Income Tax Appellate Tribunal - Ahmedabad
New Brahmakshatriya ... vs Assessee on 12 December, 2003
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IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before S/Shri Bhavnesh Saini, JM and D.C.Agrawal, AM
ITA No.4438/Ahd/2007
Asst. Year :2004-05
New Brahmakshatriya Co.Op. Vs. DY CIT (OSD), Circle-
Housing Societ y Ltd., Pritam 9, Ahmedabad.
Nagar Road, Ellishbridge,
Ahmedabad.
(Appellant) .. (Respondent)
Assessee by :- Shri S. N. Soparkar,AR
Revenueby:- Shri R. K. Dhanesta, DR
ORDER
Per D. C. Agrawal, Accountant Member.
This is an appeal filed by the assessee raising following grounds:-
(1) The ld. CIT(A) has erred in law and on facts in confirming the action of AO in adding premium on transfer of land amounting to Rs.29,85,125/- as income of the appellant.
(2) Both the lower authorities have erred in not following binding decision of Hon. Jurisdictional High Court in the case of Adarsh Co-op. Housing Society 213 ITR 677 and decisions of this Hon. ITAT in the appellant's own case on identical issue.
(3) Both the lower authorities have erred in law and on facts in not properly appreciating and considering various submissions, evidences and supporting placed on record during the course of assessment proceedings and not properly appreciating various facts and law in its proper perspective.
(4) Levy of interest u/s 234A/B/C of the Act is not justified.ITA No.4438/Ahd/2007
Asst. Year 2004-05 (5) The ld. CIT(A) has erred in law and on facts in confirming the initiation of penalty proceedings under section 271(1)(c) of the Act without recording mandatory satisfaction contemplated under the said section.
2. The only issue involved in this appeal is whether income of Rs.29,85,125/- is exempt on account of mutuality.
3. The facts of the case are that the assessee is a Co-operative Housing Society registered under the Bombay Co-operative Society Act, 1925. The society is "Tenant Ownership Society" where it is the owner of the land. It acquired land and leased out to some of its members for a period of 998 years. Certain amount was collected from the members when lease deeds were executed. The society permitted disposition or devolution of the of the lease of any plot with building constructed thereon, or otherwise, as per its regulations, from any existing member to another who register himself as a member of the society. For Asst. Year 2004-05 the assessee filed return of income declaring total income at Rs.63,035/-. This return was processed under section 143(1)(a) of the Act. However, the return was picked for scrutiny. It was noted by the AO that in this return assessee had given a note that he received a premium of Rs.29,85,125/- from a member on transfer of plot No.33 to another purchaser as per bye laws of the Society. This amount received from outgoing member was credited to Share Premium Account and was shown on the liability side of the balance sheet. The assessee had given following note in the return of income:-
"During the year under assessment, Society has received preium of Rs.29,85,125/- from member on transfer of Plot No.33 as shown in balance sheet as per by laws and is not added in above computation of income being tax free on principles of mutuality as decided by Hon. Tribunal, Ahmedabad Bench in Society's own case in the Asst. Years 2 ITA No.4438/Ahd/2007 Asst. Year 2004-05 1989-90, 1991-92 & 1996-97 (ITA Nos.890/Ahd/1994 and 3300/Ahd/1997) following the decision of Hon. Gujarat High Court in the case of Adarsh Co-op. Housing Society Ltd., Surat (ITA No.159 of 1982)".
