1998 (7) TMI 76 - HC - Income Tax

Court denies charitable trust's exemption claim under Income-tax Act Section 11 & mutuality principle.

Commissioner Of Income Tax Versus ITI. Employees Death And Superannuation Relief Fund

The court ruled against the assessee in a case concerning the exemption under Section 11 of the Income-tax Act and the principle of mutuality. The court ... Mutual Concern, Mutuality, Interest On Investments Issues Involved:1. Whether the objects of the assessee-society fall within the purview of section 2(15) of the Income-tax Act, and as such its income is exempt under section 11 of the Income-tax Act, even though the assessee has not fulfilled the conditions laid down in section 12A of the Act.2. Whether the interest income earned by the fund was exempt on the principle of mutuality.Summary:Issue 1: Exemption under Section 11 of the Income-tax ActThe trust 'Indian Telephone Industries Employees' Death and Superannuation Relief Fund' was created for the benefit of ITI employees. The trust claimed exemption u/s 11 of the Income-tax Act, asserting it was a charitable trust. The Assessing Officer denied the exemption, considering the fund a mutual benefit fund for ITI employees only, not benefiting any outsiders. The Commissioner of Income-tax (Appeals) upheld this view, rejecting the trust's claim for exemption. The Tribunal, however, accepted the trust's plea, recognizing it as a charitable trust and thus exempt under section 11. The Revenue contested this, and the court referred to a similar case, CIT v. BEL Employees Death Relief Fund and Service Benefit and Association, where it was held that such funds do not fall within the purview of section 2(15) and are not exempt under sections 11 and 12. Consequently, the court ruled in favor of the Revenue, stating that the Tribunal was incorrect in holding that the trust's objects fell within section 2(15) and thus exempt under sections 11 and 12.Issue 2: Principle of MutualityThe trust alternatively claimed that its income was not taxable based on the principle of mutuality, arguing that the contributors (ITI employees) and beneficiaries were the same, thus satisfying the mutuality test. The Tribunal rejected this plea, and the court examined various judgments to understand the principle of mutuality. It was established that mutuality requires complete identity between contributors and participators in the surplus. The court noted that the trust fund included contributions from ITI management, donations, and interest from investments, not just member contributions. The income was earned from bank deposits, not from transactions with members. Citing cases like CIT v. Ranchi Club Ltd. and CIT v. Kumbakonam Mutual Benefit Fund Ltd., the court concluded that the principle of mutuality does not apply to income earned from external sources like bank interest. Therefore, the court ruled that the trust was not entitled to exemption on the principle of mutuality, answering the question in favor of the Revenue and against the assessee.