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Facts
The assessee, an Industries Association, earned interest income of Rs. 97,235/- which it claimed as exempt based on the principle of mutuality. The Assessing Officer made an addition of this amount, which was upheld by the CIT(A). The assessee appealed to the Tribunal.
Held
The Tribunal held that while subscription income might be covered by mutuality, interest earned on surplus funds deposited with banks is not. The interest income is therefore taxable.
Key Issues
Whether interest income earned by an association from bank deposits of its surplus funds is exempt under the principle of mutuality.
Sections Cited
11, 12, 143(3), 250, 253, 246A, 57(iii)
AI-generated summary — verify with the full judgment below
Order PER PARESH M. JOSHI, J.M. : This is an appeal filed by the Assessee u/s 253 of the Income Tax Act, 1961 (hereinafter referred to as the Act for sake of brevity and convenience). The assessee is aggrieved by the order bearing number ITBA/APL/S/250/2023- 24/1063667481(1) dt. 30/03/2024 passed by the Ld. CIT(A) under section 250 of the Act which is hereinafter referred to as the “impugned order”. The relevant assessment year is 2010-11 and the corresponding previous year period is from 01/04/2009 to 31/03/2010.
Factual Matrix 2.1 That assessment in the present case originally was completed on 30/01/2013 under section 143(3) as a status of AOP.
2.2 That during the year under consideration, the assessee earned interest income of Rs. 97,235/- and that the same was claimed to be exempted 2 under section 11 & 12 of the Act. That an addition of Rs. 97,235/- was made by the then AO in the status of AOP as the Association was not registered under section 11 & 12 of the Act. 2.3 That the Assessee aggrieved by the addition preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) vide order dt. 06/07/2018 dismissed the appeal of the assessee. 2.4 Aggrieved with the order of the Ld. CIT(A) the assessee filed an appeal before this Tribunal. This Tribunal vide order dt. 28/02/2019 in Appeal No. set aside the order of Ld. CIT(A) in para 4.1 has held as under: 4.1 Reliance was placed upon decision of the Hon'ble Supreme Court in the case of Chelmsford Club vs. CIT 243 ITR 89. It has also been argued that the assessee had not indulged in any trade or business and was merely organizing activities confined to its members. Accordingly, in the light of the submissions of the parties before the Bench and in the interests of justice, the impugned order is set aside back to the file of the A.O with a direction to first bring out the correct and true facts as noticed by the tax authorities and thereafter to proceed to decide the issue also considering the alternate prayer of the assessee which has been cancelled. 2.5 Accordingly notice was issued by Ld. AO to the Assessee on 21/10/2019 to furnish reply / information in support of the order set aside by Hon’ble ITAT Chandigarh (supra). 2.6 That the Counsel of the Assessee submitted reply on 24/10/2019 which we reproduce as below: “It is submitted that assessee is an Industries Association of Chandigarh. Appellant association derived income from annual subscription from the members of the association and entrance fee from new members only by the association besides the bank interest. The income is exempt by the appellant in the returned of income on account of principal of mutuality. The case of the assessee was selected under scrutiny. During assessment proceedings the assessee has submitted and explained that surplus of Rs.97.235/- is not taxable as it is governed by principle of mutuality.. It is submitted that Industries Association of Chandigarh was registered under the Societies Registration Act XXI 1860 and as amended by the Punjab Amendment Act, 1957. The copy of certificate of Registration of Societies(Act XXI of 1860) No.7 3 of 1967-68 dated 27.10. 1967 is attached. The assessee association was formed for co- operation between all its members engaged in any industrial activity in Chandigarh and or its vicinity, to further mutual assistance on technical and industrial problems faced by industrialist, to promote and protect the industries of Chandigarh, to encourage friendly feeling and unanimity amongst the members connected with their common good and to look after the interest of the members of the association. It came into existence merely for the purpose of common benefit of the members of the association for the purpose of industrial activity in Chandigarh and association is still going strong for the common benefits of the members of the association for the purpose of industrial activity in Chandigarh and association is still going strong for the common benefits of the members, even after so may year.”
2.7 The assessee vide their letter dt. 17/01/2013 before earlier AO had submitted as under: “That the assessee derived income from annual subscription from the members of the association and entrance fee from new members only by the association besides the bank interest. The income of the assessee is exempt from Income Tax as it is clubbed by the mutual benefit of the members of the association and on account of mutuality which is exemption from Income tax".
2.8 The assessee during the course of the assessment proceedings relied upon following judgements: 1. Chelmsford Club vs CIT 243 ITR 89 2. CIT vs Bankipur Club Ltd (1197)226ITR 97(SC) 3. Delhi Gymkhana Club Ltd vs DCIT, ITAT Delhi "H" Bench 39 DTR (Del) Trib) 48 2.9 The assessee has further submitted that since inception of association, the association has claimed surplus, if any, as exempt on the basis of principle of mutuality. The association is in existence for the common purpose which is mutually beneficial to its members and it governed by the principle of mutuality.