4. The AO carried out enquiries and required the assessee to explain as to whom and by whom the land was sold. It was explained to the AO that purchaser is one Iscon Construction Ltd. whereas the sellers are Shri Anangbhai Narendrabhai Desai, Anganaben, Shubhaben and Darshiniben (daughters of A.N. Desai). Secondly, the purchaser namely Iscon Construction Ltd. had constructed a multi-storeyed shopping complex in which there are 50-60 different occupants who are not the members of the Society but they are enjoying land of the society. It was also explained to the AO that only individual person can become member even though individual or non-trading AOP, or a company may hold the land. The person whose name is entered in the Members Register will be treated as representative of such AOP or Company as the case may be. Shri Jatin R. Gupta, director of Iscon Construction Ltd. was subsequently entered as member of the Society. The assessee also pointed out to the AO that Shri Jatin R. Gupta has not been given any benefit of the society which are available to other regular members. On the above basis the AO found that occupants of various shops on the commercial complex constructed by Iscon Construction Ltd. on the land of the society are not the members of the society and, therefore, participators are different from the contributors and accordingly the principles of mutuality is lost as held by Hon. Gujarat High Court in the case of Rajpath Club 211 ITR 379 and Sports Club of Gujarat 171 ITR504. He accordingly taxed the premium receipt of Rs.29,85,125/- as income of the society.
5. Ld. CIT(A) confirmed the order of the AO on the ground that principles of mutuality is not fulfilled because contributors and 3 ITA No.4438/Ahd/2007 Asst. Year 2004-05 participators are different. The shop owners are the owners of the land as occupiers-cum-leaseholder of the society but they are not the members of the society and hence they are not participators. Thus even though one limb i.e. contribution is made by the outgoing member is satisfied but the benefit should come to the same member, is not satisfied. The assessee had relied on the decision of Hon. Gujarat High Court in Adarsh Co-op. Housing Society 213 ITR 677 but ld. CIT(A) distinguished it by holding that the Iscon Construction Ltd. or other purchasers of the shopping complex are not the members of the society and, therefore, above decision would not be applicable. In this regard we refer to para 21 & 23 from the order of ld. CIT(A) as under :-
"21. In the case of Adarsh Co-op. Housing Society Ltd. Hon. Court took note of the fact that under the regulations of Adarsh Co-op. Housing Society, a plot of land could be transferred by an existing member to another, who registered himself as a member of the society and certain percentage of the amount received by members on transfer of the lease from themselves to others was to be given to the society. But in the present case, when the persons to whom the plot of land has been transferred are not the members there is no question of extending common amenities to them. The plot of land is transferred to the company as per sale deed dated 12/12/2003. By permitting selling of plot to a construction company, trying to legalize the transfer by incorporating Director of the company as member and then expelling him when a commercial complex is constructed is all in gross violation of the very principles on which a co-operative society is formed and works. Therefore, I would uphold the order of the AO because the facts of the present case are different from the facts in Asst. Year 1989-90, 1990-91, 1991-92 and 1996-97 as well as from the facts of Adarsh Co-op. Housing Society 113 ITR 677 where plot of land was not sold to a construction company and no commercial complex was constructed with 50-60 shops on it. This ground is decided in favour of the Assessing Officer.
23. Ground No.5 - The appellant society prays that order passed u/s 143(3) of the Act, be set aside and addition of Rs.29,85,125/- made on account of Premium received from a member on transfer of plot no.33 to another purchaser member be deleted.4 ITA No.4438/Ahd/2007
Asst. Year 2004-05 The facts of the case have been dealt with in ground no.2 and 3 above. Plot of land was transferred to a non-member as per sale agreement dated 12/12/2003. The name of the purchaser there is of a company, therefore, it is not correct to say that the transfer was to another member.
How could the society approve transfer of huge a big piece of a land to a construction company, what did the society expect this business entity to do, if its director became a member it is because only director could become a member of the society. The company has to work through someone, in my view society was conscious of what it was doing and if it consciously sells its plot to a commercial entity (what else is a company or its director working for the company) then it should pay the taxes on such a receipt.
The company violated the by laws of society and constructed a commercial complex whose occupants do not get covered in the principle of mutuality and are neither members of society.(during the course of appellate proceedings, the Authorised Representative stated that no amenities are being granted to the shop owners.
Out of the two limbs of transfer to make the premium tax free only one limb is satisfied that is transfer by out going member, but it does not satisfy the second limb that is transfer to another member, because land had actually been transferred to a construction company, (its director obtaining membership of the society is of no consequence because he was just the face or human form of a construction company -a business entity) consciously.
The director's expulsion also does not help the society because the transfer does not get covered in the concept of mutuality. Further the shop owners who enjoy land of society are certainly not its members, therefore, this ground is also decided in favour of the Department."
