Delhi Gymkhana Club Ltd., V. DCIT Circle 10 (1),

ITA 3585/DEL/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9582 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2003-2004
• Appeal Filed On: 10-11-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUMAR SANJAY
• Assessee Lawyers: S R WADHWA
• Keywords: Question of law; Capital Gains
• Section: 115JB; 143(1); 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H : NEW DELHI BEFORE SHRI A.D.JAIN, JM AND SHRI R.C.SHARMA, AM ITA NO.3585/DEL/2006 ASSESSMENT YEAR : 2003-04 M/S DELHI GYMKHANA CLUB LIMITED, 2, SAFDARJUNG ROAD, NEW DELHI. PAN NO.AAACD0896L. VS. DY.COMMISSIONER OF INCOME TAX, CIRCLE-10(1), NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.R.WADHWA, ADVOCATE. RESPONDENT BY : SHRI KUMAR SANJAY, SR.DR. ORDER PER R.C.SHARMA, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) DATED 5.9.2006 FOR THE AY 2003-04, WHEREIN ASSESSEE IS AG GRIEVED FOR EXCLUDING VARIOUS INCOME EARNED, FROM THE PRINCIPLE OF MUTUALITY. 2. DURING THE COURSE OF HEARING, THE LD. AR SHRI S. R.WADHWA HAS TAKEN THREE ADDITIONAL GROUNDS AND CONTENDED THAT THE GROUNDS O F APPEAL ARE PURELY LEGAL IN NATURE AND DO NOT REQUIRE ANY DETERMINATION OF NEW FACTS. IT WAS SUBMITTED THAT THESE GROUNDS MAY KINDLY BE ADMITTED KEEPING IN VIE W THE RATIO OF THE HON'BLE SUPREME COURTS JUDGMENT IN THE CASE OF NTPC LTD. V S. CIT (1998) 229 ITR 383 (S.C), WHICH READS AS UNDER:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE APPLICANT BEING AN ASSOCIATION, REGISTERED U/S 25 OF THE COMP ANIES ACT, THE PROVISION OF SECTION 115JB ARE NOT APPLICABLE TO IT S CASE. ITA-3585/D/2006 2 2. ASSUMING THAT SECTION 115JB OF THE ACT IS APPLIC ABLE, THE INCOME WHICH IS EXEMPT FROM TAX DUE TO APPLICATION OF THE PRINCIPLE OF MUTUALITY IS TO BE EXCLUDED IN THE COMPUTATION O F BOOK PROFIT. 3. WITHOUT PREJUDICE TO THE GROUND OF APPEAL NOS.2 & 3, THE PROFIT ON THE SALE OF INVESTMENTS IS NOT INCLUDABLE IN THE COMPUTATION OF BOOK PROFIT. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS RUNNING A RECREATION C LUB FOR ITS MEMBERS AND CLAIMED EXEMPTION OF INCOME EARNED FROM THE MEMBERS ON THE BASIS OF DOCTRINE OF MUTUALITY. RETURN OF INCOME WAS FILED ON 2.12.2003 DECLARING INCOME OF RS.48,16,859/- (INCLUDING CAPITAL GAINS OF RS.4,42, 170) AND COMPUTED BOOK PROFIT U/S 115JB AT RS.49,70,963/- DETERMINED TAX PAYABLE UNDER THE MAT PROVISIONS AT RS.11,78,764/-. SINCE THE TAX UNDER THE NORMAL PRO VISIONS WAS LESS THAN THE TAX COMPUTED AS PER THE MAT PROVISIONS, THE ASSESSEE PA ID TAXES UNDER