M/S. ,MADRAS BOAT CLUB,,CHENNAI vs. ACIT, CC - 4 (1),, CHENNAI

O R D E R

PER DUVVURU RL REDDY, JUDICIAL MEMBER:

:- 2 -: & 2749/Chny/2019 being the expenditure over income under the head income from other sources for the assessment year 2015-16, which was not raised before the ld. CIT(A).

5.1 We have perused the decision in the case of Citizen Co-operative Limited v. ACIT (supra) and the relevant observations of the Hon’ble Supreme

:- 4 -: & 2749/Chny/2019 Court are reproduced hereunder for the sake of its application to the present case: 23) With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a proviso to the aforesaid provision, it is made clear that such a deduction shall not be admissible to a co-operative bank. However, if it is a primary agriculture credit society or a primary co-operative agriculture and rural development bank, the deduction would still be provided. Thus, co-operative banks are now specifically excluded from the ambit of Section 80P of the Act. 24) Undoubtedly, if one has to go by the aforesaid definition of co-operative bank, the appellant does not get covered thereby. It is also a matter of common knowledge that in order to do the business of a co-operative bank, it is imperative to have a licence from the Reserve Bank of India, which the appellant does not possess. Not only this, as noticed above, the Reserve Bank of India has itself clarified that the business of the appellant does not amount to that of a co-operative bank. The appellant, therefore, would not come within the mischief of sub-section (4) of Section 80P. 25) So far so good. However, it is significant to point out that the main reason for disentitling the appellant from getting the deduction provided under Section 80P of the Act is not sub-section (4) thereof. What has been noticed by the Assessing Officer, after discussing in detail the activities of the appellant, is that the activities of the appellant are in violations of the provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer that the assessee is catering to two distinct categories of people. The first category is that of resident members or ordinary members. There may not be any difficulty as far as this category is concerned. However, the assessee had carved out another category of nominal members. These are those members who are making deposits with the assessee for the purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the business of the appellant was with this second category of persons who have been giving deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion of these deposits is utilised to advance gold loans, etc. to the members of the first category. It is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality, such activity of the appellant is that of finance business and cannot be termed as co-operative society. It is also found that the appellant is engaged in the activity of granting loans to general public as well. All this is done without any approval from the Registrar of the Societies. With indulgence in such kind of activity by the appellant, it is remarked by the Assessing Officer that the activity of the appellant is in violation of the Co- operative Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction under Section 80P(2)(a)(i) of the Act. 26) It is in this background, a specific finding is also rendered that the principle of mutuality is missing in the instant case. Though there is a detailed discussion in this behalf in the order of the Assessing Officer, our purpose would be served by taking note of the following portion of the discussion: As various courts have observed that the following three conditions must exist before an activity could be brought under the concept of mutuality;

:- 5 -: & 2749/Chny/2019 that no person can earn from him; that there a profit motivation; and that there is no sharing of profit. It is noticed that the fund invested with bank which are not member of association welfare fund, and the interest has been earned on such investment for example, ING Mutual Fund [as said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third party vis-a-vis the assessee entitled between contributor and recipient is lost in such case. The other ingredients of mutuality are also found to be missing as discussed in further paragraphs]. In the present case both the parties to the transaction are the contributors towards surplus, however, there are no participators in the surpluses. There is no common consent of whatsoever for participators as their identity is not established. Hence, the assessee fails to satisfy the test of mutuality at the time of making the payments the number in referred as members may not be the member of the society as such the AOP body by the society is not covered by concept of mutuality at all. 27) These are the findings of fact which have remained unshaken till the stage of the High Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the appellant cannot be treated as a co-operative society meant only for its members and providing credit facilities to its members. We are afraid such a society cannot claim the benefit of Section 80P of the Act. 28) This appeal, therefore, fails and is hereby dismissed with costs.

5.2 From the above, it is clear that the assessee in the above case is AOP, which is engaged in finance business and not entitled to claim deduction under section 80(P)(2)(a)(i) of the Act. Moreover, the assessee failed to satisfy the test of mutuality at the time of making the payments and thereby, the Apex Court held that the society is not covered by the concept of mutuality at all.

(A) The Main objects to be pursued by the Company on its incorporation: 1) To promote, assist, encourage boating, training the Members, Members’ dependents, by conducting theoretical, practical. coaching to row boats as also train them to participate in regattas at District, State, National and International levels ; to organize all related activities connected with the production of various types of boats such as rowing boats, as also motor boats needed by members for sports; to encourage research connected with boats; to :- 6 -: & 2749/Chny/2019 organize and hold alone or jointly with any other Association, Club or person[s] sports activities connected with the use of boats; hold Meetings, Competitions, Tournaments and Regatta’s connected with the proper use of boats both for economic as also sports activities; offer, give or contribute towards prizes, medals and awards in connection with all or any of the objects of the Club for the time being and to establish a separate development fund or any other fund for the purpose of research and development of boats and promotion and development of sports connected with boats as also any other objects of the club. 2) To affiliate with the Amateur Rowing Association of the East, Far Eastern Amateur Rowing Association and also such other Association(s) /clubs from time to time and Laws of boat racing adopted by the above association (s) may be adopted with or without modification(s). 3) To promote social intercourse amongst members of the Club, their families and their dependants and guests with a view to achieving any one or more of the objects of the Club. 4) To provide a Boat Club House and other facilities such as accommodation to members, their families and their dependants and guests for stay. 5) To take over the assets and liabilities of the present unincorporated Club known as the Madras Boat Club established and functioning since 1867 for the benefit of its members, including the lease of its 5 Club House and grounds, establish, equip, improve, alter, administer, extend, run, maintain and aid Boats construction facilities. (B) Objects incidental or ancillary to the attainment of the main objects: 1). To purchase, acquire, take on lease or mortgage in exchange or otherwise acquire land and movable as also immoveable property including boats of all kinds, furniture and fixtures, electrical and electronics, furniture, fixtures, equipment, instruments, appliances, instruments, vehicles, boat construction facilities could be useful to achieve any one or more of the objects of the club. 2) To operate club facilities for the use of members, their families and dependants and guests, and to procure provisions, other items of food and drinks. 3) To buy, prepare, make, supply, sell and deal in all kinds of apparatus and appliances as also manufacturing facilities in connection with all or any of the objects of the club. 4) To hire and employ Secretaries, Stewards, Clerks, Managers, Professionals, Servants and Workmen and to pay them and other persons for the services rendered to the Club by way of Salaries, Wages, Gratuities and Pensions and to establish funds to pay gratuity/pension to the employees in accordance with the rules of the club subject to any provisions of the Act, if any, in force. 5) To sell, improve, manage, lease, dispose of, turn to account or otherwise deal with all or any part of the property of the Club both moveable as also immoveable; and to invest with the moneys of the Club not immediately required upon such securities and in such manner as may from time to time be determined.

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6) To borrow or raise money from banks , members as may be required from time to time, and give security by the issue of or upon Bonds, Bills of Exchange, Promissory Notes or other obligation or securities of the Club or by mortgage or charge upon all or any of the property of the Club both present and future. 7) To pay all costs, charges and other expenses pertaining and incidental to the formation, or registration of the club. 8) To open any kind of account (s) in any bank (s) and to draw, make accept, endorse, discount, negotiate, execute and issue bills of exchange, promissory notes, bills of lading, warrants, subject to the approval of the Committee of the Club. 9) To institute and to defend any suit, appeal, application for review or revision or, any other application of any nature whatsoever, to take out executions, to enter into agreements to refer to arbitration or to enforce and to contest any awards and for all such purposes to engage or retain counsels, attorneys and pay remuneration/ fees including reimbursement of actual expenses. Provided that the Company shall not support with its funds, or endeavour to impose on, or procure to be observed by its members or others, any regulations or restriction which, if an object of the company, would make it a Trade Union. (C) The other objects for which the Company is incorporated - NIL IV. The objects of the Company extend to the whole of India. V. (1) The income and property of the Club Whomsoever derived shall be applied solely towards the promotion of any one or more of the objects of the Club as set forth in this Memorandum of Association and save as aforesaid no portion thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise whatsoever to the members of the Club. (2) Except with the previous approval of the Central Government, no remuneration or other benefits in money or money’s worth shall be given by the Company to any of its members, whether officers or servants of the Company or not, except payment of out of pocket expenses, reasonable and proper interest on money lent or reasonable or proper rent on premises let out to the Company. (3) Except with the previous approval of the Central Government, no member shall be appointed to any office under the Company, which is remunerated by salary, fees or in any other manner not excepted by sub-clause (2). (4) Nothing in this clause shall prevent payment by the Company in good faith of reasonable remuneration to any of its officers or servants (not being members) or to any other person (not being a member), in return for any services actually rendered to the Company. VI. No alteration shall be made to the Memorandum of Association nor to the Articles of Association of the club which are for the time being in force unless the alteration has been submitted to and previously approved by the Regional Director, Southern Region, Ministry of Corporate affairs at Chennai. VII. The liability of the members is limited.

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VIII. Every member of the Club undertakes to contribute [such amount as may be required but not exceeding Rs. 100/- each] to the Assets of the Club in the event of the same being wound-up during the time that he is member or within one year from the date he ceases to be the member for payment of the debts and liabilities of the Club contracted before the time at which he ceases to be a member and of the costs, charges and expenses of winding-up the same, and for the adjustment of the rights of the contributories amongst themselves. IX. True accounts shall be kept of the sums of money received and expended by the Club and the matter in respect of which such receipt and expenditure takes place and of the property, credits and liabilities of the Club and subject to any reasonable restriction as to the time and manner of inspecting the same that may be imposed in accordance with the Regulations of the Club, for the time being, shall be open for inspection of the members. Once at least in every year the Accounts of the Club shall be examined and the correctness of the Balance Sheet ascertained by one or more property qualified Auditor or Auditors appointed by the members in the general meeting. X. If upon the winding-up or dissolution of the Club there remains after the satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed amongst the members of the Club but shall be given or transferred to some other institution or institutions having objects similar to the objects of the Club to be determined by the members of the Club, at or before the time of dissolution or in default thereof by the High Court of Judicature, Madras.” It is clear from the main objects as well as Rule X clearly indicate that the assessee fulfill all the three conditions for the concept of mutuality. Thus, the case law relied on by the ld. CIT(A) in the case of Citizen Co-operative Limited v. ACIT (supra) has absolutely no application to the facts of the present case.

