New Brahmakshatriya Co.Op.Hsg.So.Ltd., Ahmedabad V. The Dy.CIT.,(OSD)Circle-9, Ahmedabad

ITA 4438/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0081 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 21-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 17-12-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R K DHANESTA
• Assessee Lawyers: SN SOPARKARAR
• Keywords: Capital asset; Charitable institution; Initiation of penalty proceedings
• Section: 143(3)

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M NEW BRAHMAKSHATRIYA CO.OP. HOUSING SOCIETY LTD., PRITAM NAGAR ROAD, ELLISHBRIDGE, AHMEDABAD. VS. DY CIT (OSD), CIRCLE- 9, AHMEDABAD. (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S. N. SOPARKAR,AR REVENUEBY:- SHRI R. K. DHANESTA, DR O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS:- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE ACTION OF AO IN ADDING PREMIUM ON TRANSFER OF LAND AMOUNTING TO RS.29,85,125/- AS INCOME OF THE APPELLANT. (2) BOTH THE LOWER AUTHORITIES HAVE ERRED IN NOT FOLLOW ING BINDING DECISION OF HON. JURISDICTIONAL HIGH COURT IN THE C ASE OF ADARSH CO-OP. HOUSING SOCIETY 213 ITR 677 AND DECISIONS OF THIS HON. ITAT IN THE APPELLANTS OWN CASE ON IDENTICAL ISSUE . (3) BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AND ON FACTS IN NOT PROPERLY APPRECIATING AND CONSIDERING VARIOUS SUBMI SSIONS, EVIDENCES AND SUPPORTING PLACED ON RECORD DURING TH E COURSE OF ASSESSMENT PROCEEDINGS AND NOT PROPERLY APPRECIATIN G VARIOUS FACTS AND LAW IN ITS PROPER PERSPECTIVE. (4) LEVY OF INTEREST U/S 234A/B/C OF THE ACT IS NOT JUS TIFIED. ITA NO.4438/AHD/2007 ASST. YEAR :2004-05 ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 2 (5) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) OF THE ACT WITHOUT RECORDING MANDATORY SATISFACTION CONTEM PLATED UNDER THE SAID SECTION. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS WHETHE R INCOME OF RS.29,85,125/- IS EXEMPT ON ACCOUNT OF MUTUALITY. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A CO-OPERATIVE HOUSING SOCIETY REGISTERED UNDER THE BOMBAY CO-OPER ATIVE SOCIETY ACT, 1925. THE SOCIETY IS TENANT OWNERSHIP SOCIETY WHE RE IT IS THE OWNER OF THE LAND. IT ACQUIRED LAND AND LEASED OUT TO SOME O F ITS MEMBERS FOR A PERIOD OF 998 YEARS. CERTAIN AMOUNT WAS COLLECTED F ROM THE MEMBERS WHEN LEASE DEEDS WERE EXECUTED. THE SOCIETY PERMITT ED DISPOSITION OR DEVOLUTION OF THE OF THE LEASE OF ANY PLOT WITH BUI LDING CONSTRUCTED THEREON, OR OTHERWISE, AS PER ITS REGULATIONS, FROM ANY EXISTING MEMBER TO ANOTHER WHO REGISTER HIMSELF AS A MEMBER OF THE SOC IETY. FOR ASST. YEAR 2004-05 THE ASSESSEE FILED RETURN OF INCOME DECLARI NG TOTAL INCOME AT RS.63,035/-. THIS RETURN WAS PROCESSED UNDER SECTIO N 143(1)(A) OF THE ACT. HOWEVER, THE RETURN WAS PICKED FOR SCRUTINY. I T WAS NOTED BY THE AO THAT IN THIS RETURN ASSESSEE HAD GIVEN A NOTE THAT HE RECEIVED A PREMIUM OF RS.29,85,125/- FROM A MEMBER ON TRANSFER OF PLOT NO .33 TO ANOTHER PURCHASER AS PER BYE LAWS OF THE SOCIETY. THIS AMOU NT RECEIVED FROM OUTGOING MEMBER WAS CREDITED TO SHARE PREMIUM ACCOU NT AND WAS SHOWN ON THE LIABILITY SIDE OF THE BALANCE SHEET. T HE ASSESSEE HAD GIVEN FOLLOWING NOTE IN THE RETURN OF INCOME:- DURING THE YEAR UNDER ASSESSMENT, SOCIETY HAS RECE IVED PREIUM OF RS.29,85,125/- FROM MEMBER ON TRANSFER OF PLOT NO.3 3 AS SHOWN IN BALANCE SHEET AS PER BY LAWS AND IS NOT ADDED IN AB OVE COMPUTATION OF INCOME BEING TAX FREE ON PRINCIPLES OF MUTUALITY AS DECIDED BY HON. TRIBUNAL, AHMEDABAD BENCH IN SOCIETYS OWN CASE IN THE ASST. YEARS ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 3 1989-90, 1991-92 & 1996-97 (ITA NOS.890/AHD/1994 AN D 3300/AHD/1997) FOLLOWING THE DECISION OF HON. GUJAR AT HIGH COURT IN THE CASE OF ADARSH CO-OP. HOUSING SOCIETY LTD., SURAT ( ITA NO.159 OF 1982). 4. THE AO CARRIED OUT ENQUIRIES AND REQUIRED THE AS SESSEE TO EXPLAIN AS TO WHOM AND BY WHOM THE LAND WAS SOLD. IT WAS EX PLAINED TO THE AO THAT PURCHASER IS ONE ISCON CONSTRUCTION LTD. WHERE AS THE SELLERS ARE SHRI ANANGBHAI NARENDRABHAI DESAI, ANGANABEN, SHUBHABEN AND DARSHINIBEN (DAUGHTERS OF A.N. DESAI). SECONDLY, THE PURCHASER NAMELY ISCON CONSTRUCTION LTD. HAD CONSTRUCTED A MULTI-STOREYED SHOPPING COMPLEX IN WHICH THERE ARE 50-60 DIFFERENT OCCUPANTS WHO ARE N OT THE MEMBERS OF THE SOCIETY BUT THEY ARE ENJOYING LAND OF THE SOCIETY. IT WAS ALSO EXPLAINED TO THE AO THAT ONLY INDIVIDUAL PERSON CAN BECOME MEMBE R EVEN THOUGH INDIVIDUAL OR NON-TRADING AOP, OR A COMPANY MAY HOL D THE LAND. THE PERSON WHOSE NAME IS ENTERED IN THE MEMBERS REGISTE R WILL BE TREATED AS REPRESENTATIVE OF SUCH AOP OR COMPANY AS THE CASE M AY BE. SHRI JATIN R. GUPTA, DIRECTOR OF ISCON CONSTRUCTION LTD. WAS SUBS EQUENTLY ENTERED AS MEMBER OF THE SOCIETY. THE ASSESSEE ALSO POINTED OU T TO THE AO THAT SHRI JATIN R. GUPTA HAS NOT BEEN GIVEN ANY BENEFIT OF TH E SOCIETY WHICH ARE AVAILABLE TO OTHER REGULAR MEMBERS. ON THE ABOVE BA SIS THE AO FOUND THAT OCCUPANTS OF VARIOUS SHOPS ON THE COMMERCIAL COMPLE X CONSTRUCTED BY ISCON CONSTRUCTION LTD. ON THE LAND OF THE SOCIETY ARE NOT THE MEMBERS OF THE SOCIETY AND, THEREFORE, PARTICIPATORS ARE DIFFE RENT FROM THE CONTRIBUTORS AND ACCORDINGLY THE PRINCIPLES OF MUTUALITY IS LOST AS HELD BY HON. GUJARAT HIGH COURT IN THE CASE OF RAJPATH CLUB 211 ITR 379 AND SPORTS CLUB OF GUJARAT 171 ITR504. HE ACCORDINGLY TAXED THE PREMIU M RECEIPT OF RS.29,85,125/- AS INCOME OF THE SOCIETY. 