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TMI Blog2014 (1) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... rves 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. The assessee is covered by the principle of mutuality to the extent of its transactions with the members - Income from transactions with non-members is outside the purview of mutuality – thus, the income is exempt from taxation and only the income from the transactions from non-members is outside the purview of principles of mutuality – Decided against Revenue. Reimbursement of cost to income – Error in Calculating net income - Application of section 44C of the Act – Application of section 40(a)(iii) of the Act - Estimation of income at 5% of the gross amount recovered from non-members – Disallowance made u/s 32 of the Act – Held that:- the decision in Deputy Director of Income-tax (International Taxation)-21, Mumbai Versus Societe International De Telecommunication [2012 (11) TMI 948 - ITAT MUMBAI] followed - Both the sides of the assessee's Income and expenditure are matching paisa to paisa and there is no under-recovery or over-recovery shown as an asset or a liability in its balance sheet - the accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, and in law, the Ld. CIT(A) erred in holding that the assessee is covered by the principle of mutuality without appreciating the fact that:- I. the assessee was having transactions with the non-members also. II. it failed to produce any documentary evidence regarding 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 disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the association in providing goods and services to its members, there can be no tax on such profit on the basis of the principle of mutuality. The reason is that the contributors to the profit and participators in such profit, are the same persons as a class. If no profit follows 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customers is also borne out from its letter dated 25.03.2004, a copy of which is placed on page 29 onwards of the paper book. From para (ivc), it can be noticed that : "SITA and Equant shared network resources in certain countries outside India, in order to maximize such economies of scale. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of loan or other assistance to members in case of a bona fide need. The rules and regulations of the society made it compulsory for every member to participate in the scheme of deposit. The Assessing Officer denied the mutuality on the ground that every depositor was not necessarily borrower 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 Societ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factor eclipsing the principle of mutuality. It is so for the reason that the persons who are entitled to share and participate in the reserves of the society continue to remain the same as a group or class of persons. The mere fact that a person at the time of resignation or retirement is not entitled 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 refurbis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddressing the following grounds of appeal preferred by the appellant company: 3. The learned Assistant Director of Income Tax (' ADIT') erred in holding that the provisions of section 44C of the Act apply to the appellant company in respect of certain expenses incurred at head office level which may not fall 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, that cannot be considered as having any part of it in the nature of income. This brings us to the principle that if there is certain reimbursement of expenses as such, without there being any mark up included in such reimbursement, there cannot be any question of earning any income liable to tax from such reimbursement. 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 computa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides of the assessee's Income and expenditure are matching paisa to paisa and there is no under-recovery or over-recovery shown as an asset or a liability in its balance sheet. Further, when we consider the fact that the accounts of the assessee were maintained at the HO level, there remains nothing to doubt the correctness 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest and interest on income tax refund received by the assessee is also covered by the "Principles of Mutuality". 12. As admitted by both the parties, this issue also stands decided against the assessee in view of the judgment of the Hon'ble Jurisdictional High Court in CIT v/s Common Effluent Treatment Plant, (Thane-Belapur) Association, [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. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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