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TMI Blog2009 (7) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... A)Nos. 397 to 404 of 2008 Mr. J. Balachander for Mr. S. Sridhar for Appellant in TC(A) No. 276 of 2004 and 428 to 433 of 2008 Mr. B. Raveendran for Appellant in TC(A) No.361 of 2009 Mr. J. Naresh Kumar Sr. Standing Counsel for IT, for Respondent in TC(A) Nos. 397 to 404 of 2008 and 361 of 2009 Mr. K. Subramaniam Sr. Standing Counsel for IT for Respondent in TC(A) Nos. 428 to 433 of 2008 Mrs. Pushya Sitaraman Sr. Standing Counsel for IT for Respondent in TC(A) No. 276 of 2004 JUDGMENT F.M.IBRAHIM KALIFULLA, J. - These appeals arise out of orders passed by the Income Tax Appellate Tribunal, Chennai in various Income Tax appeals preferred by M/s.Madras Gymkhana Club, M/s. Madras Club and M/s. The Coonoor Club. 2. The common question of law involved in these appeals are as to "whether the Tribunal was right in holding that the interest income of the assessee clubs received from its corporate members, on the investment of surplus funds as Fixed Deposits with them, is not exempted from tax on the concept of Mutuality". In some appeals, a further question of law as to "whether the Tribunal is right in holding that the re-opening of the assessment u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as interest on loans to several miscellaneous income and water charges in all a sum of Rs.27,15,353/-. The income tax payable thereon was assessed at Rs.10,60,141/- and by adding the interest worked out under Sections 234(A) and 234(B), the total liability was determined at Rs.33,79,727/-. 6. The Madras Gymkhana Club preferred their appeal to the Commissioner of Income Tax, who also confirmed the order of the Assistant Commissioner of Income Tax and there was a further appeal by the appellant before the Income Tax Appellate Tribunal, which rejected the appeal preferred by the appellant and hence the present appeals have been preferred. 7. We heard Mr. T. V. Ramanujam learned senior counsel, Mr. J. Balachander and Mr. B. Raveendran learned counsel appearing for the appellants as well as Mr. K. Subramaniam, Mrs. Pushya Sitaraman and Mr. J. Naresh Kumar learned standing counsel appearing for the Income Tax Department. 8. While M/s. T. V. Ramanujam and J. Balachander contended that the interest earned by the clubs from and out of Fixed Deposits and other investments of its own constituent institutional members are covered by the principle of mutuality, the learned counsel a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct came to be served on the assessee only on 04.04.2003, which was beyond the prescribed time limit specified, whereas the date of return was 03.05.1999. 13. This question can be straightway answered by making a reference to the main part of Section 147 which does not prescribe any period of limitation in respect of the case where the tax for any assessment year has escaped assessment which was not covered by an order of assessment made under Section 143(3) of the Act or an order passed under Section 147 itself. Limitation has been provided only in the proviso to Section 147 which reads as under: "Section 147. Income escaping assessment:- ......provided that where an assessment under sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso." In the case on hand, the assessees filed nil return and since the Assessing Authority by invoking substantive part of Section 147 sought the interest earned by the assessees from the surplus income deposited with the financial institutions and Public Sector Undertakings as one of escaped assessment, the question of limitation does not arise. It is not the case of the appellant that there was any order passed under Section 143(3) prior to the assessment to the present notice under Section 147 of the Act. In the said circumstances, the question of law raised on that score is answered against the appellants. 16. Before answering the first question viz., as to whether the interest income of the assessee received from its corporate members on the investments of surplus funds as Fixed Deposits or Debentures etc., is exempted from tax on the concept of Mutuality, it will be worthwhile to refer to the principles laid down on the Doctrine of Mutuality in the decisions of the Hon'ble Supreme Court as well as some of the High Courts. 17. In the decision reported in (2000) 243 ITR 89 (SC) ( Chelmsford Club Vs. Commissioner of Income-tax ) as a proposition of law, the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the surplus income derived in the course of its business of operating club activities is not utilised for the benefit of such activities but was invested in the form of Fixed Deposits, with the member banks and out of such deposits when interest is earned, such interest income could still be held to satisfy the main conditions of identity of contributors to the fund and the recipients from the fund. The appellants would contend that such surplus income derived from the contributions of its members having regard to the fact that it runs to several lakhs, the same could not be retained in the club premises and had to be necessarily kept in some secured manner till such funds could be utilised for the benefit of the club and therefore they were kept either in the fixed deposits with the member banks or with the other corporate members in the form of Fixed Deposits or Securities. 