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TMI Blog2017 (5) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions in Chemsford Club Vs. CIT [243 ITR 89] and CIT Vs. Cawnpore Club Ltd., [140 Taxman 378] and also following the jurisdictional High Court judgment in the case of CIT Vs. Secunderbad Club Picket [340 ITR 121] (AP), AO brought an amount of Rs. 32,53,654/- to tax. There are two other items which are brought to tax but they were given relief by the CIT(A) and are not subject matter of appeal. 3. With reference to taxing of interest on Fixed Deposits, Ldassessee carried the matter to CIT(A) and submitted that as per the Memorandum of Association, objectives- surplus funds are to be deposited in banks towards security of the amounts and the main source of these deposits are from members only. Since the dividends are distributed only amongst the members and as assessee is doing business of finance amongst the members only, the principles of mutuality will apply to the interest received also. However, Ld.CIT(A), without referring to any of the judgments or the principles laid down on this issue however, examined the balance sheet and P&L A/c and confirmed the amounts on factual verification. The order of CIT(A) is as under: "4. I have carefully considered the assessment order, g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,41,197/- and non operated CDs of Rs. 9,37,212/-, are deleted since these are not the income earned by the appellant during this year and kept as a reserve fund in the balance sheet during this year. Hence, the above two additions are deleted". 4. Ld. Counsel for assessee referring to the Memorandum and the business model of assessee submitted that only members contribute the amounts and the investment in the bank is part of activity of the society to create and cultivate the habit of thrift among its members. It was further submitted that funds available with the society are preserved in the bank as security and deriving interest from the bank is consequential to the deposit of the amount for safe custody. It was submitted that banker is not a member of the society, therefore, the interest on Fixed Deposits with the bank cannot be treated as 'income assessable to tax'. Ld. Counsel also distinguished the judgments relied on by the AO to submit that deposit in the bank is incidental to the main activity of assessee. Therefore, the principles laid down by the judgments relied on by the AO does not apply. 5. Ld. DR, however, relied on the orders of the authorities both on facts as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant surplus is profitincome liable to tax. At what point the relationship of mutuality ends and that of trading begins is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. "Whether or not the persons dealing with each other, are a "mutual club" or carrying on a trading activity or an adventure in the nature of trade", is largely a question of fact. The main question canvassed by the Revenue in the appeals coming under groups A to D, the assessees being Bankipur Club Ltd., Ranch Club Ltd., Cricket Club of India and Northern India Motion Pictures Association, was whether the assessee-mutual clubs, were entitled to exemption for the receipts or surplus arising from the sales of drinks, refreshment, etc., or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature from its members. In all these cases, the Tribunal as also the High Court had found that the amounts received by the clubs were for supply of drinks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l High Court in the case of CIT Vs. 1. Secunderabad Club, Picket; 2. Armed Forces Officers' Co-operative Housing Society Ltd., [340 ITR 121] (AP) has clearly adjudicated that the nature of transaction between assessee and banks would disqualify application of principle of mutuality. It was held that interest earned was taxable. The judgment of the Hon'ble jurisdictional High Court in the above said case is as under: "If complete identity between the contributors and the participants or recipients is established the surplus generated and returned to the contributors is not regarded as profit for the purpose of charging incometax. If the persons carry on an activity, which is also trade, in such a way that they and the customers are the same persons, no profits are yielded by such trade for tax purposes and, therefore, no assessment in respect of the trade can be made. The surplus resulting from trading represents such contributions of the participants which is in excess of the requirements. Access to profits or services is a condition precedent to satisfy the element of mutuality. Even when the aggregate of the members are incorporated, the effect of the principle is not lost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd assessed it to tax. The Tribunal held that the interest income earned by the assessee on the deposits made by its corporate members was not liable to be taxed. On appeal to the High Court: Held, that the rules of the club showed that there was a difference between ordinary or permanent members of the club on the one hand and corporate members on the other. It was only a member who would be entitled to proportionate amount in the event of liquidation, and it was the member who had the right to be elected to the committee of the club and a right to vote. In the case of a corporate member, the subscription was contributed by the juridical person whereas participation in the club activities was by a natural person nominated to participate and avail of the facilities of the club. A corporate member, according to the rules, had no right to be elected to the committee of the club nor entitled to as many votes as the number of its nominees. In the event of winding up, it was the permanent members who would have a dominant role. The principle of mutuality ended the moment the club deposited the amount with the sole aim of earning interest on the deposits. Further, by depositing its fun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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