AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (12) TMI 109
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....n 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) and, therefore, it was de-facto an extended ....
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....ue 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 group, for a common benefit. Any surplus amount to that need....
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....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 after the day-to-day management of the club. The Executive Committee consists of t....
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....rtion 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 are - i) To afford its members all the usual privileges, advantages and conveniences of a Clu....
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....UDA 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) Member Further, it has been provided as under:- "Constitution: There will be a Board of Patrons consisting of the following:- 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 ....
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....rate 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 to become permanentmembers of the Club on payment of fee of Rs. 500/- and monthly subscription of Rs. 50/- or such fee and subscription as may be determined by the Executive Committee. The admission of any person into any category of the members of the club is subject to the decision of the executive committee. 14. The main thrust of the Ld. DR is that the contribution and management of the Clubsolely rests with the government officials of the HUDA only. The non-officials or the members from the public h....
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....uring 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 further feature of the licensed Club is that there are both membership fee and the price charged for club services are greater than their cost and further additional contributions. It is this kind of price and / or additional contributions which constitutes mutual fund. The nature, formation and functioning of the assessee Club before us also resembles to the characteristic and parameters of a mutual organization as discussed above. The only distinguishing feature in respect of the assessee Club is that the manage....
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....ny 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 that the consent of each or every member is required to be taken, but it must come from the members as a class or by or through their representatives either elected or selected mutually by the members. In the case of the assessee club, the representatives who takes the decisions relating to the club are neither elected nor selected by the members of the club but they come by default as per the clause of the Memorandum of association. Even there is nothing provided in the Memorandum of association that members/ genera....
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....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 have to be seen as a class of the persons who were contributing and are entitled to participate in the surplus. It is not the matter that the class may be diminished by persons coming out of the scheme or increased by others coming in. The taxation under the Income Tax Act is to be done on the receipts or the income of the society. As discussed above, though the assessee club may fall short of the definition of mutual organization in common parlance or understanding of the term, however, so far as the taxation of the surp....
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....(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 assessee company is entitled to participate in the profits without contributing to the funds of the company by taking loans. He is entitled tor received his dividend as long as he holds a share. He has not to fulfil any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the positon of the assessee is no different from an ordinary bank except that it lends money to and receives deposits from the shareholders. This does not by itself make its income any the less income from....
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....s 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 resembled that of a mutuality; the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to that extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the member banks used such deposits to advance loans to their clients. Hence, in th....
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....or 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 our opinion, correctly points out that if profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. In Thomas (supra), at pp. 822-823, he observed thus : "But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if a trading company, by trading with the shareholders - even if it limited to trading with them - makes a profit, that profit belongs to the shareholders, in a sense, but it belongs ....
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.... 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 (Surveyor of Taxes) case (supra) and opined that the position of the assessee was no different from an ordinary bank except that it lent money and received deposits from its shareholders. This did not by itself make its income any less income from business. In our opinion, the ratio of the said decision is on all fours to the facts at hand. The interest earned by the assessee even from the member banks on the surplus funds deposited with them had the taint of commerciality, fatal to the principle of mutuality. 32. We may add that the assessee is already availing the benefit of the doctrine of mutuality in re....