6. Before us, the ld. AR for the assessee submitted that applying the principles of mutuality to the present case, it is apparent that the contributors and the participator are the same. The contribution has been made by outgoing member as premium of sale of land and thereafter participators are the remaining members. Hon. Gujarat High Court in Adarsh Co-op. Housing Society (supra) has held that it is the identity of character of contributors and participators which is important and not the 5 ITA No.4438/Ahd/2007 Asst. Year 2004-05 identity of individual as contributors and participator. If members are contributors and members are participators then principles of mutuality is satisfied and the assessee would be entitled to exemption. The ld. AR relied on two more decisions namely -CIT vs. Bankipur Club Ltd.(1997) 226 ITR 97 (SC) and Chelmsford Club vs. CIT (2000) 243 ITR 89 (SC) where it is held that contributors and participators are the same then principles of mutuality would be applicable and income of the assessee would not be taxable. The ld. AR also submitted that the company has become member through its director Shri Jatin R. Gupta and, therefore, even the condition of participator is satisfied. Further money has been received from the members and not from stranger. Once twin conditions of receipt of money from the member and utilization thereof for the benefit of members is satisfied then there is no reason why principle of mutuality is not applicable. The ld. A.R. also referred to the some clauses from bye-laws of the society in support of the arguments that society can receive money as premium from outgoing members if it is disposing of land belonging to the society.
7. Against this, the ld. DR submitted that when Anangbhai Narendrabhai Desai and family decided to quit the society by disposing of its land. It cannot be said that they are members. They are in fact not defecto members once they are disposing of the land. Further, the land is sold to Iscon Construction Ltd. which is a commercial organization. This has not become the member of the society. It constructed commercial shops over the land and sold to various persons who were also not the members of the society. Thus benefit of the society did not and could not go to the purchasers of the plot. No doubt the identity of individual participator is not important but the property of the society as its lessor must be enjoyed by only the members and the benefit of the society in 6 ITA No.4438/Ahd/2007 Asst. Year 2004-05 respect of the land belong to the society should go to the members who are occupying the land of the society. If the land is continued to be disposed of to persons who did not become members of the society then there will not be finally any participator left and, therefore, it cannot be said that premium received by the society is being enjoyed by the members. The property of the society must remain intact within the members of the society who are eligible for participating in the benefit.
8. Ld. DR also referred to several other decisions where it is held that contributors and participators must be the same class. The ld. DR further submitted that if a member quits and the property belonging to the society is redistributed among the existing members then there is no difference in the contributors and participators but where property and asset is distributed to non-members then participators would be different and it would be violation of principles of mutuality.
9. We have considered the rival submissions and perused the material on record. The undisputed facts are that plot no.33 was sold by Shri Anangbhai N. Desai and family to Iscon Construction Company. Shri Anangbhai N. Desai was a outgoing member whereas Iscon Construction Company did not become a member. Inscon Construction Company later constructed the shops over the land so purchased and sold it to various shop owners. The shops owners are also not the members of the society. On this transfer of land by Desai and family, to Iscon Constructions Company a premium of Rs.39,85,125/- was paid to the society which is claimed as exempt on the principles of mutuality. Before arriving at any conclusion let us go through various authorities on the subject. Some of them have been cited by the parties. In Adarsh Co-op. Housing Society (supra) assessee had received money on allotment of plots by way of 7 ITA No.4438/Ahd/2007 Asst. Year 2004-05 lease to its members and also certain premium on transfer of the membership to others. In that case both the outgoing persons and incoming persons were members of the society. On these facts Hon. Gujarat High Court held as under :-
"Where the assessee is found to be a mutual concern, the income which it receives from its members is not liable to tax. This is founded on the principle that no one can make a profit by transacting with oneself. The primary condition of mutuality between the assessee and its members is that the assessee which collects money from its members, must apply the same for their benefit not as shareholders having an interest in its profits but as persons themselves who have put up the fund by contributing to it. There must be a thread of agency for acting for the contributors for achieving the objectives. The identity of individuals as contributors and participants is not essential but what is essential is the identity of character of contributors and participants."
10. In CIT vs. Bankipur Club (1997) 226 ITR 97(SC) it was observed that the club was realizing money both from members and from non- members for the same consideration and by giving similar facilities to all alike. It was held that privileges, advantages, or convenience attached to the membership of the club could not be said to be trading activity. It was held as under :-
'Held, dismissing the appeals, that in the light of the findings of fact the receipts for the various facilities extended by the clubs to its members, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, could not be said to be "a trading activity". The surplus -excess of receipts over the expenditure -as a result of mutual arrangement, could not be said to be "income" for the purposes of the Act.' By the court: the above four sets of cases falling in groups A to D shall alone be covered by this judgment. With regard to seven cases /appeals falling in group E, the assessee is the Cawnpore Club Ltd. It is seen that the income that was sought to be assessed in the case of the assessee was one derived from property let out and also interest received from FDR, 8 ITA No.4438/Ahd/2007 Asst. Year 2004-05 NSC, etc. Since the issue raised in this batch of seven cases is not similar to, or the same as the one involved in the other cases coming under groups A to D the court directed these cases falling in group E to be posted separately for hearing and disposal before an appropriate Bench.
11. In Chelmsford Club vs. CIT (2000) 243 ITR 89 (SC) it was held that there must be a complete identity between the contributors and participators trading between the persons associating altogether in this way which does not give rise to profits which could be chargeable to tax. The Hon. Apex Court in this case held as under :-
"Under the Income-tax Act, 1961. 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 fn 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 The law recognizes the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. A perusal of section 2(24] of the Income-tax Act, 1961 shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section The three conditions, the existence of which establishes the doctrine of mutuality are (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 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."9 ITA No.4438/Ahd/2007
Asst. Year 2004-05
12. In Haryana State Co-op. Labour & Construction Federation Ltd. vs. CIT (2001) 252 ITR 265 (P & H) the above principle was highlighted by Hon. Punjab & Haryana High Court as under :-
"The tests laid down for application of the principle of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund; (2) the organization exists only for mutual benefit, (3) the funds can be expended for mutual benefit or returned to the contributors. It is only when these tests are fulfilled that the principle of mutuality can be applied."
The assessee, a co-operative society, received contributions from its members. It claimed that the contributions were not exigible to income- tax by the principle of mutuality. The Assessing Officer rejected the claim and the order was confirmed by the Appellate Assistant Commissioner and the Tribunal. On a reference ;
Held, that, in the present case, the contributors had no control over the funds received by the assessee from them and they could not direct that the remaining amount after meeting the expenses should be returned to them. The funds could only be used for the purposes mentioned in rule of the Rules framed under the Punjab Co-operative Societies Act. 1961 The assessee was under no obligation to return the funds to the contributors The principle of mutuality could not be invoked. Therefore, the Tribunal was justified in holding that the contributions of Rs 21.205, Rs.47,434 and Rs.68,633 received by the assessee for the assessment years 1977-78, 1978-79 and 1979-80, respectively, from its members were not exempt on the principle of mutuality Mr. Garg has referred to the decision in the case of Northern India Motion Pictures Association [19891 180 ITR 160 (P & H). Their Lordships were considering the provisions of clause 7. However, we find that after this decision, there is an authoritative pronouncement of their Lordships of the Supreme Court in the case of Chelmsford Club [2000] 243 ITR 89. It has been laid down by their Lordships that in cases {page
96)". . . where there is identity in the character of those who contribute and of those who participate in the surplus the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves" Their Lordships have laid down the three tests before the principle of mutuality can be applied In a nutshell, these tests are :
10 ITA No.4438/Ahd/2007Asst. Year 2004-05
1. The identity of the contributors to the fund and the recipients from the fund.
2. The organization exists only for mutual benefit
3. The funds can be expended for mutual benefit or returned to the contributors It is only when these tests are fulfilled that the principle of mutuality can be applied.
In the present case, the assessee is under no obligation to return the funds to the contributors. Thus, it cannot invoke the principle of mutuality The view taken by the Tribunal is correct
13. In CIT vs. Cement Allocation & Co-ordinating Organization (1999) 236 ITR553 (Bom) it was held that all the contributors must be entitled to participate in the surplus. The Hon. Bombay High Court in that case held as under :-
"The cardinal principle to apply the test of mutuality is that all the contributors to the common fund are also entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. In other words, there must be a complete identity between the contributors and the participators."
14. Hon. Kerala High Court in CIT vs. Trivandrum Club (2006) 282 ITR 505 (Ker) held that where non-members were enjoying the facilities of the club and marriage hall was rented out to non-members then principles of mutuality would not apply.
"The assessee was a private club. The bye-laws of the club showed that ft was formed mainly to provide entertainment to its members by providing accommodation, library, reading room, etc., and by encouraging sports and games among members. Return of income for the year 1988-89 was filed. The assessee had taken up the stand that the assesses was governed 11 ITA No.4438/Ahd/2007 Asst. Year 2004-05 by the "doctrine of mutuality" and therefore its income was not taxable. Apart from the activities of the club for providing entertainments to its members, etc., the assessee had income by letting out its marriage hall to non-members. The assessing authority held that the assessee did not satisfy the conditions to attract the doctrine of mutuality and that the assessee was an association of persons and it was assessed as such. The Commissioner (Appeals) took the view that the assessee could not be assessed. This was upheld by the Tribunal un the ground that there was no material difference between the assessment year 1988-89 as well as the earlier assessment year 1974-75 which was covered by the decision in CIT v Trivandrum Club 1989] 177 ITR 550 (Ker) in the assessee's own case. On a reference Held- that the real contributors of income by availing of the facilities of the marriage hall were not the members but non-members. In order to enable them to avail of the facilities of the club, non-members were to be given temporary membership only for the purpose of availing of this benefit The Trivandrum Club's case [1989] 177 ITR 550 (Ker) was decided on the basis of the admitted factual position that no non-member WDS enjoying the facilities of the club. The facts in this case were different. The marriage hall was admittedly being rented out to non- members making them temporary members only for the purpose of letting out the marriage hall from non-members. The principle of mutuality would not apply. Rental income received from none-members was taxable."
15. Hon. Karnataka High Court in CIT vs. ITI Employees Death and Superannuation Relief Fund (1998) 234 ITR 308 (Karn) held as under:-
"The essence of mutuality lies in the return for what one has contributed to a common fund. The fund should fulfill the essential requirements, that all the contributors to the common fund must be entitled to participate in the surplus, and that all the participators in the surplus should be contributors to the common fund. There must be complete identity between the contributors to the fund and the participators in the surplus It does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he had paid. The principle of mutuality is not destroyed by the presence of transactions winch are non-mutual in character and the principle of mutuality can. in such cases be confined to transactions with members. The two activities in appropriate cases can 12 ITA No.4438/Ahd/2007 Asst. Year 2004-05 be separated and the profits derived from non-members can be brought to tax.
The asses see-trust styled 'The Indian Telephone industries Employees Death and Superannuation Relief Fund11 was created by a deed dated December 19, 1983, by the employees of the Indian Telephone Industries called the settlers for the benefit of about 20,000 employees of ITI in various towns in the country As per clause 2 of the trust deed, the trust funds consisted of (0 monthly contributions by employees, (ii) contributions if any made by the ITI management, (iii) donations (iv) interest or other income earned from the funds or any investments thereof, (v) securities and investments made out of the funds, and (vi) money or other assets vested in any manner in the trust. The assessee earned interest income on its deposits from various banks The assessee claiming to be a charitable trust constituted for a charitable purpose claimed exemption of its income from taxation under section 11 of the Income-tax Act, 1961. The Assessing Officer denied the exemption On appeal the assessee contended that it was entitled to exemption under section 11 and in the alternate as a mutual concern. The appellate authority rejected the contention but the Tribunal accepted the assessee s plea that it was constituted for charitable purposes and therefore its income was exempted under section 11 of the Act The alternative plea raised by the assessee that !he assessee was a mutual benefit fund and, therefore interest income delved by it was not chargeable to tax, was rejected. On a reference.
