TaxTMI 
TaxTMI 
2017 (12) TMI 109
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....inciple of mutuality' would be applicable in the case of assessee or not. 3. This is the second round of appeal before us. The brief facts relevant to the issue have been taken from ITA No. 1084/Chd/2009 for assessment year 2006-07. The assessee, Gymkhana Club, Sector 6, Panchkula has been incorporated as a society registered under the Societies Registration Act, 1860 on 17.1.1994 by the Registrar of Societies, Haryana. The assessee club filed its return of income for assessment year 2006-07 on 31.10.2006 returning nil income on the ground that it was a mutual concern. The cases was picked up for scrutiny by the Assessing Officer. The Assessing Officer perused the tax audit report for assessment year 2006-07 filed by the assessee and noticed that there was surplus of income over expenditure at Rs. 35,72,081/- including interest income amounting to Rs. 21,95,943/-. He also examined the claim of the assessee that it was a mutual concern and, therefore, exempt from tax. He scrutinized the Memorandum of Association and the by-laws of the society and noticed that the management and control of the assessee was wholly and exclusively vested in HUDA (Haryana Urban Development Authority)....
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....is pertinent to mention here that earlier the issue whether the principle of mutuality applies to the assessee concern hasarisen in assessment year 1997-98. The matter travelled to the Hon'ble High Court. The Hon'ble jurisdictional High Court whileadjudicating the issue as to whether the principle of mutuality would be applicable in the case or not, while relying uponthe decisions of the Hon'ble Supreme Court in the case of 'Banglore Club Vs. CIT' (2013) 350 ITR 509 (SC) summed up the conditions laid down for the applicability of doctrine. The relevant partof the order dated 30.10.2015 passed in ITA No. 690 of 2005 for assessment year 1997-98 is reproduced as under:- "13. The conditions for invoking the principle of mutuality have been recently enumerated by the Apex Court in Bangalore Club's case (supra) wherein after considering various other pronouncements of the Supreme Court and the High Court on the subject, it has been laid down that principle of mutuality relates to the notion that a person cannot make a profit from himself. The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the grou....
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....ed 10.12.2015, which has been made applicable retrospectively to the pending appeals also. Since the tax effect involving in the captioned appeals is more than the monetary limit prescribed, hence, the captioned appeals wereheard on merits as directed by the Hon'ble High Court. 8. The main contention of the Revenue is that the assessee club has been formed under the control of Haryana Urban Development Authority (HUDA) which is authority established by Haryana Government. HUDA is totally a Government entity. The Chief Administrator of HUDA is an ex-officio president of the assessee club. The Memorandum of Association further provides for constitution of a Board of Patrons consisting of Vice Chairman, HUDA & Chief Secretary to the Govt. of Haryana, P.S.C.M., Commissioner & Secretary to Govt. of Haryana in the Department of Town & Country Planning, Chief Administrator, HUDA and a Representative of Defense Services (Western Command) not below the rank of Lt. Gen. (To be nominated). The Board of Patrons has veto power on the decisions taken by any committee/body of the society. The Memorandum of Association also provides for the constitution of an Executive Committee to look aft....
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....he Club can be applied towards the promotion of the objects of the Club and no portion thereof can be paid or transferred directly or indirectly to the members of the Club / Society. He has also relied upon the winding up clause in the memorandum of the society and has submitted that after satisfying its liabilities, the remaining assets / properties is not to be paid or distributed among the members of the society but shall be given or transferred to some other institution having objects similar to that of the Society. He, therefore, has stated that no profit element is involved in the activities of the society and that the 'principle of mutuality' is applicable to the assessee society. 10. We have considered the rival contentions and have also gone through the records. Before going deep in the controversy, it is imperative to firstly discuss the aims / objectives and other relevant conditions and clauses regarding its constitution and membership. The aims and objects of the society have been enumerated in para 4 of the memorandum of Association, which reads as under:- "Aims/ Objectives & functions of the Society The objectives for which the Society is formed ....
