2021 (10) TMI 1290 - AT - Income Tax

Set off of deficit in mutuality account as eligible for set off as a loss against its income from Other sources - HELD THAT - Hon ble apex court s landmark decision in Bangalore Club case 2013 (1) TMI 343 - SUPREME COURT has settled the law that an assessee has to satisfy the three essential ingredients for the purpose of getting mutuality benefit i.e. a complete identity between contributors and participators their actions to be very much in furtherance to mandate of the club and that there is no scope for any kind of profiteering from the fund created by them which could only be expended or returned to themselves. It has been further made clear therein that it is only section 2(24)(vii) of the Act wherein a specific instance of a mutual organization has been held to be deriving taxable income. The legislative expression head of income must be taken as any of the five heads of income provided u/s. 14 of the Act i.e. salary income from house property profits and gains of business or profession capital gains and income from other sources; respectively. We thus are of the opinion that once the assessee s impugned deficit arising from mutuality account is neither covered in any of the said heads as well nor u/s. 2(24)(vii) defining income in the very account section 71 of the Act would not apply in isolation. We further deem it proper to refer to hon ble apex court s recent larger bench decision in Commissioner of Customs Vs. Dilip Kumar Co 2018 (7) TMI 1826 - SUPREME COURT that provisions of a taxing statutes have to be strictly construed only. As in CIT Vs. Hariprasad and Co. P. Ltd.case 1975 (2) TMI 2 - SUPREME COURT that a loss arising from a head of income not chargeable to tax is not eligible to be set off against a taxable source - As per Kishorebhai Bikabhai Virani case 2015 (2) TMI 807 - GUJARAT HIGH COURT a loss under an exempt source is not to be carried forward for set off against subsequent year s income. CIT(A) had been directed to consider the assessee s going by the corresponding statutory provisions in light of relevant facts rather than allowing the same on merits. We further make it clear that the assessee had raised the impugned argument for the first time before the learned co-ordinate bench wherein it thought it proper to redirect the same back to the CIT(A) for necessary verification and adjudication. We thus decline the assessee s instant solitary substantive grievance - Decided against assessee.

Summary

Issues Involved:
1. Set off of deficit in mutuality account against income from other sources.
2. Taxability of income derived on principles of mutuality.
3. Adjustment of loss from other heads of income by applying the provisions of Sections 70 and 71 of the Income Tax Act.
4. Allowance of TDS credit in rectification proceedings.

Detailed Analysis:

Issue 1: Set off of Deficit in Mutuality Account Against Income from Other Sources

The primary issue in these appeals is whether the assessee's deficit in the mutuality account can be set off against its income from other sources. The assessee argued that the CIT(A) erred in law and on facts by denying this set-off. The tribunal's first round remand directions had accepted the applicability of Section 71 of the Act for the set-off claim. The assessee cited several judicial precedents supporting the set-off of losses against profits from other units under the same head. However, the tribunal found no merit in the assessee's claim, emphasizing that the mutuality account deficit is not covered under any of the five heads of income provided under Section 14 of the Act. The tribunal referred to the Supreme Court's decision in the Bangalore Club case, which laid down the conditions for mutuality benefit, and concluded that the mutuality account deficit does not qualify for set-off under Section 71.

Issue 2: Taxability of Income Derived on Principles of Mutuality

The assessee contended that the CIT(A) erred in taxing income derived on principles of mutuality. The tribunal noted that the assessee is eligible for mutuality benefit regarding the deficit account, resulting in a negative figure claimed as eligible for set-off under Section 71. However, the tribunal held that the income arising from the mutuality account would never be taxable since it satisfies the three essential ingredients for mutuality benefit. Therefore, the tribunal dismissed the assessee's appeal on this ground.

Issue 3: Adjustment of Loss from Other Heads of Income by Applying Sections 70 and 71

The assessee argued that the CIT(A) erred in not adjusting the loss from other heads of income by applying the provisions of Sections 70 and 71 while arriving at the total income. The tribunal reiterated that the legislative expression "head" of income must be taken as any of the five heads of income provided under Section 14 of the Act. Since the mutuality account deficit does not fall under any of these heads, the provisions of Sections 70 and 71 do not apply. The tribunal further referred to judicial precedents that a loss under an exempt source is not eligible for set-off against a taxable source. Consequently, the tribunal dismissed the assessee's appeals on this ground as well.

Issue 4: Allowance of TDS Credit in Rectification Proceedings

In one of the appeals, the assessee raised the issue of not allowing TDS credit of Rs. 68,989 in 154 rectification proceedings. The learned counsel for the assessee did not press this ground, considering the smallness of the amount involved. Accordingly, the tribunal rejected this ground.

Conclusion:

The tribunal dismissed all sixteen appeals filed by the assessee, holding that the mutuality account deficit is not eligible for set-off against income from other sources under Sections 70 and 71 of the Income Tax Act. The tribunal also upheld the CIT(A)'s decision on the taxability of income derived on principles of mutuality and the adjustment of loss from other heads of income. The issue of TDS credit in rectification proceedings was not pressed by the assessee and was consequently rejected.