Proceedings u/s. 147 not to initiated to examine as to whether there is escapement of income

IN THE ITAT MUMBAI BENCH ‘L’

Deputy Director of Income-tax (International Taxation)

Versus

Societe International De Telecommunication

IT APPEAL NO. 4970 (MUM.) OF 2005

CO NO. 67 (MUM.) OF 2006

[ASSESSMENT YEAR 1996-1997]

SEPTEMBER 26, 2012

ORDER

R.S. Syal, Accountant Member 

This appeal by the Revenue and Cross Objection by the assessee arise out of the order passed by the CIT (A) on 23.3.2005 in relation to assessment year 1996-1997.

2.1. First ground of assessee’s cross objection is against the unfavourable decision of the ld. CIT (A) on the question of initiation of the re-assessment proceedings u/s 147.

2.2. Briefly stated the facts of the case are that the assessee was founded in 1949, in Belgium. Its branches are in more 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 survey u/s 133A was carried out on 29.11.2002 at the business premises of the assessee in Mumbai. During the course of survey, it was observed that the assessee was rendering services to its own members (hereinafter called the ‘SITA members’) and also non-members. For the reasons recorded by the Assessing Officer as set 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 income.

The facts of the case are as under:

The assessee is a company founded in 1949 in Belgium. It has branches in over 220 countries. The assessee has claimed to be a cooperative society for the benefit of International Airlines to provide a telecommunication network to all the airlines. The assessee claimed that it is a mutual benefit society, which is confirmed by the Hon’ble 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 24th Floor, Express Towers, Nariman Point, Mumbai.

The assessee claimed that it is a impartial, non-political, non-commercial organization. The assessee claimed that all the SITA members shared cost of the SITA Network Worldwide. Annual running cost are apportioned between the members according to each member’s use of the Network in each country.

On verification of past records, it was noted that assessee’s case was scrutinized for AY 1981-82. The Tribunal accepted the contention of the assessee that its income is exempt under mutuality concept. The appeal filed by the Department against the ITAT’s order was rejected by the High Court on technical grounds of delay.

As laid down by the various courts, an income of an organization can be exempt under the concept of mutuality, if the following conditions are satisfied:

(a)  It should be an association rendering services to its 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 the surplus must be the same.

(e)  It should not have dealing with outside body which results in surplus.

During the course of survey, the following facts were gathered:

(i)  The Indian Branch is rendering services to more than 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 explain 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 under the concept of mutuality.

(iv)  Nobody at the branch office could explain how the cost and revenue are being apportioned globally.

(v)  The books of accounts of the assessee are maintained globally on a online software. 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.

As the assessee company is rendering services to non-members as well, the assessee is not entitled for the benefit of mutuality. It also needs to be examined whether the assessee has accumulated reserves in general reserve of the company. If the assessee has the balance in the general reserves, the ITAT order could not be applicable to the assessee’s case.

Since, the benefit of mutuality is not applicable to the assessee, I have reason to believe that the income has escaped 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 solicited 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, 1961.”

2.3 The reasons so recorded were supplied to the assessee on request. Thereafter, the assessee raised certain objections to the initiation of the re-assessment proceedings vide its 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 the ‘principle of mutuality’ as confirmed by the Tribunal in assessee’s own case for earlier years starting from A.Ys. 1972-73 to 1983-84. It was also submitted that the SITA had effected only cost recoveries from non-members and not earned any income. As such, it was claimed that there was no reason to snatch away its tax exempt status in India. It was highlighted that as the assessee simply made recoveries, 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 regarded as income. It was reiterated that since SITA was operating on a non-profit basis, it did not generate any surplus from the cost recoveries made from members as well as non-members. It was reemphasized 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%

2.4 In view of the minuscule percentage of the presence of non-members, the assessee contended that its mutuality was not destroyed for this reason alone. After relying on certain judgments, the assessee contended, through para 7 of its objections, that the principle of mutuality would remain intact at least in relation to the income from members. As regards non-member cost recoveries, it was contended that one category was Government appointed authorities worldwide which administer the International Airports, Air Traffic Control, Civil Aviation, Customs as well as other air transport connecting bodies. The assessee submitted that such entities assist it in serving SITA members. It was restated that those organizations were granted access to SITA network on a cost sharing basis as was done to the SITA members. Other non-member cost recoveries resulted from United Nations and other government and international organizations and charities. They were allowed the benefit of the use of SITA’s facilities on a cost sharing basis. As regards the recoveries from Equant, the assessee contended, vide para 16 of its letter, that these recoveries constituted 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 reduction for its members. SITA and Equant were claimed to have pooled their global procurement functions and provided certain ancillary cross-support to each other. It was thus submitted before the AO that SITA only recovered costs incurred from its members, non-members and Equant. Such cost recoveries represented reimbursement and, therefore, were not income chargeable to tax. It was clarified that accounts of every branch of SITA worldwide (including India) were reflecting the same position of no surplus from its dealing with members and non-members. It was thus concluded that no income of the assessee was chargeable to tax.

2.5 The Assessing Officer disposed of assessee’s objections 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 order u/s 143(3) read with section 147. Vide his order, the Assessing Officer 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 Nations, Red Cross and other governmental bodies. As regards the costs, he explained that costs incurred in a country were recorded in that country alone. Certain costs incurred at Head Office level relating to specific countries were allocated by the head office to these countries. He also stated that the Head Office allocated a proportion of its general administration and financing costs to all the branches. However, he failed to give answer to the basis of allocation of such costs to different countries by the Head Office. He also failed to precisely state the basis of allocating the finance cost to different countries by the Head Office. Certain other questions also remained un-replied. He agreed to submit the necessary details as and when received. The Revenue authorities also recorded the statement of Shri S. Gopalakrishnan, Finance Manager, SITA, India during 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 raised 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 journal entries into respective regional accounts. In response to question no.12, he submitted that the accounts were finalized by the Head Office and Balance Sheet and Income & Expenditure accounts were prepared at Head Office only. After finalization of the accounts, 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 the India branch as to how various expenses were allocated by the Head Office to different branches across the world. He further showed his ignorance as to how the revenues receipts were allocated by the Head Office to various branches including India. At this stage, it is relevant to note that subsequently, the assessee submitted some of the details / explanations as promised at the time of survey. After taking into consideration the submissions of Mr. Andrew Cleak, Shri S. 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.

(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 is 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 services 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.

2.7 He observed that since facilities of the assessee were made available to members as well as non-members, the principle of mutuality was lost in entirety. For this conclusion, he placed reliance on the judgment of the Hon’ble Supreme Court in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97. He also took into account Articles 20 and 50 of the assessee’s Articles of Association as per which the members retiring or resigning were not entitled to participate in the reserves. This was also considered to be one of the reasons for the non-applicability of mutuality to provide exemption to the assessee. The AO also considered the assessee’s stand that it was working on ‘no-profit no-loss’ basis and was only recovering costs from members as well as non-members. 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 allocation of revenue, the Assessing Officer held that this contention of the assessee, as working on no profit no loss basis, was not substantiated. 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 revenue was not known at India level. In the backdrop of the above facts, the AO held that verification of allocation of global expenses and revenue to the Indian branch was not possible. Eventually he held that assessee was a non-mutual organization as its income from services and supplies extended to the members and also to the non-members. As the 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 total 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 before the ld. CIT(A) on the question of initiation of reassessment proceedings and also on merits. It was also argued that while any profits earned from non-members may be taxable, but the principle of mutuality would apply in respect of transactions with members. To fortify this contention, the reliance was placed on behalf of the assessee, inter alia, on the judgments of the Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra), CIT v. Ranchi Club Ltd. [1992] 196 ITR 137 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-op. Housing Society Ltd. v. ITO [2004] 88 ITD 159 (Mum.) (SB).

2.9 The ld. CIT(A) rejected the assessee’s contention as regards the initiation of reassessment proceedings by holding that the AO was right in initiating the reassessment proceedings. On merits, he partly agreed with the assessee’s arguments. It was held that the concept of mutuality was present in assessee’s transactions with its members thereby exempting the income from taxation to that extent. However, the transactions with the non-members were held to be taxable as not governed by the principle of mutuality. He also did not agree with the assessee’s contention about the correctness of its accounts for determining the income. Applying the mandate of rule 10, he estimated the taxable income at 5% of the gross amount recovered from the non-members.

2.10 Both the sides are in appeal against there respective stands. Whereas the assessee, apart from challenging the computation of income at 5% of the gross receipts from non-members, has also challenged the initiation of reassessment proceedings, the Revenue is primarily aggrieved against the direction of the ld. CIT(A) in accepting the rule of mutuality in respect of the assessee’s transactions with its members thereby exempting income from taxation to that extent.

2.11 Firstly, we take up ground no. 1 taken by the assessee against the initiation of re-assessment proceedings. It can be observed from the assessee’s 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 providing services to its members. It has a network of more than 200 branches worldwide including the one in India. SITA Indian branch incurs network costs and administrative costs to secure access to the global data network as required by its member airlines in India. The specific cost in relation to individual member airlines are recovered from the particular airlines concerned. The SITA Head Office 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 assessee. 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 allocation with the help of an example. If data is to be transmitted from Mumbai to New York, the transmissions are split into packets and each packet may travel by a different network route so as to reach the end destination at which the packets are reassembled. In this example, the transmission may split into three separate packets from Bombay to Singapore to Los Angeles to New York. The origin and destination countries i.e. India and USA have incurred costs related to the transmission of data. However, the intermediate countries i.e. Singapore and Los Angles have also performed an essential role in the data transmission.

2.12 At this juncture, it is of significance to mention that the position about the SITA as not liable to tax in India 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 application u/s 256(2) to the Hon’ble 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 brought to our notice as having been decided by the Hon’ble Bombay High Court. The position which now stands is that all the orders passed by the Mumbai Bench of the Tribunal in assessee’s own case have constantly accepted the principle of mutuality.

2.13 The learned Departmental Representative opposed the raising of ground raised by the assessee against the initiation of reassessment proceedings by submitting that similar ground raised by the assessee before the learned CIT(A) was not pressed 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 learned 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 was duly pressed but the learned CIT(A) recorded this fact on some erroneous notion. On a specific question, the learned AR admitted that the assessee did not file any rectification application before the learned CIT (A) in this regard.

2.14 In so far as the question of challenging the initiation of reassessment proceedings by the assessee is concerned, we find that it is certainly a question of law which can be raised before the Tribunal even for the first time. All the relevant facts are available and there is no need to ascertain any fresh facts for rendering decision on this issue. The Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 has held that the Tribunal has jurisdiction to examine 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 assessee notwithstanding the fact that the same was not raised before the lower authorities. The Hon’ble Madras High Court in the case of CIT v. Tamil Nadu Tourism Development Corporation Ltd. [2007] 288 ITR 146. has held that the Tribunal was justified in admitting an additional ground of appeal on a substantial 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 Assessing Officer as well as the ld. CIT(A) and both the authorities have decided this aspect of the matter by means of speaking orders. In view of these facts, we find the contention of the learned Departmental Representative as devoid of any merit. The same is therefore, repelled.

2.15 Now, we will take up the objections raised by the assessee on the question of re-assessment proceedings. The reasons 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 passed by the Tribunal and the Hon’ble Bombay High Court rejecting the departmental case for AY 1981-82. Thereafter, discussion has been made 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 conveniently split into two parts, viz., (i) The assessee company is rendering services to non-members and hence is not entitled to avail the benefit of mutuality and (ii) ‘It also needs to be examined whether the assessee has accumulated reserves in general reserve of the company. If the assessee has balance in the general reserves, the ITAT order could not be applicable to the assessee’s case’. In the last para, the Assessing Officer has projected his thinking by coming to the conclusion that since the benefit of mutuality is not applicable to the assessee, he has reasons to believe that there is an escapement of income.

2.16 Firstly, we will espouse the second part of the reason adduced by the Assessing Officer for initiating the reassessment proceedings. It can be seen from the wording of the text of such reasons that the Assessing Officer wanted to “examine” as to whether the assessee 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 reasons was to first make an examination and then find whether or not there is an escapement of income. This, in our considered opinion, frustrates the very concept of reassessment. Section 147 provides that if the Assessing Officer has reasons to believe that income 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 subsequently in the course of the proceedings under the section. From the language of section 147, it is apparent that before taking any action under this provision, the Assessing Officer must have “reason to believe” about the escapement of income. Unless the reasons to believe about the escapement of income exist, no recourse can be taken 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. Once there is some such material, he can validly initiate the re-assessment proceedings and thereafter, conduct thorough examination to convert his prima facie belief about the escapement of income into real escapement. The examination part comes later in the point of time.

In the order of sequence, firstly, there should be some prima facie material with the AO to entertain a belief that income of the assessee chargeable to tax has escaped assessment. Such material should exist before the issuance of notice u/s 148. Then comes the examination part and that too, after initiation of reassessment proceedings, for finally determining as to whether his prima facie view is correct or not. If the examination conducted by the AO post the initiation of reassessment proceedings gives veracity to his prima facie belief, then the addition is made. It, therefore, transpires, that prima facie belief about the escapement of income must always precede the examination. In cannot be in the reverse direction. If the issuance of notice u/s 148 is equated with a line, then the reason 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 will always be starting from left and proceeding towards right, that is firstly, to have reason to believe about the escapement of income, then issue notice u/s 148 and thereafter conduct examination to determine the amount of escaped income, if any. Where an Assessing Officer ventures to initiate reassessment proceedings with an object of finding some material about the escapement of income, such re-assessment cannot legally stand. The law does not permit the AO to conduct 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.

2.17 In the case of CIT v. Smt. Maniben Valji Shah [2006] 283 ITR 453 (Bom.) the assessee filed return of income. The Assessing Officer observed from the capital account that the assessee had purchased a flat for which no details were filed along 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 Hon’ble Bombay High Court, it upheld the order passed by the Tribunal quashing 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 Hon’ble Delhi High Court in the case of CIT v. Batra Bhatta Company [2010] 321 ITR 526.

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, allowance or relief made in the return is inadmissible, serve on the assessee a notice requiring him to produce or cause to be produced evidence in relation to such claim etc. Sub-clause (ii) of section 143(2) starts with a non-obstante clause. It provides that notwithstanding anything contained in clause (i), if the AO considers it necessary to ensure that the assessee has not understated the income or not computed the excessive loss etc., he shall serve a notice requiring the assessee to produce or cause to be produced any evidence on which the assessee may rely in support of the return. From the prescription of clause (ii) of section 143(2), it is evident that the Assessing Officer can proceed to frame assessment u/s 143(3) with a view to verify that the assessee has properly stated the facts of his case and not claimed any excessive deduction etc. This provision is in addition to clause (i) of section 143(2), which provides for the issuance 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 becomes patent that the Assessing Officer is empowered to frame assessment u/s 143(3) either on his forming reason to believe about any excessive claim of loss/exemption/deduction and also to verity the particulars of return without there being any reason to believe about such excessive claim of loss/exemption/deduction etc. In contrast to section 143(2), section 147 provides for action only where the Assessing Officer has a reason to believe that any income chargeable to tax has escaped assessment. The provision analogous to clause (ii) of section 143(2) empowering the Assessing Officer to take up the case for scrutiny with a view to ensure that the assessee has not understated the income etc., is absent in section 147. This brings us to a logical conclusion that the proceedings for assessment or reassessment u/s 147 can be initiated only when the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment and not where he wants to examine or verify the particulars of return with a view to ensure that the 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 initiated reassessment proceedings with a view to “examine” whether the assessee had accumulated reserve. Obviously, the scope of section 147 cannot encompass such an action under which certain 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 initiating the reassessment proceedings on the second count. There was no reason to believe about the escapement of income at that stage. He simply wished to ascertain post the initiation of reassessment as to whether there was any escapement of income. In other words, 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 granting exemption from tax on the principle of mutuality in the assessee’s own case have been brought to our notice. On a pertinent query, it was fairly accepted by the ld. AR that in all such earlier years, 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 service to the non-members in such earlier years and as such the tribunal never had an occasion to consider the effect of non-members also using the facilities of the assessee, in determining the question of mutuality.

