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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABRAHAM P.GEORGE & SHRI GEORGE MATHAN
आदेश / O R D E R PER BENCH:
These are appeals filed by the assessee against the Order of the Commissioner of Income Tax (Appeals)-2, Chennai, in 2/2013-14 & 119/CIT(A)-2/2014-15 dated 11.03.2016 for the AYs 2010- 11 & 2011-12, in ITA No.44 & 225/CIT(A)-2/2015-16 dated 31.03.2017 for the AYs 2012-13 & 2013-14.
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 2 -:
2. Shri N.Madhavan, ACIT, represented on behalf of the Revenue and Shri A.Kanagaraj, CA, represented on behalf of the assessee.
3. It was submitted by the Ld.AR that there was only two issues in the assessee’s appeals. It was a submission that the first issue was against the action of the Ld.CIT(A) in confirming the order of the AO and not granting the assessee the benefit of the application of the principles of mutuality in respect of interest income received by the assessee on the fixed deposits with Indian Bank and the second issue was against the action of the Ld.CIT(A) in confirming the non-granting of depreciation.
The Ld.AR placed before us a Note in regard to the issues which is extracted as under:
HISTORY:
M/s. Kalaimaghal Sabha was founded on 15.01.1984 and was registered as a Society under Tamil Nadu Societies Registration Act 1975 with following objects. i. Work for the development of education, art, culture and sports. ii. Work for the unity of persons belonging to different religion, races and castes. iii. Work for the development of the people who are economically low in standards. The society admitted the members and implemented certain Schemes as “Members Beneficial Scheme”. Each member has to contribute specified amount to the society as membership subscription. The society apart from doing activities in furtherance of its object for the general or the public welfare was also collecting funds from the members to be utilized exclusively for the benefit of its members. The above said funds were collected under different heads such as purchase of property, marriage, education, death etc., which were kept in separate fund accounts and utilized for the said purpose. The society has enrolled more than 5.75 lakhs members as on 15.01.1998 and acquired valuable immovable property in the name of “Members of Kalaimaghal Sabha”. The society under the member’s beneficial scheme would divide these properties amongst its members by the year 2006 i.e. at the time of dissolution of Sabha. In the meantime, the Govt. of Tamil Nadu on the basis of some complaints received against the Sabha has appointed a special officer on 06.11.1998 to administer the Sabha. One of the member of the Sabha challenged the order of Govt. of Tamil Nadu and filed a writ petition before Hon’ble High Court of Madras.
Hon’ble High Court as per its order dt. 30.03.1999 has appointed Receivers to take charge of the properties purchased for the benefit members and funds available for distribution among the members. The Receivers have been directed to sell the properties and distribute the sale proceeds of the properties to the members of the Sabha who had contributed for the same in the proportion in which they have contributed. Even with respect to the cash
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 3 -: which is in bank deposit or any other deposit, the same have to be distributed to the members of the society.
PRESENT ACTIVITIES:
The office of the Receivers appointed by Hon’ble High Court are functioning from the premises owned by the Sabha at different places and executing the orders of Hon’ble High Court by realizing the properties purchased in the names of members of the Sabha, temporarily parking the funds in fixed deposits with banks and distributing to the members in installments after sufficient amount has been realized. In this process Sabha is getting interest income on fixed deposits with banks and there is some surplus after meeting the administrative expenses. The surplus is also deposited with bank for distribution to members. The surplus is being taxed by the IT Department which is challenged on the basis of mutuality principles and doctrine of mutuality.
APPLICABILITY OF MUTUALITY PRINCIPLE AND DOCTRINE OF MUTUALITY:-
The funds of the Sabha in bank deposits which are made out of sale proceeds of properties in the names of members belong to the members pending disbursal to them as per High Court order and it represents Common Fund of Members. It is well established that as per principles of Income Tax Law, no taxable profit can be said to emerge from out of mutual activity.
There is complete identity between the contributors to the fund and recipients from the fund, in as much as the interest earned by the society from the surplus funds invested in fixed deposits with banks are always available and are used for the benefit of members of the society in as much as the said interest merged with the Common Fund of the Society.
The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group for a common benefit. Any amount of surplus to that needed to purse the common purpose is said to be simply an increase of the Common Fund and as such neither considered income nor taxable.
One of the earliest modern judicious statements of the mutuality principle is by Lord Watson in the House of Lods in 1989 in Styles (Surveyor of Tara) vs New York Insurance company where it has been held:-
“... When number of individuals agree to contribute funds for a common purpose.... and stipulate that their contributions, so far as not required for that purpose shall be repaid to them. I cannot conceive why they should be regarded as traders or why contribution returned to them should be regarded as profit”.
In the case of the appellant, the amount realized from the sale of properties which has to be returned to the members as per High Court order having regard to the fact that it runs to several Crores, the same could not be retained in the society premises and had to be necessarily kept in some secured manner till such funds could be utilized for the benefit of its members and therefore they were kept in Fixed Deposits with banks.
The funds are kept in the bank not with prime object of earning interest but to keep it in safe custody and the interest earned has been used only for the ultimate benefit of members of the society to be distributed amongst them.
The funds which were invested in the form of Fixed Deposits were kept in such deposits with a definite idea of using the same for the specified purpose of returning to the members as per High Court order in a phased manner and could be drawn for that purpose as and when the need arises.
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 4 -:
CASE LAWS:
In the case of CIT Vs West Godavari District Rice Millers Association (150 ITR 395), the A.P.High Court held that it is well settled that the surplus accruing to a mutual association is no income or profit at all for purposes of Income Tax, the test of mutuality being complete identity between the contributors and participants.
In the case of CIT Vs JK Organisation Ltd (279 ITR 503) (All), The Allahabad High Court held that the organization has been formed to promote and protect the interest of its members and it also provided that upon dissolution, the surplus will be distributed amongst the members of the organization on the basis of the contribution. Hence organization is a mutual organization and the income of the assessee — association of persons was exempt from tax on the ground of mutuality.
A mutual association is an association of person who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out in the same capacity in which they have made the contribution. Therefore the capacity as contributors and participants remain same. They contribute not with an idea to trade but with an idea of rendering mutual help. They receive back the surplus which is left after meeting the expenditure of the association which is incurred for the common purpose in the same capacity in which they have contributed. Thus they receive back what was really their own. The receipt in their hands is not really a profit as no man can make a profit out of himself such as he cannot enter into a trade or business with himself. Thus the main test of mutuality is complete with the identity of contributors with the recipients. This view was confirmed by Supreme Court in the case of CIT Vs Bankipur Club (226 ITR 97) and in the case of Chelmsford club Vs CIT (243 ITR 89). Similar view was taken by Madras High Court in the case of CIT Vs Madras Race Club and also held that it is enough if the members had a right of disposal over the surplus to show that they are participants. The same principle was enunciated in Addl CIT Vs Secundarabad club (150 ITR 401 (Appx)). Similar view was taken by Bombay High Court in the case of CIT Vs Cement allocation and co-ordination organization (236 ITR 553).
A mutual association arises when a certain class of people join or associates to contribute money to achieve an object for the benefit of one another and divide the surplus between themselves on that character, namely in the character of persons who contribute it. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and all the participators of the surplus must be contributors to the common fund. In other words, there must be complete identity between contributors and the participators. This principle is followed in CIT Vs Jam Merchants Association 106 ITR 542 (Guj) and CIT Vs Darjeeling Club 153 ITR 676 (Cal). In the case of Kalaimaghal Sabha the identity is proved. The participation in the surplus need not be immediate, that is it may not arise as soon as the surplus is discerned, but may arise much later, even on a winding up or on dissolution (Falconbridge Vs National Employee’s Mutual General Insurance Association (33 TC 103).
In the case of The Presidency Club Vs CIT, the Madras High Court has observed that any profit that arose to a Mutual Association is incidental to the activities which are mutual in nature and hence the receipt from letting out the rooms was held as not taxable.
Mutuality principle has been upheld in the following cases also:- a) Wankaner Jam Social Welfare Society Vs CIT (260 ITR 241 (Mad) b) CIT Vs Merchant Navy Club (96 ITR 261 (AP) c) CIT Vs Nataraj Finance Corpn (169 ITR 732 (AP) d) CIT Vs J.K.Organisation Ltd (279 ITR 503 (All) e) Chelmsford Club Vs CIT (243 ITR 89 (SC) f) CIT Vs Rayal Western India Turb Club Ltd (24 ITR 551) g) CIT Vs I.T.I. Employees (234 ITR 308 Kar) h) CIT Vs Cawnpore Club (140 Taxman 378)
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 5 -:
The case laws where it has been held that interests on fixed deposits are also exempted on mutuality principle are as under: a) CIT vs Delhi Gymkhana Club Ltd. (339 ITR 525, Delhi). b) DIT vs All India Oriental Bank of Commerce Welfare Society (130 Taxman 575, Delhi). c) CIT vs Talangang Co- operation Group Housing Society Ltd. (339 ITR 518, Delhi). d) CIT vs Standing Conferences of Public Enterprises (Scope) (319 ITR 179, Delhi). e) Chelmsferd Club vs CIT (243 ITR 89-SC).
It has been held by Karnataka High Court that a society is eligible for exemption even in respect of interest income from Term Deposits with Banks and dividend income from shares.(Canara Bank Golden Jubilee Staff Welfare Fund Vs Deputy CIT (308 ITR 202).
It has also been held by Delhi High Court that Interest on FD, dividend income, Profit on sale investment etc are not chargeable to tax on mutuality principle.
It has also been held in many cases that interests on fixed deposits with banks are taxable since the bank is not a member and it amounts to dealing with outsiders. But in all these cases, they are running clubs I associations. Whereas in the case of the appellant, the society is under the control of Hon’ble High Court and is in the process of returning the amount contributed by the members as per Court order and hence the interest earned belong to members. The society has to accumulate funds before distribution since huge amount is needed for distribution of even Rs.1000 per member as the number of members run into about 6 lakhs.