2.10 The order of Assessment of Ld. AO bears No: ITBA/Com/F/17/2019-20/ 1023537308(1) dt. 31/12/2019 in which it is observed as under:
4 (i) I have gone through the reply of the assessee, the assessee has earned interest income to the tune of Rs. 97,235/- The assessee has earned surplus from annual subscription from the members of association and entrance fee from the members and bank interest. The assessee society is not registered u/s 12AA. As regard, the concept of mutuality, reliance has been placed on various case laws of clubs, wherein the whole activity is centered towards the mutual interest of the members. However, as far assessee is concerned, the assessee has earned bank interest from the surplus funds available with it.
(ii) Reliance is placed on Supreme Court decision in case of CIT VsDr. V.P.Gopinathan 248 ITR 449 which held as under- Income from other sources-Interest on fixed deposit-Deductibility of interest on loan taken on the security of FDs-Amount paid by assessee as interest on loan that he took from the bank on the security of fixed deposit could not be reduced from his income by way of interest on the fixed deposit placed by him in the bank Held: It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank. CIT vs. Dr. V.P. Gopinathan (1997) 137 CTR (Ker) 190: (1998) 229 ITR 801 (Ker): TC S41.3613 set aside; Jashvidhyaben C. Mehta vs. CIT (1988) 67 CTR (Guj) 239 (1988) 172 ITR 680 (Guj): TC 41R.709 distinguished.
(iii) The Supreme Court also in Bangalore Club Vs- 350 ITR 509 affirmed that interest on FDR is not covered by ambit of mutuality principle & will therefore be liable to tax. It was held “ It was observed that till the stage of generation of surplus funds, the setup resembled that of mutuality; however, as soon as 5 these funds were placed in FDs with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. With the funds of the mutuality, member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the 'privity of mutuality', consequently, violating the one to one identity between the contributors and participators. Also, in the instant case, the surplus funds were not used for any specific service, infrastructure, and maintenance or for any other direct benefit for the member of the club. These were taken out of mutuality when the member banks placed the same at the disposal of third parties, thus, Initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality. This contract lacked the degree of proximity between the club and its member, which may in a distant and indirect way benefit the club. Further before the funds returned to the club, they were expended on non-members l.e. the clients of the bank. This loaning out of funds of the club, by banks to outsiders for commercial reasons, snapped the link of mutuality. Thus, none of the conditions of mutuality were satisfied. (Para 26, 27 & 28) Moreover the assessee was already availing the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities avalled by its members, before it was deposited with the bank. This surplus amount was not treated as income; since it was the residue of the collections left behind with the club. A fagade of a club could not be constructed over commercial transactions to avoid liability to tax. Such setups could not be permitted to claim double benefit of mutuality.
6 (Para 32) It was held, unlike the aforesaid surplus amount itself, which was exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee from banks would not fall within the ambit of the mutuality principle and will therefore, be eligible to Income-Tax in the hands of the assessee- club. (Para 33)” (iv) interest debited in income and expenditure account is also not allowable u/s 57(iii) as the loans has been utilized to earn the interest income. Reliance is also placed on in Supreme Court case in CIT Vs. Dr. V.Gopinathan 2001 18 SITC 191 (Supreme Court) 2.11 The Ld. AO basis what is stated in Para 2.10 above has held interest amount of Rs. 97,235/- as liable to tax. The loss on account of excess of expenditure over receipts is not adjustable on account of concept of mutuality and also interest expense is not allowable as same has not been incurred to earn interest income in view of aforesaid Supreme Court decisions reported at 248 ITR 449 and 350 ITR 509. 2.12 Finally total income of the assessee was computed as Rs. 97,235/-. 2.13 The assessee being aggrieved by the aforesaid assessment order dt. 31/12/2019 prefers first appeal in terms of Section 246A of the Act and that by impugned order same was dismissed both on account of non prosecution as well as on merits. On merits the Ld. CIT(A) has held as follows: “5.2.1. In this case the appellant has earned interest income to the tune of Rs. 97,235/-. The appellant has earned surplus from annual subscription from the members of association and entrance fee from the members and bank interest. The appellant society is not registered u/s 12AA. The appellant has earned bank interest from the surplus funds available with it. Thus, in the assessment order interest from banks of Rs. 97,235/- was rightly added relying 7 upon the decisions of Hon'ble Supreme Court in case of CIT Vs Dr. V. P. Gopinathan reported at 248 ITR 449(SC).
