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Facts
The assessee, a registered trust, filed its return of income claiming an exemption for interest income earned on bank Fixed Deposits and savings accounts based on the principle of mutuality. The Assessing Officer and the CIT(A) rejected this claim, holding that mutuality did not apply to such income and added Rs. 13,84,970/- to the assessee's total income, making it taxable under 'Income from other sources'. The assessee appealed, also raising an alternative ground for allowing proportionate expenses against the interest income.
Held
The Tribunal upheld the decision of the lower authorities, affirming that the principle of mutuality is not applicable to interest income earned from bank Fixed Deposits and savings accounts, citing Supreme Court judgments in Bangalore Club and Secundrabad Club cases. However, the Tribunal partly allowed the assessee's alternative claim, directing the Assessing Officer to allow a 5% deduction towards expenses incurred for earning the total bank interest income, even in the absence of specific working provided by the assessee for the current year, relying on prior consistent practice and Tribunal decisions.
Key Issues
1. Whether the principle of mutuality applies to interest income earned by a trust from bank Fixed Deposits and savings accounts. 2. If mutuality is not applicable, whether proportionate expenses incurred for earning such interest income should be allowed as a deduction.
Sections Cited
143(2), 142(1), 143(3), 2(24), 57, 57(iii)
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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the assessee is directed against the order dated 08.07.2025 passed by Ld. CIT(A)/NFAC for the assessment year 2018-19.
There is delay in filing of the present appeal. We are satisfied with the reasons mentioned in the application for condonation of delay duly supported by an affidavit that the applicant was prevented by sufficient cause for not filing the appeal within the prescribed time limit. After hearing Ld. DR, we condone the delay and proceed to adjudicate the appeal.
The appellant has raised the following grounds of appeal :- “The following grounds are taken without prejudice to each other- On facts and in law,
1. The learned CIT(A) erred in confirming the action of the Assessing Officer in treating the interest income earned on Fixed Deposits kept with banks as taxable under the head "Income from Other Sources", by holding that the principle of mutuality is not applicable to such income, without appreciating the peculiar facts of the appellant's case.
2. The learned CIT(A) grossly erred in placing reliance on the decision of the Hon'ble Supreme Court in the case of Bangalore Club v. CIT (2013) 29 taxmann.com 29, without appreciating that the said decision is distinguishable on facts and does not apply to the appellant's case, as the deposits were made out of mandatory contributions / surplus funds of the members, and the interest thereon partakes the same character as mutual contributions.
3. The learned CIT(A) failed to appreciate that (a) The surplus funds were inextricably linked with the mutual activities of the appellant: (b) The interest income is incidental and not in the nature of income derived from dealings with non-members; (c) The principle of mutuality continues to apply so long as there is a complete identity between contributors and participants, which is present in the appellant's case.
4. Without prejudice, the learned CIT(A) failed to appreciate that even assuming (but not admitting) that the principle of mutuality is inapplicable, the entire gross interest cannot be taxed without allowing deduction of proportionate expenses incurred for earning the said interest.
5. On facts and in law, the learned CIT(A) erred in passing the appellate order without granting the appellant an opportunity of personal hearing through video conferencing, despite the specific request made under Ground 5(b) of the appeal memo. The order so passed is in gross violation of the principles of natural justice and is therefore bad in law and liable to be quashed.
The appellant craves leave to add, alter, amend, substitute or withdraw any of the above grounds of appeal at the time of hearing.”
4. Facts of the case, in brief, are that the assessee is duly registered under the Bombay Public Trust Act, 1950 and is engaged in the activity of bringing all the builders who are involved in the business of construction and development of properties etc under one roof and providing solutions for their peculiar problems as well as the problems of the public at large. The assessee has furnished its return of income on 30.03.2018 declaring income of Rs.69,030/- only after claiming deduction of income of bank FDR interest income on principle of mutuality. The case of the assessee was selected for scrutiny and statutory notices u/s 143(2) and 142(1) respectively were issued to the assessee. During the year regular books of accounts were maintained and audited. The assessee has shown following incomes & claimed exemption as per principle of mutuality on Bank interest income :- Contribution from members 43,25,300/- (i) Interest on income tax refund 69,033/- (ii) (iii) Interest income from Bank claimed exempt as per principle of mutuality (a) interest on Bank FDR 13,81,711/- (b) savings bank interest 3,259/- Total Bank Interest income (a+b) 13,84,970/- 5. After considering the reply and submissions of the assessee, the Assessing Officer vide order dated 12.03.2021 completed the assessment u/s 143(3) of the IT Act and determined total income at Rs.14,54,003/- as against the income of Rs.69,030/- returned by the assessee. The above assessed income includes addition of Rs.13,84,970/- being interest income earned on bank fixed deposits & savings bank under the head ‘Income from other sources’. Accordingly, the Assessing Officer rejected the claim of the assessee regarding application of principle of mutuality on Bank interest income & determined it taxable under the head ‘Income from other sources’.
