Income Tax Appellate Tribunal - Hyderabad
Secunderabad Club vs The Income-Tax Officer on 30 June, 2005
Equivalent citations: (2006)100TTJ(HYD)236
ORDER
1. These are appeals by the assesee directed against the common order dated 28.7.2004 passed by the Commissioner of Income-tax (Appeals)-VI for the assessment years 1996-97 and 1998-99 to 2002-03.
2. As the issues arising in all these appeals are common, for the sake of convenience, they are heard together and disposed of by this common order.
3.1 The assessee is a Club and has been held as a mutual association by the Hon'ble High Court of A.P. in the case of Addl. Commissioner of Income-tax, A.P., Hyderabad v. Secunderabad Club 150 ITR 401 (A.P). It had in all these years, kept some moneys as deposit with iuts corporate members and had earned interest income. The assessee claims that interest earned on deposit kept with corporate members by the Club which...is a mutual association is not exigible to tax on principle of mutuality. The assessing officer as well as the Commissioner (Appeals) has rejected this argument of the assesee and held that there is a clear distinction between the income earned on surplus money kept in safe custody in bank which is the normal mode of keeping money by any concern and keeping money as deposit with a corporate member by way of separate contractual agreement and that the income so earned by the Club, from its corporate members was not from the corporate Member in its capacity as a Member. In other words, the stand of the revenue is that, there is a duel capacity for the corporate Members, and that the capacity in which they took the deposit and paid the money was not in their capacity of Members and thus principles of mutuality do not apply.
3.2 The other issue is that assessments were reopened and amounts were brought to tax. Thus the re-opening is also challenged. The assessee also raised a ground stating that the C.I.T. (Appeals) has erred in rejecting the stand of the assessee that subscriptions received from the member should be excluded from the total income on the principle of mutuality and that a specific claim made by the assessee during re-assessment proceedings was not Considered by the assessee.
4.1 Taking up the main issue in these appeals viz. assessment of interest in the hands of the Club, the learned counsel for the assessee submitted as under. The Club is a mutual benefit concern and the interest received from its members is not taxable on ground of mutuality as there is a total identity between members contributing and members participating. Hence no part of the interest received from corporate members is taxable in its hands on the principle of mutuality. The Club received the following interest amounts on deposits made with its corporate member:
Asst. Year Interest earned from
Corporate members
1996-97 6,31,771
1998-99 9,82,857
1999-00 19,10,762
2000-01 33,92,585
2001-02 45,50,504
2002-03 53,85,240
The amounts were subjected to tax by the assessing officer and was confirmed by the Commissioner (Appeals). The Club is an unincorporated association of persons and clause III of the rules which deals with the membership read as under:
III. Membership and classes of Members
(i) Subject to the provisions of these rules, Membership of the Club shall be open to ladies and gentlemen without any distinction and shall consist of the following classes.
a. Honorary Members b. Permanent Members c. Mess Members d. Lady Members e. Temporary Members (Long-term and Short term) f. Corporate Members g. Associate Members (lady) h. Affiliated Members.
Clause XXVII deals with the proposals for winding up. Sub-clause (3) which is as below:
XXVI I. Proposals for winding up.
(1) xxxxxxxxxxxxxxxxxxxxxxx (2) xxxxxxxxxxxxxxxxxxxxxxx (3) (a) "If an Extraordinary General Meeting under this Rule decides to wind up the affairs of the Club, it shall appoint a Liquidator or liquidators and fix his or their remuneration. The liquidation shall be conducted, as nearly practicable, in accordance with the Indian Companies Act and any surplus assets remaining after all the liabilities have been discharged shall be shared equally by the members of the Club.
Note: This Rule shall be deemed to have always been in existence with effect from 1.4.50.
(b) Provided that no share in the assets of the Club shall be transmissible or assignable by operation of law or otherwise.
(c) Provided further that a share in the assets of the Club shall, be deemed to include the obligation of sharing the liabilities, if any, of the Club.
The learned counsel for the assessee Shri Y. Ratnakar further submitted that the character of the club is as a mutual benefit concern and not a profit making concern was made clear by the Hon'ble A.P. High Court in its judgment in Addl. C.I.T. v. Secunderabad Club 150 ITR 401. It is merely a body of individuals who have formed themselves into a club for sports and recreation of its members. This established that the assessee club has no profit motive. The earlier rules that upon winding up the surplus would be shared by the permanent members of the club has been amended and for the years under consideration Clause XXVII(3) provides that the surplus shall be shared by all the members of the club including corporate members who are existing as on date when the club goes into liquidation. It is not disputed that the members contribute to the club and members participate in the event of winding up, there is identity between contributors and participators. The test of mutuality is totally fulfilled by the assessee and this cannot be disputed by the revenue.
4.2 It was submitted that exclusion of interest from being included as assessable income is only in relation to interest earned from corporate members and not from any third parties who are not members. The assessing officer taxed the amount only on the ground that the Hyderabad A Bench of the Tribunal in the assessee's own case in I.T.A. Nos. 819 & 820/Hyd/94 (order dated 5.3.2002) held that the interest on deposits is assessable as club's income. No other reason was given by the assessing officer while the taxing the amount.