MAT, THE RETURN WAS PROCESSED U/S 143(1) OF THE IT ACT. TH E ASSESSEE COMPANY VIDE ITS SUBMISSIONS DATED 6.1.2006 HAS FILED REVISED COMPUT ATION, SEEKING EXEMPTION OF INCOME WHICH REPRESENTS PROFIT ON SALE OF INVESTMEN TS VIZ. SALE OF SHARES AND PROFIT EARNED ON OTHER INVESTMENTS. THE ASSESSEE STATED T HAT WE HAVE BEEN OFFERING FOR TAX INCOME FROM THE CLUBS INVESTMENTS, SUCH AS INC OME FROM FDRS IN BANKS, DIVIDENDS, INCOME FROM INVESTMENTS IN MUTUAL FUNDS, INTEREST FROM TAXABLE GOVERNMENT SECURITIES ETC. UNDER THE ERRONEOUS BELI EF THAT IT IS LIABLE TO TAX UNDER THE INCOME-TAX ACT. RECENTLY HOWEVER, IT HAS COME TO OUR NOTICE THAT THE SUPREME COURT HAD HELD IN ITS JUDGMENT IN THE CASE OF CIT V S. CHELMSFORD CLUB LTD. 243 ITR 89 THAT THE INCOME OF A CLUB FROM INTEREST ON F IXED DEPOSITS, NSCS AND DIVIDENDS, IS ALSO EXEMPT ON THE PRINCIPLE OF MUTUA LITY. THE ASSESSEE WAS SPECIFICALLY ASKED BY THE AO IN THIS REGARD TO JUST IFY AND SHOW CAUSE WHY THE COMPANYS CONTENTION MAY NOT BE REJECTED IN VIEW OF THE FACT THAT SAME ARE NOT DERIVED FROM INCOME OF THE CLUB. ITA-3585/D/2006 3 4. THE AO HELD THAT EXEMPTION IS AVAILABLE TO THE C LUBS ON INCOME RECEIVED BY WAY OF CLUB ACTIVITIES, SUBSCRIPTION FROM MEMBERS, WHEREAS, NATURE OF INCOME CHANGES, ONCE IT IS DERIVED FROM ACTIVITIES OTHER T HAN SUCH PRESCRIBED IN THE ACT FOR AVAILING EXEMPTION. PROFIT EARNED FROM SOURCES OTH ER THAN SERVICES PROVIDED TO THE MEMBERS OF THE CLUB (LIKE FURTHER INVESTMENTS, INTE REST INCOME) CANNOT BE HELD TO BE ELIGIBLE FOR EXEMPTION AND ATTRACTS VIOLATION OF THE DOCTRINE OF MUTUALITY PRINCIPLE. WITH THE ABOVE REMARKS, THE INCOME OF T HE ASSESSEE WAS ASSESSED AS PER THE COMPUTATION OF INCOME FILED ORIGINALLY ON 2.12. 2003. 5. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE ACTION OF THE AO BY OBSERVING THAT THE ISSUE AT HAND IS THE INTEREST IN COME AND OTHER INCOME DERIVED BY THE ASSESSEE FROM FDRS/INVESTMENTS VIS--VIS PRINCI PLE OF MUTUALITY AND NOT INCOME FROM ANY HOUSE PROPERTY TO WHICH THE DECISIO N OF CHELMSFORD CLUB VS. CIT RELATES. IN VIEW OF THE ABOVE, THE CIT(A) WAS OF THE VIEW THAT THE FACTS OF CASES OF SPORTS CLUB OF GUJARAT LIMITED VS. CIT, 17 1 ITR 504 AND RAJPATH CLUB LTD. VS. CIT, 211 ITR ARE APTLY APPLICABLE TO THE F ACTS OF THE PRESENT CASE. IN VIEW OF ABOVE DISCUSSIONS, THE CIT(A) UPHELD THE ACTION OF THE AO IN TREATING THE INTEREST INCOME, INCOME DERIVED FROM INVESTMENTS AN D PROFITS ON SALE OF INVESTMENTS ETC., AS INCOME FROM OTHER SOURCES; N OT COMING WITHIN THE PURVIEW OF MUTUALITY. 6. AGGRIEVED BY THE ABOVE ORDER OF THE CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. THE LEARNED AR SHRI WADHWA DRAWN OUR ATTENTION TO THE CERTIFICATE OF INCORPORATION OF THE CLUB UNDER THE COMPANIES ACT, WHEREIN CLUB WAS INCORPORATED AS LIMITED COMPANY BY GUARANTEE, HAS N O SHARE CAPITAL AND NO PROFIT MOTIVE. HE CONTENDED THAT THE CLUB CANNOT DISTRIBU TE ANY DIVIDEND AND THE SPECIFIC REQUIREMENTS OF SECTION 25(1) OF THE COMPANIES ACT ARE SATISFIED WHICH READ AS UNDER:- ITA-3585/D/2006 4 25(1) WHERE IT IS PROVED TO THE SATISFACTION OF TH E CENTRAL GOVERNMENT THAT AN ASSOCIATION (A) IS ABOUT TO BE FORMED AS A LIMITED COMPANY FOR PROMOTING COMMERCE, ART, SCIENCE, RELIGION, CHARITY OR ANY OT HER USEFUL OBJECT, AND (B) INTENDS TO APPLY ITS PROFITS, IF ANY, OR OTHER INCOME IN PROMOTING ITS OBJECTS, AND TO PROHIBIT THE PAYMENT OF ANY DIVIDEND TO ITS MEMBERS, THE CENTRAL GOVERNMENT MAY, BY LICENSE , DIRECT THAT THE ASSOCIATION MAY BE REGISTERED AS A COMPANY WITH LIM ITED LIABILITY, WITHOUT THE ADDITION TO ITS NAME OF THE WORD LIMIT ED OR THE WORDS PRIVATE LIMITED. 7. THE LEARNED AR FURTHER SUBMITTED THAT VIDE SECTI ON 656 OF THE COMPANIES ACT, 1956, THE COMPANIES INCORPORATED AND REGISTERE D UNDER THE REPEALED ENACTMENTS SHALL CONTINUE TO REMAIN INCORPORATED AN D UNCHANGED. THIS COMPANY WAS REGISTERED UNDER THE COMPANIES ACT 1882 (VI OF 1882) AND BECAUSE OF SECTION 656, READ WITH SECTION 657(B) OF THE COMPANIES ACT (COPY AT ANNEXURE III), ITS STATUS CONTINUES TO REMAIN THE SAME AND UNAFFECTED. SECTION 115JB OF THE INCOME- TAX ACT, 1961 UNDER WHICH THE ASSESSING OFFICER HAS MADE THE ASSESSMENT, IS APPLICABLE TO COMPANIES WHO ARE LIABLE TO INCOME TA X ON THEIR TOTAL INCOME AS COMPUTED UNDER THE INCOME-TAX ACT, 1961. THIS IS P ROVIDED U/S 115JB(1). THE TAX ON SUCH TOTAL INCOME HAS TO BE LESS THAN 10% OF ITS BOOK PROFIT. ONLY THEN SECTION 115JB IS APPLICABLE. IN THE CASE OF THE AS SESSEE COMPANY, ON ITS INCOME FROM PROVIDING FOOD, RECREATIONAL AND RESIDENTIAL F ACILITIES TO ITS MEMBERS IS EXEMPT FROM TAX ON THE DOCTRINE OF MUTUALITY AND TH ERE IS NO MATTER OF DISPUTE. HE FURTHER SUBMITTED THAT CLUBS OTHER INCOME FROM INT EREST, DIVIDENDS, ETC, IS ALSO NOT LIABLE TO TAX AND THE COMPANY DOES NOT SUFFER FROM ANY TAINT OF COMMERCIALITY. THE SURPLUS FUND OF INTEREST AND OTHER INVESTMENT INCOM E HAD BEEN EARNED WHICH IS LARGELY OUT OF THE SUBSCRIPTION AND REGISTRATION FE E FROM THE MEMBERS AS WAS DEMONSTRATED DURING THE COURSE OF HEARING (PAGE-9 O F THE PRINTED ACCOUNTS OF 2003-04). AS PER LEARNED AR, IF THE MEMBERS