TaxTMI 
TaxTMI 
2005 (6) TMI 235
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of the assessee and held that there is a clear distinction between the income earned on surplus money kept in safe custody in bank which is the normal mode of keeping money by any concern and keeping money as deposit with a corporate member by way of separate contractual agreement and that the income so earned by the Club, from its corporate members was not from the corporate Member in its capacity as a Member. In other words, the stand of the revenue is that, there is a dual capacity for the corporate Members, and that the capacity in which they took the deposit and paid the money was not in their capacity of Members and, thus, principles of mutuality do not apply. 3.2 The other issue is that assessments were reopened and amounts were brought to tax. Thus, the re-opening is also challenged. The assessee also raised a ground stating that the CIT(A) has erred in rejecting the stand of the assessee that subscriptions received from the member should be excluded from the total income on the principle of mutuality and that a specific claim made by the assessee during re-assessment proceedings was not considered by the assessee. 4.1 Taking up the main issue in these appeals, v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....winding up.-(1) and (2)** (3)(a) If an Extraordinary General Meeting under this Rule decides to wind up the affairs of the Club, it shall appoint a liquidator or liquidators and fix his or their remuneration. The liquidation shall be conducted, as nearly practicable, in accordance with the Indian Companies Act and any surplus assets remaining after all the liabilities have been discharged shall be shared equally by the members of the Club. Note: This Rule shall be deemed to have always been in existence with effect from 1.4.50: (b) Provided that no share in the assets of the Club shall be transmissible or assignable by operation of law or otherwise: (c) Provided further that a share in the assets of the Club shall be deemed to include the obligation of sharing the liabilities, if any, of the Club." The learned counsel for the assessee Shri Y. Ratnakar further submitted that the character of the club is as a mutual benefit concern and not a profit-making concern was made clear by the Hon'ble AP High Court in its judgment in Addl. CIT v. Secunderabad Club [1984] 150 ITR 401. It is merely a body of individuals who have formed themselves into a club for sports and recrea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of one club it cannot dispute the same with reference to another club. The Tribunal further held therein that Fateh Maidan Club in depositing the moneys with the bank and earning interest cannot be said to have carried on any commercial activity. The Tribunal therein ultimately held that the interest earned was not taxable on principle of mutuality. In that case the Tribunal had referred to the decision of the AP High Court in CIT v. Nataraj Finance Corpn. [1988] 169 ITR 732 besides referring to the decision of the Bombay Bench in the case of Maharashtra Wine Merchants Association [IT Appeal Nos. 1135 and 1136 (Bom.) of 1983]. The assessee's grievance is that though before the order in the case of Fateh Maidan Club was strongly relied upon by the assessee the first appellate authority did not care to follow the orders of the Tribunal but instead went on re-examining whether the said order of the Tribunal was correct in law. The learned counsel submitted that the cases relied upon by the first appellate authority are all distinguishable. It was contended that in the case of mutual benefit concern, the contribution of the member is always as a member and there is no dual capacity. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esentative for the revenue, on the other hand, submitted as under. The Assessing Officer and the Commissioner (Appeals) while holding that interest income derived by the assessee from investment in various corporate deposits is not governed by the principle of mutuality and is therefore taxable, relied on the decisions of the Hyderabad Bench of the Tribunal in assessee's own case for assessment years 1990-91 and 1991-92 in its order dated 5-3-2002 in ITA Nos. 819 and 820/Hyd./94. The objects of the club evidently shall be social activities including sports and recreation and not advancing loans or making fixed deposits. Hence, the receipt is not for services rendered by the assessee club in pursuance of its aforesaid objects. In other words, the receipt of Rs. 1,68,53,719 is governed by a separate contractual relationship between the assessee-club and the corporate members of the assessee, in their capacity as companies accepting deposits. 5.2 In the case of Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504 the Gujarat High Court held that interest income cannot be exempt. The revenue then referred to the decision of the Supreme Court in the case of Chelmsford Club v. CIT [2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... including the decision of the Hyderabad in the case of Fateh Maidan Club, it was submitted by the revenue that they are all distinguishable as clearly done by the first appellate authority in his order and, therefore, in view of the decision of this Bench on identical issue in assessee's own case for earlier years, the decisions relied upon by the assessee cannot come to the aid of the assessee. The revenue therefore, sought sustenance of the order of the Commissioner (Appeals). 