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Income Tax Appellate Tribunal, BANGALORE BENCH A, BANGALORE
Before: SHRI. SUNIL KUMAR YADAV & SHRI. ABRAHAM P. GEORGE
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER (Assessment Year : 2009-10) Panchajanya Chits P. Ltd, No.344, 1st floor, Vinaya Complex, Chickpet, Bangalore 560 053 .. Appellant PAN : AACCP5556H v. Deputy Commissioner of Income-tax, Circle – 12(2), Bangalore .. Respondent Assessee by : Shri. C. R. Nulvi, CA Revenue by : Dr. P. K. Srihari, Addl. CIT Heard on : 02.05.2016 Pronounced on : 04.05.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by assessee, its grievance is that exemption for dividend earned from chits was not given to it applying the principles of mutuality.
ITA.393/Bang/2013 Page - 2
Facts apropos are that assessee a chit fund company had filed its return for the impugned year declaring income of Rs.78,79,840/- Though assessee had credited a sum of Rs.69,79,725/- as chit dividend in its profit and loss account, while computing its total income under the Income-tax Act, it claimed exemption for the said amount on the ground of mutuality relying on the judgment of Hon’ble Punjab & Haryana High Court in the case of Soda Silicate and Chemical Works v. CIT [(1989) 179 ITR 588]. However AO was of the opinion that assessee could not take refuge under the principles of mutuality. As per the AO, in the case of CIT v. Bankipur Club Ltd (226 ITR 97), Hon’ble Apex Court had held that profits arising from mutual activity would be taxable when there was a taint of commerciality. As per the AO, by virtue of CBDT instruction No.1175 [F No.169/21/78-IT(80), dt.16.05.1978], an organiser of chit funds could not claim the benefit of mutuality. Further as per the AO, the question before the Hon’ble Punjab & Haryana High Court in the case of Soda Silicate and Chemical Works (supra) was whether loss suffered by a subscriber could be allowed as business loss. On the other hand, according to the AO, Hon’ble Andhra Pradesh High Court in the case of CIT v. Kovur Textiles Ltd [(1982) 136 ITR 061), had held that loss or profit arising to a person joining a chit with the object of getting funds for its ITA.393/Bang/2013 Page - 3 business would be either allowed as a deduction or taxable as income. He thus held that chit fund dividend of Rs.69,79,725/- represented business income of the assessee and not exempt under the principles of mutuality. An addition of the like amount was made.
Aggrieved assessee moved in appeal before the CIT (A). Argument of the assessee was that the conditions for applying the principles of mutuality enunciated by the Hon’ble Apex Court in the case of Bankipur Club (supra) were fully satisfied. As per the assessee, coordinate bench of this Tribunal in the case of Arun Kumar Bhansali v. DCIT (99 TTJ 1308), had held that chit dividend was exempt under the principles of mutuality. Further as per the assessee, participants in the surplus fund of a chit group were the same as contributors and there was complete identity between them. Submission of the assessee was that commission earned in its capacity as foreman of the chits alone could be considered as profits of the business. Argument of the assessee was that its earnings of chit dividend, by virtue of it being a participant of the chit was exempt on the principles of mutuality. Further as per the assessee, it being the foreman, was obliged to be a subscriber for every chit floated by it, as stipulated in the Chit Fund Act, 1982.
ITA.393/Bang/2013 Page - 4
CIT (A) after considering the arguments of the assessee held that assessee itself being in the business of running chit funds, could not take refuge under dual capacity as a foreman and a contributor. As per the CIT (A), earning of dividend as a contributor was an ancillary activity, to the primary activity of organising the chits. CIT (A) noted that the case laws relied on by the assessee concerned the nature of income in the hands of a contributor to the chit and not where earnings were ancillary to the business of running the chits. As per the CIT (A), principle of mutuality, though it could be claimed by a pure contributor could not be claimed by an organiser of the chits since the latter was doing it with a commercial motive. In so far as reliance placed by the assessee on Arun Kumar Bhansali (supra), CIT (A) held that the said case concerned an individual and could not be compared to that of a company running the business of organising chits. Further as per the CIT (A), unless complete identity between contributors and participants, principle of mutuality could not be applied. CIT (A) also noted that the Hon’ble Karnataka High Court in its judgment in ITA.3249/2005, C/W.3252/2005, 3251/2005 and 3250/2005, dt.18.06.2010, in relation to a similar issue in the case of M/s. Shriram Chits Karnataka P. Ltd, upheld the order of the Tribunal wherein it had ITA.393/Bang/2013 Page - 5 ruled that the principle of mutuality did not apply to the assessees running chit funds. Thus he dismissed the appeal of the assessee.
