THE SECUNDERBAD CLUB ,HYDERABAD vs. ITO WARD -10(2), HYDERABAD

PER S.S.GODARA, J.M. :

This assessee’s appeal for AY.2016-17 arises from the CIT(A)-6, Hyderabad’s order dated 27-02-2020 passed in case No.10687 / 2018-19 / B2 / CIT(A)-6, involving proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, ‘the Act’]. Heard both the parties. Case file perused.

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“7.0 The main issue under dispute in this case is set off of loss incurred from the activities coming under the purview of principle of mutuality against the income which is not coming under the purview of mutuality and brought to tax i.e., interest income received from member banks and rental income received from member tenants which was actually assessed under the regular provisions of the Act under the head Other Sources and House Property, respectively. 7.1 In this regard, it is important to note that this issue was under dispute in earlier AYs and my predecessor has already held the issue against the assessee, vide order in ITA No.324A/2011-12/CIT(A)- 6/2015-16 dated 30.09.2015 for the AY 2006-07 against the assessee. The relevant portion of the order of CIT(A)-6 is reproduced below for ready reference: “04.1 A deficit is nothing but a negative surplus. Given the settled law that operational surplus of a club (from goods/services offered to members) does not constitute ‘income’ for purposes of income tax, it logically follows that any deficit arising from the same cannot be called ‘loss’ for purposes of income tax. The issue is whether such deficit can be set off against the income which is chargeable to tax. 04.2 That loss suffered by the assessee under a particular 'head' of income should be allowed to be set off against income earned by it under any head as per the provisions of the IT Act is a truism. Setting off of loss against income is a technical exercise and is to be carried out as per the provisions of the IT Act. There is no provision, indeed no rationale, for setting off a non-loss against income chargeable to tax. If that were done, its direct result would be undercomputation of income and the resultant evasion of tax. Given the finding that the deficit in question is not a 'loss' there is no question of setting it off against 'income' chargeable to tax. 04.3 The assessee had itself admitted this position of law when it computed the 'deficit' in the return of income but ignored the same while computing its total income chargeable to tax. As discussed above, it had claimed the interest income (earned on deposits with

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banks which happened to be its corporate members) as exempt from taxation on ground of mutuality. That income was held to be taxable. When that happened, it came up with the innovative idea that the operational deficit arising from the activities based on mutuality should also be excluded from the circle of mutuality and should effectively be treated as a 'loss' for purposes of income tax. This is another example of a club trying to avoid payment of tax on its income by resorting to subterfuge. 05.0 It is seen that the assessee-collect substantial sum by way of admission of new persons as members. Apart from that, it also earns substantial income outside the circle of mutuality. It is due to these revenue streams that it can afford to subsidise the price of goods/services offered to the members and still manage to have net cash surplus year after year. Its net asset value which stood at Rs.3.10 crores in A. Y. 1996-97 swelled to Rs.38.57 crores in A.Y. 2010-11.Considering this healthy cash flow, it may even offer its goods/services to the members free of cost. The 'operational deficit' within the circle of mutuality is really a consumption expenditure. Personal consumption expenditure is not allowable as deduction while computing total income under the provisions of Income tax Act (though for accounting purpose, it may be classified as expenditure). It is only the post-tax income that is available for consumption. The same principle applies to a club based on the principle of mutuality. The net consumption expenditure is an application of income not a charge on it. There is no question of allowing the same as deduction while computing the total income. 06.0 In view of the foregoing discussion, it is held that: i. The deficit was not a loss within the meaning of term income / loss for the purposes of income tax. ii. Such deficit cannot be set off against the income chargeable to tax”. 7.2 In this view of the matter, respectfully following the decision taken by my predecessor in the case of the same assessee, I hold the issue against the assessee for the present AY also. 8.0 Be that as it may, I would like to adjudicate the matter on merits independently, as discussed below. 8.1 Before adjudicating the issue on hand, it is important to understand that the assessee being a social and recreational club engaged in providing services to its members, the case is covered under principle of mutuality and, therefore, the taxability of any income earned by the club and allowability of any expenditure claimed thereof should be analysed by invoking the principle of

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mutuality. Further, the issue of applicability of principle of mutuality to interest income earned on FDRs parked with banks is no longer res integra inasmuch as the Hon'ble Supreme Court, in host of the cases, held that interest on FDRs received from not only outside banks, but also member banks, cannot come under the ambit of principle of mutuality. 8.2 To be precise, the Hon'ble High Court of Andhra Pradesh in the assessee's own case for the AY 1996-97 as reported in CIT Vs. Secunderabad Club [2012] 340 ITR 121 held that the interest income earned from deposits with member banks is taxable in the hands of the assessee on the ground that such income does not come under the purview of principle of mutuality. It is not out of place to mention here that, after the decision of the jurisdictional High Court (supra), the Hon'ble Supreme Court in the case of Bangalore Club Vs. CIT [2013] 350 ITR 509, while adjudicating an identical issue, held that interest earned by assessee club on fixed deposits from its member banks would not be exempted from tax on the basis of doctrine of mutuality. 8.3 Accordingly, respectfully following the decision of Hon'ble jurisdictional High Court in the assessee's own case for the AY 1996- 97 (supra) and the decision of Hon'ble Supreme Court in the case of Bangalore Club Vs. CIT (supra), I am of the confirmed view that the interest income earned by the assessee should be assessed under the head income from Other Sources without applying the doctrine of mutuality. Similarly, rental income received from member tenants should be assessed to tax under the head income from house property without applying the doctrine of mutuality. Treatment of operating losses as business loss u/s.28(iii) of the Act and Set off of operating loss against income from other sources and house property: 8.4 In this context, it is important to understand the principle of mutuality before adjudicating the issue on hand. It is well settled principle of law that, in order to fulfil the requirement of mutuality, a mutual association has to establish the crucial criteria that there is identity between contributors and participators / recipients to the fund i.e. there should be one to one identity between the members who are the contributors to the fund and the activities carried on thereof and members participating in sharing the funds / profits generated thereof. However, the fact that an association / club 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 / club satisfies the test of mutuality.

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8.5 An association / club may engage in activities which can be described as mutual and at the same time, it may engage in some other activities which can be considered as non-mutual in nature. However, in case if an association / club is having two kinds of activities i.e. activities which are mutual in nature and certain other activities which are non-mutual in nature, then also, the application of 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 characteristic of mutuality. Accordingly, the two activities can be separated and the profits derived from transactions or activities which do not fulfil the requirements of mutuality can be brought to tax and the transactions which fulfil the requirement of mutuality will be outside the purview of taxation. 8.6 At this juncture, it is important to note that the criteria or the bench mark is that whether the said transactions are fulfilling the requirement of mutuality i.e. complete identity between the contributors and the participators to the transaction, but not whether such transactions would result in profit /surplus or loss/deficit. Accordingly, the resultant or outcome of such transactions in case of principle of mutuality will be outside the purview of taxation. 8.7 In this regard, it is also important to note that the profit arising from mutuality transactions is not subject to taxation. Similarly, the loss arising out of mutuality transaction is also not recognized as allowable loss as per the provisions of the Act. This is precisely because of the reason that both profit as well as loss are outside the ambit of taxation. Accordingly, in a case of mutuality transactions resulting in loss /deficit, then such loss / deficit cannot be set off against the income taxable as per the regular provisions of the Act. 8.8 However, if there are two kinds of mutuality transactions, where, in respect of one type of transactions, there is profit and in another transactions, there is loss, then such loss has to be set off against the profit and resultant profit, if any, will be exempt from taxation. Similarly, if resultant loss, if any, should be ignored and cannot be adjusted against the taxable income of the assessee from Other Sources or other heads of income. Otherwise, such loss may be carried forward and adjusted against the income of subsequent years of the assessee quantified under mutuality principle, which is not subject to tax. 8.9 In this regard, it may be noted that, as per the scheme of taxation, the treatment of the income or loss arising out of transactions coming under the purview of principle of mutuality is

