TMI Blog2008 (7) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... re same, these appeals are disposed of by this common judgment. 2. The appellant is a registered society comprising of the employees of Canara Bank established with the object of promoting welfare among the members, who contribute towards the corpus fund. The welfare fund is utilized, inter alia, towards advance of loans to the members and receive interest, which is a major portion of its revenue. For the assessment year, 1995-96 and 1996-97 in 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income is exempted from tax on the principle of doctrine of mutuality in terms of section 4 of the Income-tax Act. It is further submitted that the funds collected by the appellant are used to provide monetary assistance to the members and as a matter of precaution the surplus fund was kept in the bank not with the primary object of earning interest, but to keep it in the safe custody and that the interest earned has been used only for the ultimate benefit of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ser for the duration of the respective membership of depositing members. Clause 10. (i) All the properties and funds of the association shall vest in the managing committee, who shall hold and administer the same in accordance with this presence for the furtherance of the objects set out in the memorandum of association. All monies and funds shall be invested in such manner and in such securities or investments or be deposited in such banks as the committee may from time to time determine. (ii) 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 determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e main reason for the reopening of the assessment is the escapement of income in respect of the interest on investments and the dividend on shares. The assessee treated these two incomes under one head along with other incomes and claimed exemption for the entire income under the doctrine of mutuality. 12. The Commissioner of Income-tax (Appeals) held that the Assessing Officer's conclusion that there is profit motivation in respect of interest income and dividend income and thereby these two incomes are not exempt from tax because there is no mutuality with respect to these incomes. Accordingly, 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 institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an activity with its members, though the surplus arising from such activity is not taxable income or profit. The principle of mutuality has also been accepted in the case of a voluntary organization, which receives contributions from its members. 16. Thus, the crucial test of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. In other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied the particular form which 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the members of the assessee and that it has not received any donations or other monetary grants from any outside source apart from the members during the two relevant assessment years. It is the members contribution which has become the corpus fund and the same was utilized to advance loan to the members and interest was received on the said loans and that portion of the fund which was not advances to the members was invested as a precaution for the purpose of keeping it in safe custody and not with an intention to derive a profit by way of interest or dividend of the surplus corpus fund. Further, the rent received is by hiring the Holiday Homes to its members 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 sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case on hand, the tax sought to be levied is not on the surplus from out of the contributions made by the members or from the interest earned on the money advanced to its members. The deposits in the banks were made for earning interest by way of income. The principle that no person can trade with himself does not arise in this case as the monies had been invested by the assessee with the bank to earn income to enable the assessee to discharge its obligations created under the trust. It is clear that income earned from outside agency on interest or securities from the bank would not be covered on the principle of mutuality for claiming exemption from tax and, therefore, it could not 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The club was run on 'no profit no loss' basis in that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The clubhouse was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the clubhouse was not assessable. The claim was rejected by the High Court. On appeal to the Supreme Court." 31. The meanings of "mutual concern and the principle of mutuality" were explained by stating that section 2(24) of the Act shows that the Act recognized the principle of mutuality and has excluded all business involving such principle from the purview of the Act, except those 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lub [2000] 243 ITR 89 and we distinguish the decision of this court in I. T. I. Employees Death and Superannuation Relief Fund [1998] 234 ITR 308 (Karn) as being not applicable to the facts and circumstances of the instant case. 34. We, therefore, answer the substantial question of law by holding that the Tribunal was not right in stating that the principle of mutuality did not apply to income of the appellants derived from interest on investments and dividend on shares and is, therefore, non-taxable income and that the decision in I. T. I. Employees Death and Superannuation Relief Fund [1998] 234 ITR 308 (Karn) is not applicable to the facts and circumstances of this case as far as the two relevant assessment years are concerned. We, however, make it clear that our conclusion is based on the source of funds of the assessee during the two relevant assessment years. 35. In view of our finding that the principles of doctrine of mutuality are wholly applicable to the relevant assessment years, the contention of the appellant regarding the date of commencement of interest does not survive for our consideration. 36. Accordingly, the appeal of the assessee is allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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