2.21 It becomes manifest that the earlier orders passed by the tribunal cannot be considered as binding precedent for the year under consideration due to emergence to fresh facts having direct bearing on the decision of mutuality, which were either not prevailing or not considered and decided by the tribunal, either impliedly or expressly.

2.22 It is seen that the survey carried out by the Revenue authorities divulged that the assessee was extending its services to non-members as well. It is in the light of these facts, that the Assessing Officer initiated re-assessment proceedings on the premise that the assessee lost the benefit of mutuality in entirety for rendering the services to non-members also. It is observed from the assessee’s objections taken up before the AO and also the reiteration of the same before the ld. CIT(A) that cost recoveries from non-members constituted 0.07% in the previous year relevant to assessment year under consideration. The assessee duly admitted before the AO that it made available its network, inter alia, to Equant customers. The assessee also argued before the ld. CIT(A), relying 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 Hon’ble Supreme Court in the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 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 Their 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 judgment of the Hon’ble Madras High Court in Dy. CIT v. K.S. Suresh [2009] 319 ITR 1 (Mad.), the ld. AR contended that the reassessment be quashed as the initiation of reassessment proceedings was invalid. From this judgment, it is observed, that the Hon’ble Madras High Court has upheld the initiation of reassessment by noting that at the stage of initiation of reassessment, the only requirement to be looked into is as to whether there was a prima facie case for reassessment. The sufficiency of reasons has been held to be not relevant at that stage.

2.25 In Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500, 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 claim of bad debts was unacceptable. The assessee challenged the initiation of reassessment proceedings before the AO but without success. The Hon’ble Gujarat High Court accepted the assessee’s contention in Rajesh Jhaveri Stock Brokers (P.) Ltd. v. Asstt. CIT [2006] 284 ITR 593 (Guj). Revenue preferred an appeal before the Hon’ble Supreme Court. The Hon’ble Summit Court has held in Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) that intimation u/s 143(1)(a) cannot be treated as an order 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 been observed by Their Lordships that the word “reason” in the phrase “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 believe that an income has escaped assessment. The expression cannot be read to mean that the “AO should have finally ascertained the fact by legal evidence or conclusion“.

2.26 In view of the above discussion, it boils 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 just to determine as to whether there is any escapement of income, in the same breath, the stringent requirement of proving that there is a definite escapement of income, is also not required to be satisfied at that 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 income, the requirement of initiation of reassessment is fully satisfied.

2.27 We now turn to the first reason taken note by the Assessing Officer for initiating the reassessment proceedings, 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 an association or organization etc. for rendering services to them alone. If, in the course of dealings of the organization or the body with its members, there arises any surplus and it is the group of such members as a class which is entitled to participate in such surplus, there exists a principle of mutuality. As no one can trade with himself, naturally there can be no question of earning any profit by the participators from the contributions made by them as a class. The essence of the rule of mutuality is the dealings with the members alone. Once such organization or body also starts dealing with non-members, the concept of mutuality is lost. To what extent the mutuality is lost in such a case, that is, whether in respect of dealings with non-members alone or with both the members and non-members, 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 organization or body with the non-members are concerned, the mutuality definitely 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-members as well. This fact was categorically admitted by Mr. Andrew Cleak, International Tax Director of SITA in answer to question nos. 7 and 8. These facts indicate that the assessee was also extending its services 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 to tax has escaped assessment, triggering the reassessment proceedings. Before the conducting of survey, it was only a reason to suspect that the principle of mutuality did not apply. It was during the course of survey conducted on the premises of the assessee that the fact of non-members also availing the facilities of the assessee came to light. This new fact was good enough for the AO to entertain a prima facie belief about the escaement of income. The contention of the ld. AR that survey conducted in the year 2002 could not have formed the foundation for reassessment for the year under consideration, is without any force. We have carefully gone through all the questions posed by the survey team and the answers given by the officers of the assessee. It no where emerges that the questions and the answers were for a particular year or relevant on a particular date. Whatever was asked and answered related to the assessee in a uniform manner without reference to any period. As the AO initiated reassessment proceedings for the year under consideration on appreciation of such answers, which in our considered opinion also applied for the extant year, there can be no question of arguing that the reassessment be quashed on this score.

2.29 The learned AR vehemently argued that the formation of belief by the Assessing Officer should be considered only with reference to the reasons recorded for reopening of assessment and no subsequent material can justify the initiation of reassessment retrospectively. In support of this contention, he relied on the judgment of the Hon’ble Bombay High Court in the case of Prashant S Joshi v. ITO [2010] 324 ITR 154 in which it has been held that the income escaping assessment must be determined with respect of reasons recorded by the Assessing Officer and not 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, there can be no other material to justify the initiation of reassessment proceedings except the reasons recorded by the Assessing Officer before 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 the very foundation for the initiation of reassessment proceedings is founded on the reasons itself. We have noticed above that the concept of mutuality can under no circumstances prevail when there are transactions with non-members. The question whether non-mutuality will apply in respect of dealing with non-members alone or with the members also, is an altogether different thing. Definitely, mutuality cannot exist in so far as transactions of the organization or body with the non-members are concerned. It is obvious from the reasons that the assessee did enter into transactions with non-members, 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 learned AR was that the assessee had disclosed all the necessary primary facts and the reasons so recoded by the Assessing Officer about the loss of principle of mutuality on account of transactions with its members constituted a change of opinion. It was submitted that no reassessment can be sustained on a change of opinion.

2.31 From the facts of the case, it is observed that no assessment for this year was initially framed. The learned AR also admitted that the return for the year was simply processed without making any assessment. Due to the fact of no earlier assessment for this year, it is palpable that no opinion at all was formed by the Assessing Officer. To bring a case within the ambit of change of opinion, it is essential that firstly, some opinion should be formed on a particular issue. Such an opinion can be formed only when assessment 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 such a case, can be declared as illegal on the ground of change of opinion. The Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) has held so in unequivocal terms. We, therefore, reject this contention raised by the learned AR and hold that the AO was justified in initiating 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 on the first reason, albeit not on the second, we uphold the initiation of reassessment proceedings by the ld. CIT(A). Ex consequenti, the first ground raised by the assessee’s in its cross objection is not allowed.

3.1 Now we take up ground no.1 raised by the Revenue against the direction of the learned CIT(A) to exempt the income of the assessee insofar as the transactions with the members are concerned, on the principle of mutuality. We have noted above that the assessee was enjoying complete exemption in respect of its income on the principle of mutuality by virtue of several orders passed by the Tribunal in assessee’s own case starting from assessment year 1972-73 up to assessment year 1983-84. The survey divulged that the assessee was also entering into transactions with non-members. Because of the participation by the non-members as well and certain other hosts of factors, the Assessing Officer rejected the status of mutuality granted to the assessee in entirety. He held that the entire amount received by the assessee from the services and 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 opinion of the AO, he resorted to Rule 10 of the Income-tax Rules, 1962 and estimated the income at 5% of total of receipts of the assessee amounting to Rs. 36.94 crore. The income was determined at Rs. 1,84,70,000. The learned CIT(A) held that the assessee was entitled to exemption in respect of transactions with its members. He, however, held that the exemption was not available on the principle of mutuality insofar as the transactions with non-members were concerned. The Revenue is aggrieved against the acceptance of the status of mutuality by the learned CIT(A) qua the transactions with members of the organization.

