TMI Blog2008 (1) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... essee (appellant herein) is a private limited company. The assessee filed a return of income for the asst. yr. 1995-96, declaring their total income of ₹ 2,42,870 from various sources. In this income, the assessee disclosed that it has earned income by way of interest during the period in question amounting to ₹ 59,000 from the bank deposits (FDR). However, assessee claimed exemption from payment of income-tax on the income earned by way of interest on FDR amounting to ₹ 59,000. According to assessee they being a company in the nature of mutual association involving no commerciality in their working and hence, on the principle of mutuality, they were not liable to pay any income-tax on this part of income of ₹ 59,000 . In other words, the case of assessee was that it being a company formed by certain shopkeepers having their shops in M.T. Cloth Market at Indore, essentially for the benefit of members (i.e. shopkeepers) only who have made contribution to the corpus of company for allotment of one shop to each member/shareholder, it has no business activity as such. It was claimed that company is not formed for earning any profit nor it is engaged in any kind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court on this point that the assessee has to be taxed in the status of a body of individual [CIT vs. Artex Manufacturing Co. (1997) 141 CTR (SC) 290: (1997) 227 ITR 260(SC)]. The assessee has relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Cawnpore Club Ltd. but in this case the assessee derived income from letting out of room to its members. The issue regarding receipt of interest on fixed deposit from bank was not at all involved, therefore, this case is not at all applicable to the case of the assessee. The assessee also relied on the decision of Hyderabad Bench in the case of Faith Maidan Club vs. Asstt. CIT. In this case no doubt the interest income from bank was held exempt on the ground of mutuality. In this case, the Tribunal had considered the decision of Hon'ble Andhra Pradesh High Court in the case of Natraj Finance Corporation and decision of Hon'ble Supreme Court in the case of CIT vs. Cawnpore Club Ltd. As discussed above, the decision of Supreme Court in the case of CIT vs. Cawnpore Club Ltd. is not applicable because in that decision only the issue involved was income from letting out of room to its members. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )] and Karnataka [CIT vs. Bangalore Club (2006) 205 CTR (Kar) 582: (2006) 287 ITR 263(Kar)] against the assessee and in favour of Revenue. It was his contention that the two decisions relied on by the Supreme Court only lay down general principle explaining the scope and ambit of doctrine of mutuality but have not decided the issue which is subject-matter of this appeal. He, therefore, urged that these decisions are distinguishable on facts and cannot be relied on for upsetting the impugned orders of the Tribunal. 11. Having heard learned counsel for the parties and having perused record of the case, we are inclined to dismiss the appeal as in our opinion, the views taken by all authorities do not call for any interference. 12. The law recognizes the principle of mutuality and its application in appropriate cases. This doctrine, though not defined, has been judicially recognized by the Courts for applicability in appropriate cases. Their Lordships of Privy Council had the occasion to examine the true meaning of the doctrine in the case The English Scottish Joint Co-operative Wholesale Society Ltd. vs. Commr. of Agrl. IT (1948) 16 ITR 270(PC). It is in this case, their Lords ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther appeal, the High Court held that assessee's income from interest was not from mutual activity and as such it was exigible to tax. 16. The learned Judge Ahmadi, J. (as His Lordship then was a Judge of High Court of Gujarat and later became Chief Justice of India) speaking for the Bench, discussed this issue very elaborately and held as under : We new revert to the question whether the income derived by way banks is exigible to tax notwithstanding the finding that the principle of mutuality applies to the assessee club. We have already pointed out earlier that one of the essentials of mutuality is that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participators and the contributors. Once such an identity is established, the surplus income would not be exigible to tax on the principle that no man can make a profit out of himself. However, as pointed out earlier, the objects clause in the memorandum and articles of association empowers those in the management of the assessee club to invest and deal with moneys of the club not immediately required in such manner as may from time to time be determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l concern, run on no profit basis, published a monthly magazine for the benefit of its members. The association received advertisements from non-members as well as members and charged from the publication thereof. The association contended that advertisement charges received from members were not taxable as income. Alternatively, it was contended that the entire cost of production of the magazine should, in any event, be deducted in computing the income from advertisement. The tax authorities overruled both the contentions and treated the advertisement charges received from members as assessable income and allowed only a part of cost of production to be set off against the advertisement receipts. On a reference, the High Court held that the profit earned by the association went to increase the funds of the association and benefits out of the same came to the members qua members, but not qua contributors or advertisers. It found that since the money was collected by the assessee association, by way of advertisement charges, from a certain number of members, but the profit made therefrom was not distributed amongst them as advertisers, there was absence of mutuality and this made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions of sale and purchase which were being incidentally undertaken for the attainment of the main object of the club. The buying, preparing and selling of provisions which were incidental to the main object of the club were also limited to the members of the club and not extended to outsiders. This incidental activity was also, therefore, immune from the taint of commerciality. We are, therefore, of the opinion that the above observation on which considerable reliance was placed by counsel for the assessee cannot go to the aid of the assessee. In view of the above, we are of the opinion that all the three questions formulated by the Tribunal and referred to us must be answered in the affirmative, that is, in favour of the Revenue and against the assessee. The reference is disposed of accordingly with no order as to costs. 17. This issue again came up for consideration before Karnataka High Court in CIT vs. Bangalore Club (supra). Their Lordships placing reliance on Sports Club's case (supra) and distinguishing two Supreme Court's decisions relied on by learned counsel for assessee as reported in Chelmsford Club vs. CIT (supra) and CIT vs. Bankipur Club Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture of thread, sewing thread cord, tab made out of cotton, art silk, nylon, synthetic, fiber, etc. In addition, the memorandum and articles of association also set out other kinds of businesses, which can be carried by the assessee. All these facts clearly go to show that interest income earned by the assessee can be utilized for carrying on various kinds of business activities which involve commercial element thereby making the principle of mutuality inapplicable to the transaction in question i.e. income earned by way of interest from FDR on this additional ground. 21. We have gone through the decisions cited by learned counsel for appellant. In our view, reliance placed by learned counsel for assessee on the decision CIT vs. Bankipur Club Ltd. (supra) is misplaced. It is distinguishable on facts. In this case, the question that fell for consideration was whether profits arising from sales made to regular members of club are entitled to claim exemption on the doctrine of mutuality and secondly, whether receipts for various facilities extended by club to its members as part of usual privileges, advantages and conveniences which are attached to membership of club can be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on decision in CIT vs. Cawnpore Club Ltd. (2004) 140 Taxman 378(SC). We have gone through the ratio of this decision. In our view, it is also of no help to the appellant. In the first place, the decision does not lay down any law as such because it has not discussed any issue much less in detail. Secondly, it is distinguishable on facts. Thirdly, it does not decide the issue of income earned by way of interest on FDR. Fourthly, the question involved in this case was whether income earned by the club by letting out the rooms to their members can be subjected to tax or is exempt on the principle of mutuality. Their Lordships held this issue in assessee's favour. Such is not the case here. 25. Learned counsel for the appellant (assessee) then placed reliance on one article reported in 287 ITR (Journal part at p. 4) written by one author on the principle of mutuality in which the learned author has opined that the decisions rendered by Gujarat and Karnataka High Courts require reconsideration in the light of some observations made by the Supreme Court in the cases of Chelmsford Club vs. CIT (supra) and CIT vs. Bankipur Club Ltd. (supra). We find no merit in this submis ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