SUBSCRI PTION AND REGISTRATION FEE WHICH ARE BY EVERY ACCOUNT SUBJECT TO THE PRINCIPLE OF MUTUALITY, ARE EXCLUDED, THERE WILL BE A LOSS NOT ONLY IN THE ASSESSMENT YEA R UNDER CONSIDERATION BUT ALSO IN ITA-3585/D/2006 5 THE PRECEDING YEAR. THE QUESTION OF COMPUTATION OF INCOME U/S.115JB, THEREFORE, DOES NOT ARISE. LEARNED AR FURTHER ALLEGED THE ACT ION OF CIT(A) IN EXCLUDING VARIOUS INCOME OF ASSESSEE CLUB FROM PRINCIPLE OF M UTUALITY WITHOUT RECORDING ANY FINDING THAT SAME ARE TAINTED BY COMMERCIALITY. 8. ON THE OTHER HAND, LEARNED DR SHRI KUMAR SANJAY RELIED ON THE ORDERS OF THE LOWER AUTHORITIES TO THE EFFECT THAT INTEREST E ARNED ON FDRS, DIVIDEND INCOME, INCOME FROM GOVERNMENT SECURITIES AND PROFIT ON SAL E OF INVESTMENT WERE CORRECTLY HELD AS NOT COVERED BY THE PRINCIPLE OF MUTUALITY. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFU LLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ADDITIONAL GROUNDS R AISED BEFORE US ARE PURELY LEGAL ISSUES WHICH GOES TO THE ROOT OF MATTER, KEEPING IN VIEW DECISION OF HON'BLE SUPREME COURT IN CASE OF NTPC LTD. (SUPRA), WE ADMI T THE ADDITIONAL GROUNDS FOR DECISION. FROM THE RECORD, WE FOUND THAT ASSESSEE COMPANY IS RUNNING A RECREATIONAL CLUB FOR ITS MEMBERS. IN ADDITION TO ITS INCOME ON ACCOUNT OF FOOD SALE, ROOM SALE TO THE MEMBERS AND THEIR GUESTS, IT HAS ALSO EARNED INTEREST INCOME ON THE FDRS PUT WITH THE BANK, DIVIDENDS FROM INVES TMENT IN SHARES AND GOVERNMENT SECURITIES. IN RESPECT OF SOME OF THE S HARES WHICH WERE SOLD DURING THE YEAR, THE ASSESSEE HAS ALSO EARNED CAPITAL GAIN S THEREIN. CONTENTION OF THE AO AND CIT(A) WAS THAT INTEREST, DIVIDEND, INCOME FROM GOVERNMENT SECURITIES AND PROFIT ON SALE OF INVESTMENT DOES NOT FALL WITHIN T HE PARAMETER OF DOCTRINE OF MUTUALITY, ACCORDINGLY THE SAME WAS HELD TO BE LIAB LE TO TAX, AND ON BOOK PROFIT TAX WAS LEVIED U/S 115JB OF IT ACT. THE ASSESSEE CLUB IS INCORPORATED UNDER THE COMPANIES ACT AND WAS GRANTED CERTIFICATE UNDER SEC TION 25 OF THE COMPANIES ACT. UNDER THE PROVISIONS OF SECTION 25 OF THE COM PANIES ACT, WHERE THE CENTRAL GOVERNMENT FOUND THAT AN ASSOCIATION WAS INCORPORAT ED FOR PROMOTING COMMERCE, ARTS, SCIENCE, RELIGION, CHARITY OR ANY OTHER USEFU L OBJECTS AND INTENDS TO APPLY ITS PROFIT IN PROMOTING ANY OBJECT AND TO PROHIBIT ANY PAYMENT TO ITS MEMBERS, DIRECT THAT SUCH ASSOCIATION MAY BE REGISTERED AS A COMPAN Y WITH LIMITED LIABILITY. UNDER ITA-3585/D/2006 6 THE GENERAL LAW RELATING TO MUTUAL CONCERNS, THE SU RPLUS EARNED BY THE MUTUAL CONCERN CANNOT BE REGARDED AS PROFITS AND