2024 (10) TMI 738 - AT - Income Tax

Club's interest income from investments ruled taxable under section 154 despite mutuality claim lacking evidence

ITAT Chennai upheld CIT(A)'s rectification order u/s 154 regarding a club's interest income taxability. The assessee club claimed interest income from ... Validity of order u/s. 154 - non-consideration of a ratio decidendi/decision of the Hon’ble Supreme Court/jurisdictional High Court - CIT(A) exercised suo-moto his power of rectification of his own earlier order passed - assessee club has shown gross income which included interest income which was claimed as not taxable on principles of mutuality but AO didn’t accept the claim of the assessee that the interest income from investment/bank wouldn’t be taxable and after giving deduction of 10% (income spent for administrative & other expenses) computed taxable income HELD THAT:- As decided in decision in the case of Saurashtra Kutch Stock Exchange Ltd. [2008 (9) TMI 11 - SUPREME COURT], it is crystal clear that non-consideration of the decision of the Hon’ble jurisdictional High Court in the assessee’s own case by the Ld.CIT(A) would definitely amount to mistake apparent on the face of the record. in the absence of such a claim being made before the AO even after 10 years after the order of the Hon’ble Madras High Court in their own case [2009 (7) TMI 68 - MADRAS HIGH COURT], setting up such a case before Ld CIT(A) during the first round was an afterthought because no material was kept before Ld CIT(A) to make such a claim. We came to such a conclusion after perusal of records, which doesn’t reveal that assessee filed any additional evidence before the Ld.CIT(A) [in the first round] to prove its assertion that its case would fall in the case-scenario as stated at Para Nos.30 & 36 of the Hon’ble High Court Bangalore Club [2006 (7) TMI 146 - KARNATAKA HIGH COURT]. And even if for argument sake it is assumed that such a claim was set up before the Ld.CIT(A), who enjoyed co-terminus power as that of AO, then he could have very well examined the relevant facts and ascertained as to whether the assessee has made out a prima facie case that the funds were invested in the form of Fixed Deposits or securities which were kept in such a deposit with a definite idea of using the same in a specific project for further development of the infrastructural facilities of the Club in the form of building or other facilities. Even before us, the assessee has neither filed any material to show that such a claim was raised before the AO at the first instance nor before the Ld.CIT(A) or before us to show the bonafide of such a claim. In the aforesaid background, the action of the AO can’t be faulted for moving Miscellaneous Application before the Ld.CIT(A) for correcting the mistake apparent on the face of the record, when there was a binding order of the Hon’ble Madras High Court in assessee’s own case for AY 1996-97; and moreover, it is noted that the Hon’ble Madras High Court concurred with the ratio of decision of Bangalore Club [2006 (7) TMI 146 - KARNATAKA HIGH COURT] which has been upheld by the Hon’ble Supreme Court in the case of Bangalore Club [2013 (1) TMI 343 - SUPREME COURT] Therefore, we find that the Ld.CIT(A) rightly exercised his power u/s. 154 of the Act which is sustainable in law and therefore, upheld. Consequently, both the appeals preferred by assessee are devoid of merits and stands dismissed. Issues Involved:1. Whether the CIT(A) erred in law by passing an order under Section 154 of the Income Tax Act after directing the AO to verify the application of income as per the Madras High Court's decision.2. Whether the CIT(A) should have dismissed the AO's petition under Section 154 due to the absence of a mistake apparent from the record.3. Whether the CIT(A) failed to follow the Madras High Court's order in the assessee's own case.4. Whether the CIT(A) overlooked the fact that the issue is pending before the Supreme Court.Issue-wise Detailed Analysis:1. Error in Passing Order under Section 154:The main grievance of the assessee was against the CIT(A) exercising suo-moto power of rectification under Section 154 of the Income Tax Act. The CIT(A) rectified his own earlier order by deleting the paragraph that directed the AO to determine the principle of mutuality concerning interest income, which was contrary to the decisions of the Hon'ble High Court and the Supreme Court. The CIT(A) held that non-consideration of a binding judicial precedent constituted a mistake apparent on the face of the record, justifying the rectification.2. Dismissal of AO's Petition under Section 154:The assessee contended that the CIT(A) should have dismissed the AO's petition under Section 154, arguing there was no mistake apparent from the record. However, the CIT(A) found that the original appellate order did not consider the binding decisions of the Hon'ble Supreme Court and the jurisdictional High Court in the assessee's own case, which rendered the order erroneous. The CIT(A) relied on the Supreme Court's decision in ACIT v. Saurashtra Kutch Stock Exchange Ltd., which allows rectification of such mistakes.3. Non-Compliance with Madras High Court's Order:The assessee argued that the CIT(A) failed to follow the Madras High Court's order, which had observed that interest income could be non-taxable if utilized for infrastructural development. The CIT(A), however, noted that the assessee did not provide evidence showing that funds were earmarked for specific developmental activities. The CIT(A) concluded that the investment of surplus funds in fixed deposits and securities did not satisfy the mutuality concept, as held by the Madras High Court and the Supreme Court.4. Pending Issue Before the Supreme Court:The assessee claimed that the issue of mutuality on interest income was pending before the larger bench of the Supreme Court. The CIT(A) observed that the assessee did not provide details of any such pending cases. Moreover, the Supreme Court in Bangalore Club v. CIT had already decided on the taxability of interest income, aligning with the Madras High Court's decision in the assessee's case. Therefore, the CIT(A) found no merit in the argument that the issue was still open for consideration.Conclusion:The appellate tribunal upheld the CIT(A)'s decision to rectify the earlier order under Section 154, finding it legally sustainable. The tribunal noted that the CIT(A) correctly applied binding judicial precedents and addressed the apparent mistake in the original order. Consequently, both appeals filed by the assessee were dismissed, affirming the taxability of interest income under the principle of mutuality.