DDIT (I.T) 2(1), MUMBAI V. M/s. SOCIETE INTERNATIONAL DE TELECOMMUNICATION, MUMBAI

ITA 4970/MUM/2005

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8758 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 11-09-2012
• Assessment Year: 1996-1997
• Appeal Filed On: 11-07-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S E DASTUR
• Keywords: Reopening of assessment; Rule of consistency; Source of fund; Question of law; Tangible material; Bad and doubtful debts; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 142(1); 133A; 234B; 147; 148

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI .. , ! '# $% , & !, ' BEFORE SHRI R.S.SYAL, AM AND SHRI AMIT SHUKLA, JM ./ ITA NO.4970/MUM/2005 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1996-1997) THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 21 MUMBAI. M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION C/O.EXPRESS TOWER, 24 TH FLOOR NARIMAN POINT, MUMBAI 400 021. PAN : AAFCS2907Q. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) -.' ./ CO NO.67/MUM/2006 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :1996-1997) M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION C/O.EXPRESS TOWER, 24 TH FLOOR NARIMAN POINT, MUMBAI 400 021. THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 21 MUMBAI. ( -.' / CROSS OBJECTOR) ) ) ) ) / VS. ( -.+,/ RESPONDENT) +, / // / 0 0 0 0 / REVENUE BY : SHRI MAHESH KUMAR (CIT-DR) -.+, / 0 / 0 / 0 / 0 / ASSESSEE BY : S/SHRI S.E.DASTUR & NITESH JOSHI ) / # / / / / DATE OF HEARING : 18.09.2012 12* / # / DATE OF PRONOUNCEMENT : 26.09.2012 !$ !$ !$ !$ / / / / O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY T HE ASSESSEE ARISE OUT OF THE ORDER PASSED BY THE CIT ( A) ON 23.3.2005 IN RELATION TO ASSESSMENT YEAR 1996-1997. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 2 2.1. FIRST GROUND OF ASSESSEES CROSS OBJECTION IS AGAINST THE UNFAVOURABLE DECISION OF THE LD. CIT (A) ON THE QUE STION OF INITIATION OF THE RE-ASSESSMENT PROCEEDINGS U/S 147. 2.2. BRIEFLY STATED THE FACTS OF THE CASE ARE THA T THE ASSESSEE WAS FOUNDED IN 1949, IN BELGIUM. ITS BRANCHES ARE IN M ORE THAN 200 COUNTRIES. THE ASSESSEE CLAIMED ITSELF TO BE A CO- OPERATIVE SOCIETY FOR THE BENEFIT OF INTERNATIONAL AIRLINES FOR PROVIDING A TELECOMMUNICATION NETWORK TO ALL THE AIRLINES. A S URVEY U/S 133A WAS CARRIED OUT ON 29.11.2002 AT THE BUSINESS PREMI SES OF THE ASSESSEE IN MUMBAI. DURING THE COURSE OF SURVEY, I T WAS OBSERVED THAT THE ASSESSEE WAS RENDERING SERVICES TO ITS OWN MEMBERS (HEREINAFTER CALLED THE `SITA MEMBERS) AND ALSO N ON-MEMBERS. FOR THE REASONS RECORDED BY THE ASSESSING OFFICER AS SE T OUT HEREUNDER, THE RE-ASSESSMENT PROCEEDINGS WERE INITIATED AFTER ISSUING NOTICE U/S 148. FOLLOWING ARE THE REASONS FOR INITIATING THE RE-ASSESSMENT PROCEEDINGS. REASONS FOR REOPENING THE CASE M/S. SOCIETE INTERNATIONAL DE TELECOMNICATIONS AERONAUTIQUES (SITA) FOR THE AY 1996-97. IN THIS CASE, THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 01/01/1997 FOR AY 1996-97 DECLARING TOTAL INCOME AT NIL. THE RETURN OF INCOME WAS PROCESSED U/S 143(1)(A) ON 25.3.1997 ACCEPTING THE RETURN OF INCO ME. THE FACTS OF THE CASE ARE AS UNDER: ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 3 THE ASSESSEE IS A COMPANY FOUNDED IN 1949 IN BELGIUM. IT HAS BRANCHES IN OVER 220 COUNTRIES. T HE ASSESSEE HAS CLAIMED TO BE A COOPERATIVE SOCIETY FO R THE BENEFIT OF INTERNATIONAL AIRLINES TO PROVIDE A TELECOMMUNICATION NETWORK TO ALL THE AIRLINES. THE ASSESSEE CLAIMED THAT IT IS A MUTUAL BENEFIT SOCIET Y, WHICH IS CONFIRMED BY THE HONBLE HIGH COURT OF BOMBAY IN ITA/304/91 (CIT, CITY-1 VS SITA FOR AY 1981-82). A SURVEY U/S 133A WAS CARRIED OUT ON 29.11.2002 AT 24 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI. THE ASSESSEE CLAIMED THAT IT IS A IMPARTIAL, NON- POLITICAL, NON-COMMERCIAL ORGANIZATION. THE ASSESS EE CLAIMED THAT ALL THE SITA MEMBERS SHARED COST OF TH E SITA NETWORK WORLDWIDE. ANNUAL RUNNING COST ARE APPORTIONED BETWEEN THE MEMBERS ACCORDING TO EACH MEMBERS USE OF THE NETWORK IN EACH COUNTRY. ON VERIFICATION OF PAST RECORDS, IT WAS NOTED THAT ASSESSEES CASE WAS SCRUTINIZED FOR AY 1981-82. TH E TRIBUNAL ACCEPTED THE CONTENTION OF THE ASSESSEE TH AT ITS INCOME IS EXEMPT UNDER MUTUALITY CONCEPT. THE APPE AL FILED BY THE DEPARTMENT AGAINST THE ITATS ORDER WA S REJECTED BY THE HIGH COURT ON TECHNICAL GROUNDS OF DELAY. AS LAID DOWN BY THE VARIOUS COURTS, AN INCOME OF A N ORGANIZATION CAN BE EXEMPT UNDER THE CONCEPT OF MUTUALITY, IF THE FOLLOWING CONDITIONS ARE SATISFIE D: A) IT SHOULD BE AN ASSOCIATION RENDERING SERVICES TO I TS MEMBERS ONLY. B) THERE SHOULD BE CONTRIBUTION BY MEMBERS. C) SURPLUS, IF ANY, TO BE REFUNDED TO THE MEMBERS. D) THE CONTRIBUTORS TO THE FUND AND PARTICIPATORS IN T HE SURPLUS MUST BE THE SAME. E) IT SHOULD NOT HAVE DEALING WITH OUTSIDE BODY WHICH RESULTS IN SURPLUS. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 4 DURING THE COURSE OF SURVEY, THE FOLLOWING FACTS WE RE GATHERED: I) THE INDIAN BRANCH IS RENDERING SERVICES TO MORE THA N 200 CUSTOMERS BUT IT IS RECEIVING PAYMENTS IN INDIA FROM ONLY A FEW PERSONS. II) THE ASSESSEE CLAIMED THAT THERE ARE SITA CUSTOMERS AND EQUANT CUSTOMERS. THE ASSESSEE COULD NOT EXPLA IN WHO ARE EQUANT CUSTOMERS. III) THE ASSESSEE IS RENDERING SERVICES TO NON-MEMBERS ALSO. THEREBY VIOLATING THE CONDITION MENTIONED AT (A) ABOVE FOR CLAIMING EXEMPTION OF INCOME FROM TAX UND ER THE CONCEPT OF MUTUALITY. IV) NOBODY AT THE BRANCH OFFICE COULD EXPLAIN HOW THE C OST AND REVENUE ARE BEING APPORTIONED GLOBALLY. V) THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE MAINTAINE D GLOBALLY ON A ONLINE SOFTWARE. THE ACCOUNTS OF THE BRANCH ARE FINALIZED AT THE HEAD OFFICE AND NO AUDIT OF TH E ACCOUNTS OF THE INDIAN BRANCH IS CARRIED OUT IN IND IA. AS THE ASSESSEE COMPANY IS RENDERING SERVICES TO NO N-MEMBERS AS WELL, THE ASSESSEE IS NOT ENTITLED FOR THE BENEF IT OF MUTUALITY. IT ALSO NEEDS TO BE EXAMINED WHETHER THE ASSESSEE H AS ACCUMULATED RESERVES IN GENERAL RESERVE OF THE COMP ANY. IF THE ASSESSEE HAS THE BALANCE IN THE GENERAL RESERVES, T HE ITAT ORDER COULD NOT BE APPLICABLE TO THE ASSESSEES CASE. SINCE, THE BENEFIT OF MUTUALITY IS NOT APPLICABLE T O THE ASSESSEE, I HAVE REASON TO BELIEVE THAT THE INCOME HAS ESCAPE D ASSESSMENT WITHIN THE MEANING OF THE PROVISIONS OF SECTION 147 OF THE IT ACT, 1961. IN VIEW OF THE ABOVE FACTS, YOUR KIND APPROVAL IS S OLICITED TO ISSUE A NOTICE U/S 148 OF THE IT ACT, 1961 IN ORDER TO BRING TO TAX THE ABOVE ESCAPED INCOME U/S 147 OF THE IT ACT, 196 1. 2.3. THE REASONS SO RECORDED WERE SUPPLIED TO THE A SSESSEE ON REQUEST. THEREAFTER, THE ASSESSEE RAISED CERTAIN O BJECTIONS TO THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 5 INITIATION OF THE RE-ASSESSMENT PROCEEDINGS VIDE IT S LETTER DATED 29.3.2004. IT WAS CONTENDED THAT NO INCOME ESCAPED FROM ASSESSMENT AS THE ASSESSEE WAS NOT LIABLE TO TAX IN INDIA ON T HE PRINCIPLE OF MUTUALITY AS CONFIRMED BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR EARLIER YEARS STARTING FROM A.YS. 1972-73 TO 1983-8 4. IT WAS ALSO SUBMITTED THAT THE SITA HAD EFFECTED ONLY COST RECO VERIES FROM NON- MEMBERS AND NOT EARNED ANY INCOME. AS SUCH, IT WA S CLAIMED THAT THERE WAS NO REASON TO SNATCH AWAY ITS TAX EXEMPT S TATUS IN INDIA. IT WAS HIGHLIGHTED THAT AS THE ASSESSEE SIMPLY MADE RE COVERIES, REPRESENTING REIMBURSEMENT OF ACTUAL COSTS INCURRED IN PROVIDING ITS FACILITIES TO THESE NON-MEMBERS AND EQUANT, THESE CONSTITUTED ONLY THE REIMBURSEMENT OF ITS COST, WHICH CANNOT BE REG ARDED AS INCOME. IT WAS REITERATED THAT SINCE SITA WAS OPERATING ON A NON-PROFIT BASIS, IT DID NOT GENERATE ANY SURPLUS FROM THE COST RECOV ERIES MADE FROM MEMBERS AS WELL AS NON-MEMBERS. IT WAS REEMPHASIZE D THAT SITA REMAINED OVERWHELMINGLY A MEMBERSHIP ORGANIZATION, WHICH FACT WAS EVIDENCED BY THE FOLLOWING FACTUAL INFORMATION. PARTICULARS AY: 1996- 1997 AY: 1997-98 COST RECOVERIES FROM MEMBERS 99.93% 99.82% COST RECOVERIES FROM GOVERNMENT AND INTERNATIONAL ORGANIZATIONS AND EQUANT 0.07% 0.18% ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 6 2.4. IN VIEW OF THE MINUSCULE PERCENTAGE OF THE PRESENCE OF NON-MEMBERS, THE ASSESSEE CONTENDED THAT ITS MUTUAL ITY WAS NOT DESTROYED FOR THIS REASON ALONE. AFTER RELYING ON CERTAIN JUDGMENTS, THE ASSESSEE CONTENDED, THROUGH PARA 7 OF ITS OBJEC TIONS, THAT THE PRINCIPLE OF MUTUALITY WOULD REMAIN INTACT AT LEAST IN RELATION TO THE INCOME FROM MEMBERS. AS REGARDS NON-MEMBER COST R ECOVERIES, IT WAS CONTENDED THAT ONE CATEGORY WAS GOVERNMENT APPO INTED AUTHORITIES WORLDWIDE WHICH ADMINISTER THE INTERNAT IONAL AIRPORTS, AIR TRAFFIC CONTROL, CIVIL AVIATION, CUSTOMS AS WEL L AS OTHER AIR TRANSPORT CONNECTING BODIES. THE ASSESSEE SUBMITTE D THAT SUCH ENTITIES ASSIST IT IN SERVING SITA MEMBERS. IT W AS RESTATED THAT THOSE ORGANIZATIONS WERE GRANTED ACCESS TO SITA NETWORK O N A COST SHARING BASIS AS WAS DONE TO THE SITA MEMBERS. OTHER NON-M EMBER COST RECOVERIES RESULTED FROM UNITED NATIONS AND OTHER G OVERNMENT AND INTERNATIONAL ORGANIZATIONS AND CHARITIES. THEY WE RE ALLOWED THE BENEFIT OF THE USE OF SITAS FACILITIES ON A COST SHARING BASIS. AS REGARDS THE RECOVERIES FROM EQUANT, THE ASSESSEE CO NTENDED, VIDE PARA 16 OF ITS LETTER, THAT THESE RECOVERIES CONSTI TUTED 0.01% OF THE TOTAL RECOVERIES MADE FOR THE ASSESSMENT YEAR 1996- 97 AND 0.03% OF THE TOTAL RECOVERIES MADE FOR ASSESSMENT YEAR 1997- 98. IT WAS PUT FORTH THAT SITA DEVELOPED ITS RELATION WITH EQUANT FOR THE PURPOSES OF ACHIEVING ECONOMIES OF SCALE AND HENCE COST REDUCTI ON FOR ITS MEMBERS. SITA AND EQUANT WERE CLAIMED TO HAVE POOLE D THEIR GLOBAL PROCUREMENT FUNCTIONS AND PROVIDED CERTAIN ANCILLAR Y CROSS-SUPPORT TO EACH OTHER. IT WAS THUS SUBMITTED BEFORE THE AO THA T SITA ONLY ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 7 RECOVERED COSTS INCURRED FROM ITS MEMBERS, NON-MEMB ERS AND EQUANT. SUCH COST RECOVERIES REPRESENTED REIMBURSEM ENT AND, THEREFORE, WERE NOT INCOME CHARGEABLE TO TAX. IT W AS CLARIFIED THAT ACCOUNTS OF EVERY BRANCH OF SITA WORLDWIDE (INCLUDI NG INDIA) WERE REFLECTING THE SAME POSITION OF NO SURPLUS FROM ITS DEALING WITH MEMBERS AND NON-MEMBERS. IT WAS THUS CONCLUDED THA T NO INCOME OF THE ASSESSEE WAS CHARGEABLE TO TAX. 2.5. THE ASSESSING OFFICER DISPOSED OF ASSESSEES O BJECTIONS VIDE HIS ORDER DATED 30.3.2004, A COPY OF WHICH HAS BEEN PROVIDED AT PAGE NO. 93 OF THE PAPER BOOK AND THEREAFTER PASSED ORDE R U/S 143(3) READ WITH SECTION 147. VIDE HIS ORDER, THE ASSESSING O FFICER OBSERVED THAT DURING THE COURSE OF SURVEY, STATEMENT OF MR. ANDREW CLEAK, INTERNATIONAL TAX DIRECTOR, SITA WAS RECORDED WHO, INTER ALIA , ADMITTED THAT THE NETWORK OF SITA WAS OPEN TO USE BY INTERNATIONAL NON-GOVERNMENTAL ORGANIZATIONS SUCH AS UNITED NATIO NS, RED CROSS AND OTHER GOVERNMENTAL BODIES. AS REGARDS THE COST S, HE EXPLAINED THAT COSTS INCURRED IN A COUNTRY WERE RECORDED IN T HAT COUNTRY ALONE. CERTAIN COSTS INCURRED AT HEAD OFFICE LEVEL RELATIN G TO SPECIFIC COUNTRIES WERE ALLOCATED BY THE HEAD OFFICE TO THES E COUNTRIES. HE ALSO STATED THAT THE HEAD OFFICE ALLOCATED A PROPOR TION OF ITS GENERAL ADMINISTRATION AND FINANCING COSTS TO ALL THE BRANC HES. HOWEVER, HE FAILED TO GIVE ANSWER TO THE BASIS OF ALLOCATION OF SUCH COSTS TO DIFFERENT COUNTRIES BY THE HEAD OFFICE. HE ALSO FA ILED TO PRECISELY STATE THE BASIS OF ALLOCATING THE FINANCE COST TO D IFFERENT COUNTRIES BY ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 8 THE HEAD OFFICE. CERTAIN OTHER QUESTIONS ALSO REM AINED UN-REPLIED. HE AGREED TO SUBMIT THE NECESSARY DETAILS AS AND WH EN RECEIVED. THE REVENUE AUTHORITIES ALSO RECORDED THE STATEMENT OF SHRI S. GOPALAKRISHNAN, FINANCE MANAGER, SITA, INDIA DURIN G THE COURSE OF SURVEY PROCEEDINGS. HE ALSO GAVE EVASIVE REPLIES TO CERTAIN QUESTIONS AND SHOWED IGNORANCE TO THE BASIS OF ALLOCATION OF HEAD OFFICE EXPENSES. ON A QUESTION AS TO HOW THE BILLS WERE R AISED AND HOW THESE WERE ACCOUNTED FOR IN THE BOOKS OF THE INDIAN BRANCH, IT WAS STATED THAT THE HEAD OFFICE DISTRIBUTED THE CHARGE AND THE SAME WAS ACCOUNTED BY THE HEAD OFFICE THROUGH AUTOMATIC JOUR NAL ENTRIES INTO RESPECTIVE REGIONAL ACCOUNTS. IN RESPONSE TO QUEST ION NO.12, HE SUBMITTED THAT THE ACCOUNTS WERE FINALIZED BY THE H EAD OFFICE AND BALANCE SHEET AND INCOME & EXPENDITURE ACCOUNTS WER E PREPARED AT HEAD OFFICE ONLY. AFTER FINALIZATION OF THE ACCOUN TS, THE SIGNED COPY OF THE BALANCE SHEET AND INCOME & EXPENDITURE WERE SENT TO THE RESPECTIVE BRANCH OFFICES INCLUDING INDIA BRANCH. HE SUBMITTED THAT ALL THE DETAILS AND DOCUMENTARY EVIDENCES WERE KEPT BY THE HEAD OFFICE ONLY AND THERE WAS NO BASIS AVAILABLE WITH T HE INDIA BRANCH AS TO HOW VARIOUS EXPENSES WERE ALLOCATED BY THE HEAD OFFICE TO DIFFERENT BRANCHES ACROSS THE WORLD. HE FURTHER SHO WED HIS IGNORANCE AS TO HOW THE REVENUES RECEIPTS WERE ALLOCATED BY T HE HEAD OFFICE TO VARIOUS BRANCHES INCLUDING INDIA. AT THIS STAGE, I T IS RELEVANT TO NOTE THAT SUBSEQUENTLY, THE ASSESSEE SUBMITTED SOME OF T HE DETAILS / EXPLANATIONS AS PROMISED AT THE TIME OF SURVEY. AF TER TAKING INTO CONSIDERATION THE SUBMISSIONS OF MR. ANDREW CLEAK, SHRI S. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 9 GOPALAKRISHNAN AND SUBMISSIONS MADE BY THE ASSESSEE , THE ASSESSING OFFICER SUMMED UP RELEVANT FACTS IN HIS ORDER U/S 143(3) AS UNDER :- (I) THE INDIAN BRANCH IS RENDERING SERVICES TO MORE THAN 200 CUSTOMERS BUT IT IS RECEIVING THE PAYMENTS IN INDIA FROM ONLY A FEW PERSONS. (II) THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE MAINTAINED GLOBALLY ON A ONLINE SOFTWARE. THE FINANCE MANAGER WAS NOT AWARE OF VARIOUS ENTRIES IN THE ACCOUNTS MAINTAINED ON COMPUTER. THE ACCOUNTS OF THE BRANCH ARE FINALIZED AT THE HEAD OFFICE AND NO AUDIT OF THE ACCOUNTS OF THE INDIAN BRANCH IS CARRIED OUT IN INDIA. (III) THERE WAS DIFFERENCE IN NOMENCLATURE OF THE PROFIT AND LOSS ACCOUNTS AND BALANCE SHEET SUBMITTED TO THIS OFFICE AND THE ONE WHICH CERTIFIED BY THE HEAD OFFICE TO THE INDIAN BRANCH. (IV) THE SERVICES ARE BEING RENDERED BY SITA TO NON MEMBERS ALSO. (V) THE TRIAL BALANCE OF ACCOUNTS OF CALENDAR YEAR ENDING 2001 SHOW THAT THERE ARE SITA CUSTOMERS, EQUANT CUSTOMERS. THE ASSESSEE COULD NOT EXPLAIN WHO ARE EQUANT CUSTOMERS. (VI) NO BODY AT THE BRANCH OFFICE COULD EXPLAIN HOW THE COST AND REVENUE ARE BEING APPORTIONED GLOBALLY. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 10 (VII) A SUM OF RS. 52 CRORES WAS SHOWN AS LIABILITY BY WAY OF PREPAID EXPENSES IN THE BALANCE SHEET FOR THE YEAR ENDED 2001. PREPAID EXPENSES CANNOT BE LIABILITY. ON VERIFICATION, IT WAS FOUND THAT IT I S AMOUNT PAYABLE TO HEAD OFFICE. THE COMPLETE DETAILS OF ENTRIES IN THIS ACCOUNT WERE NOT AVAILABLE. (VIII) THE FINANCE MANAGER, INCHARGE OF THE SITA, INDIA IS NOT AWARE OF THE BASIS OF CHARGEABILITY OF COSTS FOR THE HEAD OFFICE EXPENSES. NO VERIFICATION OF THE SAID CHARGES ARE DONE IN VOUCHERS/DOCUMENTARY EVIDENCES OF THE VARIOUS EXPENSES INCURRED BY THE HEAD OFFICE ON BEHALF OF THE SITA, INDIA ARE AVAILABLE FOR VERIFICATION. 2.6. THE AO OBSERVED THAT THE ASSESSEE, APART FROM RENDERING SERVICES TO ITS MEMBERS, WAS ALSO PROVIDING SERVICE S TO THE FOLLOWING NON-MEMBERS. I) GOVERNMENT APPOINTED AUTHORITIES WORLDWIDE WHICH ADMINISTER THE INTERNATIONAL AIRPORTS, AIR TRAFFIC CONTROL, CIVIL AVIATION ETC. II) UNITED NATIONS, OTHER GOVERNMENTAL AND INTERNATIONAL ORGANIZATIONS AND CHARITIES. III) EQUANT CUSTOMERS. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 11 2.7. HE OBSERVED THAT SINCE FACILITIES OF THE ASS ESSEE WERE MADE AVAILABLE TO MEMBERS AS WELL AS NON-MEMBERS, THE PR INCIPLE OF MUTUALITY WAS LOST IN ENTIRETY. FOR THIS CONCLUSI ON, HE PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. BANKIPUR CLUB LTD. (1997) 226 ITR 97 (SC) . HE ALSO TOOK INTO ACCOUNT ARTICLES 20 AND 50 OF THE ASSESSEES ARTICLES OF ASSOCIATION AS PER WHICH THE MEMBERS RETIRING OR R ESIGNING WERE NOT ENTITLED TO PARTICIPATE IN THE RESERVES. THIS WAS A LSO CONSIDERED TO BE ONE OF THE REASONS FOR THE NON-APPLICABILITY OF MUT UALITY TO PROVIDE EXEMPTION TO THE ASSESSEE. THE AO ALSO CONSIDERED THE ASSESSEES STAND THAT IT WAS WORKING ON NO-PROFIT NO-LOSS BA SIS AND WAS ONLY RECOVERING COSTS FROM MEMBERS AS WELL AS NON-MEMBER S. HE NOTED THAT THE ASSESSEE FAILED TO SUPPLY COMPLETE DETAILS OF EXPENSES ALONG WITH VOUCHERS. SINCE NO DETAILS WERE AVAILABLE AND FURTHER THERE WAS NO BASIS FOR ALLOCATION OF SUCH EXPENSES OR ALLOCA TION OF REVENUE, THE ASSESSING OFFICER HELD THAT THIS CONTENTION OF THE ASSESSEE, AS WORKING ON NO PROFIT NO LOSS BASIS, WAS NOT SUBSTA NTIATED. HE ALSO TOOK INTO CONSIDERATION THE STATEMENTS OF THE ABOVE OFFICERS TO THE EFFECT THAT ALL THE ACCOUNTS WERE MAINTAINED AT THE HEAD OFFICE ONLY AND THE BASIS OF ALLOCATION OF EXPENSES AND REVENU E WAS NOT KNOWN AT INDIA LEVEL. IN THE BACKDROP OF THE ABOVE FACTS, TH E AO HELD THAT VERIFICATION OF ALLOCATION OF GLOBAL EXPENSES AND R EVENUE TO THE INDIAN BRANCH WAS NOT POSSIBLE. EVENTUALLY HE HELD THAT A SSESSEE WAS A NON- MUTUAL ORGANIZATION AS ITS INCOME FROM SERVICES AND SUPPLIES EXTENDED TO THE MEMBERS AND ALSO TO THE NON-MEMBERS . AS THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 12 ASSESSEE FAILED TO CORROBORATE ITS FIGURES GIVEN IN INCOME AND EXPENDITURE ACCOUNT, THE AO APPLIED RULE 10 OF THE INCOME-TAX RULES, 1962 AND ESTIMATED THE INCOME @ 5% OF THE TO TAL RECEIPTS OF THE ASSESSEE. THIS RESULTED INTO ASSESSMENT OF THE TOTAL INCOME OF RS. 1,84,70,000/-. 2.8. THE ASSESSEE CHALLENGED THE ASSESSMENT ORDER B EFORE THE LD. CIT(A) ON THE QUESTION OF INITIATION OF REASSESSME NT PROCEEDINGS AND ALSO ON MERITS. IT WAS ALSO ARGUED THAT WHILE ANY PROFITS EARNED FROM NON-MEMBERS MAY BE TAXABLE, BUT THE PRINCIPLE OF M UTUALITY WOULD APPLY IN RESPECT OF TRANSACTIONS WITH MEMBERS. TO FORTIFY THIS CONTENTION, THE RELIANCE WAS PLACED ON BEHALF OF TH E ASSESSEE, INTER ALIA, ON THE JUDGMENTS OF THE HONBLE SUPREME COURT IN THE CASE OF BANKIPUR CLUB LTD. (SUPRA), CIT VS. RANCHI CLUB LTD . (1992) 196 ITR 137 (PAT.) (FB) AS UPHELD BY THE SUPREME COURT IN THE GROUP OF CASES DISPOSED OF IN BANKIPUR CLUB LTD. (SUPRA) AND ALSO SPECIAL BENCH ORDER IN THE CASE OF WALKESHWAR TRIVENI CO-OPERATIVE HOUSING SOCIETY LTD. VS. ITO (2004) 88 ITD 159(MUM.) (SB) . 2.9. THE LD. CIT(A) REJECTED THE ASSESSEES CONTENTION AS REGARDS THE INITIATION OF REASSESSMENT PROCEEDINGS BY HOLDI NG THAT THE AO WAS RIGHT IN INITIATING THE REASSESSMENT PROCEEDINGS. ON MERITS, HE PARTLY AGREED WITH THE ASSESSEES ARGUMENTS. IT WAS HELD THAT THE CONCEPT OF MUTUALITY WAS PRESENT IN ASSESSEES TRANSACTIONS WI TH ITS MEMBERS THEREBY EXEMPTING THE INCOME FROM TAXATION TO THAT EXTENT. HOWEVER, ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 13 THE TRANSACTIONS WITH THE NON-MEMBERS WERE HELD TO BE TAXABLE AS NOT GOVERNED BY THE PRINCIPLE OF MUTUALITY. HE ALSO D ID NOT AGREE WITH THE ASSESSEES CONTENTION ABOUT THE CORRECTNESS OF ITS ACCOUNTS FOR DETERMINING THE INCOME. APPLYING THE MANDATE OF RU LE 10, HE ESTIMATED THE TAXABLE INCOME AT 5% OF THE GROSS AMO UNT RECOVERED FROM THE NON-MEMBERS. 2.10. BOTH THE SIDES ARE IN APPEAL AGAINST THERE RESPECTIVE STANDS. WHEREAS THE ASSESSEE, APART FROM CHALLENGIN G THE COMPUTATION OF INCOME AT 5% OF THE GROSS RECEIPTS FROM NON-MEMB ERS, HAS ALSO CHALLENGED THE INITIATION OF REASSESSMENT PROCEEDIN GS, THE REVENUE IS PRIMARILY AGGRIEVED AGAINST THE DIRECTION OF THE LD . CIT(A) IN ACCEPTING THE RULE OF MUTUALITY IN RESPECT OF THE A SSESSEES TRANSACTIONS WITH ITS MEMBERS THEREBY EXEMPTING INC OME FROM TAXATION TO THAT EXTENT. 2.11. FIRSTLY, WE TAKE UP GROUND NO. 1 TAKEN B Y THE ASSESSEE AGAINST THE INITIATION OF RE-ASSESSMENT PROCEEDINGS . IT CAN BE OBSERVED FROM THE ASSESSEES LETTER DATED 25.3.2004 ADDRESSED TO THE AO, A COPY OF WHICH IS AVAILABLE AT PAGE 143 OF THE PAPER BOOK, THAT THE ASSESSEE WAS FORMED FOR THE PURPOSE OF PROVIDIN G SERVICES TO ITS MEMBERS. IT HAS A NETWORK OF MORE THAN 200 BRANCHE S WORLDWIDE INCLUDING THE ONE IN INDIA. SITA INDIAN BRANCH INC URS NETWORK COSTS AND ADMINISTRATIVE COSTS TO SECURE ACCESS TO THE GL OBAL DATA NETWORK AS REQUIRED BY ITS MEMBER AIRLINES IN INDIA. THE S PECIFIC COST IN ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 14 RELATION TO INDIVIDUAL MEMBER AIRLINES ARE RECOVERE D FROM THE PARTICULAR AIRLINES CONCERNED. THE SITA HEAD OFFIC E RECOVERS GLOBAL NETWORK CONNECTION AND TRANSMISSION COSTS FROM THE MEMBER AIRLINES ACCORDING TO THEIR USE OF THE NETWORK. THESE COSTS RECOVERIES APPEAR IN THE RECEIPTS AND EXPENDITURE ACCOUNT OF THE ASSE SSEE. THE SITA HEAD OFFICE ALLOCATES REVENUE BETWEEN ITS WORLDWIDE BRANCHES IN SUCH A WAY SO AS TO EXACTLY MATCH THE SAME WITH THE COSTS INCURRED BY EACH BRANCH. THE ASSESSEE EXPLAINED SUCH ALLOCATIO N WITH THE HELP OF AN EXAMPLE. IF DATA IS TO BE TRANSMITTED FROM MUMB AI TO NEW YORK, THE TRANSMISSIONS ARE SPLIT INTO PACKETS AND EACH P ACKET MAY TRAVEL BY A DIFFERENT NETWORK ROUTE SO AS TO REACH THE END DE STINATION AT WHICH THE PACKETS ARE REASSEMBLED. IN THIS EXAMPLE, THE TRANSMISSION MAY SPLIT INTO THREE SEPARATE PACKETS FROM BOMBAY TO SI NGAPORE TO LOS ANGELES TO NEW YORK. THE ORIGIN AND DESTINATION CO UNTRIES I.E. INDIA AND USA HAVE INCURRED COSTS RELATED TO THE TRANSMIS SION OF DATA. HOWEVER, THE INTERMEDIATE COUNTRIES I.E. SINGAPORE AND LOS ANGLES HAVE ALSO PERFORMED AN ESSENTIAL ROLE IN THE DATA T RANSMISSION. 2.12. AT THIS JUNCTURE, IT IS OF SIGNIFICANCE T O MENTION THAT THE POSITION ABOUT THE SITA AS NOT LIABLE TO TAX IN IND IA ON THE PRINCIPLE OF MUTUALITY HAS BEEN ACCEPTED BY THE TRIBUNAL VIDE ITS VARIOUS ORDERS STARTING WITH THE ASSESSMENT YEAR 1972-73 UP TO ASSESSMENT YEAR 1983-84. THE REVENUE FILED REFERENCE APPLICATIONS U/S 256(1) WHICH CAME TO BE REJECTED BY THE TRIBUNAL FOR ASSESSMENT YEARS 1974-75 TO 1978-79 AND 1981-82. THE DEPARTMENT FILED AN APPLI CATION U/S ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 15 256(2) TO THE HONBLE BOMBAY HIGH COURT AGAINST THE ORDER PASSED BY THE TRIBUNAL FOR ASSESSMENT YEAR 1981-82, WHICH ALSO MET WITH THE FATE OF DISMISSAL, THOUGH ON SOME TECHNICAL GROUND AND NOT ON MERITS. NO OTHER ASSESSMENT YEAR SO FAR HAS BEEN B ROUGHT TO OUR NOTICE AS HAVING BEEN DECIDED BY THE HONBLE BOMBAY HIGH COURT. THE POSITION WHICH NOW STANDS IS THAT ALL THE ORDER S PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE HAVE CONSTANTLY ACCEPTED THE PRINCIPLE OF MUTUALITY. 2.13. THE LEARNED DEPARTMENTAL REPRESENTATIVE OPPO SED THE RAISING OF GROUND RAISED BY THE ASSESSEE AGAINST TH E INITIATION OF REASSESSMENT PROCEEDINGS BY SUBMITTING THAT SIMILAR GROUND RAISED BY THE ASSESSEE BEFORE THE LEARNED CIT(A) WAS NOT PRES SED BY IT IN RELATION TO ASSESSMENT YEAR 1999-2000 AND 2000-2001 . THIS, IN HIS OPINION, WAS A GOOD REASON FOR THE BENCH TO DISMISS THE GROUND RAISED BY THE ASSESSEE IN THIS YEAR AS WELL AT THE VERY OUTSET. IN THE OPPOSITION, THE LEARNED AR SUBMITTED THAT THE LEARN ED CIT(A) WAS WRONG IN RECORDING THAT THE ASSESSEE DID NOT PRESS THE GROUND ABOUT THE INITIATION OF REASSESSMENT PROCEEDINGS FOR AYS 1999-2000 AND 2000-2001. IT WAS SUBMITTED THAT THE SAID GROUND W AS DULY PRESSED BUT THE LEARNED CIT(A) RECORDED THIS FACT ON SOME E RRONEOUS NOTION. ON A SPECIFIC QUESTION, THE LEARNED AR ADMITTED THA T THE ASSESSEE DID NOT FILE ANY RECTIFICATION APPLICATION BEFORE THE L EARNED CIT (A) IN THIS REGARD. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 16 2.14. IN SO FAR AS THE QUESTION OF CHALLENGING T HE INITIATION OF REASSESSMENT PROCEEDINGS BY THE ASSESSEE IS CONCERN ED, WE FIND THAT IT IS CERTAINLY A QUESTION OF LAW WHICH CAN BE RAIS ED BEFORE THE TRIBUNAL EVEN FOR THE FIRST TIME. ALL THE RELEVANT FACTS ARE AVAILABLE AND THERE IS NO NEED TO ASCERTAIN ANY FRESH FACTS F OR RENDERING DECISION ON THIS ISSUE. THE HONBLE SUPREME COURT I N THE CASE OF NATIONAL THERMAL POWER CORPORATION VS. CIT (1998) 2 29 ITR 383 (SC) HAS HELD THAT THE TRIBUNAL HAS JURISDICTION TO EXAM INE A QUESTION OF LAW WHICH ARISES FROM THE FACTS AS FOUND BY THE AUTHORITIES BELOW AND HAVING A BEARING ON THE TAX LIABILITY OF THE AS SESSEE NOTWITHSTANDING THE FACT THAT THE SAME WAS NOT RAIS ED BEFORE THE LOWER AUTHORITIES. THE HONBLE MADRAS HIGH COURT I N THE CASE OF CIT VS. TAMIL NADU TOURISM DEVELOPMENT CORPORATION LTD. (2007) 288 ITR 146 (MAD) HAS HELD THAT THE TRIBUNAL WAS JUSTIFIED IN ADMITTING AN ADDITIONAL GROUND OF APPEAL ON A SUBST ANTIAL QUESTION OF LAW WHICH WAS NOT PRESSED BEFORE THE CIT(A). HERE, IT IS RELEVANT TO NOTE THAT IN SO FAR AS THE YEAR UNDER CONSIDERATION IS CONCERNED, THE ASSESSEE VALIDLY TOOK UP THIS ISSUE BEFORE THE ASS ESSING OFFICER AS WELL AS THE LD. CIT(A) AND BOTH THE AUTHORITIES HAV E DECIDED THIS ASPECT OF THE MATTER BY MEANS OF SPEAKING ORDERS. IN VIEW OF THESE FACTS, WE FIND THE CONTENTION OF THE LEARNED DEPART MENTAL REPRESENTATIVE AS DEVOID OF ANY MERIT. THE SAME IS THEREFORE, REPELLED. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 17 2.15. NOW, WE WILL TAKE UP THE OBJECTIONS RAISED BY THE ASSESSEE ON THE QUESTION OF RE-ASSESSMENT PROCEEDINGS. THE REA SONS RECORDED BY THE AO HAVE BEEN VERBATIM REPRODUCED ABOVE. IT CAN BE OBSERVED THAT IN THE EARLIER PART OF SUCH REASONS THERE IS A REFERENCE TO THE EARLIER POSITION PREVAILING DUE TO THE ORDERS PASSE D BY THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT REJECTING THE DEP ARTMENTAL CASE FOR AY 1981-82. THEREAFTER, DISCUSSION HAS BEEN MAD E ABOUT REVELATIONS DURING THE COURSE OF SURVEY U/S 133A. IN THE PENULTIMATE PARA, THE ASSESSING OFFICER HAS STATED THE REASONS FOR THE ESCAPEMENT OF INCOME OF THE ASSESSEE, WHICH CAN BE CONVENIENTL Y SPLIT INTO TWO PARTS, VIZ., (I) THE ASSESSEE COMPANY IS RENDERING SERVICES TO NON- MEMBERS AND HENCE IS NOT ENTITLED TO AVAIL THE BEN EFIT OF MUTUALITY AND (II) `IT ALSO NEEDS TO BE EXAMINED WHETHER THE ASSESSEE HAS ACCUMULATED RESERVES IN GENERAL RESERVE OF THE COMP ANY. IF THE ASSESSEE HAS BALANCE IN THE GENERAL RESERVES, THE ITAT ORDER COULD NOT BE APPLICABLE TO THE ASSESSEES CASE. IN THE LAST PARA, THE ASSESSING OFFICER HAS PROJECTED HIS THINKING BY COM ING TO THE CONCLUSION THAT SINCE THE BENEFIT OF MUTUALITY IS N OT APPLICABLE TO THE ASSESSEE, HE HAS REASONS TO BELIEVE THAT THERE IS A N ESCAPEMENT OF INCOME. 2.16. FIRSTLY, WE WILL ESPOUSE THE SECOND PART OF THE REASON ADDUCED BY THE ASSESSING OFFICER FOR INITIATING THE REASSES SMENT PROCEEDINGS. IT CAN BE SEEN FROM THE WORDING OF THE TEXT OF SUCH REASONS THAT THE ASSESSING OFFICER WANTED TO EXAMINE AS TO WHETH ER THE ASSESSEE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 18 HAS ACCUMULATED RESERVE AND IF SUCH GENERAL RESERVE TURNS OUT TO BE THERE, THEN NOT TO FOLLOW THE EARLIER ORDER PASSED BY THE TRIBUNAL GRANTING EXEMPTION ON THE PRINCIPLE OF MUTUALITY. THUS, THE EMPHASIS OF THE ASSESSING OFFICER ON THIS PART OF R EASONS WAS TO FIRST MAKE AN EXAMINATION AND THEN FIND WHETHER OR NOT TH ERE IS AN ESCAPEMENT OF INCOME. THIS, IN OUR CONSIDERED OPI NION, FRUSTRATES THE VERY CONCEPT OF REASSESSMENT. SECTION 147 PROV IDES THAT IF THE ASSESSING OFFICER HAS REASONS TO BELIEVE THAT INCOM E CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR, HE MAY SUBJECT TO THE PROVISIONS OF SECTION 148 TO 153, ASSESS OR REASSESS SUCH INCOME AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT AND WHICH COMES TO HIS NOTICE SU BSEQUENTLY IN THE COURSE OF THE PROCEEDINGS UNDER THE SECTION. F ROM THE LANGUAGE OF SECTION 147, IT IS APPARENT THAT BEFORE TAKING A NY ACTION UNDER THIS PROVISION, THE ASSESSING OFFICER MUST HAVE REASON TO BELIEVE ABOUT THE ESCAPEMENT OF INCOME. UNLESS THE REASONS TO BEL IEVE ABOUT THE ESCAPEMENT OF INCOME EXIST, NO RECOURSE CAN BE TAKE N TO THIS PROVISION. IN OTHER WORDS, THERE SHOULD BE SOME PRIMA FACIE MATERIAL WITH THE ASSESSING OFFICER LEADING HIM TO ENTERTAIN A BELIEF THAT ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. O NCE THERE IS SOME SUCH MATERIAL, HE CAN VALIDLY INITIATE THE RE- ASSESSMENT PROCEEDINGS AND THEREAFTER, CONDUCT THOROUGH EXAMIN ATION TO CONVERT HIS PRIMA FACIE BELIEF ABOUT THE ESCAPEMENT OF INCOME INTO REAL ESCAPEMENT. THE EXAMINATION PART COMES LATER IN TH E POINT OF TIME. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 19 IN THE ORDER OF SEQUENCE, FIRSTLY, THERE SHOULD BE SOME PRIMA FACIE MATERIAL WITH THE AO TO ENTERTAIN A BELIEF THAT IN COME OF THE ASSESSEE CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. SUCH MATE RIAL SHOULD EXIST BEFORE THE ISSUANCE OF NOTICE U/S 148. THEN COMES THE EXAMINATION PART AND THAT TOO, AFTER INITIATION OF REASSESSMEN T PROCEEDINGS, FOR FINALLY DETERMINING AS TO WHETHER HIS PRIMA FACIE VIEW IS CORRECT OR NOT. IF THE EXAMINATION CONDUCTED BY THE AO POST T HE INITIATION OF REASSESSMENT PROCEEDINGS GIVES VERACITY TO HIS PRIMA FACIE BELIEF, THEN THE ADDITION IS MADE. IT, THEREFORE, TRANSPIR ES, THAT PRIMA FACIE BELIEF ABOUT THE ESCAPEMENT OF INCOME MUST ALWAYS P RECEDE THE EXAMINATION. IN CANNOT BE IN THE REVERSE DIRECTION. IF THE ISSUANCE OF NOTICE U/S 148 IS EQUATED WITH A LINE, THEN THE REA SON TO BELIEVE ABOUT THE ESCAPEMENT OF INCOME SHOULD BE ON ITS LEFT, AND EXAMINATION PART ON ITS RIGHT. THE CORRECT SEQUENCE IN SUCH A CASE W ILL ALWAYS BE STARTING FROM LEFT AND PROCEEDING TOWARDS RIGHT, TH AT IS FIRSTLY, TO HAVE REASON TO BELIEVE ABOUT THE ESCAPEMENT OF INCOME, T HEN ISSUE NOTICE U/S 148 AND THEREAFTER CONDUCT EXAMINATION TO DETER MINE THE AMOUNT OF ESCAPED INCOME, IF ANY. WHERE AN ASSESSING OFFI CER VENTURES TO INITIATE REASSESSMENT PROCEEDINGS WITH AN OBJECT OF FINDING SOME MATERIAL ABOUT THE ESCAPEMENT OF INCOME, SUCH RE-AS SESSMENT CANNOT LEGALLY STAND. THE LAW DOES NOT PERMIT THE AO TO C ONDUCT INQUIRIES AFTER THE INITIATION OF REASSESSMENT PROCEEDINGS, TO FIND IF THERE IS AN ESCAPEMENT OF INCOME. THERE MUST NECESSARILY BE SOME MATERIAL TO PRIMA FACIE INDICATE ABOUT THE ESCAPEMENT OF INCOME. ONLY THEN , THE AO CAN INITIATE REASSESSMENT PROCEEDINGS. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 20 2.17. IN THE CASE OF CIT VS. SMT. MANIBEN VALJI SHAH (2006) 283 ITR 453 (BOM) THE ASSESSEE FILED RETURN OF INCOME. THE ASSESSIN G OFFICER OBSERVED FROM THE CAPITAL ACCOUNT THAT THE ASSESSEE HAD PURCHASED A FLAT FOR WHICH NO DETAILS WERE FILED AL ONG WITH THE RETURN OF INCOME, SUCH AS COPY OF PURCHASE AGREEMENT AND SOURCE OF FUNDS ETC. IN THE ABSENCE OF THESE DETAILS, HE PROPOSED ACTION UNDER SECTION 147. WHEN THE MATTER CAME UP BEFORE THE HONBLE BOM BAY HIGH COURT, IT UPHELD THE ORDER PASSED BY THE TRIBUNAL Q UASHING THE RE- ASSESSMENT ON THE GROUND THAT THE AO COULD NOT HAVE RESORTED TO THE PROVISION OF SECTION 148 JUST TO INQUIRE ABOUT THE SOURCE OF FUNDS. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE DELHI HI GH COURT IN THE CASE OF CIT VS. BATRA BHATTA COMPANY (2010) 321 ITR 526 (DE L) . 