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similar to that of the treatment of income or loss arising out of agricultural activities of an assessee. To be precise, in a case of an assessee disclosing agricultural income, the same is exempt from tax u/s. 10(1) of the Act. As such, the same is not subject to taxation, except taken into consideration for determining the rate of tax. Similarly, if the assessee is incurring loss from agricultural. activities, he cannot claim the same as allowable loss as per the provisions of the Act for the purpose of set off of such loss against income from various heads of income as stipulated u/s. 14 of the Act rws 71 of the Act. Further, the assessee cannot claim carry forward and set off of such loss against income from various heads as envisaged u/s. 72 of the Act. The same analogy is applicable even in respect of non taxable source of income arising from the transactions coming under the doctrine of principle of mutuality. Reliance is placed on the following decisions: 1) CIT(Central) Vs. Harprasad & Co. P. Ltd. [1975] 991TR 118 (SC) 2) CIT v. Gold Coin Health Food (P.) Ltd. [20081304 ITR 308 (SC) 3) CIT v. J.H. Gotla [1985] 156 ITR 323 (SC) 4) CIT v. Elphinstone Spg. and Wvg. Mills Co. Ltd. [1960] 40 ITR 142; [1960] 3 SCR 953 (SC) In all the above mentioned decisions, the Hon'ble Supreme Court has held that loss is only negative income and that the definition of income u/s. 2(24) of the Act includes "loss" also. In other words, it assumes the same character and quality as does the positive income. In view of this, if a particular income is exempt from tax, and, therefore, it doesn't enter the computation of total. income of the assessee u/s. 2(45) of the Act, it would so applicable even in respect of negative income i.e. loss. 8.10 A detailed analysis of the judgments of Hon'ble Supreme Court (supra) is finding place in the decision of the Hon'ble ITAT in the case of DDIT (lnternational Taxation) Vs. Asia Pacific Performance SICAV [2015] 55 Taxmann.com 333 (Mum. Trib.). For the sake of ready reference, the relevant portion of the decision is reproduced below: "We have given our careful consideration to the matter. We find the assessee's case is wholly unmaintainable in view of the law as explained by the hon'ble apex court over a series of decisions, viz. CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 (SC); CIT v. J.H. Gotla [19851 156 ITR 323 (SC) and CIT (Central) v. Harprasad and Co. (P.) Ltd. [19751 99 ITR 118 (SC), to cite some. We begin by reproducing/enlisting the observations by the apex court from the said decisions.

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In CIT (Central) v. Harprasad and Co. (P.) Ltd. [19751 99 ITR 118 (SC), also relied- upon by the Assessing Officer, which decision was also in context of capital gains, and under the Indian Income-tax Act, 1922 (pages 124, 125) : "From the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains' should be understood as including losses also, so that, in one sense 'profits and gains' represent 'plus income' whereas losses represent 'minus income', * in CIT v. Karamchand Premchand Ltd. [1960] 40 ITR 106; [1960] 3 SCR 727 (SC) and CIT v. Elphinstone Spg. and Wvg. Mills Co. Ltd. [1960] 40 ITR 142; [1960] 3 SCR 953 (SC). other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although section 6 classifies income under six heads, the main charging provision is section 3 which levies income-tax, as only one tox, on the 'total income' of the assessee as defined in section 2{15}. An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the 'total amount of income, profits and gains referred to in section 4(1)'. Secondly, it must be 'computed in the manner laid down in the Act'. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge. "{Emphasis Supplied) In CIT v. J.H. Gotla [1985] 156 ITR 323 (SC), the apex court, after examining the scheme of the Act, including as to the carry forward of loss, held that in computing the assessee's income, the income of his wife or minor children which is liable to be added under section 16(3) (of the 1922 Act), would include profit or loss from the business of the assessee's spouse or minor children and, accordingly, upheld the set off of brought forward business loss from such business. The premise on which the said decision rests is again that income includes loss. In CIT v. Gold Coin Health Food {P.} Ltd. [2008] 304 ITR 308 (SC), the issue before the hon'ble apex court was whether the penalty under section 271(1)(c) could be levied if the return of income is at a 10551 i.e., in view of the amendment by the Finance Actl 2002 with effect from April 1, 2003 in Explanation 4 to the section. In deciding the matter, the hon'ble court referred to various precedents. The following section of the judgment is relevant for our purposes wherein the apex court, adverting to the decision in the case of CIT {Central} v. Harprasad and Co. {P.} Ltd. [19751 99 ITR 118 (SCI, clarifies that income by definition also includes losses: (pages 312, 313)

"7. In Reliance Jute and Industries Ltd. v. CIT £19791120 ITR 921, it was observed by this court that the law to be applied in

