2016 (4) TMI 743 - HC - Income Tax

Addition on contribution from the members - taxability of excess of income over expenditure - application of doctrine of mutuality - Held that - The contributions made by the members to the respondent-assessee cannot be a subject matter of tax merely because the part of its excess of income over expenditure is invested in mutual funds. It is also not the case of the Revenue that the dividend received from mutual funds have not been offered to tax by the respondent-assessee. The concept of Mutual concerns not being subject to tax is based on the principle of no man can profit out of itself. In this case it is not disputed that the income earned on account of investments made in Mutual Funds has been offered to tax. The respondent has in effect followed the decision of the Apex Court in Bangalore Club, however as held in Bangalore Club (2013 (1) TMI 343 - SUPREME COURT ), it cannot result in the respondent being charged to tax on the contribution received from its members. In fact the decision of this Court in Common Effluent (2010 (6) TMI 52 - BOMBAY HIGH COURT ) concludes the issue in favour of the respondent assessee.

Summary

Issues:
1. Application of the doctrine of mutuality to delete the addition made by the Assessing Officer on the Assessee.

Analysis:
1. The appeal filed by the Revenue challenges the order passed by the Income Tax Appellate Tribunal related to the Assessment Year 2007-08 under the Income Tax Act, 1961. The respondent-assessee, an association of Air Cargo Agents, received contributions from its members totaling ?54.07 lakhs during the assessment year. The Assessing Officer did not accept the principle of mutuality invoked by the assessee and brought the entire contribution received from members as income chargeable to tax.

2. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee, emphasizing that the surplus of income over expenditure should not be taxed if the assessee falls under the principle of mutuality. The Commissioner relied on a previous court decision to support this stance and deleted the addition made by the Assessing Officer.

3. The Revenue then appealed to the Tribunal, arguing against the application of the doctrine of mutuality. However, the Tribunal upheld the decision, stating that the contributions received were utilized for the benefit of the contributors, and depositing excess funds in banks or financial institutions does not negate the principle of mutuality.

4. The Revenue contended that the concept of mutuality should not apply to the respondent-assessee due to investments in Mutual Funds. The respondent, on the other hand, argued that the dividend received on the Mutual Funds had been offered to tax. The High Court held that the contributions from members cannot be taxed solely because some of the excess income over expenditure was invested in mutual funds.

5. The High Court distinguished the case from Bangalore Club v/s. CIT, where interest earned on fixed deposits with banks was held taxable. In this case, the income earned from investments in Mutual Funds was already offered to tax, following the principles laid down in previous court decisions. The High Court concluded that the question raised did not present a substantial question of law and dismissed the appeal without costs.