GAINS FOR THE PURPOSE OF CHARGING SECTION 4 OF THE IT ACT INSOFAR AS THE CONTRIBUTORS ARE TO RECEIVE BACK A PART OF THEIR OWN CONTRIBUTIONS AND THERE IS COMPLETE IDENT ITY BETWEEN THE CONTRIBUTORS AND RECIPIENTS. THUS, A MUTUAL CONCERN CAN CARRY ON THE ACTIVITY WITH ITS MEMBERS, THOUGH THE SURPLUS ARISING FROM SUCH ACTIVITY IS NO T ITS TAXABLE INCOME. HONBLE KARNATAKA HIGH COURT IN THE CASE OF CANARA BANK GOL DEN JUBILEE S.W. FUND 308 ITR 202 OBSERVED THAT THE CRUCIAL TEST FOR MUTUALIT Y IS THAT ALL THE CONTRIBUTORS TO THE COMMON FUND MUST BE ENTITLED TO PARTICIPATE IN THE SURPLUS AND THAT ALL THE PARTICIPATORS IN THE SURPLUS MUST BE CONTRIBUTORS T O THE COMMON FUND. THUS, THERE MUST BE COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND PARTICIPATORS. HONBLE COURT HELD THAT UNDER THE PRINCIPLE OF MUTUALITY WH ERE THE SURPLUS FUND OF SOCIETY IS INVESTED IN TERM DEPOSIT WITH BANK, INTEREST INC OME ON INVESTMENTS AND DIVIDEND INCOME ON SHARES ARE NOT TAXABLE. 10. THE HON'BLE SUPREME COURT IN THE CASE OF CHELMS FORD CLUB 243 ITR 89 OBSERVED THAT ONCE THE PRINCIPLE OF MUTUALITY IS BE ING ESTABLISHED, IT IS IMMATERIAL WHAT PARTICULAR FORM THE ASSOCIATION TAKES. IN THE INSTANT CASE, ASSESSEE CLUB WHICH IS FORMED AS A LIMITED COMPANY, ITS SURPLUS ARISING UNDER THE PRINCIPLE OF MUTUALITY, CANNOT BE BROUGHT TO TAX NET EVEN U/S 11 5JB OF IT ACT. 11. UNDER THE INCOME TAX ACT, 1961, WHAT IS TAXABLE IS INCOME, PROFITS OR GAINS EARNED OR ARISING, ACCRUING TO A PERSON, AND WHERE A NUMBER OF PERSONS COMBINED TOGETHER AND CONTRIBUTE TO COMMON FUND FOR FINANCIN G OF SOME VENTURE OR OBJECTS HAVING NO DEALING OR RELATION WITH OUTSIDE BODY, TH EN ANY SURPLUS RETURN TO THOSE PERSONS CANNOT BE REGARDED IN ANY SENSE AS PROFIT. THE PROVISIONS OF SECTION 2(24) RECOGNIZE THE PRINCIPLE OF MUTUALITY AND HAS EXCLUD ED ALL BUSINESS INVOLVING SUCH PRINCIPLE FROM THE PURVIEW OF THE ACT, EXCEPT THOSE MENTIONED IN CLAUSE (VII) OF SECTION 2(24). UNDER THE DOCTRINE OF MUTUALITY, TH ESE THREE CONDITIONS SHOULD CO- EXIST BEFORE AN ACTIVITY CAN BE BROUGHT UNDER THE C ONCEPT OF MUTUALITY I.E. FIRST, NO ITA-3585/D/2006 7 PERSON CAN EARN FROM HIMSELF, SECOND NO PROFIT MOTI VATION, THIRD NO SHARE OF PROFIT. THE FIRST CONDITION WITH REGARD TO NO PERSON CAN EA RN FROM HIMSELF MEANS, THERE SHOULD BE COMPLETE IDENTITY BETWEEN THE CONTRIBUTOR S AND PARTICIPATORS. IN THE INSTANT CASE BEFORE US, THERE IS NO FINDING BY ANY OF THE LOWER AUTHORITIES TO THE EFFECT THAT THERE IS NO IDENTITY BETWEEN THE CONTRI BUTORS AND PARTICIPATORS AS FAR