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income-tax assessments is the law in force in the assessment year unless otherwise provided expressly or by necessary implication. Before proceeding further, it will be necessary to focus on the definition of the expression 'income' in the statute. Section 2(24) defines 'income' which is an inclusive definition and includes losses 1 i.e., negative profit. The position has been elaborately dealt with by this court in CIT v. Harprasad and Co. {P.} Ltd. {197S1 99 ITR 118. This court held with reference to the charging provisions of the statute that the expression 'income' should be understood to include losses. The expression 'profits and gains' refers to positive income whereas losses represent negative profit or in other words mm::;s income. This aspect does not appear to have been noticed by the Bench in Virtual Soft Systems Ltd. 's case [2007] 289 ITR 83 (SC); [2007] 9 SCC 665. Reference to the order by this court dismissing the Revenue's Civil Appeal No. 7961 of 1996 in CIT v. Prithipal Singh and Co. [20011 249 ITR 670 (SC) is also not very important because that was in relation to the assessment year 1970-71 when Explanation 4 to section 271(1)(c) was not in existence. The view of this court in Harprasad's case [1975] 99 ITR 118 (SC) leads to the irresistible conclusion that income also includes losses." (Emphasis Supplied)" 8.11 Coming to the accounting of mutuality transactions, all the receipts and payments which are contributed by the members would form part of the income and expenditure of the assessee and any surplus or deficit on account of such transactions is considered as income or loss of the concern. In the instant case, the assessee has received subscription from the members to the extent of Rs.8,25,44,722/- and the same is accounted as income in its Income & Expenditure account, but for the purpose of taxation, it excluded the same by applying the principle of mutuality. However, at the same time, the assessee has failed to adjust loss arising on account of transactions coming under the purview of principle of mutuality which is otherwise claimed by the assessee as operational loss of Rs.9,11,15,126/-, being loss from club activities. As clearly explained above, all kinds of transactions coming under the purview of principle of mutuality, whether resulting in profit or loss, should be clubbed together and arrived at the net income or loss, which alone can be considered as exempted income. Also, it is an undisputed fact that subscription received from the members is a revenue receipt and would form part of income derived from the activities of the club as disclosed by the assessee on its own in the Income and Expenditure account.

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8.12 In the instant case, the assessee has selectively removed the income portion covered under principle of mutuality i.e. subscription received from the members of Rs.8,25,44,722/- but, the expenditure portion incurred towards providing various facilities to the members Le. loss from club activities is claimed as operational loss to the extent of Rs.9,11,15,126/-. Further, after claiming set off of the same against the income computed under the head Other Sources of Rs.4,51,54,037/-, being the interest from member bank and income from House Property of Rs.2,95,445/-, the assessee arrived at net operational loss of Rs. 9,11,15,126/-. DECISION: 9.0 In view of the foregoing discussion, I am of the considered opinion that the assessee is not entitled to exclude subscription receipts while computing the operational loss from the transactions covered under the principle of mutuality. Accordingly, I don't find fault with the AO in ignoring the net operational loss of Rs.9,11,15,126/- computed by the assessee without adjusting the subscription receipts received from the members of Rs.8,25,44,722/-. Thus, the grounds of appeal raised by the assessee on this issue are liable for dismissal. 9.1 In this connection, it is also pertinent to note that, whatever loss or income disclosed by the assessee arising from the transactions coming under the purview of principle of mutuality cannot be construed as income or loss derived by a trade, profession or similar association from specific services performed for its members as envisaged u/s. 28(iii} of the Act. In view of this, the loss incurred by the assessee from the activities which are falling under the purview of principle of mutuality cannot be construed as loss incurred under the head Profits and Gains of Business or Profession. 9.2 In view of the above, it is well settled legal position that operational loss computed by the assessee coming under the purview of principle of mutuality cannot enter the computation of total income as envisaged u/s.2(45) of the Act. Accordingly, the ground of appeal raised by the assessee on treating such loss arising out of transactions covered under principle of mutuality as income / loss within the meaning of Sec. 28(iii) of the Act is dismissed. As a corollary, such loss cannot be set off against other taxable sources I heads of income of the assessee such as interest income from bank falling under Income from Other Sources, Income from House Property etc. as envisaged u/s.71 of the Act. Similarly, the provisions of Sec.72 of the Act are also not applicable with regard to carry forward and set-off of such losses in the subsequent AYs. Accordingly, all the grounds of appeal raised by the assessee are hereby dismissed”.

