CIT v. Secunderabad Club Picket & Anr.

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The Tax Publishers2012 TaxPub(DT) 0675 (AP-HC) : (2012) 340 ITR 0121 : (2012) 254 CTR 0163 : (2012) 075 DTR 0206 INCOME TAX ACT, 1961 --Income --Applicability of principle of mutuality Assessee-club not offered higher interest rate by member banks/corporate concerns--The respondent-Secunderabad Club 'the assessee' was a social and recreational club. It is not registered either as an association or a society. It is a mutual association, statedly, not a profit making concern. All their activities are allegedly not tainted with commerciality or business modalities. The assessee receives monthly subscriptions, admission/ entrance fee and payments made by its members for use of club facilities. During the assessment year 1996-97, the assessee earned interest on the fixed deposits kept by it with A Bank, L Finance Ltd., I Agro-tech Ltd., V Industries Ltd., N Finance Ltd. and Credit Corporation Ltd. In their return for 1996-97, the assessee sought exemption of the interest received from tax citing the principle of mutuality. The banks/financial institutions, with whom the fixed deposits were made, are corporate members of the club. The return for the year 1996-97, admitting Rs. 1,22,700, was accepted under section 143(1). However, the AO issued notice under section 148 on the ground that the exemption claimed with regard to the interest on fixed deposits from banks/companies is not a valid claim. During the enquiry, the assessee furnished information. They stated that the assessee started admitting corporate bodies/banks as members about twenty years ago, the members of all categories are governed by the rules/bye-laws of the club, the entrance fee payable by corporate members is Rs. 3.5 lakhs for the first two nominees, and Rs. 1 lakh for each subsequent nominee, who are whole-time directors or senior executives, resident in Hyderabad. There could be up to five nominees if the paid-up capital of the corporate member is Rs. 5 crores, and up to ten nominees if the paid-up capital exceeds Rs. 5 crores. Any company incorporated under the Companies Act or a statute of the State or Central Government or International Renowned Association including a co-operative society having its office or place of business in Hyderabad and Secunderabad and its suburbs is eligible for membership as a corporate member. The club also benefits by the accrual of additional income by way of entrance fee; and nominees of the corporate members of the club enjoy the same facilities and privileges as other members. There were as many as 31 corporate members but the assessee deposited their funds with the above named six banks/financial institutions. The contention was that the interest earned by the assessee from these corporate members is interest earned from its members and, consequently, the principle of mutuality applies. The AO came to the conclusion that the assessee did not deposit the amounts with the banks treating them as corporate members; and the banks had not accepted the deposits from the assessee in their capacity as a member of the club. They accepted the deposits from the assessee as any other depositor and paid the same rate of interest as is payable to general public and, therefore, corporate membership in the club had no nexus whatever with their capacity of accepting deposits from the assessee. Accordingly, the AO added interest on deposits and assessed them to tax. The Appellate CIT relied on the decision of the Tribunal dated 5-3-2002, for the assessment years 1990-91 and 1991-92 and held that the principle of mutuality cannot be applied to the interest income derived from investments. The Tribunal, Hyderabad Bench, reversed the orders of the CIT. *Held :* There is no dispute that the assessee Club has parked its funds with financial institutions who are in the business of accepting deposits and lending money. The surplus was also deposited in nationalised banks who carry on banking business as described in section 6 of the Banking Regulation Act, 1949. Money was also deposited with financial institutions who had necessary permissions to accept deposits. When a person deposits money in a bank, the relationship is that of a creditor and a debtor, and they would be bound by the contract that regulates the deposit and payment of interest thereon. When the club deposits its funds with a bank, the latter does not treat the club any differently from its other depositors, nor is any higher rate of interest offered. The principle of mutuality ends the moment the club deposits the amount with the sole aim of earning interest on the deposits. If the club, being a party to such a banking business, earns interest, the principle of mutuality ends. The social relationship and social activities of the club have nothing to do with its deposits with corporate members. Therefore, it is difficult to accept the assessee's contention that interest income is non-taxable. It is not possible to accept the contention of the counsel for the assessee that interest earned even from third parties would be exempt from the charge of income-tax, in all types of transactions. The ratio therein is that, if an incorporated entity is engaged in trade, the profit from it, even if they are transactions with members, would be taxable and the principle of mutuality would have no application. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0675 (AP-HC) : (2012) 340 ITR 0121 : (2012) 254 CTR 0163 : (2012) 075 DTR 0206