AS THE INCOME EARNED BY THE ASSESSEE AS INTEREST ON DE POSIT, DIVIDEND ON SHARES OR PROFIT ON SALE OF SHARES ARE CONCERNED. THERE IS A LSO NO DISPUTE TO THE FACT THAT SOURCE OF THE FUND INVESTED IN BANK FDR OR SHARES I S ONLY FROM THE MEMBERS OF THE CLUB AND THE ASSESSEE CLUB HAS NOT RECEIVED ANY DON ATION OR MONETARY GRANT FROM ANY OUTSIDE SOURCE APART FROM THE MEMBERS. IT IS T HE MEMBERS CONTRIBUTION WHICH HAS BECOME THE CORPUS FUND AND THE SAME WAS DEPOSIT ED IN THE BANK OR INVESTED IN SHARES. CLUB WAS IN RECEIPT OF THE INTEREST ON DEP OSIT WITH THE BANK AND DIVIDEND INCOME ON THE SHARES AND GOVERNMENT SECURITIES. IT ALSO EARNED PROFIT ON SALE OF SOME OF SHARES. IN THE INSTANT CASE, THERE IS NO DI SPUTE TO THE FACT THAT ASSESSEE CLUB WAS PROVIDING RECREATIONAL AND REFRESHMENT FACILITI ES TO ITS MEMBERS AND GUESTS. ITS FACILITIES WERE NOT AVAILABLE TO NON MEMBERS AN D THE CLUB WAS RUN ON NO PROFIT NO LOSS BASIS. IN THAT THE MEMBERS PAID FOR ALL T HEIR EXPENSES AND WERE NOT ENTITLED TO ANY SHARE IN THE PROFITS. SURPLUS IF A NY WAS USED FOR THE MAINTENANCE AND DEVELOPMENT OF THE CLUB. THUS, THE ASSESSEE CL UB IS A MUTUAL CONCERN AND THE PRINCIPLE OF MUTUALITY AS DEFINED IN SECTION 2(24) OF THE IT ACT IS APPLICABLE TO IT WHICH HAS EXCLUDED ALL BUSINESS INVOLVING SUCH PRIN CIPLE FROM THE PURVIEW OF THE ACT EXCEPT THOSE MENTIONED IN CLAUSE (VII) OF SECTI ON 2(24). ISSUE WITH REGARD TO TAXABILITY OF INTEREST INCOME FROM DEPOSITS IN THE BANK HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF COUNTRY CLU B IN ITA NO.84/2003 VIDE ORDER DATED 11.5.2007 AFTER TAKING INTO ACCOUNT THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CHELMSFORD CLUB (SUPRA) AND IT WAS HELD THAT INTEREST INCOME EARNED BY THE ASSESSEE FROM THE DEPOSITS IN BANK WA S COVERED BY THE PRINCIPLE OF MUTUALITY, NOT LIABLE TO TAX. THE DECISION READS A S UNDER:- ITA-3585/D/2006 8 1. AFTER HEARING LEARNED COUNSEL FOR THE PARTIES W E ADMIT THIS APPEAL AND FRAME THE FOLLOWING SUBSTANTIAL QUESTION OF LAW:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE INCOME TAX APPELLATE TRIBUNAL ERRED IN LAW IN HOLDI NG THAT THE AMOUNT RECEIVED BY WAY OF INTEREST FROM BANKS ON TE MPORARY DEPOSIT OF THE FUNDS IS NOT EXEMPTED FROM TAX ON THE PRINC IPLE OF MUTUALITY ? 2. SINCE A SHORT QUESTION OF LAW IS INVOLVED, FILIN G OF PAPER BOOKS IS DISPENSED WITH. 3. THE ASSESSEE IS AGGRIEVED BY AN ORDER DATED 7 TH MARCH, 2002 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH A IN ITA NOS.7486 & 7487/DEL/1995 RELEVANT FOR THE ASSES SMENT YEARS 1991-92 AND 1992-93. 