TMI Blog1998 (7) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... The trust styled "the Indian Telephone Industries Employees' Death and Superannuation Relief Fund" was created by a deed dated December 19, 1983, by the employees of the Indian Telephone Industries called the settlers for the benefit of about 20,000 employees of ITI in various towns in the country. Copy of the trust deed along with its rules were placed on record by counsel for the assessee to which counsel for the Revenue had no objection. As per clause 2, the trust funds of the assessee consists of the following : "(2) The trust funds being the aforesaid ITI Employees' Death and Superannuation Relief Fund shall consist of the following : (a) Monthly contributions made by the employees through recovery from the pay bill. (b) Contributions, if any, made by the ITI management towards the said fund. (c) Donations received. (d) Interest or other income accrued or earned from the said funds or any investments thereof. (e) All securities and investments made from out of the funds. (f) Money or other assets that may come into or be vested in any manner in the trust to be held as part of the trust assets." Clause 8 provides that all monies contributed to the Indian Telepho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd inasmuch as the subscribers and the beneficiaries being ITI employees and that no outsider is getting any benefit out of the said amount. For all the four years under consideration exemption under section 11 of the Act was denied to the income of the assessee on the aforesaid grounds. The Assessing Officer brought the following interest income to tax denying exemption under section 11 of the Act : Assessment year Interest income (Rs.) 1985-86 4,15,815 1987-88 8,56,718 1988-89 9,73,990 1989-90 11,04,997 Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) contending, inter alia, that the assessee is a charitable trust entitled to the benefits of section 11 of the Act and that even if it is held to be a mutual benefit fund or mutual concern still its income is exempt from taxation. The first appellate authority rejected all the contentions of the assessee. It upheld the view taken by the Assessing Officer. It was held that the assessee was not a charitable trust and as such it is not entitled to claim any exemption under section 11 of the Act. The assessee's claim based on the principle of mut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme or the alleged charitable purpose could be utilised only by specified persons who were required to be the subscribers or their dependants. Contributories to the fund allegedly collected for this personal benefits, could not be held to be forming an association for charitable purpose and thus being entitled to the benefit of exemption under section 11 of the Act. The objects of the society did not fall within the purview of section 2(15) of the Act and its income was not exempt under sections 11 and 12 of the Act." In view of the aforesaid judgment on question No. 1 referred to us, it is held that the Tribunal was not right in law in holding that the objects of the assessee-society fell within the purview of section 2(15) and as such its income is exempted under sections 11 and 12 of the Act. The same is answered in favour of the Revenue and against the assessee. In the alternative the case of the assessee is that the income of the assessee is not liable to tax on the principle of mutuality. According to him, it is a well established principle of law under the Income-tax Act that no taxable profit is said to emerge from mutual activity of its members on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of life annuities, and other business conducted by the society with non-members. It was held that so much of the surplus as arises from the excess contributions of the participating policyholders is not profit assessable to the income-tax, on the principle that a person could not trade with himself and the surplus arising from the excess contribution from the policyholder was not profit assessable to the income-tax. But in so far as the company dealt with those outside its own body, it does carry on the business of insurance, and in respect of the profits made in this business was liable to income-tax. In another judgment of the House of Lords in Thomas v. Richard Evans and Co. Ltd., [1927] 11 Tax Cases 790, it was held that the surplus of the association's income from the calls from its members and the income from its investments, over its outgoings by way of indemnity payments and re-insuring its risk did not constitute profits arising from the trade carried on by the association and it was therefore not liable to income-tax in respect thereof. Styles' case [1889] 2 TC 460 (HL) was followed. The Andhra Pradesh High Court considered the principle of mutuality in CIT v. Nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness transactions are carried on by the assessee with the former partner or the Canara Bank. There is also no indication from the record to the effect that in the past years, the assessee had carried on the activities of lending moneys to any person other than the members constituting the association. We, therefore, proceed on the assumption that the assessee's claim that it confines its money-lending activity only to its members and to no outsiders, has to be accepted. If that be so, it follows automatically that the interest received by the assessee is distributed among the members forming the association and thus the principle of mutuality governs." In Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504 (Guj), the assessee-sports club was incorporated as a company. Its main object was to promote sports. The objects clause in the memorandum and articles of association empowered those in the management of the club to invest and deal with monies of the club not immediately required till such manner as may from time to time be determined by them. The assessee claimed exemption from income-tax for the years 1966-67, 1967-68, 1968-69 and 1969-70. But the Income-tax Officer reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urplus after satisfying all the debts and liabilities, the same shall be paid or distributed amongst the members in equal shares. If the income derived from investments over a period of time is added to the surplus, there can be no doubt that when the surplus is distributed, a component of return on investment would go to the members in equal shares. This component of return which the members will receive will not be by way of a plough back of their own contributions by way of fees, etc., to the club. An association which receives such income can be said to be indulging in both mutual activity as well as non-mutual activity." In CIT v. Ranchi Club Ltd. [1992] 196 ITR 137 (Patna) [FB], the question before the Full Bench of the Patna High Court was whether the Ranchi Club was a mutual concern and the income derived by the club from its house property let out to its members and their guests is not chargeable to tax and whether the income derived by the assessee-club from the sale of liquor, etc., to its members and their guests is not taxable in its hands. It was held that if an assessee is found to be indulging in both mutual activities as well as non-mutual activities that decides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany by taking loans. He is entitled to receive his dividend as long as he holds a share. He has not to fulfil any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the position of the assessee is no different from an ordinary bank except that it lends money to and receives deposits from its shareholders. This does not by itself make its income any the less income from business within section 10 of the Indian Income-tax Act." From these judgments it gets established that no taxable profit can be said to emerge from out of mutuality on the ground that "no man can trade with himself". The essence of mutuality lies in the return for what one has contributed to a common fund. The fund should fulfil the essential requirements that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus should be contributors to the common fund. There must be complete identity between the contributors to the fund and the participators in the surplus. It does not mean that each member should contribute to the common fund or that each member should participa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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