Interest on fixed deposit with banks cannot be claimed as exempt by a club on principal of mutuality

HIGH COURT OF UTTARAKHAND

Commissioner of Income-tax, Dehradun

Versus

Dehradun Club Ltd.

IT APPEAL NO. 155 OF 2007

DECEMBER 3, 2012

ORDER

Barin Ghosh, CJ.

Initially, the assessee was represented by Sri S.K. Posti, Advocate. Sri S.K. Posti withdrew from the case. Accordingly, an administrative notice was directed to be issued upon the respondent/assessee. Such notice has been served upon the respondent/assessee. Despite that, none appears on behalf of the respondent/assessee.

2. This appeal is relevant for the Assessment Year 1999-2000. The assessee filed a return showing nil income. The same was accepted. Thereafter, power under Section 147 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) was used. This power was used, when it was noticed that the assessee has received Rs. 8,60,336/- as interest income during the relevant year. The assessee contended that the facts and circumstances did not justify user of power under Section 147 of the Act. It also contended that the assessee is a club of members and, accordingly, principle of mutuality applies. It stated that income derived through mutual actions of the participants and contributors, no income is generated and, accordingly, the income of the assessee is not taxable. This argument was not accepted by the Assessing Officer. The assessee went before the Appellate Commissioner. The Appellate Commissioner found that on the basis of an opinion that income has escaped, power under Section 147 of the Act was used, but the same is not permissible. He further held that income of interest was not taxable since the Tribunal in respect of Assessment Years 1993-1994, 1994-1995, 1995-1996 and 1996-1997 remitted the claim for tax on such interest to the Assessing Officer, having had noticed that in respect of such income during the Assessment Years 1982-1983 and 1983-1984 the Tribunal excluded the same on the ground of mutuality and, subsequently, the Assessing Officer accepted interest income during the Assessment Years 1993-1994, 1994-1995, 1995-1996 and 1996-1997 as outside the purview of Income Tax Act in view of mutuality, and that, the Assessing Officer has not been able to bring on record any change in the situation from the said Assessment Years and the Assessment Year under consideration.

3. While in the judgment and order under appeal, the Tribunal has upheld user of power under Section 147 of the Act, it has dismissed the appeal of the Revenue in respect of taxability of interest income only on the ground that the Tribunal for the Assessment Years 1982-1983 and 1983-1984 granted relief to the assessee on the ground of mutuality and, subsequently, the Assessing Officer granted similar relief to the assessee for several subsequent Assessment Years and, at the same time, the Assessing Officer has not been able to bring on record any change of situation but, according to us, failed to take into consideration the fact that a decision in relation to one Assessment Year is not res judicata in relation to another Assessment Year and also failed to take into account the law pertaining to mutuality as was being projected by the assessee.

4. Section 2 (24) of the Act gives an inclusive definition of income. In such inclusive definition, only one type of income arising from activities based on mutuality has been mentioned. In that background, the Hon’ble Supreme Court in the case of Chelmsford Club v. CIT [2000] 243 ITR 89/109 Taxman 215 observed,

“A perusal of section 2(24) shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section.”

5. The logical conclusion, therefore, would be that income generated from activities based on principle of mutuality, if not covered by clause (vii) of Section 2(24) of the Act, which alone has been attempted to be taxed by the Act, will stand excluded from income. What would be an activity based on the principle of mutuality has also been settled by the Hon’ble Supreme Court in the said case by specifying three criteria of identification ;

“(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 policy holders, 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 expanded or returned to themselves.”

6. Therefore, in order to be an income derived from activities based on the principle of mutuality, it must be shown that the contributions have been made by the contributors and the same can only be expanded or returned to the contributors.

7. In the instant case, the contributors, namely, the members of the assessee made contributions, which have been kept in fixed deposit with third party banks and those third party banks have contributed to the members fund by way of interest and, accordingly, the members fund have been expanded not by the contributors/members, but by a third party. If that is the situation, as held by the Hon’ble Supreme Court in the judgment referred to above, as pointed out by it in the case of CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551, the income cannot be said to have been derived from any activity based on principle of mutuality.

8. We, accordingly, allow the appeal, set aside the judgment of the Tribunal in so far as the same related to question pertaining to mutuality and the judgment of the Appellate Commissioner in whole and restore the order of the Assessing Officer.