TMI Blog2011 (6) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Natraj Finance Corporation which is not having similar or identical fact/circumstances with the present case. 2. The CIT(A) ought to have confirmed the finding of the Assessing Officer, that interest from fixed deposits from bank is not on the principal of mutuality as the bank is not member of the club." 3. Brief facts of the case are that for the assessment year 2006-07, the assessee filed its return of income on 30-10-2006 declaring NIL income after claiming exemption of income of Rs. 27,51,587 on the 'principle of mutuality'. The income consists of income from house property of Rs. 11,96,387 (which includes income from hoarding rent of Rs. 10,30,375) and interest income from bank on fixed deposits of Rs. 15,55,200. The Assessing Officer completed the assessment under section 143(3) of the Act determining the total income of the assessee of Rs. 37,39,448. 4. On appeal, inter alia, the CIT(A) has held that interest income earned by the assessee on bank fixed deposits during the previous year under consideration is not taxable in its hand following the principles of mutuality. Against this, the revenue is in appeal before us. 5. We have heard both the parties and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly third persons to whom amounts had been advanced. One of them was a former partner and the other was the bank with which moneys had been kept in safe deposit. The interest received by the assessee was distributed among the members forming the association and hence the assessee was a mutual benefit association. Its income was not liable to be taxed." 7. In our opinion, the ratio of the above judgment of jurisdictional High Court and the Tribunal are not applicable to the facts of the present case. In the case before the High Court, the assessee had been lending money to only its 19 members, and not lending money to any other person and the interest received by the assessee are distributed among the members for mutual benefit and therefore, the concept of mutuality was fulfilled. In the present case, there has been no application of mutuality. Here there is no mutual dealing between the members inter se in the nature of banking business and the bank where the deposit was made is an independent organisation engaged in the banking business and no refund of surplus to the member. There being no mutual dealing, the question has to be complete identity of the contributor and the parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards certain activities, certain members only of the association take advantage of the facilities which it offers, does not affect the mutuality of the enterprise. The law recognises the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principal is applicable. A perusal of section 2(24) of the Income-tax Act, 1961 shows that the Act recognises the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act. Except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the company, though incorporated as a mere entity for the convenience of the members in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. 9. The assessee herein is a recreation club ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f surplus fund with some of the member banks and other institutions in the form of fixed deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept. As held in the decision of Karnataka High Court reported in CIT v ITI Employees Death Superannuation Relief Fund the principle of mutuality could be confined in respect of the income earned by the club out of the contributions received by the club from its members but it will have no application in respect of the interest earned from the deposits of surplus funds in the banks by way of income." 11. In the case of CIT v ITI Employees Death Superannuation Relief Fund [1998] 234 ITR 314/101 Taxman 315 (Kar.) wherein it was held that: "The Andhra Pradesh High Court considered the principle of mutuality in CIT v. Natraj Finance Corporation [1988] 169 ITR 732. In that case (somewhat unusual as observed by the Bench) the assessee carried on business in lending money to its partners. The assessee had been carrying on the said business for quite some time. For the assessment year 1977-78 some changes occurred in the constitution of the firm with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assumption that the assessee's claim that it confines its money-lending activity only to its members and to no outsiders, has to be accepted. If that be so, it follows automatically that the interest received by the assessee is distributed among the members forming the association and thus the principle of mutuality governs." 12. In the case of Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504/37 Taxman 38 (Guj.), the assessee-sports club was incorporated as a company. Its main object was to promote sports. The objects clause in the memorandum and articles of association empowered those in the management of the club to invest and deal with monies of the club not immediately required till such manner as may from time to time be determined by them. The assessee claimed exemption from income-tax for the years 1966-67, 1967-68, 1968-69 and 1969-70. But the Income-tax Officer rejected the claim. The Tribunal held that income assessable under the head "Profits and gains of business or profession" would not be exigible to tax on the principle of mutuality since the contributors and the participants represented one identical body. It, however, rejected the assessee's contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return on investment would go to the members in equal shares. This component of return which the members will receive will not be by way of a plough back of their own contributions by way of fees, etc., to the club. An association which receives such income can be said to be indulging in both mutual activity as well as non-mutual activity." 13. In the case of CIT v. Ranchi Club Ltd. [1992] 196 ITR 137/64 Taxman 433, the question before the Full Bench of the Patna High Court was whether the Ranchi Club was a mutual concern and the income derived by the club from its house property let out to its members and their guests is not chargeable to tax and whether the income derived by the assessee-club from the sale of liquor, etc., to its members and their guests is not taxable in its hands. It was held that if an assessee is found to be indulging in both mutual activities as well as non-mutual activities that decides whether it can still claim exemption in respect of receipts relating to mutual activities. Reliance was placed upon the judgment in the case of CIT v. Madras Race Club [1996] 105 ITR 433 (Mad.), Carlisle Silloth Golf Club v. Smith [1912] 6 TC 48 (KB) and the judgment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is no different from an ordinary bank except that it lends money to and receives deposits from its shareholders. This does not by itself make its income any the less income from business within section 10 of the Indian Income-tax Act." 15. From these judgments it gets established that no taxable profit can be said to emerge from out of mutuality on the ground that "no man can trade with himself". The essence of mutuality lies in the return for what one has contributed to a common fund. The fund should fulfil the essential requirements that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus should be contributors to the common fund. There must be complete identity between the contributors to the fund and the participators in the surplus. It does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he had paid. The principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character and the principle of mutuality can, in such cases be confined to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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