Indian Kanoon - Search engine for Indian Law

(Judgment of the Court was delivered by F.M.IBRAHIM KALIFULLA, J.) These appeals arise out of orders passed by the Income Tax Appellate Tribunal, Chennai in various Income Tax appeals preferred by M/s.Madras Gymkhana Club, M/s. Madras Club and M/s. The Coonoor Club.

2. The common question of law involved in these appeals are as to "whether the Tribunal was right in holding that the interest income of the assessee clubs received from its corporate members, on the investment of surplus funds as Fixed Deposits with them, is not exempted from tax on the concept of Mutuality". In some appeals, a further question of law as to "whether the Tribunal is right in holding that the re-opening of the assessment under Section 147 of the Income Tax Act was valid in respect of the assessee clubs".

8. While M/s. T.V.Ramanujam and J.Balachander contended that the interest earned by the clubs from and out of Fixed Deposits and other investments of its own constituent institutional members are covered by the principle of mutuality, the learned counsel appearing for the Department contended that even though such institutions and Public Sector Undertakings were institutional members, the investments by way of Fixed Deposits or other form of investments cannot be brought within the concept of Mutuality and that such investments were in the regular course of business of such institutions which have no nexus to either the membership or the regular activities of the clubs and therefore the interest cannot be exempted from payment of income tax on the ground of Mutuality principle.

23. When we considered the Division Bench decision of this Court as held in Wankaner Jain Social Welfare Society case, while deliberating on the principle of Mutuality, the Division Bench made it clear that the identification between the contributor and the participant is mandatory as held by the Hon'ble Supreme Court in the case of CIT Vs. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 and that to fulfil the concept of Mutuality, the identity was required to be established in relation to the income and as regards those contributing to the income and those participating in the distribution of that income. In other words, according to the Division Bench, the identity should exist in the matter of contribution as well as availing of the benefit in equal proportion and then and then alone it can be held that the concept of Mutuality gets fulfilled. This was also explained by way of an analogy even in the case of such clubs, where while on the one hand the contribution from the members in the form of subscription or otherwise is collected which is in turn utilised in developing the various activities of the Club by way of recreational facilities or in the form of boarding or lodging and such facilities are made available for the benefit of the members in equal proportion without there being any special benefit conferred on any particular member in either enjoying or availing the benefit in an exclusive manner.

37. At the risk of repetition, it will have to be held that investment of surplus fund with some of the member banks and other institutions in the form of Fixed Deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept. As held in the decision of the Karnataka High Court reported in (1998) 234 ITR 308 (CIT Vs. I.T.I. Employees Death and Superannuation Relief Fund) the principle of Mutuality could be confined in respect of the income earned by the club out of the contributions received by the club from its members but it will have no application in respect of the interest earned from the deposits of surplus funds in the banks by way of income.