Income Tax Appellate Tribunal - Delhi
Delhi Gymkhana Club Ltd., vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H' : NEW DELHI
BEFORE SHRI A.D.JAIN, JM AND SHRI R.C.SHARMA, AM
ITA No.3585/Del/2006
Assessment Year : 2003-04
M/s Delhi Gymkhana Club Vs. Dy.Commissioner of Income Tax,
Limited, Circle-10(1),
2, Safdarjung Road, New Delhi.
New Delhi.
PAN No.AAACD0896L.
(Appellant) (Respondent)
Appellant by : Shri S.R.Wadhwa, Advocate.
Respondent by : Shri Kumar Sanjay, Sr.DR.
ORDER
PER R.C.SHARMA, AM :
This is an appeal filed by the assessee against the order of CIT(A) dated 5.9.2006 for the AY 2003-04, wherein assessee is aggrieved for excluding various income earned, from the principle of mutuality.
2. During the course of hearing, the ld. AR Shri S.R.Wadhwa has taken three additional grounds and contended that the grounds of appeal are purely legal in nature and do not require any determination of new facts. It was submitted that these grounds may kindly be admitted keeping in view the ratio of the Hon'ble Supreme Court's judgment in the case of NTPC Ltd. vs. CIT (1998) 229 ITR 383 (S.C), which reads as under:-
"1. That on the facts and circumstances of the case, the applicant being an association, registered u/s 25 of the Companies Act, the provision of section 115JB are not applicable to its case.
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2. Assuming that section 115JB of the Act is applicable, the income which is exempt from tax due to application of the principle of mutuality is to be excluded in the computation of book profit.
3. Without prejudice to the ground of appeal Nos.2 & 3, the profit on the sale of investments is not includable in the computation of book profit."
3. Rival contentions have been heard and record perused. Facts in brief are that the assessee company is running a recreation club for its members and claimed exemption of income earned from the members on the basis of doctrine of mutuality. Return of income was filed on 2.12.2003 declaring income of Rs.48,16,859/- (including capital gains of Rs.4,42,170) and computed book profit u/s 115JB at Rs.49,70,963/- determined tax payable under the MAT provisions at Rs.11,78,764/-. Since the tax under the normal provisions was less than the tax computed as per the MAT provisions, the assessee paid taxes under MAT, the return was processed u/s 143(1) of the IT Act. The assessee company vide its submissions dated 6.1.2006 has filed revised computation, seeking exemption of income which represents profit on sale of investments viz. sale of shares and profit earned on other investments. The assessee stated that "we have been offering for tax income from the club's investments, such as income from FDRs in banks, dividends, income from investments in mutual funds, interest from taxable government securities etc. under the erroneous belief that it is liable to tax under the Income-tax Act. Recently however, it has come to our notice that the Supreme Court had held in its judgment in the case of CIT Vs. Chelmsford Club Ltd. - 243 ITR 89 that the income of a club from interest on fixed deposits, NSCs and dividends, is also exempt on the principle of mutuality." The assessee was specifically asked by the AO in this regard to justify and show cause why the company's contention may not be rejected in view of the fact that same are not 'derived from' income of the club.
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4. The AO held that exemption is available to the clubs on income received by way of club activities, subscription from members, whereas, nature of income changes, once it is derived from activities other than such prescribed in the Act for availing exemption. Profit earned from sources other than services provided to the members of the club (like further investments, interest income) cannot be held to be eligible for exemption and attracts violation of the 'doctrine of mutuality' principle. With the above remarks, the income of the assessee was assessed as per the computation of income filed originally on 2.12.2003.
