2017 (12) TMI 109 - AT - Income Tax

Principle of mutuality - assessee club has been formed under the control of Haryana Urban Development Authority (HUDA) which is authority established by Haryana Government - Held that - There can not be said to be straight jacket formula to say that in every a mutual concern the members must be entitled to a share in the surplus. In the aforesaid case laws as discussed by the Hon ble Supreme Court in Banglore Cliub s (2013 (1) TMI 343 - SUPREME COURT) if the scheme or the mechanism of functioning of a mutual organization is so devised that a taint of commerciality is involved, the income of the organization can be subjected to tax. As observed by the hon ble supreme court, it is difficult and vexed question as to at what point of time the relationship of mutually ends and that of trading begins. Since the affairs of the assessee trust are controlled by the serving officers of HUDA, hence it has to pass through greater scrutiny as the chances of it crossing the thin line between the mutuality and commerciality are very high. However, at this stage, so far the Assessment Years under consideration are concerned, the revenue could not point out the taint of commerciality in the contribution, management and application of the surplus collected through contributions and subscriptions from the members and for price of the facilities availed by its members, hence, the same cannot be said to be taxable income of the society. Receipt from interest on FDR s - It is held that for the assessment years under consideration, the assessee is entitled to the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed by its members. However the amount of interest earned by the assessee from the fixed deposits in the banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club. Our above decision will apply mutatis-mutandis to all the captioned appeals. In view of the above all the captioned appeals are treated as partly allowed.

Summary

Issues Involved:

1. Applicability of the 'principle of mutuality' to the assessee club.
2. Taxability of interest income earned from fixed deposits.

Issue-wise Detailed Analysis:

1. Applicability of the 'Principle of Mutuality':

The primary issue in all the appeals was whether the 'principle of mutuality' applied to the assessee, a Gymkhana Club incorporated as a society under the Societies Registration Act, 1860. The assessee claimed exemption from tax on the grounds of being a mutual concern. The Assessing Officer (AO) scrutinized the Memorandum of Association and by-laws of the society and noted that the management and control of the assessee were wholly vested in HUDA (Haryana Urban Development Authority). The AO observed that the contributors to the funds were neither entitled to participate in the surplus nor had any say in the management of the club. The AO also noted that the club extended facilities to non-members for payments, suggesting profit-making activities. Consequently, the AO rejected the claim of mutuality and brought the entire surplus, including interest income, to tax.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee's claim by following the Tribunal's earlier decision for assessment year 2004-05. The Tribunal upheld the CIT(A)'s decision, noting that the facts for the year under consideration were identical to previous years where the issue had been consistently decided in favor of the assessee.

The High Court remanded the matter back to the Tribunal, directing it to adjudicate the issue based on the conditions laid out by the Supreme Court in the case of 'Bangalore Club Vs. CIT' (2013) 350 ITR 509 (SC). The conditions for invoking the principle of mutuality include: (i) complete identity between contributors and participators, (ii) actions of participants and contributors must be in furtherance of the association's mandate, and (iii) no scope of profiteering by the contributors from the fund.

Upon review, the Tribunal noted that the management of the club was vested in high-ranking officials of HUDA, and members had no control over the management or financial decisions. Despite this, the Tribunal found that the funds were used for the common benefit of the members, and there was no profit motive involved. The Tribunal concluded that the surplus funds collected were for the common benefit of the contributors and thus could not be considered taxable income.

2. Taxability of Interest Income from Fixed Deposits:

The Tribunal addressed the issue of interest income earned from fixed deposits separately. The assessee's counsel conceded that the issue was settled by the Supreme Court in 'Bangalore Club' against the assessee. The Supreme Court held that interest earned from fixed deposits with banks did not satisfy the conditions of mutuality. The funds placed in fixed deposits were used by banks for commercial operations, which ruptured the 'privity of mutuality' and violated the conditions for mutuality. Consequently, the interest income was not exempt from tax under the principle of mutuality.

Conclusion:

The Tribunal held that the assessee was entitled to the benefit of the doctrine of mutuality concerning the surplus amount received as contributions or price for facilities availed by its members. However, the interest income earned from fixed deposits in banks did not fall within the ambit of mutuality and was therefore taxable. The decision applied mutatis mutandis to all the captioned appeals, which were partly allowed.