In the previous Article(s)- “HOUSING ASSOCIATION -Mutuality Principle- Supplement I & “Mutuality’ – Doctrine of- A Critical Study ” it has been explained, at some length, as to why, in view of the applicability of the common law principle of mutuality, claim for tax exemption by a housing association cannot be rightly denied. And, why, by any reasoning or logic, the SC Judgment in Bangalore Club Case is not to be regarded as a ‘precedent’ (binding authority) for doing so.
In the previous Article(s) it has been explained, at some length, as to why, in view of the applicability of the common law principle of mutuality, claim for tax exemption by a housing association cannot be rightly denied. And, why, by any reasoning or logic, the SC Judgment in Bangalore Club Case is not to be regarded as a ‘precedent’ (binding authority) for doing so.
2. Reproduced for ready reference, at the cost of repetition, the operative portion of the referred Judgment:
“32. We may add that the assessee is already availing the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed by its members, before it is deposited with the bank. This surplus amount was not treated as income; since it was the residue of the collections left behind with the club. A façade of a club cannot be constructed over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double benefit of mutuality. We feel that the present case is a clear instance of what this Court had cautioned against in Bankipur Club (supra), when it said:
“… if the object of the assessee company claiming to be a “mutual concern” or “club”, is to carry on a particular business and money is realised both from the members and from non- members, for the same consideration by giving the same or similar facilities 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 earning motive and are alike tainted with commerciality. In other words, the 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 the nature of trade and the transactions entered into with the members or non- members alike is a trade/business/transaction and the resultant surplus is certainly profit – income liable to tax. We should also 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. “Whether or not the persons dealing with each other, is a “mutual club” or carrying on a trading activity or an adventure in the nature of trade” is largely a question of fact [Wilcock’s case – 9 Tax Cases 111, (132) C.A. (1925) (1) KB 30 at 44 and 45].” (Emphasis supplied)
33. In our opinion, unlike the aforesaid surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee from the afore-noted four banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club.”
3.1. The foregoing observations, it is submitted, are not, in comparison, in line / tune with the very recent SC Judgment in CIT vs Venkatesh Premises (full text @ https://indiankanoon.org/doc/97274203/.) And, necessitates a fresh look through, and review, in the light thereof.
Extracts (for enabling a comparative study):
“14. The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot take a profit from himself. An amount received from oneself, therefore cannot be regarded as income and taxable. The income of a co-operative society from business is taxable under Section 2(24)(vii) and will stand excluded from the principle of mutuality. …..”
“25. Kumbakonam (supra), is distinguishable on its own facts. The doctrine of mutuality was held to be in applicable because of the members who had not contributed to surplus as customers were nevertheless entitled to participate and receive part of the surplus . In Chelmsford Club (supra), it was held that there was no profit motive or sharing of profits as such amongst the members. The surplus if any from the business was not shared by the members but was used for providing better facilities to the members. There was a clear identity between the contributors and the participators to the fund and the recipients thereof.”
Aside: In this case, it is to be noted that, the Revenue had placed reliance, besides on its own quota of case law, in its favour, also on the SC Judgment in Bangalore Club Case.
3.2. The apex court’s opinion handed down in Venkatesh Premises’ case is as summed up below: –
Even if any amount was left over as surplus at the end of the financial year after meeting maintenance and other common charges, that would constitute surplus fund of the society to be used for the common benefit of members; will not partake the character of profit or commerciality so so as to be eligible to tax.
3.3. Accordingly, therefore, if critically examined and incisively concluded, in one’s firm conviction, the view taken earlier in Bangalore Club case ought not to be construed to vitiate or whittle down, in any manner, any housing association claiming a blanket tax exemption in respect of its Funds comprising the collections from its members, etc.; that is, inclusive of interest income from its surplus funds invested prudently going by diktats of sheer economic sense. It has to be appreciated that, but for so investing and earning interest, additional contributions from the owner-members would be necessitated , if and when so required, for meeting the common outgoings.
4.1. The points of view as set out in the Article @ https://taxguru.in/income-tax/law-and-vs-case-law-on-flats-a-critical-study.html , call for a repeat; to specify, the following:
> Taxation of income is a fiscal matter governed by the central legislation, ‘Flat’ is house property of a special kind, and the law applicable to “UNITS” (Apartment / Flat) is embodied in the special State legislation. Unit, a house property, is, in several respects, distinct from exclusively owned independent house property, which is governed by the general / common law called, the Transfer of Property Act, 1882.
