TMI Blog2012 (11) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... rwise status of non-mutuality depends on the consideration of the totality of facts and circumstances of each case. 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. TDS u/s 234B where no TDS was deducted by the deductor - 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. - Decided in favor of assessee. Allocation of expend tire by Head office - application of section 40C - Estimation of income at 5% of the gross amount recovered from non-members - held that:- 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. - 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. - this principle is not applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erves 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 sna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endering 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 ₹ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 dism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 mutu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 362/192 Taxman 283 (Bom.). In that case the assessee-association was formed specifically with the object of providing a common effluent treatment facility t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults 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 organiza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 ₹ 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, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 23,635 ( ii ) Daily admission gate tickets from members ₹ 51,777 ( iii ) Use of private boxes by members ₹ 21,490 ( iv ) Income from entries and forfeits received from the members whose horses did not run in the race. ₹ 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 ₹ 82,490 received from members whose horses did not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-76. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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