1987 (10) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the entire expenditure incurred in all the activities should be allowed as deductions from the assessee's taxable income.
2. Whether the income from interest is not the result of mutual activity and thus exigible to income-tax.
3. Whether the income from interest is not arising from normal club activities and thus the expenditure incurred on the club activities is not deductible from interest income.

Summary:

Issue 1: Deduction of Entire Expenditure
The Tribunal rejected the assessee's claim for allowing the entire expenditure incurred in all the activities as deductions from the assessee's taxable income. The Tribunal held that only the expenditure directly related to earning the interest income could be deducted u/s 57(iii) of the Income-tax Act, 1961.

Issue 2: Taxability of Interest Income
The Tribunal held that the income from interest on fixed deposits was not the result of mutual activity and thus exigible to income-tax. The principle of mutuality did not apply to the interest income as it was derived from third-party banks and not from the members of the club. The Tribunal allowed a deduction of 10% of the gross receipts from interest u/s 57(iii).

Issue 3: Deductibility of Club Expenditure from Interest Income
The Tribunal concluded that the income from interest was not arising from normal club activities and thus the expenditure incurred on the club activities was not deductible from the interest income. The Tribunal observed that the investment of unutilized surplus in fixed deposits was not incidental to the main objects of the club and thus the interest income could not be exempted from tax.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that:
1. The entire expenditure incurred in all activities cannot be deducted from the assessee's taxable income.
2. The income from interest on fixed deposits is not the result of mutual activity and is exigible to income-tax.
3. The expenditure incurred on club activities is not deductible from the interest income.

The reference was disposed of in favor of the Revenue and against the assessee, with no order as to costs.