2003 (8) TMI 189 - AT - Income Tax

Interest on Fixed Deposits Non-Taxable: Tribunal Upholds Mutuality Principle; Affiliated Clubs' Member Receipts Exempt.

The Tribunal allowed all appeals of the assessee, determining that interest received on fixed deposits is not taxable under the principle of mutuality, ... Taxability of interest - Mutual concern - Whether the interest received by the assessee-club on fixed deposits with banks is not exigible to tax or not on the principle of mutuality - HELD THAT:- In our considered opinion, placing of surplus funds with bank as per memorandum of association and bye-laws of the club does not tantamount to mutual concern having indulged in trading activity or carrying on of business and thus the income by way of interest earned is not tainted with commerciality. Evidently, this Bench of the Tribunal had no occasion to consider the judgment of the jurisdictional High Court and that of the Supreme Court as they have not been brought to its notice. Thus, respectfully following the judgment of the Hon’ble Supreme Court in the case of CIT vs. Cawnpore Club Ltd.[1998 (2) TMI 591 - SC ORDER], we hold that interest earned on fixed deposits is incidental and does not amount to carrying on of any commercial activity and hence it is not taxable on the principle of mutuality. We, therefore, allow this ground of the assessee. In the result all these appeals of the assessee are allowed. Issues Involved:1. Taxability of interest received by the assessee-club on fixed deposits with banks on the principle of mutuality.2. Validity of reopening of assessments u/s 147.3. Taxability of receipts from members of affiliated clubs on the doctrine of mutuality.4. Assessment of the assessee-club in the status of Association of Persons (AOP).Summary:1. Taxability of Interest on Fixed Deposits:The primary issue was whether the interest received by the assessee-club on fixed deposits with banks is taxable on the principle of mutuality. The Tribunal referenced the Supreme Court's judgment in CIT vs. Cawnpore Club Ltd., which held that interest income from fixed deposits is exempt on the principle of mutuality. The Tribunal also considered various judgments, including those of the jurisdictional High Court and other benches, which supported the non-taxability of such interest. It was concluded that placing surplus funds with banks does not amount to carrying on a commercial activity, and thus, the interest earned is not taxable on the principle of mutuality.2. Validity of Reopening of Assessments u/s 147:The assessee challenged the reopening of assessments u/s 147, arguing it was based on a mere change of opinion. The Tribunal admitted the additional grounds raised by the assessee, considering them legal grounds. However, since the primary issue of taxability of interest was decided in favor of the assessee, the Tribunal did not delve into the validity of the reopening of assessments.3. Taxability of Receipts from Members of Affiliated Clubs:The issue of whether receipts from members of affiliated clubs are taxable was addressed. Both parties agreed that this issue was covered in favor of the assessee by the Tribunal's decision in the assessee's own case, ITO vs. Fateh Maidan Club. Consequently, the Tribunal allowed this ground in favor of the assessee.4. Assessment in the Status of AOP:The assessee argued against being assessed in the status of AOP, citing that the members were not associated in an income-producing activity. The Tribunal admitted this additional ground but did not address it further, as the primary issue of taxability of interest was resolved in favor of the assessee.Conclusion:All appeals of the assessee were allowed, with the Tribunal holding that the interest received on fixed deposits is not taxable on the principle of mutuality, and the receipts from members of affiliated clubs are also not taxable. The issues of reopening of assessments and the status of AOP were not further examined due to the resolution of the primary issue.