DCIT 5(2), MUMBAI vs. MALABAR HILL CLUB LTD, MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 18/07/2012 of the Ld. First Appellate Authority, Mumbai. The only ground raised by the Revenue pertains to deleting the addition of Rs.80 lakh made on account of membership fees treating the same as revenue receipt ignoring the decision from Hon'ble jurisdictional High Court.

2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order dated 26/08/2015 for ready reference and analysis:-

“Assessee company filed its return of income 28.10.2005 declaring loss at Rs.1.50 crores. The AO completed the assessment on 14.12 2007 u/s. 144 of the Act declaring the income at Rs.(-) 1.46 crores.

2. First Ground of appeal is about enhancement of income by the FAA amounting to Rs.47.22 lacs. During the course of appellate proceedings, the FAA observed that the assessee was providing services to its members, that those facilities were not available to outside members, that it was species of mutual understanding, that it was providing facilities to its members who were also entitled to participate in the surplus of funds, that it had received certain payments which were not covered by the concept of mutuality namely interest received from banks(Rs.40.46 lacs),dividend on shares (Rs.65.55 lacs) and interest on TDS refunds (Rs.6.76 lacs).He further observed that the assessee being a mutual concern was not entitled to set off its loss against income from non-mutual activities, that it was incurring losses from providing services to its members, that it was earning interest income/dividend on shares from banks and companies, that those entities were not members of the club. Accordingly, he issued a notice for enhancement of income of the assessee. He directed the assessee to explain as to why it should not be treated as mutual concern and that why its income/loss through mutual activity should not be excluded to compute its total income. In its replies, dated 11.8.2009 and 31.8.2009 ,the assessee argued that it was in business of club facility for the use of its members as well as for outsiders, that it could not be treated as mutual concern, that the Hon'ble Bombay High Court had also in the AY.s 1955-56 -1959-60 held it was engaged in the business of providing services to its members.

Challenging the proposed action of enhancement of income, the assessee argued that the FAA had no power to enhance income to consider the item of income which had not been considered by AO while framing assessment. The assessee relied upon the cases of Shapoorji Pallonji Mistry(44 ITR 891),Rai Bahadur Hardutroy Motilal Chamaria(66 ITR 443).It was contended that principles of mutuality could be applied where there is a complete identity with contributors to the common fund and the persons entitled to participate in the surplus of funds, that all the members who were contributing to the fund were not entitled to participate in the surplus, there were 13 type of members, that out of them members of only 5 categories were entitled to share the surplus in case of winding up of the company, that it could not be treated as mutual organisation on the ground non members were not entitled to use the facilities of the company, that it had not claimed the status of mutual concern.It relied upon the cases of Secunderabad Club (97 ITD 541) and Canara Bank Golden Jubilee Staff Welfare Fund (308 ITR 202).

2.1.After considering the submission of the assessee, the FAA held that he had gone through the orders of the Hon'ble Bombay High Court delivered in the case of the assessee for the AY.s 1955-56 to 1959-60, that in those years the Department had not disputed the claim of the assessee about its being a trading company, that the assessee had filed no evidence that its activities continued to be the same in the year under appeal, that it did not file evidence to prove that it was providing services to members and non-members of commercial basis, that it had not made out any case that it was still a trading concerns, that it was a members’ club providing facilities to its members only, that outsiders were no entitled to avail the facility of the assessee company without becoming a member, that it failed to prove that it was conducting a business, that it was immaterial whether a concern was trading or non trading if principle of mutuality were applicable, that there was a complete identity between contributors and participators in the fund/common fund that the activities of the assessee were covered by the concept of mutuality, that even if in the earlier years the assessee was treated as trading concern the facts of the year under consideration are to be looked in to, that if it had earned any income from mutual activities/or had suffered any loss from mutual activity such income/loss was not taxable, that while computing the taxable income for the year under appeal such income or loss was to be ignored, that he had not considered any new item of income, that the enhancement was proposed about a source that had been considered by the AO, that the enhancement was proposed on the ground that the assessee is a mutual concern and that it was covered by the concept of mutuality, that income/loss of the assessee from mutual activity was to be ignored, that even if the assessee was providing facility to outsiders income earned from them was to be taxed as per provisions of the Act, that on dissolution of the club certain members were entitled to share the surplus, that on that basis it could not be held that it was a mutual concern, that members as a class were entitled to share the surplus of funds, that the power of sharing surplus on dissolution had to be seen as a Class and not by looking whether a particular member was entitled to share the surplus or not, he referred to the case of Bankipur Club Ltd. (226 ITR 97),that no deduction/allowance which the assessee was entitled to and had not been claimed was being thrust on it, that the assessee is a mutual club and that its income/loss out of mutual activities would not form part of taxable income, that receipt accrued to the assessee under the head interest income were substantial, that the subscription received was Rs.63.87 lacs, that other income including interest income and dividend income amounted to Rs.1.29 crores, that the assessee had Fixed Deposit in bank of Rs.9.8 crores, that it had made investment not for safe deposit but for earning interest income, that the income had been earned by it from the banks who were not its members. In view of above facts, the FAA held that interest received of Rs. 47.44 lacs were not covered by principles of mutuality and was taxable in the hands of the assessee.

