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Wednesday, January 16, 2013

whether or not the interest earned by the assessee on the surplus funds invested in fixed deposits with the corporate member banks is exempt from levy of Income Tax, based on the doctrine of mutuality? = “… if the object of the assessee company claiming to be a "mutual concern" or "club", is to carry on a particular business and money is realised both from the members and from non- members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or Members' club" is a trade or an adventure in the nature of trade and the transactions entered into with the members or non- members alike is a trade/business/transaction and the resultant surplus is certainly profit - income liable to tax. We should also state, that "at what point, does the relationship of mutuality end and that of trading begin" is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. "Whether or not the persons dealing with each other, is a "mutual club" or carrying on a trading activity or an adventure in the nature of trade" is largely a question of fact [Wilcock's case - 9 Tax Cases 111, (132) C.A. (1925) (1) KB 30 at 44 and 45].” (Emphasis supplied) 33. In our opinion, unlike the aforesaid surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee from the afore-noted four banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club. 34. In light of the afore-going discussion, these appeals are bereft of any merit and are thus, liable to be dismissed. Accordingly, we dismiss all the appeals with costs.


                                                     REPORTABLE
|IN THE SUPREME COURT OF INDIA                                     |
|CIVIL APPELLATE JURISDICTION                                      |
|CIVIL APPEAL  NO. 124 OF 2007                                     |
|                                                                  |
|M/S. BANGALORE CLUB                |—         |APPELLANT          |
|VERSUS                                                            |
|COMMISSIONER OF INCOME TAX & ANR.  |—         |RESPONDENTS        |


                                    WITH


                        CIVIL APPEAL NO. 125 OF 2007,

                        CIVIL APPEAL NO. 272 OF 2013
              (Arising out of S.L.P.(Civil) No. 16863 of 2010),

                         CIVIL APPEAL NO.273 OF 2013
              (Arising out of S.L.P.(Civil) No. 16880 of 2010),

                         CIVIL APPEAL NO.274 OF 2013
              (Arising out of S.L.P.(Civil) No. 16881 of 2010),

                         CIVIL APPEAL NO.275 OF 2013
              (Arising out of S.L.P.(Civil) No. 16882 of 2010)

                      CIVIL APPEAL NOS.276-277 OF 2013
           (Arising out of S.L.P.(Civil) Nos. 16883-16884 of 2010)

                                     AND

                         CIVIL APPEAL NO.278 OF 2013
              (Arising out of S.L.P.(Civil) No. 16879 of 2010)








                               J U D G M E N T



D.K. JAIN, J.




1. Leave granted in Special Leave Petitions.



2. This batch of appeals arises from a common judgment and order  pronounced
   by the High Court of Karnataka, in Income Tax Appeals  No.  115  of  1999
   along with 70 of 2000, 3095 of 2005, 1547 of 2005, 1548 of 2005, 3091  of
   2005, 3089 of 2005 along with 3093 of 2005, and 3088 of 2005. Since these
   appeals entail the same issue, they are being disposed of by this  common
   judgment.



3. The facts necessary for  the  purpose  of  appreciating  the  controversy
   involved in the appeal are as follows:






      The Bangalore Club (hereinafter referred to as  the  “assessee”),  the
appellant herein, is an unincorporated Association  of  Persons,  (AOP).
In
relation to the assessment years 1989-90, 1990-91, 1993-94,  1994-95,  1995-
96,  1996-97,  1997-98,  1998-99  and  1999-2000,  the  assessee  sought  an
exemption from payment of income tax on the interest  earned  on  the  fixed
deposits kept with certain  banks,  which  were  corporate  members  of  the
assessee, on the basis of doctrine of mutuality. 
However, tax  was  paid  on
the interest earned on fixed deposits kept with non-member banks.




      The assessing officer rejected  the  assessee’s  claim,  holding  that
there was a lack of identity between the contributors and the  participators
to the fund, and hence treated the amount received  by  it  as  interest  as
taxable business income. 
On appeal by the  assessee,  the   Commissioner  of
Income Tax (Appeals)-II, Bangalore (“CIT (A)” for short) reversed  the  view
taken by the assessing officer, and held  that  the  doctrine  of  mutuality
clearly applied to the assessee’s case.
On appeal by the revenue the Income-
Tax Appellate Tribunal (for short “the Tribunal”), affirmed the  view  taken
by the CIT (A), observing thus (ITA No. 2440/Ban/1991):


        “7. In the instant case, the funds of the club  are  given  in  the
        form of deposits for earning income  from  the  corporate  members,
        namely, the banks here and, therefore, the earning of  interest  is
        clearly had risen  out  of  the  concept  of  mutuality  only.  The
        decisions relied upon by the DR have nowhere touch (sic)  upon  the
        fact  as  to  whether  it  was  with  corporate  members  or   not.
        Apparently,  they  had  dealt  with   the   situation   where   the
        transactions of interest are from persons who are not  the  members
        of the club. During the argument, the  DR  had  admitted  that  the
        assessee had shown interest from certain other banks as its  income
        which also goes to show that wherever the concept of mutuality  was
        absent, the assessee had offered the same as income.”









