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2015 (9) TMI 378 - AT - Income TaxApplicability of principle of mutuality - interest earned by the assessee from the financial institutions who are members of the assessee Club treated as taxable income of the assessee - Held that - No merits in the arguments submitted by the Ld. A.R. The decision of the Tribunal in the assessee s own case for A.Ys 2002-03 to 2007-08 the Bench had followed the decision of the Hon ble Apex Court in the case of CIT Vs. Vegetable Products Limited in (1973 (1) TMI 1 - SUPREME Court) wherein it was held that when two views are possible on the same issue by the two different High Courts, then the view in favour of the assessee has to be upheld. However, in the present situation the Hon ble apex Court in the case of Bangalore Club (supra) has categorically held that the interest earned by the assessee from the financial institutions who are members of the assessee Club will not fall within the ambit of mutuality principle and therefore will be exigible to income tax in the hands of the assessee club. In the case before us the situation is much worse than the case of Bangalore Club, because the financial institutions from whom the interest is received by the assessee are not members of the Assessee Company but third parties. The relation between them is only as clients of the financial institutions and there is no scope of mutuality existing between them. Further it an income earned by the assessee company from its resources out of the transactions with third parties which are available for the members of the assessee company for their collective enjoyment though not available for distribution as dividend. For these reasons in the case of the Bangalore Club, the assessee itself had admitted, that the interest received from the financial institutions who are not members of the assessee Club, as its income. Therefore, respectfully following the elaborate order of the Hon ble Apex Court, we hereby confirm the orders of the Revenue. - Decided against assessee.
Issues Involved:
1. Whether the interest received from bank and financial institutions on account of fixed deposits falls outside the purview of the "principles of mutuality" and is liable to be treated as taxable income. Issue-wise Detailed Analysis: 1. Taxability of Interest Income from Fixed Deposits: The core issue in this case revolves around whether the interest income amounting to Rs. 9,97,960/- received by the assessee from fixed deposits in banks and financial institutions should be considered outside the "principles of mutuality" and thus be taxable. Facts of the Case: - The assessee, a registered club under Section-25 of the Companies Act, filed its return of income for the assessment year 2010-11 declaring 'Nil' income. - The case was selected for scrutiny, and the Assessing Officer (AO) brought to tax the interest income from fixed deposits. Assessing Officer's Observations: - The AO noted that satisfying the norms of mutuality for member contributions does not imply that all activities of the assessee are mutual. - The interest earned from fixed deposits with third parties (banks and financial institutions) does not meet the mutuality test as these are commercial investments. - The relationship between the club and the banks is that of a customer and banker, not mutual members. - The principle of mutuality applies only when income has a direct nexus with members, which is not the case here as the banks are not members of the club. Reliance on Supreme Court Judgment: - The AO relied on the Supreme Court decision in the case of Bangalore Club Vs. CIT, which held that interest earned from surplus funds placed in fixed deposits with banks does not fall within the ambit of mutuality and is taxable. Commissioner of Income Tax (Appeals) [CIT (A)]'s Confirmation: - The CIT (A) upheld the AO's order, reiterating that the interest income from deposits does not satisfy the mutuality principle. - The CIT (A) referred to the Supreme Court's observation that the funds placed in fixed deposits with banks engage in commercial operations outside the mutuality, thus violating the mutuality principle. - The surplus funds were not used for any direct benefit of the club members but were utilized by banks for commercial purposes, breaking the mutuality link. Arguments by Assessee's Representative: - The assessee's representative argued that the Tribunal in earlier years had ruled in favor of the assessee, and the issue had reached finality as the Revenue did not appeal further. - It was contended that the Bangalore Club case was distinguishable as it involved interest from financial institutions that were members of the club, unlike the current case where the financial institutions were not members. - The representative maintained that the idle funds were kept in fixed deposits for the club's purposes and not for distributing dividends. Tribunal's Decision: - The Tribunal dismissed the assessee's appeal, finding no merit in the arguments. - It emphasized that the Supreme Court's decision in Bangalore Club categorically held that interest earned from financial institutions, even if they were members, does not fall within the mutuality principle. - The Tribunal noted that in the present case, the financial institutions were not members, making the situation worse than in Bangalore Club. - The relationship between the club and financial institutions was purely commercial, with no scope of mutuality. - The Tribunal confirmed that the interest income from fixed deposits is taxable. Conclusion: - The appeal of the assessee was dismissed, and the interest income from fixed deposits was held to be outside the purview of the "principles of mutuality" and thus taxable. Order Pronounced: - The order was pronounced on 5th August 2015 at Chennai.
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