In view of this, the Appellant’s case should be distinguished from others.
DEPRECIATION CLAIM:
The appellant has claimed depreciation on buildings and other assets owned by the Sabha. The assets of the Sabha have been taken over by the Joint Receivers of Kalaimagal Sabha in 1999-00 to carry out the orders of Honb’le High Court of Madras. The buildings and other assets were used by the Sabha to carry out the directions of High Court of Madras to realize the assets of the Sabha and refund the amount due to the members. Some buildings have been let out during the period prior to take over by joint receivers which are continued to be let out. All other buildings are under the own use of Kalaimagal Sabha in which office of the Receivers and other staff under the control of Receivers are accommodated. The buildings at various places are used to carry out the activities of the Sabha as directed by the High Court such as maintenance of Accounts and records of members, collection of details of amount due to members, identification of properties of Sabha at various places, collection of property documents, taking possession of the properties, vacation of Tenants and vacating illegal occupants of lands, bringing the property for auction, realization of auction money, making refunds to members etc.
The auctions of the properties are taking place at various places in the building owned by the Sabha. Hence all the properties and assets of the Sabha are used for the purpose of carrying out the activities as directed by Honb’le High Court of Madras.
Depreciation has to be allowed as per provisions of I.Tax Act even when there is only income from other sources. The interest income is only from the deposits of auction amount realized by Receivers as per directions of High Court.
Even in the case of charitable trusts, various Courts of Law have held that depreciation has to be allowed in arriving at the total income which is reproduced as under.
I. CIT Vs Sheth Manilal Ranchhoddas Vishram Bhavan Trust (198 ITR 598) (Guj) Held that the expression ‘income’ has to be understood in the popular or general sense and not in the sense in which the income is arrived at for the purpose of assessment. The amount of depreciation has to be deducted to arrive at the income available for application to charitable and religious purposes.
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 6 -:
II. CIT Vs Roypur Pallottine Society (180 ITR 579) (MP) Held that the depreciation is the exhaustion of the effective life of a fixed asset owing to use or absolescene. The object of providing for depreciation is to spread the expenses incurred in acquiring the asset over its effective lifetime. A charitable trust is therefore entitled to depreciation in respect of the assets owned by it. III. CIT Vs Society of the Sisters of St. Anne (146 ITR 29) (Ker) Held that if depreciation is not allowed as a necessary deduction for computing the income of a charitable institution then that can be no way to preserve the corpus of the trust for deriving the income. IV. CIT Vs Rao Bahadur Calawala Cunnan Chetty Charities (135 ITR 485) (Mad) Held that the income from the properties held under trust would have to be arrived at in the normal commercial manner. In the case of Kalaimaghal Sabha, since the buildings and other assets are used by the Receivers to carry out their activities and to implement the High Court order, the net income has to be arrived at only after allowing Depreciation on Fixed Assets.
It was fairly agreed by the Ld.AR that the Indian Bank was not a Member of the AOP.
4. In reply, the Ld.DR vehemently supported the order of the AO and the Ld.CIT(A). It was a submission that the Indian Bank where the assessee is maintaining fixed deposits, was not a Member of the assessee and consequently the principles of mutuality could not be applied in respect of the interest received by the assessee from such non-Member.
In regard to the issue of the depreciation, it was a submission that as the properties of the assessee AOP was not used in relation to earning of the income which has been brought to tax under the head income from others sources, depreciation was not applicable to the assessee.
We have considered the rival submissions. At the outset, it may be mentioned here that though various case laws has been quoted in favour of the assessee, none of them were discussed. One of the primary
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 7 -: conditions for the applicability of the principles of mutuality, is that no person can make a profit from himself, the participants must be Members, once the funds of the society are given for the business purposes of a non-Member and the assessee receives any compensation either in the form of profits or in the form of interest from such non-Member, the principles of mutuality cannot be applied to that receipt from the non- Member. This being so, we are of the view that the findings of the Ld.CIT(A) on this issue are on right footing and does not call for any interference.
Coming to the second issue of depreciation, it is an undisputed fact that the properties of the assessee are used for carrying out the activities of the society as directed by the Hon’ble High Court. Once the properties of the society are used for the purpose of activities of the assessee, the same would have to be treated as being used in the business of the assessee. If this is so, the income under the head business in the hands of the assessee, would have to be considered and depreciation liable to be allowed. Admittedly, if depreciation is allowed and the income of the assessee becomes negative or loss, the same is available for set off against the income from the other heads representing income from other sources. This being so, the findings of the Ld.CIT(A) in respect of the non-granting of the depreciation is allowed and the AO is directed to grant the assessee the benefit of depreciation as claimed.
ITA Nos.1997 & 1998/Mds/2016 & 1404/Mds/2017 :- 8 -: 7. In the result, the appeals filed by the assessee are partly allowed.