5. LD. CIT(A) CONFIRMED THE ORDER OF THE AO ON THE GROUND THAT PRINCIPLES OF MUTUALITY IS NOT FULFILLED BECAUSE CO NTRIBUTORS AND ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 4 PARTICIPATORS ARE DIFFERENT. THE SHOP OWNERS ARE TH E OWNERS OF THE LAND AS OCCUPIERS-CUM-LEASEHOLDER OF THE SOCIETY BUT THEY A RE NOT THE MEMBERS OF THE SOCIETY AND HENCE THEY ARE NOT PARTICIPATORS. T HUS EVEN THOUGH ONE LIMB I.E. CONTRIBUTION IS MADE BY THE OUTGOING MEMB ER IS SATISFIED BUT THE BENEFIT SHOULD COME TO THE SAME MEMBER, IS NOT SATI SFIED. THE ASSESSEE HAD RELIED ON THE DECISION OF HON. GUJARAT HIGH COU RT IN ADARSH CO-OP. HOUSING SOCIETY 213 ITR 677 BUT LD. CIT(A) DISTINGU ISHED IT BY HOLDING THAT THE ISCON CONSTRUCTION LTD. OR OTHER PURCHASER S OF THE SHOPPING COMPLEX ARE NOT THE MEMBERS OF THE SOCIETY AND, THE REFORE, ABOVE DECISION WOULD NOT BE APPLICABLE. IN THIS REGARD WE REFER TO PARA 21 & 23 FROM THE ORDER OF LD. CIT(A) AS UNDER :- 21. IN THE CASE OF ADARSH CO-OP. HOUSING SOCIETY L TD. HON. COURT TOOK NOTE OF THE FACT THAT UNDER THE REGULATIONS OF ADAR SH CO-OP. HOUSING SOCIETY, A PLOT OF LAND COULD BE TRANSFERRED BY AN EXISTING MEMBER TO ANOTHER, WHO REGISTERED HIMSELF AS A MEMBER OF THE SOCIETY AND CERTAIN PERCENTAGE OF THE AMOUNT RECEIVED BY MEMBERS ON TRA NSFER OF THE LEASE FROM THEMSELVES TO OTHERS WAS TO BE GIVEN TO THE SO CIETY. BUT IN THE PRESENT CASE, WHEN THE PERSONS TO WHOM THE PLOT OF LAND HAS BEEN TRANSFERRED ARE NOT THE MEMBERS THERE IS NO QUESTIO N OF EXTENDING COMMON AMENITIES TO THEM. THE PLOT OF LAND IS TRANS FERRED TO THE COMPANY AS PER SALE DEED DATED 12/12/2003. BY PERMITTING SE LLING OF PLOT TO A CONSTRUCTION COMPANY, TRYING TO LEGALIZE THE TRANSF ER BY INCORPORATING DIRECTOR OF THE COMPANY AS MEMBER AND THEN EXPELLIN G HIM WHEN A COMMERCIAL COMPLEX IS CONSTRUCTED IS ALL IN GROSS V IOLATION OF THE VERY PRINCIPLES ON WHICH A CO-OPERATIVE SOCIETY IS FORME D AND WORKS. THEREFORE, I WOULD UPHOLD THE ORDER OF THE AO BECAU SE THE FACTS OF THE PRESENT CASE ARE DIFFERENT FROM THE FACTS IN ASST. YEAR 1989-90, 1990-91, 1991-92 AND 1996-97 AS WELL AS FROM THE FACTS OF AD ARSH CO-OP. HOUSING SOCIETY 113 ITR 677 WHERE PLOT OF LAND WAS NOT SOLD TO A CONSTRUCTION COMPANY AND NO COMMERCIAL COMPLEX WAS CONSTRUCTED W ITH 50-60 SHOPS ON IT. THIS GROUND IS DECIDED IN FAVOUR OF THE ASSE SSING OFFICER. 23. GROUND NO.5 THE APPELLANT SOCIETY PRAYS THAT ORDER PASSED U/S 143(3) OF THE ACT, BE SET ASIDE AND ADDITION OF RS. 29,85,125/- MADE ON ACCOUNT OF PREMIUM RECEIVED FROM A MEMBER ON TRANSF ER OF PLOT NO.33 TO ANOTHER PURCHASER MEMBER BE DELETED. ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 5 THE FACTS OF THE CASE HAVE BEEN DEALT WITH IN GROUN D NO.2 AND 3 ABOVE. PLOT OF LAND WAS TRANSFERRED TO A NON-MEMBER AS PER SALE AGREEMENT DATED 12/12/2003. THE NAME OF THE PURCHASER THERE I S OF A COMPANY, THEREFORE, IT IS NOT CORRECT TO SAY THAT THE TRANSF ER WAS TO ANOTHER MEMBER. HOW COULD THE SOCIETY APPROVE TRANSFER OF HUGE A BI G PIECE OF A LAND TO A CONSTRUCTION COMPANY, WHAT DID THE SOCIETY EXPECT T HIS BUSINESS ENTITY TO DO, IF ITS DIRECTOR BECAME A MEMBER IT IS BECAUSE O NLY DIRECTOR COULD BECOME A MEMBER OF THE SOCIETY. THE COMPANY HAS TO WORK THROUGH SOMEONE, IN MY VIEW SOCIETY WAS CONSCIOUS OF WHAT I T WAS DOING AND IF IT CONSCIOUSLY SELLS ITS PLOT TO A COMMERCIAL ENTITY ( WHAT ELSE IS A COMPANY OR ITS DIRECTOR WORKING FOR THE COMPANY) THEN IT SH OULD PAY THE TAXES ON SUCH A RECEIPT. THE COMPANY VIOLATED THE BY LAWS OF SOCIETY AND CON STRUCTED A COMMERCIAL COMPLEX WHOSE OCCUPANTS DO NOT GET COVER ED IN THE PRINCIPLE OF MUTUALITY AND ARE NEITHER MEMBERS OF SOCIETY.(DU RING THE COURSE OF APPELLATE PROCEEDINGS, THE AUTHORISED REPRESENTATIV E STATED THAT NO AMENITIES ARE BEING GRANTED TO THE SHOP OWNERS. OUT OF THE TWO LIMBS OF TRANSFER TO MAKE THE PREMIU M TAX FREE ONLY ONE LIMB IS SATISFIED THAT IS TRANSFER BY OUT GOING MEM BER, BUT IT DOES NOT SATISFY THE SECOND LIMB THAT IS TRANSFER TO ANOTHER MEMBER, BECAUSE LAND HAD ACTUALLY BEEN TRANSFERRED TO A CONSTRUCTION COM PANY, (ITS DIRECTOR OBTAINING MEMBERSHIP OF THE SOCIETY IS OF NO CONSEQ UENCE BECAUSE HE WAS JUST THE FACE OR HUMAN FORM OF A CONSTRUCTION COMPA NY A BUSINESS ENTITY) CONSCIOUSLY. THE DIRECTORS EXPULSION ALSO DOES NOT HELP THE SOC IETY BECAUSE THE TRANSFER DOES NOT GET COVERED IN THE CONCEPT OF MUT UALITY. FURTHER THE SHOP OWNERS WHO ENJOY LAND OF SOCIETY ARE CERTAINLY NOT ITS MEMBERS, THEREFORE, THIS GROUND IS ALSO DECIDED IN FAVOUR OF THE DEPARTMENT. 6. BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT APPLYING THE PRINCIPLES OF MUTUALITY TO THE PRESENT CASE, IT IS APPARENT THAT THE CONTRIBUTORS AND THE PARTICIPATOR ARE THE SAME. THE CONTRIBUTION HAS BEEN MADE BY OUTGOING MEMBER AS PREMIUM OF SALE OF LAND AND THEREAFTER PARTICIPATORS ARE THE REMAINING MEMBERS. HON. GUJA RAT HIGH COURT IN ADARSH CO-OP. HOUSING SOCIETY (SUPRA) HAS HELD THAT IT IS THE IDENTITY OF CHARACTER OF CONTRIBUTORS AND PARTICIPATORS WHICH I S IMPORTANT AND NOT THE ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 6 IDENTITY OF INDIVIDUAL AS CONTRIBUTORS AND PARTICIP ATOR. IF MEMBERS ARE CONTRIBUTORS AND MEMBERS ARE PARTICIPATORS THEN PRI NCIPLES OF MUTUALITY IS SATISFIED AND THE ASSESSEE WOULD BE ENTITLED TO EXE MPTION. THE LD. AR RELIED ON TWO MORE DECISIONS NAMELY CIT VS. BANKIP UR CLUB LTD.(1997) 226 ITR 97 (SC) AND CHELMSFORD CLUB VS. CIT (2000) 243 ITR 89 (SC) WHERE IT IS HELD THAT CONTRIBUTORS AND PARTICIPATOR S ARE THE SAME THEN PRINCIPLES OF MUTUALITY WOULD BE APPLICABLE AND INC OME OF THE ASSESSEE WOULD NOT BE TAXABLE. THE LD. AR ALSO SUBMITTED THA T THE COMPANY HAS BECOME MEMBER THROUGH ITS DIRECTOR SHRI JATIN R. GU PTA AND, THEREFORE, EVEN THE CONDITION OF PARTICIPATOR IS SATISFIED. FU RTHER MONEY HAS BEEN RECEIVED FROM THE MEMBERS AND NOT FROM STRANGER. ON CE TWIN CONDITIONS OF RECEIPT OF MONEY FROM THE MEMBER AND UTILIZATION THEREOF FOR THE BENEFIT OF MEMBERS IS SATISFIED THEN THERE IS NO RE ASON WHY PRINCIPLE OF MUTUALITY IS NOT APPLICABLE. THE LD. A.R. ALSO REFE RRED TO THE SOME CLAUSES FROM BYE-LAWS OF THE SOCIETY IN SUPPORT OF THE ARGU MENTS THAT SOCIETY CAN RECEIVE MONEY AS PREMIUM FROM OUTGOING MEMBERS IF I T IS DISPOSING OF LAND BELONGING TO THE SOCIETY. 7. AGAINST THIS, THE LD. DR SUBMITTED THAT WHEN ANA NGBHAI NARENDRABHAI DESAI AND FAMILY DECIDED TO QUIT THE S OCIETY BY DISPOSING OF ITS LAND. IT CANNOT BE SAID THAT THEY ARE MEMBER S. THEY ARE IN FACT NOT DEFECTO MEMBERS ONCE THEY ARE DISPOSING OF THE LAND . FURTHER, THE LAND IS SOLD TO ISCON CONSTRUCTION LTD. WHICH IS A COMMERCI AL ORGANIZATION. THIS HAS NOT BECOME THE MEMBER OF THE SOCIETY. IT CONSTR UCTED COMMERCIAL SHOPS OVER THE LAND AND SOLD TO VARIOUS PERSONS WHO WERE ALSO NOT THE MEMBERS OF THE SOCIETY. THUS BENEFIT OF THE SOCIETY DID NOT AND COULD NOT GO TO THE PURCHASERS OF THE PLOT. NO DOUBT THE IDEN TITY OF INDIVIDUAL PARTICIPATOR IS NOT IMPORTANT BUT THE PROPERTY OF T HE SOCIETY AS ITS LESSOR MUST BE ENJOYED BY ONLY THE MEMBERS AND THE BENEFIT OF THE SOCIETY IN ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 7 RESPECT OF THE LAND BELONG TO THE SOCIETY SHOULD GO TO THE MEMBERS WHO ARE OCCUPYING THE LAND OF THE SOCIETY. IF THE LAND IS CONTINUED TO BE DISPOSED OF TO PERSONS WHO DID NOT BECOME MEMBERS O F THE SOCIETY THEN THERE WILL NOT BE FINALLY ANY PARTICIPATOR LEFT AND , THEREFORE, IT CANNOT BE SAID THAT PREMIUM RECEIVED BY THE SOCIETY IS BEING ENJOYED BY THE MEMBERS. THE PROPERTY OF THE SOCIETY MUST REMAIN IN TACT WITHIN THE MEMBERS OF THE SOCIETY WHO ARE ELIGIBLE FOR PARTICI PATING IN THE BENEFIT. 8. LD. DR ALSO REFERRED TO SEVERAL OTHER DECISIONS WHERE IT IS HELD THAT CONTRIBUTORS AND PARTICIPATORS MUST BE THE SAME CLA SS. THE LD. DR FURTHER SUBMITTED THAT IF A MEMBER QUITS AND THE PROPERTY B ELONGING TO THE SOCIETY IS REDISTRIBUTED AMONG THE EXISTING MEMBERS THEN TH ERE IS NO DIFFERENCE IN THE CONTRIBUTORS AND PARTICIPATORS BUT WHERE PROPER TY AND ASSET IS DISTRIBUTED TO NON-MEMBERS THEN PARTICIPATORS WOULD BE DIFFERENT AND IT WOULD BE VIOLATION OF PRINCIPLES OF MUTUALITY. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. THE UNDISPUTED FACTS ARE THAT PLOT NO.33 WAS SOLD BY SHRI ANANGBHAI N. DESAI AND FAMILY TO ISCON CONSTRUCTION COMPANY. SHRI ANANGBHAI N. DESAI WAS A OUTGOING MEMBER WHEREAS IS CON CONSTRUCTION COMPANY DID NOT BECOME A MEMBER. INSCON CONSTRUCTIO N COMPANY LATER CONSTRUCTED THE SHOPS OVER THE LAND SO PURCHASED AN D SOLD IT TO VARIOUS SHOP OWNERS. THE SHOPS OWNERS ARE ALSO NOT THE MEMB ERS OF THE SOCIETY. ON THIS TRANSFER OF LAND BY DESAI AND FAMILY, TO IS CON CONSTRUCTIONS COMPANY A PREMIUM OF RS.39,85,125/- WAS PAID TO THE SOCIETY WHICH IS CLAIMED AS EXEMPT ON THE PRINCIPLES OF MUTUALITY. B EFORE ARRIVING AT ANY CONCLUSION LET US GO THROUGH VARIOUS AUTHORITIES ON THE SUBJECT. SOME OF THEM HAVE BEEN CITED BY THE PARTIES. IN ADARSH CO-O P. HOUSING SOCIETY (SUPRA) ASSESSEE HAD RECEIVED MONEY ON ALLOTMENT OF PLOTS BY WAY OF ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 8 LEASE TO ITS MEMBERS AND ALSO CERTAIN PREMIUM ON TR ANSFER OF THE MEMBERSHIP TO OTHERS. IN THAT CASE BOTH THE OUTGOIN G PERSONS AND INCOMING PERSONS WERE MEMBERS OF THE SOCIETY. ON TH ESE FACTS HON. GUJARAT HIGH COURT HELD AS UNDER :- WHERE THE ASSESSEE IS FOUND TO BE A MUTUAL CONCERN , THE INCOME WHICH IT RECEIVES FROM ITS MEMBERS IS NOT LIABLE TO TAX. THI S IS FOUNDED ON THE PRINCIPLE THAT NO ONE CAN MAKE A PROFIT BY TRANSACT ING WITH ONESELF. THE PRIMARY CONDITION OF MUTUALITY BETWEEN THE ASSESSEE AND ITS MEMBERS IS THAT THE ASSESSEE WHICH COLLECTS MONEY FROM ITS MEM BERS, MUST APPLY THE SAME FOR THEIR BENEFIT NOT AS SHAREHOLDERS HAVING A N INTEREST IN ITS PROFITS BUT AS PERSONS THEMSELVES WHO HAVE PUT UP THE FUND BY CONTRIBUTING TO IT. THERE MUST BE A THREAD OF AGENCY FOR ACTING FOR THE CONTRIBUTORS FOR ACHIEVING THE OBJECTIVES. THE IDENTITY OF INDIVIDUA LS AS CONTRIBUTORS AND PARTICIPANTS IS NOT ESSENTIAL BUT WHAT IS ESSENTIAL IS THE IDENTITY OF CHARACTER OF CONTRIBUTORS AND PARTICIPANTS. 10. IN CIT VS. BANKIPUR CLUB (1997) 226 ITR 97(SC) IT WAS OBSERVED THAT THE CLUB WAS REALIZING MONEY BOTH FROM MEMBERS AND FROM NON- MEMBERS FOR THE SAME CONSIDERATION AND BY GIVING SI MILAR FACILITIES TO ALL ALIKE. IT WAS HELD THAT PRIVILEGES, ADVANTAGES, OR CONVENIENCE ATTACHED TO THE MEMBERSHIP OF THE CLUB COULD NOT BE SAID TO BE TRADING ACTIVITY. IT WAS HELD AS UNDER :- HELD, DISMISSING THE APPEALS, THAT IN THE LIGHT OF THE FINDINGS OF FACT THE RECEIPTS FOR THE VARIOUS FACILITIES EXTENDED BY THE CLUBS TO ITS MEMBERS, AS PART OF THE USUAL PRIVILEGES, ADVANTAGES AND CONVEN IENCES, ATTACHED TO THE MEMBERSHIP OF THE CLUB, COULD NOT BE SAID TO BE A TRADING ACTIVITY. THE SURPLUS EXCESS OF RECEIPTS OVER THE EXPENDITURE A S A RESULT OF MUTUAL ARRANGEMENT, COULD NOT BE SAID TO BE INCOME FOR T HE PURPOSES OF THE ACT. BY THE COURT: THE ABOVE FOUR SETS OF CASES FALLING IN GROUPS A TO D SHALL ALONE BE COVERED BY THIS JUDGMENT. WITH REGARD TO S EVEN CASES /APPEALS FALLING IN GROUP E, THE ASSESSEE IS THE CAWNPORE CL UB LTD. IT IS SEEN THAT THE INCOME THAT WAS SOUGHT TO BE ASSESSED IN THE CA SE OF THE ASSESSEE WAS ONE DERIVED FROM PROPERTY LET OUT AND ALSO INTEREST RECEIVED FROM FDR, ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 9 NSC, ETC. SINCE THE ISSUE RAISED IN THIS BATCH OF S EVEN CASES IS NOT SIMILAR TO, OR THE SAME AS THE ONE INVOLVED IN THE OTHER CA SES COMING UNDER GROUPS A TO D THE COURT DIRECTED THESE CASES FALLIN G IN GROUP E TO BE POSTED SEPARATELY FOR HEARING AND DISPOSAL BEFORE A N APPROPRIATE BENCH. 11. IN CHELMSFORD CLUB VS. CIT (2000) 243 ITR 89 (S C) IT WAS HELD THAT THERE MUST BE A COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND PARTICIPATORS TRADING BETWEEN THE PERSONS ASSOCIATI NG ALTOGETHER IN THIS WAY WHICH DOES NOT GIVE RISE TO PROFITS WHICH COULD BE CHARGEABLE TO TAX. THE HON. APEX COURT IN THIS CASE HELD AS UNDER :- UNDER THE INCOME-TAX ACT, 1961. WHAT IS TAXED IS, THE 'INCOME, PROFITS OR 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 VENTURE OR OBJECT AND FN THIS RES PECT HAVE NO DEALINGS OR RELATIONS WITH ANY OUTSIDE BODY THEN ANY SURPLUS RETURNED TO THOSE PERSONS CANNOT BE REGARDED IN ANY SENSE AS PROFIT. THERE MUST BE COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND THE PARTICIPATORS IF THESE REQUIREMENTS ARE FULFILLED, IT IS IMMATERIAL WHAT P ARTICULAR FORM THE ASSOCIATION TAKES TRADING BETWEEN PERSONS ASSOCIATI NG TOGETHER IN THIS WAY DOES NOT GIVE RISE TO PROFITS WHICH ARE CHARGEA BLE TO TAX. WHERE THE TRADE OR ACTIVITY IS MUTUAL, THE FACT THAT, AS REGA RDS CERTAIN ACTIVITIES, CERTAIN MEMBERS ONLY OF THE ASSOCIATION TAKE ADVANT AGE OF THE FACILITIES WHICH IT OFFERS, DOES NOT AFFECT THE MUTUALITY OF T HE ENTERPRISE THE LAW RECOGNIZES THE PRINCIPLE OF MUTUALITY EXCLUDING THE LEVY OF INCOME-TAX FROM THE INCOME OF SUCH BUSINESS TO WHICH THE ABOVE PRINCIPLE IS APPLICABLE. A PERUSAL OF SECTION 2(24] OF THE INCOM E-TAX ACT, 1961 SHOWS THAT THE ACT RECOGNIZES THE PRINCIPLE OF MUTUALITY AND HAS EXCLUDED ALL BUSINESSES INVOLVING SUCH PRINCIPLE FROM THE PURVIE W OF THE ACT, EXCEPT THOSE MENTIONED IN CLAUSE (VII) OF THAT SECTION THE THREE CONDITIONS, THE EXISTENCE OF WHICH ESTABLISHES THE DOCTRINE OF MUTU ALITY ARE (1) THE IDENTITY OF THE CONTRIBUTORS TO THE FUND AND THE RE CIPIENTS FROM THE FUND, (2) THE TREATMENT OF THE COMPANY, THOUGH INCORPORAT ED AS A MERE ENTITY FOR THE CONVENIENCE OF THE MEMBERS IN OTHER WORDS, AS AN INSTRUMENT OBEDIENT TO THEIR MANDATE, AND (3) THE IMPOSSIBILIT Y THAT CONTRIBUTORS SHOULD DERIVE PROFITS FROM CONTRIBUTIONS MADE BY TH EMSELVES TO A FUND WHICH COULD ONLY BE EXPENDED OR RETURNED TO THEMSEL VES. ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 10 12. IN HARYANA STATE CO-OP. LABOUR & CONSTRUCTION F EDERATION LTD. VS. CIT (2001) 252 ITR 265 (P & H) THE ABOVE PRINCI PLE WAS HIGHLIGHTED BY HON. PUNJAB & HARYANA HIGH COURT AS UNDER :- THE TESTS LAID DOWN FOR APPLICATION OF THE PRINCIP LE OF MUTUALITY ARE (1) THE IDENTITY OF THE CONTRIBUTORS TO THE FUND AND TH E RECIPIENTS FROM THE FUND; (2) THE ORGANIZATION EXISTS ONLY FOR MUTUAL B ENEFIT, (3) THE FUNDS CAN BE EXPENDED FOR MUTUAL BENEFIT OR RETURNED TO THE C ONTRIBUTORS. IT IS ONLY WHEN THESE TESTS ARE FULFILLED THAT THE PRINCIPLE O F MUTUALITY CAN BE APPLIED. THE ASSESSEE, A CO-OPERATIVE SOCIETY, RECEIVED CONT RIBUTIONS FROM ITS MEMBERS. IT CLAIMED THAT THE CONTRIBUTIONS WERE NOT EXIGIBLE TO INCOME- TAX BY THE PRINCIPLE OF MUTUALITY. THE ASSESSING OF FICER REJECTED THE CLAIM AND THE ORDER WAS CONFIRMED BY THE APPELLATE ASSIST ANT COMMISSIONER AND THE TRIBUNAL. ON A REFERENCE ; HELD, THAT, IN THE PRESENT CASE, THE CONTRIBUTORS H AD NO CONTROL OVER THE FUNDS RECEIVED BY THE ASSESSEE FROM THEM AND THEY C OULD NOT DIRECT THAT THE REMAINING AMOUNT AFTER MEETING THE EXPENSES SHO ULD BE RETURNED TO THEM. THE FUNDS COULD ONLY BE USED FOR THE PURPOSES MENTIONED IN RULE OF THE RULES FRAMED UNDER THE PUNJAB CO-OPERATIVE SOCI ETIES ACT. 1961 THE ASSESSEE WAS UNDER NO OBLIGATION TO RETURN THE FUND S TO THE CONTRIBUTORS THE PRINCIPLE OF MUTUALITY COULD NOT BE INVOKED. TH EREFORE, THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE CONTRIBUTIONS OF RS 21.205, RS.47,434 AND RS.68,633 RECEIVED BY THE ASSESSEE FOR THE ASSE SSMENT YEARS 1977-78, 1978-79 AND 1979-80, RESPECTIVELY, FROM ITS MEMBERS WERE NOT EXEMPT ON THE PRINCIPLE OF MUTUALITY MR. GARG HAS REFERRED TO THE DECISION IN THE CASE O F NORTHERN INDIA MOTION PICTURES ASSOCIATION [19891 180 ITR 160 (P & H). THEIR LORDSHIPS WERE CONSIDERING THE PROVISIONS OF CLAUSE 7. HOWEVER, WE FIND THAT AFTER THIS DECISION, THERE IS AN AUTHORITATIVE PRONOUNCEMENT OF THEIR LORDSHIPS OF THE SUPREME COURT IN THE CASE OF CHELM SFORD CLUB [2000] 243 ITR 89. IT HAS BEEN LAID DOWN BY THEIR LORDSHIP S THAT IN CASES {PAGE 96)'. . . WHERE THERE IS IDENTITY IN THE CHARACTER OF THOSE WHO CONTRIBUTE AND OF THOSE WHO PARTICIPATE IN THE SURPLUS THE FAC T OF INCORPORATION MAY BE IMMATERIAL AND THE INCORPORATED COMPANY MAY WELL BE REGARDED AS A MERE INSTRUMENT, A CONVENIENT AGENT FOR CARRYING OU T WHAT THE MEMBERS MIGHT MORE LABORIOUSLY DO FOR THEMSELVES' THEIR LOR DSHIPS HAVE LAID DOWN THE THREE TESTS BEFORE THE PRINCIPLE OF MUTUAL ITY CAN BE APPLIED IN A NUTSHELL, THESE TESTS ARE : ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 11 1. THE IDENTITY OF THE CONTRIBUTORS TO THE FUND AN D THE RECIPIENTS FROM THE FUND. 2. THE ORGANIZATION EXISTS ONLY FOR MUTUAL BENEFIT 3. THE FUNDS CAN BE EXPENDED FOR MUTUAL BENEFIT OR RETURNED TO THE CONTRIBUTORS IT IS ONLY WHEN THESE TESTS ARE FULFILLED THAT THE PRINCIPLE OF MUTUALITY CAN BE APPLIED. IN THE PRESENT CASE, THE ASSESSEE IS UNDER NO OBLIG ATION TO RETURN THE FUNDS TO THE CONTRIBUTORS. THUS, IT CANNOT INVOKE THE PRI NCIPLE OF MUTUALITY THE VIEW TAKEN BY THE TRIBUNAL IS CORRECT 13. IN CIT VS. CEMENT ALLOCATION & CO-ORDINATING OR GANIZATION (1999) 236 ITR553 (BOM) IT WAS HELD THAT ALL THE CO NTRIBUTORS MUST BE ENTITLED TO PARTICIPATE IN THE SURPLUS. THE HON. BO MBAY HIGH COURT IN THAT CASE HELD AS UNDER :- THE CARDINAL PRINCIPLE TO APPLY THE TEST OF MUTUAL ITY IS THAT ALL THE CONTRIBUTORS TO THE COMMON FUND ARE ALSO ENTITLED T O PARTICIPATE IN THE SURPLUS AND THAT ALL THE PARTICIPATORS IN THE SURPL US MUST BE CONTRIBUTORS TO THE COMMON FUND. IN OTHER WORDS, THERE MUST BE A COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND THE PARTICIPATORS. 14. HON. KERALA HIGH COURT IN CIT VS. TRIVANDRUM C LUB (2006) 282 ITR 505 (KER) HELD THAT WHERE NON-MEMBERS WERE ENJO YING THE FACILITIES OF THE CLUB AND MARRIAGE HALL WAS RENTED OUT TO NON -MEMBERS THEN PRINCIPLES OF MUTUALITY WOULD NOT APPLY. THE ASSESSEE WAS A PRIVATE CLUB. THE BYE-LAWS OF T HE CLUB SHOWED THAT FT WAS FORMED MAINLY TO PROVIDE ENTERTAINMENT TO ITS M EMBERS BY PROVIDING ACCOMMODATION, LIBRARY, READING ROOM, ETC., AND BY ENCOURAGING SPORTS AND GAMES AMONG MEMBERS. RETURN OF INCOME FOR THE Y EAR 1988-89 WAS FILED. THE ASSESSEE HAD TAKEN UP THE STAND THAT THE ASSESSES WAS GOVERNED ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 12 BY THE 'DOCTRINE OF MUTUALITY' AND THEREFORE ITS IN COME WAS NOT TAXABLE. APART FROM THE ACTIVITIES OF THE CLUB FOR PROVIDING ENTERTAINMENTS TO ITS MEMBERS, ETC., THE ASSESSEE HAD INCOME BY LETTING O UT ITS MARRIAGE HALL TO NON-MEMBERS. THE ASSESSING AUTHORITY HELD THAT THE ASSESSEE DID NOT SATISFY THE CONDITIONS TO ATTRACT THE DOCTRINE OF M UTUALITY AND THAT THE ASSESSEE WAS AN ASSOCIATION OF PERSONS AND IT WAS A SSESSED AS SUCH. THE COMMISSIONER (APPEALS) TOOK THE VIEW THAT THE ASSES SEE COULD NOT BE