Case Law Details
RELEVANT PARAGRAPH
16. Before answering the first question viz., as to whether the interest income of the assessee received from its corporate members on the investments of surplus funds as Fixed Deposits or Debentures etc., is exempted from tax on the concept of Mutuality, it will be worthwhile to refer to the principles laid down on the Doctrine of Mutuality in the decisions of the Hon’ble Supreme Court as well as some of the High Courts.
17. In the decision reported in (2000) 243 ITR 89 (SC) (Chelmsford Club Vs. Commissioner of Income-tax) as a proposition of law, the Hon’ble Supreme Court extracted the conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. Vs. Commr. of Agrl. I.T.(1948) 16 ITR 270 (PC), the existence of which establishes the doctrine of Mutuality. The said conditions as extracted in the decision of the Hon’ble Supreme Court are as under:
“(1) the identity of the contributors to the fund and the recipients from the fund,
(2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policyholders, in other words, as an instrument obedient to their mandate, and
(3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.”
The Hon’ble Supreme Court made it clear that Section 2(24) of the Act recognise the Principle of Mutuality and is exclusive of businesses involving such business except those mentioned under clause (vii) of that Section. Section 2(24)(vii) which is a part of the definition of income includes the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with Section 44 or any surplus taken to such profits and gains by virtue of provisions contained in the First Schedule.
18. None of the assessees who came forward with these appeals would fall within the said Section 2(24)(vii). Therefore, if the well laid down condition as extracted in the above referred to decision of the Hon’ble Supreme Court are satisfied by virtue of the fact that the object of the appellants club are for providing of various facilities and provisions exclusively for the benefit of the members of the club, which would satisfy the fundamental doctrine that no person can earn for himself as its activities are otherwise governed by the principles of Mutuality, the appellant club is entitled to claim the benefit of exemption under the said doctrine.
19. When the activities of the club vis-a-vis its members and the involvement of the funds generated from and out of the contributions made by the members for conducting the regular business of the club is considered, it would satisfy the conditions referred to above.
20. The question for consideration is that apart from its regular activities as a club when the surplus income derived in the course of its business of operating club activities is not utilised for the benefit of such activities but was invested in the form of Fixed Deposits, with the member banks and out of such deposits when interest is earned, such interest income could still be held to satisfy the main conditions of identity of contributors to the fund and the recipients from the fund. The appellants would contend that such surplus income derived from the contributions of its members having regard to the fact that it runs to several lakhs, the same could not be retained in the club premises and had to be necessarily kept in some secured manner till such funds could be utilised for the benefit of the club and therefore they were kept either in the fixed deposits with the member banks or with the other corporate members in the form of Fixed Deposits or Securities.
23. When we considered the Division Bench decision of this Court as held in Wankaner Jain Social Welfare Society case, while deliberating on the principle of Mutuality, the Division Bench made it clear that the identification between the contributor and the participant is mandatory as held by the Hon’ble Supreme Court in the case of CIT Vs. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 and that to fulfil the concept of Mutuality, the identity was required to be established in relation to the income and as regards those contributing to the income and those participating in the distribution of that income. In other words, according to the Division Bench, the identity should exist in the matter of contribution as well as availing of the benefit in equal proportion and then and then alone it can be held that the concept of Mutuality gets fulfilled. This was also explained by way of an analogy even in the case of such clubs, where while on the one hand the contribution from the members in the form of subscription or otherwise is collected which is in turn utilised in developing the various activities of the Club by way of recreational facilities or in the form of boarding or lodging and such facilities are made available for the benefit of the members in equal proportion without there being any special benefit conferred on any particular member in either enjoying or availing the benefit in an exclusive manner.
24. With the above principles in mind, when the deposit of surplus funds even with a member bank, is considered, one can easily visualise that the deposit of such funds would ensure to the benefit of that member alone, who would be in a position to utilise the said deposit in any manner it likes and thereby depriving of such benefit for the other members to enjoy which would under no circumstances satisfy the test of identity of the contributors and the participants. In fact in the Madras case, even though the interest earned from the borrowings made from some of the members was equally distributed to all the members, the Division Bench pointed out that in those circumstances, the identity between the contributor and the participant was not existing in as much as such distribution of interest was made both to members who borrowed the monies and who have not borrowed the monies whereby the identity of the contributor and the participant was lost.
25. When we looked into the rules and by-laws of the appellant club viz Madras Gymkhana Club, the main objective of the club is to provide facilities, promote and encourage sports in general. It is also to provide sporting facilities for its members as well as social, cultural, recreational and other facilities. Under Rule 1 A (2) it is stated that the object is also to promote camaraderie and fellowship among its members. Rule 1 A (3) states that the object is also to run the club for the benefit of its members from and out of the subscriptions and contributions of its members and its income from other sources keeping in view its financial viability. Provision has also been made in the Rules to receive donations and gifts without conditions for the betterment of the club. The General Committee has been authorised under the Rules to use its discretion to accept sponsorship for sporting activities, without any pre-conditions and by providing advertisement by the sponsors in the limited manner and in the event of big companies sponsoring sports events to allow commercialisation for two or three days.
26. The further object of the club is to undertake measures for social service at the time when natural calamities or disasters take place either locally or at the national level. Provision has also been made to hold various activities in the sports sector in association with other clubs or persons. The club has also been empowered to construct new buildings and go in for demolition and reconstruction of existing buildings with the prior sanction of the appropriate authorities. Under Rule 1C (c), the Committee of the club has been empowered to invest its surplus funds in banking companies as defined in the Banking Regulation Act, 1949 or units issued by the Unit Trust of India or in securities of undertaking of the State Government or in the Government of India provided such investments are made in the institutions who are members of the club. The said rule also provides for investment to be made in immovable properties with the prior approval of the General Body.
27. The above provisions contained in the rules, no doubt, enables the club to invest its surplus funds in the manner provided therein with the financial institutions who are members of the club. But when the object of the club and the provisions made under the Rules for making the investments are read together, the position that emerges is that the investment of surplus funds has nothing to do with the objects of the club. It is true that such investments can be made in the Government securities or its banking institution members or in the form of securities which can be only with its corporate members. The contention of the assessee clubs are that when enormous surplus amount is generated, such amounts cannot be kept in hot cash or even in the regular account which are being operated for the day to day administration and therefore such amounts had to be necessarily kept in fixed deposits or in the from of securities of longer duration, which funds ultimately are meant to be utilised for the improvement of the facilities of the club.
28. It is further contended that since such investments in the form of fixed deposits or securities have been made with the member institutions, no outsider is benefited by such investments and therefore the identity of the contributor and the participant is maintained.
29. Though in the first blush such an argument looks attractive, we are not able to countenance such an argument as it will have to be stated that such investments and the earning of interest have absolutely no nexus to the objects enumerated under the Rules of the club. It was contended that merely because such investment of surplus funds have been made and thereby enormous amount of interest are earned it cannot be said that that would erase the mutual interest of the members of the club in its other activities. Even though existence of the club and its activities and facilities are for the mutual interest of its members and such mutual interest in respect of its regular activities vis-a-vis its members continue to remain, based on that alone it cannot be held that its other activities such as its financial management of depositing the surplus funds in various banking institutions and thereby earning substantial amount by way of interest should also be held to have every nexus to the regular and normal activities of the club vis-a-vis its members.
30. It is not the case of the assessee clubs that the funds which were invested in the form of fixed deposits or securities were kept in such deposit with a definite idea of using the same in any specific projects for the further development of the infrastructural facilities of the club in the form of buildings or other facilities. On the other hand while the assessee clubs were able to generate substantial amount by way of contribution, donation etc., it had no corresponding plans or schemes to improve its infrastructure facilities or that such surplus funds were earmarked for any particular developmental activity in the interest of all the members of the assessee clubs and that since incurring of the expenses for such activities can be made in a phased manner, the amounts were being kept in such a way that it could be drawn for spending as and when the requirement for such spending is necessitated.
23. When we considered the Division Bench decision of this Court as held in Wankaner Jain Social Welfare Society case, while deliberating on the principle of Mutuality, the Division Bench made it clear that the identification between the contributor and the participant is mandatory as held by the Hon’ble Supreme Court in the case of CIT Vs. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 and that to fulfil the concept of Mutuality, the identity was required to be established in relation to the income and as regards those contributing to the income and those participating in the distribution of that income. In other words, according to the Division Bench, the identity should exist in the matter of contribution as well as availing of the benefit in equal proportion and then and then alone it can be held that the concept of Mutuality gets fulfilled. This was also explained by way of an analogy even in the case of such clubs, where while on the one hand the contribution from the members in the form of subscription or otherwise is collected which is in turn utilised in developing the various activities of the Club by way of recreational facilities or in the form of boarding or lodging and such facilities are made available for the benefit of the members in equal proportion without there being any special benefit conferred on any particular member in either enjoying or availing the benefit in an exclusive manner.
24. With the above principles in mind, when the deposit of surplus funds even with a member bank, is considered, one can easily visualise that the deposit of such funds would enure to the benefit of that member alone, who would be in a position to utilise the said deposit in any manner it likes and thereby depriving of such benefit for the other members to enjoy which would under no circumstances satisfy the test of identity of the contributors and the participants. In fact in the Madras case, even though the interest earned from the borrowings made from some of the members was equally distributed to all the members, the Division Bench pointed out that in those circumstances, the identity between the contributor and the participant was not existing in as much as such distribution of interest was made both to members who borrowed the monies and who have not borrowed the monies whereby the identity of the contributor and the participant was lost.
