2009 (7) TMI 68 - HC - Income Tax

Mutuality Interest on Fixed Deposits / investments out of surplus funds received from its members - such deposits/investments were made with institutional members who were either banking institutions or Public Sector Undertakings held that - investment of surplus fund with some of the member banks and other institutions in the form of Fixed Deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept - the assessees filed nil return and since the Assessing Authority by invoking substantive part of Section 147 sought the interest earned by the assessees from the surplus income deposited with the financial institutions and Public Sector Undertakings as one of escaped assessment, the question of limitation does not arise

Issues Involved:
1. Whether the interest income of the assessee clubs received from its corporate members on the investment of surplus funds as Fixed Deposits is exempted from tax on the concept of Mutuality.
2. Whether the re-opening of the assessment under Section 147 of the Income Tax Act was valid in respect of the assessee clubs.

Issue-Wise Detailed Analysis:

1. Exemption of Interest Income on the Concept of Mutuality:
The primary issue revolves around whether the interest income earned by the clubs from Fixed Deposits made with their corporate members can be exempted from tax under the principle of mutuality. The clubs argued that their activities, which include providing various facilities to their members, generate surplus funds. These funds are then invested in Fixed Deposits with institutional members, and the interest earned should be exempt from tax based on mutuality.

The court examined the principle of mutuality, which requires:
1. The identity of contributors to the fund and recipients from the fund.
2. The treatment of the entity as an instrument for the convenience of its members.
3. The impossibility of contributors deriving profits from their contributions.

The court referred to the decision in Chelmsford Club Vs. Commissioner of Income Tax (243 ITR 89), which laid down these conditions. It was argued that the surplus funds were invested with member banks for safety until they could be used for club activities, maintaining the identity of contributors and participants.

However, the court found that the investment of surplus funds in Fixed Deposits does not align with the club's objectives, which are primarily recreational and social. The interest earned from such investments does not fulfill the mutuality principle since the funds are not directly used for the club's activities or benefits to its members. The court relied on the decision in Commissioner of Income Tax Vs. Bangalore Club (287 ITR 263), which held that such deposits create a relationship similar to that of a banker and customer, not covered by mutuality.

2. Validity of Re-Opening Assessment under Section 147:
The second issue concerns the legality of reopening the assessment under Section 147 of the Income Tax Act. The appellants argued that the notice under Section 148 was served beyond the prescribed time limit, making the reopening invalid.

The court clarified that the main part of Section 147 does not prescribe a limitation period for cases where income has escaped assessment and no order under Section 143(3) or Section 147 was previously made. The proviso to Section 147, which includes a four-year limitation, applies only if an assessment under Section 143(3) or Section 147 was previously made.

In this case, since the assessees filed nil returns and no prior assessment order existed, the reopening under Section 147 was valid. The court referred to the Supreme Court decision in Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers P. Ltd. (291 ITR 500), which stated that the existence of the first condition (reason to believe income has escaped assessment) suffices for reopening under Section 147.

Conclusion:
The court concluded that the interest income from Fixed Deposits does not qualify for tax exemption under the mutuality principle. The reopening of assessments under Section 147 was deemed valid as it met the necessary conditions. Consequently, the appeals were dismissed, and the Tribunal's decision was upheld.

← Previous Next →