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2009 (7) TMI 68
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....onoor Club. 2. The common question of law involved in these appeals are as to "whether the Tribunal was right in holding that the interest income of the assessee clubs received from its corporate members, on the investment of surplus funds as Fixed Deposits with them, is not exempted from tax on the concept of Mutuality". In some appeals, a further question of law as to "whether the Tribunal is right in holding that the re-opening of the assessment under Section 147 of the Income Tax Act was valid in respect of the assessee clubs". 3. As far as the first question is concerned, the activities of the clubs viz., Madras Gymkhana Club, Madras Club and The Coonoor Club is for the benefit of its members, in as much as, the club members are provided with various facilities such as Restaurant, Gymnasium, Library, Bar, Coffee Shop, Swimming Pool and other facilities for indoor and outdoor games such as Table Tennis, playing of Cards, Tennis Court etc., In so far as the surplus funds derived by the clubs while running and maintaining the various above activities for the benefit of its members are concerned, the Revenue did not make any demand. Apart from such surplus funds derived from....
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.... learned counsel appearing for the appellants as well as Mr. K. Subramaniam, Mrs. Pushya Sitaraman and Mr. J. Naresh Kumar learned standing counsel appearing for the Income Tax Department. 8. While M/s. T. V. Ramanujam and J. Balachander contended that the interest earned by the clubs from and out of Fixed Deposits and other investments of its own constituent institutional members are covered by the principle of mutuality, the learned counsel appearing for the Department contended that even though such institutions and Public Sector Undertakings were institutional members, the investments by way of Fixed Deposits or other form of investments cannot be brought within the concept of Mutuality and that such investments were in the regular course of business of such institutions which have no nexus to either the membership or the regular activities of the clubs and therefore the interest cannot be exempted from payment of income tax on the ground of Mutuality principle. 9. The learned counsel also referred to the Rules and Bye-Laws of the Madras Gymkhana Club. Under Rule 1(A) (3) & (4), it is provided as to how to accept membership fees in the form of subscriptions and contributi....
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....assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matter of any appeal reference or revision, which is chargeable to tax and has escaped assessment." 14. The period of four years mentioned therein will have no application, where there was no order under Section 143(3) or any provisional order passed under Section 147 itself on the ground of escaped assessment. 15. In this context, we wish to rely upon the decision of the Hon'ble Supreme Court reported in (2007) 291 ITR 500 (SC) (Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers P. Ltd.). In paragraph 17, the Hon'ble Supr....
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.... of surplus funds as Fixed Deposits or Debentures etc., is exempted from tax on the concept of Mutuality, it will be worthwhile to refer to the principles laid down on the Doctrine of Mutuality in the decisions of the Hon'ble Supreme Court as well as some of the High Courts. 17. In the decision reported in (2000) 243 ITR 89 (SC) (Chelmsford Club Vs. Commissioner of Income-tax) as a proposition of law, the Hon'ble Supreme Court extracted the conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. Vs. Commr. of Agrl. I.T.(1948) 16 ITR 270 (PC), the existence of which establishes the doctrine of Mutuality. The said conditions as extracted in the decision of the Hon'ble Supreme Court are as under: "(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 members and policyholders, 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 ....
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....with the member banks or with the other corporate members in the form of Fixed Deposits or Securities. 21. It is therefore contended that such deposits having been made with the member banks/corporate members, the utilisation of such funds are by the members of the club only and thereby it satisfy the condition viz., identity of contributors and the participants. In support of such a stand, reliance was heavily placed upon the Division Bench decision of the Karnataka High Court reported in (2009) 308 ITR 202 (Karn) (Canara Bank Golden Jubilee Staff Welfare Fund Vs. Deputy Commissioner of Income Tax). In that case the appellant is a registered society comprising of employees of Canara Bank, especially with an object of promoting welfare activities amongst its members who contributed towards the corpus fund. The Assessing Officer disallowed deduction of interest income and dividend on shares which was also confirmed by the C.I.T. (Appeals) as well as the Tribunal. It was then contended that the funds collected by the assessee were used to provide monetary assistance to its members, that as a matter of precaution the surplus fund was kept in the bank not with the prime object of ea....
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....ember banks is nothing but what any other customer of a bank would have done and that it should be construed as a relationship as between a banker and a customer. In the said Division Bench Judgment reliance was placed upon the decisions reported in (1998) 234 ITR 308 (CIT Vs. I.T.I. Employees Death and Superannuation Relief Fund) and (1988) 171 ITR 504 (Sports Club of Gujarat Ltd. Vs. CIT). It also referred to the decisions of the Hon'ble Supreme Court reported in (1964) 53 ITR 241 (SC) (CIT Vs. Kumbakonam Mutual Benefit Fund Ltd), (1997) 226 ITR 97 (CIT Vs. Bankipur Club Ltd.) and (2000) 243 ITR 89 (SC) (Chelmsford Club Vs. CIT). 23. When we considered the Division Bench decision of this Court as held in Wankaner Jain Social Welfare Society case, while deliberating on the principle of Mutuality, the Division Bench made it clear that the identification between the contributor and the participant is mandatory as held by the Hon'ble Supreme Court in the case of CIT Vs. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 and that to fulfil the concept of Mutuality, the identity was required to be established in relation to the income and as regards those contributing to the inco....
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.... contributions of its members and its income from other sources keeping in view its financial viability. Provision has also been made in the Rules to receive donations and gifts without conditions for the betterment of the club. The General Committee has been authorised under the Rules to use its discretion to accept sponsorship for sporting activities, without any pre-conditions and by providing advertisement by the sponsors in the limited manner and in the event of big companies sponsoring sports events to allow commercialisation for two or three days. 26. The further object of the club is to undertake measures for social service at the time when natural calamities or disasters take place either locally or at the national level. Provision has also been made to hold various activities in the sports sector in association with other clubs or persons. The club has also been empowered to construct new buildings and go in for demolition and reconstruction of existing buildings with the prior sanction of the appropriate authorities. Under Rule 1C (c), the Committee of the club has been empowered to invest its surplus funds in banking companies as defined in the Banking Regulation Act....
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.... remain, based on that alone it cannot be held that its other activities such as its financial management of depositing the surplus funds in various banking institutions and thereby earning substantial amount by way of interest should also be held to have every nexus to the regular and normal activities of the club vis-a-vis its members. 30. It is not the case of the assessee clubs that the funds which were invested in the form of fixed deposits or securities were kept in such deposit with a definite idea of using the same in any specific projects for the further development of the infrastructural facilities of the club in the form of buildings or other facilities. On the other hand while the assessee clubs were able to generate substantial amount by way of contribution, donation etc., it had no corresponding plans or schemes to improve its infrastructure facilities or that such surplus funds were earmarked for any particular developmental activity in the interest of all the members of the assessee clubs and that since incurring of the expenses for such activities can be made in a phased manner, the amounts were being kept in such a way that it could be drawn for spending as and....
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....ties which it offers does not affect the mutuality of the enterprise." (emphasis added) 33. In the above case the facts as set out in the decision discloses that the various clubs viz., Bankipur Club Ltd., Ranchi Club Ltd., Cricket Club of India and Northern Indian Motion Pictures Association were in receipt of surplus funds arising from the sales of drinks, refreshment etc., or amounts received by way of rent for letting out the buildings and amounts received by way of admission fees, periodical subscription and receipts of similar nature from its members. The Tribunal as well as the High Court had found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or by way of admission fees, periodical subscription, etc., from the members of the club to meet the 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 was also found that different clubs realised various sums on the above counts only to afford to their members, the usual privileges, advantages, conveniences and accommodation.....