4.3 On appeal the learned Commissioner (Appeals) dismissed the assessee's appeals and confirmed the assessments of interest as income in the hands of the assessee merely following the order of the Tribunal in I.T.A. No. 819 & 820/Hyd/04 dated 5.3.2002. It was submitted that the matter is covered by- the latest decision of B-Bench of the I.T.A.T. on the case of Fateh Maidan Club where the point raised was whether the interest received by the assesee club on fixed deposits from banks is not eligible to tax or not on the principles of mutuality. It was the contention of the assessee that in the case of Fateh Maidan Club 81 TTJ 831 the interest on fixed deposits earned was not from the corporate members but from the bank which were third parties. In that order, the Tribunal held that the matter stands covered by virtue of the judgment of the Hon'ble Supreme Court in the case of C.I.T. v. Cawnpore Club in Civil Appeals No. 4777-78 of 1989 dated 5.2.98 and that the revenue cannot pick and choose any assessee at its option for contesting the claim and if it has accepted the judgment in the case of one club it cannot dispute the same with reference to another club. The Tribunal further held therein that Fateh Maidan Club in depositing the moneys with the bank and earning interest cannot be said to have carried on any commercial activity. The Tribunal therein ultimately held, that the interest earned was not taxable on principle of mutuality. In that case the Tribunal had referred to the decisions of the A.P. High Court in CIT v. Natraj Finance Corporation 169 ITR 752 besides referring to the decision of the Bombay Bench in the case of Maharaja Wine Merchants Association. The assessee's grievance is that though before the order in the case of Fateh Maidan Club was strongly relied upon by the assessee the first appellate authority did not care to follow the orders of the Tribunal but instead went on re-examining whether the said order of the Tribunal was correct in law. The learned counsel submitted that the cases relied upon by the first appellate authority are all distinguishable. It was contended that in the case of mutual benefit concern, the contribution of the member is always as a member and there is no dual capacity. The assessee club deals with only its members and not with any general public. It is the members who are who are accountable to the Club. The Club does not deal with outsiders. In the case of Fateh Mgidan Club interest was received from the banks which are non-members while in the assessee's case interest was received from institutions which are corporate members. On facts the assessee is on a stronger ground. The distinction sought to be made out by the learned Commissioner (Appeals) that members of Secunderabad Club has a dual capacity while members of Fateh Maidan Club has no such dual capacity is devoid of any merit and on the face of it fallacious. The Club deposited the moneys with the corporate members because the club has to park its moneys at some place or the other. The investment is made only in its capacity as a mutual benefit concern and that too with the corporate members so that the identity between contributors and participators is maintained.
4.4 He then drew the attention of the Bench to the decision of the Bangalore Bench in the case or ACIT v. Bangalore Club ITA No. 2440/B/91 wherein it was held that interest earned on deposit with Club Members is not liable to tax on grounds of mutuality.
4.5 Finally our attention was drawn to the decision of the A.P. High Court in the case of C.I.T. v. Natraj Finance Corporation 169 ITR 732 stating that this decision will meet the contentions raised by the revenue, wherein the High Court laid down the following principles:
a) The identity between contributors and participators should be identity as a class of members and not as individual identity of members.
b) Unless it is possible to state that a person derives income by trading with himself, it is not possible to consider that income derived from transactions between members inter se possess the character of income of a non-mutual benefit concern.
The assessee sought application of the above decision to its case. If so done, according to him the following position will emerge.
a) Secunderabad Club is a mutual benefit association;
b) The members are not trading with the Club or with themselves.
c) The appellant is not a profit making organization
d) There is an identity between corporate members as members contributing and as members participating in the surplus.
5.1 The learned representative for the Revenue, on the other hand submitted as under. The assessing officer and the Commissioner (Appeals) while holding that interest income derived by the assessee from investment in various corporate deposits is not governed by the principle of mutuality and is therefore taxable, relied on the decisions of the Hyderabad Bench of the Tribunal in assessee's own case for assessment years 1990-91 and 1991-92 in its order dated 5.3.2002 in I.T.A. Nos. 819 & 820/Hyd/94. The objects of the club evidently shall be social activities including sports and recreation and not advancing loans or making fixed deposits. Hence the receipt is not for services rendered by the assessee club in pursuance of its aforesaid objects. In other words, the receipt of Rs. 1,68,53,719/- is governed by a separate contractual relationship between the assesee club and the corporate members of the assessee, in their capacity as companies accepting deposits.
5.2 In the case of Sports Club of Gujarat Ltd. 171 ITR 504 the Gujarat High Court held that interest income cannot be exempt. The Revenue then referred to the decision of the Supreme Court in the case of Chelmsford Club v. C.I.T. 243 ITR 89 and contended that members of an association who deal with the association may have a double role, one as a member and the other as members of general public and to claim exemption the ground of mutuality, the role of a member in a transaction has first to be ascertained that is, whether he is acting in the capacity of a member of the association or in the capacity of a member of the general public. Therefore in the present case, when the corporate members of the assessee-club have accepted the deposits from the assesee, they have not acted in their 'capacity as members of the club, but as members of the general public and in this role, their status is akin to that of a bank from which rest of the interest income has been derived by the assessee. He, therefore contended for rejection of the grounds raised by the assessee stating the issue is squarely covered in favour of the revenue by the decision of the Hyderabad Bench of the I.T.A.T. for the earlier years.
5.3 The deposits from which interest was received by the assesee were classified and shown as "investments" in the balance sheet of the assessee and the expression investment means to lay out money with a view to obtain an income or profit and therefore the investment in corporate deposits and interest income derived thereon tantamount to commercial character. Further tax was deducted at source by the companies on the interest income credited to the assessee club which further shows that the interest income earned by the assessee club has the element of profit and gain In view of this the issue is also covered in favour of the revenue and against the assessee by the decision of Hyderabad Bench in assessee's own case for assessment years 1988-89 & 1989-90 in I.T.A. Nos. 1072 & 1073/Hyd/93, wherein the Bench had rejected the assessee's claim that investments were made out of money received from members and therefore, members share the same in the event of winding up and as such the same is not taxable. He submitted that only to the extent to which the income is generated out of social activities of the club, the concept of mutuality may be applicable but certainly not to all the activities o the club i.e. investments in corporate deposits etc. with a view to earn profits. About the assessee's submissions that the matter stands covered in favour of the assessee by- various decisions including the decision of the Hyderabad in the case of Fateh Maidan Club (supra), it was submitted by the Revenue that they are al distinguishable as clearly done by the first appellate authority in his order and therefore, in view of the decision of this Bench on identical issue in assessee's own case for earlier years, the decisions relied upon by the assessee cannot come to. the aid of the assessee. The Revenue therefore, sought sustenance of the order of the Commissioner (Appeals).
5.4 The Revenue further submitted that" if the above plea of the Revenue viz. that the issue is covered in favour of it is not acceptable to the Tribunal, it prayed that the matter may be placed for constitution of Special Bench under Section 255(3) read with Regulation 98A. For this reliance was pleased on the following decisions:
a) C.I.T. v. Travancore Titanium Products Ltd.
b) C.I.T. v. Goodlas Nerolac Paints Ltd. 188 ITR 15 (Bom.) The Revenue sought reference of the following question to the Special Bench for its consideration:
Whether on the facts and in the circumstances of the case, the interest income earned by the club from investments made in corporate deposits etc. is assessable to tax and not exempt on principles of mutuality.
6.1 The assessee countered the contentions of the Revenue as follows. The subject matter in dispute relates to taxing of interest received from members by a club, which is mutual association. To strengthen its contention that the issue is fully covered in its favour it relied on the following decisions:
1) Order dated 13.8.2003 of ITAT, Hyderabad Bench 'A1 ' in I.T.A. No. 947/Hyd/95 for the asst. years 1983-84 to 1997-98 in the case of Fateh Maidan Club 81 TTJ (HYD) 831
2) Order dated 7.1.1990 of ITAT Bangalore Bench in I.T.A. No. 2440/Bang/91 for the asst. year 1989-90 in the case of-Bangalore Club.
3) Order of I.T.A.T. Bombay 'B.' Bench in I.T.A. No. 1135 & 1136/Bom/1983 in the case of Maharashtra Wine Merchants Association.
4) Order dated 26.10.86 of the I.T.A.T., Allahabad Bench 'A" in I.T.A. No. 229/Alld/96 27 TTJ Alld. 468 in the case of Cawnpore Club Ltd.
5) Judgment dated 19.8.97 for the asst. year 1977-78 in the case of Natraj Finance Corporation 169 ITR 732 6.2 Repelling the arguments of the Revenue that the matter is covered in its favour by the order of the Tribunal in I.T.A. Nos. 819 & 820/Hyd/94 in the assessee's own case, the assessee contended that that decision has no more relevance and does not cover the assessee's case for the following reasons.
6.3 The decision in ITA Nos. 819 & 820/Hyd/94 was rendered by a Single Member but this was subsequently overturned by the Division Bench of the I.T.A.T., A-Bench in the case of Fateh Maidan Club on 13.8.2003 by not following it in its decision. The assessee contended that it is pertinent that the Bench held that interest received even from non-members is not taxable in the case of a mutual association. The assessee's case is on a much better footing as the interest received is only from members and not non-members. It is not the case of the Revenue that the decision of the Division Bench in Fateh Maidan Club is wrong and should not be followed and it also does riot state in what way the case of Secunderabad Club is different from Fateh Maidan Club's case. The order of the Single Member is passed without looking at the binding decision of the jurisdictional High Court in the assessee's own case reported at 150 ITR 401 holding that the assessee club is a mutual benefit concern and not a profit making concern. He referred to the order of the Division Bench where the reasons for not following the decision of the Single Member in the assessee's case have been given. The learned counsel for the assessee drew our attention to the observation of the Tribunal in Fateh Maidan's Club's case that the Department cannot accept the said position in some cases and contest the same in other cases. It cannot pick and choose the Club for disputing and choose the club for accepting it. It stressed the point that since in Cawnpore Club's case this position was accepted and the Income-tax Department did not question its taxability, it cannot question it in other cases and this is one of the reasons given by the Tribunal while allowing the appeal in the case of Fateh Maidan Club.
6.4 It is now well settled law that the Revenue cannot pick up some cases for disputing and some cases for accepting in relation to any particular point. When it accepts in one case it cannot question the same in other cases. In this regard it placed reliance on the following cases:
1) Union of India and Ors. v. Kaumudini Narayan Dalai and Anr. 249 ITR 219 (SC)
2) Union of India v. Satish Panalal Shah 249 ITR 221 (SC)
3) C.I.T. v. Narendra Doshi 254 ITR 606 (SC)
4) Berger Paints India Ltd. v. C.I.T. 266 ITR 99 (SC) 6.5. The assessee submitted that even in the case of Bangalore Club it is not Revenue's case that it has not accepted the position that interest received by the club from its members is not taxable on grounds of mutuality and the Department is silent in relation to the position ot the Bangalore Club. Hence the treatment meted out to Secunderabad Club is unjust and discriminatory which is contrary to the law laid down by the Supreme Court.
6.6. Coming to the decision of the Tribunal dated 13.6.94 in I.T.A. No. 1072 & 1073/Hyd/93 for the assessment years 1988-89 ad 1989-90 in the case of the assessee relied on by the Revenue the assessee contended that it has no application at all to the present case because that decision relates to taxability of interest received from third parties and not from members and the funds were deposited not with corporate members but with banks and other institutions who were non-members. Further there is a clear distinction between interest received from members and interest received from non-members and the present case of the assessee relates to interest received from members and it has not disputed the taxability of interest received from non-members. In that case the decision of the Gujarat High Court related to interest received from non-members and it does not cover a situation where interest is received from members.
6.7 As regards issue of whether investment of funds becomes a trading transaction, it was contended by the assessee that a club which is a mutual association is different from any commercial organization. For any income to be liable to tax in the hands of the club, the club should be trading with a profit motive either with its members or its non-members. Neither the assessee herein does carry on any such business or undertakes any commercial activity with any profit motive. In the case of the assessee (150 ITR 401] it was held by the jurisdictional High Court that it is a mutual benefit concern and is not a profit making concern. The learned counsel then drawn our attention to the decision of the Madras High Court in the case of Presidency Club Ltd. v. C.I.T. 127 ITR 264 wherein 'it was held that investment of surplus funds with corporate member of the club does not tantamount to a mutual concern indulging in any trading activity or carrying on the business.
6.8 The ITAT, Hyderabad Bench 'A' in its decision dated 15.8.03 for assessment years 1983-84 to 1997-98 held that interest earned by a Club on investment ot its surplus funds does not amount to carrying on the business or cannot be classified as an activity tainted with commerciality. The assessee submitted that this aspect of the matter was held, in assessee's favour by the Madras High Court as well as by A-Bench of ITAT, Hyderabad. The learned counsel therefore submitted that the issues in these appeals stand covered in his favour and the distinction sought to be made does not merit consideration.
6.9 On the issue of reference under Section 255(3) to the Special Bench in case the Department's pleas are not accepted by the Tribunal, the learned counsel states that the Revenue has not made out any case for reference and such reference sought is not proper. Simply because the Revenue feels aggrieved that the Tribunal decided the mater in other cases in other cases in favour of the assessee it cannot seek reference to a Special Bench. If this is acceded to, it would provoke the Department to request for reference to a Special Bench in all matters it feels aggrieved. The Department can file an appeal to the High Court in case it is aggrieved by the orders passed by the Tribunal. There is no case for reference to a Special Bench when the issue involved is covered by the decisions of this Tribunal. On the decisions relied on by the Revenue for reference to Special Bench, he submitted that those cases in facts justify the assessee's plea that no reference is needed when the matter is covered in its favour.
6.10 Concluding his arguments on the issue, the learned counsel submitted that the decision of 'A' Bench of the Tribunal in Fateh Maidan Club fully covers the appeals filed by the assessee club. No reason or grounds are made out to doubt the correctness of the said decision. Since the above decision in the case of Fateh Maidan Club by a Division Bench in favour of the assessee, even if the Department is aggrieved by the said decision as erroneous, it is proper that the Bench decide the assessee's case by applying the said decision. No case is made out that any particular decision of the Tribunal requires reappraisal in the department's submission. It is only when the Tribunal comes to the conclusion that a finding given in any particular case is erroneous and requires a reappraisal, then only the matter can be referred to a Special Bench. There are no new facts and all the facts set out in the decision of Fateh Maidan Club is squarely applicable to the case of the assesses. The Revenue was not able to show any reason that the order of the Bangalore Bench in the case of Bangalore Club and of the Bombay "B" Bench in the case of Maharashtra Wine Merchant's Association as well as the decision of the Allahabad Bench of the Tribunal in the case of Cawnpore Club are erroneous. In view of what has been stated above, the learned counsel strongly opposed the request for reference to-a Special Bench.
7.1 Rival contentions heard. On careful consideration of the facts and-circumstances of the case, we are of the considered opinion that the case of the assessee-club and the arguments advanced in support thereof have greater force unlike the case of the Revenue and the arguments advanced by the learned Departmental Representative as far as the ground of non-taxability of interest income on ground of mutuality.. Before we go to the findings on the issues raised, it is necessary to state the following.
7.2 From the rule book of Secunderabad Club, we find that there is only one object, which is as under:
II. Objects The objects of the Club shall be social activities, including sports and recreation.
Based on this sole object, the Hon'ble Andhra Pradesh High Court in the case of Addl. CIT v. Secunderabad Club 150 ITR 401 held as follows-
...In other words, all the permanent members of the club are entitled to the assets of the club. It is, therefore, a mutual benefit concern, and not a profit making Concern. Its services are limited only to its members and, to some extent, to non-members also. As such, the entrance and subscription fees paid by not only the permanent members but also the other members go to the common fund of the club, which is the property of the permanent members. We fail to see how it could be an income of the club. These fees go to constitute the fund, with the aid of which amenities are provided to the members. So, these fees, whether received from permanent members or from other members of the club, are not "income" and are not, therefore, assessable to tax....