5. By the impugned order, the CIT(A) confirmed the action of the AO by observing that the issue at hand is the interest income and other income derived by the assessee from FDRs/investments vis-à-vis principle of mutuality and not income from any house property to which the decision of Chelmsford Club Vs. CIT relates. In view of the above, the CIT(A) was of the view that the facts of cases of Sports Club of Gujarat Limited Vs. CIT, 171 ITR 504 and Rajpath Club Ltd. Vs. CIT, 211 ITR are aptly applicable to the facts of the present case. In view of above discussions, the CIT(A) upheld the action of the AO in treating the interest income, income derived from investments and profits on sale of investments etc., as 'income from other sources'; not coming within the purview of mutuality.
6. Aggrieved by the above order of the CIT(A), the assessee is in further appeal before us. The learned AR Shri Wadhwa drawn our attention to the certificate of incorporation of the club under the Companies Act, wherein club was incorporated as limited company by guarantee, has no share capital and no profit motive. He contended that the club cannot distribute any dividend and the specific requirements of Section 25(1) of the Companies Act are satisfied which read as under:-
4 ITA-3585/D/2006 "25(1) Where it is proved to the satisfaction of the Central Government that an association -
(a) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and
(b) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may, by license, direct that the association may be registered as a company with limited liability, without the addition to its name of the word "limited" or the words "private limited".
7. The learned AR further submitted that vide Section 656 of the Companies Act, 1956, the companies incorporated and registered under the repealed enactments shall continue to remain incorporated and unchanged. This company was registered under the Companies Act 1882 (VI of 1882) and because of Section 656, read with Section 657(b) of the Companies Act (copy at Annexure III), its status continues to remain the same and unaffected. Section 115JB of the Income- tax Act, 1961 under which the Assessing Officer has made the assessment, is applicable to companies who are liable to income tax on their total income as computed under the Income-tax Act, 1961. This is provided u/s 115JB(1). The tax on such total income has to be less than 10% of its book profit. Only then Section 115JB is applicable. In the case of the assessee company, on its income from providing food, recreational and residential facilities to its members is exempt from tax on the doctrine of mutuality and there is no matter of dispute. He further submitted that club's other income from interest, dividends, etc, is also not liable to tax and the company does not suffer from any taint of commerciality. The surplus fund of interest and other investment income had been earned which is largely out of the subscription and registration fee from the members as was demonstrated during the course of hearing (page-9 of the printed accounts of 2003-04). As per learned AR, if the members subscription and registration fee which are by every account subject to the principle of mutuality, are excluded, there will be a loss not only in the assessment year under consideration but also in 5 ITA-3585/D/2006 the preceding year. The question of computation of income u/s.115JB, therefore, does not arise. Learned AR further alleged the action of CIT(A) in excluding various income of assessee club from principle of mutuality without recording any finding that same are tainted by commerciality.
8. On the other hand, learned DR Shri Kumar Sanjay relied on the orders of the lower authorities to the effect that interest earned on FDRs, dividend income, income from government securities and profit on sale of investment were correctly held as not covered by the principle of mutuality.
9. We have considered the rival contentions, carefully gone through the orders of the authorities below. The additional grounds raised before us are purely legal issues which goes to the root of matter, keeping in view decision of Hon'ble Supreme Court in case of NTPC Ltd. (supra), we admit the additional grounds for decision. From the record, we found that assessee company is running a recreational club for its members. In addition to its income on account of food sale, room sale to the members and their guests, it has also earned interest income on the FDRs put with the bank, dividends from investment in shares and government securities. In respect of some of the shares which were sold during the year, the assessee has also earned capital gains therein. Contention of the AO and CIT(A) was that interest, dividend, income from government securities and profit on sale of investment does not fall within the parameter of doctrine of mutuality, accordingly the same was held to be liable to tax, and on book profit tax was levied u/s 115JB of IT Act. The assessee club is incorporated under the Companies Act and was granted certificate under Section 25 of the Companies Act. Under the provisions of Section 25 of the Companies Act, where the Central Government found that an association was incorporated for promoting commerce, arts, science, religion, charity or any other useful objects and intends to apply its profit in promoting any object and to prohibit any payment to its members, direct that such association may be registered as a company with limited liability. Under 6 ITA-3585/D/2006 the general law relating to mutual concerns, the surplus earned by the mutual concern cannot be regarded as profits and gains for the purpose of charging Section 4 of the IT Act insofar as the contributors are to receive back a part of their own contributions and there is complete identity between the contributors and recipients. Thus, a mutual concern can carry on the activity with its members, though the surplus arising from such activity is not its taxable income. Hon'ble Karnataka High Court in the case of Canara Bank Golden Jubilee S.W. Fund - 308 ITR 202 observed that the crucial test for mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. Thus, there must be complete identity between the contributors and participators. Hon'ble Court held that under the principle of mutuality where the surplus fund of society is invested in term deposit with bank, interest income on investments and dividend income on shares are not taxable.
