9911796707
TMI Blog2014 (1) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the expenses and thereby, failed to satisfy the Assessing Officer that the revenue received were matched by the expenses incurred. 2. When the case was called for hearing, none appeared on behalf of the assessee. We, however, proceed to dispose of the appeal preferred by the Revenue after hearing the learned Departmental Representative. 3. The learned Departmental Representative, at the outset, submitted that similar issue has come up for consideration before the Tribunal in assessee's own case in earlier years also and in the series of decisions right from the assessment year 1996-97 to 2006-07 and 2008-09, the Tribunal has decided this issue. She also filed copy of the Tribunal orders for the assessment year 2006-07 and 2008-09. 4. After carefully considering the relevant findings of the learned Commissioner (Appeals) as well as the earlier orders of the Tribunal, it is seen that this issue has been discussed in detail in the order passed by the Tribunal in the assessment year 1996 -97 in ITA no.4970/Mum./ 2005 and C.O. no.67/Mum./2006, order dated 26th September 2012. This decision of the Tribunal has been followed in all the assessment years up to 2006-07 and also in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llows from the transactions with the members, obviously, there can be no tax even dehors the rule of mutuality. c. If, an organization of the nature as discussed in point no. b above, apart from entering into transactions with its members in furtherance of its objects, invests its funds or makes deposit in bank, the return or interest on such investment/deposits will not be covered by the character of mutuality and such an amount will be liable to tax. It is so for the reason that the principle of mutuality will lack as the contributors of such interest income will not be participating in such income. However, mutual character of the organization in respect of transactions with its members will continue and income there from will enjoy exemption. d. When individuals join and form an association and such association sells/provides goods/services/facilities ONLY TO public at large, that is, NON-MEMBERS, there may or may not be profit motive. When there is profit motive and profits actually follows, such profit is liable to tax. If there is no profit motive but still profit follows, such a profit is also chargeable to tax. If, however there is no profit motive and no profit results, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. Under those arrangements, the costs incurred by each party were shared according to usage". It shows that non-members did avail the facilities extended by the assessee. 3.14. Now let us see the volume of transactions with such non- members. The assessee's contention is that it was simply recovering costs from its members and non-members for rendering services and there was no profit motive. The total of cost recoveries from government, international organizations and Equant customers, constituting non-members as a group, is 0.07% of the total cost recoveries. It shows that the assessee provided services to its members at 99.93% of its total operations. This fact evidences that nonmembers availed the facilities provided by the assessee to a very limited extent, less than even 0.1% of total. 3.15. At this moment, we will try to ascertain if the assessee was set up with a profit motive. We have perused Articles of association of the assessee, a copy of which is placed at page 116 onwards of the paper book. Objects of the assessee are contained in Article 3. Main object of the assessee as per clause a) of Article 3 is to foster all communication and information processing, matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and therefore, the interest paid by the borrowers and distributed amongst the non-borrower members dented the mutuality. The Hon'ble Madras High Court upheld this principle by holding that since the interest income was available for being distributed amongst all the members including those who had not borrowed moneys, the identity between the contributors and participators was lost and hence the principle of mutuality was not satisfied. 3.19. The question which, therefore, arises for our consideration is whether the mutuality is lost by reason of a member resigning or retiring from the society and not getting any share in the reserves. In other words, the larger question is whether the contributors to the fund and participators in the fund should be the same persons on an individual level or a class level. The Hon'ble jurisdictional High Court in the case of Sind Co-operative Housing Society (supra) considered the question of mutuality on the transfer fees received by the co-operative society from its members. In this case, the Hon'ble jurisdictional High Court recognized `class of members' as participators as well as contributors for mutuality, instead of the `individual' membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to share in the reserves of the organization, would not damage the mutuality so long as the persons who are entitled to share such reserves continue to be the members as a class. 3.23. Be that as it may, it is observed that this fact has been considered by the Tribunal while deciding the principle of mutuality in relation to assessment years 1974-75 and 1975-76. The Tribunal has elaborately reproduced and discussed these two Articles in its order and thereafter recorded a positive conclusion granting the status of mutual organization to the assessee. Same is true in respect of the creation of reserves as well. The learned AR has pointed out that the reserves so referred to by the learned Departmental Representative were created many years ago in accordance with the Belgian statutory requirements or arose due to revaluation or refurbishment cost or due to capitalization of refurbishment cost. The question of reserves has also been discussed in the order for assessment years 1974-75 and 1975- 76. In view of the conclusion arrived at by the Tribunal in earlier years holding that the mutuality is not disturbed by reason of Article 20 and 50 of the assessee or the creation of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the definition of 'head office expenditure' as defined in section 44C of the Act. 4. The learned ADIT also failed to appreciate that Head Office does not only apportion certain costs to India, but also allocates the matching cost recoveries, so that in the event of any disallowance of Head Office cost apportionments, the matching cost recoveries should also be excluded from the taxable income of the branch, applying the principle contended in Article 7( I )(a) of the India-Belgium Tax Treaty. 5. The learned ADJT erred in observing that the provisions of section 40(a)(iii) may apply to the appellant company. 6. The ld. ADIT erred in holding that the appellant company was required to withhold tax from the interest payments made by it to its members and not having done so, the payments are disallowable under section 40(a)(i) of the Act. The learned ADIT failed to appreciate that the payments were not liable to tax in India and accordingly the appellant was not required to withhold any tax at source and consequently no disallowance could be made under section 40(a)(i) of the Act in respect of such interest charges. 7. The learned ADIT erred in not appreciating that the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We agree with the learned AR on this principle that the reimbursement of expenses does not lead to any income and in such a situation there can be no question of any income embedded in such reimbursement. 5.5. However we find that this principle is not applicable in the facts and circumstances of the instant case. It is observed from the statements of Shri S.Gopalakrishnan and Mr.Andrew Cleak recorded at the time of survey that the basis of allocation of costs to different countries by the HO was not known. It was admitted that the HO allocates a proportion of its general administrative and financing cost to other branches to exactly match the total cost incurred in each country in each month. It was also admitted that there was no verification of the expenses allocated by the HO because the basis of charge was known to HO alone and the details of such computation were not provided to the Indian branch. On a question about the recording of revenues, it was admitted that the entry was passed on the receipt of intimation from HO and how such revenues are determined, was not known. In response to question nos.12 and 13, Shri Gopalakrishnan admitted that accounts were finalized by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view taken by the learned CIT(A) that the accounts of the assessee do not divulge the correct income. Not only the basis of allocation of expenses but also that of the revenue, as done by the HO is not known to the assessee. Under such circumstances, the contention that the assessee was only recovering costs from its non-members and there was no profit element in it, is not open for verification. 7.2 When the Tribunal has decided this issue after considering the rival contention and relevant facts, then in the absence of any new facts or material, we do not find any substance in the contention of the ld Sr counsel for the assessee regarding the remarks of the Tribunal in the earlier year. Moreover, the same does not effect the findings of the Tribunal on this issue. 7.3 As regards ground no.2 to 9 of the CO are concerned, the Tribunal as considered the same in para 5.6 & 5.7 as under: "5.6. The learned AR also pressed into service the provisions of section 44C to contend that where the basis of allocation of HO expenditure is not known, deduction for such HO expenses has to be made in terms of section 44C. In the light of this section, the learned AR contended that only a small ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociation, [2010] 328 ITR 362 (Bom.), wherein it has been held that interest received from F.D. with the bank does not possess the same character of "Mutuality" and the interest income would, therefore, be taxable under the head "Income From Other Sources". In the latest judgment, the Hon'ble Supreme Court in Bangalore Club v/s CIT, [2013] 29 Taxman.com 29 (SC), had settled this issue and held that the amount of interest earned by the assessee on the deposits made in the bank will not fall within the ambit of "Principles of Mutuality" and is exigible to tax in the hands of the assessee. Thus, in view of the law settled by the Hon'ble Supreme Court cited supra, ground no.9 raised by the assessee stands dismissed. 11. Thus, respectfully following the aforesaid decision of the Tribunal, ground no.9 raised by the assessee is treated as dismissed. 12. Insofar as the issue arising out of the ground no.10 and 11 are concerned, the same has become infructuous in view of the findings given in ground no.9 which has been decided against the assessee. Accordingly, ground no.10 and 11 are treated as dismissed. 13. In the result, the cross objection preferred by the assessee is treated as dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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