ASSESSED. THIS WAS UPHELD BY THE TRIBUNAL UN THE GR OUND THAT THERE WAS NO MATERIAL DIFFERENCE BETWEEN THE ASSESSMENT YEAR 1988-89 AS WELL AS THE EARLIER ASSESSMENT YEAR 1974-75 WHICH WAS COVER ED BY THE DECISION IN CIT V TRIVANDRUM CLUB 1989] 177 ITR 550 (KER) IN T HE ASSESSEE'S OWN CASE. ON A REFERENCE HELD- THAT THE REAL CONTRIBUTORS OF INCOME BY AVAIL ING OF THE FACILITIES OF THE MARRIAGE HALL WERE NOT THE MEMBERS BUT NON-MEMB ERS. IN ORDER TO ENABLE THEM TO AVAIL OF THE FACILITIES OF THE CLUB, NON-MEMBERS WERE TO BE GIVEN TEMPORARY MEMBERSHIP ONLY FOR THE PURPOSE OF AVAILING OF THIS BENEFIT THE TRIVANDRUM CLUB'S CASE [1989] 177 ITR 5 50 (KER) WAS DECIDED ON THE BASIS OF THE ADMITTED FACTUAL POSITI ON THAT NO NON-MEMBER WDS ENJOYING THE FACILITIES OF THE CLUB. THE FACTS IN T HIS CASE WERE DIFFERENT. THE MARRIAGE HALL WAS ADMITTEDLY BEING R ENTED OUT TO NON- MEMBERS MAKING THEM TEMPORARY MEMBERS ONLY FOR THE PURPOSE OF LETTING OUT THE MARRIAGE HALL FROM NON-MEMBERS. THE PRINCIP LE OF MUTUALITY WOULD NOT APPLY. RENTAL INCOME RECEIVED FROM NONE-M EMBERS WAS TAXABLE. 15. HON. KARNATAKA HIGH COURT IN CIT VS. ITI EMPLOY EES DEATH AND SUPERANNUATION RELIEF FUND (1998) 234 ITR 308 (KARN ) HELD AS UNDER:- THE ESSENCE OF MUTUALITY LIES IN THE RETURN FOR WH AT ONE HAS CONTRIBUTED TO A COMMON FUND. THE FUND SHOULD FULFILL THE ESSEN TIAL REQUIREMENTS, THAT ALL THE CONTRIBUTORS TO THE COMMON FUND MUST BE ENT ITLED TO PARTICIPATE IN THE SURPLUS, AND THAT ALL THE PARTICIPATORS IN THE SURPLUS SHOULD BE CONTRIBUTORS TO THE COMMON FUND. THERE MUST BE COMP LETE IDENTITY BETWEEN THE CONTRIBUTORS TO THE FUND AND THE PARTIC IPATORS IN THE SURPLUS IT DOES NOT MEAN THAT EACH MEMBER SHOULD CONTRIBUTE TO THE COMMON FUND OR THAT EACH MEMBER SHOULD PARTICIPATE IN THE SURPL US OR GET BACK FROM THE SURPLUS PRECISELY WHAT HE HAD PAID. THE PRINCIP LE OF MUTUALITY IS NOT DESTROYED BY THE PRESENCE OF TRANSACTIONS WINCH ARE NON-MUTUAL IN CHARACTER AND THE PRINCIPLE OF MUTUALITY CAN. IN SU CH CASES BE CONFINED TO TRANSACTIONS WITH MEMBERS. THE TWO ACTIVITIES IN AP PROPRIATE CASES CAN ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 13 BE SEPARATED AND THE PROFITS DERIVED FROM NON-MEMBE RS CAN BE BROUGHT TO TAX. THE ASSES SEE-TRUST STYLED 'THE INDIAN TELEPHONE IN DUSTRIES EMPLOYEES DEATH AND SUPERANNUATION RELIEF FUND 11 WAS CREATED BY A DEED DATED DECEMBER 19, 1983, BY THE EMPLOYEES OF THE INDIAN T ELEPHONE INDUSTRIES CALLED THE SETTLERS FOR THE BENEFIT OF ABOUT 20,000 EMPLOYEES OF ITI IN VARIOUS TOWNS IN THE COUNTRY AS PER CLAUSE 2 OF THE TRUST DEED, THE TRUST FUNDS CONSISTED OF (0 MONTHLY CONTRIBUTIONS BY EMPL OYEES, (II) CONTRIBUTIONS IF ANY MADE BY THE ITI MANAGEMENT, (I II) DONATIONS (IV) INTEREST OR OTHER INCOME EARNED FROM THE FUNDS OR A NY INVESTMENTS THEREOF, (V) SECURITIES AND INVESTMENTS MADE OUT OF THE FUNDS, AND (VI) MONEY OR OTHER ASSETS VESTED IN ANY MANNER IN THE T RUST. THE ASSESSEE EARNED INTEREST INCOME ON ITS DEPOSITS FROM VARIOUS BANKS THE ASSESSEE CLAIMING TO BE A CHARITABLE TRUST CONSTITUTED FOR A CHARITABLE PURPOSE CLAIMED EXEMPTION OF ITS INCOME FROM TAXATION UNDER SECTION 11 OF THE INCOME-TAX ACT, 1961. THE ASSESSING OFFICER DENIED THE EXEMPTION ON APPEAL THE ASSESSEE CONTENDED THAT IT WAS ENTITLED TO EXEMPTION UNDER SECTION 11 AND IN THE ALTERNATE AS A MUTUAL CONCERN . THE APPELLATE AUTHORITY REJECTED THE CONTENTION BUT THE TRIBUNAL ACCEPTED THE ASSESSEE S PLEA THAT IT WAS CONSTITUTED FOR CHARITABLE PURPOSE S AND THEREFORE ITS INCOME WAS EXEMPTED UNDER SECTION 11 OF THE ACT THE ALTERNATIVE PLEA RAISED BY THE ASSESSEE THAT !HE ASSESSEE WAS A MUTU AL BENEFIT FUND AND, THEREFORE INTEREST INCOME DELVED BY IT WAS NOT CHAR GEABLE TO TAX, WAS REJECTED. ON A REFERENCE. HELD (I) THAT THE OBJECTS OF THE TRUST DID NOT FALL WITHIN THE PURVIEW OF SECTION 2(15) OF THE ACT AND ITS INCOME WAS NOT EXE MPT UNDER SECTIONS 11 AND 12 OF THE ACT. CIT V BEL EMPLOYEES DEATH RELIEF FUND AND SERVICE B ENEFIT FUND ASSOCIATION [1997] 225 ITR 270 (KAR) FOLLOWED. (II) THAT IF THE FACTS OF THE PRESENT CASE WERE EXA MINED IN THE FIGHT OF THE PRINCIPLES APPLICABLE TO THE CONCEPT OF MUTUALITY, THEN IT HAD TO BE HELD THAT THE INGREDIENTS OF MUTUALITY WERE MISSING IN T HE PRESENT CASE APART FROM THE CONTRIBUTIONS MADE BY THE MEMBERS THERE WE RE OTHER SOURCES OF FUNDING OF THE TRUST FUND THE TRUST FUND COULD BE A UGMENTED BY CONTRIBUTIONS MADE BY THE ITI MANAGEMENT, DONATIONS , INTEREST OR OTHER INCOME ACCRUED OR EARNED FROM THE SAID FUNDS OR ANY INVESTMENT THEREOF AND INVESTMENT MADE FROM OUT OF THE FUNDS THE OBJEC T OF THE TRUST WAS TO INVEST THE FUNDS OF THE TRUST IN BANKS AND SECURITI ES FOR EARNING INTEREST TO DISCHARGE THE LIABILITIES AND OBLIGATIONS CREATED U NDER THE TRUST THE FUND ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 14 WAS A WELFARE FUND ESTABLISHED FOR PROVIDING BENEFI T TO THE EMPLOYEES ON RETIREMENT/TERMINATION OF SERVICE/DEATH, ETC., OF S UCH EMPLOYEES. IT WAS NOT A CASE OF A SURPLUS FROM THE CONTRIBUTIONS MADE BY THE MEMBERS. IT WAS ALSO NOT A CASE WHERE THE ASSESSEE HAD ADVANCED ITS FUNDS TO ITS MEMBERS AND HAD EARNED INTEREST ON THOSE LOANS INCO ME FROM INTEREST EARNED FROM OUTSIDE AGENCY, NAMELY, FROM THE BANK A ND SECURITIES WOULD NOT BE COVERED ON THE PRINCIPLE OF MUTUALITY. IT WA S NOT EXEMPT FROM TAXATION. 