Case Law Details
In assessee’s case, the bank is not even a member of the society. The nature of the transaction between the assessee and the bank would disqualify application of the principle of mutuality. Therefore, the transactions with the bank who is not even a member of the society cannot be considered as a transaction for which principles of mutuality will apply. Not only on the principles laid down in the subject but also on the fact that the interest was received from a non- member, the principles of mutuality do not apply.
The Honourable jurisdictional High Court in the case of CIT Vs. 1. Secunderabad Club, Picket; 2. Armed Forces Officers’ Co-operative Housing Society Ltd., [340 ITR 121] (AP) has clearly adjudicated that the nature of transaction between assessee and banks would disqualify application of principle of mutuality. It was held that interest earned was taxable. ITAT followed the case of Secunderabad Club.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)- 4, Hyderabad dated 03-12-2015. The issue in this appeal is whether the interest earned by assessee on Fixed Deposits with bank is taxable or not?
2. Briefly stated, assessee herein is an AOP carrying on the activities for the mutual benefit of the members. Its principle activity is to collect money from the members and provide it to the needy members. The income of the society is considered exempt from tax on the principle of mutuality. However, the Assessing Officer (AO) noticed that assessee has deposited its funds in Fixed Deposits with the bank and has not offered the same to tax. Elaborately discussing the principles as established by the Honourable Supreme Court in the case of CIT Vs. Bankipur Club Ltd., [226 ITR 97] and other decisions in Chemsford Club Vs. CIT [243 ITR 89] and CIT Vs. Cawnpore Club Ltd., [140 Taxman 378] and also following the jurisdictional High Court judgement in the case of CIT Vs. Secunderbad Club Picket [340 ITR 121] (AP), AO brought an amount of Rs. 32,53,654/- to tax. There are two other items which are brought to tax but they were given relief by the CIT(A) and are not subject matter of appeal.
3. With reference to taxing of interest on Fixed Deposits, Ldassessee carried the matter to CIT(A) and submitted that as per the Memorandum of Association, objectives- surplus funds are to be deposited in banks towards security of the amounts and the main source of these deposits are from members only. Since the dividends are distributed only amongst the members and as assessee is doing business of finance amongst the members only, the principles of mutuality will apply to the interest received also. However, Ld.CIT(A), without referring to any of the judgements or the principles laid down on this issue however, examined the balance sheet and P&L A/c and confirmed the amounts on factual verification. The order of CIT(A) is as under:
“4. I have carefully considered the assessment order, grounds of appeal statement of facts and also the submissions made by the appellant during the course of the appeal proceedings.
4.1. The AO has mainly added the interest on FD, unclaimed amount, interest on non operated CDs u/s. 56 of the Act and from income from other sources mainly that “these income was not attributed by members but contributed by the non members and so thereby rejecting the claim of exemption on the ground of mutuality”. Thereby the entire receipts of interest were treated as other sources. During the course of appellant proceedings, I have verified the memorandum of the society aims and objectives, profit and loss account and balance sheet of the appellant. As per the balance sheet as on 31/03/2012, the appellant has invested Rs. 3,53,64,332/- in fixed deposits. The member deposits were of Rs. 8,56,19,956/- as against Rs. 7,65,42,981/ – last year. There by there is increase of Rs.90,76,975/ – from the members. At the same time, during the this year, the business loans under current assets were of Rs.5,50,73,652/ – and HAL loan of Rs. 16,09,445/ – and education loan of Rs. 79,010/- totalling to Rs. 5,67,62,107/-. That means, the appellant is collecting deposits and distributed as loans to the members and certain amounts are deposited in the bank as FDs. The main source of these deposits are from Members deposits only. On this bank deposits and business loans given, the appellant is earning interest income and on the current liabilities i.e. on Member deposits paying interest in the form of dividend proposed @ 11 %. During this year, the appellant has an amount of Rs.80,67,825/- by service charges under the head commercial i.e. interest from the loans of Rs. 5,50,73,652/- @ 14.6%. At the same time, the appellant has received an amount of Rs. 32/53,655/- as interest received from banks. Therefore, in a nut shell, the appellant is doing the business of finance by giving loans by collecting funds from Members and by giving loans to members and excess deposit in the banks.
4.2. Therefore, the concept of mutuality is failed since there is excess amount which was deposited in the banks. Hence, the excess income of Rs.95,22,483/ and dividend proposed of Rs.86,16/010/ – to be taxed as income earned by the appellant. Hence, the addition made by the AO is confirmed.
4.3. With regard to the remaining additions of unclaimed amount of Rs. 1,41,197/- and non operated CDs of Rs. 9,37,212/-, are deleted since these are not the income earned by the appellant during this year and kept as a reserve fund in the balance sheet during this year. Hence, the above two additions are deleted”.
4. Ld. Counsel for assessee referring to the Memorandum and the business model of assessee submitted that only members contribute the amounts and the investment in the bank is part of activity of the society to create and cultivate the habit of thrift among its members. It was further submitted that funds available with the society are preserved in the bank as security and deriving interest from the bank is consequential to the deposit of the amount for safe custody. It was submitted that banker is not a member of the society, therefore, the interest on Fixed Deposits with the bank cannot be treated as ‘income asses sable to tax’. Ld. Counsel also distinguished the judgements relied on by the AO to submit that deposit in the bank is incidental to the main activity of assessee. Therefore, the principles laid down by the judgements relied on by the AO does not apply.
5. Ld. DR, however, relied on the orders of the authorities both on facts as well as on principles of law.
6. I have considered the rival contentions and perused the orders of the authorities. There is no dispute that assessee is allowed the benefit of mutuality to the extent of incomes earned amongst the members. The issue is with reference to the interest earned from the bank which is not a member of the Society. The Honourable Supreme Court in the case of CIT Vs. Bankipur Club Ltd., [226 ITR 97] (supra) has considered the principles of mutuality and the activity of trading and held as under:
“Under the Income Tax Act, what is taxed is, the “income, profits or gains” earned or “arising”, “accruing” to a “person”. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.
The decisions of the Supreme Court in CIT Vs. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 ; CIT Vs. Kumbakonam Mutual Benefit Fund Ltd., [1964] 53 ITR 241 and Fletcher (on his own behalf and on behalf of Trustees and Committee of Doctor’s Cave Bathing Club) v. ITC [1971] 3 ALL ER 1185 (PC) lay down the broad proposition that, 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 profit income liable to tax. At what point the relationship of mutuality ends and that of trading begins 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, are a “mutual club” or carrying on a trading activity or an adventure in the nature of trade”, is largely a question of fact.
The main question canvassed by the Revenue in the appeals coming under groups A to D, the assessees being Bankipur Club Ltd., Ranch Club Ltd., Cricket Club of India and Northern India Motion Pictures Association, was whether the assessee- mutual clubs, were entitled to exemption for the receipts or surplus arising from the sales of drinks, refreshment, etc., or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature from its members. In all these cases, the Tribunal as also the High Court had found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or by way of admission fees, periodical subscription, etc., from the members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to, as per the rules and regulations of the clubs. It had also been found that different clubs realised various sums on the above counts only to afford to their members, the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally).
Held, dismissing the appeals, that in the light of the findings of fact the receipts for the various facilities extended by the clubs to its members, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, could not be said to be “a trading activity.” The surplus- excess of receipts over the expenditure-as a result of mutual arrangement, could not be said to be “income” for the purpose of the Act.
By THE COURT: The above four sets of cases falling in groups A to D shall alone be covered by this judgement. With regard to seven cases/ appeals falling in group E, the assessee is the Cawnpore Club Ltd. It is seen that the income that was sought to be assessed in the case of the assessee, was one derived from property let out and also interest received from F. D. R., N. S. C., etc. Since the issue raised in this batch of seven cases, is not similar to, or the same as the one involved in the other cases coming under groups A to D, the court directed these cases falling in group E to be posted separately for hearing and disposal before an appropriate Bench.
Decisions of the Patna High Court in CIT Vs BANKIPUR CLUB LTD. [129 ITR 787 (Patna) and CIT Vs RANCHI CLUB LTD. [1992] 196 ITR 137 (Patna) [FB] affirmed”.
7. Even though the Honourable Supreme Court did not decide the issue of interest earned on Fixed Deposits in the above said judgement, subsequent judgements have clearly established that the interest received from non-members does not come within the purview of mutuality.
8. The Honourable jurisdictional High Court in the case of CIT Vs. 1. Secunderabad Club, Picket; 2. Armed Forces Officers’ Co-operative Housing Society Ltd., [340 ITR 121] (AP) has clearly adjudicated that the nature of transaction between assessee and banks would disqualify application of principle of mutuality. It was held that interest earned was taxable. The judgement of the Honourable jurisdictional High Court in the above said case is as under:
“If complete identity between the contributors and the participants or recipients is established the surplus generated and returned to the contributors is not regarded as profit for the purpose of charging income tax. If the persons carry on an activity, which is also trade, in such a way that they and the customers are the same persons, no profits are yielded by such trade for tax purposes and, therefore, no assessment in respect of the trade can be made. The surplus resulting from trading represents such contributions of the participants which is in excess of the requirements. Access to profits or services is a condition precedent to satisfy the element of mutuality. Even when the aggregate of the members are incorporated, the effect of the principle is not lost. When a company itself becomes a member of a club to the extent of making contribution it is responsible, but when it comes to participation and availment of facilities and privileges it is not the juridical person but it is only the nominated officers of the company who do so. There is thus a discernible factor which takes away the nexus between contribution and participation. There is also a dichotomy between the juridical personality who contributes to the club, and the nominees (who can be changed) who actually avail of facilities and receive benefits from the club activities. An important facet of the principle of mutuality is not only the identity of the contributors of, and the recipients from, the fund, but also the right to be returned the contribution in the event of the aggregate of members getting dissolved. If the continuance of the original contributors till the end or till the achievement of the objects for forming the association or society/ club is uncertain, the principle of mutuality ceases to apply.
When a person deposits money in a bank, the relationship is that of creditor and debtor, and they would be bound by the contract that regulates the deposit and payment of interest thereon. When a club deposits its funds with a bank, the latter does not treat the club any differently from its other depositors, nor is a higher rate of interest offered.
The assessee was a social and recreational club. It was not registered either as an association or a society. It was a mutual association and not a profit making concern. None of its activities was tainted with commerciality or business modalities. The assessee received monthly subscriptions, admission fee and payments from its members for use of club facilities. During the assessment year 1996- 97, the assessee earned interest on fixed deposits kept by it with certain banks and financial institutions. The banks and financial institutions with whom the fixed deposits were made were corporate members of the club. The return for the year 1996- 97, admitting Rs. 1,22,700 was accepted under section 143(1) of the Income-tax Act, 1961. However, the Assessing Officer issued notice under section 148 of the Act on the ground that the exemption claimed with regard to the interest on fixed deposits from banks/ companies was not a valid claim. Accordingly, the Assessing Officer added the interest on deposits and assessed it to tax. The Tribunal held that the interest income earned by the assessee on the deposits made by its corporate members was not liable to be taxed. On appeal to the High Court:
Held, that the rules of the club showed that there was a difference between ordinary or permanent members of the club on the one hand and corporate members on the other. It was only a member who would be entitled to proportionate amount in the event of liquidation, and it was the member who had the right to be elected to the committee of the club and a right to vote. In the case of a corporate member, the subscription was contributed by the juridical person whereas participation in the club activities was by a natural person nominated to participate and avail of the facilities of the club. A corporate member, according to the rules, had no right to be elected to the committee of the club nor entitled to as many votes as the number of its nominees. In the event of winding up, it was the permanent members who would have a dominant role. The principle of mutuality ended the moment the club deposited the amount with the sole aim of earning interest on the deposits. Further, by depositing its funds with its corporate member banks, the club would certainly help increase the business of the bank. In that view of the matter, the corporate member bank was being shown a favour, and was not being provided a facility. The social relationship and social activities of the club had nothing to do with its deposits with the corporate members. The nature of the transaction between the assessee and the banks would disqualify application of the principle of mutuality. The interest earned was taxable”.
8.1. In the above referred case of Secunderabad Club, the Honourable High Court has held even though the bank was having a corporate membership with the said club/ society, the principle of mutuality does not arise. In assessee’s case, the bank is not even a member of the society. The nature of the transaction between the assessee and the bank would disqualify application of the principle of mutuality. Therefore, the transactions with the bank who is not even a member of the society cannot be considered as a transaction for which principles of mutuality will apply. Not only on the principles laid down in the subject but also on the fact that the interest was received from a non- member, the principles of mutuality do not apply. The orders of the AO and CIT(A) are accordingly upheld both on facts as well as on principles of law. I find no merit in assessee’s grounds and accordingly, the same are dismissed.
Order pronounced in the open court on 28th April, 2017.