3.2 The learned Departmental Representative submitted that the decision rendered by the Tribunal in earlier years granting exemption to the assessee by reason of mutuality was marred completely by reason of participation by non-members in the current 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 on the question of granting exemption by treating it as a mutual organization 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 entirety thereby rendering the entire income of the assessee from members as well as non-members liable to tax. For this proposition, he relied on the judgment of the Hon’ble Supreme Court in the case of CIT v. Royal Western India Turf Ltd. (RWITC) [1953] 24 ITR 551 and also certain observations from the judgment of the Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra). To bolster his submission, he also pressed into service the ratio of the judgments of the Hon’ble 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 ITR 241 (SC). The learned Departmental Representative also, relying on Article 20 and 50 of the Articles of Association of the assessee, 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 society for the financial year during which that member resigned. As per this Article, such resigning member is not eligible to participate in the legal reserve funds or any other reserves. He submitted that this Article is against the mutuality as the surplus is not payable to such member resigning from the membership. It was contended 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, as 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 entitled to participate in the surplus fund, the principle of mutuality cannot get through. In his opinion each individual member in the capacity of contributor must participate in the surplus and the participators as a group or class cannot uphold mutuality. For this proposition he relied on the judgment of the Hon’ble Madras High Court in the case of Wankaner Jain Social Welfare Society v. CIT [2003] 260 ITR 241.

3.3 In the oppugnation, the learned Senior Counsel on behalf of the assessee submitted that the non-members who availed facilities provided by the assessee were by and large government, international organization and Equant. He submitted that the participation by these non-members was less than 1% of the overall total cost recoveries. In view of the fact that the non-members 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 Hon’ble Patna High Court in Ranchi Club Ltd. (supra) as approved by the Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra) and also the Hon’ble Delhi High Court in the case of CIT v. Standing Conference of Public Enterprises (SCOPE) [2009] 319 ITR 179. He also relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Willingdon Sports Club [2008] 302 ITR 279 (Bom.) to contend that the surplus realized from the members of the association was entitled to exemption by reason of mutuality. For the same proposition he also placed reliance on the judgment of the Hon’ble Bombay High Court in CIT v. Bombay Oilseeds & Oil Exchange Ltd. [1993] 202 ITR 198. 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 and also the creation of reserves, the learned AR contended that these issues 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 towards a copy of this order placed at page 194 of the paper book, the learned AR submitted that the effect of Articles 20 and 50 was considered threadbare by the Tribunal and only thereafter, a decision was taken to grant exemption of income on the principle of mutuality. He also referred certain observations of the Tribunal in that order about the creation of reserves and then upholding the principle of mutuality. Opposing the contention raised by the learned Departmental Representative that since the members resigning or retiring are not entitled to participate in the surplus fund and thereby the mutuality was lost, the learned AR relied on the judgment of the Hon’ble Bombay High Court in the case of Sind Co-op. Housing Society v. ITO [2009] 317 ITR 47 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 Hon’ble jurisdictional High Court has held that that the principle of mutuality is not destroyed by reason of the fact that there is variation in some members contributing to the fund and participating in the surplus so long as the members as a class remain the same. It was, therefore, submitted that the decision taken by the learned CIT(A), insofar as the question 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 cited 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 assessee’s favour in earlier years, per se in our considered opinion is not binding in the facts and circumstances of the instant case. All the decisions rendered by the Tribunal in the earlier year 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 no involvement of non-members. The fact that the facilities were provided by the assessee to non-members also came out only during the course of survey. This crucial fact, in our considered opinion, has rendered the earlier orders passed by the Tribunal as a non-binding precedent. There is no dearth of decisions holding that when there is a change in the factual or legal position in the facts of the earlier year vis-à-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 thereafter decide as to whether the observance of the earlier decision is called 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 mutuality on the facts and circumstances coming to fore pursuant to survey. Before that, it is relevant to consider as to what is meant by “mutuality”. It is elementary rule that one person cannot earn a profit from self. Even if some profit is artificially declared on account of transaction with self, the same cannot be charged to tax. It is a well settled principle as reiterated by the Hon’ble Apex Court several decades ago in Kikabhai PremChand v. CIT [1953] 24 ITR 506. In this case it was held that a man cannot earn profit from himself. The following observations of the Hon’ble Court assume significance in this regard :“In the present case disregarding technicalities, it is impossible to get away from the fact that the business 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 entities trading with each other and then by means of a fictional sale introduce 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 into transactions with themselves alone and there is no involvement of 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 Hon’ble Calcutta High Court in Betts Hartley Huett & Co. Ltd. v. CIT [1979] 116 ITR 425. 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 cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It is an elementary proposition that no person can enter into a contract with oneself. Debiting or crediting one’s account cannot alter this legal position.”

3.7 When such persons form a a group or association or club (hereinafter also called as ‘the organization’) and, in furtherance of its object, provides goods or services to the members constituting the group, the question arises as to whether there is mutuality. The principle of mutuality can be viewed from the following broader different angles :-

(I)  Provision of goods or services by an organization to its members alone.

(II)  Income of organization from other than the provisions of goods or services to its members alone.

(III)  Provisions of goods or services by an organization to non-members alone.

(IV)  Provisions of goods or services by an organization to members as well as non-members.

I. PROVISION OF GOODS OR SERVICES BY AN ORGANIZATION TO ITS MEMBERS ALONE

3.8.1 When certain persons form an organization and such organization provides goods or services to its members 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 its members alone is fairly settled by catena of decisions. In the case of CIT v. Bankipur Club Ltd. [1981] 129 ITR 787, the object of the club was to provide all usual privileges, advantages, conveniences and accommodation of club to its members. It was provided in the Memorandum of association that upon winding up or dissolution of the club, if there remains any property left after the satisfaction of all debts and liabilities, the same shall be paid to and distributed amongst the members of the organization. The club filed 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 ITO’s decision and held that the profit from the bar was not exempt as the principle of mutuality was not applicable. The Tribunal concurred with the submissions advanced on behalf of the assessee and held that the activities inter se the members were entitled to mutuality. In further appeal, the Hon’ble Patna High Court observed that there was no transaction with the non-members insofar as the sale of drinks was concerned. All the members were entitled to participate in this privilege and the income under the head was applied towards the club for either re-purchasing drinks or adding privileges to the members. After considering several judgments including that of the Hon’ble Supreme court in Royal Western India Turf Ltd. (RWITC) (supra) and Hon’ble Andra Pradesh High Court in CIT v. Merchant Navy Club [1974] 96 ITR 261, it was held that the profit from sale of drinks at bar was entitled to exemption on doctrine of mutuality. The Hon’ble Supreme Court affirmed inter alia, the judgment of the Hon’ble Patna High Court in a batch of appeals in the case of Bankipur Club Ltd. (supra) by holding that the surplus – excess of profits over the expenditure – as a result of mutuality arrangement, cannot be said 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 profit motive.

3.8.2 In the case of Chelmsford Club Ltd. v. CIT [2000] 243 ITR 89 the club provided recreational and refreshment facilities exclusively to its members and their guests. These facilities were not available to the non-members. Club was run on ‘no profit no loss’ basis and the surplus, if any, was to be used only for maintenance and development of the club. The Hon’ble Supreme Court held that the levy of tax on income of the club was not called for as the recreational and refreshment facilities were extended exclusively to its members. It was, therefore, held that the assessee was not liable to income-tax in view of the principle of mutuality.

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 individual transactions out of collections made from the members for extending services and facilities etc. for which it is formed, such surplus is exempt from tax on the principle of mutuality. It is so for the reason that the members who contribute to such surplus of the organization are also entitled to participate in such surplus. In other words, when the contributors to the surplus are also the persons who participate in such surplus and there is no involvement of any outsider, there is mutuality between the members forming the organization. The essence of mutuality lies in commonness or unanimity between the contributors to and the participators in the surplus of an organization. The mere fact that an organization operates with ‘no profit no loss motive’ will not by reason of this fact alone, make it a mutual organization. The mutuality lies in the commonness between the persons contributing to and also participating in income and not that there 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 going up to the retirement of members or even the dissolution of such organization itself. In order to claim exemption from tax on this reasoning, it is required to first prove that the organization is mutual. The distinctive feature of the rule of mutuality lies in oneness between the persons contributing to profit and those participating in such profit. If an organization sells goods or provides services on ‘no profit no loss basis’ to outsiders, despite the fact that there is no profit from such transactions, it will lack mutuality because such persons purchasing goods or availing services can have no right to participate in the surplus, if any, arising incidentally to the organization. On the contrary, an organization will adorn mutuality when it transacts only with its members, irrespective of there being nil or any profit arising from the dealings with the members. If there arises any surplus on account of dealings with the members on transactional level and such surplus is again available for distribution only amongst such members at any point of time, the concept of mutuality will remain intact to provide exemption in 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 liability due to two reasons, viz., first, there is no profit and second, it is a mutual organization.

3.8.4 The object of a mutual organization can in no case be to earn profit from its members on an overall basis. Profit object itself negates the concept of mutuality. Profit motive and mutual organization cannot co-exist. It, therefore, follows 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 results from individual transactions with its members, it must go back to the members at any point of time. What defeats mutuality is the profit motive and not the actual earning of any profit on certain periodicity, which eventually is liable to be distributed amongst the contributors. It, therefore, follows that in case of a mutual organization, commerciality though cannot be an object, but may be present in dealings with the members on transactional level. So long as such profit arising from the members is liable to be returned 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, to be mutual, must necessarily act on ‘no profit no loss’ on every transaction with its members, then obviously, it will earn no profit and there will be no point in seeking exemption on the principle of mutuality. The need for exemption of income from tax on the principle of mutuality arises from the very existence of profit in the first instance.

3.8.5 The Hon’ble Full Bench of the Patna High Court 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 motive of profit earning which can be said to be tainted with commerciality, is wholly irrelevant for determining the taxability of the receipts because even non-commercial or casual receipts are liable to income-tax under the Act“. It can also be seen from the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Cement Allocation & Co-Ordinating Organisation [1999] 236 ITR 553 that : “The working of the scheme clearly indicated that the contributors contributed more than what was required and in the circumstances the distribution of the balance surplus was only apportionment of the saving amongst the contributors”. In this case there was a profit of the business amounting to Rs. 94.77 lakh for the assessment year 1967-68 and Rs. 8.75 lakh for assessment year 1968-69 which was claimed as exempt on the principle of mutuality.

3.8.6 From the above discussion, it follows that when an organization with no profit motive, extends services or facilities only to its members for a specific sum and the surplus emanating from collections at a transactional level is eventually distributable amongst the members at any point of time, there is mutuality. 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 organization, extending services and facilities to its members alone, also earns certain other income such as interest on deposits from bank or return from investments. The question arises as to whether such interest etc. can be exempted on the principle of mutuality. This question has been answered by the Hon’ble jurisdictional High Court in CIT v. Common Effluent Treatment Plant (Thane-Belapur) Association [2010] 328 ITR 362. In that case the assessee-association was formed specifically with the object of providing a common effluent treatment facility to its members. It received contributions only from its members. As per its memorandum / articles 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 to transactions with its members. The association also deposited its surplus amount with certain banks and others, from which it earned interest income to the tune of Rs. 45.46 lakh. The assessee claimed exemption in respect of both the sets of income, that is, profit from dealings with the members and also the interest income. The Tribunal accepted the principle of mutuality as regards profit from dealing with members but held that the interest income was liable to tax. When the matter came up before the Hon’ble jurisdictional High Court, their Lordships held that the surplus representing excess of income over the expenditure from its members fell within the purview of doctrine of mutuality and hence was not liable to tax. As regards the interest income, it was held that it did not possess the same character of mutuality as the surplus fund generated from its members. Interest income was, therefore, held to be taxable as ‘Income from other sources’. From this judgment, it is discernible that insofar as the profit of the organization from the transactions with members alone is concerned, who, in turn, are also participators in the profit, there is mutuality and such income cannot be brought to tax. If, however, the contributions made by the members are for the time 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 principle of mutuality is that the members who contribute to the income of the organization for availing facilities or services extended 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 interest income etc. arising from such investments. It is so for the reason that the contributor of such income is bank etc. and not the members of the society and secondly, the contribution in the shape 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 is preserved on the income from dealings with members towards provision of services and facilities.

III. PROVISION OF GOODS OR SERVICES BY AN ORGANIZATION 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 basis of mutuality because the contributors and participators to the income are the members alone. It is implicit in this form of organization that there is no ultimate profit motive, yet the profit may arise from transactions with the members, which eventually goes back to the members at any time during the life or on the dissolution of the organization. If, however, an organization undertakes dealings with the public at large, that is non-members alone, the concept of mutuality is always wanting. In such a case, it will be the non-members contributing to the income. Obviously such non-members cannot participate in the ultimate profits of the organization. As there remains no unanimity between the contributors and the participators to the 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 organization also, to a very limited extent, avail the facilities provided by it, then the question arises as to whether the non-mutual status of such an organization will continue or a small participation by the members will convert it into a mutual organization. In our considered opinion, the status of non-mutuality is not destroyed if there are a few transactions with the members also. The organization will continue to remain non-mutual by reason of overwhelming preponderance of transactions with non-members coupled with insignificant number of transactions with the members.

IV. PROVISION OF GOODS OR SERVICES BY AN ORGANISATION TO MEMBERS AS WELL AS NON-MEMBERS

3.11.1 Now we approach the last category in which an organization sells goods or provides services/facilities both to its members as well as non-members. The question is whether such an organization can be characterized as mutual?

3.11.2 The learned Departmental Representative has vehemently argued that when non-members also participate in the transactions with the organization, the concept of mutuality is destroyed in totality including the transactions with the members. Per contra, 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 the assessee declared a particular sum as income for letting out its premises to non-members and claimed exemption qua the income realized from its members. The ITO held that the assessee was not a mutual concern because of it extending facilities to non-members as well and hence it was liable to pay income tax on its entire income including that earned from members. The Tribunal accepted the assessee’s stand and held that principle of mutuality was there in so far as the transactions with its members were concerned and hence such income of the club was not liable to tax. The Revenue assailed the decision of the Tribunal before the Hon’ble Patna High Court, which came to hold that the assessee club ceased to be a mutual concern and as such even the income in respect of dealings with its members and their guests was liable to tax. As the contributors were not only the members but non-members as well, the Hon’ble Patna High Court held that it was difficult to hold that there was any mutuality amongst the members and the club. This decision was rendered by the Hon’ble High Court in relation to assessment years 1972-73 to 1974-75.

3.11.4 The same issue was agitated by the Revenue before the Hon’ble Patna High Court for the assessment year 1977-78. The division bench hearing such later appeal found that there was some conflict between the views taken by the Court in the case of Bankipur Club Ltd. (supra) and Ranchi Club Ltd. (supra). Accordingly this case was referred to a Full Bench. In Ranchi Club Ltd. (supra) it was noticed by the Hon’ble Full Bench that the assessee filed its return showing income of Rs. 6,030 as realized from certain persons other than members. The ITO, while assessing the income, also included the income received 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, apart from other cases, also founded its case on the judgment of the Hon’ble Supreme Court in the case of Royal Western India Turf Ltd. RWITC (supra). The Hon’ble 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 but the mutuality cannot have any application in respect of surplus from non-members. It also observed that if the receipts are from sources other than the members, then the exemption can be claimed in respect of receipts from members on the principle of mutuality. It was illustrated by way of a members’ club having income by way of interest or capital gain etc. which was declared as taxable and not exempt on the principle of mutuality. Then, the Hon’ble High Court took up the vexed issue of a members club involved in both the mutual and non-mutual activities and posed a question to itself as to whether in such a case exemption can be claimed with respect to receipts relating to mutual activities or the claim of exemption from tax under the Act will be completely destroyed. After thoroughly considering various Indian and foreign decisions, their Lordships finally decided it in assessee’s favour by holding as under:-

“For the aforesaid reasons, I am clearly of the view that merely because the assessee-company has entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members is not lost.”

3.11.5 The law laid down in the case of Ranchi Club Ltd. (supra) 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 assailed by the Revenue before the Hon’ble Supreme Court in batch of cases in Bankipur Club Ltd. (supra). The case of Ranchi Club Ltd. (FB) (supra) was considered by the Hon’ble Supreme Court in Group-B. Relevant discussion has been made in para 10 of the judgment rendered by the Hon’ble Apex Court. In this para it was noticed by the Hon’ble Summit Court that the assessee filed its return offering income received from persons 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 Hon’ble Supreme Court in para 14 of its judgment by holding that the income arising to the assessee from its transactions with the members is not chargeable to tax as it is a mutual arrangement. With this judgment rendered by the Hon’ble Supreme Court, the judgment of the Full Bench of the Hon’ble Patna High Court in the case of Ranchi Club Ltd. (supra) came to be affirmed.

3.11.7 The judgment of the Hon’ble Delhi High Court in the case of Standing Conference of Public Enterprises (SCOPE) (supra) is also based on the facts in which both the members and non-members contributed to the income of the organization. The Assessing Officer held that by the inclusion of non-members, the mutuality was lost in entirety. The Tribunal accepted the mutuality qua the transactions with the members and held the amount to be taxable in respect of transactions with non-members. The Revenue argued before the Hon’ble Delhi High Court that the entire amount received from members as well as non-members was taxable. The Hon’ble Delhi High Court, after considering various judgments of the Hon’ble Supreme Court including Bankipur Club Ltd. (supra) and Royal Western India Turf Ltd. (RWITC) (supra), held that the income from transactions with the members was exempt on the principle of mutuality. 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 consider the arguments advanced by the learned Departmental Representative on this issue and the decisions relied upon by him. The main contention of the learned Departmental Representative was that by reason of non-members also availing the facilities or services extended by the society, the principle of mutuality gets lost in entirety. For this proposition, he hugely relied on the judgment of the Hon’ble Supreme Court in the case of Royal Western India Turf Ltd. (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 course company in all its branches; (c) to establish any, clubs, hotels 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 and distribute or to permit to be sold and distributed wines, spirits, tobacco and other goods. As per the company’s Articles of association, there were two main categories of members namely, club members and stand members besides honorary stand members, visiting members and temporary members. The company was the lessee of two plots of land, one in Bombay and other in Pune. Two Race Courses were laid out on these two plots. On each Race Course there were three enclosures known as Members enclosure, first enclosure and second enclosure. The Members enclosure was for the exclusive use of members and their families. The other two enclosures were open to the public. The company received 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 items of receipts :-

(i)	Season admission tickets from members	Rs. 23,635
(ii)	Daily admission gate tickets from members	Rs. 51,777
(iii)	Use of private boxes by members	Rs. 21,490
(iv)	Income from entries and forfeits received from the members whose horses did not run in the race.	Rs. 82,490

3.11.9 The ITO held that all the four items mentioned above received from members were liable to tax. The Tribunal held that first three items did not come within the ambit of ‘business’. When the matter came up before the Hon’ble Bombay High Court, it held that the fourth item of income was chargeable to tax and the first three items were not. The assessee accepted the judgment of the Hon’ble Bombay High Court to the extent of taxability of the 4th item of Rs. 82,490 received from members whose horses did not run in the race. The Revenue challenged the judgment of the Hon’ble Bombay high Court in relation to the first three items. The Hon’ble Supreme Court asked itself through para 10 that if the fourth sum of Rs. 82,490 received from members was a part of income of the horse racing business, then why the other three items of receipts did not form part of the assessee’s total income? Thereafter, it went on to hold that the entire amount was taxable because the company was doing ordinary business of race course. It was observed that similar amenities were given to members and non-members and similar fees was charged from both. This, in the opinion of the Hon’ble Supreme 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 Representative has created the edifice of his argument that the entire income of the assessee including that realized from the members, should be brought to tax.

3.11.10 From the above judgment it is patent discernible that the principle of mutuality qua the transaction with members has been denied by the Hon’ble Supreme Court in the light of the following prominent facts of the case :-

(i)  The fourth item, being a sum of Rs. 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 establish clubs etc. and to manage, sell lease or mortgage the properties.

(iii)  The transactions with non-members were significant as compared to with the members, which is borne out from 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 Hon’ble Supreme Court held that there was no mutuality even qua the members apart from transactions with the non-members.

3.11.12 The next decision relied upon by the learned Departmental Representative is that of the Delhi Stock Exchange Association Ltd. (supra). In that case the company was formed with the object of promoting and regulating business in shares, stocks and securities. The company charged fees for the admission of members. Trading members had to be elected and pay entrance fees. Only they were entitled to transact the business in the stock exchange. The Hon’ble Supreme Court observed that the income accruing from the business of the appellant company was distributable amongst the shareholders like in every joint company. As per the Articles of Association, the members included shareholders and members of the exchange. As the entrance fees was payable by the trading members who alone could transact business in stock-in-trade in the association, the Hon’ble Supreme Court observed that : “Therefore, the body of trading members who paid the entrance fees, and the shareholders among whom the profits were distributed were not identical and thus the element of mutuality was lacking“. It was eventually held that mutuality was lacking and the assessee was assessable 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 the 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 judgment of the Hon’ble Supreme Court in Bankipur Club Ltd. (supra). He argued that the entire judgment of the Hon’ble Supreme Court 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 Hon’ble 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 Hon’ble Supreme Court considered the case of Royal Western India Turf Ltd. (RWITC) (supra) and thereafter made the following observations :-

“We do not think it necessary to deal at length with the above decisions except to state the principle discernible from them. We understand these decisions to 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 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.”

3.11.15 In our considered opinion, the above three judgments of the Hon’ble Supreme Court do not conclusively lay down that if non-members also enjoy the facilities extended by an organization, the principle of mutuality will be invariably lost. In the case of Royal Western India Turf Ltd. (RWITC) (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 properties of the company. A larger chunk of the income from race course came from public at large which is evidenced from the fact that 2 out of 3 enclsoures were allotted to non-members. It is thus evident that in that case not only there was overwhelming predominance of non-members, but the establishment of the organization was also with profit motive. It was under such circumstances, that the Hon’ble Supreme Court held that the mutuality was lacking even in respect of income arising from the members. That was not a case in which the organization was set up without any profit motive. Another important factor which weighed with the Hon’ble Supreme Court was the acceptance by the assessee about the 4th item of income received from members as taxable.

3.11.16 The second judgment relied on by the learned 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 company were to be distributed, were not identical. It is a fundamental principle of any mutual organization that the contributors to the income and participators in the income must be the same persons as a body. This judgment, therefore, does not lay down a broader principle that the principle of mutuality is lost even qua the dealings with the members, when a few non-members also avail the facilities extended by the organization.

3.11.17 The last is the case of the Hon’ble Supreme Court is that of Ranchi Club Ltd. (supra) as approved by the Hon’ble Supreme Court in the batch of appeals titled as Bankipur Club Ltd. (supra). The learned Departmental Representative contended that the Hon’ble Supreme court made it clear at the very outset that the income received by the clubs by extending facilities to non-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 canvassed by theld. DR that since the Hon’ble Supreme Court decided the question of mutuality in assessee’s favour in relation to the transactions with the members, the same cannot be held as upholding the observations of the Full Bench of the Hon’ble Patna High Court to the effect that if there are transactions with members and non-members, then mutuality is secured insofar as transactions with members are concerned. To support this argument, the learned Departmental Representative also relied on a recent judgment dated 30.07.2012 of the Hon’ble Gujarat High Court in the case of Gujarat Power Corpn. Ltd. v. Asstt. CIT. [2012] 26 taxmann.com 51. He accentuated on the observations made in para 28 of the judgment by which it has been held that the ratio of the decision of the Apex Court is what the judgment lays down and not what the decision of the High Court challenged, held. It was due to these observations of the Hon’ble High Court that the learned Departmental Representative impressed upon us to consider the judgment of the Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra) as affirming the judgment of the Hon’ble 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 Corpn. Ltd. (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 decision of the High Court in entirety which was under challenge. But we are unable to figure out as to how this judgment supports the case of the Revenue. In Ranchi Club Ltd. (FB) (supra), the question for consideration was about the decision on mutuality in respect of transactions with members in the backdrop of the fact that both the members and non-members were enjoying the facilities extended by the club. The fact that the assessee offered income in respect of transactions with its members is amply borne out from page 140 of the report. The Assessing Officer taxed even the income from members by negativing the principle of mutuality in entirety. The Hon’ble High Court specifically observed that in a case of club providing facilities to its members and non-members, the mutuality is lost only in respect of transactions with the non-members and its income, to the extent of that received from the members, is exempt from taxation. It is more relevant to take note of the fact that the Full bench 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 also availing the facilities of the club,. Rather, it was only on this short point that the full bench was constituted, which eventually reversed 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 Hon’ble Patna High Court before the Hon’ble Supreme Court urging that the mutuality be denied even in respect of transactions with the members. The assessee could not have been in appeal because it had voluntarily offered income for taxation in respect of transactions with non-members. The Hon’ble Supreme Court again noted this fact in para 10 of its judgment that the assessee had filed its return showing income received from non-members. Thereafter, it summarized the decision of the Hon’ble Patna High Court again by noting that merely because the assessee-company entered into transaction with non-members, its right to claim exemption on the principle of mutuality in respect of transactions with its members, was not lost. It was only then that the Hon’ble Apex Court rendered its decision in para 14 by answering the question against the Revenue that the income from members was exempt on the rule of mutuality. By no stretch of imagination one can even conceive that the Hon’ble Supreme court was oblivious of the fact that the club extended its facilities both to its members and non-members; income earned from non-members was offered by the assessee for taxation; and the dispute before it was centered to consider the taxability of income from members alone de hors the fact that the club earned income from members and also non-members. The narration of facts; the reproduction of the crux of the judgment of the Hon’ble Patna High Court by the Hon’ble Supreme Court in its judgment; and even the questions raised before the Hon’ble Patna High Court, amply prove that the Hon’ble Supreme Court upheld the ratio of the judgment of the Hon’ble Patna High Court not only to the extent of the non-taxability of income from members but also this non-taxability in the light of the fact that non-members also participated and availed the facilities extended by the club.

3.11.19 The learned Departmental Representative has also referred to the observations of the Hon’ble Supreme court in para 15 of its judgment in the case of Bankipur Club Ltd. (supra) which we have reproduced above. These observations, in our considered opinion, are reiteration of the view taken by the Hon’ble Supreme Court in the case of Royal Western India Turf Ltd. (RWITC) (supra), which has also been referred to in the same paragraph. The reasons given by us above for holding that the case of Royal Western India Turf Ltd. (RWITC) (supra) does not support the learned Departmental Representative’s contention, apply with full force to these observations of the Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra) It is further relevant to note that the Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra) upheld the principle of mutuality on transactions with members when the club provided services both to its members and non-members, after duly considering its earlier judgment in Royal Western India Turf Ltd. (RWITC) (supra).

3.11.20 We have noticed in an earlier para of this order that in a case of a non-mutual organization, a few transactions with the members do not convert its non-mutual status to mutual. In the like manner, the otherwise status of mutuality of an organization 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-mutuality depends on the consideration of the totality of facts and circumstances 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 be no profit from self.

 b.  When individuals join and form an association and such association sells/provides goods/services or facilities ONLY TO ITS MEMBERS, there can invariably be no profit motive. Even if some profit ensues to the organization from members on 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 the profit and participators in such profit, are the same persons as a class. If no profit follows from the transactions with the members, 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 its members in furtherance of its objects, invests its funds or makes deposit in bank, the return or interest on such investment/deposits will not be covered by the character of mutuality and such 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 interest income will not be participating in such income. However, mutual character of the organization in respect of transactions with its members will continue and income there from will enjoy exemption.

 d.  When individuals join and form an association and such association sells/provides goods/services/facilities ONLY TO public at large, that is, NON-MEMBERS, there may or may not be profit motive. When there is profit motive and profits actually follows, such profit is liable to tax. If there is no profit motive but still profit follows, such a profit is also 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, being the members of the association as a class, thereby breaching the principle of mutuality.

 e.  If, in a case of association of the nature as discussed 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 remain as such. Whereas profits from transactions with non-members will be liable to tax, profit from transactions with the members will continue to enjoy exemption.

 f.  When the organization provides facilities and services both to its members and non-members, the following consequences flow:-

 (i)  If the ‘object’ of such an organization is ‘to earn profit’, there in no mutuality in respect of transactions with members.

(ii)  When the ‘object’ of the organization is ‘not to earn profit’ but profit emerges from transactions with members and non-members, the rule of mutuality will not apply to the extent of transactions with members unless transactions with members are phenomenally minimal.

(iii)  In both the above cases covered under (i) and (ii), profit from transactions with non-members is always taxable.

3.13 Now we will test the facts of the instant case on the touchstone of the broader principles of mutuality as figured out by us in preceding para. It is observed that the assessee extended facilities to Airport Authorities, United Nation, IFC, UNESCO and Equant customers. It is evident from page 27 para 74 of the ‘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 arrangement, the costs incurred by each party were shared according to usage 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 (ivc), it can be noticed that : “SITA and Equant shared network resources in certain 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 transactions with such non-members. The assessee’s contention is that it was simply recovering costs from its members and non-members for rendering services and there was no profit motive. The total of cost recoveries from government, international organizations and Equant customers, constituting non-members as a group, is 0.07% of the total cost recoveries. It shows that the assessee provided services to its members at 99.93% of its total operations. This fact 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 Articles 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 in 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 processing of all categories of information required in the operation of the air transport industry and to study the problems relating to them with the aim of promoting in al countries safe and regular air 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 not earned any profit from its transactions and the consideration so received represents only cost recoveries.

3.16 The above facts indicate that primarily, the assessee is not set up with a ‘profit motive’. Secondly, the non-members availing the facilities extended by the assessee are very insignificant, not even 1% of the total.

3.17 These facts are definite pointer towards the assessee being a mutual organization. Under such circumstances we are of the considered opinion that the principle of mutuality cannot be denied in entirety even in respect of transactions by the assessee with its members. Accordingly, the view taken by the learned 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 Departmental Representative in support of his contention that the mutuality should be rejected in entirety was with reference to Articles 20 and 50 of the Articles of association of the assessee. It was submitted that since the retiring or resigning members are not entitled to participate in the reserves to some extent, the mutuality was lost. It was argued that the contributor to and participator in the surplus fund should be considered on the level of individual persons. For this proposition, he relied on the judgment in the case of Wankaner Jain Social Welfare Society (supra). In this case the Hon’ble Madras High Court considered the facts in which the object of the society was to create 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 made it compulsory for every member to participate in the scheme of deposit. The Assessing Officer denied the mutuality on the ground that every depositor was not necessarily borrower and therefore, the interest paid by the borrowers and distributed amongst the non-borrower members dented the mutuality. The Hon’ble Madras High Court upheld this principle by holding that since the interest income was available for being distributed amongst all the members including those who had not borrowed moneys, the identity between the contributors and participators was lost and hence the principle of mutuality was not satisfied.

3.19 The question which, therefore, arises for 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 contributors to the fund and participators in the fund should be the same persons on an individual level or a class level. The Hon’ble jurisdictional High Court in the case of Sind Co-op. Housing Society (supra) considered the question of mutuality on the transfer fees received by the co-operative society from its members. In this case, the Hon’ble jurisdictional High Court recognized ‘class of members’ as participators as well as contributors for mutuality, instead of the ‘individual’ members. It has been held in this case that the fact that only some members from those who contributed may participate 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 Hon’ble Supreme court in the case of Kumbakonam Mutual Benefit Fund Ltd. (supra) to contend that the principle of mutuality fails if the persons who contribute 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 shareholders were entitled to participate in various recurring deposits schemes of the assessee or to obtain loans of securities. These recurring deposits constituted the main source of funds of the assessee for advancing loans. Out of the interest realized by the assessee on the loans, interest on recurring deposit was paid and the balance was divided amongst the members according to their shareholding. The ITO denied the principle of mutuality and assessed the entire profit to tax, which view has been upheld by the Hon’ble Supreme Court.

3.21 We are unable to see as to how this judgment advances the case of the Revenue. The assessee in that case received recurring deposits and made advances to certain members. The surplus was distributed amongst members according to their shareholding after making a provision for reserves etc. The shareholders who were entitled to participate in the surplus need not have either taken loans or made recurring deposits. From these facts, it is palpable that the shareholders were different as a class from the persons who availed the loan facility as a class. It was not necessary 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 club 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 reserves available, cannot be considered as a factor eclipsing the principle of mutuality. It is so for the reason that the persons who are entitled 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 share in the reserves of the organization, would not damage the mutuality so long as the persons who are entitled to share such reserves continue to be the members as a class.

3.23 Be that as it may, it is observed that this fact has been considered by the Tribunal while deciding the principle 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 true in respect of the creation of reserves as well. The learned AR has pointed 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 refurbishment cost or due to capitalization of refurbishment cost. The question of reserves has also been discussed in the order for assessment years 1974-75 and 1975-76. In view of the conclusion arrived at by the Tribunal in earlier years holding that the mutuality is not disturbed by reason of Article 20 and 50 of the assessee or the creation of reserves, we do not deem it necessary to dive deep into the arguments of the ld. DR with a view to bring out any decision contrary to what 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 ground 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 non-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 interest u/s 234B.

4.2 Having heard the rival submissions and perused the relevant material on record we find that the issue of charging of interest u/s 234B in the present case is no more res integra in view of the judgment of the Hon’ble jurisdictional High Court in the case of DIT (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 from the payee assessee u/s 234B. The same view has been reiterated in DIT (IT) v. Krupp UDHE GmbH [2010] 38 DTR 251 (Bom.). As the assessee before us is a non-resident, naturally any amount payable to it which is chargeable to tax under the Act, is otherwise liable for deduction of tax at source. In that view of the matter and respectfully 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 assessee’s 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 the principle of mutuality to the extent to the assessee’s transactions with non-members, which has been upheld by us hereinabove. The learned CIT(A), thereafter, proceeded to estimate the income 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 Assessing Officer.

5.2 The learned Counsel for the assessee submitted that there was no element of profit in transactions with the non-members and these represented only cost recoveries. He invited our attention towards the Income and Expenditure account of the assessee showing income and expenditure at the same level. In view of the fact that the assessee had only recovered costs from non-members as well as 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 assessee’s contention about recoveries of costs from non-members was not borne out from any evidence. He submitted that neither the receipts nor the expenses of the assessee were recorded on any rational basis. In support of this submission, he invited our attention towards statement of Mr.Andrew 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 the revenue, they showed ignorance about the way in which the HO was allocating income to its branches. The ld. DR also referred to 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 was, therefore, contended that the decision of the learned CIT(A) in applying 5% as the income from gross revenue from non-members was in order.

5.4 We have heard the rival submissions and perused the relevant material on record. There can be no dispute about the fact that any amount received by way of reimbursement, not containing any element of profit, is not liable to tax. This principle has been laid down by the Hon’ble 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 & Mahindra Ltd. v. Dy. CIT [2009] 30 SOT 374/[2010] 122 ITD 216 (Mum) (SB). In these cases, it has been held that when a particular amount of expenditure 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 reimbursement, 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 statements of Shri S.Gopalakrishnan and Mr.Andrew Cleak 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 administrative and financing cost to other branches to exactly match the total cost incurred in each country in each month. It was also admitted that there was no verification of the expenses allocated by the HO because the basis of charge was known to HO alone and the details of such computation were not provided to the Indian branch. On a question about the recording of revenues, it was admitted that the entry was passed on the receipt of intimation from HO and how such revenues are determined, was not known. In response to question nos.12 and 13, Shri Gopalakrishnan admitted that accounts were finalized 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 learned 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 learned 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 costs borne by those branches. Thus, the overall effect of allocating head office costs to the SITA branches worldwide is to increase both the branch costs and also the corresponding cost recoveries which are allocated to each branch to match those costs“. From this letter it is also observed that the basis of allocation of costs amongst various branches is known only at the HO level with no intimation to the Indian branch about such basis. At this stage, we would like to highlight that India is concerned only with the tax revenues relating to Indian operations. Unless it is properly established that all the expenses claimed by the Indian branch represents the assessee’s share in a proper manner, it cannot be accepted that the allocation was made on some rational basis. Here is a case in which both the sides of the assessee’s Income and expenditure account are tallying paisa to paisa. The learned AR submitted that the cost and revenues are matched and if there is any net over-recovery or net under-recovery, the same is carried forward and at the end of the year the audited accounts reflect cumulative under-recovery or over-recovery for the year. This submission was made by reading from the assessee’s 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 year 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 assessee’s Income and expenditure are matching paisa to paisa and there is no under-recovery or over-recovery shown as an asset or a liability in its balance sheet. Further, when we consider the fact that the accounts of the assessee were maintained at the HO level, there remains nothing to doubt the correctness view taken by the learned CIT(A) that the accounts of the assessee do not divulge the correct income. Not only the basis of allocation of expenses but also that of the revenue, as done by the HO is not known to the assessee. Under such circumstances, the contention that the assessee was 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 allocation of HO expenditure is not known, deduction for such HO expenses 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 expenses ought to have been disallowed by the ld. CIT(A) instead of computing income at 5% of the gross receipts.

5.7 We are not convinced with this contention for 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, rates, repairs etc. It is only the allocation of general and administrative expenses which is covered within the purview of section 44C. On the contrary, we are considering a case in which not only the basis of allocation 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 assessee’s Income and expenditure account is fully capable of verification. It is in such circumstances that Rule 10 of Income-tax Rules, 1962 comes to the rescue of the Revenue for determination of income in the case of non-residents. It is this very rule which has been invoked by the Assessing Officer and also applied by the learned CIT(A) in estimating the income of the assessee. In our considered opinion the learned CIT(A) was more than justified in estimating the income at 5% of the gross receipts from non-members. These grounds taken by the assessee are not allowed.

6. In the result, the Revenue’s appeal and the assessee’s cross objection stand dismissed.