(Emphasis supplied) The Hon'ble Court had followed two decisions of the very same Court in the case of Secunderabad Club v. CST (1957)8 STC 850 and CIT v. Merchant Navy Club . Thus, income of the Club earned from the members cannot be brought to tax on the principle of mutuality. Now, the question before us is whether the interest income earned by the assessee from deposit made with a member is liable to tax or not. The Revenue argued that the interest was earned from a member known as corporate member is not governed by the principle of mutuality, and reliance was placed in this behalf on the decision of the Single Member Bench of this Tribunal in assessee's own case, which is reported in 83 ITD 199. The Revenue also relies heavily on the judgment of the Hon'ble Gujarat High Court in the case of Sports Club of Gujarat 171 ITR 502. The Revenue also vehemently argued that the matter should be referred to a larger bench of the Tribunal as the decision of the Bangalore Bench of the Tribunal dated 7th January, 1999 in the case of AC If Circle-1(1), Bangalore v. Bangalore club in ITA No. 2440/Bang/91 for assessment year 1989-90; and the decision of this Bench of the Tribunal dated 13.8.2003 in the case of Fateh Maidan Club v. ACIT Circle 1(1) 81 TTJ 831 are in favour of the assessee and whereas the orders in the assessee's own case as well as in the case of Nizam Club (supra) are against the assessee.
7.3 The case of the assessee on the other hand is that the issue in question is covered in its favour by the decisions of the Tribunal in the case of Bangalore Club(supra) and in the case of Fateh Maidan Club(supra); and that the Single Member decision in assessee's own case for the assessment years 1990-91 and 1991-92 in ITA Nos. 8 and 9/Hyd/94, dated 5th March, 2002 is not based on correct appreciation of law; and that Division Bench may take a different view by applying the correct position of law, as laid down by the Hon'ble Supreme Court in the case of Chelmsford Club v. CIT 243 ITR 89 and in the case of CIT v. Bankipur Club 226 ITR 97 and in other cases. Their case is that there is complete identity of the contributors to the fund and the recipients from the fund, and thus, the income in question is not taxable.
8.1 We first deal with the issue as to whether we should refer the matter to the Hon'ble President for referring the issue to a Special Bench or not. In our considered opinion, it is not necessary as the principles of mutuality have been laid down in a number of reported cases, by the Hon'ble Supreme Court as well as by a number of High Courts and all that is required to be done is to apply the ratio of those decisions to the facts of the present case. Even otherwise, a similar issue of mutuality was referred to the Special Bench of the Tribunal and a finding have been given in the case of Waikeshwar Triveni Co-op. Housing Society Ltd. v. ITO 88 ITD 159(SB). Once the Special Bench has already considered the principles of mutuality, there is no necessity for referring the issue to a larger Bench.
8.2 At this juncture, we also like to point out that the heavy reliance being placed by the Revenue on the judgment of the Hon'ble Gujarat High Court in the case of Sports Club of Gujarat Ltd. v. CIT (supra). We are of the opinion that this judgment is not at alt' applicable to the facts of the case. Moreover this judgment was delivered prior to the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club and Bankipur Club (supra). Applying these judgments, the Hon'ble Delhi High Court held that interest earned as deposits" is not exigible to tax on the ground of mutuality in the case of All India Oriental Bank Commerce Welfare Society (175 Taxation 147). Moreover In the case of Sports Club of Gujarat (supra), the objects of the Club amongst others, as noted at page 506 of the Reports (171 ITR), provide-
(o) To invest and deal with the monies of the Club not immediately required in such manner as may from time to be determined;
Interpreting this object, the Hon'ble Gujarat High Court at page 512 of the Reports(171 ITR), observed as follows-
...However, as pointed out earlier, the objects clause in the memorandum and articles of association empowers those in the management of the assessee-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. Under this clause, the investment need not be way of fixed deposits with banks. It can take any other form or shape, such as investment in shares real estate, etc. When income is derived from such investment, whether by way of interest, dividend or recent, it is derived from a third party and is not by way of contribution from the members club.
(emphasis supplied) The above observations have been made after stating the law on the issue in the following manner-
...We have already pointed out earlier that 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 participators and the contributors. Once such an 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."
Further, at page 513 of the Reports (171 ITR), the Hon'ble Gujarat High Court distinguished the judgment in the case of IRC v. Westleigh Estates Co. Ltd. (1925) 12 TC 657, in the following words-
...In support if this contention, considerable reliance was placed on the following observation found at page 696 in IRC v. Westleigh Estates Co. Ltd. (1925) 12 TC 657:
I think proper mode of regarding the company in the present case is a convenient instrument or medium for enabling the members to conduct a social club the objects of which are immune from every taint of commerciality, the transactions of sale and purchase being merely incidental to the attainment of the main object.
These observations must be read in the context of the case. There a company was incorporated as a company limited by guarantee. Its main object was to promote social intercourse between gentlemen connected (directly or indirectly) with literature, art, music, drama, scientific and liberal professions, sports and commerce and with a view thereto to establish, maintain, and conduct a club of a non-political character for the accommodation of members of the club, and their friends, and to provide a club house and other conveniences, and generally to afford to members and their friends all the usual privileges, advantages, convenience and accommodation of a club. Incidentally, certain other things which are usually done by social clubs, for example, buying preparing and selling of Provisions, was included in the memorandum. The income and property of club were to be applied towards promotion of the objects of the club as set out above. All the members of the company were members of the club. No payment for provisions supplied in the club were taken from any person who was not a member thereof. In this back ground, the question arose whether the profits could be charged to tax and it is in this context that the above observations came to be made which only shows that the objects of the club should be immune from every taint of commerciality and this also applied to the transactions of sale and purchase which were being incidentally undertaken for the attainment of the main object of the club. The buying, preparing and selling of provisions which were incidental to the main object of the club was limited to the members of the club and not extended to outsiders. This incidental activity was also, therefore, immune from the taint of commerciality. We are, therefore, of the opinion that the above observations on which considerable reliance as placed by counsel for the assessee cannot go to the aid of the assessee.