> In the nature of things, therefore, the basic proposition requiring necessarily to be addressed for an insightful deliberation to is this:
For examining and deciding, more so in proper light, any question of law raised under the IT Act, due regard must necessarily be had to and taken into consideration the provisions of the State law on Units; in as much as the scope and nature of peculiar characteristics of, and distinct legal rights and interests attached to, the property in a “Unit” could conceivably be ascertained only from, not de hors, that governing / applicable law.
The proposition that emerges from the foregoing observations, as enlarged, is that for adjudicating upon any tax related issue (s), the implications of any one or more of other inter-connected/-linked laws have to be kept in sharp focus and duly taken into consideration.
No need to add that, in most of the cases in which the matter of discussion- that is, applicability or otherwise of the principle of mutuality has been adjudicated upon, the stated proposition has not been addressed and stressed by both sides; so much so, that has resulted in the hung certainty; which, otherwise, would have been categorically decided in assesses’ favour.
4.2. By and large, in most cases, as borne out by the Judgments handed down by courts, the thrust of the discussion is confined to earlier decided cases; notwithstanding that in each one of those, in turn, the specific point of dispute and the factual matrix had not been on all fours. And, neither of the two opposite parties considered it necessary, inappropriately so; but avoided addressing the court from a broader perspective. Consequently, the court likewise was not impelled to decide the point (s) of issue in the case on hand from a long range viewpoint or with a broader vision. To put it differently, most such case law might not have been founded on, or taken to have decided the issue on hand or the other related issues, giving an in-depth consideration to the so called “First Principles”, as desired or warranted.
The responsibility lies with counsel of either side, to try his best and persuade the Bench , – firmly but politely prompt,- to consider why the case law cited by him , in support, needs to be followed , as a better exposition of the legal position, and/or why not follow that cited by the other side. Of course, that, in the normal course, may not be / have been possible for the obvious reason; that is, counsel has not been able to get a clear impression – by the Bench giving at least some indication during the discussion- as to which view the court is inclined to agree with.
For a rare judicial confession, across the border; but with no barriers to isolate (: https://www.nytimes.com/2014/12/23/us/supreme-court-justices-admit-inconsistency-and-embrace-it.html
MORE – INCONSTENT Court Decisions
Looking through the history of inconsistent court decisions, it might be more than obvious that such inconsistency in adjudication has alarmingly assumed the proportions of a convention / rule, rather than an exception.
4.3. The principles of interpretation as enunciated by case law, as have been updated /modified, hence expected to be ideally followed may be summed up thus:
The law on income-tax is a comprehensive and complete code in itself. As such, anything done, or purported to be done, under the Act has to be necessarily in accordance with its general and/or special provisions. For ensuring that it is so, basically, one should have sufficient familiarity with the general scheme as well as the applicable special provisions of the Act; also, have a proper understanding and appreciation in the right perspective of the scheme and the provisions. As ruled by the Courts, the Act must be read as a whole; thereafter the same should be considered Chapter-by-Chapter, then section-by-section, and ultimately word-by-word. Further, the provisions should be so construed as to make a consistent enactment of the whole statute.
4.4. Another area in which different considerations arise, but invariably not-so-realised by even law experts, active in practice, pertains to tax issues requiring to be decided having regard to, not only the provisions of the IT Act but also to the other related /inter- connected legislative enactments.
A) In the above respect, some of the eminent but disturbing observations of the apex court, albeit in a different context, require to be drawn attention to. The Report of that Judgment has to be found @ https://indiankanoon.org/doc/181443842/.
Extract (for sampling):
(v) Our attention was then invited to Section 13 of the NTT Act, which is reproduced hereunder:-
84. We have already noticed hereinabove, from data placed on record by the learned counsel for the petitioners, that the NTT would be confronted with disputes arising out of Family Law, Hindu Law, Mohemmedan Law, Company Law, Law of Partnership, Law relating to Territoriality, Law relating to Trusts and Societies, Contract Law, Law relating to Transfer of Property, Law relating to Intellectual Property, Interpretation of Statutes/Rules, and other Miscellaneous Provisions of Law. Besides the above, the Members of the NTT will regularly have to interpret the provisions of the Income Tax Act, the Customs Actand the Excise Act. We are of the considered opinion, that only a person possessing professional qualification in law, with substantial experience in the practice of law, will be in a position to handle the onerous responsibilities which a Chairperson and Members of the NTT will have to shoulder.