10. The Hon'ble Supreme Court in the case of Chelmsford Club - 243 ITR 89 observed that once the principle of mutuality is being established, it is immaterial what particular form the association takes. In the instant case, assessee club which is formed as a limited company, its surplus arising under the principle of mutuality, cannot be brought to tax net even u/s 115JB of IT Act.
11. Under the Income Tax Act, 1961, what is taxable is income, profits or gains earned or arising, accruing to a person, and where a number of persons combined together and contribute to common fund for financing of some venture or objects having no dealing or relation with outside body, then any surplus return to those persons cannot be regarded in any sense as profit. The provisions of Section 2(24) recognize the principle of mutuality and has excluded all business involving such principle from the purview of the Act, except those mentioned in clause (vii) of Section 2(24). Under the doctrine of mutuality, these three conditions should co- exist before an activity can be brought under the concept of mutuality i.e. first, no 7 ITA-3585/D/2006 person can earn from himself, second no profit motivation, third no share of profit. The first condition with regard to no person can earn from himself means, there should be complete identity between the contributors and participators. In the instant case before us, there is no finding by any of the lower authorities to the effect that there is no identity between the contributors and participators as far as the income earned by the assessee as interest on deposit, dividend on shares or profit on sale of shares are concerned. There is also no dispute to the fact that source of the fund invested in bank FDR or shares is only from the members of the club and the assessee club has not received any donation or monetary grant from any outside source apart from the members. It is the members' contribution which has become the corpus fund and the same was deposited in the bank or invested in shares. Club was in receipt of the interest on deposit with the bank and dividend income on the shares and government securities. It also earned profit on sale of some of shares. In the instant case, there is no dispute to the fact that assessee club was providing recreational and refreshment facilities to its members and guests. Its facilities were not available to non members and the club was run on 'no profit no loss' basis. In that the members paid for all their expenses and were not entitled to any share in the profits. Surplus if any was used for the maintenance and development of the club. Thus, the assessee club is a mutual concern and the principle of mutuality as defined in Section 2(24) of the IT Act is applicable to it which has excluded all business involving such principle from the purview of the Act except those mentioned in clause (vii) of Section 2(24). Issue with regard to taxability of interest income from deposits in the bank has been considered by the Hon'ble Delhi High Court in the case of Country Club in ITA No.84/2003 vide order dated 11.5.2007 after taking into account the decision of Hon'ble Supreme Court in the case of Chelmsford Club (supra) and it was held that interest income earned by the assessee from the deposits in bank was covered by the principle of mutuality, not liable to tax. The decision reads as under:-
8 ITA-3585/D/2006 "1. After hearing learned counsel for the parties we admit this appeal and frame the following substantial question of law:-
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal erred in law in holding that the amount received by way of interest from banks on temporary deposit of the funds is not exempted from tax on the "principle of mutuality?"
2. Since a short question of law is involved, filing of paper books is dispensed with.
3. The assessee is aggrieved by an order dated 7th March, 2002 passed by the Income Tax Appellate Tribunal, Delhi Bench 'A' in ITA Nos.7486 & 7487/Del/1995 relevant for the assessment years 1991-92 and 1992-93.