16. HON. GUJARAT HIGH COURT IN SPORTS CLUB OF GUJAR AT LTD. VS. CIT (1988) 171 ITR 504 (GUJ) HAS HELD AS UNDER:- ONE OF THE ESSENTIALS OF MUTUALITY IS THAT THE CON TRIBUTORS TO THE COMMON FUND ARE ENTITLED TO PARTICIPATE IN THE SURPLUS, TH EREBY CREATING AN IDENTITY BETWEEN THE PARTICIPANTS AND THE CONTRIBUTORS ONCE SUCH IDENTITY IS ESTABLISHED, THE SURPLUS INCOME WOULD NOT BE EXIGIB LE TO TAX ON THE PRINCIPLE THAT NO MAN CAN MAKE A PROFIT OUT OF HIMS ELF THE PRINCIPLE OF MUTUALITY IS NOT DESTROYED BY THE PRESENCE OF TRANS ACTIONS WHICH ARE NON- MUTUAL IN CHARACTER. THE PRINCIPLE OF MUTUALITY CAN , IN SUCH CASES, BE CONFINED TO TRANSACTIONS WITH MEMBERS. THE TWO ACTI VITIES CAN. IN APPROPRIATE CASES, BE SEPARATED AND THE PROFITS DER IVED FROM NON- MEMBERS CAN BE BROUGHT TO TAX. SEC. 44A OF THE INCOME-TAX ACT, 1961 , WHICH BEGINS WITH A NON OBSTANTE CLAUSE APPLIES TO ANY TRADE, PROFESSIONAL OR SIMILA R ASSOCIATION AND BUT FOR THE USE OF THE WORDS 'OTHER THAN AN ASSOCIATION OR INSTITUTION REFERRED TO IN CLAUSE (23A) OF SECTION 10', EVEN THE PROFESS IONAL ASSOCIATIONS REFERRED TO IN SECTION 10(23A) WOULD HAVE DERIVED T HE VANTAGE OF SECTION 44A THE INTENTION OF THE LEGISLATURE WAS TO GIVE TH E BENEFIT OF SECTION 44A TO ALL PROFESSIONAL ASSOCIATIONS OTHER THAN THOSE R EFERRED TO IN SECTION 10(23A) THEY ARE CLEARLY WORDS OF LIMITATION NOT IN TENDED TO ENLARGE THE SCOPE OF THE EXPRESSION 'SIMILAR ASSOCIATION 11 BEYOND ITS MEANING IN SECTION 28(III). THE ASSESSEE, THE SPORTS CLUB OF GUJARAT, WAS INCOR PORATED AS A COMPANY ITS MAIN OBJECT WAS TO PROMOTE THE GAME OF CRICKET AND OTHER GAMES AND SPORTS. THE OBJECTS CLAUSE IN THE MEMORANDUM AND AR TICLES OF ASSOCIATION EMPOWERED THOSE IN THE MANAGEMENT OF THE CLUB TO IN VEST AND DEAL WITH MONEYS OF THE CLUB NOT IMMEDIATELY, REQUIRED IN SUC H MANNER AS MAY, FROM TIME TO TIME BE DETERMINED BY THEM THE ASSESSE E CLAIMED EXEMPTION FROM INCOME-TAX FOR THE ASSESSMENT YEARS 1966-67 TO 1969-70, BUT THE ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 15 INCOME-TAX OFFICER REJECTED THE CLAIM THE TRIBUNAL H -ID THAT INCOME ASSESSABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION' WOULD NOT BE EXIGIBLE TO TAX ON THE PRINCIPLE OF MU TUALITY, SINCE THERE WAS COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND THE PARTICIPANTS BUT INCOME DERIVED BY WAY OF INTEREST ON THE FIXED DEPO SITS WITH BANKS MINUS 10 PERCENT ALLOWED UNDER SECTION 57(III) WAS EXIGIB LE TO TAX ON A REFERENCE: HELD- (I) THAT THE ASSESSEE'S INCOME FROM INTEREST WAS NOT FROM A MUTUAL ACTIVITY AND AS SUCH IT WAS EXIGIBLE TO TAX. 17. HON. GUJARAT HIGH COURT IN RAJPATH CLUB LTD. VS . CIT (1995) 211 ITR 379 (GUJ) ALSO HELD AS UNDER :- THE ASSESSEE CLUB WAS INCORPORATED AS A COMPANY. IT S MAIN OBJECTS WERE MAINTAINING AND CARRYING ON A CLUB HOUSE OR HOUSES WITH ALL THE USUAL OR SUITABLE ACCOMMODATION AND CONVENIENCES AND TO PROM OTE AND PROVIDE FACILITIES FOR SPORTS AND GAMES. IN 1974 AND 1975, THE ASSESSEE RIVED INTEREST INCOME OF RS.11,638 AND RS. 24,492. RESPEC TIVELY, ON THE AMOUNTS DEPOSITED BY IT IN THE BANKS. ON THE QUESTION WHETH ER THESE AMOUNTS WERE ASSESSABLE AND IF SO WHETHER THE EXPENDITURE INCURR ED IN EARNING THE INTEREST WAS DEDUCTIBLE HELD, (I) THAT THE ASSESSEE'S INCOME FROM INTEREST WAS NOT FROM A MUTUAL ACTIVITY AND AS SUCH IT WAS EXIGIBLE TO TAX; SPORTS CLUB OF GUJARAT LTD V CIT [1988] 171 ITR 504 (GUJ) FOLLOWED. (II) THAT THE EXPENDITURE LAID OUT OR EXPENDED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING THE INTEREST INCOME WAS DEDU CTIBLE. 18. ON THE BASIS OF ABOVE AUTHORITIES WE CULL OUT F OLLOWING PRINCIPLES- (1) IDENTITY OF THE CONTRIBUTORS TO THE FUNDS AND T HE RECIPIENT OF THE FUNDS MUST BE THE SAME AS A CLASS. (2) THE ORGANIZATION SHOULD EXIST ONLY FOR MUTUAL B ENEFIT. (3) FUNDS CAN BE SPENT FOR THE MUTUAL BENEFIT OR RE TURNED TO THE CONTRIBUTORS. ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 16 (4) IF ANY FLOW OF INCOME IS FROM NON-MEMBERS IT WO ULD BE TAXABLE. (5) IF THE SOCIETY IS UNDER NO OBLIGATION TO RETURN THE FUNDS TO THE CONTRIBUTORS THEN THERE IS NO PRINCIPLE OF MUTUALIT Y. 19. IN THE PRESENT CASE EVEN THOUGH THE CONTRIBUTOR S ARE OUTGOING MEMBERS AND CONTRIBUTION IS BY WAY OF PREMIUM ON SA LE OF SOCIETYS LAND BUT SUCH CONTRIBUTOR EXIT IMMEDIATELY ON SALE OF LA ND TO ISCON CONSTRUCTION COMPANY. THE ASSESSEE WOULD RECEIVE MO NEY FROM THE PURCHASER ONLY WHEN AN AGREEMENT TO SELL HAS TAKEN PLACE AND LAND IS DE FACTO TRANSFERRED TO THE PURCHASER AND ONLY A FORMA LITY OF MUTATION OF NAMES IN THE RECORDS OF SOCIETY REMAINS TO BE COMPL ETED. IN FACT FOR TRANSFER OF LAND, THE LEGAL REQUIREMENT IS RECORDIN G OF THE TRANSFER IN THE RECORD OF REGISTRAR OF PROPERTY ON REQUISITE STAMP PAPERS, MUTATION IN THE RECORD OF SOCIETY IS CONSEQUENTIAL FORMALITY. IT CA NNOT BE SAID THAT CHANGE IN THE MEMBERSHIP IN THE RECORD OF SOCIETY WAS A CO NDITION PRECEDENT FOR RECORDING OF TRANSACTION IN THE RECORD OF REGISTRAR OF PROPERTY WHICH ALONE CONSTITUTES A VALID TRANSFER. ACCORDINGLY, WE ARE OF THE VIEW THAT ASSESSEE HAS NOT PROVED THAT HE WAS A DE JURE MEMBE R OF THE SOCIETY AT THE TIME WHEN HE MADE THE PAYMENT OF PREMIUM. PAYMENT O F PREMIUM TO THE SOCIETY IS CONSIDERED NECESSARY FOR EFFECTING THE C HANGE IN THE MEMBERSHIP AND ENJOYING THE BENEFIT ON THE LAND OF THE SOCIETY BY THE INCOMING MEMBER OR THE TRANSFEREE BUT IT IS NOT SHO WN THAT IT WAS A CONDITION NECESSARY FOR RECORDING THE DOCUMENTS IN THE OFFICE OF THE REGISTRAR OF PROPERTIES. IT IS UNDISPUTED THAT PURC HASER I.E. ISCON CONSTRUCTION COMPANY AS SUCH IS NOT THE MEMBER OF T HE SOCIETY AND, THEREFORE, BENEFIT OF CONTRIBUTION BY THE SELLER CO ULD NOT GO TO THE PURCHASER. FURTHER THE SHOP OWNERS WHO HAVE PURCHAS ED THE SHOPS FROM ISCON CONSTRUCTION CO. ALSO STAND IN THE SAME CAMPU S AND IN THE PREMISES OF THE SOCIETY. THEY ARE NON-MEMBERS BUT ENJOYING T HE LAND BELONGING TO ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 17 THE SOCIETY. THEY ARE IN FACT SUB-LEASEHOLDERS OF T HE LAND ON WHICH SHOPS ARE CONSTRUCTED AND PURCHASED FROM ISCON CONSTRUCTI ON COMPANY. THE ASSESSEE HAD LEASED OUT THE LAND TO SHRI ANANGBHAI N. DESAI WHO FURTHER LEASED TO ISCON CONSTRUCTION CO. AND WHICH IN TURN FURTHER LEASED IT TO THE SHOP OWNERS. THEREFORE, THE PARTICIPATORS IN THE PR OPERTY OF THE SOCIETY ARE CLEARLY NON-MEMBERS AND IT VIOLATES THE PRINCIP LES OF MUTUALITY. WE AGREE WITH THE LD. DR THAT IF CONTRIBUTORS GO ON PA RTING AWAY THE ASSET OF THE SOCIETY BY TRANSFERRING THEM TO PERSONS WHO ULT IMATELY DO NOT BECOME THE MEMBERS BECAUSE OF CERTAIN RESTRICTIONS IN THE BYE LAWS OF THE SOCIETY, THEN THE BENEFITS ATTACHED WITH THE SOCIETY WILL G O IN DIMINISHING AND IF THIS PROCESS CONTINUES I.E. MORE AND MORE MEMBERS T RANSFER THEIR RIGHTS IN THE LAND OF THE SOCIETY IN FAVOUR OF THOSE WHO CANN OT BECOME THE MEMBERS OF THE SOCIETY. THUS AT THE END NO PARTICIP ATOR AS MEMBER WOULD SURVIVE AND BENEFIT OF THE SOCIETY ON ACCOUNT OF IT HOLDING THE LAND WOULD BE ENJOYED BY THOSE WHO CANNOT BECOME THE MEMBERS. THE CONCEPT OF THE CLASS OF PARTICIPATORS IS DILUTED IF THEY AS CONTRI BUTORS LEAVE THE SOCIETY AFTER DISPOSING OF THEIR RIGHTS. AS A RESULT THE BE NEFIT YIELDING SOURCE WHICH IN THE PRESENT CASE IS LAND IS REDUCED AND WH AT REMAINS WITH THE REMAINING PARTICIPATORS IS THE REDUCED BENEFIT YIEL DING SOURCE. IF IN A CASE LIKE THIS NOT ONLY THE NUMBER OF PARTICIPATORS GO O N REDUCING BUT ALSO THE BENEFIT YIELDING SOURCE I.E. THE LAND, IS REDUCED A S BEING OWNED BY NON- PARTICIPATORS, IT CANNOT BE SAID THAT MUTUAL GROUP WHICH ORIGINALLY EXISTED AS A CLASS, CONTINUED TO EXIST AT THE END OF SUCH T RANSACTIONS. IN THE PRESENT CASE IT IS CLEARLY A CHANGE IN CLASS OF THE PARTICI PATOR, AS WELL AS CHANGE IN BENEFIT YIELDING SOURCE TO THE REMAINING PARTICIPAT ORS. THE BENEFIT YIELDING SOURCE DOES NOT REMAIN CONFINED TO THE ORI GINAL PARTICIPATORS AS A CLASS. A NEW CLASS OF NON-PARTICIPATORS IS CREATED WHICH IS ALSO ENJOYING THE BENEFIT YIELDING SOURCE I.E. THE LAND. ONCE THE RE IS A DIVISION IN THE ORIGINAL CLASS OF PARTICIPATORS AND NEW CLASS OF PA RTICIPATORS IS CREATED THE ITA NO.4438/AHD/2007 ASST. YEAR 2004-05 18 CONCEPT OF MUTUALITY IS HURT AND ORIGINALITY OF CLA SS OF PARTICIPATORS IS DESTROYED. THE ISCON CONSTRUCTION COMPANY AND SHOP OWNERS WHO ARE ENJOYING THE LAND IN THEIR OWN RIGHT IS A NEW CLASS OF PARTICIPATORS DIFFERENT FROM ORIGINAL CLASS OF PARTICIPATORS WHO HAD THE RIGHT TO ENJOY THE BENEFIT YIELDING SOURCE I.E. THE LAND JOINTLY A ND SEVERELY WITHOUT ANY DEMARCATION. THE CONCEPT OF MUTUALITY DOES NOT ENVI SAGE A DIFFERENT CLASS OF PARTICIPATORS WHO ARE NOT CONTRIBUTORS. THEREFOR E, WHERE THE PARTICIPATORS OF THE SOCIETY ARE NON-MEMBERS THERE IS A CLEAR VIOLATION OF PRINCIPLES OF MUTUALITY AND ACCORDINGLY ASSESSEE SO CIETY IS NOT ENTITLED FOR EXEMPTION ON THE PREMIUM RECEIVED BY IT. THE APPEAL FILED BY THE ASSESSEE IS ACCORDINGLY DISMISSED. 20. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 27/8/2010. SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBE R AHMEDABAD, DATED : 27/8/2010. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD