TaxTMI 
TaxTMI 
2024 (11) TMI 774
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....or short 'the Tribunal') for different assessment years as listed below:- T.A. No. A.Y. 1 689/2012 2006-07 2 690/2012 2006-07 3 691/2012 2008-09 4 692/2012 2008-09 5 216/2022 2014-15 6 500/2023 2019-20 7 670/2024 2017-18 8 671/2024 2018-19 3. These appeals are raising the common issue as to whether in the facts and circumstances, the Tribunal erred in not deciding the question of surplus on the ground of principle of mutuality having been decided in favour of the respondent - Assessee. So far as Tax Appeal No.670 of 2024 and 671 of 2024 the same are also admitted on the following substantial questions of law:- "(1) "Whether in the facts and circumstances of the case the Tribunal erred in not deciding the question of surplus of the sum of Rs. 6,08,72,639/- on the ground of principle of mutuality having been decided by it in favour of the assessee respondent?" (2) "Whether on the facts and circumstances of the case, the Tribunal was right in holding that principle of mutuality on the surplus of Rs. 3,02,97,496/- applies to the income of the assessee company?" (3) "Whe....
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....d not be applicable in the facts of the case and the income/surplus of the assessee cannot be exempted from tax. The CIT (Appeals) consequently confirmed the addition of disallowance of depreciation under Section 80IA of the Act. 8. Being aggrieved, the respondent - Assessee preferred appeals before the Tribunal who by common order allowed the appeal of the assessee by applying the principle of mutuality relying upon the decision of this Court in case of Sports Club of Gujarat Limited v. CIT reported in (1987) 171 ITR 504 and remanded the matter to the Assessing Officer with a direction to verify the claim of the assessee whether any outsider is getting service or not from the assessee which has to be taxed accordingly. The Tribunal consequently, did not decide the issue of allowance of depreciation and deduction under section 80IA as the entire income/surplus was held to be exempt on the basis of the principle of mutuality. 9. Before adverting to the submissions made by the learned advocates for the respective parties it would be germane to refer to the relevant facts recorded by the CIT (Appeals) in detail as under:- "4. FACTS IN BRIEF:- 4.1 The appellant ....
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....hrough GIDC drainage pipe lines. Hence, every factory discharging such effluents shall nominate its proprietor/partner/nominee/ director as the case may be to be a member of the Company". Article 4 states the situations in which a member shall cease to be a member. Declaration by competent authority that the activities of an industrial unit are non-polluting and permanent closure of manufacturing activities are the two situations in which a member shall cease to be a member. Cl. 34 of AOA-certain powers to be excersied by the Board only at the Meting: That the Board shall exercise the following powers on behalf of the company by means of resolution passed inter-alia; a) the power to make call on shareholders in respect of moneys unpaid on their share, b) the power to issue debentures, c) the power to borrow money otherwise than debentures, d) the power to invest the funds of the Company, e) the power to make loans. 6.1 Pursuant to the Order of the Hon'ble Gujarat High Court, Vapi Industries Association ("VIA") had filed an affidavit in the Court stating the steps taken by VIA for Pollution Control, includin....
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....pay the balance in EQI, with interest on outstanding balance. It may, thus, be noted that the earmarking of installed capacity is notional and therefore, by paying up their contribution in the manner stated above, the Members do not acquire any inherent right, title or interest in the plant. The appellant company is the absolute owner of the effluent treatment plant. 6.4 From time to time, the appellant Company has temporary surplus funds due to excess of "on account" contribution received from the members over treatment cost incurred. Such excess contributions ensure uninterrupted and smooth operations of the effluent treatment facility. The surplus funds are placed in term deposits with bank which yields interest. Quite often, to ensure that there is no loss of interest on premature encashment of term deposits, the appellant takes temporary overdraft from the bank and pays interest thereon. Such overdraft is repaid from the funds received on maturity of the deposits." 10. Learned Senior Standing Counsel Mr. Karan Sanghani relying upon the findings given by the CIT (Appeals) submitted that the Tribunal without considering the findings of the CIT (Appeals) by giving cur....
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.... providing service of CEFT but it also has undertaken various other projects like construction of roads etc. which is outside the scope of its objects and the application of the contribution made by the members is not utilized for the purpose for which it is made. It was also pointed out that the respondent assessee has borrowed the funds from outside sources and loans are also provided to the Vapi Industrial Association which is not a member of the assessee company. It was therefore submitted that there is no complete identity between the participants i.e. the assessee company and its members which goes against the principle of mutuality. It was submitted that the Tribunal has not considered the above facts and evidence and findings arrived at by the CIT (Appeals), hence, the order passed by the Tribunal is perverse which is required to be quashed and set aside. 15. Learned advocate Mr. Sanghani also submitted that the assessee Company is not a company incorporated under Section 25 of the Companies Act, 1956 for non profit making purpose but the same is incorporated under Section 26 of the said Act for profit making and therefore, the exemption of income/surplus allowed by the ....
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....as been succinctly summarised in the textbooks which we have adverted to hereinabove (Halsbury's Laws of England, Simon's Taxes, Wheatcroft etc.). particular stress was laid on the decisions of the Supreme Court in CIT v. Royal Western India Turf Club Ltd., CIT v. Kumbakonam Mutual Benefit Fund Ltd., Fletcher v. CIT. We do not think it necessary to deal at length with the above decisions except to state the principle discernible for them. We understand these decisions to lay down the broad proposition - that, if the object of the assessee company claiming to be a "mutual concern" pr "club", is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit-earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or "members' club" is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike ....
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....of these cases, the parties will bear their own costs." 19. Referring to the decision of Bombay High Court in case of Commissioner of Income Tax v. Common Effluent Treatment Plant, Thane reported in (2010) 328 ITR 362, it was submitted that facts of the case before Bombay High Court were similar to the facts of the assessee company wherein the Hon'ble Bombay High Court has held as under:- "6. The factual position as it emerges from the record before the court is that the assessee is a company incorporated under section 25 of the Companies Act, 1956. The assessee is an association formed with the object of setting up an effluent treatment plant for the members of the assessee, who run industrial units in the Trans Thane Creek Area. The income of the assessee consists of contributions by members made for the purposes of setting up the effluent treatment facility. The association collects contributions in excess of what is required to be expended. The case of the assessee is that the treatment costs recovered are generally maintained at such a level, that recoveries are normally more than the expenses of that year so as to ensure that funds are available to meet a part....
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....of the first issue, it must be noted that this income is exclusive of interest which is earned on fixed and other deposits and on refund of Income-tax which would be dealt with separately. The income of the assessee is contributed by its members. The assessee has been formed specifically with the object of providing a common effluent facility to its members. The income is not generated out of dealings with any third party. The entire contribution originates in its members and is expended only in furtherance of the objects of the association, for the benefit of the members. On these facts, both the Commissioner (Appeals) and the Tribunal were justified in coming to the conclusion that the surplus so generated falls within the purview of the doctrine of mutuality and was not exigible to tax. The first question of law would accordingly have to be answered in favour of the assessee and against the Revenue." 20. Learned Advocate Mr. Soparkar invited the attention of the Court to the decision of the Hon'ble Apex Court in the case of Income Tax Officer, Mumbai v. Venkaatesh Premises Cooperative Society Limited reported in (2018) 15 SCC 37 to submit that in case of cooperative socie....
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....is, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. 224. Clubs, etc.- Members clubs are an example of a mutual undertaking, but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting." 17. Simon's Taxes, Vol. B, 3rd Edn., Paras B 1.218 AND b 1.222 (pp.159 and 167) formulate the law on the point, thus: '...it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered.... ....
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....d 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 the present case, with the funds of the mutuality, the member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the 'privity of mutuality, and consequently, violating the one-to-one identity between the contributors and participators as mandated by the first condition. Thus, in the case before us the first condition for a claim of mutuality is not satisfied. 30. As aforesaid, the second condition demands that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club, which is not the case here. In the instant case, the surplus funds were not used for any specific service, infrastructure, maintena....
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....he pollution in Vapi Industrial area on the suggestion of the Hon'ble Gujarat High Court. The company is limited by guarantee. There is no share capital of the members. Only subscription is made on the basis of wastage delivered by their plants. No dividend has been distributed by the company so far. The object mentioned in the main and ancillary object are as per the line of the company act but it is not for profit earning. The Board of Director has to pass resolution to allow the outsider to get the services of the company. No director is outside from the members of Vapi Industrial Association. On the basis of decision of Hon'ble Gujarat High Court in the case of Sports Club of Gujarat (supra) the assessee also has declared the interest income in return as taxable on fixed deposit with bank however, it was admitted that no outsider had provided the services of the company but the AO is directed to verify the claim of the assessee whether any outsider is getting services or not from non-members, has to be taxed accordingly after giving full opportunity to the assessee. The assessee is also directed to cooperate with the A.O. and give all the evidences as required ....