The principle of mutuality could be confined in respect of surplus accrued to the club out of the contributions received by the club from its members. However, this principle would have no application in respect of surplus received from non-members.

Headnote:
Income-tax - Charitable Trust - Sections 11, 12 - Interest income earned by trust fund - Trust fund invested surplus funds in various banks and earned interest on the deposits - Principle of mutuality - Held, trust fund not entitled to exemption from tax on the principle of mutuality - Answered in favour of the Revenue and against the assessee
Fact of the Case:

The Indian Telephone Industries Employees' Death and Superannuation Relief Fund claimed exemption of its income from taxation under Section 11 of the Income-tax Act, on the ground that it is a charitable trust. The Assessing Officer denied the exemption, bringing the interest income to tax for the assessment years 1985-86, 1987-88, 1988-89, and 1989-90. The first appellate authority upheld the view taken by the Assessing Officer, denying the exemption to the assessee. The Tribunal accepted the assessee's plea that it was constituted for charitable purposes and, therefore, its income is exempted under Section 11 of the Act. The alternative plea raised by the assessee that it is a mutual benefit fund and, therefore, interest income derived by it is not chargeable to tax was rejected.
Finding of the Court:

The court held that the trust fund was not entitled to exemption from tax on the principle of mutuality, as the income earned from outside agency on interest or securities from the bank would not be covered on the principles of mutuality for claiming exemption from tax and, therefore, it could not be excluded from the arena of taxation.
Issues: Whether the trust fund is entitled to exemption from tax on the principle of mutuality.
Ratio Decidendi: The principle of mutuality could be confined in respect of surplus accrued to the club out of the contributions received by the club from its members. However, this principle would have no application in respect of surplus received from non-members. The income earned from outside agency on interest or securities from the bank would not be covered on the principles of mutuality for claiming exemption from tax and, therefore, it could not be excluded from the arena of taxation.
Final Decision: The court answered in favour of the Revenue and against the assessee, holding that the trust fund was not entitled to exemption from tax on the principle of mutuality.

JUDGMENT

Ashok Bhan, J.

1. This order shall dispose of ITRC Nos. 30-31 of 1995, ITRC Nos. 32-33 of 1995, ITRC Nos. 34-35 of 1995 and ITRC Nos. 36-37 of 1995, arising from the order of the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal"), dated June 15, 1993, relating to the assessment years 1985-86, 1986-87, 1988-89 and 1989-90. The Revenue as well as the assessee have claimed one question each in all the assessment years thereby giving rise to eight reference petitions. The Tribunal has disposed of eight appeals relating to the four assessment years by passing one order as the facts and the questions of law involved are the same. Since common issues arise for consideration arising from the same facts in all these petitions, we also dispose of them by a consolidated order for the sake of convenience.

2. The trust styled "the Indian Telephone Industries Employees' Death and Superannuation Relief Fund" was created by a deed dated December 19, 1983, by the employees of the Indian Telephone Industries called the settlers for the benefit of about 20,000 employees of ITI in various towns in the country. Copy of the trust deed along with its rules were placed on record by counsel for the assessee to which counsel for the Revenue had no objection. As per Clause 2, the trust funds of the assessee consists of the following :

"(2) THE trust funds being the aforesaid ITI Employees' Death and Superannuation Relief Fund shall consist of the following :

(a) Monthly contributions made by the employees through recovery from the pay bill.

(b) Contributions, if any, made by the ITI management towards the said fund.

(d) Interest or other income accrued or earned from the said funds or any investments thereof.

(e) All securities and investments made from out of the funds. (f) Money or other assets that may come into or be vested in any manner in the trust to be held as part of the trust assets."

Clause 8 provides that all monies contributed to the Indian Telephone Industries Employees Death and Superannuation Relief Fund or received or accrued by way of interest or otherwise, shall be deposited in the bank accounts of the fund and shall be invested as judiciously as possible to see that the fund does not suffer on account of non-investment. Clause 15 made all the provisions of the ITI employees death and superannuation relief fund rules, as detailed in the annexure to the trust, applicable as if the same were contained in the presents of the trust deed. As per Clause 3, the object of the fund is to provide immediate financial assistance to the families of any member of the fund in the case of death of the member or monetary relief to members on superannuation/termination on medical grounds/dismissals/terminations. Clause 4(a) provides that all employees of ITI who subscribe to the aims and objects of the fund shall be eligible to become members. The subscription is Rs. 10 per month recoverable through the pay bills. The board of trustees had the power to change or alter the rate of subscription, as and when it is deemed necessary for fulfilling the objects of the fund. Vide circular resolution dated November 13, 1984, Clause 8 of the annexure was amended and it was provided that the funds may be invested in interest bearing deposits or securities in any scheduled bank, institutions like ITI Employees Union Co-operative Credit Society Ltd., and financially secure co-operative banks, where there is insurance coverage for the deposits made. The secretary with the approval of the chairman is empowered to make such investments. Rules enumerating benefits which could be given to any member of the fund in the case of death of a member or monetary relief to members on superannuation/termination on medical grounds/dismissals/terminations were also framed.

3. The amount was deposited in banks to earn interest. The assessee earned interest income on its deposits from various banks. The assessee claiming itself to be a

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1998 Supreme(Kar) 452

High Court Of Karnataka Ashok Bhan, S.R.Venkatesha Murthy, JJ. Commissioner Of Income-Tax - Appellant VersusI.T.I. Employees Death And Superannuation Relief Fund – Respondent I.T.R.C. 30, 31, 32, 33, 34, 35, 36 and 37 of 1995 Decided On : Jul 24, 1998

The principle of mutuality could be confined in respect of surplus accrued to the club out of the contributions received by the club from its members. However, this principle would have no application in respect of surplus received from non-members.

High Court Of Karnataka
Ashok Bhan, S.R.Venkatesha Murthy, JJ.
Commissioner Of Income-Tax - Appellant
Versus
I.T.I. Employees Death And Superannuation Relief Fund – Respondent
I.T.R.C. 30, 31, 32, 33, 34, 35, 36 and 37 of 1995
Decided On : Jul 24, 1998