4. THE ASSESSEE CLUB EARNS INCOME FROM ITS MEMBERS AND THEIR GUESTS. SURPLUS FUNDS ARE DEPOSITED IN BANKS AND T HESE SURPLUS FUNDS ARE ATTRIBUTABLE TO AMOUNTS RECEIVED FROM MEMBERS O F THE ASSESSEE CLUB TOWARDS THEIR DUES AND FOR EXPENSES INCURRED B Y MEMBERS AND THEIR GUESTS IN RESTAURANTS AND OTHER FACILITIES OF THE CLUB LIKE BILLIARD ROOM, TENNIS AND SQUASH COURTS AND SWIMMING POOL, E TC. THERE IS NO DISPUTE ABOUT THE FACT THAT ALL THESE FACILITIES AR E AVAILABLE ONLY TO MEMBERS OF THE ASSESSEE CLUB AND THEIR GUESTS. 5. APPLYING THE DOCTRINE OF MUTUALITY, THE TRIBUNAL HELD THAT INCOME RECEIVED BY THE ASSESSEE FOR THE USE OF FACI LITIES BY GUESTS OF THE MEMBERS IS EXEMPT FROM TAXATION. THIS BEING TH E POSITION, WE ARE OF THE VIEW THAT DEPOSITS MADE AS A RESULT OF T HIS INCOME RECEIVED AND THE INTEREST RECEIVED THEREON FROM THE BANKS CA NNOT BE SAID TO BE OUTSIDE THE DOCTRINE OF MUTUALITY . 6. LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED UPON DIRECTOR OF INCOME TAX V. ALL INDIA ORIENTAL BANK OF COMMERCE W ELFARE SOCIETY, [2003] 130 TAXMAN 575 (DELHI), IN WHICH TH IS COURT HAS RELIED UPON IN CHELMSFORD CLUB V. CIT [2000] 243 IT R 89 (SC). IT WAS HELD, FOLLOWING THE DECISION OF THE SUPREME COU RT, THAT WHERE A NUMBER OF PERSONS COMBINE TO CONTRIBUTE TO A COMMON FUND AND HAVE NO DEALINGS OR RELATIONS WITH ANY OTHER BODY, THEN ANY SURPLUS GENERATED CANNOT, IN ANY SENSE BE REGARDED AS PROFI TS CHARGEABLE OF TAX. ON THIS BASIS, THE DOCTRINE OF MUTUALITY WAS APPLIED TO THE FACTS OF THAT CASE. WE SEE NO DISTINCTION IN THE DECISIO N RENDERED BY THIS ITA-3585/D/2006 9 COURT IN ALL INDIA ORIENTAL BANK OF COMMERCE WELFAR E SOCIETY AND THE PRESENT CASE . 7. UNDER THE CIRCUMSTANCES, WE ANSWER THE QUESTION OF LAW IN THE AFFIRMATIVE, IN FAVOUR OF THE ASSESSEE AND AGAI NST THE REVENUE. 8. THE APPEAL IS DISPOSED OF. (EMPHASIS SUPPLIED BY US) 12. THUS, ON THE PRINCIPLE OF MUTUALITY, INTEREST I NCOME FROM DEPOSITS OF FUND WITH THE BANK WILL NOT ATTRACT INCOME TAX, IF THERE IS NO TAINT OF COMMERCIALITY. IN THE CASE OF ALL INDIA ORIENTAL BANK OF COMMERCE WEL FARE SOCIETY 130 TAXMAN 575, HON'BLE DELHI HIGH COURT HELD THAT NO SUBSTANT IAL QUESTION OF LAW ARISES ON THE DECISION OF TRIBUNAL THAT PRINCIPLE OF MUTUALIT Y APPLIES TO THE INTEREST INCOME DERIVED FROM THE DEPOSITS MADE BY IT OUT OF THE CON TRIBUTIONS MADE BY THE MEMBERS OF SOCIETY. 