Income Tax Appellate Tribunal - Delhi
Tata Steels Officers Enclave, vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : H : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No. 862/Del/2009
Assessment Year : 2005-06
Tata Steels Officers Enclave, Vs. Addl. Commissioner of Income-tax,
Plot No. GH-03, Sector Beta I, Noida.
Greater Noida.
PAN: AAAAT9767A
(Appellant) (Respondent)
Assessee by : Shri Satish Agarwal, CA
Revenue by : Shri N.K. Chimol, Sr. DR
O R D E R
PER I.P. BANSAL, JUDICIAL MEMBER:
This is an appeal filed by the assessee. It is directed against the order of the CIT (A) dated 04.11.2008 for assessment year 2005-06. Grounds of appeal read as under:-
(i) That the order of the Ld. CIT (A), Ghaziabad is bad in law and in facts of the case and the CIT (A) has grossly erred in upholding the addition made by the Assessing Officer.
(ii) That the Ld. CIT (A) has grossly erred in not treating the assessee as an Association of Persons without assigning any reason.
(iii) That the Ld. CIT (A) has grossly erred in confirming the action of the A.O. that interest income of Rs.6,36,153/- is taxable and not subject to set off against loss incurred by the appellant on flat maintenance services provided by it to its member 2 ITA No.862/Del/2009 by holding that appellant is a mutual association.
(iv) That the Ld. CIT (A) has passed cryptic and non speaking order wherein, he has referred that the income from bank deposits is being taxed as the same had been offered by the assessee for tax itself which is contrary to the submission made and the information on record.
(v) Without prejudice to the above grounds that the action of the Ld. CIT (A) & A.O. in treating the appellant as an Association of Persons is not tenable, the Ld. CIT (A) has grossly erred in sustaining the addition even if assessee was to be treated as a mutual association as contended by the revenue authorities.
(v) That the appellant craves leave to add, alter or delete the above grounds of appeal at the time of hearing.
2. The assessee is a society formed with a view inter alia to maintain the common area of the complex e.g., street, drainage, sewerage system, passages, gardens, platforms, common assets such as generators, pumps, lifts, etc. of a complex situated at plot No. GH-03, Sector Beta I, Greater Noida. Its objects as stated in the byelaws are as under:-
"a) Maintenance of the common area of the complex e.g., street drainage, sewerage system, passages, gardens, plantations, common assets such as generator, pumps, lifts, etc.
b) Maintenance of the records for common assets like pumps, generator, lifts, Affluent Plan, Electrical & Other Equipments, etc.
c) Arranging day to day cleaning, lighting and maintaining water supply.
d) Maintaining Security of the Complex.
e) Receiving complaints from the Members and getting attended the
same promptly.
3 ITA No.862/Del/2009
f) Arranging payment of taxes, levies, insurance charges ad other statutory payments in respect of the said complex, in time, to the respective authority.
g) Arranging recreational programmes and other programme for the benefit of the members.
h) Investing surplus funds of the Committee from time to time, in such manner and in such mode, as may be decided by the Executive body.
i) Any other objective as may be decided by members in their meeting, from time to time, for the common benefit of all the members.
3. According to Clause 6, the funds of the society will be constituted from contributions collected from the members under heads e.g., initial subscription, monthly maintenance charges, capital maintenance charges, as decided by the Executive Body from time to time and notified to all the members through notice board and also at the address of the members as recorded in the members register, the corpus fund transferred by the society to the committee and any income generated from the investment of funds of the committee. The accounts of the society are audited and under the head 'income and expenditure' account for the year under consideration the income mainly accrues from maintenance charges due, interest from bank, fixed deposits, savings bank interest, club charges, miscellaneous income, interest free members and service charges. From all these heads, total income shown is a sum of Rs.15,76,356.35 and in the expenditure the total sum incurred is a sum of Rs.16,34,087.20 and deficit has been shown at Rs.57,730.85. The corpus fund has been shown at Rs.79,77,870.75. The business income has been computed at a loss of Rs.57,731/- showing net loss at Rs.57,731/-. The business income has been shown at nil in the return of income filed claiming therein that a loss of Rs.57,731/- should be carried forward to next year i.e., assessment year 2006-
07. The Assessing Officer did not accept the claim of the assessee that the income /loss was assessable as "business income/loss." The Assessing Officer 4 ITA No.862/Del/2009 observed that so far as the income of assessee relating to the activity of maintenance of the premises or complex, the same was governed by the principle of mutuality and so far as it relates to interest income earned by the assessee from FDRs and savings bank deposit of a sum of Rs.6,36,347/- the said income was to be assessed under the head "income from other sources." Therefore, the Assessing Officer computed the income of the assessee at Rs.6,36,346/- as against nil computed by the assessee in the return of income on the ground that the principle of mutuality could not be applied to the income earned by the assessee in the shape of interest on FDRs and interest earned on savings bank deposit. The Ld. CIT (A) has upheld the findings of the Assessing Officer. The assessee is aggrieved, hence, in appeal.
