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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.2060 OF 2009
The Commissioner of Income Tax,
City - 10, Aayakar Bhavan,
4th Floor, M.K. Marg,
Mumbai - 400 020 ..Appellant.
Versus
M/s.Common Effluent Treatment Plant,
(Thane Belapur) Association,
P-20, Anand Bhakamkar Common
Facility, Centre Khairne, M.I.D.C.,
Navi Mumbai - 400 705 ..Respondent.
Mr.Suresh Kumar for the appellant.
Mr.S.N. Inamdar with Ms.Aasifa Khan for the respondent.
CORAM : Dr.D.Y. Chandrachud &
J.P. Devadhar, JJ.
DATE : 17 June, 2010.
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ORAL JUDGMENT (Per Dr.D.Y. Chandrachud, J.)
1. Leave to amend the questions of law is granted.
Amendment to be carried out during the course of the day, in terms of
the draft amendment tendered on record. Verification is dispensed
with.
2. This is an appeal by the Revenue under Section 260A of the
Income Tax Act, 1961 against a decision of the Income Tax Appellate
Tribunal (Tribunal) for assessment year 2001-2002. During the course
of the hearing, Counsel appearing on behalf of the Revenue and
Counsel appearing on behalf of the assessee addressed the Court on two
issues. In view of the submissions which have been urged before the
Court, the questions of law raised in the appeal have been re-framed
thus with the consent of Counsel appearing on behalf of the Revenue
and Counsel appearing for the assessee :
A) Whether on the facts and in the circumstances of the case,
the Tribunal was justified in holding that the excess of
income over expenditure in respect of the effluent
treatment receipts is exempt from income-tax on the
principle of mutuality;
B) Whether the Tribunal was justified in holding that interest
on bank fixed deposits, other deposits and income-tax
refunds is not chargeable to tax on the principle of
mutuality;
3. The assessee is an Association incorporated under Section
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25 of the Companies Act, 1956. The members of the assessee are
industries operating in the Thane-Belapur region. The assessee was set
up with a view to provide a centralized treatment facility for industrial
effluents and was incorporated on 12 October 1994. The objects
underlying the establishment of the assessee, as stated in the
Memorandum of Association (MoA), are as follows :
"A. THE MAIN OBJECTS OF THE COMPANY TO BE
PURSUED BY THE ASSOCIATION ON ITS
INCORPORATION :
1. To constitute and maintain an organization for
treatment of Industrial Effluents generated by all
those User Members engaged in the manufacture of
various products and engaged in Industrial processes
in the Trans Thane Creek Industrial Area.
2. To act as an advisor for the process and treatment of
all kinds of pollution such as Air Pollution, Water
Pollution, Waste Water Pollution, Sewage, Industrial
Hazardous Solid Wastes, Chemicals, Gases Effluents
from Industries, and all other kinds of environmental
pollution related to the effluent treatment plant”.
4. For assessment year 2001-2002, the assessee filed a return
of income declaring the total income at Nil, on the principle of
mutuality. The Assessing Officer rejected the claim of the assessee. The
Commissioner (Appeals) by his decision dated 20 October 2003 noted
that the assessee owes its formation to increased levels of pollution in
the Trans-Thane Creek Industrial Area; stringent norms for the control
of effluents prescribed by the Maharashtra Pollution Control Board; the
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inability of each individual unit to set up a separate industrial effluent
treatment facility; and the policy of the Union Ministry of Environment
and Forests to encourage the establishment of Common Effluent
Treatment Plants. The Commissioner (Appeals) held that the treatment
cost is recovered only from user members of the assessee and that the
principle of mutuality was established since there was a complete
identity between contributors and participators. On this ground, the
Commissioner (Appeals) directed that the excess of income over
expenditure (excluding interest on fixed deposits held with banks and
others) was not exigible to tax in the hands of the assessee. However,
the Commissioner (Appeals) came to the conclusion that the interest
income of the assessee amounting to Rs.45.46 lakhs on fixed deposits
and other deposits and on income-tax refunds was taxable under the
head of income from other sources. The decision of the Commissioner
(Appeals) was questioned before the Tribunal both on behalf of the
Revenue and the assessee. The Tribunal by its decision dated 6
February 2007 confirmed the decision of the Commissioner in so far as
it applied the principle of mutuality to the excess of income over
expenditure. The Tribunal noted that the assessee is a non-profit
company formed by units engaged in industrial activity with the object
of setting up a common effluent treatment facility. The Tribunal
confirmed the finding that there is a complete identity between
contributors and participators and was consequently of the view that
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the principle of mutuality was attracted. On the second question, the
Tribunal held that since the principle of mutuality was applicable,
interest on bank fixed deposits, other deposits and income-tax refunds
was also not chargeable to tax. The appeal by the Revenue was
dismissed and the appeal of the assessee was allowed.