4. The assessee club earns income from its members and their guests. Surplus funds are deposited in banks and these surplus funds are attributable to amounts received from members of the assessee club towards their dues and for expenses incurred by members and their guests in restaurants and other facilities of the club like billiard room, tennis and squash courts and swimming pool, etc. There is no dispute about the fact that all these facilities are available only to members of the assessee club and their guests.
5. Applying the doctrine of mutuality, the Tribunal held that income received by the assessee for the use of facilities by guests of the members is exempt from taxation. This being the position, we are of the view that deposits made as a result of this income received and the interest received thereon from the banks cannot be said to be outside the doctrine of mutuality.
6. Learned counsel for the assessee has relied upon Director of Income Tax v. All India Oriental Bank of Commerce Welfare Society, [2003] 130 Taxman 575 (Delhi), in which this Court has relied upon in Chelmsford Club v. CIT [2000] 243 ITR 89 (SC). It was held, following the decision of the Supreme Court, that where a number of persons combine to contribute to a common fund and have no dealings or relations with any other body, then any surplus generated cannot, in any sense be regarded as profits chargeable of tax. On this basis, the doctrine of mutuality was applied to the facts of that case. We see no distinction in the decision rendered by this 9 ITA-3585/D/2006 Court in All India Oriental Bank of Commerce Welfare Society and the present case.
7. Under the circumstances, we answer the question of law in the affirmative, in favour of the assessee and against the Revenue.
8. The appeal is disposed of."
(Emphasis supplied by us)
12. Thus, on the principle of mutuality, interest income from deposits of fund with the bank will not attract income tax, if there is no taint of commerciality. In the case of All India Oriental Bank of Commerce Welfare Society - 130 Taxman 575, Hon'ble Delhi High Court held that no substantial question of law arises on the decision of Tribunal that principle of mutuality applies to the interest income derived from the deposits made by it out of the contributions made by the members of society.
13. Mutuality offers a tax exemption as long as its mutual association is retained and its income is not tainted by commerciality. The object clause of the memorandum and article of association empowered those in the management of the assessee club to invest and deal with the moneys of the club not immediately required, in such manner as may be determined by them from time to time. Under this clause, the investment need not be confined to investment by way of deposits with banks. It can take any other form or shape such as investment in shares, government securities etc. and where any income is derived from such investment whether by way of interest, dividend or capital gain, the same cannot be said to be outside the doctrine of mutuality. Nowhere the activity of assessee club was found by any of the lower authorities, as tainted by commerciality, it is also an admitted fact that the activities of assessee club does not come within the scope of business referred to in Section 2(24)(vii). When the dividend income on shares was held to be not liable to tax under the principle of mutuality in case of Canara Bank (supra), there is no reason to exclude the gain arising on the sale of such shares, from the principle of mutuality. Once the income is found to be covered by 10 ITA-3585/D/2006 principle of mutuality, the same cannot be brought to tax even under the provisions of Section 115JB of IT Act. Accordingly, there is no merit in the action of lower authorities for bringing the income exempt under principle of mutuality, within the purview of Section 115JB of IT Act.
14. In the case of assessee club, Hon'ble Supreme Court in assessee's own case reported at 155 ITR 373 has observed that object of the assessee club was mainly to provide recreation of its members by promoting various types of sports and pastime and refreshment for the members. The income from providing refreshment to its members was held exempt from income tax on the basis of doctrine of mutuality. Even income earned as a room rent which were made available to the members on payment of fixed monthly charges and also income from providing various facilities, were held to be covered by principle of mutuality.
15. In view of the above discussion, and respectfully following the proposition of law laid down by Jurisdictional High Court and Karnataka High Court as discussed hereinabove, the appeal of assessee is allowed in terms indicated hereinabove.
Decision pronounced in the open Court on 30th Sept,2009.
Sd/- Sd/-
(A.D.JAIN) (R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 30.9.2009.
VK.
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar
11 ITA-3585/D/2006