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Income Tax Appellate Tribunal, BENCH “I”,MUMBAI
Before: SHRI D.KARUNAKARA RAO & SHRI PAWAN SINGH
Assessee by : Mr. Firoz B. Andhyarujina (AR) Revenue by : Mr. T.A. Khan (DR) Date of hearing : 01.12.2016 Date of Pronouncement : 11.01.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JM: 1. This appeal by assessee filed u/s 253 of the Income-tax Act (‘Act’) is directed against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –I, Mumbai dated 15.10.2015 for Assessment Year (AY) 2011-12. Though, the assessee has raised as many as four Grounds of appeal
, however, as per our considered opinion, the sole and substantial ground of appeal is “whether the ld. CIT(A) erred in law and in fact in confirming the addition of Rs. 35,34,192/- being interest on Fixed Deposit with Banks without appreciating that on the principle of mutuality the income is exempted.”
2. Brief facts of the case are that the assessee is ‘Company’ registered u/s 25 of the Companies Act, 1956, filed its return of income for relevant AY on 29.09.2011 declaring total income at Rs. Nil. The assessment was completed u/s 143(3) of the Act on 21.03.2014. The Assessing Officer (AO) while making the assessment treated the interest income of Rs. 35,34,192/- as income of the assessee within the meaning of 2 All India Gems & Jewellery Trade Federation first proviso to section 2(15) of the Act for non-charitable purpose and has rejected the claim exempt u/s 11 of the Act. On appeal, the action of AO was upheld, thus further aggrieved by the order of AO, the assessee has filed the present appeal before us.
We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee argued that proviso attached with sub-section 15 of Section 2 is not applicable against the assessee. The activity of the assessee consisting of to promote, aid, assist and encourage advancement and furtherance of local and inland trade in Gold, Diamond, Silver, pearls, precious and semi-precious jewellery by providing all types of trading, information and knowledge. The assessee claims for following the mandate of Clause-(iii) of sub-section 5 of Section 11 of the Income-tax Act for depositing the amount of assessee in Scheduled Bank. The ld. AR of the assessee further argued that the interest income is not a taxable income under the head of “Profit and gains of business or profession”. The ld. AR of the assessee further relied upon the decision of Mumbai Tribunal in case of Bombay Presidency Golf Club vs. ITO(E) (2016) 69 taxmann.com 208. On the other hand, ld. DR for the Revenue relied upon the orders of authorities below. The ld. DR for the assessee argued that the activity of the assessee are not charitable and further the ‘Principle of Mutuality’ is not applicable in the present case.
We have considered the rival contentions of the parties and perused the record. The AO while framing the assessment observed that assessee, in its Income & Expenditure Account has shown Interest Income of Rs. 35,34,192/-. The assessee was asked to explain as to why the interest received on Fixed Deposit should not be considered as taxable income of the assessee. The assessee filed its reply vide reply dated 04.03.2014 and 05.03.2014. In reply, the assessee contended as under: “In response to your query as to why interest earned on Fixed Deposits with banks should not be treated as a taxable income on the basis of the judgment in the case of Bangalore Club vs CIT (Supreme Court), we would like to submit as under:
1. 1. The facts of the case in the judgement of Bangalore Club vs CIT (Supreme Court) are different than those of our client.
2. The concept of mutuality had been violated in the Bangalore Club case. The three pre-conditions for claiming income as exempt on the basis of mutuality principle were not fulfilled in the said case. In the case of Bangalore Club vs CIT (Supreme Court), the club had sought an exemption for the interest earned on fixed deposits kept with certain banks, which were 3 All India Gems & Jewellery Trade Federation corporate members of the assessee, on the basis of doctrine of mutuality, The funds were raised from contribution of several members including the said banks. With the funds of mutuality these banks advanced loans to their clients, i.e. third parties outside of the mutuality, thereby rupturing the 'privity of mutuality'. Secondly, the treatment of the excess funds must be in furtherance of the objects of the club. In the case is cited as these funds were taken out of mutuality when the same were placed at the disposal of third parties, not privy to the mutuality. Thirdly, the funds must be returned to the contributors as well as expended solely on the contributors. In the said case the funds do return to the club, but before that, they are expended on non-members i.e. the clients of the bank. The bank pays a lower rate to the club on its deposits and loans out the same at higher rates of interest to third parties; this snaps the link of mutuality. In the case of our client, the contributions are only received from its members and the fixed deposits have been placed with non-member banks on which interest has been earned. The Hon' Court has explained the-doctrine of mutuality in Para 7 of its order as "...... 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 surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income or taxable. " In the assessee's case the contributions received from its members were deposited with non-member banks and the interest earned has been utilized for the benefit of the members only. Therefore, the facts of the case relied on for the purpose of taxing the interest on fixed deposits is completely different than that of the assessee's case. The underlying ratio of the said judgment is not applicable in this case.”
The contention of the assessee was not accepted by AO and held that the assessee is pre-dominantly a mutual association. According to AO, the charitable object and object of mutual benefit are contrary to each other in this case. The members subscribes to the assessee for the primary purpose of mutual benefit. Thus, in a charitable institution, member subscribes for charitable object without any expectation in return to his benefit. In case of assessee, the members contributed only for the purpose of their own benefit for acquiring certain benefit. Therefore, the assessee is treated as mutual association and not as charitable institution. AO treated the interest income as “Business Income” within the meaning of first proviso to section 2(15) of the Act. The ld. CIT(A) while considering the contention of the assessee, observed that the main and predominant object of the assessee to provide benefits to its members. The assessee is predominantly is a mutual association and not charitable institution. It was further observed that registration u/s 12A would not ipso 4 All India Gems & Jewellery Trade Federation facto entitle the assessee to claim exemption u/s 11. The main grievance of the assessee is that despite following the principles of mutuality the Revenue treated the interest income earned on fixed deposit as taxable income. It is not in dispute that the assessee is registered under section 25 of Companies Act, 1956 and having registration u/s 12A of the Act. We find that the case of AO is that the assessee is not a charitable organization (Para7of AO order). Apart from invoking the proviso of section 2(15) the AO has not brought anything on record to justify his finding. Although the provision of section 12 AA are independent and the conditions to the genuineness of the object and the activities of the trust. There are many decisions of various courts that the charitable character of the organization cannot be questioned while making disallowance under section 11 for the year under consideration. So the AO needs to bring clarity in this regard. The AO should note that trust is meant for the benefits of others. The principle of maturity is always with reference to the benefits of the founder of the organization/ AOP. The AO has not brought on record as to how the funds were received, utilized and the particulars of beneficiary who were availed the benefit of such funds. All these facts and assessee for thrusting the principle of maturity. Such principles cannot be invoked, if the beneficiary of the organization is its shareholder. The relevant facts are missing forest to adjudicate the ground number two raised by assessee before us. Therefore, deem it appropriate to restore this appeal to the file of AO to examine all the facts, if the case of assessee would falls within the ambit of mutuality and pass appropriate order in accordance with law. Needless to say that the AO shall afford sufficient and reasonable opportunity to the assessee before passing the order.
In the result, appeal of the assessee is allowed for statistical purpose. Order pronounced in the open court on this 11th January, 2017. Sd/- Sd/- (D.KARUNAKARA RAO) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 11/01/2017 S.K.PS Copy of the Order forwarded to :
1. 1. The Appellant 2. The Respondent.
3. The CIT(A), Mumbai.