2.14 The assessee being aggrieved by the impugned order has preferred appeal before this Tribunal and has raised following grounds of appeal against impugned order which are as follows:
1. That the order dated 30.03.2024, under section 250 of the Income Tax Act, 1961 passed by the Ld. Addl/JCIT (Appeals)-9, Mumbai in Appeal No. ITBA/APL/250/2023-24/1063667481 (1) is contrary to law and facts of the case.
2. That in the facts and circumstances of the case, the Ld. AddI/JCIT (Appeals)-9, Mumbai gravelly erred in not giving the reasonable opportunity of being heard to the appellant and decided the appeal exparte.
3. (a) That in the facts and circumstances of the case, the Ld. AddI/JCIT (Appeals)-9, Mumbai gravelly erred in upholding the addition of Rs. 97,235/- made by the Id. Assessing Officer on account of interest on bank deposits. (b). Without prejudice to the above, income assessed by the Id. Assessing Officer of Rs. 97,235/- was much less than the threshold limit of Rs. 1,60,000/- for the income to be taxable in the case of an association of person.
4. That in the facts and circumstances of the case, the Ld. AddI/JCIT (Appeals)-9, Mumbai gravelly erred in deciding the issue without considering the facts and history of the case and the order of the Hon'ble Income Tax Appellate Tribunal, Chandigarh in ITA No. 1185/CHD/2018.
5. That the appellant craves to add, amend or alter any ground of appeal before or at the time of hearing of appeal, with the permission of the Hon'ble Income Tax Appellate Tribunal, Chandigarh
3. Record of Hearing 3.1 The hearing in the matter took place before us on 04/12/2024 when both parties i.e; Ld. AR for and on behalf of the assessee and Ld. DR for and on behalf of the Revenue appared before us. The Ld. AR raised few legal objections against the “impugned order” primarily on account of breach of principles of natural justice etc. On merits he contended that addition of Rs. 97,235/- cannot be made as income is exempted income basis principles of mutuality. The object of assessee association is not to make profit. It’s income is derived as and by way subscription from members of the association and 8 entrance fee from new members. It additionally has interest income from banks. The income thus is shown as exempt in return of income on account of principal of mutuality. It was submitted that Industries Association of Chandigarh was registered under the Societies Registration Act, XXI 1860 and as amended by the Punjab Amendment Act, 1957. The Assessee Association was formed for Cooperation between all its members engaged in any industrial activity in Chandigarh and or its vicinity, to further mutual assistance on technical and industrial problems faced by industrialists to promote and protect the industries of Chandigarh to encourage friendly feeling and unanimity amongst the members connected with their common good and to look after the interest of the members of the association. It came into existence merely for the purpose of common benefits of the members of the association for the purpose of industrial activity in Chandigarh and is still going strong for common benefits of the members even after many years of its existence. The Association is in existence for common purpose which is beneficial to its members and it is governed by principle of mutuality. 3.2 It was also contended that even if sum of Rs. 97,235/- is not considered as income basis principle of mutuality as discussed supra the amount is less than threshold limit of Rs. 1.60 lakh for the income to be taxable in the case of an Association of Person (AOP)/ 3.3 The Ld. DR has relied upon the orders of lower authorities.
Observations, Findings & Conclusions 4.1 We now examine the legality, validity and proprietary of the impugned order basis records of the case.
9 4.2 We are of the considered opinion basis principle of mutuality of interest interse between association and its members that subscription amount which assessee receives is in the form of subscription fee from its members and so also from the new members who join fresh. There is thus a common kitty of funds available which is utilised by association for welfare of its members who have collective object and aim i.e. to promote and protect industries of Chandigarh which is a small union territory. To elevate the problems faced by Industries in Chandigarh. The object and purpose is indeed laudable and it is for mutual benefit of members of association. In so far as this corpus of fund mainly consisting of subscription from members no doubt it is for mutual benefit as there is a mutuality of interest. The corpus amount is not spent to earn income and profit. But we notice that in the year under consideration excess fund must have come into its kitty or must have been carried forwards from earlier years in accounts which made them to invest this surplus fund in safe heaven which was in form of FDR with a bank carrying interest. This interest component of Rs. 97,235/- certainly partakes the character of income of the association as has been rightly held by lower authorities following the judgement of Hon’ble Supreme Court in case of CIT Vs. Dr. VP Gopinathan reported at 248 ITR 449 (SC). This finding of Ld. CIT(A) has not been effectively rebutted by the Assessee in any manner whatsoever in appeal before us. Further Hon’ble Supreme Court of India in case of Bangalore Club V. CIT reported in 350 ITR 509 has clearly held that interest earned on deposit is not covered by mutuality principle. The amount is liable to be taxed in the hands of assessee the double benefit of mutuality is not permitted.