2015 (5) TMI 114 - AT - Income Tax

Denial of exemption being an income of mutual concern - Principle of mutuality - Income from the transaction of non members is outside the purview of the mutuality - Taxability of Bank interest Interest and Interest u/s 234D of the Act - Interest received from FD with the bank does not cover in Mutuality, hence taxable under the head income from other sources - Held that - On a perusal of the orders of the authorities below as well as the material available on record, we find that this issue has been discussed in detail in assessee s own case 2012 (11) TMI 948 - ITAT MUMBAI in the order for the assessment year 1996-97, vide order dated 26th September 2012. This decision has been followed in the subsequent years also upto the assessment year 2006-07. Thus, respectfully following the earlier year s precedence we hold that the income of the assessee in relation to the transactions entered with the members are covered by the Principles of Mutuality and, hence, the same is exempt from taxation and only the income from the transaction of non-members is outside the purview of Principles of Mutuality . Accordingly, all the grounds raised by the Department stand dismissed. Respectfully following the earlier year s order 2012 (11) TMI 948 - ITAT MUMBAI of the Tribunal, we do not find any reason to deviate from such findings and the grounds no.1 and 2 of the cross objection stand dismissed. In ground no.9, the assessee has challenged that the interest income comprising of bank interest and interest on income tax refund received by the assessee is also covered by the Principles of Mutuality .As admitted by both the parties, this issue also stands decided against the assessee in view of the judgment of the Hon'ble Jurisdictional High Court in CIT v/s Common Effluent Treatment Plant, (Thane-Belapur) Association, 2010 (6) TMI 52 - BOMBAY HIGH COURT , wherein it has been held that interest received from F.D. with the bank does not possess the same character of Mutuality and the interest income would, therefore, be taxable under the head Income From Other Sources . In the latest judgment, the Hon'ble Supreme Court in Bangalore Club 2013 (1) TMI 343 - SUPREME COURT , had settled this issue and held that the amount of interest earned by the assessee on the deposits made in the bank will not fall within the ambit of Principles of Mutuality and is exigible to tax in the hands of the assessee. Thus, in view of the law settled by the Hon'ble Supreme Court, ground no.9 raised by the assessee stands dismissed. - In the net, Revenue s appeal and assessee s cross objection are dismissed.

Issues Involved:
1. Principles of Mutuality
2. Transactions with Members vs. Non-Members
3. Reimbursement of Expenses
4. Allocation of Head Office Costs
5. Interest Income and Mutuality

Detailed Analysis:

1. Principles of Mutuality:
The assessee, a company founded in Belgium, claimed exemption of its income under the "Principles of Mutuality." The Assessing Officer denied this claim. The learned Commissioner (Appeals) had previously accepted the assessee's claim for exemption from assessment years 1996-97 to 2007-08, but only for transactions with members, not non-members. The Tribunal upheld this distinction, noting that the mutual status of an organization is not destroyed by a few transactions with non-members. The Tribunal summarized the principles of mutuality, emphasizing that no profit can arise from transactions within the same group, but income from investments or transactions with non-members is taxable.

2. Transactions with Members vs. Non-Members:
The Tribunal reiterated that income from transactions with members is exempt under the principles of mutuality, while income from transactions with non-members is taxable. The assessee provided services to both members and non-members, but the extent of transactions with non-members was minimal (0.07% of total cost recoveries). The Tribunal concluded that the assessee was primarily a mutual organization, and the principles of mutuality applied to transactions with members but not to those with non-members.

3. Reimbursement of Expenses:
The Tribunal addressed the issue of reimbursement of expenses, stating that reimbursement without any profit element is not taxable. However, in this case, the basis of allocation of costs by the Head Office (HO) was unknown, and the Indian branch could not verify the expenses allocated by the HO. Consequently, the Tribunal upheld the view that the accounts did not reflect the correct income, and the reimbursement could not be accepted as non-taxable without proper verification.

4. Allocation of Head Office Costs:
The Tribunal discussed the allocation of HO costs, noting that the basis of allocation was not known to the Indian branch. The Tribunal emphasized that for tax purposes, the allocation of both income and expenses must be verifiable. Since the allocation basis was unknown, the Tribunal supported the estimation of income at 5% of gross receipts from non-members, as determined by the Assessing Officer and upheld by the learned Commissioner (Appeals).

5. Interest Income and Mutuality:
The assessee argued that interest income from bank deposits and income tax refunds should be covered by the principles of mutuality. However, the Tribunal referred to judgments by the Hon'ble Jurisdictional High Court and the Hon'ble Supreme Court, which held that interest income does not possess the character of mutuality and is taxable under "Income From Other Sources."

Conclusion:
The Tribunal dismissed the Revenue's appeal and the assessee's cross objection. It upheld that the assessee's income from transactions with members is exempt under the principles of mutuality, but income from transactions with non-members and interest income is taxable. The Tribunal also supported the estimation of income at 5% of gross receipts from non-members due to the unverifiable allocation of HO costs.

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