5. The Revenue is in appeal before this Court. The first
question of law that has been raised before the Court is as to whether
the Tribunal is in error in holding that the principle of mutuality would
apply to the excess of income over expenditure; the income
representing contributions received from members. The second
question of law relates to the treatment that is to be afforded to the
interest received on bank and other deposits and income-tax refunds. It
would be appropriate to deal with the two questions of law separately.
RE : QUESTION A
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
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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 of the capital cost. According to the
assessee, the capacity of the Effluent Treatment Plant installed initially
was 12 mld which became insufficient to handle the effluents generated
and a result an additional plant was required. Moreover, a surplus is
required to ensure that funds are available to meet sudden eventualities
such as major repairs and replacement expenses. The underground
pipeline for the supply of effluents is stated to be over 30 years of age
and the assessee maintains a surplus to deal with unforeseen situations.
The assessee does not collect any contributions from third parties and
the entire contribution originates from its members. The contribution is
expended only for meeting the objects of the Association, for the benefit
of the members. According to the assessee, there is an absolute identity
between the contributors and the participators and, as a result, the
principle of mutuality would stand attracted.
Mutuality :
7. The principle of mutuality postulates that all the
contributors to the common fund must be entitled to participate in the
surplus and that all the participators in the surplus are contributors to
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the common fund. It is in this sense that the law postulates that there
must be a complete identity between the contributors and the
participators. The essence of the doctrine of mutuality lies in the
principle that what is returned is what is contributed by a member. A
person cannot trade with himself. It is on this hypothesis that the
income which falls within the purview of the doctrine of mutuality is
exempt from taxation.
8.
In Commissioner of Income Tax V/s. Bankipur Club
Limited1, the Supreme Court considered as to whether a surplus of
receipts over expenditure generated from the facilities extended by a
club to its members were exempt on the ground of mutuality. The
Supreme Court reiterated the principle that in the case of a mutual
society, there must be a complete identity between the class of
contributors and of participators. The main object of the club, noted by
the Supreme Court, was to afford to its members the usual privileges,
advantages, conveniences and accommodation provided by the club.
The amounts received by the club were for the supply of drinks,
refreshments or other goods from the members of the club. These
being charges for the privileges, conveniences and amenities provided
to members, such services, as observed by the Supreme Court, were not
provided with a profit motive and were not tainted by commerciality.
1 (1997) 92 Taxman 298
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This, therefore, did not constitute a trading activity and the surplus of
receipts over expenditure, generated as a result of such a mutual
arrangement, did not constitute income for the purposes of the Act. In
Chelmsford Club V/s. Commissioner of Income Tax2, the Supreme
Court held that “the law recognises the principle of mutuality excluding
the levy of income-tax from the income of such business to which
the …. principle is applicable”. Adverting to the judgment of the Privy
Council in English and Scottish Joint Co-operative Wholesale Society
Limited V/s. Commissioner of Agricultural IT,3 the Supreme Court
adopted the existence of the following principles as establishing
mutuality : “(i) the identity of the contributors to the fund and the
recipients from the fund, (ii) 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 (iii) the impossibility that contributors should derive
profits from contributions made by themselves to a fund which could
only be expended or returned to themselves.”
