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TMI Blog2024 (11) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years as listed below:- T.A. No. A.Y. 1 689/2012 2006-07 2 690/2012 2006-07 3 691/2012 2008-09 4 692/2012 2008-09 5 216/2022 2014-15 6 500/2023 2019-20 7 670/2024 2017-18 8 671/2024 2018-19 3. These appeals are raising the common issue as to whether in the facts and circumstances, the Tribunal erred in not deciding the question of surplus on the ground of principle of mutuality having been decided in favour of the respondent - Assessee. So far as Tax Appeal No.670 of 2024 and 671 of 2024 the same are also admitted on the following substantial questions of law:- "(1) "Whether in the facts and circumstances of the case the Tribunal erred in not deciding the question of surplus of the sum of Rs. 6,08,72,639/- on the ground of principle of mutuality having been decided by it in favour of the assessee respondent?" (2) "Whether on the facts and circumstances of the case, the Tribunal was right in holding that principle of mutuality on the surplus of Rs. 3,02,97,496/- applies to the income of the assessee company?" (3) "Whether in the facts and circumstances of the case the Tribunal erred in not deciding the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequently confirmed the addition of disallowance of depreciation under Section 80IA of the Act. 8. Being aggrieved, the respondent - Assessee preferred appeals before the Tribunal who by common order allowed the appeal of the assessee by applying the principle of mutuality relying upon the decision of this Court in case of Sports Club of Gujarat Limited v. CIT reported in (1987) 171 ITR 504 and remanded the matter to the Assessing Officer with a direction to verify the claim of the assessee whether any outsider is getting service or not from the assessee which has to be taxed accordingly. The Tribunal consequently, did not decide the issue of allowance of depreciation and deduction under section 80IA as the entire income/surplus was held to be exempt on the basis of the principle of mutuality. 9. Before adverting to the submissions made by the learned advocates for the respective parties it would be germane to refer to the relevant facts recorded by the CIT (Appeals) in detail as under:- "4. FACTS IN BRIEF:- 4.1 The appellant company was incorporated under the Companies Act, 1956 on 17.01.1997 without share capital as a company limited by guarantee. The company was forme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 4 states the situations in which a member shall cease to be a member. Declaration by competent authority that the activities of an industrial unit are non-polluting and permanent closure of manufacturing activities are the two situations in which a member shall cease to be a member. Cl. 34 of AOA-certain powers to be excersied by the Board only at the Meting: That the Board shall exercise the following powers on behalf of the company by means of resolution passed inter-alia; a) the power to make call on shareholders in respect of moneys unpaid on their share, b) the power to issue debentures, c) the power to borrow money otherwise than debentures, d) the power to invest the funds of the Company, e) the power to make loans. 6.1 Pursuant to the Order of the Hon'ble Gujarat High Court, Vapi Industries Association ("VIA") had filed an affidavit in the Court stating the steps taken by VIA for Pollution Control, including promotion of the Company, and establishment of common waste water treatment plant by the Company. In the Court's Order dated February 27, 1997, it was observed that it was in the interest of the industries that the Industrial Units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest in the plant. The appellant company is the absolute owner of the effluent treatment plant. 6.4 From time to time, the appellant Company has temporary surplus funds due to excess of "on account" contribution received from the members over treatment cost incurred. Such excess contributions ensure uninterrupted and smooth operations of the effluent treatment facility. The surplus funds are placed in term deposits with bank which yields interest. Quite often, to ensure that there is no loss of interest on premature encashment of term deposits, the appellant takes temporary overdraft from the bank and pays interest thereon. Such overdraft is repaid from the funds received on maturity of the deposits." 10. Learned Senior Standing Counsel Mr. Karan Sanghani relying upon the findings given by the CIT (Appeals) submitted that the Tribunal without considering the findings of the CIT (Appeals) by giving cursory reasons has allowed the appeal of the assessee by applying the principle of mutuality which is contrary to the facts recorded by the CIT (Appeals). Referring to the facts recorded by the CIT (Appeals), it was pointed out that the CIT (Appeals) after considering the facts nar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the respondent assessee has borrowed the funds from outside sources and loans are also provided to the Vapi Industrial Association which is not a member of the assessee company. It was therefore submitted that there is no complete identity between the participants i.e. the assessee company and its members which goes against the principle of mutuality. It was submitted that the Tribunal has not considered the above facts and evidence and findings arrived at by the CIT (Appeals), hence, the order passed by the Tribunal is perverse which is required to be quashed and set aside. 15. Learned advocate Mr. Sanghani also submitted that the assessee Company is not a company incorporated under Section 25 of the Companies Act, 1956 for non profit making purpose but the same is incorporated under Section 26 of the said Act for profit making and therefore, the exemption of income/surplus allowed by the Tribunal on the principle of mutuality is contrary to the settled legal position. 16. On the other hand, learned advocate Mr. Soparkar appearing for the respondent - Assessee vehemently submitted that the form of incorporation of the assessee company is not material when it is not in disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cher v. CIT. We do not think it necessary to deal at length with the above decisions except to state the principle discernible for them. We understand these decisions to lay down the broad proposition - that, if the object of the assessee company claiming to be a "mutual concern" pr "club", is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit-earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or "members' club" is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant surplus is certainly profit income liable to tax. We should also state, that "at what point, does the relationship of mutuality end and that of trading begin" is a difficult and vexed question. A host of factors may have to be considered to arrive at a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Bombay High Court has held as under:- "6. The factual position as it emerges from the record before the court is that the assessee is a company incorporated under section 25 of the Companies Act, 1956. The assessee is an association formed with the object of setting up an effluent treatment plant for the members of the assessee, who run industrial units in the Trans Thane Creek Area. The income of the assessee consists of contributions by members made for the purposes of setting up the effluent treatment facility. The association collects contributions in excess of what is required to be expended. The case of the assessee is that the treatment costs recovered are generally maintained at such a level, that recoveries are normally more than the expenses of that year so as to ensure that funds are available to meet a part of the capital cost. According to the assessee, the capacity of the effluent treatment plant installed initially was 12 mld which became insufficient to handle the effluents generated and a result an additional plant was required. Moreover, a surplus is required to ensure that funds are available to meet sudden eventualities such as major repairs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t generated out of dealings with any third party. The entire contribution originates in its members and is expended only in furtherance of the objects of the association, for the benefit of the members. On these facts, both the Commissioner (Appeals) and the Tribunal were justified in coming to the conclusion that the surplus so generated falls within the purview of the doctrine of mutuality and was not exigible to tax. The first question of law would accordingly have to be answered in favour of the assessee and against the Revenue." 20. Learned Advocate Mr. Soparkar invited the attention of the Court to the decision of the Hon'ble Apex Court in the case of Income Tax Officer, Mumbai v. Venkaatesh Premises Cooperative Society Limited reported in (2018) 15 SCC 37 to submit that in case of cooperative societies, the transfer charges, fees and charges paid by the transferee of membership who at the time of such payment was not a member of the cooperative society was subjected to the principle of mutuality. It was submitted that the Hon'ble Apex Court while considering the principle of mutuality in such facts has held as under:- "14. The doctrine of mutuality, based on comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 167) formulate the law on the point, thus: '...it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered.... It has been held that a company conducting a members 9and not a proprietary) club, the members of the company and of the club being identical, was not carrying on a trade or business or undertaking of a similar character for purposes of the former corporation profits tax. A members' club is assessable, however, in respect of profits derived from affording its facilities to non-members. Thus, in Carlisle & Sillot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present case, with the funds of the mutuality, the member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the 'privity of mutuality, and consequently, violating the one-to-one identity between the contributors and participators as mandated by the first condition. Thus, in the case before us the first condition for a claim of mutuality is not satisfied. 30. As aforesaid, the second condition demands that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club, which is not the case here. In the instant case, the surplus funds were not used for any specific service, infrastructure, maintenance or for any other direct benefit for the member of the club. These were taken out of mutuality when the member banks placed the same at the disposal of third parties, thus, initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality. This contract lacked the degree of proximity between the club and its member, which may in a distant and indirect way benefit the club, none the less, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to allow the outsider to get the services of the company. No director is outside from the members of Vapi Industrial Association. On the basis of decision of Hon'ble Gujarat High Court in the case of Sports Club of Gujarat (supra) the assessee also has declared the interest income in return as taxable on fixed deposit with bank however, it was admitted that no outsider had provided the services of the company but the AO is directed to verify the claim of the assessee whether any outsider is getting services or not from non-members, has to be taxed accordingly after giving full opportunity to the assessee. The assessee is also directed to cooperate with the A.O. and give all the evidences as required by the A.O. for his satisfaction. The revenue appeal on allowance of depreciation by the CIT(A) has no bearing as the principle of mutuality has been accepted by this Court. The other grounds of appeal of the assessee like deduction u/s 80 IA, disallowance under head operating expenses and carry forward loss of earlier year has no meaning when principle of mutuality has been held in favour of the appellant." 27. Considering the settled legal position as canvassed on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the authorities. (v) Because the company has provided discount to its members and settled the outstanding dues, company has undertaken various activities other than waste water, Effluent Treatment Plant like construction of road etc. (vi) Funds have been raised from outside and loans have been given to the Vapi Industrial Association. 31. All the above factors and the facts found by the CIT (Appeals) would fall outside the scope of destroying the basic ingredients of the principle of mutuality. The objects of the company also makes it clear that the surplus, if any, would not be paid to its members and in case of dissolution of the respondent company, only Rs. 100/- would be paid to its members. Thus, the submissions made by the learned advocate for the appellant revenue relying upon the findings arrived at by the CIT (Appeals) are contrary to the settled legal position and the Tribunal has rightly therefore held in favour of the assessee by applying the principle of mutuality by holding that the income/surplus of the respondent assessee company would not be liable to tax on principle of mutuality. We are therefore, of the opinion that no question of law much-less and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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