      On an application by the Commissioner of Income Tax,  Bangalore  under
Section 260A of the Income Tax Act, 1961 (for short  “the  Act”),  the  High
Court entertained the  appeal  and  framed  the  following  two  substantial
questions of law for its adjudication :-

        “(1) Whether, a sum of Rs. 7,87,648/- received by the  assessee  as
        interest from fixed deposit made by the assessee in four banks  who
        are members in  the  assessee  club  amounted  to  its  income  and
        constituted a revenue receipt as per the provision  of  Income  Tax
        Act.




        (2) Whether, the principle of mutuality can be made  applicable  to
        the fund deposited in the  four  banks  who  are  also  members  of
        assessee club, especially when the fund is raised from contribution
        of several members  including  the  four  banks  and  the  interest
        derived from it is utilized by  several  members  of  the  assessee
        club?”



Answering both the questions in favour of the revenue, the High Court held
:-



        “12. On the facts of this case  and  in  the  light  of  the  legal
        principles it is clear to us that what has been done by the club is
        nothing but what could have been done by a customer of a Bank     .
        The principle of ‘no man can trade with himself’ is  not  available
        in respect of a nationalised bank holding a fixed deposit on behalf
        of its customer.  The  relationship  is  one  of  a  banker  and  a
        customer.”



Consequently, the High Court reversed  the  decision  of  the  Tribunal  and
restored the order of the assessing  officer.  Hence,  this  appeal  by  the
assessee.




4. Thus, the  short  question  for  determination  is
whether  or  not  the
   interest earned by the assessee on the surplus funds  invested  in  fixed
   deposits with the corporate member banks is exempt from  levy  of  Income
   Tax, based on the doctrine of mutuality?



5. Mr. Joseph Vellapally, learned senior counsel appearing for the  assessee
   strenuously urged that the assessee meets all the requirements,  as  laid
   down in  The English & Scottish Joint Co-operative Wholesale Society Ltd.
   Vs. The Commissioner of Agricultural Income Tax, Assam[1], as affirmed by
   this Court in Chelmsford Club Vs. Commissioner of  Income  Tax,  Delhi[2]
   in order to  fall  within  the  ambit  of  the  principle  of  mutuality.
   According to the learned counsel, there is a  complete  identity  between
   the contributors to the fund and the assessee  and the  recipients   from
   the funds, in as much as the interest earned by  the  assessee  from  the
   surplus fund invested in fixed deposits  with  member  banks  are  always
   available and are used for the benefit of members alike. It was  asserted
   that there is no commercial  motive  involved  in  the  dealings  of  the
   assessee with its members, including the banks  concerned.  It  was  also
   argued that the interest earned on such deposits with  the  member  banks
   was always available for use and benefit of the members of the  assessee,
   in as much as the said interest merged with the common fund of the club.



6. Mr. A.S. Chandhiok, learned Additional Solicitor  General  of  India,  on
   the  other  hand,  contended   that   the   fundamental   principle   for
   applicability of the doctrine of mutuality is a complete identity between
   the contributors and the participators, which is missing  in  this  case.
   It was submitted that in the present case, the surplus funds in the hands
   of the assessee were placed at the disposal of the corporate members viz.
   the banks, with the sole motive to earn interest,  which  brings  in  the
   commerciality element and thus, the interest so earned  by  the  assessee
   has to be treated as a revenue receipt, exigible to tax. It  was  pleaded
   that transaction between the assessee and the member banks concerned  was
   in the nature of parking of funds by the assessee with a corporate member
   and was nothing but what could have been done by a customer of a bank and
   therefore, the principle that “no man could trade with  himself”  is  not
   applicable.



7. Before we evaluate the rival stands, it would be necessary to  appreciate
   the general understanding of doctrine of mutuality. The principle relates
   to the notion that a person cannot make a profit from himself. An  amount
   received from oneself is not regarded as  income  and  is  therefore  not
   subject to tax; only the income which  comes  within  the  definition  of
   Section 2(24) of  the  Act  is  subject  to  tax  (income  from  business
   involving the doctrine of mutuality is denied exemption only  in  special
   cases covered under clause (vii) of Section  2  (24)  of  the  Act).  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 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  nor  taxable.  Over  time,  groups  which  have  been
   considered to have mutual income have included corporate  bodies,  clubs,
   friendly societies, credit  unions,  automobile  associations,  insurance
   companies  and  finance  organizations.  Mutuality  is  not  a  form   of
   organization, even if the participants  are  often  called  members.  Any
   organization can have mutual  activities.  A  common  feature  of  mutual
   organizations in general and of licensed clubs  in  particular,  is  that
   participants usually do not have property rights to their  share  in  the
   common fund, nor can they sell their share. And when  they  cease  to  be
   members, they  lose  their  right  to  participate  without  receiving  a
   financial benefit from the  surrender  of  their  membership.  A  further
   feature of licensed clubs is that there are  both  membership  fees  and,
   where prices charged for club  services  are  greater  than  their  cost,
   additional contributions. It is these kinds of prices  and/or  additional
   contributions which constitute mutual income.