INCOME TAX ACT, 1961

--Income --Applicability of principle of mutuality Assessee-club not offered higher interest rate by member banks/corporate concerns--The respondent-Secunderabad Club 'the assessee' was a social and recreational club. It is not registered either as an association or a society. It is a mutual association, statedly, not a profit making concern. All their activities are allegedly not tainted with commerciality or business modalities. The assessee receives monthly subscriptions, admission/ entrance fee and payments made by its members for use of club facilities. During the assessment year 1996-97, the assessee earned interest on the fixed deposits kept by it with A Bank, L Finance Ltd., I Agro-tech Ltd., V Industries Ltd., N Finance Ltd. and Credit Corporation Ltd. In their return for 1996-97, the assessee sought exemption of the interest received from tax citing the principle of mutuality. The banks/financial institutions, with whom the fixed deposits were made, are corporate members of the club. The return for the year 1996-97, admitting Rs. 1,22,700, was accepted under section 143(1). However, the AO issued notice under section 148 on the ground that the exemption claimed with regard to the interest on fixed deposits from banks/companies is not a valid claim. During the enquiry, the assessee furnished information. They stated that the assessee started admitting corporate bodies/banks as members about twenty years ago, the members of all categories are governed by the rules/bye-laws of the club, the entrance fee payable by corporate members is Rs. 3.5 lakhs for the first two nominees, and Rs. 1 lakh for each subsequent nominee, who are whole-time directors or senior executives, resident in Hyderabad. There could be up to five nominees if the paid-up capital of the corporate member is Rs. 5 crores, and up to ten nominees if the paid-up capital exceeds Rs. 5 crores. Any company incorporated under the Companies Act or a statute of the State or Central Government or International Renowned Association including a co-operative society having its office or place of business in Hyderabad and Secunderabad and its suburbs is eligible for membership as a corporate member. The club also benefits by the accrual of additional income by way of entrance fee; and nominees of the corporate members of the club enjoy the same facilities and privileges as other members. There were as many as 31 corporate members but the assessee deposited their funds with the above named six banks/financial institutions. The contention was that the interest earned by the assessee from these corporate members is interest earned from its members and, consequently, the principle of mutuality applies. The AO came to the conclusion that the assessee did not deposit the amounts with the banks treating them as corporate members; and the banks had not accepted the deposits from the assessee in their capacity as a member of the club. They accepted the deposits from the assessee as any other depositor and paid the same rate of interest as is payable to general public and, therefore, corporate membership in the club had no nexus whatever with their capacity of accepting deposits from the assessee. Accordingly, the AO added interest on deposits and assessed them to tax. The Appellate CIT relied on the decision of the Tribunal dated 5-3-2002, for the assessment years 1990-91 and 1991-92 and held that the principle of mutuality cannot be applied to the interest income derived from investments. The Tribunal, Hyderabad Bench, reversed the orders of the CIT. Held : There is no dispute that the assessee Club has parked its funds with financial institutions who are in the business of accepting deposits and lending money. The surplus was also deposited in nationalised banks who carry on banking business as described in section 6 of the Banking Regulation Act, 1949. Money was also deposited with financial institutions who had necessary permissions to accept deposits. When a person deposits money in a bank, the relationship is that of a creditor and a debtor, and they would be bound by the contract that regulates the deposit and payment of interest thereon. When the club deposits its funds with a bank, the latter does not treat the club any differently from its other depositors, nor is any higher rate of interest offered. The principle of mutuality ends the moment the club deposits the amount with the sole aim of earning interest on the deposits. If the club, being a party to such a banking business, earns interest, the principle of mutuality ends. The social relationship and social activities of the club have nothing to do with its deposits with corporate members. Therefore, it is difficult to accept the assessee's contention that interest income is non-taxable. It is not possible to accept the contention of the counsel for the assessee that interest earned even from third parties would be exempt from the charge of income-tax, in all types of transactions. The ratio therein is that, if an incorporated entity is engaged in trade, the profit from it, even if they are transactions with members, would be taxable and the principle of mutuality would have no application.