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TMI Blog2019 (11) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... is, on income that has been earned by the petitioner club from its investments made with banks. Thus the judgment and the ratio thereof as extracted above will cover the facts and circumstances of the present case on all fours. These Writ Petitions are thus dismissed. - Writ Petition Nos.29164 to 29167 and 30572 of 2008 & M.P.Nos.1,1,1,1 and 1 of 2008 - - - Dated:- 24-9-2019 - Dr. Justice Anita Sumanth For the Petitioner : No appearance For the Respondent : Mr.A.P.Srinivas Standing Counsel COMMON ORDER The petitioner challenges orders of assessment dated 28.10.2008 and 27.11.2008 passed under the provisions of the Income Tax Act, 1961 (in short 'Act&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration of surplus funds, the setup resembled that of a mutuality; the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to that extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the member banks used such deposits to advance loans to their clients. Hence, in the present case, with the funds of the mutuality, member banks engaged in commercial operations with third parties outside of the mutuality, rupturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28. The facts at hand also fail to satisfy the third condition of the mutuality principle i.e. the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only 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 ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eople - it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 case (supra) and opined that the position of the assessee was no different from an ordinary bank except that it lent money and received deposits from its sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity carried on by the assessee in such cases, claiming to be a mutual concern or Members' club is a trade or an adventure in the nature of trade and the transactions entered into with the members or nonmembers alike is a trade/business/transaction and the resultant surplus is certainly profit - income liable to tax. We should also state, that at what point, does the relationship of mutuality end and that of trading begin is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. Whether or not the persons dealing with each other, is a mutual club or carrying on a trading activity or an adventure in the nature of trade is largely a question of fact [Wilcock' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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