13. MUTUALITY OFFERS A TAX EXEMPTION AS LONG AS ITS MUTUAL ASSOCIATION IS RETAINED AND ITS INCOME IS NOT TAINTED BY COMMERCIA LITY. THE OBJECT CLAUSE OF THE MEMORANDUM AND ARTICLE OF ASSOCIATION EMPOWERED THO SE IN THE MANAGEMENT OF THE ASSESSEE CLUB TO INVEST AND DEAL WITH THE MONEY S OF THE CLUB NOT IMMEDIATELY REQUIRED, IN SUCH MANNER AS MAY BE DETERMINED BY TH EM FROM TIME TO TIME. UNDER THIS CLAUSE, THE INVESTMENT NEED NOT BE CONFINED TO INVESTMENT BY WAY OF DEPOSITS WITH BANKS. IT CAN TAKE ANY OTHER FORM OR SHAPE SU CH AS INVESTMENT IN SHARES, GOVERNMENT SECURITIES ETC. AND WHERE ANY INCOME IS DERIVED FROM SUCH INVESTMENT WHETHER BY WAY OF INTEREST, DIVIDEND OR CAPITAL GAI N, THE SAME CANNOT BE SAID TO BE OUTSIDE THE DOCTRINE OF MUTUALITY. NOWHERE THE ACT IVITY OF ASSESSEE CLUB WAS FOUND BY ANY OF THE LOWER AUTHORITIES, AS TAINTED BY COMM ERCIALITY, IT IS ALSO AN ADMITTED FACT THAT THE ACTIVITIES OF ASSESSEE CLUB DOES NOT COME WITHIN THE SCOPE OF BUSINESS REFERRED TO IN SECTION 2(24)(VII). WHEN THE DIVIDE ND INCOME ON SHARES WAS HELD TO BE NOT LIABLE TO TAX UNDER THE PRINCIPLE OF MUTUALI TY IN CASE OF CANARA BANK (SUPRA), THERE IS NO REASON TO EXCLUDE THE GAIN ARI SING ON THE SALE OF SUCH SHARES, FROM THE PRINCIPLE OF MUTUALITY. ONCE THE INCOME I S FOUND TO BE COVERED BY ITA-3585/D/2006 10 PRINCIPLE OF MUTUALITY, THE SAME CANNOT BE BROUGHT TO TAX EVEN UNDER THE PROVISIONS OF SECTION 115JB OF IT ACT. ACCORDINGLY , THERE IS NO MERIT IN THE ACTION OF LOWER AUTHORITIES FOR BRINGING THE INCOME EXEMPT UNDER PRINCIPLE OF MUTUALITY, WITHIN THE PURVIEW OF SECTION 115JB OF I T ACT. 14. IN THE CASE OF ASSESSEE CLUB, HON'BLE SUPREME C OURT IN ASSESSEES OWN CASE REPORTED AT 155 ITR 373 HAS OBSERVED THAT OBJECT OF THE ASSESSEE CLUB WAS MAINLY TO PROVIDE RECREATION OF ITS MEMBERS BY PROMOTING V ARIOUS TYPES OF SPORTS AND PASTIME AND REFRESHMENT FOR THE MEMBERS. THE INCOM E FROM PROVIDING REFRESHMENT TO ITS MEMBERS WAS HELD EXEMPT FROM INC OME TAX ON THE BASIS OF DOCTRINE OF MUTUALITY. EVEN INCOME EARNED AS A ROO M RENT WHICH WERE MADE AVAILABLE TO THE MEMBERS ON PAYMENT OF FIXED MONTHL Y CHARGES AND ALSO INCOME FROM PROVIDING VARIOUS FACILITIES, WERE HELD TO BE COVERED BY PRINCIPLE OF MUTUALITY. 15. IN VIEW OF THE ABOVE DISCUSSION, AND RESPECTFUL LY FOLLOWING THE PROPOSITION OF LAW LAID DOWN BY JURISDICTIONAL HIGH COURT AND K ARNATAKA HIGH COURT AS DISCUSSED HEREINABOVE, THE APPEAL OF ASSESSEE IS AL LOWED IN TERMS INDICATED HEREINABOVE. DECISION PRONOUNCED IN THE OPEN COURT ON 30 TH SEPT,2009. SD/- SD/- (A.D.JAIN) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30.9.2009. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR ITA-3585/D/2006 11