TaxTMI 
TaxTMI 
2011 (6) TMI 70
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....laring NIL income after claiming exemption of income of Rs. 27,51,587 on the 'principle of mutuality'. The income consists of income from house property of Rs. 11,96,387 (which includes income from hoarding rent of Rs. 10,30,375) and interest income from bank on fixed deposits of Rs. 15,55,200. The Assessing Officer completed the assessment under section 143(3) of the Act determining the total income of the assessee of Rs. 37,39,448. 4. On appeal, inter alia, the CIT(A) has held that interest income earned by the assessee on bank fixed deposits during the previous year under consideration is not taxable in its hand following the principles of mutuality. Against this, the revenue is in appeal before us. 5. We have heard both the parties and perused the materials available on record. We have also carefully gone through the order of the Tribunal dated 30-4-2008 in the case of Secunderabad Club v. ITO [IT Appeal No. 356/Hyd./2007], wherein it was held that: "6.6 The case under consideration centres around inclusion of interest accrued to the club from deposits with banks and financial institutions which are corporate members with no taint of commerciality. Since this Bench of the Tr....
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....l are not applicable to the facts of the present case. In the case before the High Court, the assessee had been lending money to only its 19 members, and not lending money to any other person and the interest received by the assessee are distributed among the members for mutual benefit and therefore, the concept of mutuality was fulfilled. In the present case, there has been no application of mutuality. Here there is no mutual dealing between the members inter se in the nature of banking business and the bank where the deposit was made is an independent organisation engaged in the banking business and no refund of surplus to the member. There being no mutual dealing, the question has to be complete identity of the contributor and the participators cannot be raised or considered. Suffice as to say that in the absence, as there is in the present case, of any dealing between the members inter se in the nature of making deposits, the principles laid down in the case of Natraj Finance Corpn. (supra) have no application here. The principles that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per se to prevent t....
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....l businesses involving such principle from the purview of the Act. Except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the company, though incorporated as a mere entity for the convenience of the members in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. 9. The assessee herein is a recreation club made a deposit with the bank and earned interest income and that income cannot be said to be earned by the doctrine of mutuality. That income did not come within the concept of mutuality and it is to be taxable as income from other sources. 10. In the case of CIT v. Wellington Gymkhana Club [2010] 46 DTR 22 (Mad.) wherein it was held that : "3. The questions of law raised by the revenue are covered by the judgment of this Court in Madras Gymkhana ....
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....butions received by the club from its members but it will have no application in respect of the interest earned from the deposits of surplus funds in the banks by way of income." 11. In the case of CIT v ITI Employees Death & Superannuation Relief Fund [1998] 234 ITR 314/101 Taxman 315 (Kar.) wherein it was held that: "The Andhra Pradesh High Court considered the principle of mutuality in CIT v. Natraj Finance Corporation [1988] 169 ITR 732. In that case (somewhat unusual as observed by the Bench) the assessee carried on business in lending money to its partners. The assessee had been carrying on the said business for quite some time. For the assessment year 1977-78 some changes occurred in the constitution of the firm with the result that a deed of partnership was executed on 15-4-1976, among 19 partners. The firm filed a return declaring an income of Rs. 48,310. It was said to represent interest received on loans advanced by the firm to its partners except some interest amount received from a former partner and also on moneys deposited in a savings account with the Canara Bank which monies were kept in deposits for safe keeping. Rs. 48,310 did not include the interest from any ....
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....rporated as a company. Its main object was to promote sports. The objects clause in the memorandum and articles of association empowered those in the management of the club to invest and deal with monies of the club not immediately required till such manner as may from time to time be determined by them. The assessee claimed exemption from income-tax for the years 1966-67, 1967-68, 1968-69 and 1969-70. But the Income-tax Officer rejected the claim. The Tribunal held that income assessable under the head "Profits and gains of business or profession" would not be exigible to tax on the principle of mutuality since the contributors and the participants represented one identical body. It, however, rejected the assessee's contention that the entire surplus should be exempted on the ground of mutuality. It was held that where an association receives income by indulging in mutual activity and non-mutual activity, then the principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character. The principle of mutuality in such cases can be confined to transactions with members and the income earned from non-members would not be exempted on the principle ....
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.... Patna High Court was whether the Ranchi Club was a mutual concern and the income derived by the club from its house property let out to its members and their guests is not chargeable to tax and whether the income derived by the assessee-club from the sale of liquor, etc., to its members and their guests is not taxable in its hands. It was held that if an assessee is found to be indulging in both mutual activities as well as non-mutual activities that decides whether it can still claim exemption in respect of receipts relating to mutual activities. Reliance was placed upon the judgment in the case of CIT v. Madras Race Club [1996] 105 ITR 433 (Mad.), Carlisle & Silloth Golf Club v. Smith [1912] 6 TC 48 (KB) and the judgment of the Gujarat High Court in Sports Club of Gujarat Ltd. (supra). It was held (page 145) ; "Therefore, by applying the principle of mutuality members' clubs always claim exemption in respect of surplus accruing to them out of the contributions received by the clubs from their members. But this principle cannot have any application in respect of the surplus received from non-members. It is not difficult to conceive of cases where one and the same concern may ind....
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....one has contributed to a common fund. The fund should fulfil the essential requirements that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus should be contributors to the common fund. There must be complete identity between the contributors to the fund and the participators in the surplus. It does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he had paid. The principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character and the principle of mutuality can, in such cases be confined to transactions with members. The two activities in appropriate cases can be separated and the profits derived from non-members, can be brought to tax. 16. If the facts of the present case are examined in the light of the principles applicable to the concept of mutuality, then it has to be held that the ingredients of mutuality are missing in the present case. Apart from the contributions made by the members there are other sources of funding of the club fund. The ....