4. After narrating the facts, it was pleaded by Ld. AR that assessee's claim is that the income earned by the assessee is from a business activity of maintaining the complex. He contended that the move of the Assessing Officer to treat the said income earned out of principle of mutuality is contrary to the facts available on record. Ld. AR referred to the provisions of Section 71(1) of the Act to contend that if income of the assessee earned by it from the activity of maintaining the complex is treated as business, then, even if the interest income is assessed under the head "income from other sources", then, set off of that income has to be granted against the business income and, therefore, there will be no income assessable in the hands of the assessee.
5. In the alternative, he submitted that even if the income of the assessee is treated to be income earned from mutuality, then also interest income earned by the assessee employing surplus funds in FDRs and interest earned from savings bank deposit cannot be considered to be taxable in view of the decision of the Hon'ble Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund vs. DCIT 222 CTR (Kar) 286 wherein it as been held that assessee society having been formed for the mutual benefit of its members, income earned by it by way of interest and dividend by making investment of surplus funds which is wholly contributed by the members is governed by the 5 ITA No.862/Del/2009 principles of mutuality and is not taxable. Thus, it was vehemently pleaded by Ld. AR that interest income on both the counts could not be treated as taxable as is done by the Assessing Officer and upheld by the Ld. CIT (A). He, therefore, pleaded that the requisite relief should be granted to the assessee and the appeal of the assessee should be allowed.
6. On the other hand, it was vehemently pleaded by Ld. DR that the Assessing Officer was right in assessing the income earned by the assessee from FDRs and savings bank deposits as "income from other sources". He contended that set off of interest income could not be granted against any other loss or expenditure as the same was assessable as income from separate activity. He contended that the income of the assessee could not be assessed under the head "business" as has been held by Assessing Officer. He has submitted before us a chart showing three examples to contend that in a case where substantial contributions are made by the members to the society, the income earned from that substantial contribution which is invested in FDRs and expenses met therefrom, set off cannot be granted against income earned from FDRs as the same will be tantamounting to meeting personal expenditures of the members. Thus, it was vehemently pleaded by Ld. DR that the claim of the assessee as made in the grounds of appeal cannot be accepted and the appeal filed by the assessee deserves to be dismissed in the light of the discussions made by the Assessing Officer and Ld. CIT (A).
7. We have carefully considered the rival contentions in the light of the material placed before us. So as it relates to the contributions received by the assessee from its members and income relating thereto, the Assessing Officer has accepted the claim of the assessee that the same is governed by the principle of mutuality and, therefore, no income could be assessed. However, in respect of interest earned from FDRs and savings bank deposits, the same has been made taxable on the ground that the same is a separate activity against which no set off can be granted as the other activity of the assessee is not governed by the principles of mutuality. We have to examine the question that 6 ITA No.862/Del/2009 whether or not income earned by the assessee from interest on FDRs and interest on savings bank deposit can be taxed separately.
8. First we will examine the claim of the assessee that the income earned in the shape contributions made by the members for meeting the objects of the society and making expenditure thereon is a business activity. We find no force in such claim of the assessee that such activity of the assessee constituted a "business." Though the word "business" has not been defined in the taxing statute, yet it postulates the existence of certain elements in the activity of an assesse which would invest it with the character of business. According to the well-established interpretation of word "business" as found in taxing statutes, it is the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. To record an activity as business there must be a course of dealings either actually continued or contemplated to be continued with a profit motive and not for support or plier. Whether or not a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. Such motive must pervade the whole series of transactions effected by the person in the course of his activity. Thus, earning profit from an activity is a condition precedent to fall the said activity within the scope of "business." In the present case, the very basic factor i.e., profit motive is absent as certain persons have combined with an object of maintaining a particular complex. Therefore, the claim of the assessee that it is a business activity cannot be accepted and this claim of the assessee has rightly been rejected by the Assessing Officer and the CIT (A).
9. Now, coming to the other aspect that whether interest earned by the assessee and assessed by the Assessing Officer as "income from other sources"
can also fall under the principle of mutuality. The principle of mutuality has been discussed by Hon'ble Apex Court in the case of Chelmsford Club vs. CIT (2000) 7 ITA No.862/Del/2009 159 CTR (SC) 235. It was observed that three conditions are stipulated to establish the doctrine of mutuality which are as follows:-
(1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
10. In CIT vs. Bankipur Club Ltd., 226 ITR 97 (SC), it was observed that 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.