6.1 The Apex Court has settled the issues regarding the principle of mutuality in two land-mark judgements, viz. (i) CIT Vs. Bankipur Club Ltd., 226 ITR 97 (SC), and (ii) Chelmsford Club Vs. CIT 243 ITR 89 (SC). The Hon’ble Supreme Court in the case of CIT Vs. Bankipur Club Ltd., 226 ITR 97 had an occasion to deal with the claims of a number of clubs seeking benefit based on the principle of mutuality. The principle laid down by the Apex Court in the case of Bankipur Club Ltd., are summarized, as follows:

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“Under the Income-Tax Act, what is taxed is, the ‘income, profits or gains’ earned or ‘arising’, ‘accruing’ to a ‘person’. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings 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 particular 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.” [ Head Note p.97 of the Report] The main question canvassed by the Revenue in the appeals coming under groups A to D, the assessees being Bankipur Club Ltd., Ranchi Club Ltd., Cricket Club of India and Northern India Motion Pictures Association. The main issue in all these appeals was, whether the assessee-mutual clubs, were entitled to exemption for the receipts or surplus arising from the sales of drinks, refreshments, etc. or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature from its members. In all these cases, the Tribunal as also the High Court had found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or by way of admission fees, periodical subscription, etc. from the members of the clubs and the same were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to, as per the rules and regulations of the respective clubs. It had also been found that different clubs realised various sums on the above counts only to afford to their members, the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally). Held, dismissing the appeals, that in the light of the findings of fact the receipts for the various facilities extended by the clubs to its members, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, could not be said to be from “a trading activity”. The surplus-excess of receipts over the expenditure – as a result of mutual arrangement, could not be said to be “income” for the purpose of the Act.” 6.2 The principle of mutuality in respect of the income of “mutual concern” has been further clarified by the Apex Court in the case of Chelmsford Club Vs. CIT, 243 ITR 89 (SC). The principles laid down have been summarized in the head note and the same are reproduced as under:

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“Under the Income-Tax Act, what is taxed is, the ‘income, profits or gains’ earned or ‘arising’, ‘accruing’ to a ‘person’. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings 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 particular 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. The law recognizes the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. A perusal of S. 2(24) of the Income-tax Act, 1961, shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identify of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.” [Under the Act, ………….] The assessee, a members’ club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on “no profit no loss” basis in that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable. The claim was rejected by the High Court. Held, reversing the decision of the High Court, that the assessee’s business was governed by the doctrine of mutuality. It was an admitted fact that the business of the assessee did not come within the scope of business referred to S. 2(24)(vii). It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, even the annual value of the club house, as contemplated in S.22 of the Act, would be outside the purview of the levy of income-tax.” 6.3 While considering similar issue on identical facts, in the case of DCIT v. Madras Cricket Club in & I.T.A. Nos. 1752 & 1753/Chny/2017 for the assessment years 2012-13 to 2014-15 21.01.2020,

:- 11 -: & 2749/Chny/2019 the Coordinate Benches of the Tribunal has decided the issue in favour of the assessee by dismissing the appeals of the Revenue by following the decision in the case of CIT v. Willingdon Sports Club 302 ITR 279 (Bom) in which the judgement of the Hon’ble Supreme Court in the case of Chelmsford Club v. CIT (supra) has been applied and referred the decision in the case of CIT v. Bankipur Club Ltd. (supra). Thus, respectfully following the above judgements of the Hon’ble Supreme Court, we set aside the orders of authorities below and direct the Assessing Officer to delete the addition made in both the assessment years.

:- 12 -: & 2749/Chny/2019 Counsel for the assessee could not controvert the above submissions of the ld. DR. We have perused the decision in the case of Bangalore Club v. CIT (supra), wherein, while emphasizing the decision of the Hon’ble Supreme Court in the case of CIT v. Bankipur Club Ltd. (supra), the Hon’ble Supreme Court has held as under: “33. In our opinion, unlike the aforesaid surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee from the afore-noted four banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club.

by the assessee towards the claim of exemption towards surplus income over expenditure as well as interest income for the assessment year 2013-14 as well as claim of loss being the expenditure over income under the head income from other sources for the assessment year 2015-16. In the result, both the appeals filed by the assessee are partly allowed.

9. Order pronounced on the 06th January, 2021 at Chennai.