2009 (9) TMI 682 - AT - Income Tax

Computation of book profit - Excluding various income earned - profit on the sale of investments - principle of mutuality - HELD THAT - The assessee-club is incorporated under the Companies Act and was granted certificate u/s 25 of the Companies Act. Under the provisions of section 25 of the Companies Act, where the Central Government found that an association was incorporated for promoting commerce, arts, science, religion, charity or any other useful objects and intends to apply its profit in promoting any object and to prohibit any payment to its members, direct that such association may be registered as a company with limited liability. Under the general law relating to mutual concerns, the surplus earned by the mutual concern cannot be regarded as profits and gains for the purpose of charging section 4 of the Income-tax Act insofar as the contributors are to receive back a part of their own contributions and there is complete identity between the contributors and recipients. Thus, a mutual concern can carry on the activity with its members, though the surplus arising from such activity is not its taxable income. Hon ble Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund v. Dy. CIT. When the dividend income on shares was held to be not liable to tax under the principle of mutuality in case of Canara Bank Golden Jubilee Staff Welfare Fund 2008 (7) TMI 239 - KARNATAKA HIGH COURT , there is no reason to exclude the gain arising on the sale of such shares, from the principle of mutuality. Once the income is found to be covered by principle of mutuality, the same cannot be brought to tax even under the provisions of section 115JB. Accordingly, there is no merit in the action of lower authorities for bringing the income exempt under principle of mutuality, within the purview of section 115JB. In the case of assessee-club, Hon ble Delhi High Court in assessee s own case - CIT v. Delhi Gymkhana Club Ltd. 1985 (4) TMI 51 - DELHI HIGH COURT has observed that object of the assessee-club was mainly to provide recreation of its members by promoting various types of sports and pastime and refreshment for the members. The income from providing refreshment to its members was held exempt from income-tax on the basis of doctrine of mutuality. Even income earned as a room rent which were made available to the members on payment of fixed monthly charges and also income from providing various facilities, were held to be covered by principle of mutuality. In view of the above discussion, and respectfully following the proposition of law laid down by Jurisdictional High Court and Karnataka High Court as discussed hereinabove, the appeal of assessee is allowed in terms indicated hereinabove.

Summary

Issues Involved:

1. Applicability of Section 115JB of the Income-tax Act to an association registered under Section 25 of the Companies Act.
2. Exclusion of income exempt from tax due to the principle of mutuality in the computation of book profit.
3. Inclusion of profit on the sale of investments in the computation of book profit.

Issue-wise Detailed Analysis:

1. Applicability of Section 115JB of the Income-tax Act:

The appellant argued that Section 115JB, which pertains to Minimum Alternate Tax (MAT), should not apply to an association registered under Section 25 of the Companies Act. The appellant contended that the club, being a mutual concern, does not have a profit motive and its income should be exempt from tax under the principle of mutuality. The Tribunal admitted the additional grounds raised by the appellant, citing the Supreme Court's decision in NTPC Ltd. v. CIT [1998] 229 ITR 383, which allows purely legal grounds to be admitted even if they were not raised earlier.

2. Exclusion of Income Exempt from Tax Due to the Principle of Mutuality:

The appellant claimed exemption for income earned from its members based on the doctrine of mutuality. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had denied this exemption for interest income from Fixed Deposit Receipts (FDRs), dividends, and profits on the sale of investments, arguing that these incomes did not arise from activities related to the club's members. The Tribunal, however, found that the surplus funds invested in FDRs and other securities were derived from members' contributions, and there was no taint of commerciality. The Tribunal cited the Supreme Court's decision in Chelmsford Club Ltd. v. CIT [2000] 243 ITR 89, which held that income from interest on fixed deposits and dividends is also exempt under the principle of mutuality.

3. Inclusion of Profit on the Sale of Investments in the Computation of Book Profit:

The appellant argued that profits from the sale of investments should not be included in the computation of book profit under Section 115JB. The Tribunal noted that the club's activities were confined to its members and were not tainted by commerciality. The Tribunal referred to the Karnataka High Court's decision in Canara Bank Golden Jubilee Staff Welfare Fund v. Dy. CIT [2009] 308 ITR 202, which held that interest income on investments and dividend income on shares are not taxable under the principle of mutuality. The Tribunal also cited the Delhi High Court's decision in the case of Country Club [IT Appeal No. 84 of 2003], which held that interest income from bank deposits is covered by the principle of mutuality and not liable to tax.

Conclusion:

The Tribunal concluded that the income earned by the club from interest on FDRs, dividends, and profits on the sale of investments is exempt from tax under the principle of mutuality. Consequently, such income should not be included in the computation of book profit under Section 115JB. The appeal filed by the assessee was allowed, and the orders of the lower authorities were set aside.