21. It is therefore contended that such deposits having been made with the member banks/corporate members, the utilisation of such funds are by the members of the club only and thereby it satisfy the condition viz., identity of contributors and the participants. In support of such a stand, reliance was hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case are identical in nature in respect to the facts involved in these appeals. Like in the present case, the assessee in the Karnataka case is also a club registered as a Society under the provisions of the Societies Registration Act. It had two scheduled banks, State Bank of Mysore and State Bank of India as its corporate members. The Club deposited substantial sum of around Rs.76 lakhs in Fixed Deposits with four of its member banks which earned interest of nearly Rs.8 lakhs. In its returns, the club claimed deduction of the interest earned on the principle of Mutuality. The Assessing Authority and the Appellate Authority rejected the stand of the club, which was taken up on appeal to the High Court and the High Court in its decision held that the deposits made by the club in its member banks is nothing but what any other customer of a bank would have done and that it should be construed as a relationship as between a banker and a customer. In the said Division Bench Judgment reliance was placed upon the decisions reported in (1998) 234 ITR 308 ( CIT Vs. I.T.I. Employees Death and Superannuation Relief Fund ) and (1988) 171 ITR 504 ( Sports Club of Gujarat Ltd. Vs. CIT ). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y between the contributor and the participant was not existing in as much as such distribution of interest was made both to members who borrowed the monies and who have not borrowed the monies whereby the identity of the contributor and the participant was lost. 25. When we looked into the rules and by-laws of the appellant club viz Madras Gymkhana Club, the main objective of the club is to provide facilities, promote and encourage sports in general. It is also to provide sporting facilities for its members as well as social, cultural, recreational and other facilities. Under Rule 1 A (2) it is stated that the object is also to promote camaraderie and fellowship among its members. Rule 1 A (3) states that the object is also to run the club for the benefit of its members from and out of the subscriptions and contributions of its members and its income from other sources keeping in view its financial viability. Provision has also been made in the Rules to receive donations and gifts without conditions for the betterment of the club. The General Committee has been authorised under the Rules to use its discretion to accept sponsorship for sporting activities, without any pre-condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch investments and therefore the identity of the contributor and the participant is maintained. 29. Though in the first blush such an argument looks attractive, we are not able to countenance such an argument as it will have to be stated that such investments and the earning of interest have absolutely no nexus to the objects enumerated under the Rules of the club. It was contended that merely because such investment of surplus funds have been made and thereby enormous amount of interest are earned it cannot be said that that would erase the mutual interest of the members of the club in its other activities. Even though existence of the club and its activities and facilities are for the mutual interest of its members and such mutual interest in respect of its regular activities vis-a-vis its members continue to remain, based on that alone it cannot be held that its other activities such as its financial management of depositing the surplus funds in various banking institutions and thereby earning substantial amount by way of interest should also be held to have every nexus to the regular and normal activities of the club vis-a-vis its members. 30. It is not the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act, what is taxed is the 'income, profits or gains' earned or 'arising', 'accruing' to a 'person'. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise." (emphasis added) 33. In the above case the facts as set out in the decision discloses that the various clubs viz., Bankipur Club Ltd., Ranchi Club Ltd., Cricket Club of India and Northern Indian Motion Pictures Association were in receipt of surplus funds arising from the sales of drinks, ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r considered opinion, the same is not applicable to the facts of this case. 36. Therefore what is relevant is to see as to how the funds generated by way of contribution, donation etc., from the members as well as the outsiders are expended and that utilisation of such funds were with a view to fulfil the object of providing various recreational and other facilities to the members and then alone it can be held that the principle of identity between the contributor and the participator is fulfilled which is the basic requirement in the concept of mutuality of the enterprise. 37. At the risk of repetition, it will have to be held that investment of surplus fund with some of the member banks and other institutions in the form of Fixed Deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept. As held in the decision of the Karnataka High Court reported in (1998) 234 ITR 308 ( CIT Vs. I.T.I. Employees Death and Superannuation Relief Fund ) the principle of Mutuality could be confined in respect of the income earned by the club out of the contributions received by the club from its members ..... X X X X Extracts X X X X X X X X Extracts X X X X
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