2008 (1) TMI 918 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of interest income under the principle of mutuality.

Summary:

Issue 1: Taxability of Interest Income under the Principle of Mutuality

This is an appeal filed by an assessee u/s 260A of the IT Act against an order dated 27th Jan., 2005 passed by the Tribunal, Indore, in ITA No. 690/Ind/1998. The substantial question of law was whether the Tribunal erred in holding that the interest amount of Rs. 59,000 received by the appellant assessee from the bank is liable to income-tax and the principle of mutuality is not applicable to the interest received from the bank.

The assessee, a private limited company, filed a return of income for the assessment year 1995-96, declaring a total income of Rs. 2,42,870, including Rs. 59,000 earned as interest from bank deposits (FDR). The assessee claimed exemption from income-tax on this interest income based on the principle of mutuality, arguing that it was a company formed by shopkeepers for their benefit, with no commercial activity or profit motive.

The AO rejected the claim, holding that the interest income was taxable. The CIT(A) and the Tribunal upheld this view, stating that the principle of mutuality does not apply to income derived from non-members, such as banks. The Tribunal noted that there should be complete identity between the contributors and participators, which was not the case with interest income from a bank.

The High Court, agreeing with the AO, CIT(A), and Tribunal, dismissed the appeal. The Court emphasized that the principle of mutuality requires identity between contributors and recipients, and income from third parties, such as banks, does not meet this criterion. The Court cited precedents from the Gujarat High Court in Sports Club of Gujarat Ltd. vs. CIT and the Karnataka High Court in CIT vs. Bangalore Club, which held that interest income from bank deposits is taxable as it lacks mutuality.

The Court also distinguished the cases cited by the assessee, such as CIT vs. Bankipur Club Ltd. and Chelmsford Club vs. CIT, noting that these cases did not address the issue of interest income from bank deposits. The Court concluded that the relationship between the assessee and the bank is that of a customer and banker, not based on mutuality, and thus, the interest income is taxable.

In conclusion, the appeal was dismissed, affirming that the interest income of Rs. 59,000 earned from bank deposits is liable to income-tax, and the principle of mutuality does not apply.