8. The doctrine of mutuality finds its origin in  common  law.  One  of  the
   earliest modern judicial statements of the mutuality principle is by Lord
   Watson in the House of Lords, in 1889, in Styles (Surveyor of Taxes)  Vs.
   New York Life Insurance Co.[3] (hereinafter referred to  as  the  “Styles
   case”). The appellant in that  case  was  an  incorporated  company.  The
   company issued life policies of two kinds, namely, participating and non-
   participating. The members of the  mutual  life  insurance  company  were
   confined to the holders of the participating policies, and each year, the
   surplus of receipts over expenses and estimated liabilities  was  divided
   among them, either in the form of a reduction of future premiums or of  a
   reversionary  addition  to  the  policies.  There  were  no   shares   or
   shareholders in the ordinary sense of the term but each and every  holder
   of a participating policy became ipso facto a member of the  company  and
   as such became entitled to a share in the assets and liable for  a  share
   in the losses. The company conducted a calculation of the probable  death
   rate amongst the members and the probable expenses and liabilities; calls
   in the shape of premiums were made on the members accordingly. An account
   used to be taken annually and the greater part of  the  surplus  of  such
   premiums, over the expenditure referable to such policies,  was  returned
   to the members i.e. (holders of participating policies) and  the  balance
   was carried forward as a fund in hand to the credit of the  general  body
   of members. The question was whether the surplus returned to the  members
   was liable to be assessed to income tax as profits or gains. The majority
   of the Law Lords answered the question in the negative. It may be noticed
   that in that case the members had associated themselves together for  the
   purpose of  insuring  each  other’s  life  on  the  principle  of  mutual
   assurance, that is to say, they contributed annually to a common fund out
   of which payments were to  be  made,  in  the  event  of  death,  to  the
   representatives of the deceased members. Those  persons  were  alone  the
   owners of the common fund and they alone were entitled to participate  in
   the surplus. This surplus was obtained partly from  the  profits  arising
   from non-participating policies and other business. It was held that that
   portion of the surplus which arose from the excess contributions  of  the
   holders of participating policies was not an assessable  profit.  It  was
   therefore, held to be a case of mutual assurance. The individuals insured
   and those associated for the purpose of  receiving  their  dividends  and
   meeting other stipulated requisites under the policies were identical. It
   was held that that identity was not destroyed by the incorporation of the
   company. Lord Watson even went to the extent of saying that  the  company
   in that case did not carry on any business  at  all,  which  perhaps  was
   stating the position a little too widely as pointed out by Viscount  Cave
   in a later case; but, be that as it may, all the Noble Lords, who  formed
   the majority, were of the view that what the members  received  were  not
   profits but their respective shares of the excess amount  contributed  by
   themselves. They held thus:

        “... when a 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
        contributions returned to them should be regarded as profits.”





9. Lord Watson’s statement was explained  by  the  House  of  Lords  in  The
   Commissioners Of  Inland Revenue Vs. The  Cornish  Mutual  Assurance  Co.
   Ltd.[4] wherein it was held that a mutual concern may be held to carry on
   a business or trade with its members, though  the  surplus  arising  from
   such trade is not taxable income or profit.



10.  The High Court of Australia first considered  the  mutuality  principle
   in The Bohemians Club Vs. The Acting Federal Commissioner of  Taxation[5]
   in 1918:

        “A man is not the source of his  own  income  ...  A  man’s  income
        consists  of  moneys  derived  from  sources  outside  of  himself.
        Contributions made by a person for expenditure in his  business  or
        otherwise for his own benefit cannot be regarded as his income  ...
        The contributions are, in substance,  advances  of  capital  for  a
        common purpose, which are expected to be exhausted during the  year
        for which they are paid. They are not income of the collective body
        of members any more than the calls paid by  members  of  a  company
        upon their shares are income of the company. If  anything  is  left
        unexpended it is not income or  profits,  but  savings,  which  the
        members may claim to have returned to them.”

