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TMI Blog2017 (12) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... tage, 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. - ITA No. 1084/Chd/2009, ITA No. 364/Chd/2003, ITA No. 777/Chd/2007, ITA No. 778/Chd/2007, ITA No. 252/Chd/2007 And ITA No. 535/Chd/2014 - - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticipate in the surplus nor otherwise had any say in the management including finances/funds of the club. He also noticed that the Club facilities were being extend to certain non-members against payments made by them and thus Club is also involved in profit making activities from third parties. Taking into account the totality of facts and circumstances of the case as narrated in detail in the assessment order, the Assessing Officer held that there was no identity between the contributors and the participants and, therefore, he rejected the claim of the assessee that it was a mutual concern. In support of his decision, the Assessing Officer relied upon several decisions including those of the Hon'ble Jurisdictional High Court. In this view of the matter the entire surplus shown by the assessee in its account including interest income was brought to tax by the Assessing Officer. 4. Aggrieved by the order of the Assessing Officer the assessee filed appeal before the Commissioner of Income-tax (A) who, following the order of this Tribunal in assessee s own case for assessment year 2004-05, allowed the claim of the assessee. 5. Aggrieved by the order passed by the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mutuality requires that there must be a complete identity between the contributors and the participators; (ii) the second feature demands that the action of the participants and the contributors must be in furtherance of the mandate of the association. However, in the case of a club, the steps have to be taken in furtherance of activities that benefit the club and in turn its members. The condition postulates a direct step with direct benefits to the functioning of the club. The mandate of the club requires to be examined in the factual matrix keeping in view the memorandum or articles of association, rules of membership, rules of the organization etc. However, it cannot be construed myopically. In some situations, the benefit may be evident directly in the short run, in others, they may be accruable to an organization indirectly, in the long run and the space must be made for both such forms of interactions between the organization and its member; (iii) Further, there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves and it is a difficult question of fact that at what point mutuality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... club is not independent entity but working under the control of HUDA. All the financial decisions are being taken by HUDA authority. Besides this, President, Vice President and other members are also not elected from the members of the club. All the expenditure is incurred through HUDA. This issue of control is being highlight to show that there is no complete equality between the contributors of the club. Further, the assessee club is receivinginterest income from fixed deposits held with various banks. These amounts deposited in fixed deposits have mostly been received from members of the club as membership fee, renewal fee or in the form of other charges like subscriptions and guest charges. This whole amount is deposited with various banks. The withdrawals of this amount and the use to which it can be put, is totally in the hands of the management of the club, which comprises, the official of Haryana Governmenti.e. Chief Administrator. It has also been contended that as per clause 5(d) of the Memorandum of Association, upon the winding up or dissolution of the society, if, there remains after satisfaction of all its debts and liabilities any property, the same shall not be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, in the games such as swimming, tennis, badminton, table tennis, billiards, squash and other indoor as well as outdoor games etc. iv) To invite as and when feasible, renowned artists, masters, sportsmen, culturalleaders, scholars, scientists and creative artists, who may or may not be members of the Society to take advantage of the facilities offered by the Society. v) To promote or hold either alone or jointly with any association or persons, meetings, tournaments, competitions and matches relating to games to other health exercise and to offer, give or contribute prizes, medal and awards and to promote, give or support dance, concerts and other social supporting or cultural, entertainments events. vi) To establish, promote or assist in establishing or promoting and to subscribe to or become a member of any other Association whose objects are similar or in part of similar to the objects of the Club or the establishment or promotion of which may be beneficial to the Club. The HUDA Gymkhana Club may affiliate with any other club. 11. Article 5 deals with the condition which provides that income and property of the Society shall be applied towards thepr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vice Chairman, HUDA and Chief Secretary to Government. Haryana Chairman, Board of Patrons 2 P.S.C.M. Member 3 Commissioner Secretary to Government. Haryana, Town Country Planning Department Member 4 Chief Administrator, HUDA Member 5 Representative of Defence Services (Western Command) Not below the rank of Lt. Gen. (to be nominated) Member Further, it has been provided as under:- Constitution: There will be a Board of Patrons consisting of the following:- 1 Vice Chairman, HUDA and Chief Secretary to Government. Haryana Chairman, Board of Patrons 2 P.S.C.M. Member 3 Commissioner Secretary to Government. Haryana, Town Country Planning Department Member 4 Chief Admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Permanent members b) Dependent members c) Corporate members d) HUDA members e) Service members 13. It has been further provided that Permanentmember has to pay an entrance fee, annual subscription, monthly subscription and such other fees as may be fixed from time to time by the Executive Committee.The Dependent Members are the spouse and dependent children of the members. Guest of the Permanent Members can also use the facility on payment of certain amount. The Corporate Member means a limited Company or an organization who will have the right to nominate not more than three persons who will be entitled to enjoy Clubfacilities on payment of subscription fee. Another clause of members is HUDA Members, who are members of the Authority and Gazetted officers of HUDA posted at Panchkula/Chandigarh and they are eligible to becomepermanentmembers on payment of fee of ₹ 250/- and monthly subscription of ₹ 50/- or such fee and subscription as may be determined by the Executive Committee. In the category of Service Members, all the class-I II officers of the State Government / Central Government, Boards / Corporations etc. have been made el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... himself. An amount received from oneself is not regarded as income and is therefore, not subject to tax. The concept of Mutuality has been has been explained to define group of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purposes is said to be simply an increase of common fund and as such neither considered income nor taxable. In the light of the above principles, we have to decide as to whether the surplus accrued / collected during the year is taxable income of the assessee or the same is just the collection of the common fund to which Principle of mutuality applies. 16. The Hon'ble Supreme Court in the case of Bangalore Club (supra) has also discussed the nature and functioning of the mutual organizations. It has been observed that a common feature of mutual organization in general and of licensed Club in particular is that participators usually do not have property right to their shares in the common fund, nor they can sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the club to the high rank officers of HUDA, whether any right of reverse action that is to divest the officials of HUDA from the management of the club lies with the members of the club? The answer is no. We have gone through the memorandum of the association but have not found any clause giving any such right in particular or any other right in general to the members of the club in general. All the rights vests in the executive committee. The Board of Patron have the absolute powers in terms of taking decision pertaining to any matter relating to Club.They have veto power on the decision taken to any committee / body relating to the club. Under these circumstances, it can not be said that the appoint of management or vesting of all rights relating to the running of affairs of the club including taking financial decisions relating to the manner and items on which the surplus is to be applied. In general parlance, as we understand, the participation in the surplus includes not only the right to get common benefit out of surplus but also the right to participate in the decision making as to in what manner or on what item or services the surplus is to be applied. Having said so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been raised or collected with a profit element to the HUDA or to the official management who are ex-officio members of the Club. No doubt the participation in the surplus of the non-official members is restricted to the enjoyment and use of facilities of the Club and they are not entitled to participate in the decision making as to on which activity and in what manner funds are to be expended for the common benefit of the members or for carrying out the objects of the Club. Such a restriction though may be of some importance with the question as to the mutually equal rights in the management of Club if any such dispute arises inter se between the members. However, so far as the taxability of the surplus is concerned, the surplus funds cannot be said to be income of the Society as there is lack of business profit motive involved and the funds so collected have to be necessary expended for the common benefit of the contributors only. It has also been held time and again that when we speak of the contributions to the common fund and the participation in the surplus, that does not mean that each member should contribute to the fund or that each member should participate in the sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. We further, taking clue from the observations of the Hon ble Supreme Court in Banglore Club s case (supra), may add here that sometimes the right to share in the surplus may lead to a conclusion of involvement of the motive of commerciality in the operation or working of such an organization resulting into denial of the benefit of mutuality. In this respect, the Hon'ble Supreme Court in Banglore Club (supra) has referred to the British Common Law decisions in the case of Styles (Surveyor of Taxes) Vs. New York Life Insurance Co (1889) 2 TC 460 and in the case of Thomas Vs. Richard Evans Co Ltd (1927) 11 TC 790 wherein it has been held that if profits are distributed to shareholders, the principle of mutuality is not satisfied. Further, in the case of Commissioner of Income Tax, Madras Vs. Kumbakonam Mutual Benefit Fund Ltd ., AIR 1965 SC 96, the Hon'ble Supreme Court denied the exemption on different facts of the case before it from those of Styles case (supra) and denied the exemption because of the taint of commerciality, observing as under:- It seems to us that it is difficult to hold that Stylee s case applies to the facts of the case. A shareholder in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 21. So far as the receipt from interest on FDR s is concerned, the ld. Counsel for the assessee society has fairly agreed that the issue has been settled by the Hon ble supreme court in the case of Banglore Club (supra) against the assessee by observing as under: 25. This brings us to the facts of the present case. As aforesaid, the assessee is an AOP. The concerned banks are all corporate members of the club. The interest earned from fixed deposits kept with non- member banks was offered for taxation and the tax due was paid. Therefore, we are required to examine the case of the assessee, in relation to the interest earned on fixed deposits with the member banks, on the touchstone of the three cumulative conditions, enumerated above. 26. Firstly, the arrangement lacks a complete identity between the contributors and participators. Till the stage of generation of surplus funds, the setup res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be expended or returned to themselves. This principle requires that the funds must be returned to the contributors as well as expended solely on the contributors. True, that in the present case, the funds do return to the club. However, before that, they are expended on non- members i.e. the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, in our opinion, snaps the link of mutuality and thus, breaches the third condition. 29. There is nothing on record which shows that the banks made separate and special provisions for the funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client. This directly contravenes the third condition as elucidated in Styles (Surveyor of Taxes) and Kumbakonam Mutual Benefit Fund Ltd. cases (supra). Rowlatt J., in our opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts to be contributed monthly by them for a fixed number of months as stipulated at the end of which a fixed amount was returned to them according to published tables. The amount so returned, covered the compound interest of the period. These recurring deposits constituted the main source of funds of the assessee for advancing loans. Such loans were restricted only to members who had, however, to offer substantial security therefor, by way of either the paid up value of their recurring deposits, if any, or immovable properties within a particular district. Out of the interest realised by the assessee on the loans which constituted its main income, interest on the recurring deposits aforesaid was paid as also all the other outgoings and expenses of management and the balance amount was divided among the members pro rata according to their share-holdings after making provision for reserves, etc., as required by the Memorandum or Articles aforesaid. It was not necessary for the shareholders, who were entitled to participate in the profits to either take loans or make recurring deposits. 31. On these facts, as already noted, the Court distinguished Styles (Surveyor of Taxes) ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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