Karnataka High Court
The Commissioner Of Income-Tax And The ... vs Bangalore Club [Alongwith Income Tax ... on 21 July, 2006
Equivalent citations: (2006)205CTR(KAR)582, [2006]287ITR263(KAR), [2006]287ITR263(KARN)
Bench: R. Gururajan, Jawad Rahim
JUDGMENT
Page 0846
1. Revenue is before us challenging the order of the Income Tax Appellate tribunal dtd 7-1-1999. The order of the Commissioner of Income Tax dtd 30-8-1991 on the following facts.
Page 0847
2. The assessee is a club registered under the Societies Registration Act. It has several members. Four of its members are Vijaya Bank, Canara Bank, State Bank of Mysore, and State Bank of India. The club is running on commercial lines for the assessment year 1989-90. The assessee declared a total income of Rs. 2,26,991/-. The assessee deposited a surplus amount of Rs. 76,16,054/- in Fixed Deposit with the above stated four banks. The Fixed Deposit earned an interest of Rs. 7,887,648/-. This interest was claimed as deduction by the assessee on the principle of mutuality. It was stated that the four banks being members of a club constitute a common entity and that therefore tax could not be levied as it would amount to levying tax on oneself. The assessing authority did not accept the same and he disallowed the claim. An appeal was filed and the appellate commissioner set aside the order of assessment. A second appeal was filed and it stood rejected. It is in these circumstances, appellant is before us.
3. The following questions of law arise for our consideration.
1. Whether, a sum of Rs. 7,87,648/- received by the assessee as interest from Fixed Deposit made by the assessee in four banks who are members in the assessee club amounted to its income and constituted a revenue receipt as per the provision of the Income Tax Act.
2. Whether, the principal of Mutuality can be made applicable to the fund deposited in the four banks who are also members of assessee club, especially when the fund is raised from contribution of several members including the four banks and the interest derived from it is utilized by several member of assessee club?
Parties have entered appearance. Arguments were heard.
4. Learned Counsel for the revenue would contend that both the tribunal and the appellate authority are wrong in accepting the principle of mutuality in the present circumstances. He would say that the amount deposited in the bank earned interest and that interest is taxable as rightly ruled by the assessing authority. He would also say that the relationship between club and the banks are the relationship of a customer and banker. He would rely on several judgments in support of his submission.
5. Per contra, learned Counsel for the club would take us through the material on record to say that there exists mutuality. He would elaborate by saying that the club has deposits, and the interest earned from the amount deposited in non-member banks have been subjected to tax. It is only member banks fixed deposit interest is claimed as deduction on the ground of mutuality. He would support the order. He also relies on several judgments.
6. After hearing, we have carefully perused the material on record.
7. Assessing Officer has chosen to disallow the claim of interest i.e., on the deposit made in the member banks. He has noticed that there exists no mutuality in the case on hand. When the same was challenged, the appellate commissioner holds that the activity of keeping the liquid asset i.e., cash in the custody of its members for safe custody cannot be tainted with Page 0848 commerciality to come within the purview of business income. The appellate authority holds that the surplus fund of the club have been invested in the banks more for security and there was no business activity intended in this investment. This finding of the appellate commissioner is accepted by the tribunal. The tribunal also holds that the activity of the club with such corporate members and vice-versa are clearly activities of mutual consent and interest.
8. Mutual interest or mutuality have been considered by courts of law in several judgments.
In the Supreme Court has case considered the mutual benefit theory and ruled as under;
The essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed to shareholders as shareholders the principle of mutuality is not satisfied.
Subsequently, the Supreme Court in has ruled as under;
A host of factors may have to be considered to arrive at a conclusion. "Whether or not the persons dealing with each other, are a "mutual club" or carrying on a trading activity or an adventure in the nature of trade", is largely a question of fact.
Therefore what is clear to us is that mutuality principle would depend upon the facts and circumstances of each case.
9. Sri Parthasarathi, learned Counsel would rely on (2000) 243 ITR 89. A reading of the said judgment would show that in that case, the assessee, a member's club, provided recreational and refreshment facilities exclusively to its members and their guests. The club house in the club was owned by the assessee. The club house was not assessable. The Apex Court reversed the judgment of the High Court and ruled that the assessee's business was governed by the doctrine of mutuality. The facts in that case is clearly distinguishable. Since in that case what was involved was letting out of a building in terms of the findings of the Court.
10. In fact in somewhat similar circumstances, the Gujarat High Court in 171 XTR 504 has considered the mutual concern theory in respect of a club in its judgment. In the said case, the court noticed that the club was incorporated as a company and 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 Page 0849 be determined by them. The assessee claimed exemption but the income tax officer rejected the same and held that the profits and gains of business or profession would not be exigible to tax on the principle of mutuality. The Gujrat High Court after noticing the 1964 (53) ITR 241, ruled that the assessee's income from interest was not from mutual activity and as such it was exigible to tax.
11. A Division Bench of this Court after referring to various case laws on the subject considered the principle of mutuality in and ruled as under;
The principle that no person can trade with himself does not arise in this case as the monies had been invested by the assessee with the bank to earn income to enable the assessee to discharge its obligations created under the trust. It is clear that income earned from outside agency on interest or securities from the bank would not be covered on the principles of mutuality for claiming exemption from tax and, therefore, it could not be excluded from the arena of taxation.
In the said judgment the Division Bench has made it very clear that income earned from outside agency on interest or securities from the bank would not be covered on the principles of mutuality for claiming exemption from tax. This judgment squarely applies to facts of this case.
12. On the facts of this case and in the light of the legal principles it is clear to us that what has been done by the club is nothing but what could have been done by a customer of a Bank. The principle of 'no man can trade with himself is not available in respect of a nationalised bank holding a fixed deposit on behalf of its customer. The relationship is one of a banker and a customer.
13. In these circumstance, we have no hesitation in accepting these appeals. The questions of law are answered in favour of the revenue. The order of the Commissioner of Income Tax and the order of the Tribunal are set aside. The order of the Assessing Officer is accepted. No costs.