11. In the case of Canara Bank Golden Jubilee Staff Welfare Fund (supra), the Hon'ble Karnataka High Court while considering the question that the assessee society when formed for mutual benefit of its members and advancing loans to its members and where source of funds was only the contributions made by the members of the society and which did not receive any donation or monitory benefit/grants from any outside source during the relevant Assessment Years and where the members' contributions which had become corpus fund and the portion of fund which was not advanced to the members was invested for the purposes of safe custody and not with an intention to derive profit by way of interest or dividend, then the earning of interest as well as dividend also are governed by the principles of mutuality and was not taxable.
12. The Hon'ble Delhi High Court in the case of the Director of Income-tax vs. All India Oriental Bank of Commerce Welfare Society [130 Taxman 575 (Del)]after referring to the three conditions for applying the principle of mutuality 8 ITA No.862/Del/2009 as described in the case of Chelmsford Club vs. CIT (Supra) have observed that interest earned on deposits made out of members' contributions is an income governed by the principles of mutuality.
13. Following the aforementioned decision in the case of All India Oriental Bank of Commerce Welfare Society, the Hon'ble Delhi High Court in an unreported decision decided on 11th May, 2007 in ITA No.84/2003 in the case of Country Club vs. Director of Income-tax have observed as under (copy placed on record):-
"4. the assessee club earns income from its members and their guests. Surplus funds are deposited in banks and these surplus funds are attributable to amounts received from members of the assessee club towards their dues and for expenses incurred by members and their guests in restaurants and other facilities of the club like billiard room, tennis and squash courts and swimming pool, etc. There is no dispute about the fact that all these facilities are available only to members of the assessee club and their guests.
5. Applying the doctrine of mutuality, the Tribunal held that income received by the assessee for the use of facilities by guests of the members is exempt from taxation. This being the position, we are of the view that deposits made as a result of this income received and the interest received thereon from the banks cannot be said to be outside the doctrine of mutuality.
6. Learned counsel for the assessee has relied upon Director of Income Tax v. All India Oriental Bank of Commerce Welfare Society [2003] 130 TAXMAN 575 (Delhi), in which this Court has relied upon in Chelmsford Club v. CIT [2000] 243 ITR 89 (SC). It was held, following the decision of the Supreme Court, that where a number of persons combine to contribute to a common fund and have no dealings or relations with any other body, then any surplus generated cannot, in any sense be regarded as profits chargeable of tax. On this basis, the doctrine of mutuality was applied to the facts of that case. We see no distinction in the decision rendered by this Court in All India Oriental Bank of Commerce Welfare Society and the present case.
7. Under the circumstances, we answer the question of law in the affirmative, in favour of the assessee and against the revenue."9 ITA No.862/Del/2009
14. If the facts of the present case are examined in the light of the principles laid down in aforementioned decisions, then, it will be observed that in the present case a number of persons combined to contribute to common fund and they have no dealings or relations with any other body, then any surplus generated cannot, in any sense, be regarded as profit chargeable to tax. It may also be mentioned here that their Lordships of Karnataka High Court in the aforementioned decision in the case of Canara Bank Golden Jubilee Staff Welfare Fund (supra) have also considered the question that whether bank with whom such deposits/FDRs are placed can be treated to be a third party and the observations of their Lordships contained in para 23 which is reproduced below:-
"23. It is noticed that the funds of the assessee have been invested in a term deposit with a bank which is not a member of the assessee's welfare fund and earned interest on the investment made. The bank, in which the surplus fund is deposited, no doubt, forms a third party vis-à-vis the assessee, but, in our view, it cannot be said that the identity between the contributors and the recipients is lost. Accordingly, the interest on investment of Rs.42,13,690 and dividend income on shares of Rs.55,760 have to be treated as non-taxable incomes."
15. From the above observations it is clear that though the bank can be considered to be a third party vis-à-vis the contributors and the recipients, but in that case even identity between the contributors and the recipients is not lost. Hence, it cannot be said that interest earned by the assessee was not out of principle of mutuality.
16. In view of the above discussion, it is held that the Ld. CIT (A) was wrong in upholding the findings of the Assessing Officer vide which the interest earned by the assessee on FDRs/savings bank deposits is considered as "income from other sources" liable for income-tax and is outside the scope of principles of mutuality. It is held that the interest earned by the assessee from FDRs/savings bank deposit is also governed by the principles of mutuality and could not be taxed separately.
10 ITA No.862/Del/200917. In the result, the appeal filed by the assessee is allowed in aforementioned manner.
.
18. The order pronounced in the open court on 07.08.2009.
[A.K. GARODIA] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 07.08.2009.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches