2009 (9) TMI 63 - HC - Income Tax

High Court Confirms Mutuality Principle for Society's Income Excluding Non-Member Rentals

COMMISSIONER OF INCOME TAX Versus STANDING CONFERENCE OF PUBLIC ENTERPRISES (SCOPE)

The High Court upheld the Tribunal's decision that the principle of mutuality applies to the assessee's income, except for rental income from non-members. ... Principle of Mutuality – income received from non members - interest received by the assessee on FDRs/deposits – held that - the assessee is incorporated as a society and the main objective is to improve the purpose of public enterprises. The membership of the society is open to public sector enterprises of Central/State Governments. It is, thus, performed for the benefit of its members, which are public sector enterprises. It is not indulging in any “commercial activities” in traditional sense, but is catering to the needs of its members - Of course, for using convention centre as well as other parts of the building, members pay some charges which becomes additional source of income. That by itself cannot be treated as commercial activity of the assessee – answered in favor of assessee – appeal dismissed with cost. Issues Involved:1. Whether the assessee society is a mutual concern so as to claim exemption on the principle of mutuality.2. Whether the ITAT was correct in law in holding that only rental income received by the assessee from non-members is chargeable to tax.3. Whether the ITAT was correct in law in holding that interest received by the assessee on FDRs/deposits was not chargeable to tax on the principle of mutuality.Issue-wise Detailed Analysis:1. Mutual Concern and Principle of Mutuality:The primary issue was whether the assessee society qualifies as a mutual concern, thereby claiming exemption based on the principle of mutuality. The assessee, a society registered under the Societies Registration Act, 1860, aimed to improve public enterprises' performance. The membership was open to all public enterprises of the Central/State Government. The society's income sources included interest from bank deposits, rent from the convention center, and subscriptions from members. The assessee claimed the entire income exempt from tax on the principle of mutuality, which was initially accepted for the year 1999-2000. However, the Assessing Officer (AO) later concluded that the interest income, receipts from non-members, and rent were taxable. The AO reopened the assessment for 1999-2000, rejecting the mutual concern plea, observing that the society treated members and non-members alike, and the activities extended to the community at large, thus tainting the mutuality principle with commerciality.2. Rental Income from Non-Members:The Tribunal held that rental income from non-members is taxable, aligning with the Supreme Court's judgment in Commissioner of Income-tax, Bihar v. M/s. Bankipur Club Ltd., which stated that income from non-members could be taxed, and the mutuality principle does not apply to such transactions. The Tribunal noted that allowing premises to non-members when idle does not constitute a commercial activity. The AO's assessment, influenced by the fact that rental income from members like State Bank of Hyderabad and Dena Bank had a commercial aspect, was partially overturned by the Tribunal, which distinguished between income from members and non-members.3. Interest Income on FDRs/Deposits:The Tribunal also addressed whether interest income from surplus funds deposited with banks is taxable. The AO treated this as 'Income from Other Sources,' but the Tribunal exempted it under the principle of mutuality, referencing the case of Director of Income Tax (Exemptions) v. All India Oriental Bank of Commerce Welfare Society. The Tribunal's rationale was that the society's predominant objective was to assist its members, not to engage in commercial activities, thus maintaining the mutuality principle for interest income.Conclusion:The Tribunal's decision was that the principle of mutuality applies to the assessee's income except for rental income from non-members. The High Court upheld this view, emphasizing that the society's activities were not commercially motivated but aimed at benefiting its members. The appeal was dismissed, affirming the Tribunal's partial exemption of the assessee's income under the mutuality principle, with costs awarded against the Revenue.