5.4 The revenue further submitted that if the above plea of the revenue viz., that the issue is covered in favour of it is not acceptable to the Tribunal, it prayed that the matter may be placed for constitution of Special Bench under section 255(3) read with regulation 98A. For this reliance was pleased on the following decisions: (a) CIT v. Travancore Titanium Products Ltd. [2003] 183 CTR (Ker.) 473 (b) CIT v. Goodlas Nerolac Paints Ltd. [1991] 188 ITR 1 (Bom.). The revenue sought reference of the following question to the Special Bench for its consideration: "Whether on the facts and in the circumstances of the case, the interest income earned by the club from investments made in corporat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Club [1984] 150 ITR 401 (AP) holding that the assessee-club is a mutual benefit concern and not a profit-making concern. He referred to the order of the Division Bench where the reasons for not following the decision of the Single Member in the assessee's case have been given. The learned counsel for the assessee drew our attention to the observation of the Tribunal in Fateh Maidan Club's case that the Department cannot accept the said position in some cases and contest the same in other cases. It cannot pick and choose the Club for disputing and choose the club for accepting it. It stressed the point that since in Cawnpore Club's case this position was accepted and the Income-tax Department did not question its taxability, it cannot question it in other cases and this is one of the reasons given by the Tribunal while allowing the appeal in the case of Fateh Maidan Club. 6.4 It is now well-settled law that the revenue cannot pick up some cases for disputing and some cases for accepting in relation to any particular point. When it accepts in one case it cannot question the same in other cases. In this regard it placed reliance on the following cases: (1) Union of India v. Kaum....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herein it was held that investment of surplus funds with corporate member of the club does not tantamount to a mutual concern indulging in any trading activity or carrying on the business. 6.8 The ITAT, Hyderabad Bench 'A' in its decision dated 15-8-2003 for assessment years 1983-84 to 1997-98 held that interest earned by a Club on investment of its surplus funds does not amount to carrying on the business or cannot be classified as an activity tainted with commerciality. The assessee submitted that this aspect of the matter was held, in assessee's favour by the Madras High Court as well as by A-Bench of ITAT, Hyderabad. The learned counsel therefore submitted that the issues in these appeals stand covered in his favour and the distinction sought to be made does not merit consideration. 6.9 On the issue of reference under section 253(3) to the Special Bench in case the Department's pleas are not accepted by the Tribunal, the learned counsel states that the revenue has not made out any case for reference and such reference sought is not proper. Simply because the revenue feels aggrieved that the Tribunal decided the matter in other cases in favour of the assessee it cannot see....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... non-taxability of interest income on ground of mutuality. Before we go to the findings on the issues raised, it is necessary to state the following. 7.2 From the rule book of Secunderabad Club, we find that there is only one object, which is as under: "II. Objects.- The objects of the Club shall be social activities, including sports and recreation." Based on this sole object, the Hon'ble Andhra Pradesh High Court in the case of Addl CIT v. Secunderabad Club [1984] 150 ITR 401 held as follows:- "... In other words, all the permanent members of the club are entitled to the assets of the club. It is, therefore, a mutual benefit concern, and not a profit making concern. Its services are limited only to its members and, to some extent, to non-members also. As such, the entrance and subscription fees paid by not only the permanent members but also the other members go to the common fund of the club, which is the property of the permanent members. We fail to see how it could be an income of the club. These fees go to constitute the fund, with the aid of which amenities are provided to the members. So, these fees, whether received from permanent members or from other members ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....deal with the issue as to whether we should refer the matter to the Hon'ble President for referring the issue to a Special Bench or not. In our considered opinion, it is not necessary as the principles of mutuality have been laid down in a number of reported cases, by the Hon'ble Supreme Court as well as by a number of High Courts and all that is required to be done is to apply the ratio of those decisions to the facts of the present case. Even otherwise, a similar issue of mutuality was referred to the Special Bench of the Tribunal and a finding have been given in the case of Walkeshwar Triveni Co-op. Housing Society Ltd. v. ITO [2004] 88 ITD 159 (Mum.)(SB). Once the Special Bench has already considered the principles of mutuality, there is no necessity for referring the issue to a larger Bench. 8.2 At this juncture, we also like to point out that the heavy reliance being placed by the revenue on the judgment of the Hon'ble Gujarat High Court in the case of Sports Club of Gujarat Ltd. We are of the opinion that this judgment is not at all applicable to the facts of the case. Moreover this judgment was delivered prior to the judgment of the Hon'ble Supreme Court in the case of C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a social club the objects of which are immune from every taint of commerciality, the transactions of sale and purchase being merely incidental to the attainment of the main object.' These observations must be read in the context of the case. There a company was incorporated as a company limited by guarantee. Its main object was to promote social intercourse between gentlemen connected (directly or indirectly) with literature, art, music, drama, scientific and liberal professions, sports and commerce and with a view thereto to establish, maintain, and conduct a club of a non-political character for the accommodation of members of the club, and their friends, and to provide a club house and other conveniences, and generally to afford to members and their friends all the usual privileges, advantages, convenience and accommodation of a club. Incidentally, certain other things which are usually done by social clubs, for example, buying, preparing and selling of provisions, was included in the memorandum. The income and property of the club were to be applied towards promotion of the objects of the club as set out above. All the members of the company were members of the club. No paym....