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TMI Blog2010 (6) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... A) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the excess of income over expenditure in respect of the effluent treatment receipts is exempt from income-tax on the principle of mutuality; B) Whether the Tribunal was justified in holding that interest on bank fixed deposits, other deposits and income-tax refunds is not chargeable to tax on the principle of mutuality; 3. The assessee is an Association incorporated under Section 25 of the Companies Act, 1956. The members of the assessee are industries operating in the ThaneBelapur region. The assessee was set up with a view to provide a centralized treatment facility for industrial effluents and was incorporated on 12 October 1994. The objects underlying the establishment of the assessee, as stated in the Memorandum of Association (MoA), are as follows: "A. THE MAIN OBJECTS OF THE COMPANY TO BE PURSUED BY THE ASSOCIATION ON ITS INCORPORATION: 1. To constitute and maintain an organization for treatment of Industrial Effluents generated by all those User Members engaged in the manufacture of various products and engaged in Industrial processes in the Trans Thane Creek Indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was attracted. On the second question, the Tribunal held that since the principle of mutuality was applicable, interest on bank fixed deposits, other deposits and income- tax refunds was also not chargeable to tax. The appeal by the Revenue was dismissed and the appeal of the assessee was allowed. 5. The Revenue is in appeal before this Court. The first question of law that has been raised before the Court is as to whether the Tribunal is in error in holding that the principle of mutuality would apply to the excess of income over expenditure; the income representing contributions received from members. The second question of law relates to the treatment that is to be afforded to the interest received on bank and other deposits and income-tax refunds. It would be appropriate to deal with the two questions of law separately. RE: QUESTION A 6. The factual position as it emerges from the record before the Court is that the assessee is a company incorporated under Section 25 of the Companies Act, 1956. The assessee is an Association formed with the object of setting up an effluent treatment plant for the members of the assessee, who run industrial units in the Trans Thane Creek Are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete identity between the class of contributors and of participators. The main object of the club, noted by the Supreme Court, was to afford to its members the usual privileges, advantages, conveniences and accommodation provided by the club. The amounts received by the club were for the supply of drinks, refreshments or other goods from the members of the club. These being charges for the privileges, conveniences and amenities provided to members, such services, as observed by the Supreme Court, were not provided with a profit motive and were not tainted by commerciality. This, therefore, did not constitute a trading activity and the surplus of receipts over expenditure, generated as a result of such a mutual arrangement, did not constitute income for the purposes of the Act. In Chelmsford Club V/s. Commissioner of Income Tax {(2002) 243 ITR 89 (S.C.)}, the Supreme Court held that "the law recognises the principle of mutuality excluding the levy of income-tax from the income of such business to which the .... principle is applicable". Adverting to the judgment of the Privy Council in English and Scottish Joint Cooperative Wholesale Society Limited V/s. Commissioner of Agricul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refunds amounting to Rs. 45.46 lakhs. The submission which has been urged on behalf of the Revenue is that (i) The interest income does not satisfy the test of mutuality since the income is generated not from the members of the assessee but from third parties such as banks with whom the surplus is kept in fixed deposits; (ii) Clause 15 of the Memorandum of Association enables the assessee to invest any money of the Association in one or more of the modes of investment specified therein, which include deposits with a Government company and the holding of securities and investments authorized by law. An investment made in pursuance of the provisions of clause 15 of the MoA will not meet the test of mutuality since interest is earned out of a commercial decision of the assessee to invest in such deposits for the purposes of earning interest; (iii) The predominant view on the question as to whether interest on bank deposits falls within the principle of mutuality is that of the High Courts of Madras, Karnataka, Gujarat and Jammu & Kashmir, which have held that interest earned on surplus funds parked with a bank does not satisfy the test of mutuality. On the other hand, it has been urg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjects clause of the Memorandum and Articles of Association empowered the management of the assessee to invest in and deal with the moneys of the club not immediately required, in such a manner as may from time to time be determined by it. Under the clause, investment was not confined to the holding of fixed deposits in banks but could take any other form or shape including an investment in shares or real estate. In that context, the Gujarat High Court held as follows: "........ When income is derived from such investment, whether by way of interest, dividend or rent, it is derived from a third party and is not by way of contribution from the members of the club". Apart from the fact that in that case the object clause empowered the management to invest surplus funds in several categories of investment, the Division Bench also noted that the surplus, if it remained after satisfying the debts and liabilities was to be distributed amongst the members in equal shares. 14. Counsel appearing on behalf of the assessee sought to distinguish the judgment of the Gujarat High Court on the ground that in the present case, unlike in the case before the Gujarat High Court, clause V (6) postul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man 323 (Kar.)}, the assessee was a club which was registered under the Societies' Registration Act and its members included four Scheduled Banks. The surplus which was generated during the course of assessment year 198990 was held in fixed deposits with the four banks and the interest that was generated thereon was claimed not to be exigible to tax on the principle of mutuality. A Division Bench of the Karnataka High Court held, after adverting to the decisions of the Supreme Court, that what had been done by the club is similar to what could have been done by a customer of a bank. The principle that no man can trade with himself would not be applicable where the deposit was held by a nationalized bank with its customers since the prevailing relationship was that of a banker with its customer. 16. The Karnataka High Court distinguished the judgment in the I.T.I. Employees' case in a subsequent decision in Canara Bank Golden Jubilee Staff Welfare Fund V/s. Deputy Commissioner of Income Tax {(2009) 243 ITR 89 (SC)}. In that case the assessee was a registered society comprising of the employees of the Canara Bank, and was established with the object of promoting welfare amongst the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt was of the view that such investments in fixed deposits could not be equated within or brought within the concept of mutuality and the benefit of tax exemption could not be extended in respect of the interest earned on surplus income. The Madras High Court was not inclined to follow the decision of the Karnataka High Court in the Canara Bank case and confined it to the special facts as they appeared before the High Court there. 18. The High Court of Jammu & Kashmir held in Amar Singh Club v/s. Union of India {(2009) 184 Taxman 481 (J&K)} that interest received on fixed deposits and bank deposits would not be covered by the principle of mutuality. The High Court observed that there was no statutory obligation on the part of the assessee to make such deposits. The principle of mutuality could be applied only if interest was earned for advances / facilities of loan given to the members of the club. 19. Our attention has been drawn to the judgment of the Delhi High Court in Commissioner of Income Tax V/s. Standing Conference of Public Enterprises (Scope) {(2009) 319 ITR 179 (Del)}. This decision of the Delhi High Court appears to have been based on a concession made before the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would or would not fall within the purview of the principle of mutuality has not been adjudicated upon. The judgment of the Supreme Court must be construed as it stands. The observation of the Supreme Court was that no useful purpose would be served in proceeding with the appeals on the other questions. That was because as between the assessee and the Revenue in that case, the finding of the High Court that the doctrine of mutuality applied to the income earned by the assessee from letting out of the rooms to the members of the assessee had not been challenged in appeal. 22. On behalf of the assessee, Counsel relied upon the Commentary on Income-tax by Sampath Iyengar {(10th Editiion Volume 8 Page 111)} where, after adverting to the judgment of the Supreme Court in Cawnpore Club, the author has concluded that, "the issue can now be treated as finally resolved in favour of taxpayer". Reliance was also sought to be placed on a judgment of the Hyderabad Bench of the Tribunal in Fateh Maidan Club Vs. Asstt. Commissioner of Income Tax {(2003) 81 TTJ (Hyd) 831}. The judgment of the Tribunal was sought to be relied upon since it contains an extract of the questions which were referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation may engage in activities which can be described as mutual and in other activities which are not mutual. The Gujarat High Court recognized this in its decision in Sports Club of Gujarat (supra). Adverting to the decision in Commissioner of Income Tax V/s. Madras Race Club, the Court noted that the application of the principle of mutuality is not destroyed by the presence of transactions which are nonmutual in character. However, in such a case, the principle of mutuality has to be confined to transactions with members possessing the essential character of mutuality. The two activities can in appropriate cases be separated and the profits derived from transactions which do not fulfill the requirements of mutuality can be brought to tax. 26. The assessee in the present case utilizes its surplus funds for investment in fixed deposits with Banks. The interest that is generated on the investment of such funds is not income which is received from the members of the assessee but from third parties such as the banks with whom the funds are invested. Section 35(1) of the Bombay Public Trust Act, 1950 provides that where the trust property consists of money and which cannot be applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contributions received from the members of the assessee are subject. 27. We have adverted to several decisions of the High Courts which have considered the issue which has fallen for determination in these proceedings. Some of these decisions may undoubtedly possess a factual background on which there may not be complete identity with the facts of another case. The quest for complete identity is an illusion. The Court must be guided by the basic underlying principle which will guide the determination of the case. We are in agreement with the principle that is enunciated by the Karnataka High Court in I.T.I. Employees that the principle of mutuality would cover the surplus which accrues to a mutual association out of the contribution received by it from its members. The principle would have no application in case of surplus received from nonmembers. In a similar way, a deposit made with a bank for earning interest by way of income will not fulfill the requirement of mutuality. As the Karnataka High Court observed in its subsequent decision in the Bangalore Club, such a deposit implicates a relationship between a banker and a customer, to which the principle of mutuality would not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operative credit societies to invest their surplus funds in specified securities and the submission was that in view of the statutory obligation, income derived from shortterm deposits and securities must be considered as income derived from business activities. The assessee marketed the produce of its members whose sale proceeds were at times retained by the assessee and the Court was concerned with the tax treatment of that amount. The Supreme Court held that such interest income would fall within the category of income from other sources and that it was correctly held to be taxable under Section 56 by the Assessing Officer. In adverting to the judgment in the case of Totgar's Cooperative Sale Society, we must note that the principle of mutuality as such did not arise for consideration before the Supreme Court in that case. The submission that funds not immediately required for business were invested in specified securities / deposits under a statutory obligation and the receipt on account of interest would not constitute income from other sources was a specific issue which was raised before the Supreme Court. The Supreme Court held that such interest would fall for taxation as i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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