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....istrator, HUDA, Panchkula Vice President 3 Sh. Parveen Kumar Estate Officer, HUDA, Panchkula Service` General Secretary 4 Sh. S.C. Kansal C.C.G.HUDA Service Treasurer 5 Sh. S.K. Sardana Legal Remembrance, HUDA Service Joint Secretary 6 Sh. T.R. Sharma D.C. Panchkula Service Member 7 Sh. K.P.Singh S.P. Panchkula Service Member 8 Sh. S.K.Monga Administrator (HQ) Service Member 9 Sh. B.P. Sinha C.T.P. HUDA Service Member 10 Sh. R.C. Taneja S.E. HUDA Service Member Thereafter, we find mention of the names of 11 persons who have decidedto form the Society in the name of Gymkhana Club, Sector 6, and Panchkula, as under:- 1 Vice Chairman, HUDA and Chief Secretary to Government. Haryana Chairman, Board of Patrons 2 P.S.C.M. Member 3 Commissioner & Secretary to Government. Haryana, Town & Country Planning Department Member 4 Chief Administrator, HUDA Member 5 Representative of Defence Services (Western Command) Not below the rank of Lt. Gen. (to be nominated) ....
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....Permanent members b) Dependent members c) Corporate members d) HUDA members e) Service members 13. It has been further provided that Permanentmember has to pay an entrance fee, annual subscription, monthly subscription and such other fees as may be fixed from time to time by the Executive Committee.The Dependent Members are the spouse and dependent children of the members. Guest of the Permanent Members can also use the facility on payment of certain amount. The Corporate Member means a limited Company or an organization who will have the right to nominate not more than three persons who will be entitled to enjoy Clubfacilities on payment of subscription fee. Another clause of members is HUDA Members, who are members of the Authority and Gazetted officers of HUDA posted at Panchkula/Chandigarh and they are eligible to becomepermanentmembers on payment of fee of Rs. 250/- and monthly subscription of Rs. 50/- or such fee and subscription as may be determined by the Executive Committee. In the category of Service Members, all the class-I & II officers of the State Government / Central Government, Boards / Corporations etc. have been made eligible....
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....mount received from oneself is not regarded as income and is therefore, not subject to tax. The concept of Mutuality has been has been explained to define group of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purposes is said to be simply an increase of common fund and as such neither considered income nor taxable. In the light of the above principles, we have to decide as to whether the surplus accrued / collected during the year is taxable income of the assessee or the same is just the collection of the common fund to which Principle of mutuality applies. 16. The Hon'ble Supreme Court in the case of Bangalore Club (supra) has also discussed the nature and functioning of the mutual organizations. It has been observed that a common feature of mutual organization in general and of licensed Club in particular is that participators usually do not have property right to their shares in the common fund, nor they can sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A f....
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....to the high rank officers of HUDA, whether any right of reverse action that is to divest the officials of HUDA from the management of the club lies with the members of the club? The answer is no. We have gone through the memorandum of the association but have not found any clause giving any such right in particular or any other right in general to the members of the club in general. All the rights vests in the executive committee. The Board of Patron have the absolute powers in terms of taking decision pertaining to any matter relating to Club.They have veto power on the decision taken to any committee / body relating to the club. Under these circumstances, it can not be said that the appoint of management or vesting of all rights relating to the running of affairs of the club including taking financial decisions relating to the manner and items on which the surplus is to be applied. In general parlance, as we understand, the participation in the surplus includes not only the right to get common benefit out of surplus but also the right to participate in the decision making as to in what manner or on what item or services the surplus is to be applied. Having said so, we do not mean....