2.18. WE WILL LIKE TO MENTION THAT THAT ISSUANCE OF NOTICE U/S 142(1) AND 143(2) IS SINE QUA NON FOR MAKING SCRUTINY ASSESSMENT U/S 143(3). CLAUSE (I) OF SECTION 143(2) PROVIDES THAT WHERE A RETURN HAS BEEN FURNISHED, THE ASSESSING OFFICER, IF HE HAS `REASON TO BELIEVE THAT ANY CLAIM OF LOSS, EXEMPTION, DEDUCTION, ALLOW ANCE OR RELIEF MADE IN THE RETURN IS INADMISSIBLE, SERVE ON THE AS SESSEE A NOTICE REQUIRING HIM TO PRODUCE OR CAUSE TO BE PRODUCED E VIDENCE IN RELATION TO SUCH CLAIM ETC. SUB-CLAUSE (II) OF SE CTION 143(2) STARTS WITH A NON-OBSTANTE CLAUSE . IT PROVIDES THAT NOTWITHSTANDING ANYTHING CONTAINED IN CLAUSE (I), IF THE AO CONS IDERS IT NECESSARY TO ENSURE THAT THE ASSESSEE HAS NOT UNDERSTATED THE IN COME OR NOT COMPUTED THE EXCESSIVE LOSS ETC., HE SHALL SERVE A NOTICE REQUIRING THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 21 ASSESSEE TO PRODUCE OR CAUSE TO BE PRODUCED ANY EV IDENCE ON WHICH THE ASSESSEE MAY RELY IN SUPPORT OF THE RETURN. FR OM THE PRESCRIPTION OF CLAUSE (II) OF SECTION 143(2), IT IS EVIDENT THA T THE ASSESSING OFFICER CAN PROCEED TO FRAME ASSESSMENT U/S 143(3) WITH A V IEW TO VERIFY THAT THE ASSESSEE HAS PROPERLY STATED THE FACTS OF HIS C ASE AND NOT CLAIMED ANY EXCESSIVE DEDUCTION ETC. THIS PROVISION IS IN ADDITION TO CLAUSE (I) OF SECTION 143(2), WHICH PROVIDES FOR THE ISSUA NCE OF NOTICE UNDER SECTION IF THE AO HAS REASON TO BELIEVE THAT THE ASSESSEE HAS CLAIMED ANY EXCESSIVE LOSS, EXEMPTION OR DEDUCTION ETC. ON A CONJOINT READING OF CLAUSES (I) AND (II) OF SECTION 143(2), IT BECOM ES PATENT THAT THE ASSESSING OFFICER IS EMPOWERED TO FRAME ASSESSMENT U/S 143(3) EITHER ON HIS FORMING REASON TO BELIEVE ABOUT ANY E XCESSIVE CLAIM OF LOSS / EXEMPTION / DEDUCTION AND ALSO TO VERITY THE PARTICULARS OF RETURN WITHOUT THERE BEING ANY REASON TO BELIEVE AB OUT SUCH EXCESSIVE CLAIM OF LOSS / EXEMPTION / DEDUCTION ETC. IN CONT RAST TO SECTION 143(2), SECTION 147 PROVIDES FOR ACTION ONLY WHERE THE ASSESSING OFFICER HAS A REASON TO BELIEVE THAT ANY INCOME CH ARGEABLE TO TAX HAS ESCAPED ASSESSMENT. THE PROVISION ANALOGOUS TO CL AUSE (II) OF SECTION 143(2) EMPOWERING THE ASSESSING OFFICER TO TAKE UP THE CASE FOR SCRUTINY WITH A VIEW TO ENSURE THAT THE ASSESS EE HAS NOT UNDERSTATED THE INCOME ETC., IS ABSENT IN SECTION 147. THIS BRINGS US TO A LOGICAL CONCLUSION THAT THE PROCEEDINGS FOR A SSESSMENT OR REASSESSMENT U/S 147 CAN BE INITIATED ONLY WHEN THE ASSESSING OFFICER HAS REASON TO BELIEVE THAT ANY INCOME CHARG EABLE TO TAX HAS ESCAPED ASSESSMENT AND NOT WHERE HE WANTS TO EXAMIN E OR VERIFY THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 22 PARTICULARS OF RETURN WITH A VIEW TO ENSURE THAT TH E ASSESSEE HAS NOT UNDERSTATED ITS INCOME. 2.19. REVERTING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN THAT IN SO FAR AS THE SECOND REASON IS CONCERNED, THE AO IN ITIATED RE- ASSESSMENT PROCEEDINGS WITH A VIEW TO EXAMINE WHE THER THE ASSESSEE HAD ACCUMULATED RESERVE. OBVIOUSLY, THE S COPE OF SECTION 147 CANNOT ENCOMPASS SUCH AN ACTION UNDER WHICH CER TAIN EXAMINATION IS TO BE CONDUCTED FOR FORMING A REASON TO BELIEVE AS TO THE ESCAPEMENT OF INCOME. IN VIEW OF THE FOREGOING DISCUSSION, IT IS VIVID THAT THE AO WAS CAUGHT ON A WRONG FOOT IN INI TIATING THE REASSESSMENT PROCEEDINGS ON THE SECOND COUNT. THER E WAS NO REASON TO BELIEVE ABOUT THE ESCAPEMENT OF INCOME AT THAT S TAGE. HE SIMPLY WISHED TO ASCERTAIN POST THE INITIATION OF REASSESS MENT AS TO WHETHER THERE WAS ANY ESCAPEMENT OF INCOME. IN OTHER WORD S, HE PUT THE CART IN FRONT OF THE HORSE. AS SUCH, THE INITIATION OF REASSESSMENT PROCEEDINGS ON THIS SCORE IS SET ASIDE. 2.20. NOW, WE TURN TO EXAMINE THE FIRST REASON RECORDED BY THE ASSESSING OFFICER, BEING THE LOSS OF MUTUALITY DUE TO THE PROVISION OF FACILITIES BY THE ASSESSEE TO NON-MEMBERS AS WELL. IT IS OBSERVED THAT THE ASSESSEE WAS AVAILING EXEMPTION FROM TAX ON THE PRINCIPLE OF MUTUALITY. SEVERAL ORDERS PASSED BY THE TRIBUNAL G RANTING EXEMPTION FROM TAX ON THE PRINCIPLE OF MUTUALITY IN THE ASSE SSEES OWN CASE HAVE BEEN BROUGHT TO OUR NOTICE. ON A PERTINENT QU ERY, IT WAS FAIRLY ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 23 ACCEPTED BY THE LD. AR THAT IN ALL SUCH EARLIER YEA RS, THE EXEMPTION WAS GRANTED BY CONSIDERING THE FACTUM OF PROVISION OF FACILITIES AND SERVICES BY THE ASSESSEE TO ITS MEMBERS ALONE. THE LD. AR WAS CANDID IN ADMITTING THAT THE ASSESSEE DID NOT RENDER ANY S ERVICE TO THE NON- MEMBERS IN SUCH EARLIER YEARS AND AS SUCH THE TRIBU NAL NEVER HAD AN OCCASION TO CONSIDER THE EFFECT OF NON-MEMBERS ALSO USING THE FACILITIES OF THE ASSESSEE, IN DETERMINING THE QUE STION OF MUTUALITY. 2.21. IT BECOMES MANIFEST THAT THE EARLIER ORD ERS PASSED BY THE TRIBUNAL CANNOT BE CONSIDERED AS BINDING PRECEDENT FOR THE YEAR UNDER CONSIDERATION DUE TO EMERGENCE TO FRESH FACTS HAVIN G DIRECT BEARING ON THE DECISION OF MUTUALITY, WHICH WERE EITHER N OT PREVAILING OR NOT CONSIDERED AND DECIDED BY THE TRIBUNAL, EITHER IMPLIEDLY OR EXPRESSLY. 2.22. IT IS SEEN THAT THE SURVEY CARRIED OUT B Y THE REVENUE AUTHORITIES DIVULGED THAT THE ASSESSEE WAS EXTENDIN G ITS SERVICES TO NON-MEMBERS AS WELL. IT IS IN THE LIGHT OF THESE F ACTS, THAT THE ASSESSING OFFICER INITIATED RE-ASSESSMENT PROCEEDIN GS ON THE PREMISE THAT THE ASSESSEE LOST THE BENEFIT OF MUTUALITY IN ENTIRETY FOR RENDERING THE SERVICES TO NON-MEMBERS ALSO. IT IS OBSERVED F ROM THE ASSESSEES OBJECTIONS TAKEN UP BEFORE THE AO AND ALSO THE REIT ERATION OF THE SAME BEFORE THE LD. CIT(A) THAT COST RECOVERIES FROM NO N-MEMBERS CONSTITUTED 0.07% IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. THE ASSESSEE DULY ADMITTED BE FORE THE AO THAT ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 24 IT MADE AVAILABLE ITS NETWORK, INTER ALIA, TO EQUANT CUSTOMERS. THE ASSESSEE ALSO ARGUED BEFORE THE LD. CIT(A), RELYIN G ON CERTAIN JUDGMENTS AS NOTICED ABOVE, THAT THE MUTUALITY MAY BE RETAINED IN SO FAR AS TRANSACTIONS WITH THE MEMBERS ARE CONCERNED, THOUGH IT MAY BE WAIVED IN RESPECT OF TRANSACTIONS WITH NON-MEMBERS. 2.23. AT THIS STAGE, IT IS RELEVANT TO NOTE THAT THE ACTION U/S 147 CAN BE TAKEN WHEN THERE IS A PRIMA FACIE MATERIAL TO REOPEN THE ASSESSMENT. AT THIS STAGE OF ISSUANCE OF NOTICE U/ S 148, THE SUFFICIENCY OR CORRECTNESS OF SUCH PRIMA FACIE MATERIAL IS NOT RELEVANT. THE HONBLE SUPREME COURT IN THE CASE OF RAYMOND WOOLLEN MILLS LTD. VS. ITO & ORS. (1999) 236 ITR 34 (SC) HAS HELD THAT THERE SHOULD BE PRIMA FACIE MATERIAL ON THE BASIS OF WHICH THE DEPARTMENT CAN REOPEN THE CASE. IT HAS BEEN LAID DOWN BY THEI R LORDSHIPS THAT : SUFFICIENCY OR CORRECTNESS OF THE MATERIAL IS NOT A THING TO BE CONSIDERED AT THIS STAGE . 2.24. BY PLACING ON RECORD A COPY OF THE JUDGME NT OF THE HONBLE MADRAS HIGH COURT IN DCIT VS. K.S.SURESH (2009) 319 ITR 1 (MAD) , THE LD. AR CONTENDED THAT THE REASSESSMENT BE QUASH ED AS THE INITIATION OF REASSESSMENT PROCEEDINGS WAS INVALID. FROM THIS JUDGMENT, IT IS OBSERVED, THAT THE HONBLE MADRAS H IGH COURT HAS UPHELD THE INITIATION OF REASSESSMENT BY NOTING THA T AT THE STAGE OF INITIATION OF REASSESSMENT, THE ONLY REQUIREMENT T O BE LOOKED INTO IS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 25 AS TO WHETHER THERE WAS A PRIMA FACIE CASE FOR REASSESSMENT. THE SUFFICIENCY OF REASONS HAS BEEN HELD TO BE NOT RELE VANT AT THAT STAGE. 2.25. IN ACIT VS. RAJESH JHAVERI STOCK BROKERS (P) LTD. (20 07) 291 ITR 500 (SC), THE ASSESSEE FILED ITS RETURN WHICH WAS PROCESSED U/S 143(1) OF THE ACT ACCEPTING THE AMOUNT RETURNED BY THE ASSESSEE. NOTICE U/S 148 WAS ISSUED ON THE GROUND THAT THE CL AIM OF BAD DEBTS WAS UNACCEPTABLE. THE ASSESSEE CHALLENGED THE INIT IATION OF REASSESSMENT PROCEEDINGS BEFORE THE AO BUT WITHOUT SUCCESS. THE HONBLE GUJARAT HIGH COURT ACCEPTED THE ASSESSEES CONTENTION IN RAJESH JHAVERI VS. ACIT (2006) 284 ITR 593 (GUJ) . REVENUE PREFERRED AN APPEAL BEFORE THE HONBLE SUPREME COUR T. THE HONBLE SUMMIT COURT HAS HELD IN RAJESH JHAVERI STOCK BROKERS (SUPRA) THAT INTIMATION U/S 143(1)(A) CANNOT BE TREATED AS AN O RDER OF ASSESSMENT AND IN THE ABSENCE OF THERE BEING ANY ASSESSMENT AT ALL, THE QUESTION OF CHANGE OF OPINION DOES NOT ARISE. IT HAS ALSO B EEN OBSERVED BY THEIR LORDSHIPS THAT THE WORD REASON IN THE PHRAS E REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATION. IF THE ASSESSING OFFICER HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPORT THAT INCOME HAD ESCAPED ASSESSMENT IT CAN BE SAID TO HAVE A REASON TO BELIE VE THAT AN INCOME HAS ESCAPED ASSESSMENT. THE EXPRESSION CANNOT BE R EAD TO MEAN THAT THE AO SHOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGA L EVIDENCE OR CONCLUSION . ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 26 2.26. IN VIEW OF THE ABOVE DISCUSSION, IT BOI LS DOWN THAT THE INITIATION OF REASSESSMENT CAN BE VALIDLY DONE WHEN THE AO HAS REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. IT IS A STAGE SOMEWHERE IN BETWEEN THE TWO ENDS, THAT IS REASON TO SUSPECT ABOUT THE ESCAPEMENT OF INCOME ON ONE END AND COMING TO A FIRM CONCLUSION ABOUT THE ESCAPEMENT OF INCOME ON THE OTHER. AS THE REASSESSMENT CAN NOT BE INITIATED JU ST TO DETERMINE AS TO WHETHER THERE IS ANY ESCAPEMENT OF INCOME, IN THE S AME BREATH, THE STRINGENT REQUIREMENT OF PROVING THAT THERE IS A DE FINITE ESCAPEMENT OF INCOME, IS ALSO NOT REQUIRED TO BE SATISFIED AT TH AT STAGE. SO LONG AS SOME PRIMA FACIE VIEW, ON THE BASIS OF SOME TANGIBLE MATERIAL, CAN BE ENTERTAINED BY THE AO ABOUT THE ESCAPEMENT OF IN COME, THE REQUIREMENT OF INITIATION OF REASSESSMENT IS FULLY SATISFIED. 2.27. WE NOW TURN TO THE FIRST REASON TAKEN NOTE B Y THE ASSESSING OFFICER FOR INITIATING THE REASSESSMENT P ROCEEDINGS, BEING THE LOSS OF MUTUALITY BECAUSE OF THE ASSESSEE ALSO RENDERING SERVICES TO NON-MEMBERS. AT THIS STAGE, WE DO NOT INTEND TO GO DEEP INTO THE CONCEPT OF MUTUALITY, EXCEPT FOR RECORDING THAT IT REFERS TO A SITUATION WHERE NUMBER OF PERSONS JOIN EACH OTHER AND FORM A N ASSOCIATION OR ORGANIZATION ETC. FOR RENDERING SERVICES TO THEM A LONE. IF, IN THE COURSE OF DEALINGS OF THE ORGANIZATION OR THE BOD Y WITH ITS MEMBERS, THERE ARISES ANY SURPLUS AND IT IS THE GROUP OF S UCH MEMBERS AS A CLASS WHICH IS ENTITLED TO PARTICIPATE IN SUCH SURP LUS, THERE EXISTS A PRINCIPLE OF MUTUALITY. AS NO ONE CAN TRADE WITH H IMSELF, NATURALLY ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 27 THERE CAN BE NO QUESTION OF EARNING ANY PROFIT BY T HE PARTICIPATORS FROM THE CONTRIBUTIONS MADE BY THEM AS A CLASS. TH E ESSENCE OF THE RULE OF MUTUALITY IS THE DEALINGS WITH THE MEMBERS ALONE. ONCE SUCH ORGANIZATION OR BODY ALSO STARTS DEALING WITH NON-M EMBERS, THE CONCEPT OF MUTUALITY IS LOST. TO WHAT EXTENT THE M UTUALITY IS LOST IN SUCH A CASE, THAT IS, WHETHER IN RESPECT OF DEAL INGS WITH NON- MEMBERS ALONE OR WITH BOTH THE MEMBERS AND NON-MEMB ERS, IS A DIFFERENT QUESTION, WHICH WE WILL DISCUSS IN A LATER PART OF THIS ORDER. IN ANY CASE, IN SO FAR AS DEALINGS OF THE O RGANIZATION OR BODY WITH THE NON-MEMBERS ARE CONCERNED, THE MUTUALITY D EFINITELY GETS DAMAGED. 2.28. FROM THE REASONS RECORDED ABOVE, IT IS OBSERVED THAT THE SURVEY CARRIED OUT ON THE PREMISES OF THE ASSESSEE REVEALED THAT THE ASSESSEE WAS HAVING DEALINGS WITH CERTAIN NON-MEMBE RS AS WELL. THIS FACT WAS CATEGORICALLY ADMITTED BY MR. ANDREW CLEAK , INTERNATIONAL TAX DIRECTOR OF SITA IN ANSWER TO QUESTION NOS. 7 A ND 8. THESE FACTS INDICATE THAT THE ASSESSEE WAS ALSO EXTENDING ITS S ERVICES TO NON- MEMBERS, THOUGH TO A LIMITED EXTENT. THIS, IN OUR CONSIDERED OPINION WAS A GOOD REASON FOR THE ASSESSING OFFICER TO FORM A PRIMA FACIE BELIEF THAT THE INCOME OF THE ASSESSEE CHARGEABLE T O TAX HAS ESCAPED ASSESSMENT, TRIGGERING THE REASSESSMENT PROCEEDINGS . BEFORE THE CONDUCTING OF SURVEY, IT WAS ONLY A REASON TO SUSPE CT THAT THE PRINCIPLE OF MUTUALITY DID NOT APPLY. IT WAS DURING THE COURSE OF SURVEY CONDUCTED ON THE PREMISES OF THE ASSESSEE TH AT THE FACT OF NON- ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 28 MEMBERS ALSO AVAILING THE FACILITIES OF THE ASSESSE E CAME TO LIGHT. THIS NEW FACT WAS GOOD ENOUGH FOR THE AO TO ENTERTA IN A PRIMA FACIE BELIEF ABOUT THE ESCAEMENT OF INCOME. THE CONTENTI ON OF THE LD. AR THAT SURVEY CONDUCTED IN THE YEAR 2002 COULD NOT HA VE FORMED THE FOUNDATION FOR REASSESSMENT FOR THE YEAR UNDER CON SIDERATION, IS WITHOUT ANY FORCE. WE HAVE CAREFULLY GONE THROUGH ALL THE QUESTIONS POSED BY THE SURVEY TEAM AND THE ANSWERS GIVEN BY T HE OFFICERS OF THE ASSESSEE. IT NO WHERE EMERGES THAT THE QUESTIONS AN D THE ANSWERS WERE FOR A PARTICULAR YEAR OR RELEVANT ON A PARTICU LAR DATE. WHATEVER WAS ASKED AND ANSWERED RELATED TO THE ASSESSEE IN A UNIFORM MANNER WITHOUT REFERENCE TO ANY PERIOD. AS THE AO INITIATE D REASSESSMENT PROCEEDINGS FOR THE YEAR UNDER CONSIDERATION ON APP RECIATION OF SUCH ANSWERS, WHICH IN OUR CONSIDERED OPINION ALSO APPL IED FOR THE EXTANT YEAR, THERE CAN BE NO QUESTION OF ARGUING THAT TH E REASSESSMENT BE QUASHED ON THIS SCORE. 2.29. THE LEARNED AR VEHEMENTLY ARGUED THAT THE FORMATION OF BELIEF BY THE ASSESSING OFFICER SHOULD BE CONSIDERE D ONLY WITH REFERENCE TO THE REASONS RECORDED FOR REOPENING OF ASSESSMENT AND NO SUBSEQUENT MATERIAL CAN JUSTIFY THE INITIATION OF R EASSESSMENT RETROSPECTIVELY. IN SUPPORT OF THIS CONTENTION, HE RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF PRASHANT S JOSHI VS. ITO & ANR. (2010) 324 ITR 154 (BOM) IN WHICH IT HAS BEEN HELD THAT THE INCOME ESCAPING ASSESSMENT MUST BE DETERMINED WITH RESPECT OF REASONS RECORDED BY THE ASSESSING O FFICER AND NOT ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 29 ANYTHING ELSE, SUCH AS THE AFFIDAVITS FILED BY THE REVENUE AUTHORITIES LATER ON. IT IS BEYOND OUR COMPREHENSION AS TO HOW THIS JUDGMENT ADVANCES THE CASE OF THE ASSESSEE. OBVIOUSLY, THER E CAN BE NO OTHER MATERIAL TO JUSTIFY THE INITIATION OF REASSESSMENT PROCEEDINGS EXCEPT THE REASONS RECORDED BY THE ASSESSING OFFICER BEFOR E ISSUING NOTICE UNDER SECTION 148. WHEN WE ADVERT TO THE REASONS SO RECORDED, WHICH EMPHATICALLY REFER TO THE LOSS OF MUTUALITY DUE TO PARTICIPATION BY NON-MEMBERS AS WELL, IT BECOME CRYSTAL CLEAR THAT T HE VERY FOUNDATION FOR THE INITIATION OF REASSESSMENT PROCEEDINGS IS F OUNDED ON THE REASONS ITSELF. WE HAVE NOTICED ABOVE THAT THE CONC EPT OF MUTUALITY CAN UNDER NO CIRCUMSTANCES PREVAIL WHEN THERE ARE T RANSACTIONS WITH NON-MEMBERS. THE QUESTION WHETHER NON-MUTUALITY WI LL APPLY IN RESPECT OF DEALING WITH NON-MEMBERS ALONE OR WITH T HE MEMBERS ALSO, IS AN ALTOGETHER DIFFERENT THING. DEFINITELY, MUTU ALITY CANNOT EXIST IN SO FAR AS TRANSACTIONS OF THE ORGANIZATION OR BODY WITH THE NON- MEMBERS ARE CONCERNED. IT IS OBVIOUS FROM THE REAS ONS THAT THE ASSESSEE DID ENTER INTO TRANSACTIONS WITH NON-MEMBE RS, WHICH FACT EMERGED DURING THE COURSE OF SURVEY AND FORMED THE BEDROCK FOR THE ASSESSING OFFICER TO ISSUE NOTICE UNDER SECTION 148 . IN SUCH A SITUATION, WE FIND THIS CONTENTION TO BE DEVOID OF MERITS. 2.30. THE NEXT CONTENTION PUT FORTH BY THE LE ARNED AR WAS THAT THE ASSESSEE HAD DISCLOSED ALL THE NECESSARY PRIMAR Y FACTS AND THE REASONS SO RECODED BY THE ASSESSING OFFICER ABOUT T HE LOSS OF PRINCIPLE OF MUTUALITY ON ACCOUNT OF TRANSACTIONS W ITH ITS MEMBERS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 30 CONSTITUTED A CHANGE OF OPINION. IT WAS SUBMITTED THAT NO REASSESSMENT CAN BE SUSTAINED ON A CHANGE OF OPINIO N. 2.31. FROM THE FACTS OF THE CASE, IT IS OBSER VED THAT NO ASSESSMENT FOR THIS YEAR WAS INITIALLY FRAMED. THE LEARNED AR ALSO ADMITTED THAT THE RETURN FOR THE YEAR WAS SIMPLY PROCESSED WITHOU T MAKING ANY ASSESSMENT. DUE TO THE FACT OF NO EARLIER ASSESSM ENT FOR THIS YEAR, IT IS PALPABLE THAT NO OPINION AT ALL WAS FORMED BY TH E ASSESSING OFFICER. TO BRING A CASE WITHIN THE AMBIT OF CHANG E OF OPINION, IT IS ESSENTIAL THAT FIRSTLY, SOME OPINION SHOULD BE FORM ED ON A PARTICULAR ISSUE. SUCH AN OPINION CAN BE FORMED ONLY WHEN ASS ESSMENT IS TAKEN UP. IN A CASE WHEN NO ASSESSMENT HAS BEEN FRAMED, THERE CAN BE NO POINT TO FORM AN OPINION ON AN ISSUE CONCERNING THE ASSESSMENT. NO NOTICE ISSUED UNDER SECTION 148 SUBSEQUENTLY IN SUC H A CASE, CAN BE DECLARED AS ILLEGAL ON THE GROUND OF CHANGE OF OPIN ION. THE HONBLE SUPREME COURT IN THE CASE OF RAJESH JHAVERI (SUPRA) HAS HELD SO IN UNEQUIVOCAL TERMS. WE, THEREFORE, REJECT THIS CONTE NTION RAISED BY THE LEARNED AR AND HOLD THAT THE AO WAS JUSTIFIED IN IN ITIATING REASSESSMENT FOR THE FIRST REASON. THERE IS HARDLY ANY NEED TO EMPHASIZE THAT IF THE INITIATION OF REASSESSMENT IS SUSTAINABLE ON ANY OF THE SEVERAL REASONS RECORDED BY THE AO, THE SAME SHALL STAND. AS IN THE INSTANT CASE, THE REASSESSMENT IS SUSTAINABLE O N THE FIRST REASON, ALBEIT NOT ON THE SECOND, WE UPHOLD THE INITIATION OF REA SSESSMENT PROCEEDINGS BY THE LD. CIT(A). EX CONSEQUENTI , THE FIRST GROUND RAISED BY THE ASSESSEES IN ITS CROSS OBJECTION IS NOT ALL OWED. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 31 3.1. NOW WE TAKE UP GROUND NO.1 RAISED BY THE REVENUE AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO EXEMPT THE I NCOME OF THE ASSESSEE INSOFAR AS THE TRANSACTIONS WITH THE MEMBE RS ARE CONCERNED, ON THE PRINCIPLE OF MUTUALITY. WE HAVE NOTED ABOVE THAT THE ASSESSEE WAS ENJOYING COMPLETE EXEMPTION IN RESPECT OF ITS I NCOME ON THE PRINCIPLE OF MUTUALITY BY VIRTUE OF SEVERAL ORDERS PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE STARTING FROM ASSES SMENT YEAR 1972- 73 UP TO ASSESSMENT YEAR 1983-84. THE SURVEY DIVULG ED THAT THE ASSESSEE WAS ALSO ENTERING INTO TRANSACTIONS WITH N ON-MEMBERS. BECAUSE OF THE PARTICIPATION BY THE NON-MEMBERS AS WELL AND CERTAIN OTHER HOSTS OF FACTORS, THE ASSESSING OFFICER REJE CTED THE STATUS OF MUTUALITY GRANTED TO THE ASSESSEE IN ENTIRETY. HE H ELD THAT THE ENTIRE AMOUNT RECEIVED BY THE ASSESSEE FROM THE SERVICES A ND FACILITIES EXTENDED IN INDIA, INCLUDED THOSE TO ITS MEMBERS, DURING THE YEAR WAS LIABLE TO ASSESSMENT. AS THE NECESSARY DETAILS FOR THE COMPUTATION OF INCOME WERE NOT SUFFICIENT IN THE OP INION OF THE AO, HE RESORTED TO RULE 10 OF THE INCOME-TAX RULES, 196 2 AND ESTIMATED THE INCOME AT 5% OF TOTAL OF RECEIPTS OF THE ASSESS EE AMOUNTING TO ` 36.94 CRORE. THE INCOME WAS DETERMINED AT ` 1,84,70,000. THE LEARNED CIT(A) HELD THAT THE ASSESSEE WAS ENTITLED TO EXEMPTION IN RESPECT OF TRANSACTIONS WITH ITS MEMBERS. HE, HOWEV ER, HELD THAT THE EXEMPTION WAS NOT AVAILABLE ON THE PRINCIPLE OF MUT UALITY INSOFAR AS THE TRANSACTIONS WITH NON-MEMBERS WERE CONCERNED. T HE REVENUE IS AGGRIEVED AGAINST THE ACCEPTANCE OF THE STATUS OF M UTUALITY BY THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 32 LEARNED CIT(A) QUA THE TRANSACTIONS WITH MEMBERS OF THE ORGANIZATION. 3.2. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT THE DECISION RENDERED BY THE TRIBUNAL IN EARLIER YEARS GRANTING EXEMPTION TO THE ASSESSEE BY REASON OF MUTUALITY WAS MARRED C OMPLETELY BY REASON OF PARTICIPATION BY NON-MEMBERS IN THE CURRE NT YEAR, WHICH FACT WAS UNFOLDED DURING THE COURSE OF SURVEY. IT WAS ARGUED THAT THE SAID DECISION RENDERED FOR EARLIER YEARS COULD NOT HAVE BEEN ACTED UPON BY THE LEARNED CIT(A) AS A BINDING PRECEDENT O N THE QUESTION OF GRANTING EXEMPTION BY TREATING IT AS A MUTUAL ORGAN IZATION IN RESPECT OF TRANSACTIONS WITH THE MEMBERS. IT WAS SUBMITTED THAT THE VERY FACT THAT THE NON-MEMBERS ALSO PARTICIPATED AND AVAILED SERVICES PROVIDED BY THE ASSESSEE, DISTURBED THE MUTUALITY IN ENTIRET Y THEREBY RENDERING THE ENTIRE INCOME OF THE ASSESSEE FROM MEMBERS AS W ELL AS NON- MEMBERS LIABLE TO TAX. FOR THIS PROPOSITION, HE RE LIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F CIT V.ROYAL WESTERN INDIA TURF LTD. (RWITC) [(1953) 24 ITR 551 (SC)] AND ALSO CERTAIN OBSERVATIONS FROM THE JUDGMENT OF THE HONB LE SUPREME COURT IN THE CASE OF CIT V. BANKIPUR CLUB LTD. (SUPRA) . TO BOLSTER HIS SUBMISSION, HE ALSO PRESSED INTO SERVICE THE RATIO OF THE JUDGMENTS OF THE HONBLE SUPREME COURT IN THE CASE OF DELHI STOCK EXCHANGE ASSOCIATION LTD. V. CIT [(1961) 41 ITR 495 (SC)] AND CIT V. KUMBAKONAM MUTUAL BENEFIT FUND LTD. [(1964) 53 I TR 241 (SC)] . THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO, RELYI NG ON ARTICLE 20 ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 33 AND 50 OF THE ARTICLES OF ASSOCIATION OF THE ASSESS EE, SUBMITTED THAT IN THE EVENT OF LOSS OF MEMBERSHIP BY A MEMBER, THE SHARE OF HIS IS TO BE RECKONED ACCORDING TO THE BALANCE SHEET OF THE S OCIETY FOR THE FINANCIAL YEAR DURING WHICH THAT MEMBER RESIGNED. A S PER THIS ARTICLE, SUCH RESIGNING MEMBER IS NOT ELIGIBLE TO PARTICIPATE IN THE LEGAL RESERVE FUNDS OR ANY OTHER RESERVES. HE SUBMI TTED THAT THIS ARTICLE IS AGAINST THE MUTUALITY AS THE SURPLUS IS NOT PAYABLE TO SUCH MEMBER RESIGNING FROM THE MEMBERSHIP. IT WAS CONTEN DED THAT WHEN THE MEMBERS OF THE ASSOCIATION ARE NOT ENTITLED TO PARTICIPATE IN THE ENTIRE SURPLUS OF THE ORGANIZATION, AT THE TIME OF RETIREMENT OR RESIGNATION, THE PRINCIPLE OF MUTUALITY IS LOST, A S THEY AS CONTRIBUTORS TO THE FUND CEASE TO BE PARTICIPATORS IN THE FUND. IT WAS SUBMITTED THAT UNLESS EACH AND EVERY CONTRIBUTOR OF INCOME IS ENTI TLED TO PARTICIPATE IN THE SURPLUS FUND, THE PRINCIPLE OF MUTUALITY CAN NOT GET THROUGH. IN HIS OPINION EACH INDIVIDUAL MEMBER IN THE CAPACITY OF CONTRIBUTOR MUST PARTICIPATE IN THE SURPLUS AND THE PARTICIPATO RS AS A GROUP OR CLASS CANNOT UPHOLD MUTUALITY. FOR THIS PROPOSITION HE RELIED ON THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF WANKANER JAIN SOCIAL WELFARE SOCIETY V. CIT [(2003) 260 ITR 241 (MAD.)] . 3.3. IN THE OPPUGNATION, THE LEARNED SENIOR COUNSE L ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE NON-MEMBERS WHO AVA ILED FACILITIES PROVIDED BY THE ASSESSEE WERE BY AND LARGE GOVERNME NT, INTERNATIONAL ORGANIZATION AND EQUANT. HE SUBMITTED THAT THE PAR TICIPATION BY THESE NON-MEMBERS WAS LESS THAN 1% OF THE OVERALL T OTAL COST ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 34 RECOVERIES. IN VIEW OF THE FACT THAT THE NON-MEMBE RS PARTICIPATED TO A VERY LIMITED EXTENT, THE LEARNED AR SUBMITTED THAT THE CONCEPT OF MUTUALITY SHOULD BE CONSIDERED AS INTACT INSOFAR AS TRANSACTIONS WITH THE MEMBERS ARE CONCERNED. IN ORDER TO STRENGTHEN THIS SUBMISSION, HE RELIED ON THE JUDGMENT OF THE FULL BENCH OF THE HONBLE PATNA HIGH COURT IN CIT V. RANCHI CLUB LTD. [(1992) 196 ITR 137 (PAT) (FB)] AS APPROVED BY THE HONBLE SUPREME COURT IN THE CA SE OF CIT V. BANKIPUR CLUB LTD. (SUPRA) AND ALSO THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. STANDING CONFERENCE OF PUBLIC ENTERPRISES (SCOPE) [(2009) 319 ITR 179 (DEL.)] . HE ALSO RELIED ON THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT V. WELLINGDON SPORTS CLUB [(2008) (302 ITR 279 (BOM .)] TO CONTEND THAT THE SURPLUS REALIZED FROM THE MEMBERS OF THE A SSOCIATION WAS ENTITLED TO EXEMPTION BY REASON OF MUTUALITY. FOR T HE SAME PROPOSITION HE ALSO PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN CIT V. BOMBAY OILSEEDS AND OIL EXCHANGE LTD. [(1993) 202 ITR 198 (BOM.)] . COUNTERING THE SUBMISSION ADVANCED BY THE LEARNED DR ON THE LOSS OF MUTUALITY BY REASON OF ARTICLES 20 AND 50 OF THE ARTICLES OF ASSOCIATION A ND ALSO THE CREATION OF RESERVES, THE LEARNED AR CONTENDED THAT THESE IS SUES HAVE BEEN CONSIDERED AND DECIDED BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 1974-75 VIDE ITS ORDER DATED 27.10.1979 IN ITA NO.473 AND 1188/BOM/1979. INVITING OUR ATTENTION TO WARDS A COPY OF THIS ORDER PLACED AT PAGE 194 OF THE PAPER BOOK, TH E LEARNED AR SUBMITTED THAT THE EFFECT OF ARTICLES 20 AND 50 WAS CONSIDERED ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 35 THREADBARE BY THE TRIBUNAL AND ONLY THEREAFTER, A DECISION WAS TAKEN TO GRANT EXEMPTION OF INCOME ON THE PRINCIPLE OF M UTUALITY. HE ALSO REFERRED CERTAIN OBSERVATIONS OF THE TRIBUNAL IN TH AT ORDER ABOUT THE CREATION OF RESERVES AND THEN UPHOLDING THE PRINCIP LE OF MUTUALITY. OPPOSING THE CONTENTION RAISED BY THE LEARNED DEPAR TMENTAL REPRESENTATIVE THAT SINCE THE MEMBERS RESIGNING OR RETIRING ARE NOT ENTITLED TO PARTICIPATE IN THE SURPLUS FUND AND THE REBY THE MUTUALITY WAS LOST, THE LEARNED AR RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SIND CO-OPERATIVE HOUSING SOCIETY V. ITO [(2009) 317 ITR 47 (BOM.)] IN WHICH IT HAS BEEN HELD THAT THE MEMBERS ARE TO BE SEEN AS A CLASS AND NOT INDIVIDUALLY. IT WAS STATED THAT IN THIS CASE, THE HONBLE JURISDICTIO NAL HIGH COURT HAS HELD THAT THAT THE PRINCIPLE OF MUTUALITY IS NOT DE STROYED BY REASON OF THE FACT THAT THERE IS VARIATION IN SOME MEMBERS CO NTRIBUTING TO THE FUND AND PARTICIPATING IN THE SURPLUS SO LONG AS T HE MEMBERS AS A CLASS REMAIN THE SAME. IT WAS, THEREFORE, SUBMITTE D THAT THE DECISION TAKEN BY THE LEARNED CIT(A), INSOFAR AS THE QUESTIO N OF GRANTING EXEMPTION TO THE INCOME FROM MEMBERS IS CONCERNED, SHOULD BE UPHELD. 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD IN THE LIGHT OF THE PRECEDENTS C ITED BEFORE US. THE PRINCIPLE OF CONSISTENCY, AS URGED BY THE LEARNED AR FOR GRANTING THE EXEMPTION ON THE BASIS OF MUTUALITY DECIDED BY THE TRIBUNAL IN ASSESSEES FAVOUR IN EARLIER YEARS, PER SE IN OUR CONSIDERED OPINION IS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 36 NOT BINDING IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. ALL THE DECISIONS RENDERED BY THE TRIBUNAL IN THE EARLIER Y EAR FROM ASSESSMENT YEARS 1972-73 TO 1983-84 ARE ADMITTEDLY BASED ON THE FACT THAT ONLY THE MEMBERS OF THE ORGANIZATION WERE AVAILING THE FACILITIES PROVIDED BY THE ASSESSEE AND THERE WAS N O INVOLVEMENT OF NON-MEMBERS. THE FACT THAT THE FACILITIES WERE PRO VIDED BY THE ASSESSEE TO NON-MEMBERS ALSO CAME OUT ONLY DURING THE COURSE OF SURVEY. THIS CRUCIAL FACT, IN OUR CONSIDERED OPINIO N, HAS RENDERED THE EARLIER ORDERS PASSED BY THE TRIBUNAL AS A NON-BIND ING PRECEDENT. THERE IS NO DEARTH OF DECISIONS HOLDING THAT WHEN T HERE IS A CHANGE IN THE FACTUAL OR LEGAL POSITION IN THE FACTS OF THE E ARLIER YEAR VIS--VIS THE LATER YEAR, THE DECISION TAKEN IN SUCH EARLIER YEAR CEASES TO BE BINDING ON THE PRINCIPLE OF CONSISTENCY. IN SUCH A SCENARIO, THE SUBSEQUENT BENCH IS REQUIRED TO CONSIDER THE IMPACT OF THE NEW DEVELOPMENTS TAKING PLACE IN A LATER YEAR AND THERE AFTER DECIDE AS TO WHETHER THE OBSERVANCE OF THE EARLIER DECISION IS C ALLED FOR OR THERE ARE REASONS TO DEPART FROM SUCH EARLIER DECISION. AS ADMITTEDLY A NEW VITAL FACT FOR THE YEAR UNDER CONSIDERATION IN THE SHAPE OF PROVISION OF SERVICES BY THE ASSESSEE TO NON-MEMBERS HAS COME TO LIGHT, THE DECISION TAKEN BY THE TRIBUNAL FOR EARLIER YEARS IS REQUIRED TO BE RE- EXAMINED IN THE LIGHT OF SUCH FRESH FACT. AS SUCH, THE EARLIER ORDERS CEASE TO BE BINDING PRECEDENTS ON THE PRINCIPLE OF CONSISTENCY. 3.5. WE NOW PROCEED TO DETERMINE THE QUESTION OF MU TUALITY ON THE FACTS AND CIRCUMSTANCES COMING TO FORE PURSUANT TO SURVEY. BEFORE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 37 THAT, IT IS RELEVANT TO CONSIDER AS TO WHAT IS MEA NT BY MUTUALITY. IT IS ELEMENTARY RULE THAT ONE PERSON CANNOT EARN A PR OFIT FROM SELF. EVEN IF SOME PROFIT IS ARTIFICIALLY DECLARED ON ACC OUNT OF TRANSACTION WITH SELF, THE SAME CANNOT BE CHARGED TO TAX. IT IS A WELL SETTLED PRINCIPLE AS REITERATED BY THE HONBLE APEX COURT S EVERAL DECADES AGO IN KIKABHAI PREMCHAND V. CIT (1953) 24 ITR 506 (SC) . IN THIS CASE IT WAS HELD THAT A MAN CANNOT EARN PROFIT FROM HIMSELF. THE FOLLOWING OBSERVATIONS OF THE HONBLE COURT ASSUME SIGNIFICANCE IN THIS REGARD : IN THE PRESENT CASE DISREGARDING TECHNICALITIES, I T IS IMPOSSIBLE TO GET AWAY FROM THE FACT THAT THE BUSIN ESS IS OWNED AND RUN BY THE ASSESSEE HIMSELF. IN SUCH CIRCUMSTANCES WE ARE OF OPINION THAT IT IS WHOLLY UNREAL AND ARTIFICIAL TO SEPARATE THE BUSINESS FROM ITS OWNER AND TREAT THEM AS IF THEY WERE SEPARATE ENTIT IES TRADING WITH EACH OTHER AND THEN BY MEANS OF A FICTIONAL SALE IN TRODUCE A FICTIONAL PROFIT WHICH IN TRUTH AND IN FACT IS NON-EXISTENT. CUT AWAY THE FICTIONS AND YOU REACH THE POSITION THAT THE MAN IS SUPPOSED TO BE SELLING TO HIMSELF AND THEREBY MAKING A PROFIT OUT OF HIMSELF WHICH ON THE FACE OF IT IS NOT ONLY ABSURD BUT AGAINST ALL CANONS OF MERCANTILE AND INCOME-TAX LAW. 3.6. THE SAME RESULT FOLLOWS WHEN AN INDIVIDUAL IS CONVERTED INTO A GROUP OF PERSONS. WHEN MORE THAN ONE PERSON ENTER IN TO TRANSACTIONS WITH THEMSELVES ALONE AND THERE IS NO INVOLVEMENT O F ANY OUTSIDER, THERE CAN BE NO QUESTION OF EARNING PROFIT BY SUCH GROUP FROM THE TRANSACTIONS INTER SE ITS MEMBERS. IT HAS BEEN HELD SO BY THE HONBLE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 38 CALCUTTA HIGH COURT IN BETTS HARTLEY HUETT & CO. LTD. V. CIT (1979) 116 ITR 425 (CAL). A USEFUL REFERENCE MAY BE MADE TO THE FOLLOWING REMARKS OF THE COURT : WE NOTE, HOWEVER, THAT THE PARTIES ALL ALONG DID PROCEED UNDER A MISCONCEPTION. IN LAW THERE CAN NOT BE A VALID TRANSACTION OF SALE BETWEEN THE BRANCH OFFICE OF TH E ASSESSEE IN INDIA AND ITS HEAD OFFICE IN LONDON. IT IS AN ELEMENTARY PROPOSITION THAT NO PERSON CAN ENTER INTO A CONTRACT WITH ONESELF. DEBI TING OR CREDITING ONE'S ACCOUNT CANNOT ALTER THIS LEGAL POSITION. 3.7. WHEN SUCH PERSONS FORM A A GROUP OR ASSOCI ATION OR CLUB (HEREINAFTER ALSO CALLED AS `THE ORGANIZATION) AND , IN FURTHERANCE OF ITS OBJECT, PROVIDES GOODS OR SERVICES TO THE MEMB ERS CONSTITUTING THE GROUP, THE QUESTION ARISES AS TO WHETHER THERE IS M UTUALITY. THE PRINCIPLE OF MUTUALITY CAN BE VIEWED FROM THE FOLLO WING BROADER DIFFERENT ANGLES :- (I) PROVISION OF GOODS OR SERVICES BY AN ORGANIZAT ION TO ITS MEMBERS ALONE. (II) INCOME OF ORGANIZATION FROM OTHER THAN THE P ROVISIONS OF GOODS OR SERVICES TO ITS MEMBERS ALONE. (III) PROVISIONS OF GOODS OR SERVICES BY AN ORGANI ZATION TO NON- MEMBERS ALONE. (IV) PROVISIONS OF GOODS OR SERVICES BY AN ORGANIZ ATION TO MEMBERS AS WELL AS NON-MEMBERS. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 39 I. PROVISION OF GOODS OR SERVICES BY AN ORGANIZATIO N TO ITS MEMBERS ALONE. 3.8.1. WHEN CERTAIN PERSONS FORM AN ORGANIZATION AN D SUCH ORGANIZATION PROVIDES GOODS OR SERVICES TO ITS MEMB ERS ALONE, THE QUESTION ARISES AS TO WHETHER SUCH ORGANIZATION IS MUTUAL AND THEN SECOND QUESTION WHETHER INCOME OF SUCH ORGANIZATION , IF ANY, IS EXEMPT ON THE PRINCIPLE OF MUTUALITY. THE PRINCIPLE OF MUTUALITY IN RESPECT OF TRANSACTIONS OF THE ORGANIZATION WITH IT S MEMBERS ALONE IS FAIRLY SETTLED BY CATENA OF DECISIONS. IN THE CASE OF CIT V. BANKIPUR CLUB LTD. [(1981) 129 ITR 787 (PATNA)], THE OBJECT OF THE CLUB WAS TO PROVIDE ALL USUAL PRIVILEGES, ADVANTAGES, CONVEN IENCES AND ACCOMMODATION OF CLUB TO ITS MEMBERS. IT WAS PROVID ED IN THE MEMORANDUM OF ASSOCIATION THAT UPON WINDING UP OR D ISSOLUTION OF THE CLUB, IF THERE REMAINS ANY PROPERTY LEFT AFTER THE SATISFACTION OF ALL DEBTS AND LIABILITIES, THE SAME SHALL BE PAID TO AN D DISTRIBUTED AMONGST THE MEMBERS OF THE ORGANIZATION. THE CLUB F ILED ITS RETURN DECLARING NIL INCOME. THE ITO ASSESSED THE CLUB ON VARIOUS COUNTS INCLUDING SALE OF DRINKS AT THE BAR. THE AAC AGREED WITH THE ITOS DECISION AND HELD THAT THE PROFIT FROM THE BAR WAS NOT EXEMPT AS THE PRINCIPLE OF MUTUALITY WAS NOT APPLICABLE. THE TRIB UNAL CONCURRED WITH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSE SSEE AND HELD THAT THE ACTIVITIES INTER SE THE MEMBERS WERE ENTITLED TO MUTUALITY. IN FURTHER APPEAL, THE HONBLE PATNA HIGH COURT OBSERV ED THAT THERE WAS NO TRANSACTION WITH THE NON-MEMBERS INSOFAR AS THE SALE OF DRINKS WAS CONCERNED. ALL THE MEMBERS WERE ENTITLED TO PARTICI PATE IN THIS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 40 PRIVILEGE AND THE INCOME UNDER THE HEAD WAS APPLIED TOWARDS THE CLUB FOR EITHER RE-PURCHASING DRINKS OR ADDING PRIVILEG ES TO THE MEMBERS. AFTER CONSIDERING SEVERAL JUDGMENTS INCLUDING THAT OF THE HONBLE SUPREME COURT IN RWITC (SUPRA) AND HONBLE ANDRA PRADESH HIGH COURT IN CIT V. MERCHANT NAVY CLUB [(1974) 96 ITR 261 (AP)], IT WAS HELD THAT THE PROFIT FROM SALE OF DRINKS AT BAR WAS ENTITLED TO EXEMPTION ON DOCTRINE OF MUTUALITY. THE HONBLE SUP REME COURT AFFIRMED INTER ALIA, THE JUDGMENT OF THE HONBLE PATNA HIGH COURT IN A BATCH OF APPEALS IN THE CASE OF CIT V. BANKIPUR CLUB LTD. (SUPRA) BY HOLDING THAT THE SURPLUS EXCESS OF PROFITS OVE R THE EXPENDITURE AS A RESULT OF MUTUALITY ARRANGEMENT, CANNOT BE SAI D TO BE INCOME FOR THE PURPOSE OF THE ACT. IT WAS FOUND THAT THE CLUB REALIZED VARIOUS SUMS TO AFFORD TO ITS MEMBERS THE USUAL PRIVILEGES, ADVANTAGES ETC. AND THE SERVICES OFFERED WERE NOT DONE WITH ANY PRO FIT MOTIVE. 