COLLECTION OF DETAILS OF AMOUNT DUE TO MEM BERS, IDENTIFICATION OF PROPERTIES OF SABHA AT VARIOUS PLACES, COLLECTION OF PROPERTY DOC UMENTS, TAKING POSSESSION OF THE PROPERTIES, VACATION OF TENANTS AND VACATING ILLEGA L OCCUPANTS OF LANDS, BRINGING THE PROPERTY FOR AUCTION, REALIZATION OF AUCTION MONEY, MAKING REFUNDS TO MEMBERS ETC. THE AUCTIONS OF THE PROPERTIES ARE TAKING PLACE AT VARIOUS PLACES IN THE BUILDING OWNED BY THE SABHA. HENCE ALL THE PROPERTIES AND ASSETS OF T HE SABHA ARE USED FOR THE PURPOSE OF CARRYING OUT THE ACTIVITIES AS DIRECTED BY HONBLE HIGH COURT OF MADRAS. DEPRECIATION HAS TO BE ALLOWED AS PER PROVISIONS OF I.TAX ACT EVEN WHEN THERE IS ONLY INCOME FROM OTHER SOURCES. THE INTEREST INCOME IS O NLY FROM THE DEPOSITS OF AUCTION AMOUNT REALIZED BY RECEIVERS AS PER DIRECTIONS OF H IGH COURT. EVEN IN THE CASE OF CHARITABLE TRUSTS, VARIOUS COUR TS OF LAW HAVE HELD THAT DEPRECIATION HAS TO BE ALLOWED IN ARRIVING AT THE TOTAL INCOME WHICH IS REPRODUCED AS UNDER. I. CIT VS SHETH MANILAL RANCHHODDAS VISHRAM BHAVAN TRU ST (198 ITR 598) (GUJ) HELD THAT THE EXPRESSION INCOME HAS TO BE UNDERSTOOD I N THE POPULAR OR GENERAL SENSE AND NOT IN THE SENSE IN WHICH THE INCOME IS ARRIVED AT FOR THE PURPOSE OF ASSESSMENT. THE AMOUNT OF DEPRECIATION HAS TO BE DE DUCTED TO ARRIVE AT THE INCOME AVAILABLE FOR APPLICATION TO CHARITABLE AND RELIGIO US PURPOSES. ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 6 -: II. CIT VS ROYPUR PALLOTTINE SOCIETY (180 ITR 579) (MP) H ELD THAT THE DEPRECIATION IS THE EXHAUSTION OF THE EFFECTIVE LIFE OF A FIXED ASS ET OWING TO USE OR ABSOLESCENE. THE OBJECT OF PROVIDING FOR DEPRECIATION IS TO SPREAD T HE EXPENSES INCURRED IN ACQUIRING THE ASSET OVER ITS EFFECTIVE LIFETIME. A CHARITABLE TRUST IS THEREFORE ENTITLED TO DEPRECIATION IN RESPECT OF THE ASSETS OWNED BY IT. III. CIT VS SOCIETY OF THE SISTERS OF ST. ANNE (146 ITR 29) (KER) HELD THAT IF DEPRECIATION IS NOT ALLOWED AS A NECESSARY DEDUCTIO N FOR COMPUTING THE INCOME OF A CHARITABLE INSTITUTION THEN THAT CAN BE NO WAY TO P RESERVE THE CORPUS OF THE TRUST FOR DERIVING THE INCOME. IV. CIT VS RAO BAHADUR CALAWALA CUNNAN CHETTY CHARITIES (135 ITR 485) (MAD) HELD THAT THE INCOME FROM THE PROPERTIES HELD UNDER TRUS T WOULD HAVE TO BE ARRIVED AT IN THE NORMAL COMMERCIAL MANNER. IN THE CASE OF KALAIMAGHAL SABHA, SINCE THE BUILDIN GS AND OTHER ASSETS ARE USED BY THE RECEIVERS TO CARRY OUT THEIR ACTIVITIES AND TO IMPL EMENT THE HIGH COURT ORDER, THE NET INCOME HAS TO BE ARRIVED AT ONLY AFTER ALLOWING DEP RECIATION ON FIXED ASSETS. IT WAS FAIRLY AGREED BY THE LD.AR THAT THE INDIAN BANK WAS NOT A MEMBER OF THE AOP. 4. IN REPLY, THE LD.DR VEHEMENTLY SUPPORTED THE ORD ER OF THE AO AND THE LD.CIT(A). IT WAS A SUBMISSION THAT THE INDIAN BANK WHERE THE ASSESSEE IS MAINTAINING FIXED DEPOSITS, WAS NOT A M EMBER OF THE ASSESSEE AND CONSEQUENTLY THE PRINCIPLES OF MUTUALITY COULD NOT BE APPLIED IN RESPECT OF THE INTEREST RECEIVED BY THE ASSESSEE FR OM SUCH NON-MEMBER. IN REGARD TO THE ISSUE OF THE DEPRECIATION, IT WAS A SUBMISSION THAT AS THE PROPERTIES OF THE ASSESSEE AOP WAS NOT USED IN RELA TION TO EARNING OF THE INCOME WHICH HAS BEEN BROUGHT TO TAX UNDER THE HEAD INCOME FROM OTHERS SOURCES, DEPRECIATION WAS NOT APPLICABLE TO THE ASS ESSEE. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT TH E OUTSET, IT MAY BE MENTIONED HERE THAT THOUGH VARIOUS CASE LAWS HAS BE EN QUOTED IN FAVOUR OF THE ASSESSEE, NONE OF THEM WERE DISCUSSED. ONE OF THE PRIMARY ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 7 -: CONDITIONS FOR THE APPLICABILITY OF THE PRINCIPLES OF MUTUALITY, IS THAT NO PERSON CAN MAKE A PROFIT FROM HIMSELF, THE PARTICIP ANTS MUST BE MEMBERS, ONCE THE FUNDS OF THE SOCIETY ARE GIVEN FOR THE BUS INESS PURPOSES OF A NON-MEMBER AND THE ASSESSEE RECEIVES ANY COMPENSATI ON EITHER IN THE FORM OF PROFITS OR IN THE FORM OF INTEREST FROM SUC H NON-MEMBER, THE PRINCIPLES OF MUTUALITY CANNOT BE APPLIED TO THAT R ECEIPT FROM THE NON- MEMBER. THIS BEING SO, WE ARE OF THE VIEW THAT THE FINDINGS OF THE LD.CIT(A) ON THIS ISSUE ARE ON RIGHT FOOTING AND DO ES NOT CALL FOR ANY INTERFERENCE. 6. COMING TO THE SECOND ISSUE OF DEPRECIATION, IT I S AN UNDISPUTED FACT THAT THE PROPERTIES OF THE ASSESSEE ARE USED FOR CA RRYING OUT THE ACTIVITIES OF THE SOCIETY AS DIRECTED BY THE HONBLE HIGH COUR T. ONCE THE PROPERTIES OF THE SOCIETY ARE USED FOR THE PURPOSE OF ACTIVITI ES OF THE ASSESSEE, THE SAME WOULD HAVE TO BE TREATED AS BEING USED IN THE BUSINESS OF THE ASSESSEE. IF THIS IS SO, THE INCOME UNDER THE HEAD BUSINESS IN THE HANDS OF THE ASSESSEE, WOULD HAVE TO BE CONSIDERED AND DE PRECIATION LIABLE TO BE ALLOWED. ADMITTEDLY, IF DEPRECIATION IS ALLOWED AN D THE INCOME OF THE ASSESSEE BECOMES NEGATIVE OR LOSS, THE SAME IS AVAI LABLE FOR SET OFF AGAINST THE INCOME FROM THE OTHER HEADS REPRESENTIN G INCOME FROM OTHER SOURCES. THIS BEING SO, THE FINDINGS OF THE LD.CIT (A) IN RESPECT OF THE NON-GRANTING OF THE DEPRECIATION IS ALLOWED AND THE AO IS DIRECTED TO GRANT THE ASSESSEE THE BENEFIT OF DEPRECIATION AS CLAIMED . ITA NOS.1997 & 1998/MDS/2016 ITA NOS.1403 & 1404/MDS/2017 :- 8 -: 7. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 08, 2018, AT CHENNAI. SD/- SD/- ( . ) ( ABRAHAM P.GEORGE ) /ACCOUN TANT MEMBER ( ! ) (GEORGE MATHAN) $ /JUDICIAL MEMBER /CHENNAI, 1 /DATED: JANUARY 08, 2018. TLN * ($23 43 /COPY TO: 1. ' /APPELLANT 4. 5 /CIT 2. ()' /RESPONDENT 5. 3 ($$ /DR 3. 5 ( ) /CIT(A) 6. ! /GF