B) The concurring opinion of R.F.Nariman J (separately recorded in the cited Judgment) reads:
“31. It is obvious, that substantial questions of law which relate to taxation would also involve many areas of civil and criminal law, for example Hindu Joint Family Law, partnership, sale of goods, contracts, Mohammedan Law, Company Law, Law relating to Trusts and Societies, Transfer of Property, Law relating to Intellectual Property, Interpretation of Statutes and sections dealing with prosecution for offences. It is therefore not correct to say that taxation, being a specialized subject, can be dealt with by a tribunal. All substantial questions of law have under our constitutional scheme to be decided by the superior courts and the superior courts alone. Indeed, one of the objects for enacting the National Tax Tribunals Act, as stated by the Minister on the floor of the House, is that the National Tax Tribunal can lay down the law for the whole of India which then would bind all other authorities and tribunals. This is a direct encroachment on the High Courts’ power under Art. 227 to decide substantial questions of law which would bind all tribunals vide East India Commercial Co. case, supra.”
C) The opinion of the eminent law expert, is in essence, no different but the very same; look up-
“The practice of tax laws is not confined just to the provisions of the relevant Direct Tax Acts. One has to consider the provisions of a whole range of what may be termed as “general laws” like the Transfer of Property Act, personal laws which determine succession to a deceased’s property, company and partnership law (including the Limited Liability Partnership Act), stamp duty and registration provisions, and laws relating to limitation and new financial instruments etc. Even the provisions of the Evidence Act and of criminal law may have to be applied. A judge once addressed Counsel arguing a tax appeal before him by saying. “You tax lawyers …” Counsel replied, “I am not aware of any such animal!”
5. For a proper compliance, therefore, there is no scope for a second or contra opinion on the crucial aspects mentioned below:
It is essential that the advising / consulting professionals (engaged by taxpayers) should have knowledge, in the true sense of the term, of the law (s). And, for a proper implementation, enforcement or adjudication, it is all the more essential that the officers and authorities, and courts, appointed/empowered under the Act should equip themselves with a thorough and intimate knowledge of/familiarity with the law(s), more so the case law, and remain up-dated/ -graded, so as to properly discharge their respective duties and responsibilities of implementation, enforcement and administration. For evaluating as to how far the concerned authorities are really committed or disposed to live up to such expectations of them as aforesaid, a close review of the plethora of decided court cases, running into numerous volumes, should be of help as an eye-opener.
6. The discussion herein may be faulted or prove inconclusive, if fail to refer also to another instance of relevance; that is the case of, Hill Properties Case (SC) (Text of the Report @https://indiankanoon.org/doc/18993990/)
In that case the issues which arose, disputed and eventually taken up for adjudication by the apex court, was in comparison to the Bangalore Club case, in a different context, with varying factual matrix.
For the limited discussion herein, it may suffice to just draw attention to the study and analysis of that judgment as available @ SC Judgment in Hill Properties case – Substance seems to … – TaxGuru.
To briefly recap: On the peculiar facts of and circumstances in that case, the court, having had no option open,- was obliged to ,and preferred to go by, rightly so, the “SUBSTANCE” of the matter in dispute; ignoring the “FORM” as would normally have been expected of and been insisted upon. For dilation, suggest reading through the referred Article.
The logic and the line of reasoning adopted by the SC in deciding the point of dispute are open to be gathered from the paragraph reproduced below:
“10. We are of the view that the right, title, interest over a flat conveyed is a species of property, whether that right has been accrued under the provisions of the Articles of Association of a Company or through the bye-laws of a Cooperative Society. The people in this country, especially in urban cities and towns are now accustomed to flat culture, especially due to paucity of land. Multi-storeyed flats are being constructed and sold by Companies registered under the Companies Act as well as the Cooperative Societies registered under the Registration of Cooperative Societies Act, etc. Flats are being purchased by people by either becoming members of the Cooperative Society or shareholders of the Company and the flat owners have an independent right as well as the collective right over the flat complex. Flat owners’ right to dispose of its flat is also well recognized, and one can sell, donate, leave by will or let out or hypothecate his right. These rights are even statutorily recognized by many State Legislatures by enacting Apartment Ownership Acts. Such legislation exists in the State of Maharashtra as well.”
Now, what really, more particularly, is of contextual relevance herein is the Order of the ITAT that has been reported @ https://indiankanoon.org/doc/18993990/ For, the dispute was again regarding the applicability of the same Principle of Mutuality under discussion, the ITAT was obliged to deal with.
The issue of tax exemption of interest by applying the principle of mutuality has been decided also by the Del.HC in re.
CIT v Talangang Coop. Group Housing (1 July, 2010)
“9. As regards the interest derived from the deposits made by the society out of the contributions made by the members of the society, the tribunal placing reliance on the decision in All India Oriental Bank of Commerce Welfare Society (supra) has expressed the view that ONCE THE IDENTITY OF THE CONTRIBUTOR TO THE FUND OF RECIPIENTS IS ACCEPTED, THE PRINCIPLE OF MUTUALITY WOULD GET ATTRACTED. It is also noticeable that there is NOTHING ON RECORD TO SHOW THAT THE AMOUNT COLLECTED FROM THE RESPONDENT HAS BEEN DIVERTED FOR ANY OTHER PURPOSE.”
As independently viewed, among several others, the above cited Del. HC Judgment, so also the SC Judgment in Venkatesh Premises case should help in successfully pressing for tax exemption of any interest income from deposits of surplus funds with bank or any other like investee.
Reverting to the ITAT Order in Hill properties case (:
As is seen from Paragraph 6 of the Order, the Issues raised by Revenue on taxability of receipts by the assessee- company of –
(i) share transfer fees on transfer of flats;
(ii) nominee occupancy charges; and
(iii) non-refundable security deposits.
have all been decided in the company’s favour. The stated grounds of the decision are that, – similar issues are squarely covered, in company’s favour by the earlier order of the Tribunal dated 3.4.2013; and that similar issues have in the past been consistently decided by the Tribunal in favour of the assessee and thus stand settled.
The company’s points of cross-objection were two. One was against disallowance of the nominee- occupancy charges as are received from non-members. Taking the same view as in respect of such charges received from members, the disallowance has been set aside.
(See paragraphs 7. And 8 of the ITAT Order)
The second cross -objection was against inclusion in the total income, of interest income. That has been dealt with as under:
“9. Ground no.2 relates to the inclusion of the interest income of Rs. 29,40,721/- in the total income of the assessee. Briefly stated, during the assessment, assessee received the said amount of Rs. 29,40,721/- as interest and claimed exempt on the ground of „principle of mutuality‟. AO brought the same to the tax by holding that the said interest income is not covered by the concept of mutuality and relied on the judgment of Hon‟ble Madras High Court in the case of Madras Gymkhana Club 183 Taxman 333. Aggrieved, the assessee carried the matter to the files of the CIT (A). During the proceedings before the first appellate authority, after considering the submissions of the assessee, CIT (A) dismissed the appeal of the assessee by following the earlier AY‟s order of the CIT (A) and the order of the ITAT for the AY 2007-2008. Aggrieved with the above decision of the CIT (A), assessee raised the ground no.2.
10. During the proceedings before us, Ld Counsel reiterated the submissions made before the lower authorities. In this regard, he RELIED ON THE JUDGMENT relied of the Hon‟ble Supreme Court in the case of Bangalore Club v. Commissioner of Income-tax, 350 ITR 509 and PRAYED FOR REMANDING THE MATTER TO THE FILES OF THE AO to adjudicate the issue afresh.
11. On the other hand, Ld DR relied on the orders of the Revenue Authorities.
12. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited judgment of the Hon‟ble Supreme Court in the case of Bangalore Club (supra). On perusal of the said judgment of the Apex Court, we find that the said judgment is relevant in this regard, wherein it was held that “The principle of mutuality relates to the notion that a person cannot make a profit from himself. The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable”. CONSIDERIN THE SAME, we remit the issue to the files of the AO to adjudicate the same afresh in the light of the above cited judgment after affording a reasonable opportunity of being heard to the assessee. Accordingly, ground no.2 raised by the assessee is allowed for statistical purposes.”
The quoted observations in paragraphs 10 and 12 are not readily understood, There is no clue available from the Order as to whether,
a) the disputed item of interest income was received from members (as covered and adjudicated upon in Bangalore Club case), or from non-members, of the assessee-company;
b) there was any favourable case law cited and relied upon by the assessee- company.
Further, the rhyme or reason for, or logic in, the assessee-company volunteering to have the dispute remitted to AO for a fresh consideration is not quite clear; left to anybody’s wild guess.
Be that as it may, it is possible that the above issue, apart from the other points of dispute, has been made the subject matter of, and is being pursued in further proceedings. If so, as indicated before, the assessee might be expected to succeed, provided all possible grounds are raised and argued out fully and fairly as expected of.
It is noteworthy that applicability of the principle of mutuality has been canvassed for, taken on, and been successfully pursued, also concerning / against similar attempts made at levy of ‘service tax ‘.
(Custom, Excise & Service Tax Tribunal in re. Cosmopolitan Club (6 February, 2018))
> ST ( or VAT , OR GST )- ‘NO’ on ground of ‘Mutuality’ Princiiple – VIEWS >
These and other host of like material available in public domain might be of immense help to any professional- in- practice, if so inspired to embark on an independent study; and thereby equip self with an in-depth knowledge of the connected intricate aspects of the common law principle (of mutuality) , overriding the legislative enactments.
(Republished with amendments on 22.11.2018)