3.8.2. IN THE CASE OF CHELMSFORD CLUB LTD. V. CIT [(2000) 243 ITR 89 (SC)] THE CLUB PROVIDED RECREATIONAL AND REFRESHMENT FAC ILITIES EXCLUSIVELY TO ITS MEMBERS AND THEIR GUESTS. THESE FACILITIES WERE NOT AVAILABLE TO THE NON-MEMBERS. CLUB WAS RUN ON `NO P ROFIT NO LOSS BASIS AND THE SURPLUS, IF ANY, WAS TO BE USED ONLY FOR MAINTENANCE AND DEVELOPMENT OF THE CLUB. THE HONBLE SUPREME COURT HELD THAT THE LEVY OF TAX ON INCOME OF THE CLUB WAS NOT CALLED FO R AS THE RECREATIONAL AND REFRESHMENT FACILITIES WERE EXTEND ED EXCLUSIVELY TO ITS MEMBERS. IT WAS, THEREFORE, HELD THAT THE ASSES SEE WAS NOT LIABLE TO INCOME-TAX IN VIEW OF THE PRINCIPLE OF MUTUALITY. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 41 3.8.3. THUS AN ORGANIZATION PROVIDING GOODS OR/AND SERVICES TO ITS MEMBERS ALONE IS A MUTUAL ORGANIZATION. WHEN THE OBJECT OF SUCH ORGANIZATION IS NOT TO EARN PROFIT FROM ITS MEMBERS BY CARRYING ON BUSINESS, BUT THERE ARISES SOME SURPLUS ON INDIVID UAL TRANSACTIONS OUT OF COLLECTIONS MADE FROM THE MEMBERS FOR EXTENDING SERVICES AND FACILITIES ETC. FOR WHICH IT IS FORMED, SUCH SURPLU S IS EXEMPT FROM TAX ON THE PRINCIPLE OF MUTUALITY. IT IS SO FOR THE RE ASON THAT THE MEMBERS WHO CONTRIBUTE TO SUCH SURPLUS OF THE ORGANIZATION ARE ALSO ENTITLED TO PARTICIPATE IN SUCH SURPLUS. IN OTHER WORDS, WHEN T HE CONTRIBUTORS TO THE SURPLUS ARE ALSO THE PERSONS WHO PARTICIPATE IN SUCH SURPLUS AND THERE IS NO INVOLVEMENT OF ANY OUTSIDER, THERE IS M UTUALITY BETWEEN THE MEMBERS FORMING THE ORGANIZATION. THE ESSENCE O F MUTUALITY LIES IN COMMONNESS OR UNANIMITY BETWEEN THE CONTRIBUTORS TO AND THE PARTICIPATORS IN THE SURPLUS OF AN ORGANIZATION. T HE MERE FACT THAT AN ORGANIZATION OPERATES WITH `NO PROFIT NO LOSS MOTI VE WILL NOT BY REASON OF THIS FACT ALONE, MAKE IT A MUTUAL ORGANI ZATION. THE MUTUALITY LIES IN THE COMMONNESS BETWEEN THE PERSON S CONTRIBUTING TO AND ALSO PARTICIPATING IN INCOME AND NOT THAT TH ERE IS NO PROFIT. THE PERIODICITY FOR THE CONTRIBUTORS TO PARTICIPATE IN THE INCOME OF THE ORGANIZATION MAY VARY FROM CASE TO CASE. IT MAY BE WEEKLY OR MONTHLY OR ANNUALLY OR EVEN CROSSING THE YEAR AND G OING UP TO THE RETIREMENT OF MEMBERS OR EVEN THE DISSOLUTION OF SU CH ORGANIZATION ITSELF. IN ORDER TO CLAIM EXEMPTION FROM TAX ON TH IS REASONING, IT IS REQUIRED TO FIRST PROVE THAT THE ORGANIZATION IS MUTUAL. THE DISTINCTIVE FEATURE OF THE RULE OF MUTUALITY LIES I N ONENESS BETWEEN ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 42 THE PERSONS CONTRIBUTING TO PROFIT AND THOSE PARTIC IPATING IN SUCH PROFIT. IF AN ORGANIZATION SELLS GOODS OR PROVIDES SERVICES ON `NO PROFIT NO LOSS BASIS TO OUTSIDERS, DESPITE THE FA CT THAT THERE IS NO PROFIT FROM SUCH TRANSACTIONS, IT WILL LACK MUTUAL ITY BECAUSE SUCH PERSONS PURCHASING GOODS OR AVAILING SERVICES CAN HAVE NO RIGHT TO PARTICIPATE IN THE SURPLUS, IF ANY, ARISING INCID ENTALLY TO THE ORGANIZATION. ON THE CONTRARY, AN ORGANIZATION WILL ADORN MUTUALITY WHEN IT TRANSACTS ONLY WITH ITS MEMBERS, IRRESPECTI VE OF THERE BEING NIL OR ANY PROFIT ARISING FROM THE DEALINGS WITH TH E MEMBERS. IF THERE ARISES ANY SURPLUS ON ACCOUNT OF DEALINGS WITH THE MEMBERS ON TRANSACTIONAL LEVEL AND SUCH SURPLUS IS AGAIN AVAIL ABLE FOR DISTRIBUTION ONLY AMONGST SUCH MEMBERS AT ANY POINT OF TIME, THE CONCEPT OF MUTUALITY WILL REMAIN INTACT TO PROVIDE EXEMPTION I N RESPECT OF ANY AMOUNT OF PROFIT AS RESULTING AT THE END OF A YEAR. IF, THERE IS NO INCOME AT THE END OF THE YEAR, THERE WILL NO TAX LI ABILITY DUE TO TWO REASONS, VIZ., FIRST, THERE IS NO PROFIT AND SECO ND, IT IS A MUTUAL ORGANIZATION. 3.8.4. THE OBJECT OF A MUTUAL ORGANIZATION C AN IN NO CASE BE TO EARN PROFIT FROM ITS MEMBERS ON AN OVERALL BASIS. PROFIT OBJECT ITSELF NEGATES THE CONCEPT OF MUTUALITY. PROFIT MOTIVE AN D MUTUAL ORGANIZATION CANNOT CO-EXIST. IT, THEREFORE, FOLLOW S THAT TO BE A MUTUAL ORGANIZATION IT IS NECESSARY THAT THERE SHOULD NOT BE ANY PROFIT MOTIVE FROM THE TRANSACTIONS WITH ITS MEMBERS. IF PROFIT R ESULTS FROM INDIVIDUAL TRANSACTIONS WITH ITS MEMBERS, IT MUST GO BACK TO THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 43 MEMBERS AT ANY POINT OF TIME. WHAT DEFEATS MUTUALIT Y IS THE PROFIT MOTIVE AND NOT THE ACTUAL EARNING OF ANY PROFIT ON CERTAIN PERIODICITY, WHICH EVENTUALLY IS LIABLE TO BE DISTRIBUTED AMONGS T THE CONTRIBUTORS. IT, THEREFORE, FOLLOWS THAT IN CASE OF A MUTUAL ORG ANIZATION, COMMERCIALITY THOUGH CANNOT BE AN OBJECT, BUT MAY B E PRESENT IN DEALINGS WITH THE MEMBERS ON TRANSACTIONAL LEVEL. S O LONG AS SUCH PROFIT ARISING FROM THE MEMBERS IS LIABLE TO BE RET URNED TO THE MEMBERS ALONE, THERE IS ABSOLUTE MUTUALITY AND ANY PROFIT ARISING AT THE END OF A PARTICULAR YEAR CANNOT BE SUBJECTED TO TAX. IF WE PROCEED WITH THE HYPOTHESIS THAT AN ORGANIZATION, T O BE MUTUAL, MUST NECESSARILY ACT ON `NO PROFIT NO LOSS ON EVERY TR ANSACTION WITH ITS MEMBERS, THEN OBVIOUSLY, IT WILL EARN NO PROFIT AND THERE WILL BE NO POINT IN SEEKING EXEMPTION ON THE PRINCIPLE OF MUTU ALITY. THE NEED FOR EXEMPTION OF INCOME FROM TAX ON THE PRINCIPLE O F MUTUALITY ARISES FROM THE VERY EXISTENCE OF PROFIT IN THE FIRST INST ANCE. 3.8.5. THE HONBLE FULL BENCH OF THE PATNA HIGH COU RT IN THE CASE OF RANCHI CLUB LTD. (SUPRA) HAS OBSERVED ON PAGE 146 OF THE REPORT THAT : WHETHER THE SURPLUS IN THE HANDS OF THE CLUB HAS RESULTED OUT OF TRANSACTIONS ENTERED INTO WITH A MO TIVE OF PROFIT EARNING WHICH CAN BE SAID TO BE TAINTED WITH COMMER CIALITY, IS WHOLLY IRRELEVANT FOR DETERMINING THE TAXABILITY OF THE RE CEIPTS BECAUSE EVEN NON-COMMERCIAL OR CASUAL RECEIPTS ARE LIABLE TO INC OME-TAX UNDER THE ACT . IT CAN ALSO BE SEEN FROM THE JUDGMENT OF THE HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. CEMENT ALLOCATION AND ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 44 CO-ORDINATING ORGANISATION [(1999) 236 ITR 553 (BOM .)] THAT : THE WORKING OF THE SCHEME CLEARLY INDICATED THAT T HE CONTRIBUTORS CONTRIBUTED MORE THAN WHAT WAS REQUIRED AND IN THE CIRCUMSTANCES THE DISTRIBUTION OF THE BALANCE SURPLUS WAS ONLY AP PORTIONMENT OF THE SAVING AMONGST THE CONTRIBUTORS. IN THIS CASE THERE WAS A PROFIT OF THE BUSINESS AMOUNTING TO ` 94.77 LAKH FOR THE ASSESSMENT YEAR 1967- 68 AND ` 8.75 LAKH FOR ASSESSMENT YEAR 1968-69 WHICH WAS CLA IMED AS EXEMPT ON THE PRINCIPLE OF MUTUALITY. 3.8.6. FROM THE ABOVE DISCUSSION, IT FOLLOWS TH AT WHEN AN ORGANIZATION WITH NO PROFIT MOTIVE, EXTENDS SERVIC ES OR FACILITIES ONLY TO ITS MEMBERS FOR A SPECIFIC SUM AND THE SURPLUS E MANATING FROM COLLECTIONS AT A TRANSACTIONAL LEVEL IS EVENTUALLY DISTRIBUTABLE AMONGST THE MEMBERS AT ANY POINT OF TIME, THERE IS MUTUALIT Y. IN SUCH A CASE, THE PERIODIC INCOME OF SUCH AN ORGANIZATION WILL BE EXEMPT FROM TAX ON THE PRINCIPLE OF MUTUALITY. II. INCOME OF AN ORGANIZATION FROM OTHER THAN PROVISIONS OF GOODS OR SERVICES TO MEMBERS ALONE 3.9.1. THERE MAY ARISE A SITUATION WHEN AN ORGANIZA TION, EXTENDING SERVICES AND FACILITIES TO ITS MEMBERS AL ONE, ALSO EARNS CERTAIN OTHER INCOME SUCH AS INTEREST ON DEPOSITS F ROM BANK OR RETURN FROM INVESTMENTS. THE QUESTION ARISES AS TO WHETHE R SUCH INTEREST ETC. CAN BE EXEMPTED ON THE PRINCIPLE OF MUTUALITY. THIS QUESTION HAS BEEN ANSWERED BY THE HONBLE JURISDICTIONAL HIGH CO URT IN CIT V.COMMON EFFLUENT TREATMENT PLANT (THANE-BELAPUR) A SSOCIATION ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 45 [(2010) 328 ITR 362 (BOM.)]. IN THAT CASE THE ASSESSEE-ASSOCIATION WAS FORMED SPECIFICALLY WITH THE OBJECT OF PROVIDIN G A COMMON EFFLUENT TREATMENT FACILITY TO ITS MEMBERS. IT RECE IVED CONTRIBUTIONS ONLY FROM ITS MEMBERS. AS PER ITS MEMORANDUM / ARTI CLES IT WAS REQUIRED TO EXPAND THE CONTRIBUTIONS RECEIVED FROM ITS MEMBERS ONLY IN FURTHERANCE OF ITS OBJECT AND FOR THE BENEFIT OF ITS MEMBERS. THERE WAS A PROFIT FOR THE YEAR IN QUESTION IN RELATION T O TRANSACTIONS WITH ITS MEMBERS. THE ASSOCIATION ALSO DEPOSITED ITS SURPLUS AMOUNT WITH CERTAIN BANKS AND OTHERS, FROM WHICH IT EARNED INT EREST INCOME TO THE TUNE OF ` 45.46 LAKH. THE ASSESSEE CLAIMED EXEMPTION IN RESPE CT OF BOTH THE SETS OF INCOME, THAT IS, PROFIT FROM DEA LINGS WITH THE MEMBERS AND ALSO THE INTEREST INCOME. THE TRIBUNAL ACCEPTED THE PRINCIPLE OF MUTUALITY AS REGARDS PROFIT FROM DEALI NG WITH MEMBERS BUT HELD THAT THE INTEREST INCOME WAS LIABLE TO TAX . WHEN THE MATTER CAME UP BEFORE THE HONBLE JURISDICTIONAL HIGH COUR T, THEIR LORDSHIPS HELD THAT THE SURPLUS REPRESENTING EXCESS OF INCOME OVER THE EXPENDITURE FROM ITS MEMBERS FELL WITHIN THE PU RVIEW OF DOCTRINE OF MUTUALITY AND HENCE WAS NOT LIABLE TO TAX. AS R EGARDS THE INTEREST INCOME, IT WAS HELD THAT IT DID NOT POSSESS THE SA ME CHARACTER OF MUTUALITY AS THE SURPLUS FUND GENERATED FROM ITS ME MBERS. INTEREST INCOME WAS, THEREFORE, HELD TO BE TAXABLE AS `INCOM E FROM OTHER SOURCES. FROM THIS JUDGMENT, IT IS DISCERNIBLE TH AT INSOFAR AS THE PROFIT OF THE ORGANIZATION FROM THE TRANSACTIONS WI TH MEMBERS ALONE IS CONCERNED, WHO, IN TURN, ARE ALSO PARTICIPATOR S IN THE PROFIT, THERE IS MUTUALITY AND SUCH INCOME CANNOT BE BROUGHT TO T AX. IF, HOWEVER, ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 46 THE CONTRIBUTIONS MADE BY THE MEMBERS ARE FOR THE T IME BEING NOT REQUIRED AND USED ELSEWHERE FROM WHERE SOME INCOME RESULTS, SUCH INCOME, THOUGH HAVING NEXUS WITH THE CONTRIBUTIONS MADE BY THE MEMBERS, CANNOT ESCAPE TAXATION. THE CARDINAL PRIN CIPLE OF MUTUALITY IS THAT THE MEMBERS WHO CONTRIBUTE TO THE INCOME OF THE ORGANIZATION FOR AVAILING FACILITIES OR SERVICES EX TENDED BY IT SHOULD BE THE SAME PERSONS WHO PARTICIPATE IN THE SURPLUS REMAINING WITH THE ORGANIZATION. IF THE CONTRIBUTIONS SO REALIZED FROM THE MEMBERS ARE INVESTED ELSEWHERE OR DEPOSITED WITH THE BANK, THE PRINCIPLE OF MUTUALITY WILL BE DESTROYED TO THE EXTENT OF INTER EST INCOME ETC. ARISING FROM SUCH INVESTMENTS. IT IS SO FOR THE RE ASON THAT THE CONTRIBUTOR OF SUCH INCOME IS BANK ETC. AND NOT TH E MEMBERS OF THE SOCIETY AND SECONDLY, THE CONTRIBUTION IN THE SHAP E OF INTEREST INCOME RESULTS NOT DUE TO ANY TRANSACTIONS OF THE SOCIETY BY PROVIDING SERVICES AND FACILITIES FOR WHICH IT IS SET UP. TO SUM UP, INCOME EARNED BY THE ORGANIZATION FROM BANK DEPOSITS ETC. IS CHARGEABLE TO TAX BUT THE MUTUALITY AND THE RESULTANT EXEMPTION I S PRESERVED ON THE INCOME FROM DEALINGS WITH MEMBERS TOWARDS PROVISION OF SERVICES AND FACILITIES. III. PROVISION OF GOODS OR SERVICES BY AN ORGANIZAT ION TO NON-MEMBERS ALONE 3.10.1 WE HAVE SEEN ABOVE THAT THE INCOME OF AN ORGANIZATION FROM DEALINGS WITH ITS MEMBERS IS EXEMPT ON THE BAS IS OF MUTUALITY BECAUSE THE CONTRIBUTORS AND PARTICIPATORS TO THE I NCOME ARE THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 47 MEMBERS ALONE. IT IS IMPLICIT IN THIS FORM OF ORGAN IZATION THAT THERE IS NO ULTIMATE PROFIT MOTIVE, YET THE PROFIT MAY ARIS E FROM TRANSACTIONS WITH THE MEMBERS, WHICH EVENTUALLY GOES BACK TO THE MEMBERS AT ANY TIME DURING THE LIFE OR ON THE DISSOLUTION OF THE O RGANIZATION. IF, HOWEVER, AN ORGANIZATION UNDERTAKES DEALINGS WITH THE PUBLIC AT LARGE, THAT IS NON-MEMBERS ALONE, THE CONCEPT OF MU TUALITY IS ALWAYS WANTING. IN SUCH A CASE, IT WILL BE THE NON-MEMBER S CONTRIBUTING TO THE INCOME. OBVIOUSLY SUCH NON-MEMBERS CANNOT PART ICIPATE IN THE ULTIMATE PROFITS OF THE ORGANIZATION. AS THERE REMA INS NO UNANIMITY BETWEEN THE CONTRIBUTORS AND THE PARTICIPATORS TO T HE INCOME, THE TEST OF MUTUAL ORGANIZATION FAILS. INCOME SO RESULTING TO SUCH AN ORGANIZATION BECOMES TAXABLE. 3.10.2. IF CERTAIN MEMBERS OF SUCH AN ORGANIZATI ON ALSO, TO A VERY LIMITED EXTENT, AVAIL THE FACILITIES PROVIDED BY I T, THEN THE QUESTION ARISES AS TO WHETHER THE NON-MUTUAL STATUS OF SUCH AN ORGANIZATION WILL CONTINUE OR A SMALL PARTICIPATION BY THE MEMBE RS WILL CONVERT IT INTO A MUTUAL ORGANIZATION. IN OUR CONSIDERED OPIN ION, THE STATUS OF NON-MUTUALITY IS NOT DESTROYED IF THERE ARE A FEW T RANSACTIONS WITH THE MEMBERS ALSO. THE ORGANIZATION WILL CONTINUE TO REM AIN NON-MUTUAL BY REASON OF OVERWHELMING PREPONDERANCE OF TRANSACT IONS WITH NON- MEMBERS COUPLED WITH INSIGNIFICANT NUMBER OF TRANSA CTIONS WITH THE MEMBERS. IV. PROVISION OF GOODS OR SERVICES BY AN ORGANISATI ON TO MEMBERS AS WELL AS NON-MEMBERS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 48 3.11.1. NOW WE APPROACH THE LAST CATEGORY IN WHICH AN ORGANIZATION SELLS GOODS OR PROVIDES SERVICES/FACIL ITIES BOTH TO ITS MEMBERS AS WELL AS NON-MEMBERS. THE QUESTION IS WH ETHER SUCH AN ORGANIZATION CAN BE CHARACTERIZED AS MUTUAL? 3.11.2. THE LEARNED DEPARTMENTAL REPRESENTATIVE H AS VEHEMENTLY ARGUED THAT WHEN NON-MEMBERS ALSO PARTICIPATE IN TH E TRANSACTIONS WITH THE ORGANIZATION, THE CONCEPT OF MUTUALITY IS DESTROYED IN TOTALITY INCLUDING THE TRANSACTIONS WITH THE MEMBERS. PER CO NTRA, THE VIEW CANVASSED BY THE LEARNED AR IS THAT WHEN THERE ARE TRANSACTIONS WITH NON-MEMBERS ALSO, THE MUTUALITY DOES NOT EXTINCT IN ENTIRETY BUT GETS RESTRICTED TO THE TRANSACTIONS WITH THE MEMBERS. 3.11.3. IN THE CASE OF CIT V. RANCHI CLUB LTD. [(1987) 168 ITR 120 (PATNA)] THE ASSESSEE DECLARED A PARTICULAR SUM AS INCOME FOR LETTING OUT ITS PREMISES TO NON-MEMBERS AND CLAIME D EXEMPTION QUA THE INCOME REALIZED FROM ITS MEMBERS. THE ITO HELD THAT THE ASSESSEE WAS NOT A MUTUAL CONCERN BECAUSE OF IT EXTENDING F ACILITIES TO NON- MEMBERS AS WELL AND HENCE IT WAS LIABLE TO PAY INCO ME TAX ON ITS ENTIRE INCOME INCLUDING THAT EARNED FROM MEMBERS. T HE TRIBUNAL ACCEPTED THE ASSESSEES STAND AND HELD THAT PRINCIP LE OF MUTUALITY WAS THERE IN SO FAR AS THE TRANSACTIONS WITH ITS MEMBER S WERE CONCERNED AND HENCE SUCH INCOME OF THE CLUB WAS NOT LIABLE TO TAX. THE REVENUE ASSAILED THE DECISION OF THE TRIBUNAL BEFORE THE H ONBLE PATNA HIGH COURT, WHICH CAME TO HOLD THAT THE ASSESSEE CLUB C EASED TO BE A MUTUAL CONCERN AND AS SUCH EVEN THE INCOME IN RESPE CT OF DEALINGS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 49 WITH ITS MEMBERS AND THEIR GUESTS WAS LIABLE TO TA X. AS THE CONTRIBUTORS WERE NOT ONLY THE MEMBERS BUT NON-MEMB ERS AS WELL, THE HONBLE PATNA HIGH COURT HELD THAT IT WAS DIFFI CULT TO HOLD THAT THERE WAS ANY MUTUALITY AMONGST THE MEMBERS AND THE CLUB. THIS DECISION WAS RENDERED BY THE HONBLE HIGH COURT IN RELATION TO ASSESSMENT YEARS 1972-73 TO 1974-75. 