9. A Division Bench of the Gujarat High Court in Sports Club
of Gujarat V/s. Commissioner of Income Tax4 held that one of the
essential requirements of mutuality is that the contributors to the
2 (2002) 243 ITR 89 (S.C.)
3 (1948) 16 ITR 320 (PC)
4 (1988) 37 Taxman 38 (Guj.)
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common fund are entitled to participate in the surplus thereby creating
an identity between participators and the contributors. Once such an
identity is established the surplus income would not be exigible to the
tax on the principle that no man can make a profit out of himself.
10. Applying the principle which has been enunciated by the
Supreme Court, there can be no manner of doubt that the surplus
generated by the assessee representing the excess of its income over
expenditure would fall within the purview of the doctrine of mutuality.
For the purposes 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.
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RE : QUESTION B
11. During the assessment year, the assessee earned interest on
bank deposits, other deposits and income-tax refunds amounting to Rs.
45.46 lakhs. The submission which has been urged on behalf of the
Revenue is that (i) The interest income does not satisfy the test of
mutuality since the income is generated not from the members of the
assessee but from third parties such as banks with whom the surplus is
kept in fixed deposits; (ii) Clause 15 of the Memorandum of Association
enables the assessee to invest any money of the Association in one or
more of the modes of investment specified therein, which include
deposits with a Government company and the holding of securities and
investments authorized by law. An investment made in pursuance of
the provisions of clause 15 of the MoA will not meet the test of
mutuality since interest is earned out of a commercial decision of the
assessee to invest in such deposits for the purposes of earning interest;
(iii) The predominant view on the question as to whether interest on
bank deposits falls within the principle of mutuality is that of the High
Courts of Madras, Karnataka, Gujarat and Jammu & Kashmir, which
have held that interest earned on surplus funds parked with a bank
does not satisfy the test of mutuality.
On the other hand, it has been urged on behalf of the
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assessee that : (i) The source of funds invested in bank deposits is the
contribution made by the members of the assessee; (ii) The surplus is
maintained in order to deal with uncertain eventualities that are likely
to arise in the functioning of the Effluent Treatment facility; (iii) The
assessee as a Section 25 company is under a statutory obligation to hold
its surplus funds with a Scheduled Bank under Section 35 of the
Bombay Public Trust Act, 1950; (iv) The tenor of clause 15 of the MoA
merely contemplates that the assessee may invest its funds as a matter
of efficient handling. In other words, the submission of Counsel for the
assessee is that the actual nature of the activity, the source of funds and
the manner in which the funds are spent should lead to the conclusion
that the earning of interest was motivated by an efficient utilization of
the funds of the assessee during the period when they are surplus to
needs. The earning of interest, it was urged, is not branded with a taint
of commerciality.
12. Clause 15 of the MoA provides that any money of the
Association may be invested in certain specified modes :
“15. Any money of the Association may be invested in or upon
any one or more of the following securities or modes of
investments with power from time to time to vary such
investments and securities held by the Association for others
of the character hereby authorized :-
i) Deposits with any Government Company. ::: Downloaded on - 09/06/2013 16:01:30 ::: 12 ii) Purchase of ownership or other flats in any co-
operative Housing Society or other organization for
running the activities of the Company.
iii) Any other securities or investments authorized by law.
iv) To invest the funds of the Company not immediately
required in accordance with the pattern laid down
u/s.11(5) of the Income-Tax Act, 1961 as amended
from time-to-time and/or as may be directed by any
authority or authorities under the Income Tax Act,
1961, and/or any other law for the time being in force
concerning the name”.
13.
Several High Courts have considered the question whether
interest earned on surplus funds originating in the members’
contribution of a mutual association is exigible to income tax. The
Gujarat High Court had occasion to consider the question in Sports Club
of Gujarat Limited V/s. Commissioner of Income Tax (supra). A
Division Bench of the Gujarat High Court noted that in that case, the
objects clause of the Memorandum and Articles of Association
empowered the management of the assessee to invest in and deal with
the moneys of the club not immediately required, in such a manner as
may from time to time be determined by it. Under the clause,
investment was not confined to the holding of fixed deposits in banks
but could take any other form or shape including an investment in
shares or real estate. In that context, the Gujarat High Court held as
follows :
“…….. When income is derived from such
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investment, whether by way of interest, dividend or rent, it
is derived from a third party and is not by way of
contribution from the members of the club”.
Apart from the fact that in that case the object clause empowered the
management to invest surplus funds in several categories of investment,
the Division Bench also noted that the surplus, if it remained after
satisfying the debts and liabilities was to be distributed amongst the
members in equal shares.
14. Counsel appearing on behalf of the assessee sought to
distinguish the judgment of the Gujarat High Court on the ground that
in the present case, unlike in the case before the Gujarat High Court,
clause V (6) postulates that upon winding up or dissolution of the
assessee, the surplus after meeting debts and liabilities is not to be
distributed amongst the members but is to be transferred to another
company having similar objects as determined by the members of the
company. We are of the view that the principle enunciated in the
judgment of the Gujarat High Court cannot be distinguished on that
ground because the principal basis of the determination of the Gujarat
High Court was that when income is derived from an investment
whether by way of interest, dividend or rent, it is derived from a third
party and it is not by way of contribution from the members of the club.
The principle of mutuality will hence not apply to such income.
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15. The Karnataka High Court dealt with the issue in three
decisions.
In Commissioner of Income Tax V/s. I.T.I. Employees
Death & Superannuation Relief Fund,5 a fund was created by the
employees of the Indian Telephone Industries and interest was
generated by making deposits by investment in a bank. A Division
Bench of the Karnataka High Court noted that the ingredients of
mutuality were missing in that case since apart from the contributions
made by the members, there were other sources of funding for the trust
fund. The Division Bench was of the view that income was earned by
making deposits by way of investment in the bank and that was a case
where the assessee had invested its surplus funds and earned interest
on these deposits. The High Court held that the principle of mutuality
could be confined to the surplus which has accrued to the club out of
the contributions received from the members but, this principle would
have no application to the surplus received from non-members. The tax
was sought to be levied not on the surplus arising from the
contributions made by the members or from interest earned on the
moneys contributed by the members. On the other hand, the deposits
in banks were made for earning interest by way of income. The
principle that no person could trade with himself would not arise as
5 (1998) 101 Taxman 315 (Kar.)
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moneys were invested by the assessee with the bank to earn income, to
enable the assessee to discharge its obligations. Consequently, the
income earned from an outside agency by way of interest would not be
covered by the principle of mutuality.
In Commissioner of Income Tax V/s. Bangalore Club6,
the assessee was a club which was registered under the Societies’
Registration Act and its members included four Scheduled Banks. The
surplus which was generated during the course of assessment year
1989-90 was held in fixed deposits with the four banks and the interest
that was generated thereon was claimed not to be exigible to tax on the
principle of mutuality. A Division Bench of the Karnataka High Court
held, after adverting to the decisions of the Supreme Court, that what
had been done by the club is similar to what could have been done by a
customer of a bank. The principle that no man can trade with himself
would not be applicable where the deposit was held by a nationalized
bank with its customers since the prevailing relationship was that of a
banker with its customer.
16. The Karnataka High Court distinguished the judgment in
the I.T.I. Employees’ case in a subsequent decision in Canara Bank
Golden Jubilee Staff Welfare Fund V/s. Deputy Commissioner of
6 (2006) 156 Taxman 323 (Kar.)
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Income Tax7. In that case the assessee was a registered society
comprising of the employees of the Canara Bank, and was established
with the object of promoting welfare amongst the members who
contributed towards the corpus fund. The Assessing Officer taxed the
interest income on investments and dividend income on shares. The
appeals of the assessee were dismissed by the Commissioner and by the
Tribunal. The question before the High Court inter alia was whether
the principle of mutuality would apply. The Karnataka High Court
noted that during the assessment years in question the source of funds
was exclusively the members and no outsiders had contributed. The
High Court was of the view that it was the contribution of the members
which had formed the corpus of the fund. A portion of the fund which
was not advanced to the members was invested. The High Court noted
that the investment was “as a precaution for the purpose of keeping it
in safe custody and not with an intention to derive a profit by way of
interest”. The High Court distinguished the decision in the case of I.T.I.
Employees and came to the conclusion that taking into consideration
the objects of the assessee, the source of funds during the relevant years
and applicability of the funds for the benefit of the members, the
principle of mutuality was attracted.
17. The Madras High Court considered a similar issue in
7 (2009) 243 ITR 89 (SC)
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Madras Gymkhana Club V/s. Deputy Commissioner of Income-tax8.
The question for consideration before the Division Bench was whether
interest earned on surplus income derived in the course of the activities
of the club and invested in fixed deposits would satisfy the test of
mutuality. The Division Bench of the Madras High Court considered the
decisions of the Karnataka High Court both in the case of I.T.I.
Employees and in Bangalore Club. The Madras High Court held that
though the club existed for the mutual interest of its members, on the
basis of this alone it could not be held that the other activities such as
financial management of depositing surplus funds in banking
institutions and earning a substantial amount by way of interest should
also be regarded as possessing a nexus to the regular activities of the
club in relation to its members. The High Court observed that it was
not the case of the assessee that the funds which were invested in the
form of fixed deposits were so maintained with a definite idea of using
them for a specific project or for the development of the infrastructural
facilities of the club. The Karnataka High Court was of the view that
such investments in fixed deposits could not be equated within or
brought within the concept of mutuality and the benefit of tax
exemption could not be extended in respect of the interest earned on
surplus income. The Madras High Court was not inclined to follow the
decision of the Karnataka High Court in the Canara Bank case and
8 (2009) 183 Taxman 333 (Mad.)
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confined it to the special facts as they appeared before the High Court
there.
18. The High Court of Jammu & Kashmir held in Amar Singh
Club v/s. Union of India9 that interest received on fixed deposits and
bank deposits would not be covered by the principle of mutuality. The
High Court observed that there was no statutory obligation on the part
of the assessee to make such deposits. The principle of mutuality could
be applied only if interest was earned for advances / facilities of loan
given to the members of the club.
19. Our attention has been drawn to the judgment of the Delhi
High Court in Commissioner of Income Tax V/s. Standing Conference
of Public Enterprises (Scope)10. This decision of the Delhi High Court
appears to have been based on a concession made before the Court on
behalf of the Revenue and the assessee. Before the Delhi High Court,
parties agreed that the issue as to whether receipts on account of
interest earned from surplus funds deposited with the banks would be
taxable would follow by the application of the principle of mutuality.
The Delhi High Court was of the view that simply because some
incidental activity of the assessee is revenue generating that does not
give any justification to hold that it is tainted with commerciality and
9 (2009) 184 Taxman 481 (J&K)
10 (2009) 319 ITR 179 (Del)
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reaches the point where a relationship of mutuality ends and that of
trading begins.
20. On behalf of the assessee, it has been urged before the
Court that exigibility to tax of interest earned on fixed deposits placed
with a bank on the surplus funds of the assessee is not res-integra in
view of the judgment of the Supreme Court in Commissioner of
Income Tax V/s. Cawnpore Club Limited11. The judgment of the
Supreme Court is as follows :
“1. One of the questions which the High Court had
decided in other cases relating to the same assessee was
that the doctrine of mutuality applied and, therefore, theincome earned by the assessee from the rooms let out to its
members could not be subjected to tax. No appeal hadbeen filed against the said decision and the matters stood
concluded as far as the assessee was concerned. This being
so, no useful purpose would be served in proceeding with
the appeals on the other questions when the respondentcannot be taxed because of the principle of mutuality.
2. The appeals were accordingly dismissed.”
21. Now, from the judgment of the Supreme Court it is evident
that the High Court had held, in other cases relating to the same
assessee, that the doctrine of mutuality applied and, therefore, the
income earned by the assessee from the rooms let out to its members
could not be subjected to tax. The Supreme Court noted that no appeal
had been filed against that decision and the issue stood concluded in so
11 (2004) 140 Taxman 378 (SC)
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far as the assessee was concerned. It is in this backdrop that the
Supreme Court observed that no useful purpose would be served in
proceeding with the appeals on the other questions, when the assessee
could not be taxed because of the principle of mutuality. Hence, from
the judgment of the Supreme Court it is clear that the question as to
whether interest earned on fixed deposits made by an assessee out of
surplus funds would or would not fall within the purview of the
principle of mutuality has not been adjudicated upon. The judgment of
the Supreme Court must be construed as it stands. The observation of
the Supreme Court was that no useful purpose would be served in
proceeding with the appeals on the other questions. That was because
as between the assessee and the Revenue in that case, the finding of the
High Court that the doctrine of mutuality applied to the income earned
by the assessee from letting out of the rooms to the members of the
assessee had not been challenged in appeal.
22. On behalf of the assessee, Counsel relied upon the
Commentary on Income-tax by Sampath Iyengar12 where, after
adverting to the judgment of the Supreme Court in Cawnpore Club, the
author has concluded that, “the issue can now be treated as finally
resolved in favour of taxpayer”. Reliance was also sought to be placed
on a judgment of the Hyderabad Bench of the Tribunal in Fateh
12 (10th Editiion Volume 8 Page 111)
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Maidan Club Vs. Asstt. Commissioner of Income Tax13. The judgment
of the Tribunal was sought to be relied upon since it contains an extract
of the questions which were referred to the High Court at Allahabad
from whose decision the judgment of the Supreme Court in Cawnpore
Club emanated. Counsel submitted that two questions were referred
for the decision of the High Court; the first being the exigibility to tax
of the income of the club from letting out of rooms vis-a-vis the
principles of mutuality and the second as to whether interest earned on
fixed deposits and dividend was exempt on the principles of mutuality.
The submission which was urged was that since both the issues were
dealt with in the judgment of the High Court, they arose in the appeal
before the Supreme Court and the judgment of the Supreme Court
must, therefore, be regarded as concluding the question as to whether
interest on fixed deposits would be within the fold of the principle of
mutuality.
23. We are of the view that as a High Court, it is our bounden
duty to read the judgment of the Supreme Court as it stands and not
with reference to the underlying decision of the High Court of
Allahabad, which has been quoted in the decision of the Income Tax
Appellate Tribunal. The judgment of the Supreme Court makes it
abundantly clear that since there was no challenge by the Revenue to
13 (2003) 81 TTJ (Hyd) 831
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the finding on the principle of mutuality qua the income earned from
letting out of the rooms to the members of the club, the Supreme Court
was of the view that no useful purpose would be served in pursuing the
other questions. The other questions have, therefore, not been
adjudicated by the Supreme Court.
24. A decision of the Supreme Court becomes a precedent
under Article 141 of the Constitution, when a question is directly raised
and considered. The decision becomes a law declared where the
question is actually adjudicated upon (Tika Ram Vs.State of U.P.)14
The decision in Cawnpore Club does not actually decide upon the issue
as regards the exigibility to tax of the interest received on surplus
income invested in fixed deposits.
25. In order to fulfill the requirement of mutuality, a mutual
association has to establish, as an essential requirement, the identity
between participators and contributors to the fund. However, the fact
that an Association satisfies the norm of mutuality in respect of the
receipts of contributions from its members does not necessarily lead to
the conclusion that every activity of the Association satisfies the test of
mutuality. An Association may engage in activities which can be
described as mutual and in other activities which are not mutual. The
14 (2009) 12 SCALE 349
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Gujarat High Court recognized this in its decision in Sports Club of
Gujarat (supra). Adverting to the decision in Commissioner of Income
Tax V/s. Madras Race Club, the Court noted that the application of the
principle of mutuality is not destroyed by the presence of transactions
which are non-mutual in character. However, in such a case, the
principle of mutuality has to be confined to transactions with members
possessing the essential character of mutuality. The two activities can
in appropriate cases be separated and the profits derived from
transactions which do not fulfill the requirements of mutuality can be
brought to tax.
