Case Details:
I.T.A.No.1529/Mds. /2013 Assessment Year :2010-11
M/s.Ootacamund Club (Appellant) vs Income Tax Officer (Respondent)
Date of Order: 05-08-2015
Coram: Shri N.R.S. Ganesan, Judicial Member and Shri A. Mohan Alankamony, Accountant Member

Case Laws Referred:
M/s.Bangalore Club Vs. CIT in civil Appeal No.124-125/2007 with Civil Appeal No.272-278 of 2013
CIT Vs. Vegetable Products Limited in (1973) 88 ITR 192 (SC)

Facts of the Case:
The assessee Club was a Section-25 registered company under the Companies Act and had filed its return of income for the assessment year 2010-11 with NIL income. On Scrutiny u/s 143(3), the Assessing Officer taxed an amount of Rs. 9,97,960/- being interest received by the assessee company on account of fixed deposit held by it in banks & financial institutions on the ground that it shall fall outside the purview of the “principles of mutuality” and accordingly liable for taxation. On appeal, the CIT (A) also confirmed the order of the Assessing Officer.

Contentions of the Assessing Officer:

i) The fact that an assessee company satisfies the norms of mutuality in respect of receipts by contributions from its members does not necessarily lead to the conclusion that every activity of the assessee satisfies the test of the mutuality.
ii) An assessee may engage in certain activities which can be described as mutual and also in other activities which are not mutual.
iii) The interest received from banks and financial institutions by the assessee company on account of fixed deposits are investments made with third parties and not with the members of the assessee company.
iv) The decision to invest funds in banks and financial institutions is a prudent commercial decision motivated by the desire to earn interest and that would not fulfill the requirement of the mutuality.
v) While investing the funds with banks and financial institutions the assessee company assumed the character of a customer of the financial institutions and the relationship between them is that of a banker and its clients.
vi) The principles of mutuality will be applicable only when the income earned has a direct nexus with members.
vii) The interest income received from such deposits are not receipts in the form of contributions from the members of the assessee company.
ix) The banks and financial institutions are not the members of the assessee company; consequently the concept of mutuality does not arise.

Assessing Officer also relied on the decision of the Supreme Court in the case of M/s.Bangalore Club Vs. CIT wherein the Supreme Court answered the question “whether or not the interest earned by the assessee on the surplus funds invested in fixed deposits with corporate member banks is exempt from levy of income tax, based on the principles of mutuality?”

Contentions of the Assessee:
Assessee relied in the decision of Chennai bench of the Tribunal in assessee’s own case in ITA Nos.505 to 510/Mds./2009 for A.Ys 2002-03 to 2007-08and argued that the order of the Tribunal had reached finality since the Revenue did not carry the matter any further. It was also argued that in the case of Bangalore Club relied upon by the Revenue the issue was with respect to the interest earned from the financial institutions who are members of the assessee Club and in the case of the assessee the issue was with respect to interest earned from the financial institutions who are not the members of the assessee Company. Hence facts were not identical and therefore the said decision will not be applicable to the  assessee company and the decision of the Tribunal in the assessee’s own case of the earlier years would be applicable which is on the identical issue and in favour of the assessee.

That in the case of the assessee company the principles of mutuality would apply because the idle funds of the assessee company are only kept in fixed deposits in banks which are meant to be utilized for the purpose of the assessee company and not for the purpose of distributing dividend.

Excerpts from ITAT Order:

We have heard both the parties and carefully perused the materials available on record. We do not find any merits in the arguments submitted by the Ld. A.R. The decision of the Tribunal in the assessee’s own case (supra), the Bench had followed the decision of the Hon’ble Apex Court in the case of CIT Vs. Vegetable Products Limited in (1973) 88 ITR 192 (SC) wherein it was held that when two views are possible on the same issue by the two different High Courts, then the view in favour of the assessee has to be upheld. However, in the present situation the Hon’ble apex Court in the case of Bangalore Club (supra) has categorically held that the interest earned by the assessee from the financial institutions who are members of the assessee Club will not fall within the ambit of mutuality principle and therefore will be exigible to income tax in the hands of the assessee club. The gist of the order is reproduced herein below for reference:-

(a) Firstly, the arrangement lacked complete identity between the contributors and participators. Till the stage of generation of surplus funds, 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, with the funds of the mutuality, 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 the participators as mandated by the first condition.

(b) The surplus funds were not used for any specific service, infrastructure, and maintenance or for any other direct benefit for the members of the club. When the member banks placed them at the disposal of third parties, an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality, was initiated. This contract was not an activity of the club in pursuit of its objectives.

(c) The principle of impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves requires that the funds must be returned to the contributors as well as expended solely on the contributors. Although in the assessee’s case the funds did return to the club, before that, they were expended on non-members, i.e., the clients of the bank. The loaning by the banks out of funds of the club to outsiders for commercial reasons snapped the link of mutuality. 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. The interest accrued on the surplus deposited by the club like in the case of any other deposit made by an account holder with the bank.

(d) The assessee was already availing of the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed of by its members, before it was deposited with the bank. The assessee could not be permitted to claim double benefit of mutuality.

In the case before us the situation is much worse than the case of Bangalore Club, because the financial institutions from whom the interest is received by the assessee are not members of the Assessee Company but third parties. The relation between them is only as clients of the financial institutions and there is no scope of mutuality existing between them. Further it an income earned by the assessee company from its resources out of the transactions with third parties which are available for the members of the assessee company for their collective enjoyment though not available for distribution as dividend. For these reasons in the case of the Bangalore Club, the assessee itself had admitted, that the interest received from the financial institutions who are not members of the assessee Club, as its income. Therefore, respectfully following the elaborate order of the Hon’ble Apex Court, we hereby confirm the orders of the Revenue. We further make it clear that since in our opinion the issue in this case before us is squarely covered by the decision of the Honorable Apex Court in the case Bangalore Club supra and the decisions cited by the Ld.A.R are not directly on the subject, those decisions are not discussed in this order.