TMI Blog2022 (1) TMI 1156X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act would not apply in isolation. Order of CIT(A) sustained wherein it was observed that: it is well settled legal position that operational loss computed by the assessee coming under the purview of principle of mutuality cannot enter the computation of total income as envisaged u/s.2(45) of the Act. Accordingly, the ground of appeal raised by the assessee on treating such loss arising out of transactions covered under principle of mutuality as income / loss within the meaning of Sec. 28(iii) of the Act is dismissed. As a corollary, such loss cannot be set off against other taxable sources I heads of income of the assessee such as interest income from bank falling under Income from Other Sources, Income from House Property etc. as envisaged u/s.71 of the Act. Similarly, the provisions of Sec.72 of the Act are also not applicable with regard to carry forward and set-off of such losses in the subsequent AYs. Accordingly, all the grounds of appeal raised by the assessee are hereby dismissed Decided against assessee. - I.T.A. No. 166/HYD/2021 - - - Dated:- 27-1-2022 - Shri S.S.Godara, Judicial Member And Shri Laxmi Prasad Sahu, Accountant Member For the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of the IT Act is a truism. Setting off of loss against income is a technical exercise and is to be carried out as per the provisions of the IT Act. There is no provision, indeed no rationale, for setting off a non-loss against income chargeable to tax. If that were done, its direct result would be undercomputation of income and the resultant evasion of tax. Given the finding that the deficit in question is not a 'loss' there is no question of setting it off against 'income' chargeable to tax. 04.3 The assessee had itself admitted this position of law when it computed the 'deficit' in the return of income but ignored the same while computing its total income chargeable to tax. As discussed above, it had claimed the interest income (earned on deposits with banks which happened to be its corporate members) as exempt from taxation on ground of mutuality. That income was held to be taxable. When that happened, it came up with the innovative idea that the operational deficit arising from the activities based on mutuality should also be excluded from the circle of mutuality and should effectively be treated as a 'loss' for purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no longer res integra inasmuch as the Hon'ble Supreme Court, in host of the cases, held that interest on FDRs received from not only outside banks, but also member banks, cannot come under the ambit of principle of mutuality. 8.2 To be precise, the Hon'ble High Court of Andhra Pradesh in the assessee's own case for the AY 1996-97 as reported in CIT Vs. Secunderabad Club [2012] 340 ITR 121 held that the interest income earned from deposits with member banks is taxable in the hands of the assessee on the ground that such income does not come under the purview of principle of mutuality. It is not out of place to mention here that, after the decision of the jurisdictional High Court (supra), the Hon'ble Supreme Court in the case of Bangalore Club Vs. CIT [2013] 350 ITR 509, while adjudicating an identical issue, held that interest earned by assessee club on fixed deposits from its member banks would not be exempted from tax on the basis of doctrine of mutuality. 8.3 Accordingly, respectfully following the decision of Hon'ble jurisdictional High Court in the assessee's own case for the AY 1996-97 (supra) and the decision of Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia or the bench mark is that whether the said transactions are fulfilling the requirement of mutuality i.e. complete identity between the contributors and the participators to the transaction, but not whether such transactions would result in profit /surplus or loss/deficit. Accordingly, the resultant or outcome of such transactions in case of principle of mutuality will be outside the purview of taxation. 8.7 In this regard, it is also important to note that the profit arising from mutuality transactions is not subject to taxation. Similarly, the loss arising out of mutuality transaction is also not recognized as allowable loss as per the provisions of the Act. This is precisely because of the reason that both profit as well as loss are outside the ambit of taxation. Accordingly, in a case of mutuality transactions resulting in loss /deficit, then such loss / deficit cannot be set off against the income taxable as per the regular provisions of the Act. 8.8 However, if there are two kinds of mutuality transactions, where, in respect of one type of transactions, there is profit and in another transactions, there is loss, then such loss has to be set off against the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed analysis of the judgments of Hon'ble Supreme Court (supra) is finding place in the decision of the Hon'ble ITAT in the case of DDIT (lnternational Taxation) Vs. Asia Pacific Performance SICAV [2015] 55 Taxmann.com 333 (Mum. Trib.). For the sake of ready reference, the relevant portion of the decision is reproduced below: We have given our careful consideration to the matter. We find the assessee's case is wholly unmaintainable in view of the law as explained by the hon'ble apex court over a series of decisions, viz. CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 (SC); CIT v. J.H. Gotla [19851 156 ITR 323 (SC) and CIT (Central) v. Harprasad and Co. (P.) Ltd. [19751 99 ITR 118 (SC), to cite some. We begin by reproducing/enlisting the observations by the apex court from the said decisions. In CIT (Central) v. Harprasad and Co. (P.) Ltd. [19751 99 ITR 118 (SC), also relied- upon by the Assessing Officer, which decision was also in context of capital gains, and under the Indian Income-tax Act, 1922 (pages 124, 125) : From the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that income by definition also includes losses: (pages 312, 313) 7. In Reliance Jute and Industries Ltd. v. CIT 19791120 ITR 921, it was observed by this court that the law to be applied in income-tax assessments is the law in force in the assessment year unless otherwise provided expressly or by necessary implication. Before proceeding further, it will be necessary to focus on the definition of the expression 'income' in the statute. Section 2(24) defines 'income' which is an inclusive definition and includes losses 1 i.e., negative profit. The position has been elaborately dealt with by this court in CIT v. Harprasad and Co. {P.} Ltd. {197S1 99 ITR 118. This court held with reference to the charging provisions of the statute that the expression 'income' should be understood to include losses. The expression 'profits and gains' refers to positive income whereas losses represent negative profit or in other words mm::;s income. This aspect does not appear to have been noticed by the Bench in Virtual Soft Systems Ltd. 's case [2007] 289 ITR 83 (SC); [2007] 9 SCC 665. Reference to the order by this court dismissing the Revenue's Civi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of ₹ 9,11,15,126/-. DECISION: 9.0 In view of the foregoing discussion, I am of the considered opinion that the assessee is not entitled to exclude subscription receipts while computing the operational loss from the transactions covered under the principle of mutuality. Accordingly, I don't find fault with the AO in ignoring the net operational loss of ₹ 9,11,15,126/- computed by the assessee without adjusting the subscription receipts received from the members of ₹ 8,25,44,722/-. Thus, the grounds of appeal raised by the assessee on this issue are liable for dismissal. 9.1 In this connection, it is also pertinent to note that, whatever loss or income disclosed by the assessee arising from the transactions coming under the purview of principle of mutuality cannot be construed as income or loss derived by a trade, profession or similar association from specific services performed for its members as envisaged u/s. 28(iii} of the Act. In view of this, the loss incurred by the assessee from the activities which are falling under the purview of principle of mutuality cannot be construed as loss incurred under the head Profits and Gains of Busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oregoing conditions. It has been further made clear therein that it is only section 2(24)(vii) of the Act wherein a specific instance of a mutual organization has been held to be deriving taxable income. 9. Coming to the assessee's impugned deficit of ₹ 18,58,643 arising from its income and expenditure account that profit and loss account as set off against its interest income assessed as income from other sources, there could hardly be any issue that although hon'ble apex court s landmark decision in CIT Vs. J.S. Gotla (1985) 156 ITR 223 (SC) holds that it can be accepted without much doubt that income would include loss and vice versa, the fact remains that the assessee's income, if any, arising from its impugned mutuality account, would never be taxable since satisfying the foregoing three ingredients. It is at this stage that we take note of the clinching statutory expressions employed in section 71 of the Act providing for Set Off of loss from one head against income from another . We deem it appropriate to observe that the legislative expression head of income must be taken as any of the five heads of income provided u/s. 14 of the Act i.e. sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in (2015) 367 ITR 261 (Guj) Kishorebhai Bikabhai Virani Vs. ACIT also holds that a loss under an exempt source is not to be carried forward for set off against subsequent year s income. 10. So far as the assessee's argument that the foregoing judicial precedents (supra) have duly held that it ought to adopt commercial principles in computation of income, there would be hardly any dispute qua the same. The question before us is not that of computation of income but regarding set off of loss u/s.71 of the Act which it has to be computed as per strictly construction principle only going by the clinching fact that the assessee herein is eligible for mutuality benefit qua deficit claimed as loss. We thus hold that the assessee s case law is distinguishable of facts. 11. Lastly comes the learned counsel s argument that the tribunal had already accepted applicability of section 71 of the Act qua set off of its loss claim in remand directions (supra), we hold that the CIT(A) had been directed to consider the assessee s going by the corresponding statutory provisions in light of relevant facts rather than allowing the same on merits. We further make it clear that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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