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M/s. Ootacamund Club Versus Income Tax Officer, Ward I (1) , Ootacamund.

2015 (9) TMI 378 - ITAT CHENNAI

Applicability of principle of mutuality - interest earned by the assessee from the financial institutions who are members of the assessee Club treated as taxable income of the assessee - Held that:- No merits in the arguments submitted by the Ld. A.R. The decision of the Tribunal in the assessee’s own case for A.Ys 2002-03 to 2007-08 the Bench had followed the decision of the Hon’ble Apex Court in the case of CIT Vs. Vegetable Products Limited in (1973 (1) TMI 1 - SUPREME Court) wherein it was h .....

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ee club.

In the case before us the situation is much worse than the case of Bangalore Club, because the financial institutions from whom the interest is received by the assessee are not members of the Assessee Company but third parties. The relation between them is only as clients of the financial institutions and there is no scope of mutuality existing between them. Further it an income earned by the assessee company from its resources out of the transactions with third parties whic .....

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.A.No.1529/Mds. /2013 - Dated:- 5-8-2015 - SHRI N.R.S.GANESAN AND SHRI A.MOHAN ALANKAMONY, JJ. For The Appellant : Mr.Jehangir D.Mistry, Sr.Counsel For The Respondent : Mr.P.Radhakrishnan,JCIT, D.R ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-I, Coimbatore dated 15.05.2013 in ITA No.119/12-13 passed under Sec.143(3) read with section Sec. 250 of the Act. 2. The Assessee has raised five .....

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ase are that the assessee Ootacamund Club registered under Section-25 of the Companies Act, filed its return of income for the assessment year 2010-11 on 09.10.2010 admitting Nil income. Subsequently, the case was selected for scrutiny and order U/s.143(3) was passed on 29.01.2013 wherein the Ld. Assessing Officer brought to tax an amount of 9,97,960/- being interest received by the assessee company on account of fixed deposit held by it in banks & financial institutions. 4. While arriving a .....

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itutions by the assessee company on account of fixed deposits are investments made with third parties and not with the members of the assessee company. iv) The decision to invest funds in banks and financial institutions is a prudent commercial decision motivated by the desire to earn interest and that would not fulfill the requirement of the mutuality. v) While investing the funds with banks and financial institutions the assessee company assumed the character of a customer of the financial ins .....

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er also relied on the decision of the Hon ble Apex Court in the case of M/s.Bangalore Club Vs. CIT in civil Appeal No.124-125/2007 with Civil Appeal No.272-278 of 2013 wherein the Hon ble apex Court while answering the question Whether or not the interest earned by the assessee on the surplus funds invested in fixed deposits with corporate member banks is exempt from levy of income tax, based on the principles of mutuality? It was held that:- The set-up resembled that of a mutuality till the sta .....

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iolating the one to one identity between the contributors and participators as mandated - the funds do return to the club, but before that, they are expended on non-members i.e. the clients of the bank and this loaning out of funds of the club by banks to outsiders for commercial reasons, snaps the link of mutuality- the amount of interest earned by the assessee from the four banks will not fall within the ambit of the mutuality principle and will therefore, be eligible to income tax in the hand .....

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e on the institute. The Ld. A.R. also argued that it is not the surplus fund of the Club that was deposited in the banks to earn interest but only the entrance fee received from members which was directly taken to the corpus fund, which are being deposited from which the income has been earned. 5. I have gone through the submissions made by the appellant and also the order of the Assessing Officer. In the recent judgment, the Hon ble Apex Court in its decision (January 14, 2013) in the case of B .....

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ever, as soon as these funds were placed in fixed deposit with banks, the closed flow of funds between the banks and the club suffer from deflections due to exposure to commercial banking operations. During the course of their banking business, the banks used their deposits to advance loans to their clients. Hence, in the instant case with the funds of the mutuality, banks were engaged in commercial operations with third parties outside of the mutuality, rupturing the privity of mutuality and co .....

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or for any other direct benefit for the member of the club. These were taken out mutuality that the banks placed the funds at the disposal of their parties thus initiating an independent contract between the bank and the clients of the bank, a third party not privy to the mutuality. 6. The facts of the appellant s case clearly fall in the ambit of the decision of the Hon ble Supreme Court. The facts at hand also fail to satisfy the third condition of mutuality principle i.e. impossibility. The .....

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funds of the club by the banks to outsiders for commercial reasons, is not the link of mutuality. The decision of the Hon ble Apex Court is clearly applicable to the facts of the appellant club. Respectfully following the decision of the Apex Court in the case of Bangalore Club Vs. CIT 29 Taxmann.com 29, I confirm the action of the Assessing Officer in bringing the interest on bank deposits for taxation. 7. The Ld. A.R. relied in the decision of Chennai bench of the Tribunal in assessee s own ca .....

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om the financial institutions who are not the members of the assessee Company. Hence facts were not identical and therefore the decision of the Honorable Apex Court in the case of Bangalore Club will not be applicable to the case of the assessee company and the decision of the Tribunal in the assessee s own case of the earlier years would be applicable which is on the identical issue and in favour of the assessee. The Ld. A.R. further submitted that in the case of the assessee company the princi .....

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arefully perused the materials available on record. We do not find any merits in the arguments submitted by the Ld. A.R. The decision of the Tribunal in the assessee s own case (supra), the Bench had followed the decision of the Hon ble Apex Court in the case of CIT Vs. Vegetable Products Limited in (1973) 88 ITR 192 (SC) wherein it was held that when two views are possible on the same issue by the two different High Courts, then the view in favour of the assessee has to be upheld. However, in t .....

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ticipators. Till the stage of generation of surplus funds, the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to that extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their bankin .....

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ct benefit for the members of the club. When the member banks placed them at the disposal of third parties, an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality, was initiated. This contract was not an activity of the club in pursuit of its objectives. (c) The principle of impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves requires t .....

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