(emphasis supplied) The facts of this case are identical to the facts of the case of IRC v. Westleigh Estates Co. Ltd. (1925) 12 TC 657.
8.3 As already mentioned another important aspect is, the judgment in the case of Sports Club of Gujarat v. CIT (supra) was rendered much prior to the decision of the Hon'ble Supreme Court in the case of CIT v. Bankipur Club 226 ITR 97 and the decision of the Hon'ble Supreme Court in the case of Chelmsford Club v. CIT 243 ITR 89.
8.4 In the case of Chelmsford Club the Hon'ble Supreme Court had followed its earlier judgement in the case of C.I.T. v. Bankipur Club Ltd. (supra).
8.5 In the case of Bankipur Club (supra), the Hon'ble Supreme Court at page 109 held as follows:
Now, we turn to the main question canvassed by the Revenue in the appeals coming under Groups-A to D, namely, whether the assessees - mutual clubs, are entitled to exemption for the receipts or surplus arising from the sales of drinks, refreshments, etc. or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature, from its members? In all these cases, the Appellate Tribunal as also the High Court have found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or the amounts received by way of admission fees, periodical subscription, etc., from the members of the clubs were only for towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs. It has also been found that different clubs realised various sums on the above counts only to afford to their members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any availing of the facilities occasionally).
In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the club to their members as stated herein above, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be "a trading activity". The surplus excess of receipts over the expenditure - as a result of mutual arrangement, cannot be said to be "income" for the purpose of the Act.
(Emphasis supplied) The Hon'ble Supreme Court upheld the conclusion of the High Court and held that such receipts are not taxable.
8.6 The Delhi High Court in the case of Director of Income Tax v. AII India Oriental Bank of Commerce Welfare Society 175 Taxation 147, applied the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club v. CIT (supra) and answered the following questions referred to it in favour of the assessee:
A. Whether ITAT was correct in excluding the interest income on deposits made out of contributions from members, deposits so made are not determined vis-a-vis member's contributions?
B. Whether the principles of mutuality applies to the cases where interest earned on deposits made out of members contributions is not segregable from the interest earned from non-members contributions/donations.
C. Whether ratio of Supreme Court of India judgment in Chelmsford Club v. CIT 243 ITR 89 applies to the cases where the income earned on deposits made out of members and non-members contributions/ donations/subscriptions are not segregable.
D. Whether the order of ITAT is perverse in Law "on facts"?
(emphasis supplied) Last para of the said judgment on p.148 of the Reports (175 Taxation) reads as follows-
The Issue with regard to the concept and principle of mutuality has been elaborately examined by the Apex Court in Chelmsford Club v. CIT (2000) 156 Taxation 644, 243 ITRR 89. Their Lordships have held 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 dealing or relation with any outside body, then any surplus generated cannot in any case be regarded as profits chargeable to tax. It has been observed that what is required to be seen is whether there is a complete identity between the contributors and participators. Once the identity of the contributors to the fund of the recipients of the funds, the treatment of the company, through incorporated as a mere entity for the convenience of the members, in other words as an instruments obtained to their mandate; and the impossibility that the contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves is established, the doctrine of mutuality is established.
It is not ate revenue's case that the afore-noted three conditions are not established in the instant case. As a matter of fact, before the Tribunal, the learned departmental representative had conceded that the controversy, sought to be raised again in this appeal stands concluded against the Revenue in Chelmsford Club v. CIT (supra).
The fact is that the learned Departmental Representative for the Income tax Department in that case has conceded before the I.T.A.T. that the controversy sought to be raised in that appeal stands concluded against the Revenue by the decision of the Apex Court in the case of Chelmsford Club v. CIT (supra). Despite this concession, the revenue challenged the order of the I.T.A.T. before the High Court and the issue was considered on merits. The assessing officer is thus wrong in holding that the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club (supra) is not applicable to interest earned ion deposits. If the stand of the Revenue in the case of All India Oriental Bank of Commerce Welfare Society (supra) is. read along with the ratio of the judgments of the Hon'ble Supreme Court in the case of Berger Paints Ind. Ltd. v. C.I.T. 266 ITR 99 (SC) and in the case of Union of India v. Satish Panalal Shah 249 ITR 221 (SC) and Union of India and Ors. v. Kaumudini Naayan Dalai and Anr. 249 ITR 219 (SC), we have to hold that the revenue cannot agitate this issue.
8.7 Following these judgments, this Bench of the Tribunal in the case of Fateh Maidari Club (supra) has taken a view that money kept in the bank either in the S.B. Account or in a F. D. Account is for safe custody and in respect of income by way of interest which accrues suo geris, it can by no stretch of imagination be said to be for commercial purposes and was done with the sole motive of earning profit, nor can it be said to be tainted with commerciality. If keeping surplus funds for safe custody in a Bank is to be considered as business being done with a bank, then all of us who are Govt. servants and who keep our surplus money with Banks would be guilty of violation of our terms of employment. Such income is assessable under the head "other sources" and not under the head "Business or Profession." This was the ratio of the judgement of the Hon'ble Supreme Court in the case of Tuticorin Alkali, Chemicals and Fertilizers Ltd. 227 ITR 172. The Hon'ble Allahabad High Court judgment in the case of Cawnpore Club Ltd. in R.A. No. 413/Alld/92 in ITA No. 2433/Alld/90 which was referred to elaborately in the case of Fateh Maidan Club (supra) had decided the issue in favour of the assessee and the revenue did not dispute the same.
8.8 Reliance placed by the learned single Member of the Tribunal in the single member decision of the Tribunal in the case of Secunderabad Club (supra), on the decision of the Supreme Court in Royal Western India Turf Club Ltd. to hold that the said interest income is taxable, is not the correct position of law. We thus respectfully differ from the same. There is a change in the legal position from the dates on which the earlier decisions of this Bench were rendered. The Hon'ble Supreme Court in the case of Bankipur Club Ltd. (supra) at page 110 of the Reports (226 ITR), referring to the gist of these decisions held as follows-
...We do not think it necessary to deal at length with the above decisions except to state the principle discernible from them. We understand these decisions to lay down the broad proposition -that, if the object of the assessee-company claiming to be a "mutual concern" or "club" is to carry on a particular business and money is realised both from the members and from non-members, for; the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity 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 withy the members or non-members 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; are a "mutual club" or carrying on a trading activity; or an adventure in the nature of trade", is largely a question of fact. (Wilcock's case (1924)9 TC 111, 132 (CA): (1925) 1 KB 30 at page 44 and 45).
8.9 The Hon'ble Supreme Court in the case of Chelmsford Club 243 IT 89 at page 95 explained the case of Royal Western India Turf Club Ltd. 24 ITR 551 (SC) as follows:
This court in the case of Royal Western India Turf Club Ltd. , on the facts came to the conclusion that the club in that case had kept open its business not only to its members but also to outsiders who would participate in the club's business on payment which income from the outsiders would go to the same kitty as that of the members, consequently, the identity between the contributors and the recipients was lost. Therefore, this court held that the doctrine of mutuality did not apply in the case of Royal Western India Turf Club Ltd. , otherwise this court in that judgment had accepted that, in regard to the businesses governed by the doctrine of mutuality, the levy of tax under the Income tax Act did not arise.
8.10 Thus, going by the proposition laid down by the Hon'ble Supreme Court, to hold that the assessee cannot claim exemption on principles of mutuality, it would be very much necessary to hold that the activity in question, which results in the income is a commercial activity or an adventure in the nature of trade; and that the activity is tainted with commerciality. It should be further held that such trade or business is being done with non-members and members alike without any difference. That is the reason why in the case of a Railway company, when both members and non-members travel by purchasing tickets, and profit is earned on the same, the Courts have held that the principles of mutuality cannot be claimed, as the transaction is tainted with commerciality as the concern is doing business with non-members and incomes both from the members and non-members stand on the same footing, and are liable to tax.
8.11 Similarly, in the case of Royal Western India Turf Club Ltd. (supra), in the case of horse racing company, when both non-members land members were contributing to the income by participating in the activity of horse racing, and members and non-members were treated alike in this trade or business, and thus the incomes both from members and non-members were held as taxable, as the assessee therein was doing business of horse racing, and there was no identity whatsoever between the contributors and recipients of the Fund. The finding of fact, to repeat, is that those associations in question were doing business with non-members, just as they were doing business with members and so, earning income from both members and non-members for the same activity. The ratio can be better appreciated from the observations in the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club v. CIT at page 97 of the Reports (243 ITR). After extracting the judgment in the case of Royal Western India Turf Club Ltd. (supra) the Apex Court went on to hold that the income earned by the club from letting out of rooms in club building not only to members, but also to non-members, who are guests of Members, is not exigible to tax on the principles of mutuality. The judgment of the Hon'ble Supreme Court in the case of Chelmsford Club (supra) had been interpreted and applied by the Hon'ble Delhi High Court in the case of All India Oriental Bank of Commerce Welfare Society (supra) and it was held that interest income from deposits is also not exigible to tax on principles of mutuality. When a High Court interprets and applies a judgment of Hon'ble Supreme Court on an issue, it is not open for this Tribunal to take a different view. In the case on hand, the jurisdictional High Court in the assessee's own case held that it is not a profit making concern and that it is a mutual concern. On application of these principles discussed above this Bench of the Tribunal had in the case of Shriram Chits (P) Ltd. v. D.C.I.T. 83 ITD 792 held that the assesses doing business cannot claim that its income is exempt on ground of mutuality.
8.12 In fact, in the case of Fateh Maidan Club(supra)), we had mentioned at para 18 on page 11 that this Bench of the Tribunal, while deciding the cases involving similar issue earlier had not considered the judgment of the jurisdictional High Court in the case of Nataraj Finance Corporation 169 ITR 732 and the judgment of Hon'ble Supreme Court in the case of CIT v. Cawnpore Club Ltd. (supra) and it adopted the ratio laid down by the Supreme Court as interpreted and applied by the Hon'ble Delhi High Court in the case of All India Oriental Bank of Commerce Welfare Society (supra), and decided the issue in favour of the assessee. Thus, for these reasons, we are not inclined to accept the submissions of the learned Departmental Representative that the issue should be referred to a larger Bench. As the law has now been laid down by the Apex Court and as the earlier Benches of this Tribunal did not have the benefit of those decisions, we are not in a position to follow those decisions.
