TaxTMI 
TaxTMI 
2013 (9) TMI 1293
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....s shall be utilised for the expenditure and other activities of the Association and shall not be distributed among the members of anybody. 2. In the Assessment for AY 07-08, the disputes raised by the Assessee relates to (i) bringing to tax interest on fixed deposits received from banks which is a member of the Assessee; (ii) bringing to tax interest received on deposits with BESCOM which is mandatory for getting electricity service connection; (iii) income from diesel generator operation. The claim of the Assessee with regard to non-taxability of the aforesaid items of income is based on the principle of mutuality which was rejected by the revenue authorities. 3. As far as the interest on fixed deposits is concerned, the issue has to be decided against the Assessee in view of the decision of the Hon'ble Supreme Court in the case of Bangalore Club v. CIT [2013] 350 ITR 509 : 212 Taxman 566 : 29 Taxman 29. The facts of the case before the Hon'ble Supreme Court were that assessee sought an exemption from payment of income tax on interest earned on FD kept with certain banks, which were corporate members of assessee, on basis of doctrine of mutuality. The AO rejected ass....
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....djudication of the additional ground is already on record. Hence, the additional ground is admitted for adjudication. 6. The facts relevant for adjudication of the issue raised by the Assessee with regard to interest on deposit with BESCOM are as follows. The Assessee has to keep as deposit 3 months minimum deposit (3 MMD) as deposit with BESCOM for availing service connection. The Karnataka Electricity Regulatory Commission, Bangalore, in exercise of powers conferred under Clause 181 read with clause 47(4) of the Electricity Act, 2003 (Central Act 36 of 2003) has framed the K.E.R.C. (Interest on Security Deposit) Regulations, 2005. In terms of Regulation 3.1 thereof the electricity supply company has to pay interest on security deposit of consumer at the bank rates prevailing as on the 1st day of April of the financial year for which interest is due. In terms of Regulation 3.2 thereof the accrued interest on security deposit for each financial year shall be credited to the Consumer's account during the first quarter of the subsequent financial year and be adjusted against the consumption charges. 7. The learned counsel for the Assessee pointing out to the above regulatio....
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....' can be allowed deduction of expenses that are necessary for maintaining its status and other obligations as per memorandum & articles of association. The Tribunal took the view that the association can run only through certain staff and that for proper management and making of deposits, the expenses of maintaining the staff are necessary and allowable as deduction against interest income. 8. The Ld. DR, on the other hand, submitted that on the principles laid down by the Hon'ble Supreme Court in the case of Bangalore Club (supra), interest earned on deposits with BESCOM is akin to deposits made by the association with banks. His further submission was that the electricity charges which is set off against the interest on 'three months minimum deposit' (3MMD) cannot be said to be an expenditure incurred in earning interest on deposit with BESCOM u/s. 57(iii) of the Act. 9. We have given a careful consideration to the rival submissions. It is seen from the facts of the case that the assessee is an association of owners of various commercial areas owned by different persons and located in a building known as Manipal Centre. The association is formed for the purp....
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....rest receipts against the electricity expenses deserves to be allowed based on the decisions relied upon by the learned counsel for the Assessee. As far as the plea of the assessee for allowing general & administrative expenses based on the decision of the ITAT Bangalore Bench decision in the case of Defence/Govt. Official Site Owners Association (supra) is concerned, we are of the view that on the facts of the present case, there was no necessity for managing and placing the deposit with BESCOM. In the case decided by the Tribunal, the factual basis was that there was a necessity for proper management by placing and making various deposits and for this purpose, the use of the services of the staff was necessary. No such facts exist in the present case. 13. For the reasons given above, we are of the view that the plea of the assessee for non-taxability of interest on deposits with BESCOM on the principle of mutuality is not accepted but the plea of the assessee for allowing set off of electricity consumption expenses against interest received from BESCOM is accepted. 14. The ground regarding the third item of receipts of Rs. 5,880 on account of diesel generation operation ....
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....erated by the club was within the principle of mutuality, but the moment the funds were placed in the fixed deposits with the bank which were no doubt members of the club, for the funds so placed with the banks could be used by the bank in any other commercial operation and at this stage, the principle of mutuality got severed. In our view, the aforesaid principle cannot be extended to the receipt of interest for late payment of subscription by members. In our view, the interest on late payment of subscription charges would assume the same character as subscription charges and would be well within the principle of mutuality. It is not in dispute that insofar as the membership fee is collected by the assessee from its members is concerned, the claim of the assessee that the same is not taxable on the principle of mutuality has been accepted by the revenue. Applying the same principle, we are of the view that interest on late payment of subscription would not be taxable by applying the principle of mutuality. Accordingly, we hold that the sum in question cannot be brought to tax. 20. The next item is rents received from ICON Hospitality Pvt. Ltd. ["ICON" for short]. The facts that....
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....ent of admission fee and membership fee issued by the assessee admitting ICON as member of the association. The application for admission of membership was made by the assessee on 03.04.2007 which was accepted by the assessee by issue of receipt on 05.04.2007. All these additional documents, in our opinion, are required for proper adjudication of the issues involved in the appeal and the same are admitted as additional evidence. 23. According to the revenue, a sum of Rs. 18,64,130 received by the assessee is taxable and not exempt on the principle of mutuality. According to the revenue, the same is nothing but rent for use of various areas belonging to the assessee received from ICON and would be taxable and not exempt by applying the principle of mutuality. The main reason given by the AO for not accepting the plea of the assessee is as follows: "8. As already stated, M/s. MCOCA basically consists of two blocks (North and South). These two blocks house all the 260 members of the association. M/s. ICON Hospitality Pvt. Ltd. is an independent and a completely separate block. M/s. ICON Hospitality Pvt. Ltd. does not own any units in north and south block of M....
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....agement and Transfer) Act, 1972 and highlighted as to how those legislations will not be applicable to the case of the Assessee. 26. The learned DR pointed out that ICON was not paying monthly subscription for use of the various facilities provided in the complex by the Association and that the electricity consumption charges being paid by ICON was only because of the existence of a common distribution point for the whole complex. It was his submission that the MOU is an independent agreement as between two strangers and the element of mutuality is completely absent. He further submitted that the fact that at a later point of time ICON became a member of the Assessee will not bring in the concept of mutuality as between the Assessee and ICON. It was also his submission that but for the payment of monthly charges, ICON could not as a matter of right use any of the facilities which were subject matter of the MOU. 27. We have considered the rival submissions. Exemption from tax on receipts applying the Principle of mutuality is applicable to a certain receipt, which does not have any characteristics of income. When several persons join together in a common activity, which is def....
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....ing; but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting...." In para-15, the above proposition has been explained as follows: "15. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequence. Kanga & Palkhivala explain this concept in "The Law and Practice of Income Tax" (8th Edn. Vol. I, 1990) at p. 113 as follows: "...The contributors to the common fund and the participators in the surplus must be an identical body. That 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 has paid." The Madras, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves: it is enough if they have a right of disposal over the sur....
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....y is not satisfied. 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 to them qua shareholders. It does not come back to them as purchasers or customers. It comes back to them as shareholders, upon their shares. Where all that a company does is to collect money from a certain number of people -it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity ....
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....like 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 begin" 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, is 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 - 9 Tax Cases 111, (p.132): C.A. (1925) (1) KB 30 at p. 44 and 45" 29. Keeping in mind the principles-summarized by the, Hon'ble Supreme Court in-the aforesaid decision, we shall now look into the facts of the present case. At the outset, we should admit that the facts, as it emanates from the orders of the authorities below, are vague. It is however clear that on 28.6.2006 when the MOU was entered into between the Assessee and ICON, ICON was not a member of the Assessee. The Assessee was registered as a Society under the Karnataka Societies Registration Act, 1960 as early as 21.9.1990. It was formed, among other objects, for providing all facilities and oth....
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....he contributors and recipients contemplates that the assessee when collects money from its members, must apply the same for their benefit not as members having an interest in its profits but as persons themselves who have put up the fund by contributing to it. There must be a thread of agency for acting for the contributors for achieving the objectives. The identity of individuals as contributors and participants is not essential but what is essential is the identity of character of contributors and participants. 34. The character of the contribution of ICON is not that of Maintenance charges as is the one paid by the owners of the North and South Block in the complex Manipal Centre. The same has to be rightly characterized as Rent for use of the common area of North and South Block. In this regard we observe that there is no material on record nor is it the case of the Assessee that the Association caters to maintenance of the Hotel Block or any common area of the hotel block. All that the hotel block had to do with the North and South Block was that they shared common road which allowed ingress and egress to the hotel block from Dickenson road. Just by becoming a member of the....