25. When we looked into the rules and by-laws of the appellant club viz Madras Gymkhana Club, the main objective of the club is to provide facilities, promote and encourage sports in general. It is also to provide sporting facilities for its members as well as social, cultural, recreational and other facilities. Under Rule 1 A (2) it is stated that the object is also to promote camaraderie and fellowship among its members. Rule 1 A (3) states that the object is also to run the club for the benefit of its members from and out of the subscriptions and contributions of its members and its income from other sources keeping in view its financial viability. Provision has also been made in the Rules to receive donations and gifts without conditions for the betterment of the club. The General Committee has been authorised under the Rules to use its discretion to accept sponsorship for sporting activities, without any pre-conditions and by providing advertisement by the sponsors in the limited manner and in the event of big companies sponsoring sports events to allow commercialisation for two or three days.
26. The further object of the club is to undertake measures for social service at the time when natural calamities or disasters take place either locally or at the national level. Provision has also been made to hold various activities in the sports sector in association with other clubs or persons. The club has also been empowered to construct new buildings and go in for demolition and reconstruction of existing buildings with the prior sanction of the appropriate authorities. Under Rule 1C (c), the Committee of the club has been empowered to invest its surplus funds in banking companies as defined in the Banking Regulation Act, 1949 or units issued by the Unit Trust of India or in securities of undertaking of the State Government or in the Government of India provided such investments are made in the institutions who are members of the club. The said rule also provides for investment to be made in immovable properties with the prior approval of the General Body.
27. The above provisions contained in the rules, no doubt, enables the club to invest its surplus funds in the manner provided therein with the financial institutions who are members of the club. But when the object of the club and the provisions made under the Rules for making the investments are read together, the position that emerges is that the investment of surplus funds has nothing to do with the objects of the club. It is true that such investments can be made in the Government securities or its banking institution members or in the form of securities which can be only with its corporate members. The contention of the assessee clubs are that when enormous surplus amount is generated, such amounts cannot be kept in hot cash or even in the regular account which are being operated for the day to day administration and therefore such amounts had to be necessarily kept in fixed deposits or in the from of securities of longer duration, which funds ultimately are meant to be utilised for the improvement of the facilities of the club.
28. It is further contended that since such investments in the form of fixed deposits or securities have been made with the member institutions, no outsider is benefited by such investments and therefore the identity of the contributor and the participant is maintained.
29. Though in the first blush such an argument looks attractive, we are not able to countenance such an argument as it will have to be stated that such investments and the earning of interest have absolutely no nexus to the objects enumerated under the Rules of the club. It was contended that merely because such investment of surplus funds have been made and thereby enormous amount of interest are earned it cannot be said that that would erase the mutual interest of the members of the club in its other activities. Even though existence of the club and its activities and facilities are for the mutual interest of its members and such mutual interest in respect of its regular activities vis-a-vis its members continue to remain, based on that alone it cannot be held that its other activities such as its financial management of depositing the surplus funds in various banking institutions and thereby earning substantial amount by way of interest should also be held to have every nexus to the regular and normal activities of the club vis-a-vis its members.
30. It is not the case of the assessee clubs that the funds which were invested in the form of fixed deposits or securities were kept in such deposit with a definite idea of using the same in any specific projects for the further development of the infrastructural facilities of the club in the form of buildings or other facilities. On the other hand while the assessee clubs were able to generate substantial amount by way of contribution, donation etc., it had no corresponding plans or schemes to improve its infrastructure facilities or that such surplus funds were earmarked for any particular developmental activity in the interest of all the members of the assessee clubs and that since incurring of the expenses for such activities can be made in a phased manner, the amounts were being kept in such a way that it could be drawn for spending as and when the requirement for such spending is necessitated.
36. Therefore what is relevant is to see as to how the funds generated by way of contribution, donation etc., from the members as well as the outsiders are expended and that utilisation of such funds were with a view to fulfil the object of providing various recreational and other facilities to the members and then alone it can be held that the principle of identity between the contributor and the participator is fulfilled which is the basic requirement in the concept of mutuality of the enterprise.
37. At the risk of repetition, it will have to be held that investment of surplus fund with some of the member banks and other institutions in the form of Fixed Deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept. As held in the decision of the Karnataka High Court reported in (1998) 234 ITR 308 (CIT Vs. I.T.I. Employees Death and Superannuation Relief Fund) the principle of Mutuality could be confined in respect of the income earned by the club out of the contributions received by the club from its members but it will have no application in respect of the interest earned from the deposits of surplus funds in the banks by way of income.
