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
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[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