                                                            (Emphasis added)



11. One of the  first  Indian  cases  that  dealt  with  the  principle  was
   Commissioner of Income-Tax, Bombay City Vs. Royal Western India Turf Club
   Ltd.[6].  It quoted with approval  three  conditions  stipulated  in  The
   English & Scottish Joint Co-operative  Wholesale  Society  Ltd.  (supra),
   which were propounded  after  referring  to  various  passages  from  the
   speeches of the different Law Lords in Styles case (supra). Lord Normand,
   who delivered the judgment of the Board summarized  the  grounds  of  the
   decision in Styles case (supra) as follows:

        “From these quotations it appears that the exemption was  based  on
        (1) the identity of the contributors to the fund and the recipients
        from  the  fund;  (2)  the  treatment  of   the   company,   though
        incorporated, as a mere entity for the convenience of  the  members
        and policy holders, in other words, as an  instrument  obedient  to
        their mandate; and (3) the impossibility that  contributors  should
        derive profits from contributions made  by  themselves  to  a  fund
        which could only be expended or returned to themselves.”





12. We will consider each of these conditions in  detail  before  proceeding
   to the facts of the case. The first condition requires that there must be
   a complete identity between the contributors and participators. This  was
   first laid down by Lord Macmillan in Municipal Mutual Insurance Ltd.  Vs.
   Hills[7] wherein he observed:


        “The cardinal requirement is  that  all  the  contributors  to  the
        common fund must be entitled to participate in the surplus and that
        all the participators in the surplus must be  contributors  to  the
        common fund; in  other  words,  there  must  be  complete  identity
        between the contributors and the participators.”




13. On this aspect of the doctrine,  especially  with  regard  to  the  non-
   members, Halsbury’s Laws of England, 4th Edition, Reissue, Vol. 23, paras
   161 and 162 (pp. 130 and 132) states:

        “Where the trade or activity is mutual, the fact that,  as  regards
        certain activities, certain members only of  the  association  take
        advantage of the facilities which it offers  does  not  affect  the
        mutuality of the enterprise.

       *                          *                                  *
        Members' clubs are an example of a mutual undertaking;  but,  where
        a club extends  facilities  to  non-members,  to  that  extent  the
        element of mutuality is wanting....”



14. Simon’s Taxes, Vol. B, 3rd Edn., paras B1.218 and B1. 222 (pp.  159  and
   167) formulate the law on the point, thus:

        “..it is settled law that if the persons carrying on a trade  do so
        in such a way that they and the customers are the same persons,  no
        profits or gains are yielded by the  trade  for  tax  purposes  and
        therefore no assessment in respect of the trade can  be  made.  Any
        surplus resulting from this form of  trading  represents  only  the
        extent to which the contributions of the participators have  proved
        to be in excess of requirements. Such  a  surplus  is  regarded  as
        their own  money  and  returnable  to  them.  In  order  that  this
        exempting element of mutuality should exist it  is  essential  that
        the profits should be capable of coming back at some  time  and  in
        some form to the persons  to  whom  the  goods  were  sold  or  the
        services rendered....
                       *           *                         *
        It has been held that a company conducting a members'  (and  not  a
        proprietary) club, the members of the company and of the club being
        identical, was not carrying on a trade or business  or  undertaking
        of a similar character  for  purposes  of  the  former  corporation
        profits tax.
                       *           *                         *
        A members' club is  assessable,  however,  in  respect  of  profits
        derived from affording its  facilities  to  non-members.  Thus,  in
        Carlisle and Silloth Golf Club v. Smith, (1913) 3 K.B. 75, where  a
        members' golf club admitted non-members to play on payment of green
        fees it was held that it was carrying on a business which could  be
        isolated and defined, and the profit of  which  was  assessable  to
        income tax. But there is no liability in respect  of  profits  made
        from members who avail themselves of the  facilities  provided  for
        members.”
                                                                  (Emphasis
        supplied)



15. In short, there has to be a  complete  identity  between  the  class  of
   participators and class of contributors; the particular label or form  by
   which the mutual association is known  is  of  no  consequence.  Kanga  &
   Palkhivala explain this concept in “The Law and Practice of  Income  Tax”
   (8th Edn. Vol. I, 1990) at p. 113 as follows:

        “...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  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  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....”

        (Emphasis supplied)




16. British Tax Encyclopedia (I), 1962 Edn. (edited  by  G.S.A.  Wheatcroft)
   at pp. 1201, dealing with “mutual trading operations”, the law is  stated
   as under:

        “For  this  doctrine  to  apply  it  is  essential  that  all   the
        contributors to the common fund are entitled to participate in  the
        surplus  and  that  all  the  participators  in  the  surplus   are
        contributors, so  that   there   is   complete   identity   between
        contributors and participators. This means identity as a class,  so
        that at any given moment of time the persons who  are  contributing
        are identical with the persons entitled to participate; it does not
        matter that the class may be diminished by persons going out of the
        scheme or increased by others coming in....”

                                                                   (Emphasis
                                                                   supplied)






17. In Jones Vs. South-West Lancashire  Coal  Owners’  Association  Ltd.[8],
   Viscount Cave LC held that “sooner or later, in  meal  or  in  malt,  the
   whole of the associations” receipts must go back to the policy holders as
   a class, though not precisely in  the  proportions  in  which  they  have
   contributed to them and the association does not in any true  sense  make
   any profit out of their contributions.



