TMI Blog2018 (7) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) is arbitrary and artificial. Therefore, we agree that assessee is covered by the principle of mutuality and its income will be exempt on that concept Disallowance of honorarium - TDS u/s 194J - Held that:- The director referred to therein is not equivalent to the ‘director’ of the assessee-society. The director, manager or managing agent in relation to a company have the meaning respectively assigned to them in the Companies Act, 1956. A company is different from a co-operative society as they are defined U/s. 2(17) and 2(19) separately. Just because the person administering the society is also referred to as director, provisions of Section 194J cannot be attracted to the payment of honorarium made to the director of assessee-society. In view of that, we are of the opinion that there is no violation U/s. 194J so as to attract disallowance U/s. 40(a)(ia). Since assessee has adduced the evidence to the respective person have paid/filing returns of income and AO has not initiated any proceedings U/s. 201 for violation of TDS provisions under any other provisions of the Act, the disallowance U/s. 40(a)(ia) cannot be sustained. Interest on bank deposits - Held that:- The n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utiny assessment, it was the contention of assessee that it is a mutually aided co-operative society and the activities of the society are confined to Members only who are making deposits and availing loans and surplus if any is distributed among the Members only. In the course of assessment proceedings, AO asked the clarifications, examined the by-laws and noticed that there are two categories of Members Ordinary Members and Nominal Members and the transactions with non-Members being third parties is not entitled for deduction either U/s. 80P or under the concept of mutuality. Accordingly, he denied the benefit and restricted it to an amount of ₹ 40,300/- U/s. 80P(2) of the Act. In addition to the above issue, AO noticed that assessee has paid honorarium to its directors to an extent of ₹ 20,76,200/- and since TDS was not deducted, the said amount was also disallowed U/s. 40(a)(ia) of the Act. Third issue raised by the AO is with reference to interest earned on deposits to an extent of ₹ 17,01,964/-. Relying on the principles laid down by the Hon'ble Supreme Court in the case of M/s. Totgars Co-operative Sale Society Limited [322 ITR 283] (SC) he brought th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer should have given the benefit of mutuality to the Society. The three conditions, the existence of which establishes the doctrine of mutuality are: a) The identity of the contributors to the fund and the recipients from the fund. b) The treatment 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 c) The impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. 4.1. With reference to the treatment of income on bank deposits, it was submitted that these interests were earned in the course of its activities with the members and following the principles laid down by various decision including the jurisdictional High Court, the income is business income and cannot be brought to tax under the head other sources . 4.2. Coming to the disallowance U/s. 40(a)(ia) of the Act on the honorarium paid, it was submitted that honorarium was paid to 15 directors for all the 12 months and this amount is not covered by the provisions of Section 194J as it is not a professio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentity of the contributors to the fund and the recipients from the fund 2. The treatment of the society as a mere entity for the convenience of the members and in other words as a instrument obedient to their mandate 3. The impossibility that the contributors of the fund should derive profits from contributions made by themselves to the society to be selectively utilized by themselves thereby creating a colourable devise to circumvent the mandatory provisions of Law from the best advantage 5.4. In my considered view, the Society is not being run on the lines of the objects for which it is constituted and the action of the AO in recomputing the benefits of the Sec 80P needs to be upheld. Accordingly, this ground raised by the appellant is dismissed. 5.5. Ground No. 4 relate to the addition made U/s. 40(a)(ia) and since it is not a case of assessee filing the ROI during the relevant previous year. Therefore for the detailed reasons brought out by the AO in para 7.3 of the Assessment Order, I am in conformity with the view that the appellant is not eligible for any deducation during this year. Accordingly, the sum of ₹ 20,76,000/- disallowed by the AO is uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, relied on the orders of AO and CIT(A) to submit that assessee has two different types of members and hence the transactions with non-members are to be brought to tax and principles of mutuality does not apply. Ld.DR, supported all other disallowances also. 8. We have considered the rival contentions and perused the order of the AO and CIT(A). Principles of Mutuality The AO and CIT(A) have considered the ordinary members and nominal members are different class of members. AO accepts that ordinary members are having mutuality but he denies the same with reference to nominal members. The principle of mutuality cannot be denied simply because there are two categories of members as per the bye-laws of the society. What is important to decide is the class of contributors and the class of participators, rather than classification of members. In this case, the class of contributors and class of participators are identical. Even though the bye-laws characterizes two types of members, the original members being the founder members, others are called nominal members but as seen from the order of the AO itself and the clause-9 extracted in the assessment order, it indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular from the association takes. Trading between persons associated together in this way does not give rise to profits which are chargeable to tax. Where the trades or activity is mutual, the fact that as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise . 11. Since all the parameters with regard to principles of mutuality are complied, we are of the opinion that the AO s distinction or findings that society is transacting with non-members is not correct. There is no distinction between ordinary members and nominal members and just because categorized as nominal members, they cannot be treated as non-members . If assessee s transactions are with non-members, who are not members of the society, principles of mutuality do not apply. But in this case, even a nominal member is also admitted to the membership as per clause-9 and he has all the rights of any other member. The ordinary members are those members who are available at the time of registration and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g returns of income and AO has not initiated any proceedings U/s. 201 for violation of TDS provisions under any other provisions of the Act, the disallowance U/s. 40(a)(ia) cannot be sustained. Grounds are allowed. Interest on bank deposits: 14. AO treated the interest earned on bank deposits amounting to ₹ 17,01,963/- as income from other sources. AO relied on the principles laid down by the Hon'ble Supreme Court in the case of M/s. Totgars Co-operative Sale Society Limited (supra) rendered U/s. 80P of the Act. Even though the Hon'ble Supreme Court has upheld the treatment given to the income from bank deposits as from other sources, there is no finding that these funds are surplus funds not used in the business of assessee. It was the submission that assessee in the course of business activity itself maintain the deposits as per the principles governing by the co-operative society and the source of funds are the borrowals or deposits from the members and they are not surplus funds as considered by the Hon'ble Supreme Court in the case of M/s. Totgars Co-operative Sale Society Limited (supra). There is no finding whether by the AO that these funds are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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