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y for towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs. It has also been found that different clubs realized various sums on the above counts only to afford to their members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any availing of the facilities occasionally). In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the club to their members as stated herein above, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be "a trading activity". The surplus - excess of receipts over the expenditure - as a result of mutual arrangement, cannot be said to be 'income' for the purpose of the Act." The Hon'ble Supreme Court upheld the conclusion of the High Court and held th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed departmental representative had conceded that the controversy, sought to be raised again in this appeal stands concluded against the revenue in Chelmsford Club v. CIT." The fact is that the learned Departmental Representative for the Income-tax Department in that case has conceded before the ITAT that the controversy sought to be raised in that appeal stands concluded against the revenue by the decision of the Apex Court in the case of Chelmsford Club. Despite this concession, the revenue challenged the order of the ITAT before the High Court and the issue was considered on merits. The Assessing Officer is thus wrong in holding that the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club is not applicable to interest earned on deposits. If the stand of the revenue in the case of All India Oriental Bank of Commerce Welfare Society is read along with the ratio of the judgments of the Hon'ble Supreme Court in the case of Berger Paints India v. CIT [2004] 266 ITR 99 and in the case of Union of India v. Satish Panalal Shah [2001] 249 ITR 221 and Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219, we have to hold that the revenue cannot agitate this issue....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the one and the same business carried on by it, the dealings as a whole disclose the same profit-earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a 'mutual concern' or 'members club' is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade/business transaction and the resultant surplus is certainly profit-income liable to tax. We should also state, that 'at what point, does the relationship of mutuality end and that of trading begins' is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion, 'Whether or not the persons dealing with each other, are a "mutual club" or carrying on a trading activity; or an adventure in the nature of trade', is largely a question of fact. [Wilcock's case [1924] 9 TC 111, 132 (CA): [1925] 1 KB 30 at pages 44 and 45J." 8.9 The Hon'ble Supreme Court in the case of Chelmsford Club v. CIT [2000] 243 ITR 89 at page 95 explained the case of CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC) as follows: "This Court in the cas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the same activity. The ratio can be better appreciated from the observations in the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club v. CIT [2000] 243 ITR 891 at page 97. After extracting the judgment in the case of Royal Western India Turf Club Ltd. the Apex Court went on to hold that the income earned by the club from letting out of rooms in club building not only to members, but also to non-members, who are guests of Members, is not exigible to tax on the principles of mutuality. The judgment of the Hon'ble Supreme Court in the case of Chelmsford Club had been interpreted and applied by the Hon'ble Delhi High Court in the case of All India Oriental Bank of Commerce Welfare Society and it was held that interest income from deposits is also not exigible to tax on principles of mutuality. When a High Court interpret and applies a judgment of Hon'ble Supreme Court on an issue, it is not open for this Tribunal to take a different view. In the case on hand, the jurisdictional High Court in the assessee's own case held that it is not a profit-making concern and that it is a mutual concern. On application of these principles discussed above this Bench of the Tribu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t as deposit with members, themselves is exigible to tax on the principles of mutuality. As it was necessary to give a finding, on the issue as to whether the Club was doing business, to decide this other issue, we dealt on the issue at length. The Bangalore Bench of the Tribunal in the case of Bangalore Club upheld the order of the CIT(A) and at paras 6 and 7 of its order dated 7th January, 1999, on pages 4 and 5 thereof respectively, held as follows:- "6. The club has clearly shown the various categories of members, one of which is corporate members. The corporate members could be any company including a bank. In the instant case, nationalised banks, State Bank of India and its subsidiaries have been taken as corporate members of the club and it is only with them that the liquid funds of the club could be kept as deposit. No doubt such corporate members may be few in number compared to other corporate members, but ail the same they remain corporate members of the club. The activity of the club with such corporate members and vice versa are clearly activities of mutual consent and interest. It is similar to the club selling some of its produce or items to its members and receiv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n to deal with the claims of a number of clubs seeking benefits based on the principle of mutuality. In that case, this Court held 'Under the Income-tax Act, what is taxed is the "income, profits and gains" earned or "arising", "accruing" to a "person". Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associated together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage, of the facilities which it offers does not affect the mutuality of the enterprise." 8.16 Special Bench of the Tribunal in Walkeshwar Triveni Co-op. Housing Society Ltd. v. ITO [2004] 88 ITD 159 (Mum.). In para 82 at page 183 of the....