8.13 The Hon'ble Madras High Court in the case of The Presidency Club Ltd. v. C.I.T., Madras 127 ITR 264 had clearly explained the law. The Head-note reads as follows:
Unless a trade with a profit motive was indulged in by a club, whether exclusively with its members or with non-members also, there could be no assessable income. In the case of a club which carries on business, whether with members alone or with members and outsiders, the business activity which yields profit would be of a commercial nature, and there could be no exemption merely because a club indulges in it. But the position of a club which does not carry on any commercial activity would be wholly different and the basic principles of mutuality that one cannot make any profit out of himself would apply to all non-commercial activities.
8.14 Moreover, the issue before us is not taxability of the interest earned by the assessee on fixed deposits and S.B. Accounts kept with bank for safe custody. In fact, the C.I.T.(A) has accepted that this income is not liable to be taxed on the principles of mutuality. Thus, the ratio of the decision in the case of Fateh Maidan Club(supra) is not in dispute before us. The dispute is as to whether income earned on amount kept as deposit with members, themselves is exigible to tax on the principles of mutuality. As it was necessary to give a finding, on the issue as to whether the Club was doing business, to decide this 'other issue, we dealt on the issue at length. The Banglore Bench of the Tribunal in the case of Bangalore Club(supra) upheld the order of the CIT(A) and at paras-6 and 7 of its order dated 71h January, 1999, on pages 4 and 5 thereof respectively, held as follows-
6. The club has clearly shown the various categories of members, one of which is corporate members. The corporate members could be any company including a bank. In the instant case, nationalised banks. State Bank of India and its subsidiaries have been taken as corporate members of the club and it is only with them that the liquid funds of the club could be kept as deposit. No doubt such corporate members may be few in number compared to other corporate members, but all the same they remain corporate members of the club. The activity of the club with such corporate members and vice versa are clearly activities of mutual consent and interest. It is similar to the club selling some of its produce or items to its members and receiving a price for the same.
7. In the instant case, the funds of the club are given in the form of deposits for earning income from the corporate members, namely, the banks here and, therefore, the earning of interest is clearly had risen out of the concept of mutuality only. The decisions relied upon by the DR have nowhere touched upon the fact as to whether it was with corporate members or not. Apparently they had dealt with the situation where the transactions of interest are from persons who are not the members of the club. During the argument, the DR had admitted that the assessee had shown interest from certain other banks as its income which also goes to show that wherever had offered the same....
8.15 In our considered opinion, the case of the assessee is on a stronger footing than that of Fateh Maidan Club's case. As the issue of taxability of interest received from fixed deposits on bank deposits has a bearing on this issue, it was necessary to deal with that issue at length. The Hon'ble Supreme Court in the case of Chelmsford Club 243 ITR 89 at page 97 has spelt out the doctrine of mutuality as follows:
From the above extract of the judgment, it is crystal clear that 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. In the above case, this court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agrl. I.T. (1948) 16 ITR 270 (PC); existence of which establishes the doctrine of mutuality. They are as follows (page 559):
(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 policyholders, 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.
I If we apply the above three criteria to the facts of the case in hand, then we find that the appellant's business is governed by the doctrine of mutuality.
That apart, this court in the case of CIT v. Bankipur Club Ltd. also had an occasion to deal with the claims of a number of clubs seeking benefits based on the principle of mutuality. In that case, this court held (headnote) Under the Income-tax Act, what is taxed is the 'income, profits and 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 fakes. Trading between persons associated 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.
...
8.16 Special Bench of the Tribunal in Walkeshwar Triveni Co-op. Housing Society Ltd. v. ITO 88 ITD 159-Mum(SB) in para-82 at page 183 of the Reports (88 ITD) reiterated this position. Thus, even if we have to hold that these amounts are not kept for safe custody with the members, but for the purpose of earning profit, still the interest earned there from is nothing but income earned from the members, and the identity of the contributor to the fund and the recipient of the fund is established, and thus, the income in question cannot be subject to tax, on the principles of mutuality as it is settled by the jurisdictional High Court that this assessee is not a profit making enterprise and that it is a mutual concern. Thus the interest income earned from deposits kept with the members is not liable to tax.
8.17 Had the assessee-club in pursuance of its objects, deposits monies or keeps the same by way of investments or fixed deposits with members as well as non-members with a profit motive and as a business activity then the interest income earned there from, could have been brought to tax by applying the ratio of the judgments of the Hon'ble Supreme Court in the case of CIT v. Royal Western India Turf Club Ltd. (supra). The facts of the case on hand are otherwise. Deposits have not been made in pursuance of the objective of the assessee-club as there is no such specific object but were incidentally made as they had to park their surplus money for safe custody and thus, this assessee's activity was incidental to the attainment of the main object and not tainted with commerciality. it cannot be said that the assessee did business to earn profits. As already stated, even if it is held as a trade with members as no outsiders are involved the income is not exigible to tax.
8.18 For the foregoing reasons, we accept the contentions of the assessee on this aspect and hold that the interest income earned by the assessee on deposits made with the corporate members is not liable to be taxed. Additions made by the assessing officer and confirmed by the CIT (A) in this behalf are deleted.
9. Coming to the second issue, the assessee has made certain claims, subsequent to re-opening of the assessment under Section 147. Irrespective of the merits of the case, we are of the considered opinion that the issue is covered against the assessee by the judgment of the Apex Court in the case of C.I.T. v. Sun Engineering Works P. Ltd. 198 ITR 297. The assessee cannot re-agitate questions which had been decided in the original assessment proceedings. Thus on this legal proposition this ground of the assessee is dismissed.
10. As far as the assessee's challenge of re-opening of the assessment is concerned, the same has not been argued before us and thus this ground is dismissed as not pressed.
11. In the result, the appeals are allowed in part.