Now before us, Ld. AR strongly assailing the orders of the authorities below, submitted that the judgment of Hon’ble jurisdictional High Court in the case of Shriram Chits Karnataka P. Ltd, was erroneously applied by the CIT (A). According to him, the appeals preferred by the assessee M/s. Shriram Chits Karnataka P. Ltd, before the Hon’ble High Court were dismissed since this Tribunal had followed its own decision for earlier assessment year in the same assessee’s case, and the assessee concerned, though it had moved appeals in such earlier assessment years had withdrawn such appeals. It was for this reason that the Hon’ble High Court rejected the appeals of M/s. Shriram Chits Karnataka P. Ltd, and as per the Ld. AR there was no finding of Hon’ble High Court that principles of mutuality, could not be applied on dividend received by the foreman of a chit fund.
Further continuing his argument, Ld. DR submitted that the decision of coordinate bench in the case of Arun Kumar Bhansali (supra) clearly went in favour of the assessee. As per the Ld. AR in the said decision it was held by the Tribunal that dividend earned by the foreman from chits ITA.393/Bang/2013 Page - 6 were exempt under the principles of mutuality. Reliance was also placed on the decision of this Tribunal in the case of ITO v. M/s. Margasoochi Chits P. Ltd & others in ITA.995(Bng)/2008, dt.16.01.2009.
Per contra, Ld. DR submitted that assessee was a company formed for the purpose of running chits as a business. As per the Ld. DR, principle of mutuality did not apply when commercial reasons were behind the transactions giving rise to the dividend. As per the Ld. DR, the case of Arun Kumar Bhansali (supra) relied on by the Ld. AR, concerned person had conducted 22 numbers of chits in his personal capacity and was not comparable with the case of the assessee where it was running the chit business on commercial basis. As per the Ld. DR, assessee’s case was more comparable to that of Shriram Chits (Bangalore) Ltd v. DCIT in ITA.751, 750, 749 & 748 (Bang)/1998, dt.08.04.2003, wherein it was held that the principles of mutuality could not be applied to income from commercial pursuits. Thus according to him, lower authorities were justified in considering the dividend income to be a part of the business income of the assessee. Further as per the Ld. DR subsequently a coordinate bench had followed its earlier decision in the case of Shriram ITA.393/Bang/2013 Page - 7 Chits Karnataka P. Ltd, for later years, viz., A. Ys. 2003-04 and 2008-09, vide its order dt.14.08.2013.
Ad libitum reply of the Ld. AR was that decision in the case of Arun Kumar Bhansali relied by him was rendered by this Tribunal on 30.11.2005 whereas that of the coordinate bench in the case of Shriram Chits (Bangalore) Ltd, was dated.08.04.2003. Therefore according to him latter decision should be given precedence.
We have perused the orders and heard the rival contentions. Question before us is whether chit fund dividend received by a company running chit fund as its business, can be considered as exempt on the principles of mutuality. Assessee is strongly relying on the decision of the coordinate bench in the case of Arun Kumar Bhansali (supra) and that of Punjab & Haryana High Court in the case of Soda Silicate and Chemical Works (supra). As against this, Department is relying on a decision of coordinate bench in the case of Shriram Chits (Bangalore) Ltd (supra). In the case of Arun Kumar Bhansali (supra), concerned assessee had conducted 22 chits over a number of years and assessee was both a contributory and participant of the chit. What was held by this Tribunal at para 3 of the is reproduced hereunder :
ITA.393/Bang/2013 Page - 8
We have carefully considered the relevant facts and the arguments advanced. The only question to be considered is that even though admitted, whether the assessee can claim income of Rs. 4 lakhs as exempt on the principle of mutuality relying upon the decision of Hon'ble Supreme Court and that of Hon'ble Andhra Pradesh High Court (supra). In the present case, it is seen that the assessee conducted various chits numbering 22 over several years. The assessee was one of the participants of the chits. The assessee is contributory as well. Whatever surplus arises in conducting the chits is distributed equally amongst the members-beneficiaries. What is the real nature of income is the assessee receiving dividend by conducting such chits. The dividend is nothing but the surplus arising by contributing into the chits and not by way of commission for conducting such chits. Hon'ble Andhra Pradesh High Court in the case of Nataraj Finance (supra) held thus: "An entity would be a mutual benefit association if all the participators to the common fund are also contributors and their identity is established. It is this basic principle that satisfies the test of mutuality. The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus."
Hon'ble Supreme Court in the case of Bankipur Club Ltd. (supra) quoted with approval the following passage from the book on the Law and Practice of Income-tax by Kanga and Palkhivala thus: “….The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. The Madras, Andhra Pradesh and the Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if ITA.393/Bang/2013 Page - 9 they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects.."
In the present case, it is seen that various persons contributing (to) the chits are availing the combined contributed sum for a lesser sum called chit and the surplus arising is distributed amongst the chit contributors. Thus, the contributors to the common fund and the participators in the surplus are same persons. Hence, the principles of mutuality are squarely applicable. Applying the ratio laid down by Hon'ble Supreme Court as well as the Andhra Pradesh High Court, the income is not to be taxed but is to be exempted as the profit is made from oneself and not from others”
When this case was heard by the Tribunal, none of the parties had brought to the attention of the bench the earlier decision of a coordinate bench in the case of Shriram Chits (Bangalore) Ltd (supra). Similar issue regarding applicability of principles of mutuality was considered there also. What was held by this Tribunal in its order dt.08.04.2003 at paras 18 to 21 is reproduced hereunder :
The next issue in these appeals relates to the claim of the assessee that The dividend received by the assesee as foreman should be exempt under the principles of mutuality. The assessee, as already stated in the preceding paragraphs, is a foreman for conducting the business of chits. He also acts as a subscriber to the chit group and dividend received by the assessee as subscriber of chit group is claimed to be exempt on the principle of mutuality. The claim of the assessee is that the assessee, though chit funds company, is entitled to be a member of a mutual association as a subscriber and thereby receive dividends which are exempt from tax on the ground of mutuality. Reliance ITA.393/Bang/2013 Page - 10
was placed on the decision of the Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works v. CIT (179 ITR 588) and also decision of the ITAT, Delhi Bench, in The case of ITO v. Muthoot M.George Chits (India) Ltd., (34 ITD 1). The contention of the assessee before us is that the Department is accepting the principle that mutuality is applicable to chit fund transactions and chit companies and therefore, on the some logic, dividend received as 'subscriber should be excluded on the principle of mutuality. Once the assessee joins the group as a subscriber, it is bound by 'the rules and regulations applicable to all the subscribers. It has to contribute I subscription like any other subscriber. It has the privilege of bidding at The auction like any other subscriber if it had subscribed to more than one ticket and even as the successful bidder it has to offer higher discount Than the other competing subscriber. Just as the discount offered by other subscribers is a source of dividend, discount offered by the assessee is a source of dividend. The rights of the assessee as a subscriber are identical in all respects with the rights and obligations of other subscribers. Our attention was specifically drawn to the discussions at pages 47, 48, 113 and 127 of the book “Law & Practice of Incometax” by'. Palkhiwala, Vol.1, 6 edition. The exemption, according to the learned counsel, is conferred indelibly on a particular kind of income and does not depend upon the character of the recipient. Our attention was also drawn to the decision of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd.(82 ITR 452). Manifestly, such dividend receipts are to be held not taxable.
The learned Departmental Representative, on the other hand, strongly argued that the claims of the assessee should be rejected in the light of the discussions in the order of the CIT (A) on the disputed issue. The assessee is in the business of running chits and all the income incidental to such business activity are to be part of the business profit and the question of mutuality is not applicable. The receipt of income is in the course of business and inextricably connected with the transaction of the business and the same is liable to be included in the computation of income under the head ITA.393/Bang/2013 Page - 11
‘profits and gains of business’.
We have carefully considered the rival contentions and gone through the case laws. In our view, the contentions of the assessee have 'no force. The assessce.-company was carrying on business of chits. It went on to form/promote hundreds of chit groups, with fixed number of subscribers with fixed amount of subscription and for a fixed period. The CF Act provided that the assessee could also become a subscriber to the chits. The assessee which promoted these groups compulsorily joined each and every group as one of the subscribers. The assessee was a commercial entity formed to derive profits and gains from the business of chits. It is now well-settled proposition that the principle of mutuality is not applicable to commercial organizations formed with an object of earning profit of commercial nature. The assessee may have joined the chit group either as a foremen in fulfillment of the requirement of law namely CF Act or on the assessee-company entering into the shoes of defaulting subscribers or in some cases to fill up vacant chits as a matter of necessity or expediency its business and not by choice. It was not the case of the assesses participated In chits promoted by other companies or entities. The basic principle of mutuality cannot be applied to income, from commercial pursuits. Earning of profit was the sole motto of the ossessee-company. 21, The principle of mutuality, or the other hand, is based on the concept that no one can make profits out of himself. The essence of mutuality is of complete identity between the contributor and the participator. These identical set of facts were examined by the ITAT, Hyderabad Bench in the case of Shriran'Chits (P)Ltd, v. CIT (83 ITD 792) wherein the principle of mutuality has been rejected after elaborately discussing the various case laws including the decision of the AP High court in the case of CIT v, Kovur Textiles Co. (136 ITR 61). Therefore, in the light of these discussions, we confirm the orders of the CIT(A) on this issue, ITA.393/Bang/2013 Page - 12
Against the latter decision, concerned assessee had moved before the Hon’ble jurisdictional High Court, but had later withdrawn their appeals. Now the only question to be answered by us is whether any distinction can be drawn between the two cases mentioned above, viz., Arun Kumar Bhansali and Shriram Chits (Bangalore) Ltd, and which one applies more to the fact situation here.
In the case of Arun Kumar Bhansali, it is an admitted position that the assessee was an individual and had conducted only 22 chits over a number of years. As against this, in the case of Shriram Chits (Bangalore Ltd, the said company was running the chits as a part of its business which entirely consisted of running chits and activities incidental to this.
Here in the given case before us also the assessee concerned is a limited company and its sole business was to run chits. Due to the predominantly commercial nature of running of the chits by the assessee, in our opinion, the appropriate decision which could be considered as the correct precedent is that of Shriram Chits (Bangalore Ltd (supra). In the case of Shriram Chits (Bangalore) Ltd, coordinate bench had considered the effect of the judgment of Punjab & Haryana High Court in the case of Soda Silicate and Chemical Works (supra) also. Be that as it may, it cannot ITA.393/Bang/2013 Page - 13 be disputed that Hon’ble Apex Court had in the case of Bankipur Club Ltd laid down the essential requirement for satisfying the principles of mutuality. The primary requirement was that a number of persons should combine together and contribute to a common fund for financing some venture or object and should not have any dealings or relations with any outside body. What is to be seen is whether chit is conducted as a trade or adventure in the nature of trade for producing a profit or whether it is done on a mutual agreement, which incidentally give rise to a surplus. The object for which the assessee company was formed was to carry on the business of chits and the dividend and commission earned by it were in the pursuit of the said business. We cannot say that the relationship between the assessee and other subscribers to the chits run by it was of a non-trading character. Earnings of dividend was therefore only incidental to the business of running chits. It was not the result of persons joining together to contribute to a common fund.
Coming to the case of Soda Silicate & Chemical Works (supra), of Hon’ble Punjab & Haryana High Court, the assessee there was only a subscriber whereas in the instant case the ITA.393/Bang/2013 Page - 14 assessee is an organisor and had also participated. It is also established that the chit business was run as the main business of assessee company. A chit company has to ascertain the profit on each chit run considering all the benefit arising to it in the course of such business including dividends on own chits. In the case of Soda Silicate & Chemical Works (supra), no doubt it was held that a chit fund is a mutual society and neither the payment could be allowed as a deduction nor the receipt could be taxed. However said assessee was not running the chits, but was only a subscriber to a chit run by some other person. However in this case we are concerned with a person, who runs chits as a business. We may, in this connection, beneficially refer to the judgment of the Supreme Court in the case of CIT vs. Kumbakonam Mutual Benefit Fund Ltd (1964) 53 ITR 241 (SC). Hon’ble Apex Court has pointed out that companies limited by shares stand on a different footing.
When the chit is run as a business proposition the surplus goes to the assessee only. It does not go to the subscribers. What the subscribers get is only the discount allowed by the bidder ITA.393/Bang/2013 Page - 15 minus 5 per cent which goes to the foreman. This is the only amount available to the subscribers. The rest of it is the profit for the assessee. Participation in these profits is by the shareholders of the assessee company not the subscribers of the chits. In the facts and circumstances of the case we are therefore of the opinion that assessee being a company running chit funds as a part of its main business could not take refuge under the principles of mutuality. Thus we do not find any merit in this appeal filed by the assessee.
In the result, appeal stands dismissed.
Order pronounced in the open court on 4th day of May, 2016.