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....ed or collected with a profit element to the HUDA or to the official management who are ex-officio members of the Club. No doubt the participation in the surplus of the non-official members is restricted to the enjoyment and use of facilities of the Club and they are not entitled to participate in the decision making as to on which activity and in what manner funds are to be expended for the common benefit of the members or for carrying out the objects of the Club. Such a restriction though may be of some importance with the question as to the mutually equal rights in the management of Club if any such dispute arises inter se between the members. However, so far as the taxability of the surplus is concerned, the surplus funds cannot be said to be income of the Society as there is lack of business profit motive involved and the funds so collected have to be necessary expended for the common benefit of the contributors only. It has also been held time and again that when we speak of the contributions to the common fund and the participation in the surplus, that does not mean that each member should contribute to the fund or that each member should participate in the surplus but they ....
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....further, taking clue from the observations of the Hon'ble Supreme Court in Banglore Club's case (supra), may add here that sometimes the right to share in the surplus may lead to a conclusion of involvement of the motive of commerciality in the operation or working of such an organization resulting into denial of the benefit of mutuality. In this respect, the Hon'ble Supreme Court in 'Banglore Club' (supra) has referred to the British Common Law decisions in the case of 'Styles (Surveyor of Taxes) Vs. New York Life Insurance Co' (1889) 2 TC 460 and in the case of 'Thomas Vs. Richard Evans & Co Ltd (1927) 11 TC 790 wherein it has been held that if profits are distributed to shareholders, the principle of mutuality is not satisfied. Further, in the case of 'Commissioner of Income Tax, Madras Vs. Kumbakonam Mutual Benefit Fund Ltd'., AIR 1965 SC 96, the Hon'ble Supreme Court denied the exemption on different facts of the case before it from those of Styles case (supra) and denied the exemption because of the taint of commerciality, observing as under:- "It seems to us that it is difficult to hold that Stylee's case applies to the facts of the case. A shareholder in the assesse....
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....nt of commerciality in the contribution, management and application of the surplus collected through contributions and subscriptions from the members and for price of the facilities availed by its members, hence, the same cannot be said to be taxable income of the society. 21. So far as the receipt from interest on FDR's is concerned, the ld. Counsel for the assessee society has fairly agreed that the issue has been settled by the Hon'ble supreme court in the case of Banglore Club (supra) against the assessee by observing as under: "25. This brings us to the facts of the present case. As aforesaid, the assessee is an AOP. The concerned banks are all corporate members of the club. The interest earned from fixed deposits kept with non- member banks was offered for taxation and the tax due was paid. Therefore, we are required to examine the case of the assessee, in relation to the interest earned on fixed deposits with the member banks, on the touchstone of the three cumulative conditions, enumerated above. 26. Firstly, the arrangement lacks a complete identity between the contributors and participators. Till the stage of generation of surplus funds, the setup res....
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....d only be expended or returned to themselves. This principle requires that the funds must be returned to the contributors as well as expended solely on the contributors. True, that in the present case, the funds do return to the club. However, before that, they are expended on non- members i.e. the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, in our opinion, snaps the link of mutuality and thus, breaches the third condition. 29. There is nothing on record which shows that the banks made separate and special provisions for the funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client. This directly contravenes the third condition as elucidated in Styles (Surveyor of Taxes) and Kumbakonam Mutual Benefit Fund Ltd. cases (supra). Rowlatt J., in o....
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.... for fixed amounts to be contributed monthly by them for a fixed number of months as stipulated at the end of which a fixed amount was returned to them according to published tables. The amount so returned, covered the compound interest of the period. These recurring deposits constituted the main source of funds of the assessee for advancing loans. Such loans were restricted only to members who had, however, to offer substantial security therefor, by way of either the paid up value of their recurring deposits, if any, or immovable properties within a particular district. Out of the interest realised by the assessee on the loans which constituted its main income, interest on the recurring deposits aforesaid was paid as also all the other outgoings and expenses of management and the balance amount was divided among the members pro rata according to their share-holdings after making provision for reserves, etc., as required by the Memorandum or Articles aforesaid. It was not necessary for the shareholders, who were entitled to participate in the profits to either take loans or make recurring deposits. 31. On these facts, as already noted, the Court distinguished Styles (Surve....