3.11.4. THE SAME ISSUE WAS AGITATED BY THE REVENU E BEFORE THE HONBLE PATNA HIGH COURT FOR THE ASSESSMENT YEAR 19 77-78. THE DIVISION BENCH HEARING SUCH LATER APPEAL FOUND THAT THERE WAS SOME CONFLICT BETWEEN THE VIEWS TAKEN BY THE COURT IN TH E CASE OF CIT V. BANKIPUR CLUB (SUPRA) AND RANCHI CLUB LTD. (SUPRA) . ACCORDINGLY THIS CASE WAS REFERRED TO A FULL BENCH. IN CIT V. RANCHI CLUB LTD. [(1992) 196 ITR 137 (PAT) (FB), IT WAS NOTICED BY THE HONBLE FULL BENCH THAT THE ASSESSEE FILED ITS RETURN SHOWING IN COME OF ` 6,030 AS REALIZED FROM CERTAIN PERSONS OTHER THAN MEMBERS. T HE ITO, WHILE ASSESSING THE INCOME, ALSO INCLUDED THE INCOME RECE IVED FROM ITS MEMBERS. IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE INCOME FROM NON-MEMBERS ALONE SHOULD BE SUBJECTED TO TAX, THEREBY EXEMPTING THE INCOME FROM MEMBERS DUE TO COMMONNESS BETWEEN THE CONTRIBUTORS AND PARTICIPATORS. THE REVENUE, A PART FROM OTHER CASES, ALSO FOUNDED ITS CASE ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF RWITC (SUPRA). THE HONBLE FULL BENCH HELD THAT THE PRINCIPLE OF MUTUALITY CAN APPLY TO EXEMPT ANY SURPLUS ACCRUING OUT OF CONTRIBUTIONS RECEIVED BY THE CLUB FROM ITS MEMBERS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 50 BUT THE MUTUALITY CANNOT HAVE ANY APPLICATION IN RE SPECT OF SURPLUS FROM NON-MEMBERS. IT ALSO OBSERVED THAT IF THE REC EIPTS ARE FROM SOURCES OTHER THAN THE MEMBERS, THEN THE EXEMPTION CAN BE CLAIMED IN RESPECT OF RECEIPTS FROM MEMBERS ON THE PRINCIPL E OF MUTUALITY. IT WAS ILLUSTRATED BY WAY OF A MEMBERS CLUB HAVING IN COME BY WAY OF INTEREST OR CAPITAL GAIN ETC. WHICH WAS DECLARED AS TAXABLE AND NOT EXEMPT ON THE PRINCIPLE OF MUTUALITY. THEN, THE HO NBLE HIGH COURT TOOK UP THE VEXED ISSUE OF A MEMBERS CLUB INVOLVED IN BOTH THE MUTUAL AND NON-MUTUAL ACTIVITIES AND POSED A QUEST ION TO ITSELF AS TO WHETHER IN SUCH A CASE EXEMPTION CAN BE CLAIMED WIT H RESPECT TO RECEIPTS RELATING TO MUTUAL ACTIVITIES OR THE CLAI M OF EXEMPTION FROM TAX UNDER THE ACT WILL BE COMPLETELY DESTROYED. AFT ER THOROUGHLY CONSIDERING VARIOUS INDIAN AND FOREIGN DECISIONS, T HEIR LORDSHIPS FINALLY DECIDED IT IN ASSESSEES FAVOUR BY HOLDING AS UNDER:- FOR THE AFORESAID REASONS, I AM CLEARLY OF THE VI EW THAT MERELY BECAUSE THE ASSESSEE-COMPANY HAS ENTERED INT O TRANSACTIONS WITH NON-MEMBERS AND EARNED PROFITS OU T OF TRANSACTIONS HELD WITH THEM, ITS RIGHT TO CLAIM EXE MPTION ON THE PRINCIPLE OF MUTUALITY IN RESPECT OF TRANSAC TIONS HELD BY IT WITH ITS MEMBERS IS NOT LOST. 3.11.5. THE LAW LAID DOWN IN THE CASE OF RANCHI CLUB LTD. [168 ITR 120 (PATNA)] WAS THEREFORE, HELD TO BE NOT CORRECT AND ACCORDINGLY OVERRULED. 3.11.6. THIS JUDGMENT OF THE FULL BENCH OF THE HON BLE PATNA HIGH COURT ALONG WITH THE CASE OF BANKIPUR CLUB LTD. (SUPRA) WAS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 51 ASSAILED BY THE REVENUE BEFORE THE HONBLE SUPREME COURT IN BATCH OF CASES IN CIT V. BANKPUR CLUB LTD. [(1997) 226 ITR 97 (SC)] . THE CASE OF RANCHI CLUB LTD. (FB) WAS CONSIDERED BY THE HONBLE SUPREME COURT IN GROUP-B. RELEVANT DISCUSSION HAS B EEN MADE IN PARA 10 OF THE JUDGMENT RENDERED BY THE HONBLE APE X COURT. IN THIS PARA IT WAS NOTICED BY THE HONBLE SUMMIT COURT THA T THE ASSESSEE FILED ITS RETURN OFFERING INCOME RECEIVED FROM PERS ONS OTHER THAN MEMBERS BUT THE ITO INCLUDED THE AMOUNT RECEIVED BY THE ASSESSEE EVEN FROM ITS MEMBERS. THE FINAL DECISION HAS BEEN GIVEN BY THE HONBLE SUPREME COURT IN PARA 14 OF ITS JUDGMENT BY HOLDING THAT THE INCOME ARISING TO THE ASSESSEE FROM ITS TRANSACTION S WITH THE MEMBERS IS NOT CHARGEABLE TO TAX AS IT IS A MUTUAL ARRANGEM ENT. WITH THIS JUDGMENT RENDERED BY THE HONBLE SUPREME COURT, THE JUDGMENT OF THE FULL BENCH OF THE HONBLE PATNA HIGH COURT IN THE CASE OF RANCHI CLUB LTD. (SUPRA) CAME TO BE AFFIRMED. 3.11.7. THE JUDGMENT OF THE HONBLE DELHI HIGH COUR T IN THE CASE OF SCOPE (SUPRA) IS ALSO BASED ON THE FACTS IN WHICH BOTH THE MEMBERS AND NON-MEMBERS CONTRIBUTED TO THE INCOME O F THE ORGANIZATION. THE ASSESSING OFFICER HELD THAT BY TH E INCLUSION OF NON- MEMBERS, THE MUTUALITY WAS LOST IN ENTIRETY. THE TR IBUNAL ACCEPTED THE MUTUALITY QUA THE TRANSACTIONS WITH THE MEMBERS AND HELD THE AMOUNT TO BE TAXABLE IN RESPECT OF TRANSACTIONS WIT H NON-MEMBERS. THE REVENUE ARGUED BEFORE THE HONBLE DELHI HIGH C OURT THAT THE ENTIRE AMOUNT RECEIVED FROM MEMBERS AS WELL AS NON- MEMBERS WAS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 52 TAXABLE. THE HONBLE DELHI HIGH COURT, AFTER CONSI DERING VARIOUS JUDGMENTS OF THE HONBLE SUPREME COURT INCLUDING BANKIPUR CLUB (SUPRA) AND RWITC (SUPRA) , HELD THAT THE INCOME FROM TRANSACTIONS WITH THE MEMBERS WAS EXEMPT ON THE PRINCIPLE OF MUT UALITY. IT HAS BEEN OBSERVED IN THIS CASE THAT : SOME INCIDENTAL ACTIVITY OF THE ASSESSEE IN REVENUE GENERATING DOES NOT PROVIDE ANY JUSTIFICATION TO HOLD THAT THE MUTUALITY CAME TO AN END. THUS THE DECISION TAKEN BY THE TRIBUNAL THAT INCOME FROM TRANSACTIONS WITH THE MEMBERS WAS EXEMPT AND THOSE FROM NON-MEMBERS WAS TAXABLE, WAS UPHELD. 3.11.8. AT THIS STAGE IT WILL BE RELEVANT TO CONSID ER THE ARGUMENTS ADVANCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THIS ISSUE AND THE DECISIONS RELIED UPON BY HIM. THE MAIN CON TENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS THAT BY REA SON OF NON- MEMBERS ALSO AVAILING THE FACILITIES OR SERVICES EX TENDED BY THE SOCIETY, THE PRINCIPLE OF MUTUALITY GETS LOST IN EN TIRETY. FOR THIS PROPOSITION, HE HUGELY RELIED ON THE JUDGMENT OF TH E HONBLE SUPREME COURT IN THE CASE OF RWITC(SUPRA). LET US SEE THE FACTS OF THAT CASE. THE OBJECT FOR WHICH THAT ASSESSEE WAS INCORPORATED INTER ALIA INCLUDED : (B) TO CARRY ON THE BUSINESS OF RACE C OURSE COMPANY IN ALL ITS BRANCHES; (C) TO ESTABLISH ANY, CLUBS, H OTELS AND OTHER CONVENIENCES IN CONNECTION WITH THE PROPERTY OF THE COMPANY; (D) TO CARRY ON THE BUSINESS OF HOTEL-KEEPERS; AND (E) TO SELL, IMPROVE, MANAGE, DEVELOP, LEASE OR OTHERWISE DEAL WITH ALL OR ANY PART OF THE PROPERTY OF THE COMPANY WITH POWER ESPECIALLY TO SELL ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 53 AND DISTRIBUTE OR TO PERMIT TO BE SOLD AND DISTRIBU TED WINES, SPIRITS, TOBACCO AND OTHER GOODS. AS PER THE COMPANYS ARTI CLES OF ASSOCIATION, THERE WERE TWO MAIN CATEGORIES OF MEMB ERS NAMELY, CLUB MEMBERS AND STAND MEMBERS BESIDES HONORARY STA ND MEMBERS, VISITING MEMBERS AND TEMPORARY MEMBERS. THE COMPANY WAS THE LESSEE OF TWO PLOTS OF LAND, ONE IN BOMBAY AND OTHE R IN PUNE. TWO RACE COURSES WERE LAID OUT ON THESE TWO PLOTS. ON E ACH RACE COURSE THERE WERE THREE ENCLOSURES KNOWN AS MEMBERS ENCLOS URE, FIRST ENCLOSURE AND SECOND ENCLOSURE. THE MEMBERS ENCLOSU RE WAS FOR THE EXCLUSIVE USE OF MEMBERS AND THEIR FAMILIES. THE OT HER TWO ENCLOSURES WERE OPEN TO THE PUBLIC. THE COMPANY REC EIVED MONEYS FROM MEMBERS AND NON-MEMBERS. THERE WAS NO DISPUTE AS TO THE LIABILITY TO TAX IN RESPECT OF MONEYS RECEIVED FROM NON-MEMBERS. THE DISPUTE AROSE IN RESPECT OF THE FOLLOWING FOUR ITEM S OF RECEIPTS :- (I) SEASON ADMISSION TICKETS FROM MEMBERS ` 23,635 (II) DAILY ADMISSION GATE TICKETS FROM MEMBERS ` 51,777 (III) USE OF PRIVATE BOXES BY MEMBERS ` 21,490 (IV) INCOME FROM ENTRIES AND FORFEITS RECEIVED FROM THE MEMBERS WHOSE HORSES DID NOT RUN IN THE RACE. ` 82,490 3.11.9. THE ITO HELD THAT ALL THE FOUR ITEMS MEN TIONED ABOVE RECEIVED FROM MEMBERS WERE LIABLE TO TAX. THE TRIBU NAL HELD THAT FIRST THREE ITEMS DID NOT COME WITHIN THE AMBIT OF `BUSIN ESS. WHEN THE MATTER CAME UP BEFORE THE HONBLE BOMBAY HIGH COURT , IT HELD THAT THE FOURTH ITEM OF INCOME WAS CHARGEABLE TO TAX AND THE FIRST THREE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 54 ITEMS WERE NOT. THE ASSESSEE ACCEPTED THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT TO THE EXTENT OF TAXABILITY OF TH E 4 TH ITEM OF ` 82,490 RECEIVED FROM MEMBERS WHOSE HORSES DID NOT R UN IN THE RACE. THE REVENUE CHALLENGED THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN RELATION TO THE FIRST THREE ITEMS. THE HO NBLE SUPREME COURT ASKED ITSELF THROUGH PARA 10 THAT IF THE FOURTH SU M OF ` 82,490 RECEIVED FROM MEMBERS WAS A PART OF INCOME OF THE H ORSE RACING BUSINESS, THEN WHY THE OTHER THREE ITEMS OF RECEIP TS DID NOT FORM PART OF THE ASSESSEES TOTAL INCOME? THEREAFTER, IT WE NT ON TO HOLD THAT THE ENTIRE AMOUNT WAS TAXABLE BECAUSE THE COMPANY WAS D OING ORDINARY BUSINESS OF RACE COURSE. IT WAS OBSERVED THAT SIMIL AR AMENITIES WERE GIVEN TO MEMBERS AND NON-MEMBERS AND SIMILAR FEES W AS CHARGED FROM BOTH. THIS, IN THE OPINION OF THE HONBLE SUP REME COURT, INDICATED THE SAME PROFIT MOTIVE FROM DEALINGS WITH THE MEMBERS AND NON-MEMBERS. EVENTUALLY THE THREE ITEMS OF RECEIPTS FROM MEMBERS WERE ALSO HELD TO BE TAXABLE. IT IS MAINLY ON THE FOUNDATION OF THIS JUDGMENT THAT THE LEARNED DEPARTMENTAL REPRESENTATI VE HAS CREATED THE EDIFICE OF HIS ARGUMENT THAT THE ENTIRE INCOME OF THE ASSESSEE INCLUDING THAT REALIZED FROM THE MEMBERS, SHOULD B E BROUGHT TO TAX. 3.11.10. FROM THE ABOVE JUDGMENT IT IS PATENT DI SCERNIBLE THAT THE PRINCIPLE OF MUTUALITY QUA THE TRANSACTION WITH MEMBERS HAS BEEN DENIED BY THE HONBLE SUPREME COURT IN THE LIGHT OF THE FOLLOWING PROMINENT FACTS OF THE CASE :- ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 55 (I) THE FOURTH ITEM, BEING A SUM OF ` 82,490 WAS NO DIFFERENT FROM THE REMAINING THREE ITEMS AND SUCH FOURTH ITEM WAS ACCEPTED BY THE ASSESSEE TO BE TAXABLE. (II) THE OBJECTS FOR WHICH THE ASSESSEE-COMPANY WAS INCORPORATED INCLUDED CARRYING ON THE BUSINESS OF RACE COURSE, TO CARRY ON THE BUSINESS OF HOTEL-KEEPERS TO ESTABL ISH CLUBS ETC. AND TO MANAGE, SELL LEASE OR MORTGAGE THE PROPERTIE S. (III) THE TRANSACTIONS WITH NON-MEMBERS WERE SIGNI FICANT AS COMPARED TO WITH THE MEMBERS, WHICH IS BORNE OUT FR OM THE FACT THAT THERE WAS ONLY ONE ENCLOSURE MEANT FOR MEMBERS AND TWO FOR THE PUBLIC, THAT IS, NON-MEMBERS. 3.11.11. IT IS ON THE CONSIDERATION OF THE ABOVE FACTS THAT THE HONBLE SUPREME COURT HELD THAT THERE WAS NO MUTUAL ITY EVEN QUA THE MEMBERS APART FROM TRANSACTIONS WITH THE NON-ME MBERS. 3.11.12. THE NEXT DECISION RELIED UPON BY THE L EARNED DEPARTMENTAL REPRESENTATIVE IS THAT OF THE DELHI STOCK EXCHANGE ASSOCIATION LTD. (SUPRA) . IN THAT CASE THE COMPANY WAS FORMED WITH THE OBJE CT OF PROMOTING AND REGULATING BUSINESS IN SHARES, STOCKS AND SECURITIES. THE COMPANY CHARGED FEES FOR THE ADMISSION OF MEMBE RS. TRADING MEMBERS HAD TO BE ELECTED AND PAY ENTRANCE FEES. ON LY THEY WERE ENTITLED TO TRANSACT THE BUSINESS IN THE STOCK EXCH ANGE. THE HONBLE SUPREME COURT OBSERVED THAT THE INCOME ACCRUING FRO M THE BUSINESS OF THE APPELLANT COMPANY WAS DISTRIBUTABLE AMONGST THE SHAREHOLDERS LIKE IN EVERY JOINT COMPANY. AS PER THE ARTICLES OF ASSOCIATION, THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 56 MEMBERS INCLUDED SHAREHOLDERS AND MEMBERS OF THE EX CHANGE. AS THE ENTRANCE FEES WAS PAYABLE BY THE TRADING MEMBERS WH O ALONE COULD TRANSACT BUSINESS IN STOCK-IN-TRADE IN THE ASSOCIAT ION, THE HONBLE SUPREME COURT OBSERVED THAT : THEREFORE, THE BODY OF TRADING MEMBERS WHO PAID THE ENTRANCE FEES, AND THE SHAREHO LDERS AMONG WHOM THE PROFITS WERE DISTRIBUTED WERE NOT IDENTICA L AND THUS THE ELEMENT OF MUTUALITY WAS LACKING . IT WAS EVENTUALLY HELD THAT MUTUALITY WAS LACKING AND THE ASSESSEE WAS ASSESSAB LE TO TAX IN RESPECT OF ITS ENTIRE INCOME. 3.11.13. FROM THIS JUDGMENT IT IS DISCERNIBLE THAT THE PRINCIPLE OF MUTUALITY HAS BEEN HELD TO BE LACKING MAINLY FOR TH E REASON THAT THE BODY OF TRADING MEMBERS WHO PAID THE ENTRANCE FEES AND THE SHAREHOLDERS AMONG WHOM THE PROFITS OF THE COMPANY WERE DISTRIBUTED, WERE NOT IDENTICAL. 3.11.14. THE LEARNED DR HAS ALSO RELIED ON THE JU DGMENT OF THE HONBLE SUPREME COURT IN BANKIPUR CLUB LTD. (SUPRA). HE ARGUED THAT THE ENTIRE JUDGMENT OF THE HONBLE SUPREME COU RT SHOULD BE CONSIDERED IN THE LIGHT OF THE OBSERVATIONS MADE IN PARA 5 WHICH WAS THE SOLE QUESTION BEFORE IT AND THE SAME WAS MADE CATEGORICALLY CLEAR BY THE HONBLE SUPREME COURT BY NOTING THAT : THE INCOME RECEIVED BY THE CLUBS BY EXTENDING FACILITIES TO NON-MEMBERS IS NOT IN ISSUE IN THIS BATCH OF APPEALS . THEN THE LEARNED DEPARTMENTAL REPRESENTATIVE REFERRED TO PARA 15 OF THE JUDGMENT IN WHICH THE HO NBLE SUPREME ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 57 COURT CONSIDERED THE CASE OF RWITC AND THEREAFTER MA DE THE FOLLOWING OBSERVATIONS :- WE DO NOT THINK IT NECESSARY TO DEAL AT LENGTH WIT H THE ABOVE DECISIONS EXCEPT TO STATE THE PRINCIPLE DISCERNIBLE FROM THEM. WE UNDERSTAND THESE DECISIONS TO LAY DOWN THE BROAD PR OPOSITION-THAT, IF THE OBJECT OF THE ASSESSEE-COMPANY CLAIMING TO BE A MUTUAL CONCERN OR CLUB, IS TO CARRY ON A PARTICULAR BUS INESS AND MONEY IS REALISED BOTH FROM THE MEMBERS AND FROM NON-MEMB ERS, FOR THE SAME CONSIDERATION BY GIVING THE SAME OR SIMILAR FA CILITIES TO ALL ALIKE IN RESPECT OF THE ONE AND THE SAME BUSINESS CARRIED ON BY IT, THE DEALINGS AS A WHOLE DISCLOSE THE SAME PROFIT-EARNIN G MOTIVE AND ARE ALIKE TAINTED WITH COMMERCIALITY. IN OTHER WORDS, T HE ACTIVITY CARRIED ON BY THE ASSESSEE IN SUCH CASES, CLAIMING TO BE A MUTUAL CONCERN OR MEMBERS CLUB IS A TRADE OR AN ADVENTURE IN TH E NATURE OF TRADE AND THE TRANSACTIONS ENTERED INTO WITH THE MEMBERS OR NON-MEMBERS ALIKE IS A TRADE/BUSINESS/TRANSACTION AND THE RESUL TANT SURPLUS IS CERTAINLY PROFIT- INCOME LIABLE TO TAX. WE SHOULD A LSO STATE, THAT AT WHAT POINT, DOES THE RELATIONSHIP OF MUTUALITY END AND THAT OF TRADING BEGIN IS A DIFFICULT AND VEXED QUESTION. A HOST OF FACTORS MAY HAVE TO BE CONSIDERED TO ARRIVE AT A CONCLUSION. 3.11.15. IN OUR CONSIDERED OPINION, THE ABOVE THR EE JUDGMENTS OF THE HONBLE SUPREME COURT DO NOT CONCLUSIVELY LAY D OWN THAT IF NON- MEMBERS ALSO ENJOY THE FACILITIES EXTENDED BY AN OR GANIZATION, THE PRINCIPLE OF MUTUALITY WILL BE INVARIABLY LOST. IN THE CASE OF RWITC ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 58 (SUPRA), THE OBJECT WITH WHICH THAT THE ASSESSEE WAS SET UP WAS TO CARRY ON BUSINESS OF RACE COURSE AND ALSO ESTABLISH CLUBS OR HOTELS ETC. APART FROM SELLING, IMPROVING OR MANAGING THE PROPE RTIES OF THE COMPANY. A LARGER CHUNK OF THE INCOME FROM RACE C OURSE CAME FROM PUBLIC AT LARGE WHICH IS EVIDENCED FROM THE FACT TH AT 2 OUT OF 3 ENCLSOURES WERE ALLOTTED TO NON-MEMBERS. IT IS THU S EVIDENT THAT IN THAT CASE NOT ONLY THERE WAS OVERWHELMING PREDOMINA NCE OF NON- MEMBERS, BUT THE ESTABLISHMENT OF THE ORGANIZATION WAS ALSO WITH PROFIT MOTIVE. IT WAS UNDER SUCH CIRCUMSTANCES, THA T THE HONBLE SUPREME COURT HELD THAT THE MUTUALITY WAS LACKING E VEN IN RESPECT OF INCOME ARISING FROM THE MEMBERS. THAT WAS NOT A CAS E IN WHICH THE ORGANIZATION WAS SET UP WITHOUT ANY PROFIT MOTIVE. ANOTHER IMPORTANT FACTOR WHICH WEIGHED WITH THE HONBLE SUPREME COURT WAS THE ACCEPTANCE BY THE ASSESSEE ABOUT THE 4 TH ITEM OF INCOME RECEIVED FROM MEMBERS AS TAXABLE. 3.11.16. THE SECOND JUDGMENT RELIED ON BY THE L EARNED DEPARTMENTAL REPRESENTATIVE IN THE CASE OF DELHI STOCK EXCHANGE ASSOCIATION LTD. (SUPRA) CLEARLY LACKS THE PRINCIPLE OF MUTUALITY AS THE BODY OF TRADING MEMBERS WHO PAID THE ENTRANCE FEES AND THE SHAREHOLDERS AMONGST WHOM THE PROFITS OF THE COMPA NY WERE TO BE DISTRIBUTED, WERE NOT IDENTICAL. IT IS A FUNDAMENTA L PRINCIPLE OF ANY MUTUAL ORGANIZATION THAT THE CONTRIBUTORS TO THE IN COME AND PARTICIPATORS IN THE INCOME MUST BE THE SAME PERSON S AS A BODY. THIS JUDGMENT, THEREFORE, DOES NOT LAY DOWN A BROADER P RINCIPLE THAT THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 59 PRINCIPLE OF MUTUALITY IS LOST EVEN QUA THE DEALINGS WITH THE MEMBERS, WHEN A FEW NON-MEMBERS ALSO AVAIL THE FACILITIES EX TENDED BY THE ORGANIZATION. 3.11.17. THE LAST IS THE CASE OF THE HONBLE SUPREME COURT IS THAT OF RANCHI CLUB LTD. AS APPROVED BY THE HONBLE SUPREME COURT IN THE BATCH OF APPEALS TITLED AS CIT V. BANKIPUR CLUB (SUPRA) . THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE HONBLE SUPREME COURT MADE IT CLEAR AT THE VERY OUTSET THAT THE INCOME RECEIVED BY THE CLUBS BY EXTENDING FACILITIES TO NO N-MEMBERS WAS NOT AN ISSUE BEFORE IT AND THE ONLY SURPLUS RECEIPTS OF THE CLUB FROM EXTENDING FACILITIES TO ITS MEMBERS WAS THE POINT UNDER CONSIDERATION. IN THE BACKDROP OF THESE OBSERVATIONS, A VIEW WAS C ANVASSED BY THELD. DR THAT SINCE THE HONBLE SUPREME COURT DECIDED THE QUESTION OF MUTUALITY IN ASSESSEES FAVOUR IN RELATION TO THE T RANSACTIONS WITH THE MEMBERS, THE SAME CANNOT BE HELD AS UPHOLDING THE O BSERVATIONS OF THE FULL BENCH OF THE HONBLE PATNA HIGH COURT TO THE EFFECT THAT IF THERE ARE TRANSACTIONS WITH MEMBERS AND NON-MEMBERS , THEN MUTUALITY IS SECURED INSOFAR AS TRANSACTIONS WITH M EMBERS ARE CONCERNED. TO SUPPORT THIS ARGUMENT, THE LEARNED D EPARTMENTAL REPRESENTATIVE ALSO RELIED ON A RECENT JUDGMENT DAT ED 30.07.2012 OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT POWER CORPORATION LIMITED V. ACIT. HE ACCENTUATED ON THE OBSERVATIONS MADE IN PARA 28 OF THE JUDGMENT BY WHICH IT HAS BEE N HELD THAT THE RATIO OF THE DECISION OF THE APEX COURT IS WHAT THE JUDG MENT LAYS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 60 DOWN AND NOT WHAT THE DECISION OF THE HIGH COURT CH ALLENGED, HELD. IT WAS DUE TO THESE OBSERVATIONS OF THE HONBLE HIGH C OURT THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE IMPRESSED UPON US TO CONSIDER THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF BANKIPUR CLUB (SUPRA) AS AFFIRMING THE JUDGMENT OF THE HONBLE HIGH COURT TO THE EXTENT OF UPHOLDING MUTUALITY QUA MEMBERS ALONE. 