6. Being aggrieved with the above assessment order, the assessee preferred an appeal before Ld. CIT(A)/NFAC. Not being convinced with the reply and submissions of the assessee, Ld. CIT(A)/NFAC dismissed the appeal filed by the assessee by observing as under :- “5.2.3 I have perused the submission of the appellant vis-a-vis the observations of the Assessing Officer. It is seen that the appellant's contentions are revolving around the concept of mutuality. The Assessing Officer, however, has not disregarded the applicability of concept of mutuality in the case of the appellant. He has allowed the claim of exemption on other income (member's contribution) of Rs.43,25,300/- (para 2.11 of the impugned assessment order). In the same paragraph, the Assessing Officer has only disallowed the exemption on the interest on fixed deposit amounting of Rs.13,84,970/-, holding the same as inadmissible. 5.2.4 Now, the appellant's claim that even the interest on fixed deposit is exempt, on the principle of mutuality, is to be examined. The principle of mutuality is predicated on the fundamental requirement of complete identity between contributors to a common fund and the beneficiaries of that fund. Hon'ble Supreme Court of India has consistently upheld this principle, emphasizing that any breach of this identity results in the transactions assuming a commercial character, thereby making the surplus taxable. This position has been reinforced in several landmark rulings. In Chelmsford Club v C/T (2000) 109 Taxman 215/243 ITR 89 (SC), Hon'ble Supreme Court underscored the necessity of a reciprocal relationship where all contributors to a fund must also be beneficiaries of the surplus The Apex Court held that if contributors are excluded from receiving benefits, the principle of mutuality is breached, and the resulting surplus is taxable. This decision highlighted that mutuality requires a strict identity between contributors and participants, and any deviation from this identity transforms the nature of the transactions from mutual to commercial. In Bankipur Club Ltd. [1997] 92 Taxman 278 (SC) [08-05-1997), (also relied upon by the appellant) the Hon'ble Supreme Court has held that income derived from transactions involving non-members or from the activities in the nature commercial activities does not qualify for mutuality. The ruling emphasized that the absence of identity between contributors and beneficiaries converts the surplus into taxable income. This judgment reinforced the notion that mutuality is strictly confined to activities within the mutual entity where contributors and beneficiaries are the same. Such a principle was again reaffirmed in Bangalore Club [2013] 29 taxmann.com 29 (SC) where Hon'ble Supreme Court held that interest income earned from fixed deposits in banks by clubs is taxable. The involvement of third parties, such as banks, breaches the mutuality principle, making the income derived from such transactions taxable. This decision reiterated that mutuality applies only to transactions within the mutual entity and does not extend to dealings with external parties. 5.2.5 In the instant case, the appellant has undisputedly earned interest income earned from to the extent of Rs.13,84,970/- from FDs with Bank, which, going by the ratio laid down by the Hon'ble Supreme Court in the case of Bangalore Club (supra) is taxable. Before deciding the issue, the decisions relied upon by the appellant are discussed below Decisions relied Comments of the CIT(Appeals) CIT, Bombay City vs. Royal These decisions have been Western India Turf Club Ltd. AIR considered by the Hon'ble 1954 SC 85 Supreme Court in the case of Bangalore Club [2013] 29 taxmanın.com 29 (SC) CIT. Bihar vs Bankipur Club Ltd. [1997] 5 SCC 394.1 CIT vs. Escort Dealers Association These decisions were delivered Ltd. [253 ITR 305] prior to the decision of the (Date of order: 19.09.2001) Hon'ble Supreme Court in the case of Bangalore Club (supra) Indermani Jatia vs. CIT [35 ITR 298] (Date of order 03.10.1958) Date of order: 14.01.2013 All the cases relied upon in Para 1.10 Yum Restaurants (Marketing) Pvt. In this case, the interest on FD Ltd. (taxpayer) [116 taxmann.com was not the issue. Therefore, the 374 (SC)) decision is respectfully distinguished from the facts leading to the addition in the case of the appellant. 5.2.6 In a nut shell, it is seen that the Assessing Officer has allowed the claim of exemption on member's contribution of Rs.43.25,300/- and, has disallowed the exemption on the interest on fixed deposit amounting of Rs.13,84,970/-, holding the same as inadmissible. In view of the decision of the Hon'ble Supreme Court in the case of Bangalore Club (supra), it is held that the Assessing Officer was justified in denying claim of deduction on the amount of interest received on Fixed Deposits. Accordingly, I uphold the action of the Assessing Officer in making addition of Rs.13,84,970/- from FDs with Bank. Grounds no. 3 and 4 are dismissed Grounds no. 1 and 5 are general/non-specific in nature, and hence, do not merit separate adjudication. 6.0 In the result, the appeal filed by the appellant is DISMISSED.”