18. Therefore, in the case of Royal Western India Turf  Club  Ltd.  (supra),
   since the club realized money from both members and non- members, in lieu
   of the same services rendered in the course of  the  same  business,  the
   exemption of mutuality could not be granted. This Court held thus:

        “As already stated, in the instant case there is no mutual  dealing
        between the members inter se and no putting up of a common fund for
        discharging the common obligations to each other undertaken by  the
        contributors for their mutual benefit. On  the  contrary,  we  have
        here an incorporated company authorised to  carry  on  an  ordinary
        business of a race course company and that of licensed  victuallers
        and refreshment purveyors and in fact carrying on such a  business.
        There is no dispute that the dealings  of  the  company  with  non-
        members take place in the ordinary course of  business  carried  on
        with  a  view  to  earning  profits  as  in  any  other  commercial
        concern.”

                                                                   (Emphasis
                                                                   supplied)



19. The second feature demands that the actions  of  the  participators  and
   contributors must be in furtherance of the mandate of the association. In
   the case of a club, it would be necessary to show that steps are taken in
   furtherance of activities that benefit the club, and in turn its members.
   Therefore, in Chelmsford  Club  (supra),  since  the  appellant  provided
   recreational facilities exclusively to its members and  their  guests  on
   “no-profit-no-loss” basis and  surplus,  if  any,  was  used  solely  for
   maintenance and development of the club, the Court allowed the  exception
   of mutuality.



20.  The mandate of the club is a question of fact  and  can  be  determined
   from the memorandum or articles  of  association,  rules  of  membership,
   rules of  the  organization,  etc.  However,  the  mandate  must  not  be
   construed myopically. While in  some  situations,  the  benefits  may  be
   evident directly in the short-run, in others, they may be accruable to an
   organization indirectly, in the long-run. Space must  be  made  for  both
   such forms of interactions between  the  organization  and  its  members.
   Therefore, as  Finlay  J.  observed  in  National  Association  of  Local
   Government Officers Vs. Watkins[9], where member of a club orders  dinner
   and consumes it, there is no sale to him. At the same time, as in case of
   Commissioner of Income Tax, Bihar Vs. Bankipur  Club  Ltd.[10],  where  a
   club makes ‘surplus receipts’ from the subscriptions and charges for  the
   various conveniences paid by members, even  though  there  is  no  direct
   benefit of the receipts  to  the  customers,  the  fact  that  they  will
   eventually be used in furtherance of the services of  the  club  must  be
   considered as a furtherance of the mandate of the club.



21.  Thirdly, there must be no scope of  profiteering  by  the  contributors
   from a fund made by them which could only  be  expended  or  returned  to
   themselves.  The locus classicus pronouncement comes  from  Rowlatt,  J’s
   observations in Thomas Vs. Richard Evans & Co.  Ltd.[11]  wherein,  while
   interpreting Styles case (supra), he held that if profits are distributed
   to shareholders as  shareholders,  the  principle  of  mutuality  is  not
   satisfied. He observed thus:

        "But a company can make a profit out of its members  as  customers,
        although its range of customers is limited to its shareholders.  If
        a railway company makes a profit by carrying its  shareholders,  or
        if a trading company, by trading with the shareholders - even if it
        limited to trading with them - makes a profit, that profit  belongs
        to the shareholders, in  a  sense,  but  it  belongs  to  them  qua
        shareholders. It does not  come  back  to  them  as  purchasers  or
        customers. It comes  back  to  them  as  shareholders,  upon  their
        shares. Where all that a company does is to collect  money  from  a
        certain number of people - it does  not  matter  whether  they  are
        called members of the company, or participating  policy  holders  -
        and apply  it  for  the  benefit  of  those  same  people,  not  as
        shareholders in the company, but as the people who  subscribed  it,
        then, as I understand the New York case, there is no profit. If the
        people were to do the thing  for  themselves,  there  would  be  no
        profit, and the fact that they incorporate a legal entity to do  it
        for them makes no difference, there is still no profit. This is not
        because the entity of the company  is  to  be  disregarded,  it  is
        because there is no profit, the money being simply  collected  from
        those people and handed back to  them,  not  in  the  character  of
        shareholders, but in the character of those who have paid it. That,
        as I understand it, is the effect of the decision in the  New  York
        case."


        (Emphasis supplied)







22. In Commissioner of Income Tax,  Madras  Vs.  Kumbakonam  Mutual  Benefit
   Fund Ltd.[12], this Court differentiated the facts of the case before  it
   from those of Styles case (supra) and denied the exemption  of  mutuality
   because of the taint of commerciality. It was observed thus:

        “It seems to us that it is  difficult  to  hold  that  Style's case
        applies to the facts of the case. A  shareholder  in  the  assessee
        company  is  entitled  to  participate  in  the   profits   without
        contributing to the funds of the company by  taking  loans.  He  is
        entitled to receive his dividend as long as he holds  a  share.  He
        has not to fulfil any other condition. His position is  in  no  way
        different from a shareholder  in  a  banking  company,  limited  by
        shares. Indeed, the position of the assessee is no  different  from
        an ordinary bank  except  that  it  lends  money  to  and  receives
        deposits from its shareholders. This does not by  itself  make  its
        income any the less income from business within S. 10 of the Indian
        Income Tax Act.”



23. However, at what point mutuality ends  and  commerciality  begins  is  a
   difficult question of fact.  It  is  best  summarized  in  Bankipur  Club
   (supra) wherein this Court echoed the following views:

        “…if the object of the assessee company claiming to  be  a  "mutual
        concern" or "club", is to carry on a particular business and  money
        is realised both from the members and  from  non-members,  for  the
        same consideration by giving the same or similar facilities to  all
        alike in respect of the one and the same business carried on by it,
        the dealings as a whole disclose the same profit earning motive and
        are alike tainted with commerciality. In other words, the  activity
        carried on by the assessee in such cases, claiming to be a  "mutual
        concern" or “members' club" is a  trade  or  an  adventure  in  the
        nature of trade and the transactions entered into with the  members
        or  non-members  alike  is  a  trade/business/transaction  and  the
        resultant surplus is certainly profit - income liable  to  tax.  We
        should also state, that "at what point, does  the  relationship  of
        mutuality end and that of trading begin" is a difficult  and  vexed
        question. A host of factors may have to be considered to arrive  at
        a conclusion. "Whether or not the persons dealing with each  other,
        is a  ‘mutual club’  or  carrying  on  a  trading  activity  or  an
        adventure in the nature of trade", is largely a  question  of  fact
        [Wilcock's case - 9 Tax Cases  111,  (p.132);  C.A. (1925)  (1)  KB
        30 at p. 44 and 45].”





24. In Royal Western India Turf Club Ltd. (supra), this Court  made  similar
   observations, holding that it is not always the case that a legal  entity
   cannot make profits out of its members. It held as follows :




             “14…The principle that no one can make a profit out of  himself
             is true enough but  may  in  its  application  easily  lead  to
             confusion. There is nothing ‘per se’ to prevent a company  from
             making a profit out of its own members. Thus a railway  company
             which earns profits by carrying  passengers  may  also  make  a
             profit by carrying its shareholders or a  trading  company  may
             make a profit out of its trading with its members  besides  the
             profit it makes from the general public which deals with it but
             that profit belongs to the members as shareholders and does not
             come back to them as persons who had contributed them.

                 Where a company collects money from its members and applies
             it for their benefit not as shareholders but as persons who put
             up the fund the company makes no profit. In  such  cases  where
             there is identity in the character of those who contribute  and
             of  those  who  participate  in  the  surplus,  the   fact   of
             incorporation may be immaterial and  the  incorporated  company
             may well be regarded as a mere instrument, a  convenient  agent
             for carrying out what the members might more laboriously do for
             themselves. But it cannot  be  said  that  incorporation  which
             brings into being a legal entity separate from its  constituent
             members is to be disregarded always and that the  legal  entity
             can never make a profit out of its own members…”

                                                                   (Emphasis
                                                                   supplied)



25. This brings us to the facts of  the  present  case.  As  aforesaid,  the
   assessee is an AOP. The concerned banks are all corporate members of  the
   club. The interest earned from fixed deposits kept with non- member banks
   was offered for taxation and  the tax due was  paid.  Therefore,  we  are
   required to examine the case of the assessee, in relation to the interest
   earned on fixed deposits with the member banks, on the touchstone of  the
   three cumulative conditions, enumerated above.



26.  Firstly,  the  arrangement  lacks  a  complete  identity  between   the
   contributors and participators. Till the stage of generation  of  surplus
   funds, the setup resembled that of a mutuality; the flow of money, to and
   fro, was maintained within the closed circuit formed by the banks and the
   club, and to that extent, nobody who was not  privy  to  this  mutuality,
   benefited from the arrangement. However, as  soon  as  these  funds  were
   placed in fixed deposits with banks, the closed flow of funds between the
   banks  and  the  club  suffered  from  deflections  due  to  exposure  to
   commercial  banking  operations.  During  the  course  of  their  banking
   business, the member banks used such deposits to advance loans  to  their
   clients. Hence, in the present case, with the  funds  of  the  mutuality,
   member banks engaged in commercial operations with third parties  outside
   of the mutuality, rupturing the ‘privity of mutuality’, and consequently,
   violating  the  one  to  one  identity  between  the   contributors   and
   participators as mandated by the  first  condition.  Thus,  in  the  case
   before us the first condition for a claim of mutuality is not satisfied.



27. As aforesaid, the second condition demands that to  claim  an  exemption
   from tax on the principle of mutuality, treatment  of  the  excess  funds
   must be in furtherance of the object of the club, which is not  the  case
   here. In the instant case, the  surplus  funds  were  not  used  for  any
   specific service, infrastructure, maintenance or  for  any  other  direct
   benefit for the member of the club.  These were taken  out  of  mutuality
   when the member banks placed the same at the disposal of  third  parties,
   thus, initiating an independent contract between the bank and the clients
   of the bank, a third party, not privy to  the  mutuality.  This  contract
   lacked the degree of proximity between the club and its member, which may
   in a distant and indirect way benefit the club, nonetheless, it cannot be
   categorized as an activity of the club in pursuit of its  objectives.  It
   needs little emphasis that the second condition postulates a direct  step
   with direct benefits to the functioning of the  club.  For  the  sake  of
   argument, one may draw remote connections with the most brazen commercial
   activities to a club’s functioning. However, such is not  the  design  of
   the second condition. Therefore, it stands violated.



28.  The facts at hand also fail to  satisfy  the  third  condition  of  the
   mutuality principle  i.e.  the  impossibility  that  contributors  should
   derive profits from contributions made by  themselves  to  a  fund  which
   could only be expended or returned to themselves. This principle requires
   that the funds must be returned to the contributors as well  as  expended
   solely on the contributors. True, that in the present case, the funds  do
   return to the club.  However, before that,  they  are  expended  on  non-
   members i.e. the clients of the bank. Banks generate revenue by paying  a
   lower rate of interest to club-assessee, that makes deposits  with  them,
   and then loan out the deposited amounts at a higher rate of  interest  to
   third parties. This loaning  out  of  funds  of  the  club  by  banks  to
   outsiders for commercial reasons, in  our  opinion,  snaps  the  link  of
   mutuality and thus, breaches the third condition.



29.  There is nothing on record which shows that  the  banks  made  separate
   and special provisions for the funds that came from  the  club,  or  that
   they did not loan them out. Therefore, clearly, the club did not give, or
   get, the treatment a club gets from its members; the interaction  between
   them clearly reflected one between a bank and its client.  This  directly
   contravenes the third condition as elucidated in  Styles  and  Kumbakonam
   Mutual Benefit Fund Ltd. cases (supra).   Rowlatt  J.,  in  our  opinion,
   correctly points out that if profits are distributed to  shareholders  as
   shareholders, the principle of mutuality is not satisfied. In Thomas  Vs.
   Richard Evans & Co. (supra), at pp. 822-823, he observed thus :

           "But a  company  can  make  a  profit  out  of  its  members  as
           customers, although its range of customers  is  limited  to  its
           shareholders. If a railway company makes a  profit  by  carrying
           its shareholders, or if a trading company, by trading  with  the
           shareholders - even if it limited to trading with them - makes a
           profit, that profit belongs to the shareholders, in a sense, but
           it belongs to them qua shareholders. It does not  come  back  to
           them as purchasers or  customers.  It  comes  back  to  them  as
           shareholders, upon their shares. Where all that a  company  does
           is to collect money from a certain number of people  -  it  does
           not matter whether they are called members of  the  company,  or
           participating policy holders - and apply it for the  benefit  of
           those same people, not as shareholders in the  company,  but  as
           the people who subscribed it, then, as I understand the New York
           case, there is no profit. If the people were to do the thing for
           themselves, there would be no profit, and  the  fact  that  they
           incorporate  a  legal  entity  to  do  it  for  them  makes   no
           difference, there is still no profit. This is  not  because  the
           entity of the company is to be disregarded, it is because  there
           is no profit, the money being simply collected from those people
           and handed back to them, not in the character  of  shareholders,
           but in the character of those who  have  paid  it.  That,  as  I
           understand it, is the effect of the decision  in  the  New  York
           case."
                                                         (Emphasis supplied)



In the present case, the interest accrues on the surplus  deposited  by  the
club like in the case of any other deposit made by an  account  holder  with
the bank.

30. An almost similar issue arose in Kumbakonam  Mutual  Benefit  Fund  Ltd.
   case (supra).  The facts in that case were  that  the  assessee,  namely,
   Kumbakonam Mutual Benefit Fund  Ltd., was an incorporated company limited
   by  shares.  Since  1938,  the  nominal  capital  of  the  assessee   was
   Rs.33,00,000/- divided into shares of      Rs.1/-  each.  It  carried  on
   banking business restricted to its shareholders, i.e.,  the  shareholders
   were entitled to participate in its various recurring deposit schemes  or
   obtain loans on security.  Recurring deposits were obtained from  members
   for fixed amounts to be contributed monthly by them for a fixed number of
   months as stipulated at the end of which a fixed amount was  returned  to
   them according to published tables. The amount so returned,  covered  the
   compound interest of the period. These recurring deposits constituted the
   main source of funds of the assessee for advancing loans. Such loans were
   restricted only  to  members  who  had,  however,  to  offer  substantial
   security therefor, by way of either the paid up value of their  recurring
   deposits, if any, or immovable properties within a  particular  district.
   Out of  the  interest  realised  by  the  assessee  on  the  loans  which
   constituted its main income, interest on the recurring deposits aforesaid
   was paid as also all the other outgoings and expenses of  management  and
   the balance amount was divided among the members pro  rata  according  to
   their share-holdings  after  making  provision  for  reserves,  etc.,  as
   required by the Memorandum or Articles aforesaid. It  was  not  necessary
   for the shareholders, who were entitled to participate in the profits  to
   either take loans or make recurring deposits.




31. On these facts, as already noted, the Court  distinguished  Styles  case
   (supra) and opined that the position of the  assessee  was  no  different
   from an ordinary bank except that it lent  money  and  received  deposits
   from its shareholders.  This did not by itself make its income  any  less
   income from business.  In our opinion, the ratio of the said decision  is
   on all fours to the facts at hand.  The interest earned by  the  assessee
   even from the member banks on the surplus funds deposited with  them  had
   the taint of commerciality, fatal to the principle of mutuality.




32. We may add that
the assessee is already  availing  the  benefit  of  the
doctrine of mutuality in  respect  of  the  surplus  amount  received  as contributions or price for some of the facilities availed by its members,before it is deposited with the bank.

This surplus amount was not treated
as income; since it was the residue of the collections left  behind  with the club. 
A façade of  a  club  cannot  be  constructed  over  commercial
   transactions to avoid liability to tax.
Such setups cannot  be  permitted to claim double benefit of mutuality. 
We feel that the present case is  a
   clear instance of what this Court had cautioned against in Bankipur  Club
   (supra), when it said:











           “… if the object of  the  assessee  company  claiming  to  be  a
           "mutual concern" or "club", is to carry on a particular business
           and money is realised  both  from  the  members  and  from  non-
           members, for the  same  consideration  by  giving  the  same  or
           similar facilities to all alike in respect of the  one  and  the
           same business carried on by it, the dealings as a whole disclose
           the same profit  earning  motive  and  are  alike  tainted  with
           commerciality. In other words, the activity carried  on  by  the
           assessee in such cases, claiming to be  a  "mutual  concern"  or
           Members' club" is a trade or an adventure in the nature of trade
           and the transactions entered  into  with  the  members  or  non-
           members alike is a trade/business/transaction and the  resultant
           surplus is certainly profit - income liable to  tax.  We  should
           also state, that  "at  what  point,  does  the  relationship  of
           mutuality end and that of trading  begin"  is  a  difficult  and
           vexed question. A host of factors may have to be  considered  to
           arrive at a conclusion. "Whether or not the persons dealing with
           each other, is a "mutual club" or carrying on a trading activity
           or an adventure in the nature of trade" is largely a question of
           fact [Wilcock's case - 9 Tax Cases 111, (132) C.A. (1925) (1) KB
           30 at                44                and                 45].”



           (Emphasis supplied)




33. In our opinion, 
unlike the aforesaid surplus  amount  itself,  which  is
   exempt from tax under the doctrine of mutuality, 
the amount  of  interest
   earned by the assessee from the afore-noted  four  banks  will  not  fall
   within the ambit of  the  mutuality  principle  and  will  therefore,  be
   exigible to Income-Tax in the hands of the assessee-club.



34.  In light of the afore-going discussion, these  appeals  are  bereft  of
   any merit and are thus, liable to be dismissed. Accordingly,  we  dismiss
   all the appeals with costs.



|                      |                                         |
|                      |……..………………………………….                       |
|                      |        (D.K. JAIN, J.)                  |
|                      |                                         |
|                      |                                         |
|                      |……..………………………………….                       |
|                      |        (JAGDISH SINGH KHEHAR, J.)       |
|                      |                                         |
|NEW DELHI,            |                                         |
|JANUARY  14, 2013.    |                                         |


RS

-----------------------
[1]    AIR 1948 PC 142 (E)
[2]    (2000) 3 SCC 214
[3]    [1889] 2 TC 460

[4]    [1926] 12 T.C. 841 (H.L.)
[5]    (1918) 24 CLR 334
[6]    AIR 1954 SC 85
[7]    (1932) 16 TC 430, 448 (HL); CIT v. Firozepur Ice Manufacturers’
Association 84 ITR 607

[8]   1927 AC 827

[9]    (1934) 18 TC 499; 503, 506
[10]   (1997) 5 SCC 394
[11]   (1927) 11 TC 790
[12]   AIR 1965 SC 96



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