3.11.18. WE RESPECTFULLY AGREE WITH THE RATIO DECIDENDI IN THE CASE OF GUJARAT POWER CORPORATION LIMITED (SUPRA) BY WHICH IT HAS BEEN HELD THAT THE RATIO OF A DECISION OF THE APEX COURT IS WHAT HAS BEEN DECIDED IN THE APEX COURT JUDGMENT AND NOT THE DECI SION OF THE HIGH COURT IN ENTIRETY WHICH WAS UNDER CHALLENGE. BUT WE ARE UNABLE TO FIGURE OUT AS TO HOW THIS JUDGMENT SUPPORTS THE CAS E OF THE REVENUE. IN RANCHI CLUB LTD. (FB) (SUPRA) , THE QUESTION FOR CONSIDERATION WAS ABOUT THE DECISION ON MUTUALITY IN RESPECT OF TRA NSACTIONS WITH MEMBERS IN THE BACKDROP OF THE FACT THAT BOTH THE M EMBERS AND NON- MEMBERS WERE ENJOYING THE FACILITIES EXTENDED BY TH E CLUB. THE FACT THAT THE ASSESSEE OFFERED INCOME IN RESPECT OF TRAN SACTIONS WITH ITS MEMBERS IS AMPLY BORNE OUT FROM PAGE 140 OF THE REP ORT. THE ASSESSING OFFICER TAXED EVEN THE INCOME FROM MEMBER S BY NEGATIVING THE PRINCIPLE OF MUTUALITY IN ENTIRETY. THE HONBLE HIGH COURT SPECIFICALLY OBSERVED THAT IN A CASE OF CLUB PROVIDING FACILITIES TO ITS MEMBERS AND NON-MEMBERS, THE MUTUALITY IS LO ST ONLY IN RESPECT OF TRANSACTIONS WITH THE NON-MEMBERS AND ITS INCOME , TO THE EXTENT OF THAT RECEIVED FROM THE MEMBERS, IS EXEMPT FROM TAXA TION. IT IS MORE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 61 RELEVANT TO TAKE NOTE OF THE FACT THAT THE FULL BEN CH WAS CONSTITUTED TO EXAMINE THE CORRECTNESS OF THE JUDGMENT RENDERED IN THE CASE OF THE SAME ASSESSEE HOLDING THAT THE MUTUALITY WAS LOST EVEN IN RESPECT OF TRANSACTIONS WITH THE MEMBERS DUE TO NON-MEMBERS A LSO AVAILING THE FACILITIES OF THE CLUB,. RATHER, IT WAS ONLY ON THI S SHORT POINT THAT THE FULL BENCH WAS CONSTITUTED, WHICH EVENTUALLY REVERS ED THE EARLIER JUDGMENT AND UPHELD THE MUTUALITY TO THE EXTENT OF TRANSACTIONS WITH MEMBERS WHEN THE CLUB WAS EXTENDING FACILITIES TO BOTH THE MEMBERS AND NON-MEMBERS. IT WAS THE REVENUE WHO CHALLENGED THE FULL BENCH JUDGMENT OF THE HONBLE PATNA HIGH COURT BEFORE THE HONBLE SUPREME COURT URGING THAT THE MUTUALITY BE DENIED E VEN IN RESPECT OF TRANSACTIONS WITH THE MEMBERS. THE ASSESSEE COULD N OT HAVE BEEN IN APPEAL BECAUSE IT HAD VOLUNTARILY OFFERED INCOME FO R TAXATION IN RESPECT OF TRANSACTIONS WITH NON-MEMBERS. THE HONB LE SUPREME COURT AGAIN NOTED THIS FACT IN PARA 10 OF ITS JUDGM ENT THAT THE ASSESSEE HAD FILED ITS RETURN SHOWING INCOME RECEIVED FROM N ON-MEMBERS. THEREAFTER, IT SUMMARIZED THE DECISION OF THE HON BLE PATNA HIGH COURT AGAIN BY NOTING THAT MERELY BECAUSE THE ASSES SEE-COMPANY ENTERED INTO TRANSACTION WITH NON-MEMBERS, ITS RIGH T TO CLAIM EXEMPTION ON THE PRINCIPLE OF MUTUALITY IN RESPECT OF TRANSACTIONS WITH ITS MEMBERS, WAS NOT LOST. IT WAS ONLY THEN T HAT THE HONBLE APEX COURT RENDERED ITS DECISION IN PARA 14 BY ANSW ERING THE QUESTION AGAINST THE REVENUE THAT THE INCOME FROM M EMBERS WAS EXEMPT ON THE RULE OF MUTUALITY. BY NO STRETCH OF IMAGINATION ONE CAN EVEN CONCEIVE THAT THE HONBLE SUPREME COURT WA S OBLIVIOUS OF ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 62 THE FACT THAT THE CLUB EXTENDED ITS FACILITIES BOT H TO ITS MEMBERS AND NON-MEMBERS; INCOME EARNED FROM NON-MEMBERS WAS OF FERED BY THE ASSESSEE FOR TAXATION; AND THE DISPUTE BEFORE IT W AS CENTERED TO CONSIDER THE TAXABILITY OF INCOME FROM MEMBERS ALON E DE HORS THE FACT THAT THE CLUB EARNED INCOME FROM MEMBERS AND A LSO NON- MEMBERS. THE NARRATION OF FACTS; THE REPRODUCTION OF THE CRUX OF THE JUDGMENT OF THE HONBLE PATNA HIGH COURT BY THE HON BLE SUPREME COURT IN ITS JUDGMENT; AND EVEN THE QUESTIONS RAISE D BEFORE THE HONBLE PATNA HIGH COURT, AMPLY PROVE THAT THE HON BLE SUPREME COURT UPHELD THE RATIO OF THE JUDGMENT OF THE HONBLE PATNA HIGH COURT NOT ONLY TO THE EXTENT OF THE NON-TAXABILITY OF INCOME FROM MEMBERS BUT ALSO THIS NON-TAXABILITY IN THE LIGHT O F THE FACT THAT NON- MEMBERS ALSO PARTICIPATED AND AVAILED THE FACILITIE S EXTENDED BY THE CLUB. 3.11.19. THE LEARNED DEPARTMENTAL REPRESENTATIVE H AS ALSO REFERRED TO THE OBSERVATIONS OF THE HONBLE SUPREME COURT IN PARA 15 OF ITS JUDGMENT IN THE CASE OF BANKIPUR CLUB (SUPRA) WHICH WE HAVE REPRODUCED ABOVE. THESE OBSERVATIONS, IN OUR CONSID ERED OPINION, ARE REITERATION OF THE VIEW TAKEN BY THE HONBLE SUPREM E COURT IN THE CASE OF RWITC, WHICH HAS ALSO BEEN REFERRED TO IN THE SAME PARAGRAPH. THE REASONS GIVEN BY US ABOVE FOR HOLDIN G THAT THE CASE OF RWITC (SUPRA) DOES NOT SUPPORT THE LEARNED DEPARTMENTAL REPRESENTATIVES CONTENTION, APPLY WITH FULL FORCE TO THESE OBSERVATIONS OF THE HONBLE SUPREME COURT IN THE C ASE OF BANKIPUR ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 63 CLUB . IT IS FURTHER RELEVANT TO NOTE THAT THE HONBLE SUPREME COURT IN THE CASE OF BANKIPUR CLUB UPHELD THE PRINCIPLE OF MUTUALITY ON TRANSACTIONS WITH MEMBERS WHEN THE CLUB PROVIDED S ERVICES BOTH TO ITS MEMBERS AND NON-MEMBERS, AFTER DULY CONSIDERING ITS EARLIER JUDGMENT IN RWITC (SUPRA). 3.11.20. WE HAVE NOTICED IN AN EARLIER PARA OF TH IS ORDER THAT IN A CASE OF A NON-MUTUAL ORGANIZATION, A FEW TRANSACTI ONS WITH THE MEMBERS DO NOT CONVERT ITS NON-MUTUAL STATUS TO MUTUAL. IN THE LIKE MANNER, THE OTHERWISE STATUS OF MUTUALITY OF AN OR GANIZATION CANNOT BE DESTROYED BECAUSE OF A FEW TRANSACTION WITH THE NON-MEMBERS. WHAT EXTENT OF PARTICIPATION BY NON-MEMBERS DESTROYS THE OTHERWISE MUTUAL STATUS OF AN ORGANIZATION OR WHAT EXTENT OF PARTICIPATION BY MEMBERS CHANGES THE OTHERWISE STATUS OF NON-MUTUALI TY DEPENDS ON THE CONSIDERATION OF THE TOTALITY OF FACTS AND CIRC UMSTANCES OF EACH CASE. 3.12. FOLLOWING PRINCIPLES OF MUTUALITY CAN BE DEDUCED FROM THE ABOVE DISCUSSION:- A. NO ONE CAN TRADE WITH HIMSELF AND HENCE THERE CAN B E NO PROFIT FROM SELF. B. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AND S UCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES OR FACILI TIES ONLY TO ITS MEMBERS, THERE CAN INVARIABLY BE NO PROFIT MOTI VE. EVEN IF SOME PROFIT ENSUES TO THE ORGANIZATION FROM MEMBERS ON ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 64 TRANSACTIONAL LEVEL, WHILE PURSUING THE OBJECTS OF THE ASSOCIATION IN PROVIDING GOODS AND SERVICES TO ITS MEMBERS, THERE CAN BE NO TAX ON SUCH PROFIT ON THE BASIS OF THE PRINCIPLE OF MUTUALITY. THE REASON IS THAT THE CONTRIBUTORS TO T HE PROFIT AND PARTICIPATORS IN SUCH PROFIT, ARE THE SAME PERSONS AS A CLASS. IF NO PROFIT FOLLOWS FROM THE TRANSACTIONS WITH THE ME MBERS, OBVIOUSLY, THERE CAN BE NO TAX EVEN DE HORS THE RULE OF MUTUALITY. C. IF, AN ORGANIZATION OF THE NATURE AS DISCUSSED IN POINT NO. B ABOVE, APART FROM ENTERING INTO TRANSACTIONS WITH I TS MEMBERS IN FURTHERANCE OF ITS OBJECTS, INVESTS ITS FUNDS OR MA KES DEPOSIT IN BANK, THE RETURN OR INTEREST ON SUCH INVESTMENT/DEP OSITS WILL NOT BE COVERED BY THE CHARACTER OF MUTUALITY AND SUC H AN AMOUNT WILL BE LIABLE TO TAX. IT IS SO FOR THE REASON THAT THE PRINCIPLE OF MUTUALITY WILL LACK AS THE CONTRIBUTORS OF SUCH INT EREST INCOME WILL NOT BE PARTICIPATING IN SUCH INCOME. HOWEVER, MUTUAL CHARACTER OF THE ORGANIZATION IN RESPECT OF TRANSAC TIONS WITH ITS MEMBERS WILL CONTINUE AND INCOME THERE FROM WILL EN JOY EXEMPTION. D. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AND S UCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES/FACILITIE S ONLY TO PUBLIC AT LARGE, THAT IS, NON-MEMBERS, THERE MAY OR MAY NOT BE PROFIT MOTIVE. WHEN THERE IS PROFIT MOTIVE AND P ROFITS ACTUALLY FOLLOWS, SUCH PROFIT IS LIABLE TO TAX. IF THERE IS NO PROFIT ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 65 MOTIVE BUT STILL PROFIT FOLLOWS, SUCH A PROFIT IS A LSO CHARGEABLE TO TAX. IF, HOWEVER THERE IS NO PROFIT MOTIVE AND NO PROFIT RESULTS, THERE WILL NOT BE ANY TAX BECAUSE OF NO INCOME AND NOT BECAUSE OF PRINCIPLE OF MUTUALITY. OBVIOUSLY IN SUCH A CASE , THE CONTRIBUTORS TO THE PROFIT, BEING THE CUSTOMERS AS A CLASS, WILL BE DIFFERENT FROM THE PARTICIPATORS IN THE PROFIT, BEI NG THE MEMBERS OF THE ASSOCIATION AS A CLASS, THEREBY BREACHING T HE PRINCIPLE OF MUTUALITY. E. IF, IN A CASE OF ASSOCIATION OF THE NATURE AS DISCU SSED IN POINT NO. D. ABOVE, THERE ARE BY AND LARGE TRANSACTIONS WITH NON-MEMBERS, BUT THERE ARE ONLY A FEW TRANSACTIONS WITH MEMBERS AS WELL, THE NATURE OF THE ORGANIZATION AS NON-MUTUAL, WILL REMA IN AS SUCH. WHEREAS PROFITS FROM TRANSACTIONS WITH NON-MEMBERS WILL BE LIABLE TO TAX, PROFIT FROM TRANSACTIONS WITH THE ME MBERS WILL CONTINUE TO ENJOY EXEMPTION. F. WHEN THE ORGANIZATION PROVIDES FACILITIES AND SERVI CES BOTH TO ITS MEMBERS AND NON-MEMBERS, THE FOLLOWING CONSEQUE NCES FLOW:- (I) IF THE `OBJECT OF SUCH AN ORGANIZATION IS `TO EARN PROFIT, THERE IN NO MUTUALITY IN RESPECT OF TRANSACTIONS WI TH MEMBERS. (II) WHEN THE `OBJECT OF THE ORGANIZATION IS `NOT TO EARN PROFIT BUT PROFIT EMERGES FROM TRANSACTIONS WITH M EMBERS AND NON-MEMBERS, THE RULE OF MUTUALITY WILL NOT APPLY T O THE EXTENT OF TRANSACTIONS WITH MEMBERS UNLESS TRANSACTIONS WI TH MEMBERS ARE PHENOMENALLY MINIMAL. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 66 (III) IN BOTH THE ABOVE CASES COVERED UNDER (I) AN D (II), PROFIT FROM TRANSACTIONS WITH NON-MEMBERS IS ALWAYS TAXABL E. 3.13. NOW WE WILL TEST THE FACTS OF THE INSTANT CASE ON THE TOUCHSTONE OF THE BROADER PRINCIPLES OF MUTUALITY A S FIGURED OUT BY US IN PRECEDING PARA. IT IS OBSERVED THAT THE ASSESS EE EXTENDED FACILITIES TO AIRPORT AUTHORITIES, UNITED NATION, IFC, UNESCO AND EQUANT CUSTOMERS. IT IS EVIDENT FROM PAGE 27 PARA 74 OF T HE `STATEMENT OF FACTS FILED BY THE ASSESSEE BEFORE THE LEARNED CIT (A) THAT THE ASSESSEE-COMPANY AND EQUANT SHARED NETWORK OUTSIDE INDIA IN ORDER TO ACHIEVE ECONOMIES OF SCALE. UNDER THIS ARRANGEME NT, THE COSTS INCURRED BY EACH PARTY WERE SHARED ACCORDING TO USA GE AND THESE COSTS RECHARGED WERE SHOWN IN ITS INCOME AND EXPENDITURE ACCOUNT. THE FACT THAT THE ASSESSEE RENDERED SERVICES TO EQUANT CUSTOMERS IS ALSO BORNE OUT FROM ITS LETTER DATED 25.03.2004, A COPY OF WHICH IS PLACED ON PAGE 29 ONWARDS OF THE PAPER BOOK. FROM PARA (IV C), IT CAN BE NOTICED THAT : SITA AND EQUANT SHARED NETWORK RESOURCES IN CERTAI N COUNTRIES OUTSIDE INDIA, IN ORDER TO MAXIMIZE SUCH ECONOMIES OF SCALE. UNDER THOSE ARRANGEMENTS, THE COSTS INCURRED BY EACH PARTY WERE SHARED ACCORDING TO USAGE . IT SHOWS THAT NON-MEMBERS DID AVAIL THE FACILITIES EXTENDED BY THE ASSESSEE. 3.14. NOW LET US SEE THE VOLUME OF TRANSACTION S WITH SUCH NON- MEMBERS. THE ASSESSEES CONTENTION IS THAT IT WAS S IMPLY RECOVERING COSTS FROM ITS MEMBERS AND NON-MEMBERS FOR RENDERIN G SERVICES AND ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 67 THERE WAS NO PROFIT MOTIVE. THE TOTAL OF COST RECO VERIES FROM GOVERNMENT, INTERNATIONAL ORGANIZATIONS AND EQUANT CUSTOMERS, CONSTITUTING NON-MEMBERS AS A GROUP, IS 0.07% OF T HE TOTAL COST RECOVERIES. IT SHOWS THAT THE ASSESSEE PROVIDED SER VICES TO ITS MEMBERS AT 99.93% OF ITS TOTAL OPERATIONS. THIS FA CT EVIDENCES THAT NON-MEMBERS AVAILED THE FACILITIES PROVIDED BY THE ASSESSEE TO A VERY LIMITED EXTENT, LESS THAN EVEN 0.1% OF TOTAL. 3.15. AT THIS MOMENT, WE WILL TRY TO ASCERTAIN IF THE ASSESSEE WAS SET UP WITH A PROFIT MOTIVE. WE HAVE PERUSED ARTICL ES OF ASSOCIATION OF THE ASSESSEE, A COPY OF WHICH IS PLACED AT PAGE 116 ONWARDS OF THE PAPER BOOK. OBJECTS OF THE ASSESSEE ARE CONTAINED I N ARTICLE 3. MAIN OBJECT OF THE ASSESSEE AS PER CLAUSE A) OF ARTICLE 3 IS :` TO FOSTER ALL COMMUNICATION AND INFORMATION PROCESSING, MATTERS DIRECTLY OR INDIRECTLY CONNECTED WITH THE TRANSMISSION AND PROC ESSING OF ALL CATEGORIES OF INFORMATION REQUIRED IN THE OPERATION OF THE AIR TRANSPORT INDUSTRY AND TO STUDY THE PROBLEMS RELATI NG TO THEM WITH THE AIM OF PROMOTING IN AL COUNTRIES SAFE AND REGULAR A IR TRANSPORT . OTHER OBJECTS OF THE ASSESSEE ARE ON THE SAME LINES . THERE IS NO REFERENCE TO ANY PROFIT MOTIVE IN SUCH OBJECTS. IT HAS BEEN CONSISTENTLY CLAIMED BY THE ASSESSEE THAT IT HAS NO T EARNED ANY PROFIT FROM ITS TRANSACTIONS AND THE CONSIDERATION SO RECE IVED REPRESENTS ONLY COST RECOVERIES. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 68 3.16. THE ABOVE FACTS INDICATE THAT PRIMARILY, THE ASSESSEE IS NOT SET UP WITH A `PROFIT MOTIVE. SECONDLY, THE NON-ME MBERS AVAILING THE FACILITIES EXTENDED BY THE ASSESSEE ARE VERY INSIGN IFICANT, NOT EVEN 1% OF THE TOTAL. 3.17. THESE FACTS ARE DEFINITE POINTER TOWARD S THE ASSESSEE BEING A MUTUAL ORGANIZATION. UNDER SUCH CIRCUMSTANCES WE A RE OF THE CONSIDERED OPINION THAT THE PRINCIPLE OF MUTUALITY CANNOT BE DENIED IN ENTIRETY EVEN IN RESPECT OF TRANSACTIONS BY THE ASS ESSEE WITH ITS MEMBERS. ACCORDINGLY, THE VIEW TAKEN BY THE LEARNE D CIT(A) CAN NOT BE FAULTED WITH INSOFAR AS IT ACCEPTS THE RULE OF MUTUALITY QUA THE TRANSACTIONS WITH MEMBERS AND DENIES THE SAME QUA THE TRANSACTIONS WITH NON-MEMBERS. 3.18. THE NEXT ARGUMENT OF THE LEARNED DEPARTMENTA L REPRESENTATIVE IN SUPPORT OF HIS CONTENTION THAT TH E MUTUALITY SHOULD BE REJECTED IN ENTIRETY WAS WITH REFERENCE TO ARTI CLES 20 AND 50 OF THE ARTICLES OF ASSOCIATION OF THE ASSESSEE. IT WAS SUB MITTED THAT SINCE THE RETIRING OR RESIGNING MEMBERS ARE NOT ENTITLED TO P ARTICIPATE IN THE RESERVES TO SOME EXTENT, THE MUTUALITY WAS LOST. IT WAS ARGUED THAT THE CONTRIBUTOR TO AND PARTICIPATOR IN THE SURPLUS FUN D SHOULD BE CONSIDERED ON THE LEVEL OF INDIVIDUAL PERSONS. FO R THIS PROPOSITION, HE RELIED ON THE JUDGMENT IN THE CASE OF WANKANER JAIN SOCIAL WELFARE SOCIETY (SUPRA) . IN THIS CASE THE HONBLE MADRAS HIGH COURT CONSIDERED THE FACTS IN WHICH THE OBJECT OF THE SOC IETY WAS TO CREATE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 69 AND CULTIVATE THE HABIT OF SAVING AND THRIFT AMONG THE MEMBERS OF THE SOCIETY TO HELP BY WAY OF LOAN OR OTHER ASSISTANCE TO MEMBERS IN CASE OF A BONA FIDE NEED. THE RULES AND REGULATIONS OF THE SOCIETY MAD E IT COMPULSORY FOR EVERY MEMBER TO PARTICIPATE IN THE S CHEME OF DEPOSIT. THE ASSESSING OFFICER DENIED THE MUTUALITY ON THE G ROUND THAT EVERY DEPOSITOR WAS NOT NECESSARILY BORROWER AND THEREFOR E, THE INTEREST PAID BY THE BORROWERS AND DISTRIBUTED AMONGST THE N ON-BORROWER MEMBERS DENTED THE MUTUALITY. THE HONBLE MADRAS HI GH COURT UPHELD THIS PRINCIPLE BY HOLDING THAT SINCE THE INT EREST INCOME WAS AVAILABLE FOR BEING DISTRIBUTED AMONGST ALL THE MEM BERS INCLUDING THOSE WHO HAD NOT BORROWED MONEYS, THE IDENTITY BET WEEN THE CONTRIBUTORS AND PARTICIPATORS WAS LOST AND HENCE T HE PRINCIPLE OF MUTUALITY WAS NOT SATISFIED. 3.19. THE QUESTION WHICH, THEREFORE, ARISES FO R OUR CONSIDERATION IS WHETHER THE MUTUALITY IS LOST BY REASON OF A MEMBER RESIGNING OR RETIRING FROM THE SOCIETY AND NOT GETTING ANY SHARE IN THE RESERVES. IN OTHER WORDS, THE LARGER QUESTION IS WHETHER THE CON TRIBUTORS TO THE FUND AND PARTICIPATORS IN THE FUND SHOULD BE THE S AME PERSONS ON AN INDIVIDUAL LEVEL OR A CLASS LEVEL. THE HONBLE JURI SDICTIONAL HIGH COURT IN THE CASE OF SIND CO-OPERATIVE HOUSING SOCIETY (SUPRA) CONSIDERED THE QUESTION OF MUTUALITY ON THE TRANSFE R FEES RECEIVED BY THE CO-OPERATIVE SOCIETY FROM ITS MEMBERS. IN THIS CASE, THE HONBLE JURISDICTIONAL HIGH COURT RECOGNIZED `CLASS OF MEM BERS AS PARTICIPATORS AS WELL AS CONTRIBUTORS FOR MUTUALITY , INSTEAD OF THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 70 `INDIVIDUAL MEMBERS. IT HAS BEEN HELD IN THIS CAS E THAT THE FACT THAT ONLY SOME MEMBERS FROM THOSE WHO CONTRIBUTED MAY PA RTICIPATE IN THE SURPLUS, IS IRRELEVANT AS LONG AS THE CLASS IS SAME. 3.20. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF KUMBAKONAM MUTUAL BENEFIT FUND LTD. (SUPRA) TO CONTEND THAT THE PRINCIPLE OF MUTUALITY FAILS IF THE PERSONS WHO CON TRIBUTE TO THE INCOME ARE NOT THE SAME PERSONS WHO PARTICIPATE IN THE SURPLUS OF THE ORGANIZATION. IN THIS CASE THE ASSESSEE CARRIED ON A BANKING BUSINESS RESTRICTED TO ITS SHAREHOLDERS, THAT IS, THE SHAREH OLDERS WERE ENTITLED TO PARTICIPATE IN VARIOUS RECURRING DEPOSITS SCHEMES O F THE ASSESSEE OR TO OBTAIN LOANS OF SECURITIES. THESE RECURRING DEPOSIT S CONSTITUTED THE MAIN SOURCE OF FUNDS OF THE ASSESSEE FOR ADVANCING LOANS. OUT OF THE INTEREST REALIZED BY THE ASSESSEE ON THE LOANS, INT EREST ON RECURRING DEPOSIT WAS PAID AND THE BALANCE WAS DIVIDED AMONGS T THE MEMBERS ACCORDING TO THEIR SHAREHOLDING. THE ITO DENIED THE PRINCIPLE OF MUTUALITY AND ASSESSED THE ENTIRE PROFIT TO TAX, WH ICH VIEW HAS BEEN UPHELD BY THE HONBLE SUPREME COURT. 3.21. WE ARE UNABLE TO SEE AS TO HOW THIS JUDG MENT ADVANCES THE CASE OF THE REVENUE. THE ASSESSEE IN THAT CASE RECE IVED RECURRING DEPOSITS AND MADE ADVANCES TO CERTAIN MEMBERS. THE SURPLUS WAS DISTRIBUTED AMONGST MEMBERS ACCORDING TO THEIR SHAR EHOLDING AFTER MAKING A PROVISION FOR RESERVES ETC. THE SHAREHOLDE RS WHO WERE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 71 ENTITLED TO PARTICIPATE IN THE SURPLUS NEED NOT HAV E EITHER TAKEN LOANS OR MADE RECURRING DEPOSITS. FROM THESE FACTS, IT IS PALPABLE THAT THE SHAREHOLDERS WERE DIFFERENT AS A CLASS FROM THE PER SONS WHO AVAILED THE LOAN FACILITY AS A CLASS. IT WAS NOT NECESSAR Y FOR A SHAREHOLDER EITHER TO TAKE LOAN OR TO MAKE A RECURRING DEPOSIT. THUS THE CONTRIBUTORS TO THE FUNDS WERE DIFFERENT AS A GROUP FROM THE PARTICIPATORS, BEING, THE SHAREHOLDERS OF THE CLU B AS A GROUP. 3.22. IN VIEW OF THE FACT THAT ARTICLES 20 AND 50 DEBAR THE RETIRING OR RESIGNING MEMBERS FROM PARTICIPATING IN THE RESE RVES AVAILABLE, CANNOT BE CONSIDERED AS A FACTOR ECLIPSING THE PRIN CIPLE OF MUTUALITY. IT IS SO FOR THE REASON THAT THE PERSONS WHO ARE EN TITLED TO SHARE AND PARTICIPATE IN THE RESERVES OF THE SOCIETY CONTINUE TO REMAIN THE SAME AS A GROUP OR CLASS OF PERSONS. THE MERE FACT THAT A PERSON AT THE TIME OF RESIGNATION OR RETIREMENT IS NOT ENTITLED TO SHA RE IN THE RESERVES OF THE ORGANIZATION, WOULD NOT DAMAGE THE MUTUALITY SO LONG AS THE PERSONS WHO ARE ENTITLED TO SHARE SUCH RESERVES CON TINUE TO BE THE MEMBERS AS A CLASS. 3.23. BE THAT AS IT MAY, IT IS OBSERVED THAT T HIS FACT HAS BEEN CONSIDERED BY THE TRIBUNAL WHILE DECIDING THE PRIN CIPLE OF MUTUALITY IN RELATION TO ASSESSMENT YEARS 1974-75 AND 1975-76 . THE TRIBUNAL HAS ELABORATELY REPRODUCED AND DISCUSSED THESE TWO ARTICLES IN ITS ORDER AND THEREAFTER RECORDED A POSITIVE CONCLUSION GRANTING THE STATUS OF MUTUAL ORGANIZATION TO THE ASSESSEE. SAME IS TR UE IN RESPECT OF THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 72 CREATION OF RESERVES AS WELL. THE LEARNED AR HAS PO INTED OUT THAT THE RESERVES SO REFERRED TO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE WERE CREATED MANY YEARS AGO IN ACCORDANCE WITH THE BELGIAN STATUTORY REQUIREMENTS OR AROSE DUE TO REVALUATION OR REFURBI SHMENT COST OR DUE TO CAPITALIZATION OF REFURBISHMENT COST. THE QUEST ION OF RESERVES HAS ALSO BEEN DISCUSSED IN THE ORDER FOR ASSESSMENT YEA RS 1974-75 AND 1975-76. IN VIEW OF THE CONCLUSION ARRIVED AT BY TH E TRIBUNAL IN EARLIER YEARS HOLDING THAT THE MUTUALITY IS NOT DIS TURBED BY REASON OF ARTICLE 20 AND 50 OF THE ASSESSEE OR THE CREATION O F RESERVES, WE DO NOT DEEM IT NECESSARY TO DIVE DEEP INTO THE ARGUMEN TS OF THE LD. DR WITH A VIEW TO BRING OUT ANY DECISION CONTRARY TO W HAT HAS ALREADY BEEN TAKEN BY THE TRIBUNAL IN EARLIER YEARS ON THE SAME FACTS AND CIRCUMSTANCES. 3.24. WE, THEREFORE, SUM UP OUR CONCLUSION ON GROU ND NO.1 TAKEN BY THE REVENUE IN ITS APPEAL BY HOLDING THAT THE ASSESSEE IS COVERED BY THE PRINCIPLE OF MUTUALITY TO THE EXTENT OF ITS TRANSACTIONS WITH THE MEMBERS. INCOME FROM TRANSACTIONS WITH NO N-MEMBERS IS OUTSIDE THE PURVIEW OF MUTUALITY. 4.1. SECOND GROUND TAKEN BY THE REVENUE IN ITS APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) NOT TO CHARGE I NTEREST U/S 234B. 4.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ISSUE OF CHARGI NG OF INTEREST U/S 234B IN THE PRESENT CASE IS NO MORE RES INTEGRA IN VIEW OF THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 73 JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) V. NGC NETWORK ASIA LLC [(2009) 313 ITR 187 (BOM.)] IN WHICH IT HAS BEEN HELD THAT WHEN THE DUTY IS CAST ON THE PAYER TO DEDUCT TAX AT SOURCE, ON FAILURE OF THE PAYER TO DO SO, NO INTEREST CAN BE CHARGED F ROM THE PAYEE ASSESSEE U/S 234B. THE SAME VIEW HAS BEEN REITERATE D IN DIT (IT) V. KRUPP UDHE GMBH[(2010) 38 DTR (BOM.) 251] . AS THE ASSESSEE BEFORE US IS A NON-RESIDENT, NATURALLY ANY AMOUNT P AYABLE TO IT WHICH IS CHARGEABLE TO TAX UNDER THE ACT, IS OTHERWISE LI ABLE FOR DEDUCTION OF TAX AT SOURCE. IN THAT VIEW OF THE MATTER AND RESPE CTFULLY FOLLOWING THE ABOVE PRECEDENTS, WE HOLD THAT NO INTEREST CAN BE CHARGED UNDER SECTIONS 234B AND 234C OF THE ACT. THIS GROUND IS, THEREFORE, NOT ALLOWED. 5.1. GROUND NOS.2 TO 4 OF THE ASSESSEES CROSS OBJECTION ARE AGAINST THE VIEW OF THE LEARNED CIT(A) TO ESTIMATE INCOME AT 5% OF THE GROSS AMOUNT RECOVERED FROM NON-MEMBERS. IT IS OBSERVED FROM THE IMPUGNED ORDER THAT THE LEARNED CIT(A) DENIED T HE PRINCIPLE OF MUTUALITY TO THE EXTENT TO THE ASSESSEES TRANSACTI ONS WITH NON- MEMBERS, WHICH HAS BEEN UPHELD BY US HEREINABOVE. THE LEARNED CIT(A), THEREAFTER, PROCEEDED TO ESTIMATE THE INC OME OF THE ASSESSEE AT THE RATE OF 5% OF THE GROSS RECOVERIES FROM NON- MEMBERS BY APPLYING RULE 10, WHICH WAS ALSO INVOKED BY THE AS SESSING OFFICER. 5.2. THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THERE WAS NO ELEMENT OF PROFIT IN TRANSACTIONS WITH THE NON-M EMBERS AND THESE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 74 REPRESENTED ONLY COST RECOVERIES. HE INVITED OUR AT TENTION TOWARDS THE INCOME AND EXPENDITURE ACCOUNT OF THE ASSESSEE SHOW ING INCOME AND EXPENDITURE AT THE SAME LEVEL. IN VIEW OF THE FACT THAT THE ASSESSEE HAD ONLY RECOVERED COSTS FROM NON-MEMBERS AS WELL A S MEMBERS, THE LEARNED AR SUBMITTED THAT THERE CAN BE NO QUESTION OF ESTIMATING ANY INCOME FROM THE REIMBURSEMENT OF COST. HE RELIED ON CERTAIN DECISIONS TO SUBMIT THAT THERE CAN BE NO INCOME IN SO FAR AS REIMBURSEMENT OF COST IS CONCERNED. 5.3. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, CONTENDED THAT THE ASSESSEES CONTENTION ABOUT RECO VERIES OF COSTS FROM NON-MEMBERS WAS NOT BORNE OUT FROM ANY EVIDENC E. HE SUBMITTED THAT NEITHER THE RECEIPTS NOR THE EXPENSE S OF THE ASSESSEE WERE RECORDED ON ANY RATIONAL BASIS. IN SUPPORT OF THIS SUBMISSION, HE INVITED OUR ATTENTION TOWARDS STATEMENT OF MR.ANDRE W CLEAK, INTERNATIONAL TAX DIRECTOR, SITA AND THAT OF SHRI S .GOPALAKRISHNAN, FINANCE MANAGER, SITA, INDIA, RECORDED AT THE TIME OF SURVEY IN WHICH THEY ADMITTED THAT THE ALLOCATION OF EXPENSES WAS DONE BY HO TO DIFFERENT COUNTRIES INCLUDING INDIAN BRANCH AND THE BASIS OF SUCH ALLOCATION WAS NOT KNOWN. SIMILARLY, AS REGARDS TH E REVENUE, THEY SHOWED IGNORANCE ABOUT THE WAY IN WHICH THE HO WAS ALLOCATING INCOME TO ITS BRANCHES. THE LD. DR ALSO REFERRED T O OTHER QUESTIONS, IN ANSWERS TO WHICH IT WAS STATED BY THEM THAT THE ACCOUNTS OF THE BRANCHES INCLUDING INDIAN BRANCH, WERE MAINTAINED AT HO LEVEL AND ONLY ON THEIR FINALIZATION, A COPY OF THE SAME WAS SENT TO INDIA. IT ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 75 WAS, THEREFORE, CONTENDED THAT THE DECISION OF THE LEARNED CIT(A) IN APPLYING 5% AS THE INCOME FROM GROSS REVENUE FROM N ON-MEMBERS WAS IN ORDER. 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. THERE CAN BE NO DISPUT E ABOUT THE FACT THAT ANY AMOUNT RECEIVED BY WAY OF REIMBURSEMENT, N OT CONTAINING ANY ELEMENT OF PROFIT, IS NOT LIABLE TO TAX. THIS P RINCIPLE HAS BEEN LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN CIT V. SIEMENS AKTIONGESELLSCHAFT [(2009) 177 TAXMAN 81 (BOM.)] AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA AND MAHINDRA LTD. V. DCIT [(2009) 313 ITR (AT) 263 (MUM) (SB)] . IN THESE CASES, IT HAS BEEN HELD THAT WHEN A PARTICULAR AMOUNT OF EXPENDIT URE IS INCURRED AND THE SAME SUM IS REIMBURSED AS SUCH, THAT CANNOT BE CONSIDERED AS HAVING ANY PART OF IT IN THE NATURE OF INCOME. THIS BRINGS US TO THE PRINCIPLE THAT IF THERE IS CERTAIN REIMBURSEMENT OF EXPENSES AS SUCH, WITHOUT THERE BEING ANY MARK UP INCLUDED IN SUCH RE IMBURSEMENT, THERE CANNOT BE ANY QUESTION OF EARNING ANY INCOME LIABLE TO TAX FROM SUCH REIMBURSEMENT. WE AGREE WITH THE LEARNED AR ON THIS PRINCIPLE THAT THE REIMBURSEMENT OF EXPENSES DOES NOT LEAD TO ANY INCOME AND IN SUCH A SITUATION THERE CAN BE NO QUESTION OF ANY INCOME EMBEDDED IN SUCH REIMBURSEMENT. 5.5. HOWEVER WE FIND THAT THIS PRINCIPLE IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. IT IS OBSERVED FROM THE ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 76 STATEMENTS OF SHRI S.GOPALAKRISHNAN AND MR.ANDREW C LEAK RECORDED AT THE TIME OF SURVEY THAT THE BASIS OF ALLOCATION OF COSTS TO DIFFERENT COUNTRIES BY THE HO WAS NOT KNOWN. IT WAS ADMITTED THAT THE HO ALLOCATES A PROPORTION OF ITS GENERAL ADMINISTRATIV E AND FINANCING COST TO OTHER BRANCHES TO EXACTLY MATCH THE TOTAL COST I NCURRED IN EACH COUNTRY IN EACH MONTH. IT WAS ALSO ADMITTED THAT TH ERE WAS NO VERIFICATION OF THE EXPENSES ALLOCATED BY THE HO BE CAUSE THE BASIS OF CHARGE WAS KNOWN TO HO ALONE AND THE DETAILS OF SUC H COMPUTATION WERE NOT PROVIDED TO THE INDIAN BRANCH. ON A QUESTI ON ABOUT THE RECORDING OF REVENUES, IT WAS ADMITTED THAT THE EN TRY WAS PASSED ON THE RECEIPT OF INTIMATION FROM HO AND HOW SUCH REVE NUES ARE DETERMINED, WAS NOT KNOWN. IN RESPONSE TO QUESTION NOS.12 AND 13, SHRI GOPALAKRISHNAN ADMITTED THAT ACCOUNTS WERE FIN ALIZED BY THE HO AND AFTER FINALIZATION OF SUCH ACCOUNTS, A SIGNED COPY OF THE BALANCE SHEET WAS SENT TO THE BRANCH OFFICE IN INDIA. THE L EARNED AR HAS INVITED OUR ATTENTION TOWARDS ITS LETTER DATED 5.02 .2005 ADDRESSED TO THE LD. CIT(A) ABOUT THE BASIS OF ALLOCATION. FROM THIS LETTER IT IS CRYSTAL CLEAR THAT THE ASSESSEE STATED BEFORE THE L EARNED CIT(A) THAT THE GLOBAL COST RECOVERIES MADE BY THE SITA HO ARE ALLOCATED TO ALL OF THE SITA BRANCHES WORLDWIDE SO AS TO MATCH THE C OSTS BORNE BY THOSE BRANCHES. THUS, THE OVERALL EFFECT OF ALLOCAT ING HEAD OFFICE COSTS TO THE SITA BRANCHES WORLDWIDE IS TO INCREASE BOTH THE BRANCH COSTS AND ALSO THE CORRESPONDING COST RECOVERIES WHICH AR E ALLOCATED TO EACH BRANCH TO MATCH THOSE COSTS . FROM THIS LETTER IT IS ALSO OBSERVED THAT THE BASIS OF ALLOCATION OF COSTS AMON GST VARIOUS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 77 BRANCHES IS KNOWN ONLY AT THE HO LEVEL WITH NO INTI MATION TO THE INDIAN BRANCH ABOUT SUCH BASIS. AT THIS STAGE, WE W OULD LIKE TO HIGHLIGHT THAT INDIA IS CONCERNED ONLY WITH THE TAX REVENUES RELATING TO INDIAN OPERATIONS. UNLESS IT IS PROPERLY ESTABLI SHED THAT ALL THE EXPENSES CLAIMED BY THE INDIAN BRANCH REPRESENTS TH E ASSESSEES SHARE IN A PROPER MANNER, IT CANNOT BE ACCEPTED THAT THE ALLOCATION WAS MADE ON SOME RATIONAL BASIS. HERE IS A CASE IN WHI CH BOTH THE SIDES OF THE ASSESSEES INCOME AND EXPENDITURE ACCOUNT AR E TALLYING PAISA TO PAISA. THE LEARNED AR SUBMITTED THAT THE COST AND R EVENUES ARE MATCHED AND IF THERE IS ANY NET OVER-RECOVERY OR NE T UNDER-RECOVERY, THE SAME IS CARRIED FORWARD AND AT THE END OF THE Y EAR THE AUDITED ACCOUNTS REFLECT CUMULATIVE UNDER-RECOVERY OR OVER- RECOVERY FOR THE YEAR. THIS SUBMISSION WAS MADE BY READING FROM THE ASSESSEES AFORESAID LETTER DATED 05.02.2005 ADDRESSED TO THE CIT(A). ON A SPECIFIC QUESTION AS TO WHAT IS THE AMOUNT OF UNDER -RECOVERY OR OVER- RECOVERY IN THE ACCOUNTS OF THE ASSESSEE FOR THIS Y EAR OR ANY EARLIER OR LATER YEAR, THE LEARNED AR FAILED TO POINT OUT ANY SUCH AMOUNT. WE HAVE PERUSED THE INCOME AND EXPENDITURE ACCOUNT AND BALANCE SHEET OF THE ASSESSEE. IT IS OBSERVED THAT BOTH THE SIDES OF THE ASSESSEES INCOME AND EXPENDITURE ARE MATCHING PAISA TO PAISA AND THERE IS NO UNDER-RECOVERY OR OVER-RECOVERY SHOWN AS AN ASSET O R A LIABILITY IN ITS BALANCE SHEET. FURTHER, WHEN WE CONSIDER THE FACT THAT THE ACCOUNTS OF THE ASSESSEE WERE MAINTAINED AT THE HO LEVEL, TH ERE REMAINS NOTHING TO DOUBT THE CORRECTNESS VIEW TAKEN BY THE LEARNED CIT(A) THAT THE ACCOUNTS OF THE ASSESSEE DO NOT DIVULGE TH E CORRECT INCOME. ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 78 NOT ONLY THE BASIS OF ALLOCATION OF EXPENSES BUT AL SO THAT OF THE REVENUE, AS DONE BY THE HO IS NOT KNOWN TO THE ASS ESSEE. UNDER SUCH CIRCUMSTANCES, THE CONTENTION THAT THE ASSESSEE WA S ONLY RECOVERING COSTS FROM ITS NON-MEMBERS AND THERE WAS NO PROFIT ELEMENT IN IT, IS NOT OPEN FOR VERIFICATION. 5.6. THE LEARNED AR ALSO PRESSED INTO SERVICE THE PROVISIONS OF SECTION 44C TO CONTEND THAT WHERE THE BASIS OF ALLO CATION OF HO EXPENDITURE IS NOT KNOWN, DEDUCTION FOR SUCH HO E XPENSES HAS TO BE MADE IN TERMS OF SECTION 44C. IN THE LIGHT OF THIS SECTION, THE LEARNED AR CONTENDED THAT ONLY A SMALL PORTION OF THE HO EX PENSES OUGHT TO HAVE BEEN DISALLOWED BY THE LD. CIT(A) INSTEAD OF C OMPUTING INCOME AT 5% OF THE GROSS RECEIPTS. 5.7. WE ARE NOT CONVINCED WITH THIS CONTENTION FO R THE REASON THAT SECTION 44C ONLY TALKS OF HO EXPENSES, WHICH MEAN EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA INCLUDING EXPENDITURE IN RESPECT OF RENT, RAT ES, REPAIRS ETC. IT IS ONLY THE ALLOCATION OF GENERAL AND ADMINISTRATIVE E XPENSES WHICH IS COVERED WITHIN THE PURVIEW OF SECTION 44C. ON THE C ONTRARY, WE ARE CONSIDERING A CASE IN WHICH NOT ONLY THE BASIS OF A LLOCATION OF EXPENSES IS NOT KNOWN, BUT THE BASIS OF ALLOCATION OF INCOME IS EQUALLY UNKNOWN AT INDIA LEVEL. THIS BRINGS US TO A SITUATION WHERE NEITHER THE INCOME SIDE NOR THE EXPENDITURE SIDE OF THE ASSESSEES INCOME AND EXPENDITURE ACCOUNT IS FULLY CAPABLE OF VERIFICATION. IT IS ITA NO.4970/M/05 & CO NO.67/M/06 M/S.SOCIETE INTERNATIONAL DE TELECOMMUNICATION. 79 IN SUCH CIRCUMSTANCES THAT RULE 10 OF INCOME-TAX RU LES, 1962 COMES TO THE RESCUE OF THE REVENUE FOR DETERMINATION OF I NCOME IN THE CASE OF NON-RESIDENTS. IT IS THIS VERY RULE WHICH HAS B EEN INVOKED BY THE ASSESSING OFFICER AND ALSO APPLIED BY THE LEARNED C IT(A) IN ESTIMATING THE INCOME OF THE ASSESSEE. IN OUR CONSI DERED OPINION THE LEARNED CIT(A) WAS MORE THAN JUSTIFIED IN ESTIMATIN G THE INCOME AT 5% OF THE GROSS RECEIPTS FROM NON-MEMBERS. THESE GR OUNDS TAKEN BY THE ASSESSEE ARE NOT ALLOWED. 6. IN THE RESULT, THE REVENUES APPEAL AND THE ASSE SSEES CROSS OBJECTION STAND DISMISSED. ORDER PRONOUNCED ON THIS 26 TH DAY OF SEPTEMBER, 2012. !$ / 12* 3!)4 2 / 5 SD/- SD/- (AMIT SHUKLA) (R.S.SYAL) & ! & ! & ! & ! / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER MUMBAI ; 3!) DATED : 26 TH SEPTEMBER, 2012. DEVDAS* !$ / -&#'6 76*# !$ / -&#'6 76*# !$ / -&#'6 76*# !$ / -&#'6 76*#/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. 8 () / THE CIT(A)- XXXI, MUMBAI. 4. 8 / CIT 5. 6;5 -&#&) , , / DR, ITAT, MUMBAI 6. 5< = / GUARD FILE. !$) !$) !$) !$) / BY ORDER, .6# -&# //TRUE COPY// > > > >/ // /? @ ? @ ? @ ? @ ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI