Surplus returned from Common contributed Fund cannot be treated as profit

Savitri Phule Mahila Bahu Uuddeshiya Sahakari Samiti Ltd. Vs ACIT (ITAT Jaipur)

 Hon’ble Supreme Court in Chelmsford Club Vs CIT 243 ITR 89(SC) had held that what is taxed is, the income, “profits or gains” earned or “arising”, “accruing” to a “person”. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. In view of these facts and circumstances we are of the considered view that the assessee is entitled to the deduction of Rs. 12,41,850/- and therefore the appeal of the assessee is allowed by reversing the order of the Commissioner (Appeals).

FULL TEXT OF THE ORDER OF ITAT JAIPUR

The assessee has filed an appeal against the order of the ld.CIT(A), Alwar dated 03-01-2019 for the assessment year 2009-10 raising therein solitary ground as under:-

‘’The ld. CIT(A) erred in law as well as on the facts of the case in confirming the addition made of Rs.12,41,850/- by holding that the principle of mutuality does not fit in the case of the assessee.”

2.1 The brief facts of the case is that the assessee is a registered co-operative credit Society and the main object of the society is to help the women in rural and backward area financially and follow a concept of self help through savings. The Society has carried out activity for encouragement of the woman empowerment. The activity includes providing loans by recognizing them as member of society, thereby obtaining regular savings providing loans for various purposes. Society pays interest to the members on the amount deposited by them under different heads, whereas society also charges interest on loans granted for various purposes. The society helped to rural women in organizing their different financial needs and also social and economical development. For the assessment year 2012-2013, the return of income was filed on 28-09-2012 declaring total income of Rs. NIL. The case of the Assessee was taken up for scrutiny u/s 143(3) of the Income tAx Act, 1961( “the Act”) and statutory notice u/s 143(2) of the Act, dated 13-09-2013 was issued and served upon the Assessee after claiming exemption of Rs. 12,41,850/- u/s 4 of the I.T. Act. The assessee was asked to file reason for claiming exemption vide order Sheet dated 19-03-2015. In this regard, the assessee has submitted many case laws of Hon’ble Supreme Court decisions, published in 252 ITR (Jour.) p.37 (Part-7). However, the assessing officer denied the claim of exemption of Rs. 12,41,850/- u/s 4 of the I.T. Act. The assessing officer also held that that the section 4 of Income tax Act is only related to charging Income Tax, not for allowing exemption, relying upon the Income Tax Act, 1961 the exemption u/s 4 claimed by the assessee is not allowable.

2.2 Aggrieved, the assessee filed an appeal before the ld.CIT(A) who upheld the view taken by the assessing officer and denied the claim of principle of mutuality deduction by placing reliance on the judgment of the Hon’ble Supreme Court in Chelmsford Club Vs CIT 243 ITR 89(SC) and held that the very fact that the society is earning surplus interest income and contributing to its fund defies the principle of mutuality.

2.3 Now aggrieved by the order of the ld. CIT(A), the assessee filed this appeal before the Tribunal. As regards the claim of exemption under the principle of mutuality is concerned, the learned AR submitted as under:-

2.1. Your honour, kind attention to few paragraphs appearing below of the judgment of the Hon’ble Supreme Court in case of Chelmsford Club Vs CIT 243 ITR 89(SC) (Apex Court) relied upon by the learned CIT Appeals and submit that the provisions of law considered by the Hon’ble Supreme Court in the said judgment and the conclusion drawn were totally different:-

2.2. Kindly see case law paper book page no. 4 point no 4 wherein the relevant portion of the below scanned portion of facts of the judgement is appearing

2.3. Kindly see case law paper book page no. 8 point no 12 wherein the relevant portion of the below scanned portion of the judgement is appearing

2.4. Your honour, kindly notice the undisputed facts as follows :-

A. Your honor kindly see Ld. AO order page no. 2 point no. 3

B. The Ld. CIT Appeal also gave similar finding Kindly see Ld. CIT Appeal order page no. 4 point 5.3

2.5. Hence your honor it is undisputed fact that its facilities are available to members only. The assessee is a registered co­operative credit Society and the main object of the society is to help the women in rural and backward area financially and follow a concept of self help through savings, its business is governed by the principle of mutuality, therefore, the income, if any, earned by the appellant is outside the scope of the IT Act. This is based on a principle that it is the only income which comes within the definition of s. 2(24) of the Act, that could be taxed and this definition generally excludes the income from business involving doctrine of mutuality, except the business that is included specifically in sub-cl. (vii) of that section. The appellant contends that its business admittedly does not come under that clause, hence, any income earned by the appellant is not exigible to income-tax. The appellant relies on a decision of this Court in CIT vs. Bankipur Club Ltd. (1997) 140 CTR (SC) 102 : (1997) 226 ITR 97 (SC) : TC S38.3434 and Chelmsford Club Vs. CIT, 243 ITR P.89 (SC). It is further contended by the appellant that what is taxed under s. 22 of the Act is in reality an income, though in a deemed form and, therefore, this income is also outside the scope of income-tax in view of the principle of mutuality.

2.6. Hence your honour, the conclusion drawn on judgments relied upon by the Ld. AO is bad in law and facts.

2.4 The ld. DR, on the other hand, strongly supported the orders of the Income Tax Authorities.

2.5 We have heard rival submission and perused the material on record. The Hon’ble Supreme Court in Chelmsford Club Vs CIT 243 ITR 89(SC) had held that what is taxed is, the income, “profits or gains” earned or “arising”, “accruing” to a “person”. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. In view of these facts and circumstances we are of the considered view that the assessee is entitled to the deduction of Rs. 12,41,850/- and therefore the appeal of the assessee is allowed by reversing the order of the Commissioner (Appeals). The assessing officer is directed accordingly.

3. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 30 /06/2022