It is the above order against which the assessee is in appeal before this Tribunal.
We have heard Ld. counsels from both the sides and perused the material available on record including the paper book and copy of case laws furnished/relied on by the assessee. In this regard, we find that the dispute is only with regard to the taxability of interest income earned from bank FDR & savings bank by the assessee. The claim of the assessee is that the interest income earned from bank FDR & savings bank account is exempted income on the ground of principle of mutuality whereas the Assessing Officer and Ld. CIT(A)/NFAC are of the view that the principle of mutuality is not applicable on bank FDR/savings bank interest income, hence it is taxable income in the hands of the assessee trust.
With regard to ground nos.1, 2 and 3 raised by the assessee before the bench, we find that Hon’ble Supreme Court in the case of Secundrabad Club vs. CIT has held in para 43(v) that “thus the interest income earned on fixed deposits made in the banks by the appellant club has to be treated like any other income from other sources within the meaning of section 2(24) of Income Tax Act, 1961.”
We also find that Hon’ble Supreme Court in the above case law also approved the order passed in the case Bangalore Club vs. CIT [2013] 29 taxmann.com 29 (SC) which was relied on by Ld. CIT(A)/NFAC in the instant case in hand. Accordingly, we do not find any error in the order passed by Ld. CIT(A)/NFAC wherein the appeal of the assessee was dismissed by holding that principle of mutuality does not apply with regard to Bank interest income. Accordingly, the ground nos.1, 2 & 3 raised by the assessee are dismissed.
With regard to alternate ground no.4 raised by the assessee, we find that it is also claimed by the assessee that the entire gross bank FDR interest income cannot be taxed without allowing deduction of proportionate expenses incurred for earning the said bank FDR & savings bank interest income. With regard to this alternative claim the assessee relied on the decision passed by a coordinate bench of this Tribunal in the case of Poona Club Ltd. vs. CIT in for A.Y. 2011-12 order dated wherein the Tribunal allowed the appeal filed by the assessee by observing as under :- “24. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal
no.3 relates to the allowance of expenditure at the rate of 7.5% of the interest income claimed. Admittedly, there is no specific expenditure incurred to earn the interest income. However, incurring of sum indirect expenditure cannot be ruled out. It is trite law that what can be taxed is only real income not hypothetical income, when the specific expenditure cannot be identified, it is appropriate to estimate certain amount of expenditure. In the present case, in earlier year, the Tribunal took a view that 7.5% of interest income should be allowed as deduction. This finding had attained the finality, accepted both the assessee as well as the Department. Even on the principle of consistency, the same should have been followed by the lower authorities. The decision of the Hon’ble ITAT in assessee’s own case is also in consonance with the ratio of decision of the Hon’ble Allahabad High Court in the case of CIT vs. Kisan Sahkari Chini Mills Ltd., 274 ITR 119, wherein, the Hon’ble Allahabad High Court confirmed the findings of the Tribunal that where the assessee held some interest income other than the exempted income, it must incur some expenses for earning the interest income and the expenditure cannot be identified. Then estimated expenditure in terms of the percentage of the income can be allowed as deduction by holding as under :-
4. It is not in dispute that the respondent-assessee earned interest on investments with banks and post-office deposits. However, it claimed expenses to the tune of Rs. 2,03,573. The aforesaid expenses, which it had debited was towards maintenance of office, staff, audit and other ex-penses. Under section 57 of the Act certain deductions are permissible while computing income chargeable under head ‘Income from other sources’. Section 57(iii) provides for deduction of any other expenditure, which is not in the nature of capital expenditure and is laid out or expended wholly and exclusively for the purpose of making or earning such income. The respondent-assessee must have incurred some expenses for earning interest income other than the exempted interest income and, therefore, if the Tribunal has fixed 5 per cent of the taxable interest income as a deduction while computing income from other sources, it cannot be said that the Tribunal has committed any illegality.”
Further, admittedly, the issue in the grounds of appeal i.e. allowance of 7.5% of the interest income as expenditure against the interest income came to be accepted by the Department in the assessment year 2010-11 and as well as earlier years. Though, the principle of res-judicata does not apply in respect of matter pertaining to income-tax as each assessment is separate and distinct proceedings but in the absence of any change in the facts and law warranting different view, no authority of the quasi judicial or judicial can generally be permitted to take a different view. This position is laid down by the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. vs. Union of India, 282 ITR 273 (SC). The Hon’ble Bombay High Court in the case of PCIT vs. Quest Investment Advisors (P.) Ltd., 409 ITR 545 (Bom.-HC) after extracting the observation made by the Hon’ble Supreme Court in the case Bharat Sanchar Nigam Ltd. (supra) made in para 20 held as follows :-
8. However, subsequently the Apex Court in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 has after referring to the decision of Radhasoami Satsang (supra) has observed as under :—
20. The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi- judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision of where the earlier decision is per incuriam. However, these are fetters only on a co-ordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction." (emphasis supplied)
The principle accepted by the Revenue for 10 earlier years and 4 subsequent years to the Assessment Years 2007-08 and 2008-09 was that the entire expenditure is to be allowed against business income and no expenditure is to be allocated to capital gains. Once this principle was accepted and consistently applied and followed, the Revenue was bound by it. Unless of course it wanted to change the practice without any change in law or change in facts therein, the basis for the change in practice should have been mentioned either in the assessment order or atleast pointed out to the Tribunal when it passed the impugned order. None of this has happened. In fact, all have proceeded on the basis that there is no change in the principle which has been consistently applied for the earlier assessment years and also for the subsequent assessment years. Therefore, the view of the Tribunal in allowing the respondent's appeal on the principle of consistency cannot in the present facts be faulted with, as it is in accord with the Apex Court decision in Bharat Sanchar Nigam Ltd.'s case (supra).”
Similarly, the Hon’ble Bombay High Court placing reliance on its earlier decision in the case of CIT vs. Arts and Crafts Exports, 22 taxmann.com 53 (Bom.-HC) held in the case of CIT vs. Macbrout Engineering (P.) Ltd., 52 taxmann.com 219 (Bom.-HC) that where the decision of the Tribunal in the case of the assessee for the earlier years had been accepted by the Revenue and no argument was advanced to establish that the said decision of the Tribunal was erroneous, the decision cannot be assailed by the Revenue in the subsequent years. Therefore, we do not see any reason to deviate from the decision of the Hon’ble ITAT for earlier years in assessee’s own case and, accordingly, we allow 7.5% of the interest income as allowable expenditure.
The ratio of the decision of the Hon’ble Supreme Court in the case of Bangalore Club (supra) has no application in deciding the issue of allowability of expenditure. The issue in the said decision is in relation to the taxability of interest income received from corporate members invoking the principle of mutuality, whereas, in the present case, it is a question of allowability of expenditure against the interest income, therefore, the decision of Hon’ble Supreme Court in the case of Bangalore Club (supra) has no application to the instant case. Accordingly, the ground of appeal no.3 raised by the assessee stands allowed.”
On the basis of above decision passed in the case of Poona Club Ltd. in order dated 20-04-2022, the assessee is requesting to allow deduction of proportionate expenses incurred for earning the said interest income. In this regard, we find that in the other appeal of Poona Club Ltd. vs. ACIT in order dated 23-01-2018, the assessee has furnished the working on the basis of which the Tribunal in earlier years has quantified the expenditure and following the earlier years orders the assessee was claiming 7.5% expenditure in his return of income, however, in the instant case in hand the assessee has not furnished any such working/basis in support of his contention, therefore, we are of the considered opinion that a fixed amount of % of expenses cannot be allowed without any reasonable basis until & unless the assessee establishes nexus between expenditure incurred under various heads to earn the bank interest income. However, considering the totality of facts & in the light of coordinate bench decision passed in the case of Poona Club Ltd. in order dated 20-04-2022 & in the absence of any working provided by the assessee, we deem it appropriate to allow 5% towards expenditure out of the total bank interest income