26. The assessee in the present case utilizes its surplus funds
for investment in fixed deposits with Banks. The interest that is
generated on the investment of such funds is not income which is
received from the members of the assessee but from third parties such
as the banks with whom the funds are invested. Section 35(1) of the
Bombay Public Trust Act, 1950 provides that where the trust property
consists of money and which cannot be applied immediately or at an
early date to the purposes of the public trust, the trustees shall be
bound to deposit the money, notwithstanding anything contained in the
instrument of the trust in a Scheduled Bank, in a Postal Savings Bank or
in a Cooperative Bank approved by the State Government or to invest in
public securities. What sub-section (1) of Section 35 mandates is that
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moneys which are not required to be utilized immediately or at an early
date for the purpose of the trust should be deposited in one of the forms
which the Legislature has considered to be safe to protect the Trust.
Section 35(1) in any case does not contain a mandate that moneys will
have to be invested in a fixed deposit. Where moneys are invested in
fixed deposits of Banks, the interest that is received on a deposit does
not possess the same character of mutuality as the surplus funds
derived by the assessee from the contributions of its members. The
principle of mutuality applies to surplus funds generated from the
contribution of members for the reason that the funds are contributed
by the members of the Society and there is an identity between the
contributors and the participators in the fund. The decision to invest
the funds of the Association in Bank fixed deposits is a prudent
commercial decision motivated by the desire to earn interest that would
not be available on moneys maintained in ordinary, current or savings
accounts. Such interest does not fulfill the requirement of mutuality.
While investing the funds with a Bank or a Financial Institution, the
assessee assumes the character of a customer of the bank or institution
and the relationship that is engendered is that between a banker and its
customer. The fact that the funds which are invested have their source
in the contribution by the members of the assessee cannot be dispositive
of the nature of the receipt obtained by the assessee on account of the
interest payments on the deposits made. In determining the exigibility
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to tax of receipts on account of interest, it is the character of the receipt
as interest that must play a determinative role. A payment on account
of interest by the bank or a party with whom the deposit is placed is an
arms length transaction with a third party. The recompense which is
received by the assessee by and as a result of the transaction does not
fulfill the condition of mutuality to which the contributions received
from the members of the assessee are subject.
27.
We have adverted to several decisions of the High Courts
which have considered the issue which has fallen for determination in
these proceedings. Some of these decisions may undoubtedly possess a
factual background on which there may not be complete identity with
the facts of another case. The quest for complete identity is an illusion.
The Court must be guided by the basic underlying principle which will
guide the determination of the case. We are in agreement with the
principle that is enunciated by the Karnataka High Court in I.T.I.
Employees that the principle of mutuality would cover the surplus
which accrues to a mutual association out of the contribution received
by it from its members. The principle would have no application in
case of surplus received from non-members. In a similar way, a deposit
made with a bank for earning interest by way of income will not fulfill
the requirement of mutuality. As the Karnataka High Court observed in
its subsequent decision in the Bangalore Club, such a deposit implicates
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a relationship between a banker and a customer, to which the principle
of mutuality would not apply. The Madras High Court in the Madras
Gymkhana Club emphasized the distinction between those activities of
a mutual association which fulfill the norm of mutuality and those
which do not. The mere fact that an Association exists for the mutual
interest of its members would not result in the conclusion that all its
activities, including those which involve financial transactions of the
deposit of surplus funds for earning interest, also partake of the same
character and nature. The judgment of the Madras High Court, has
considered all the three judgments of the Karnataka High Court
including the judgment in Canara Bank which struck a divergent note.
Having given our careful consideration to the judgment of the
Karnataka High Court in Canara Bank, we must express our
reservations. The Madras High Court in Madras Gymkhana Club
confined the decision in Canara Bank to the special facts as they appear
in that case. The Karnataka High Court, while dealing with the issue in
the Canara Bank placed a great deal of emphasis on the source of funds
of the assessee. The High Court clarified that it was making it clear that
its conclusion ‘is based on the source of funds of the assessee during the
two relevant years’. With respect, it must be pointed out that the mere
fact that the funds which are invested in a fixed deposit with the bank
are funds which originated from the contributions made by the
members of the assessee cannot conclude the question as regards the
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taxability of the receipts on account of interest obtained from the
investment of these funds. These receipts must partake of the character
of income from other sources and would be exigible to tax.
28. At this stage, it would be necessary for the Court to advert
to a recent judgment of the Supreme Court Totgar’s Cooperative Sale
Society Limited V/s. Income-Tax Officer15. In that case, the issue
before the Supreme Court related to the deduction under Section 80P.
The Supreme Court dealt with interest which had accrued on funds
which were not required immediately by the assessee which was a
cooperative credit society, for the purposes of its business and which
came to be invested in specified securities as investment. The assessee
had contended before the Supreme Court that under the provisions of
the Karnataka Cooperative Societies Act, 1959, a statutory obligation
was imposed on cooperative credit societies to invest their surplus funds
in specified securities and the submission was that in view of the
statutory obligation, income derived from short-term deposits and
securities must be considered as income derived from business
activities. The assessee marketed the produce of its members whose
sale proceeds were at times retained by the assessee and the Court was
concerned with the tax treatment of that amount. The Supreme Court
held that such interest income would fall within the category of income
from other sources and that it was correctly held to be taxable under
15 (2010) 322 ITR 283 (SC)
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Section 56 by the Assessing Officer. In adverting to the judgment in the
case of Totgar’s Cooperative Sale Society, we must note that the
principle of mutuality as such did not arise for consideration before the
Supreme Court in that case. The submission that funds not
immediately required for business were invested in specified securities /
deposits under a statutory obligation and the receipt on account of
interest would not constitute income from other sources was a specific
issue which was raised before the Supreme Court. The Supreme Court
held that such interest would fall for taxation as income from other
sources.
29. A Division Bench of this Court in Sind Co-operative
Society V/s. Income-Tax Officer16 considered whether transfer fees
received by a Cooperative Housing Society from an incoming member
were not liable to tax on the ground of mutuality. The transfer fees
were to be paid by an Applicant for membership. The Court noted that
the transfer fees could be appropriated only if the transferee is admitted
to membership. In this context, the Division Bench observed that the
fact that the proposed transferee may make the payment in advance
was by itself not relevant since the amount could be appropriated only
on the transferee being admitted as a member of the Society. If the
member was not admitted, the transfer fee was refundable. The
transfer fee was regarded as having no element of trading or
16 (2009) 317 ITR 47 (Bom)
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commerciality and met the requirements of mutuality. In Sind
Cooperative Housing Society, the issue which fell for consideration
before the Division Bench was, therefore, distinct and is not the same as
what has fallen for consideration in the second limb of the questions
raised in this appeal by the Revenue.
For all these reasons, the second question of law as
formulated would have to be answered in favour of the Revenue and
against the assessee.
30. In so far as the taxability of other deposits and interest on
income-tax refunds is concerned, we find from a reading of the order of
the Tribunal that this issue has not been specifically dealt with or
considered. Hence, we are of the view that it would be fair to permit
the parties to urge all appropriate submissions before the Tribunal. We,
accordingly restore the question of the taxability of other deposits and
income-tax refunds for decision by the Tribunal afresh.
31. For all the aforesaid reasons, the appeal is disposed of.
There shall be no order as to costs.
(J.P. Devadhar, J.) (Dr.D.Y. Chandrachud, J.)
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