2.2.Before us, the Authorised Representative (AR) contended that while making the addition the FAA had used a new source of income, that the AO had not dealt with the principle of mutuality while deciding the appeal, that it had sold the depreciable asset which proved the business activities of the assessee that it he earlier years and subsequent years the AO had treated the income under the head business, that the rule of consistency was not followed without assigning any reason, that there were 13 different types of members. He referred to pages no.206, 207, 234 and 235 of the paper book. He relied upon the cases of .The Departmental Representative (DR) supported the order of the FAA.

2.3.We have heard the rival submissions and perused the material before us. We find that the AO had completed the assessment u/s.144 of the Act for the year under appeal, that he had not discussed anything about mutuality, that the FAA had held that the assessee was not carrying out business activities, that he further held that the profit earned or loss suffered by the assessee out of the mutual had to be ignored, that the interest received by the assessee was not covered by the principles of mutuality and that same was taxable. We find that the assessee had opposed the enhancement proposed by the FAA on the ground that he could not tax income from a new source of income and that rule of consistency stipulated that income for the year had to be taxed under the income business income. First we would like to discuss the principle of consistency one of the precedents followed by in judicial proceedings. Rule of consistency is not new. As early as 1956,the rule of consistency was deliberated at length by the Hon’ble Bombay High Court in the case of H.A. Shah and Co.(30ITR618)as under:

As a general rule the principle of res judicata is not applicable to decision of Income-tax Authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. A Tribunal like the Appellate Tribunal, should be extremely slow to depart from a finding given by an earlier Tribunal. …. There is also a further limitation, namely, that the effect of revising a decision in a subsequent year should not lead to injustice and the court must always be anxious to avoid injustice to the assessee. For instance, if the court is satisfied that by depriving the assessee of his rights under the later decision, in an earlier year, the assessee lost an important advantage or lost some benefit which he could have got under the Income-tax Act, then the Court may take the view that departing from the earlier decision leads to injustice or denial of justice and the Court may prevent an Income-tax Authority from doing something which would be unjust and inequitable.

In the matter of Aroni Commercials Ltd.(362 ITR403),the Hon’ble Bombay High Court has observed that though the principle of res judicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and in treatment(emphasis supplied). Similarly, in the case of Gopal Purohit(336 ITR 287)the Hon’ble Court reiterated the same principle and held that there should be uniformity in treatment and when facts and circumstances for different years were identical particularly in the case of the same assessee.(emphasis).

Hon’ble jurisdictional High Court in the case of Dhansiram Agarwalla(217ITR4)had also dealt the similar issue .In that matter the assessee, following the mercantile system of accounting, was assessed in the status of an individual for the AY.1973-74.Assessment was completed under section 143(3) of the Act,on March 31.03.1976. It was found by the AO that the assessee had deposited Rs.1,58,400 with the Bank of India, Netaji Subhash Road Branch, Calcutta, on 05.04. 1972,through the assessee's son, D, that the assessee stayed in Tinsukia, that on 04.04.1972 the assessee had no sufficient opening cash balance and had to borrow from other firms on that day and in such a circumstance D could not have reached Calcutta on the 5th before noon. Therefore, the amount of Rs. 90,000 was treated as the assessee's income from undisclosed sources. The assessee had explained that D had travelled by air but later stated that D had travelled by car and the AO did not accept this as true. On appeal, the assessee contended that the assessment proceedings had started some years after the event and he did not remember the mode of transport correctly. For the AY.1972-73,the Tribunal accepted this explanation but rejected it for the AY.1973- 74.When the matter travelled to the Hon’ble High Court it was held that the totality of the circumstances and their combined effect were to be taken into consideration while deciding the question as to whether or not a particular fact is proved. Neither the principle of res judicata nor the rule of estoppel is applicable to the assessment proceedings, yet the rule of consistency does apply to such proceedings .Finally, it was held that the Tribunal cannot take a different view in the subsequent year when in the earlier year on the same facts, it had accepted the claim made by the assessee.

In our opinion, rule of consistency requires that the view taken by the AO in the preceding years should not be disturbed, unless there is a substantial change in the factual and legal position. We have gone through the assessment orders passed by the AO for the earlier and subsequent assessment orders and have found that the activities carried out by the assessee were same and that the AO had assessed the income arising out of such activities as business income. On 05.04.2011the AO had passed a rectification order u/s154 of the Act for the AY.2003-04 and had specifically mentioned that principles of mutuality were inapplicable to the facts of the case(pg.237 of the PB).The coterminous powers of the FAA authorise him to assess the income of an assessee in a different manner as assessed by the AO. But, the right has its own limitation also. From the orders of the FAA it is not clear as to why he had disturbed the findings given by the AO in earlier years. Passage of time in itself does not alter legal position. The Hon’ble High Court had decided the issue of nature of activities carried out by the assessee in earlier years and the department had accepted the judgment. Thus,t he question about the nature of activities had attained finality. The FAA has not elaborated as to what were the new facts and circumstances as compared to the facts mentioned by the Hon’ble High Court which justified that the assessee was not carrying out business activities in the year under appeal. The AO had even in the best judgment assessment has allowed loss on sale of depreciable assets. It clearly shows that he was convinced about the nature of the activities of the assessee.

Besides, the principles of consistency what has to be seen is the decision of the FAA wherein he held that while computing the taxable income for the year under appeal income or loss arising out of mutual activities was to be ignored. As a result, the assessee was deprived of claiming carry forward of loss. The enhancement in the income of the assessee was made by him by following the principle of mutuality. As stated earlier, the AO had not discussed anything about mutuality in his order. The assessee had demonstrated that the contributor to the fund the ultimate beneficiaries of the fund were different. But, the FAA treated the members of the club as a class and ignored the basic facts that the members were of different types and every member was not entitled to the benefits in case of winding up of the company. In short, it can be safely be said that the contributors and beneficiaries were not same and that the principles of mutuality was not applicable to the facts of the case under consideration. In the case of Rai Bahadur Hardutroy Motilal Chamaria (supra),the Hon’ble Apex Court had held that FAA for enhancing the income during appellate proceedings, the FAA should not travel outside the record, i.e., the return made by the assessee or the assessment order of the AO, that the power of enhancement was restricted to the sources of income which have been the subject-matter of consideration by the AO from the point of view of taxability, that consideration did not mean incidental or collateral examination of any matter by the AO in the process of assessment, that there must be something in the assessment order to show that the AO had applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection. In the assessment order passed by the AO, there is nothing to show that he had applied his mind to the particular subject matter i.e. applicability of principle of mutuality. Therfore, the FAA was not justified in enhancing the income of the assessee by applying principles of mutuality for the year under appeal. Reversing his orders, we hold that the assessee was carrying out business activities and that the principles of mutuality are not applicable to such activities. The assessee is entitled to the carry forward/set off of losses as per the provisions of the Act.

We find that the FAA had heavily relied upon the case of Bankipur Club Ltd. (supra).In our opinion facts of Bankipur Club are not identical to the facts of case under conisideration. In that matter the FAA had not enhanced the income of the = applying the principle of mutuality. The issue before the Apex Court was as to whether the assessee-mutual club, was 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. The Hon’ble Apex court had held in that case that whether or not the persons dealing with each other, were a "mutual club" or carrying on a trading activity or an adventure in the nature of trade", was largely a question of fact. In the case before us, we have the benefit of having judgments of the Hon’ble jurisdictional High Court for two AY.s. As a result, effective ground(Grounds of appeal No.1&2)raised by the assessee is decided in its favour.”

2.2. Likewise, the Tribunal vide order dated 30/11/2015 (ITA No.292/Mum/2012) for Assessment year 2003-04, which is reproduced hereunder:-

“The revenue has filed the appeal against the order of learned Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as the “learned CIT(A)”] dated 14.10.2011 relevant to the A.Y. 2003-04. The assessee has also filed the Cross Objection. Therefore, these cases are being taken up together and are being decided jointly by passing the single order being the parties are same and matter of controversy is also the same which can be adjudicated conveniently.

(i) From Life Members received during the year Rs.3,43,15,700/- (ii) From Life Members Rs. 20,21,500/- (Transferred from advance account) Total….. Rs.3,63,37,200/- The Assessing Officer arrived at this conclusion that in view of the decision of the Hon’ble High Court, Mumbai, 80% of the life membership fees received is required to be treated as a income of the assessee.

The only dispute in appeal is what portion of the entrance fees received by the Appellant front persons at the time of admitting them as life members are taxable receipts. The issue has been settled by the Bombay High Court in its own case in assessment year1963-64 and assessment year 1964- 65 (136 ITR 569). Bombay High Court held that the entrance fee paid by the life members equivalent to the amount collected from ordinary members is a capital receipts not liable to tax and the balance amount is infact compounded payment in lieu of annual subscriptions and therefore are revenue receipts. . Thus it will be seen that Bombay High Court has not laid down any ratio for the purpose of splitting entrance fee between revenue and capital receipt. Therefore, the Assessing Officer was wrong in splitting the fee received from life members into capital and revenue receipts in 20 : 80 ratio. That part of the entrance fee collected from life members, which collected from ordinary members, is to be treated as capital receipts and over and above this amount is to be treated as compounded mille of annual subscriptions and therefore this part is a taxable receipts as held by Bombay High Court. Accordingly the Assessing Officer was not justified in making an addition of Rs.5. 76,000/- to the income of the Appellant on account of subscriptions transferred from the advance subscription account of ordinary members to the life members subscription account. This ground of the appeal of the Appellant is allowed.

5.2. I have considered the facts and the submissions made by the Authorized representative. Since the facts are same and issue is identical, I do not find any reason to deviate from the stand taken by my predecessor and accordingly hold that the addition made by the Assessing Officer is not justified. The ground of appeal is, therefore allowed.

From the above, learned CIT(A) merely followed his processed order who reliance upon the judgement of Hon’ble Bombay High Court for the A.Y.1964-65(Supra). Requirement of splitting up of the entrance fee collected from life members in the ratio 20:80 is not the ratio of the cited judgement. To that extent, the decision of the learned CIT(A) is in order. Considering the above learned DR has not brought anything on record to show how the impugned order of learned CIT(A) decided on the strength of Bombay High Court judgement is not fair. We find the order of learned CIT(A) does not call for any interference. Thus, the ground raised by the revenue is dismissed.

We find that in the aforesaid order of the Tribunal, the decision from Hon'ble Bombay High Court in the case of the assessee for Assessment years 1963-64 and 1964-65 (136 ITR 569) (Bom.) was duly considered and hold that the ration of the decision is not applicable to the facts under consideration for the year under appeal. Hon'ble Bombay High Court has not laid down any ratio for the purpose of splitting entrance fee between revenue and capital receipt. The ld. DR has not brought any contrary facts/case laws in his favour, therefore, following the aforesaid decisions of the Tribunal, we find no infirmity in the conclusion drawn by the Ld. Commissioner of Income Tax (Appeal). It is affirmed, resulting into, dismissal of appeal of the Revenue. Finally, the appeal of the Revenue is dismissed. This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 24/10/2016.