TaxTMI 
TaxTMI 
2008 (7) TMI 239
X X X X Extracts X X X X
X X X X Extracts X X X X
.... respect of excess income over expenditure Rs. 4,20,719 and Rs. 6,08,303. The appellant claimed exemption from tax on the basis of the principle of mutuality. The assessment was processed under section 143(1)(a) of the Income-tax Act. Subsequently, the assessment was reopened under section 147 of the Act on September 9, 1999 and a notice under section 148 was issued. In response to the said notice the appellant filed a return on November 4, 1999, declaring the same income as per the original return of the income. While completing the assessment under section 143(3) read with section 147 the Assessing Officer taxed the interest income on investments and dividend income on shares and arrived at an income of Rs. 42,69,460 and Rs. 68,50,994 respectively as per annexure A1. 3. Aggrieved by the said order of the Assessing Officer, the appellant filed appeals before the Commissioner of Income-tax (Appeals)-V in respect of the two assessment years who by order dated March 29, 2001, and January 30, 2001, dismissed the appeals. The appellant next filed appeals before the Income-tax Appellate Tribunal challenging the taxing of the interest income and dividend income, which were also dismisse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the members. He further submitted that while applying the doctrine of mutuality it is the source of the deposit that has to be taken into consideration and not the manner in which the fund is applied. He has also referred to the objects of the appellant as stated in clause 3 of the memorandum of association of the appellant and has taken us through clauses 9 and 10 to highlight on the source of funds and as to how, the income and property of the assessee is applied by way of loan to members, rehabilitation in distress, development and general welfare. He has also relied upon Chelmsford Club v. CIT [2000] 243 ITR 89 (SC) and CIT v. Natraj Finance Corporation [1988] 169 ITR 732 (AP) to submit that in the instant case the authorities below failed to appreciate the doctrine of mutuality as applicable to the facts and circumstances of the case. The appellant's counsel has also submitted that the Assessing Officer was not right in levying interest from April 1, 1995, as this is a case under section 147 of the Income-tax Act and, therefore, interest should be from the date of determination under section 143(1) (a) to the date of order under section 143(3), 6. Per contra, counsel for th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i) The income and property of the association howsoever derived shall be applied solely towards the promotion of the objects of this association and no portion thereof shall be paid or transferred directly or indirectly by way of dividends, bonus or otherwise howsoever by way of profits to the persons who at any time are or have been members of the association or to any one of them or to any person claiming through them, provided that nothing herein contained shall prevent the payment in good faith of any remuneration to the employees of the association or to any member thereof or other person in return for any service rendered to the association or payment of interest at rates to be determined from time to time, on amounts deposited with the fund by the members or repayments of such deposits with interest thereon." 8. A perusal of the objects of the appellant/assessee makes it apparent that it is to give assistance to its members towards economic, social and moral advancement and to work towards the welfare of the members whether singly or in collaboration with other institutions or associations. While adverting to the source of funds it is seen that it comprises mainly of donati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dingly, the appeal was dismissed. 13. Before the Appellate Tribunal the appellant while reiterating its stand before the lower authorities submitted that the income of the appellant comprised of interests received on loans dispersed with members and also a small portion represented the income from investments made with the banks and other non-member organizations and, therefore, the doctrine of mutuality applied to the facts and circumstances of the case and when once the principle of mutuality were found to exist then the source of income becomes irrelevant and the affairs of the institution as a whole is covered by the principle of mutuality and, therefore, any surplus derived by the assessee had to fall outside the tax net. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Chelmsford Club v. CIT [2000] 243 ITR 89 and a decision of the Andhra Pradesh High Court in CIT v. Natraj Finance Corporation [1988] 169 ITR 732. The stand of the Revenue before the Tribunal was based on the judgment of the Division Bench of this court in CIT v. I. T. I. Employees Death and Superannuation Relief Fund [1998] 234 ITR 308. These decisions shall be considered later. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h the association takes is immaterial. Conversely, where there is no such identity between the class of contributors to the common fund and the class of participators in the surplus, the profits of the association would be assessable to tax. 17. The Supreme Court in CIT v. Royal Western India Turf Club Limited [1953] 24 ITR 551 reviewed the case law related to mutual concern and laid down that an incorporated company which carries on business and realize money both from members and from non-members for the same consideration, namely, the giving of the same or similar facilities to all alike in the course of one and the same business carried on by it, cannot be regarded as a mutual concern. 18. On the other hand in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97 (SC) followed in Chelmsford Club v. CIT [2000] 243 ITR 89, the hon'ble Supreme Court summed up that where a number of persons combined together and contribute to the common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. 19. Hence, where an association or c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mbers and no outside agency has been involved in the receipt of this income. It is also submitted by the learned counsel for the appellant that for the relevant assessment years there was no donation or receipt of money from any third party including the bank which has not been controverted by the Revenue. 25. It is noticed that the funds of the assessee have been invested in a term deposit with a bank which is not a member of the assessee's welfare fund and earned interest on the investment made. The bank, in which the surplus fund is deposited, no doubt, forms a third party vis-a-vis the assessee, but, in our view, it cannot be said that, the identity between the contributors and the recipients is lost. Accordingly, the interest on investments of Rs. 42,13,690 and dividend income on shares of Rs. 55,760 have to be treated as non-taxable incomes. 26. While distinguishing the judgment of this court in the case of I. T. I. Employees Death and Superannuation Relief Fund [1998] 234 ITR 308 (Karn) learned counsel for the appellant has relied upon the decisions in Chelmsford Club [2000] 243 ITR 89 (SC) and Natraj Finance Corporation [1998] 169 ITR 732 (AP). 27. In I. T. I. Employees ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot be excluded from the arena of taxation. For the reasons stated, it is held that the assessee was not entitled to exemption from tax on the principle of mutuality." (underlining by us) 28. In the case of Natraj Finance Corporation [1988] 169 ITR 732 (AP) the question arose as to whether the assessee which was described as a partnership firm and had been carrying out the business activities of lending out money to its members was not liable for tax on the principle of mutuality. In the said case, after looking into the memorandum of association the High Court of Andhra Pradesh held that it was an association of persons and that there was nothing on record to show that the assessee had been carrying out the business activity of lending money to any person other than its 19 members and there was no indication from the records to the effect that in the past years the assessee had been carrying out the activities of lending money to any person other than the members constituting an association. The assessee's claim that it confined its money-lending activity only to its members and not to outsiders was accepted. The court further held as follows (page 736) "We have seen in the pres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ose mentioned at clause (vii) of the section. After referring to its earlier decision in CIT v. Royal Western India Turf Club Limited [1953] 24 ITR 551 the Supreme Court stated that (page 97): "……it is crystal clear that the law recognizes the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. In the above case, this court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural I. T. [1948] 16 ITR 270 (PC); existence of which establishes the doctrine of mutuality. They are as follows (page 559): (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. If we apply the above three criteria to ....