Held (i) that the objects of the trust did not fall within the purview of section 2(15) of the Act and its income was not exempt under sections 11 and 12 of the Act.
CIT v Bel Employees Death Relief Fund and Service Benefit Fund Association [1997] 225 ITR 270 (Kar) followed.
(ii) that if the facts of the present case were examined in the fight of the principles applicable to the concept of mutuality, then it had to be held that the ingredients of mutuality were missing in the present case Apart from the contributions made by the members there were other sources of funding of the trust fund The trust fund could be augmented by contributions made by the ITI management, donations, interest or other income accrued or earned from the said funds or any investment thereof and investment made from out of the funds The object of the trust was to invest the funds of the trust in banks and securities for earning interest to discharge the liabilities and obligations created under the trust The fund 13 ITA No.4438/Ahd/2007 Asst. Year 2004-05 was a welfare fund established for providing benefit to the employees on retirement/termination of service/death, etc., of such employees. It was not a case of a surplus from the contributions made by the members. It was also not a case where the assessee had advanced its funds to its members and had earned interest on those loans Income from interest earned from outside agency, namely, from the bank and securities would not be covered on the principle of mutuality. It was not exempt from taxation."
16. Hon. Gujarat High Court in Sports Club of Gujarat Ltd. vs. CIT (1988) 171 ITR 504 (Guj) has held as under:-
"One of the essentials of mutuality is that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participants and the contributors Once such identity is established, the surplus income would not be exigible to tax on the principle that no man can make a profit out of himself The principle of mutuality is not destroyed by the presence of transactions which are non- mutual in character. The principle of mutuality can, in such cases, be confined to transactions with members. The two activities can. in appropriate cases, be separated and the profits derived from non- members can be brought to Tax.
Sec. 44A of the Income-tax Act, 1961 , which begins with a non obstante clause applies to any trade, professional or similar association and but for the use of the words "other than an association or institution referred to in clause (23A) of section 10", even the professional associations referred to in section 10(23A) would have derived the vantage of section 44A The intention of the Legislature was to give the benefit of section 44A to all professional associations other than those referred to in section 10(23A) They are clearly words of limitation not intended to enlarge the scope of the expression "similar association11 beyond its meaning in section 28(iii).
The assessee, the Sports Club of Gujarat, was incorporated as a company Its main object was to promote the game of cricket and other games and sports. The objects clause in the memorandum and articles of association empowered those in the management of the club to invest and deal with moneys of the club not immediately, required in such manner as may, from time to time be determined by them The assessee claimed exemption from income-tax for the assessment years 1966-67 to 1969-70, but the 14 ITA No.4438/Ahd/2007 Asst. Year 2004-05 Income-tax Officer rejected the claim The Tribunal h -•Id that income assessable under the head "Profits and gains of business or profession"
would not be exigible to tax on the principle of mutuality, since there was complete identity between the contributors and the participants but income derived by way of interest on the fixed deposits with banks minus 10 percent allowed under section 57(iii) was exigible to tax On a reference:
Held- (i) that the assessee's income from interest was not from a mutual activity and as such it was exigible to tax."
17. Hon. Gujarat High Court in Rajpath Club Ltd. vs. CIT (1995) 211 ITR 379 (Guj) also held as under :-
The assessee club was incorporated as a company. Its main objects were maintaining and carrying on a club house or houses with all the usual or suitable accommodation and conveniences and to promote and provide facilities for sports and games. In 1974 and 1975, the assessee •rived interest income of Rs.11,638 and Rs. 24,492. respectively, on the amounts deposited by it in the banks. On the question whether these amounts were assessable and if so whether the expenditure incurred in earning the interest was deductible Held, (i) that the assessee's income from interest was not from a mutual activity and as such it was exigible to tax;
Sports Club of Gujarat Ltd v CIT [1988] 171 ITR 504 (Guj) followed.
(ii) that the expenditure laid out or expended wholly and exclusively for the purpose of earning the interest income was deductible.
