ORDER
S.V. Mehrotra, Accountant Member
1. All the three appeals have been filed by the assessee against the order of the Id. CIT(A)-I, Lucknow, dated 17.12.2004 for assessment year 1996-97 and combined order dated 19.10.2005 for assessment years 1997-98 & 1998-99.
2. The effective ground of appeal is that the Id. CIT(A) erred in law and on facts in confirming the order of the AO assessing the assessee’s income at Rs. 6,00,841/- in assessment year 1996-97, Rs. 8,13,170/- in assessment year 1997-98 and Rs. 9,44,987/- in assessment year 1998-99 as income from other sources and in not assessing the said income earned by the assessee from its own members, as exempt from tax on the principles of mutuality.
3. The assessee society was formed on 18.7.1992 and had moved an application for registration with Registrar of Societies under the UP Co-operative Societies Act, 1965. During the course of assessment proceedings in the case of Mansarovar Co-operative Bank Ltd, Lucknow, it was noticed that the assessee had invested certain amounts in the said Bank, but had not filed any return. Accordingly, proceedings Under Section 147 were initiated and notice Under Section 148 was issued for assessment of the impugned interest income in the hands of assessee. The assessee pointed out that various urban Co-operative Banks had become members of the assessee society and they had contributed a sum of Rs. 39,45,000/- as share application money and admission fee which was deposited with Mansarovar Nagar Sahkari Bank Ltd in the name of UP State Nagariya Sahkari Bank Ltd. (the assessee). There were 20 urban Co-operative Banks, who had jointly formed the assessee society. The assessee pointed out that in assessment year 1996-97, interest of Rs. 6,00.841/- had accrued on FDRs and in Form No. 3A a footnote was appended wherein it was stated that “income of a Co-operative Society received from other Co-operative Society is exempt”. It was also pointed out that no business activity was carried out as the Reserve Bank of India had not given permission to carry on banking business and whatever money received were being deposited in the FDR with Mansarovar Urban Co-operative Bank Ltd and interest accrued year after year. It was a precondition for carrying on banking business by a Co-operative Bank that it gets a licence from the RBI for the said purpose. The Registrar of Societies does not register a society till the time the approval from the RBI for grant of banking licence is received. The RBI has made certain basic criteria as to share capital before it sanctions the licence for carrying on the banking business. The assessee society got registered on 3.10.1997. Accordingly, for assessment year 1996-97 and 1997-98 the AO did not accept the assessee’s status as that of Co-operative Society, but treated it as an AOP. In regard to assessment year 1998-99, since the registration certificate was granted on 3.10.1997, prior to that date, the assessee’s status would be same as that in assessment year 1996-97 and 1997-98. The AO, however, treated the status of the assessee as AOP in all the three assessment years. The AO denied the assessee’s claim for deduction Under Section 80P(d) of the Act. The AO also did not accept the assessee’s contention regarding provision made in the accounts for interest due to various member co-operative banks. In assessment year 1996-97, the amount claimed as exempt wag Rs. 6,00,841/- and on the same basis, in assessment years 1997-98 and 1998-99, the amount claimed as exempt was at Rs. 8,13,170/- and Rs. 9,44,987/- respectively. Before the Id. CIT(A) it was submitted that the amount was earned by the members collectively on their contribution from another member on the deposits so made and not on account of any activity or business or any other commercial activity undertaken. Accordingly, it was claimed that this amount was exempt from taxation on the principles of mutuality for no one can earn from onself. It was submitted that the income earned stood distributed amongst the same members, who had contributed and therefore, the contributors and the participants were the same on account of mutuality. The Id. CIT(A), however, did not agree with the assessee’s contention and relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Royal Western India Turf Club Ltd. 24 ITR 551, for the assessment years 1996-97, 1997-98 and for the period upto 2.10.1997.
4. The Id. Counsel’s submission for all the three years are primarily that the income accrued on FDR was exempt on the principles of mutuality because there was complete identity between the contributors and participators of the fund. He pointed out that no non-member had contributed to the assessee society or entitled to participate in the common fund. The second contention of the Id, counsel for the assessee was that the assessee society was formed on 18.7.1992 and had applied for registration with the Registrar of Societies Under Section 7 of the C-operative Societies Act, 1965. The application of the assessee was not rejected by the Registrar and the registration certificate was issued in the normal course. The Id. Counsel submitted that since no objection was raised by the Registrar, the registration will relate back to 18.7.1992. The Id. Counsel further pointed out that the assessment order for assessment year 1996-97 was made as base and therefore, neither the AO nor the Id. CIT(A) appreciated the facts for subsequent years. The Id. Counsel has pointed out that in any view of the mater, the income from 3.10.1997 to 31.3.1998 comprised in assessment year 1998-99 was exempt in view of Section 80P(2)(d) of the Act. The Id. DR submitted that no valid return had been filed and therefore, no deduction can be allowed in the light of Section 80A(1).
5. We have considered the rival submissions and have perused the record of the case. The facts are not disputed. Firstly, we will consider whether assessee acquired the status of Co-operative Society under the UP Co-operative Societies Act, 1965 or not before the registration certificate was granted on 3.10.1997. In this regard, the assessee’s contention is that the grant of registration certificate is the official culmination of various acts done for the registration of the co-operative society but, in fact, the co-operative society is registered the day it applied for registration to the Registrar and the grant of certificate is only a formal act. The assessee referred to Section 7 of the UP Co-operative Societies Act 1965, which deals with registration of societies as per which Registrar has to either grant registration or reject the same within a period of three months from the date of application and the applicant society will have a right to appeal against rejection of registration. Since there was no rejection of its application for registration by Registrar of Societies, therefore, the society came into existence on 18.7.1992. We find it difficult to accept this proposition because admittedly, the registration could be granted only after receipt of licence from the RBI for carrying on the banking business activities. There is no dispute that RBI had not granted the licence for carrying on banking business activities and therefore, we reject this plea of the assessee.
6. The second plea on which the assessee has emphatically relied is based on the principles of mutuality, by applying which, the assessee claimed that its income was exempt. It is not disputed that the assessee society was formed by 20 urban co-operative banks, who had contributed share capital of the bank and this co-operative society was formed to act as umbrella to all its member societies. The money received from various registered member co-operative banks was parked with M/s Mansarovar Co-operative Bank Ltd, who was also one of the member co-operative bank till the receipt of licence for carrying on the banking business from RBI. It is not disputed that there was no dealing with any non-member at any point of time. It is also undisputed that whatever income had been earned was distributed among members. In the backdrop of this undisputed factual position; the assessee has relied on the decision of the Hon’ble Supreme Court in the case of Bankipur Club Ltd. 226 ITR 97 and has distinguished the decision in the case of CIT v. Royal Western India Turf Club Ltd. 24 ITR 551(S.C.) on the ground that in the assessee’s case there was no dealing whatsoever with any non-member. Before the Tribunal the assessee has also placed reliance on the decision of the Hon’ble AP High Court in the case of CIT v. Nataraj Finance Corporation 169 ITR 732, wherein the concept of mutual benefit association was considered and it was held that interest received and distributed among members was not assessable.
7. Before we proceed to consider the applicability of various decisions to the facts of the case, it will be necessary to refer to the concept of mutuality. The Halsbury Laws of England has defined the concept of mutuality as under:
Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealing or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements, are fulfilled, it is immaterial what particulars form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax.
Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.
8. The concept of mutuality is primarily based on the principle that one can not make profit from himself. These principles were applied by the Hon’ble Supreme Court in the case of Bankipur Club Ltd cited supra wherein it was held that the surplus resulting from rendering various services to its members is exempt on the concept of mutuality. The Hon’ble Supreme Court in the said judgment delinked those appeals where the issue was of extending facilities to non-members. Thus, it is evident that when the facilities are provided only to members of an association, who provide the funds of the association and their identity with, the funds and their participation in the surplus arising from the said fund is unmistakably found then the principles of mutuality will apply and income will be exempted from tax. In the case of Royal Estern India Turf Club Ltd cited supra, it was found that there was no contribution to a common fund for payment of liabilities undertaken by each contributor to the other contributors and no refund of surplus to the contributors. It was held that the principles of mutuality cannot apply to an incorporated company which carried on the business of horse racing and realizes money both from the members and from non-members for the some consideration namely, by the giving of the same or similar facilities to all alone in course of one and the same business carried on by it. Thus, the non-members also contributed to the fund and in this factual background the Hon’ble Supreme Court held that the concept of mutuality was not applicable to the surplus arisen from such commercial concern. The facts in the present case are akin to the factual position as obtaining in the Bankipur Club Ltd’s case and not in the case of Royal western India Turf Club Ltd. Here all the ingredients necessary for holding the income being exempt on the concept of mutuality are satisfied because there is complete identity between the contributors and participators. In the present case, the complete identity between the contributors and the participators is fully satisfied. The requirement of law is that 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. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the club for its development and for providing better amenities to its members. This was so held in the decision in the case of CIT v. Nataraj Finance Corporation 169 ITR 732.
9. In view of aforementioned discussion, we hold that the income earned by the assessee was exempt on the concept of mutuality for assessment year 1996-97 and 1997-98 and earned upto 2.10.1997 in assessment year 1998-99. The income from 3.10.19997 to 31.3.1998 was exempt Under Section 80P(2)(d) as per which the assessee is entitled for deduction Under Section 80P if the income is earned by way of interest or dividend from its investment with any other co-operative society then the whole of such income will be eligible for deduction. The ground taken by the assessee is allowed for all the three assessment years.
10. In the result, all the appeals are allowed.