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sources; respectively. We thus are of the opinion that once the assessee's impugned deficit arising from mutuality account is neither covered in any of the said heads as well nor u/s. 2(24)(vii) defining “income” in the very account, section 71 of the Act would not apply in isolation. We further deem it proper to refer to hon'ble apex court’s recent larger bench decision in Commissioner of Customs Vs. Dilip Kumar & Co. (2018) 9 SCC 1 (SC) that provisions of a taxing statutes have to be strictly construed only. We next quote CIT Vs. Hariprasad and Co. P. Ltd. (1975) 99 ITR 118 (SC) that a loss arising from a head of income not chargeable to tax is not eligible to be set off against a taxable source as follows : “ It may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off. Its sole purpose is to set off the loss against the profits of a subsequent year. It presupposes the permissibility and possibility of the carried-forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax- demand. It follows that if such set-off is not permissible or possible owing to the income or profits of the subsequent year being from a nontaxable source, there would be no point in allowing the loss to be "carried forward". Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source. Now let us test the claim of the assessee in the light of the above principles. The "capital loss" of Rs. 28,662/- in the present case, was, sustained in September 1953, that is, in the previous year 1953-54. Let us assume that in the subsequent years 1955-56 and 1956-57 when the capital gains were not taxable, he made huge capital gains far exceeding this loss, could he be obliged to show those capital gains ill his return? Could the loss of the year 1953-54 be absorbed or set off against such capital gains of the subsequent years? The answer is emphatically in the negative.” Hon’ble Gujarat High Court judgment in (2015) 367 ITR 261 (Guj) Kishorebhai Bikabhai Virani Vs. ACIT also holds that a loss under an exempt source is not to be carried forward for set off against subsequent year’s income. 10. So far as the assessee's argument that the foregoing judicial precedents (supra) have duly held that it ought to adopt commercial principles in computation of income, there would be hardly any dispute qua the same. The question before us is not that of computation of income but regarding set off of loss u/s.71 of the Act which it has to be computed as per strictly construction principle only going by the clinching fact that the assessee herein is eligible for

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“mutuality” benefit qua deficit claimed as loss. We thus hold that the assessee’s case law is distinguishable of facts. 11. Lastly comes the learned counsel’s argument that the tribunal had already accepted applicability of section 71 of the Act qua set off of its loss claim in remand directions (supra), we hold that the CIT(A) had been directed to consider the assessee’s going by the corresponding statutory provisions in light of relevant facts rather than allowing the same on merits. We further make it clear that the assessee had raised the impugned argument for the first time before the learned co-ordinate bench wherein it thought it proper to redirect the same back to the CIT(A) for necessary verification and adjudication. We thus decline the assessee's instant solitary substantive grievance as well as the main “lead” appeal ITA No.1388/Hyd/2015. Same order to follow in assessee's remaining three appeals 1389 & 1390/Hyd/2015 (heard on 22.09.2021) since learned counsel fairly stated at Bar for all these four cases raise identical substantive grounds. 12. Next comes the assessee's appeals ITA Nos.1392 to 1398/Hyd/2015 (heard on 29.09.2021) wherein learned counsel has made a similar statement that our foregoing adjudication squarely covers the outcome therein. These seven appeals are also dismissed therefore”.

4.1. Assessee’s pleadings are fair enough in not pin pointing any distinction on facts of law in the impugned assessment year. We thus adopt the foregoing detailed discussion mutatis mutandis to reject the assessee’s instant sole substantive grievance.

Order pronounced in the open court on 27th January, 2022

Sd/- Sd/- (LAXMI PRASAD SAHU) (S.S.GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 27-01-2022 TNMM

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Copy to : 1.Secunderabad Club, 220, Picket, Secunderabad. 2.The Income Tax Officer, Ward-10(2), Hyderabad. 3.CIT(Appeals)-6, Hyderabad. 4.Pr.CIT-6, Hyderabad. 5.D.R. ITAT, Hyderabad. 6.Guard File.