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TMI Blog2010 (6) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... r Dr.D.Y. Chandrachud, J.) 1. Leave to amend the questions of law is granted. Amendment to be carried out during the course of the day, in terms of the draft amendment tendered on record. Verification is dispensed with. 2. This is an appeal by the Revenue under Section 260A of the Income Tax Act, 1961 against a decision of the Income Tax Appellate Tribunal (Tribunal) for assessment year 2001-2002. During the course of the hearing, Counsel appearing on behalf of the Revenue and Counsel appearing on behalf of the assessee addressed the Court on two issues. In view of the submissions which have been urged before the Court, the questions of law raised in the appeal have been reframed thus with the consent of Counsel appearing on behalf of the Revenue and Counsel appearing for the assessee : A) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the excess of income over expenditure in respect of the effluent treatment receipts is exempt from income-tax on the principle of mutuality; B) Whether the Tribunal was justified in holding that interest on bank fixed deposits, other deposits and income-tax refunds is not chargeable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee amounting to Rs.45.46 lakhs on fixed deposits and other deposits and on income-tax refunds was taxable under the head of income from other sources. The decision of the Commissioner (Appeals) was questioned before the Tribunal both on behalf of the Revenue and the assessee. The Tribunal by its decision dated 6 February 2007 confirmed the decision of the Commissioner in so far as it applied the principle of mutuality to the excess of income over expenditure. The Tribunal noted that the assessee is a nonprofit company formed by units engaged in industrial activity with the object of setting up a common effluent treatment facility. The Tribunal confirmed the finding that there is a complete identity between contributors and participators and was consequently of the view that the principle of mutuality was attracted. On the second question, the Tribunal held that since the principle of mutuality was applicable, interest on bank fixed deposits, other deposits and income- tax refunds was also not chargeable to tax. The appeal by the Revenue was dismissed and the appeal of the assessee was allowed. 5. The Revenue is in appeal before this Court. The first question of law that has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contributors to the common fund. It is in this sense that the law postulates that there must be a complete identity between the contributors and the participators. The essence of the doctrine of mutuality lies in the principle that what is returned is what is contributed by a member. A person cannot trade with himself. It is on this hypothesis that the income which falls within the purview of the doctrine of mutuality is exempt from taxation. 8. In Commissioner of Income Tax V/s. Bankipur Club Limited{(1997) 92 Taxman 298}, the Supreme Court considered as to whether a surplus of receipts over expenditure generated from the facilities extended by a club to its members were exempt on the ground of mutuality. The Supreme Court reiterated the principle that in the case of a mutual society, there must be a complete identity between the class of contributors and of participators. The main object of the club, noted by the Supreme Court, was to afford to its members the usual privileges, advantages, conveniences and accommodation provided by the club. The amounts received by the club were for the supply of drinks, refreshments or other goods from the members of the club. These being ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibuted by its members. The assessee has been formed specifically with the object of providing a common effluent facility to its members. The income is not generated out of dealings with any third party. The entire contribution originates in its members and is expended only in furtherance of the objects of the Association, for the benefit of the members. On these facts, both the Commissioner (Appeals) and the Tribunal were justified in coming to the conclusion that the surplus so generated falls within the purview of the doctrine of mutuality and was not exigible to tax. The first question of law would accordingly have to be answered in favour of the assessee and against the Revenue. RE: QUESTION B 11. During the assessment year, the assessee earned interest on bank deposits, other deposits and income-tax refunds amounting to Rs. 45.46 lakhs. The submission which has been urged on behalf of the Revenue is that (i) The interest income does not satisfy the test of mutuality since the income is generated not from the members of the assessee but from third parties such as banks with whom the surplus is kept in fixed deposits; (ii) Clause 15 of the Memorandum of Association enables t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the activities of the Company. iii) Any other securities or investments authorized by law. iv) To invest the funds of the Company not immediately required in accordance with the pattern laid down u/s.11(5) of the Income-tax Act, 1961 as amended from time-to-time and/or as may be directed by any authority or authorities under the Income Tax Act, 1961, and/or any other law for the time being in force concerning the name". 13. Several High Courts have considered the question whether interest earned on surplus funds originating in the members' contribution of a mutual association is exigible to income tax. The Gujarat High Court had occasion to consider the question in Sports Club of Gujarat Limited V/s. Commissioner of Income Tax (supra). A Division Bench of the Gujarat High Court noted that in that case, the objects clause of the Memorandum and Articles of Association empowered the management of the assessee to invest in and deal with the moneys of the club not immediately required, in such a manner as may from time to time be determined by it. Under the clause, investment was not confined to the holding of fixed deposits in banks but could take any other form or shape inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined to the surplus which has accrued to the club out of the contributions received from the members but, this principle would have no application to the surplus received from nonmembers. The tax was sought to be levied not on the surplus arising from the contributions made by the members or from interest earned on the moneys contributed by the members. On the other hand, the deposits in banks were made for earning interest by way of income. The principle that no person could trade with himself would not arise as moneys were invested by the assessee with the bank to earn income, to enable the assessee to discharge its obligations. Consequently, the income earned from an outside agency by way of interest would not be covered by the principle of mutuality. In Commissioner of Income Tax V/s. Bangalore Club {(2006) 156 Taxman 323 (Kar.)}, the assessee was a club which was registered under the Societies' Registration Act and its members included four Scheduled Banks. The surplus which was generated during the course of assessment year 198990 was held in fixed deposits with the four banks and the interest that was generated thereon was claimed not to be exigible to tax on the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court considered the decisions of the Karnataka High Court both in the case of I.T.I. Employees and in Bangalore Club. The Madras High Court held that though the club existed for the mutual interest of its members, on the basis of this alone it could not be held that the other activities such as financial management of depositing surplus funds in banking institutions and earning a substantial amount by way of interest should also be regarded as possessing a nexus to the regular activities of the club in relation to its members. The High Court observed that it was not the case of the assessee that the funds which were invested in the form of fixed deposits were so maintained with a definite idea of using them for a specific project or for the development of the infrastructural facilities of the club. The Karnataka High Court was of the view that such investments in fixed deposits could not be equated within or brought within the concept of mutuality and the benefit of tax exemption could not be extended in respect of the interest earned on surplus income. The Madras High Court was not inclined to follow the decision of the Karnataka High Court in the Canara Bank case and confine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed." 21. Now, from the judgment of the Supreme Court it is evident that the High Court had held, in other cases relating to the same assessee, that the doctrine of mutuality applied and, therefore, the income earned by the assessee from the rooms let out to its members could not be subjected to tax. The Supreme Court noted that no appeal had been filed against that decision and the issue stood concluded in so far as the assessee was concerned. It is in this backdrop that the Supreme Court observed that no useful purpose would be served in proceeding with the appeals on the other questions, when the assessee could not be taxed because of the principle of mutuality. Hence, from the judgment of the Supreme Court it is clear that the question as to whether interest earned on fixed deposits made by an assessee out of surplus funds would or would not fall within the purview of the principle of mutuality has not been adjudicated upon. The judgment of the Supreme Court must be construed as it stands. The observation of the Supreme Court was that no useful purpose would be served in proceeding with the appeals on the other questions. That was because as between the assessee and the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Article 141 of the Constitution, when a question is directly raised and considered. The decision becomes a law declared where the question is actually adjudicated upon (Tika Ram Vs.State of U.P.){(2009) 12 SCALE 349}. The decision in Cawnpore Club does not actually decide upon the issue as regards the exigibility to tax of the interest received on surplus income invested in fixed deposits. 25. In order to fulfill the requirement of mutuality, a mutual association has to establish, as an essential requirement, the identity between participators and contributors to the fund. However, the fact that an Association satisfies the norm of mutuality in respect of the receipts of contributions from its members does not necessarily lead to the conclusion that every activity of the Association satisfies the test of mutuality. An Association may engage in activities which can be described as mutual and in other activities which are not mutual. The Gujarat High Court recognized this in its decision in Sports Club of Gujarat (supra). Adverting to the decision in Commissioner of Income Tax V/s. Madras Race Club, the Court noted that the application of the principle of mutuality is not de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee assumes the character of a customer of the bank or institution and the relationship that is engendered is that between a banker and its customer. The fact that the funds which are invested have their source in the contribution by the members of the assessee cannot be dispositive of the nature of the receipt obtained by the assessee on account of the interest payments on the deposits made. In determining the exigibility to tax of receipts on account of interest, it is the character of the receipt as interest that must play a determinative role. A payment on account of interest by the bank or a party with whom the deposit is placed is an arms length transaction with a third party. The recompense which is received by the assessee by and as a result of the transaction does not fulfill the condition of mutuality to which the contributions received from the members of the assessee are subject. 27. We have adverted to several decisions of the High Courts which have considered the issue which has fallen for determination in these proceedings. Some of these decisions may undoubtedly possess a factual background on which there may not be complete identity with the facts of ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of these funds. These receipts must partake of the character of income from other sources and would be exigible to tax. 28. At this stage, it would be necessary for the Court to advert to a recent judgment of the Supreme Court Totgar's Cooperative Sale Society Limited V/s. Income-tax Officer {(2010) 322 ITR 283 (SC)}. In that case, the issue before the Supreme Court related to the deduction under Section 80P. The Supreme Court dealt with interest which had accrued on funds which were not required immediately by the assessee which was a cooperative credit society, for the purposes of its business and which came to be invested in specified securities as investment. The assessee had contended before the Supreme Court that under the provisions of the Karnataka Cooperative Societies Act, 1959, a statutory obligation was imposed on cooperative credit societies to invest their surplus funds in specified securities and the submission was that in view of the statutory obligation, income derived from shortterm deposits and securities must be considered as income derived from business activities. The assessee marketed the produce of its members whose sale proceeds were at times retaine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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