ALL INDIA STATE BANK OF PATIALA EMP.WELF. SOCIETY vs. CIT, PATIALA AND ANR.

This order shall dispose of ITA Nos. 677, 679, 682, 684 and 685 of 2009 as according to the learned counsel for the parties, the substantial questions of law involved therein are identical and the same arise from the common order of the Tribunal dated 30.4.2009. For brevity, the facts are being taken from ITA No. 677 of 2009. 2. The appeal was admitted by this Court vide order dated January 14, 2010 for determination of the following substantial questions of law:- “i) Whether in the facts and circumstances of the case, the action of the authorities below in not allowing the exemption from tax on the amount received as -2- interest on FDRs on the principle of mutuality when the same assessee has been granted exemption u/s 10(23AAA) of the Act on the basis of principle of mutuality for the future assessment years, is legally sustainable in the eyes of law? ii) Whether in the facts and circumstances of the case, principles of mutuality would be applicable to interest earned on deposit of surplus when the surplus itself has qualified for exemption from tax on the principles of mutuality? iii) Whether in the facts and circumstances of the case, the action of the authorities below, the impugned orders are legally sustainable in the eyes of law?”

Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee is Employees Welfare Association registered as Welfare Society under the Societies Registration Act, 1860. As per the Memorandum of Association, the contributions to the funds are made by the permanent employees by way of periodical subscriptions and the amounts accumulated by the assessee were invested in fixed deposits and the interest accrued thereon was utilized for providing various benefits to the members of the staff and their dependents in the event of death of an employee. The assessee filed an application on 18.12.2003 to the Commissioner of Income Tax [in short “the CIT”] for approval under Section 10(23AAA) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) who granted the same prospectively. The assessee filed returns of income -3- for the assessment years 1999-2000 to 2003-04 on 22.12.2003 declaring nil income. The Assessing Officer issued notice under Section 148 of the Act on 11.8.2004 holding that the assessee was liable to tax because the approval under Section 10(23AAA) of the Act was granted prospectively, i.e. from the assessment year 2004-05. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] who vide order dated 5.9.2006 upheld the view of the Assessing Officer and dismissed the appeal. Still feeling aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal, Chandigarh Bench “A” (in short “the Tribunal”). The Tribunal vide order dated 25.10.2007 set aside the orders of the CIT(A) as well as the Assessing Officer and remanded the issue to the Assessing Officer for fresh decision in accordance with law. In compliance with the order of the Tribunal, the Assessing Officer vide order dated 10.10.2008 held that the assessee had no requisite approval under Section 10(23AAA) of the Act. The assessee filed an appeal against the order dated 10.10.2008 and the CIT(A) vide order dated 13.1.2009 dismissed the appeal while upholding the order of the Assessing Officer. On further appeal by the assessee, the Tribunal vide order dated 30.4.2009 partly allowed the appeal holding the amount received from periodical subscription to be non-taxable on the ground of mutuality whereas the amount of interest on FDRs was held to be taxable. Hence, the present appeal by the assessee.

We have heard learned counsel for the parties.

The point for consideration which arises in these appeals is whether the interest which was received by the assessee on fixed deposit made by it with the State Bank of India from the funds of contribution and subscription received from its member was exempt on the ground of mutuality.

Learned counsel for the assessee relying upon the decision of the Karnataka High Court in Canara Bank Golden Jubliee Staff Welfare Fund v. Deputy Commissioner of Income-tax, [2009] 308 ITR 202 submitted that the identical issue was considered and decided in favour of the assessee against which Special Leavel Petition had also been dismissed. He referred to the findings recorded by the Tribunal in para 11 of its order in favour of the assessee that the principle of mutuality applied to the present case and the same read as under:- “11. In this case, evidently the income of the assessee is derived from two sources. The first is by way of contributions from the permanent employees of the bank, who are the members of the assessee. The second source of income is the interest earned on the amounts invested in the fixed deposits out of the amounts accumulated as a result of the subscriptions made by the members. In so far as the utilization of the incomes is concerned, the same is being utilized for providing various benefits to the members of the staff and dependents of the members of the funds in the event of death of the employee member. On these aspects, there is no -5- dispute. In this background, in our considered opinion, in so far as the income by way of periodical subscription is concerned, clearly the principle of mutuality applies. Admittedly, such income is contributed by the members and the benefits from the same are also to the members or their dependents in the event of death of the employee member. Quite clearly, surplus as a result of the said activity is because of the transactions interse the members and therefore such surplus would qualify for exemption from tax on the principles of mutuality.”

Written submissions have been filed by the revenue. According to written submissions, the approval under Section 10 (23AAA) of the Act had been accorded to the assessee from assessment year 2004-2005 onwards whereas the assessment year involved in these appeals are from 1999-2000 to 2003-2004, and therefore, income of the assessee was exigible to tax. It had also been pleaded that the concept of mutuality is not applicable and, thus, interest on Fixed Deposit Receipts is taxable income of the assessee. In addition thereto, learned counsel for the revenue, supported the order passed by the Tribunal.

After giving thoughtful consideration to the respective submissions of learned counsel for the parties, we find that the issue involved herein stands concluded in favour of the assessee in Canara Bank Golden Jubilee Staff Welfare Fund's case (supra).

In that case, the Karnataka High Court while delving into -6- the aforesaid issue had held that the interest income which was derived by the assessee on the investments made in a term deposit with a bank from the funds contributed by its members was not exigible to tax. Noticing the facts in that case, it was recorded that the assessee was a registered society of employees of a bank established with the object of promoting welfare among the members, who contributed towards the corpus fund. The fund was utilized for advancing loans to the members. The interest received formed a major portion of the revenue of the society. Surplus funds of the society were invested in term deposits with a bank which was not a member of the society. For the assessment years 1995-96 and 1996-97, the assessee claimed exemption from tax on the basis of the principle of mutuality. The High Court, while allowing the appeal of the assessee held that the source of funds was only from the members of the assessee and it had not received any donations or other monetary grants from any outside source apart from the members during the two relevant assessment years. The bank in which the surplus funds were deposited, no doubt, formed a third party, but the identity between the contributors and the recipients was not lost. The funds had been applied for the benefit of the members who contributed it. The interest on investments and dividend earned on shares was only a portion of the total income earned by investment of the surplus funds wholly contributed by the members of the assessee for the relevant assessment years. The income earned as interest on investment and dividend on shares was deemed income from the property of the assessee and was governed by the principle of mutuality and, therefore, was not taxable for the -7- relevant assessment year.

In view of the above, the substantial questions of law are answered in favour of the assessee and against the revenue. The appeals stand allowed. (AJAY KUMAR MITTAL) JUDGE April 6, 2011 gbs JUDGE -8- ITA No. 679 of 2009 Date of Decision: 6.4.2011 All India State Bank of Patiala Employees Welfare Society (Regd) ....Appellant. Versus Commissioner of Income Tax, Patiala and another ...Respondents. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Akshay Bhan, Advocate for the appellant. Mr. Tajender K. Joshi, Advocate for the respondents.