18. On the basis of above authorities we cull out following principles-
(1) Identity of the contributors to the funds and the recipient of the funds must be the same as a class.
(2) The organization should exist only for mutual benefit.
(3) Funds can be spent for the mutual benefit or returned to the contributors.
15 ITA No.4438/Ahd/2007Asst. Year 2004-05 (4) If any flow of income is from non-members it would be taxable.
(5) If the society is under no obligation to return the funds to the contributors then there is no principle of mutuality.
19. In the present case even though the contributors are outgoing members and contribution is by way of premium on sale of society's land but such contributor exit immediately on sale of land to Iscon Construction Company. The assessee would receive money from the purchaser only when an agreement to sell has taken place and land is de facto transferred to the purchaser and only a formality of mutation of names in the records of society remains to be completed. In fact for transfer of land, the legal requirement is recording of the transfer in the record of Registrar of Property on requisite Stamp papers, Mutation in the record of society is consequential formality. It cannot be said that change in the membership in the record of society was a condition precedent for recording of transaction in the record of Registrar of Property which alone constitutes a valid transfer. Accordingly, we are of the view that assessee has not proved that he was a de jure member of the society at the time when he made the payment of premium. Payment of premium to the society is considered necessary for effecting the change in the membership and enjoying the benefit on the land of the society by the incoming member or the transferee but it is not shown that it was a condition necessary for recording the documents in the Office of the Registrar of Properties. It is undisputed that purchaser i.e. Iscon Construction Company as such is not the member of the society and, therefore, benefit of contribution by the seller could not go to the purchaser. Further the shop owners who have purchased the shops from Iscon Construction Co. also stand in the same campus and in the premises of the society. They are non-members but enjoying the land belonging to 16 ITA No.4438/Ahd/2007 Asst. Year 2004-05 the society. They are in fact sub-leaseholders of the land on which shops are constructed and purchased from Iscon Construction Company. The assessee had leased out the land to Shri Anangbhai N. Desai who further leased to Iscon Construction Co. and which in turn further leased it to the shop owners. Therefore, the participators in the property of the society are clearly non-members and it violates the principles of mutuality. We agree with the ld. DR that if contributors go on parting away the asset of the society by transferring them to persons who ultimately do not become the members because of certain restrictions in the bye laws of the society, then the benefits attached with the society will go in diminishing and if this process continues i.e. more and more members transfer their rights in the land of the society in favour of those who cannot become the members of the society. Thus at the end no participator as member would survive and benefit of the society on account of it holding the land would be enjoyed by those who cannot become the members. The concept of the class of participators is diluted if they as contributors leave the society after disposing of their rights. As a result the benefit yielding source which in the present case is land is reduced and what remains with the remaining participators is the reduced benefit yielding source. If in a case like this not only the number of participators go on reducing but also the benefit yielding source i.e. the land, is reduced as being owned by non- participators, it cannot be said that mutual group which originally existed as a class, continued to exist at the end of such transactions. In the present case it is clearly a change in class of the participator, as well as change in benefit yielding source to the remaining participators. The benefit yielding source does not remain confined to the original participators as a class. A new class of non-participators is created which is also enjoying the benefit yielding source i.e. the land. Once there is a division in the original class of participators and new class of participators is created the 17 ITA No.4438/Ahd/2007 Asst. Year 2004-05 concept of mutuality is hurt and originality of class of participators is destroyed. The Iscon Construction Company and shop owners who are enjoying the land in their own right is a new class of participators different from original class of participators who had the right to enjoy the benefit yielding source i.e. the land jointly and severely without any demarcation. The concept of mutuality does not envisage a different class of participators who are not contributors. Therefore, where the participators of the society are non-members there is a clear violation of principles of mutuality and accordingly assessee society is not entitled for exemption on the premium received by it. The appeal filed by the assessee is accordingly dismissed.
20. In the result, the appeal filed by the assessee is dismissed.
Order was pronounced in open Court on 27/8/2010.
Sd/- Sd/-
(Bhavnesh Saini) (D.C.Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 27/8/2010.
Mahata/-
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
18