Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2009 Supreme(Mad) 2796

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE F.M. IBRAHIM KALIFULLA & THE HONOURABLE MR. JUSTICE B. RAJENDRAN
M/s. Madras Gymkhana Club, The Island, Anna Salai, Chennai
Versus
The Deputy Commissioner of Income Tax, Business Circle-VI, Chennai
Tax Case (Appeal) Nos.397 to 404 of 2008, 276 of 2004, 428 to 433 of 2008 and 361 of 2009
Decided on: 30-07-2009

Advocates Appeared:
For the Appellant:T.V. Ramanujam Senior Counsel, T. V. Krishnamachari, J. Balachander, S. Sridhar, B. Raveendran, Advocates. For the Respondent: J. Naresh Kumar, K. Subramaniam, Pushya Sitaraman, Sr. Standing Counsels for IT.

Ratios:
a. Concept of mutuality applies when there is an identity in the matter of contribution as well as availing the benefit in equal proportion without there being any special benefit conferred on any particular member in either enjoying or availing the benefit in an exclusive manner.
b. Mere financial prudence of keeping the surplus income in deposits would not be the sole criteria to decide the eligibility to apply the concept of mutuality to the income generated out of such investments.
c. When the assessee had no concrete plan for the utilisation of income generated out of the investments with its members to the benefit of the members who contributed such income, mere fact that it is a club would not entitle it to claim the benefit of mutuality.

Headnote:(A) Income Tax Act, 1961(43 of 1961)-Sec.2 (24)-Income-Taxable income-Clubs-Investments-Interest from deposits-Mutuality-Petitioner is a club providing facilities to its members-It generated enormous surplus fund and invested it as deposits with its corporate members-Interest income received-Claimed as exempt-Contended that the income were to be spent for its members and the concept of mutuality is involved-Revenue contended that the income earned is not exclusively meant for its appropriation to the persons who paid it, complete identity between the parson who paid interest and derives benefit is absent etc.-Assessing officer and other appellate authorities held in favour of revenue-Appeal by assessee-Held, concept of mutuality involves the persons paying and the persons utilizing it should be same-When interest is paid by few corporate members and meant for its utilization for the overall objects of the club and for the large body of members, mutuality is lost-Enormous income generated by club and there was no concrete plan for its utilization-So, interest income is not exempt-Appeal dismissed.
       (B) Income Tax Act, 1961(43 of 1961)-Sec.2 (24)-Income-Taxable income-Clubs-Investments-Mutuality-Criteria-Concept of mutuality applies when there is an identity in the matter of contribution as well as availing of the benefit in equal proportion without there being any special benefit conferred on any particular member in either enjoying or availing the benefit in an exclusive manner.
       The identity should exist in the matter of contribution as well as availing of the benefit in equal proportion and then and then alone it can be held that the concept of Mutuality gets fulfilled. This was also explained by way of an analogy even in the case of such clubs, where while on the one hand the contribution from the members in the form of subscription or otherwise is collected which is in turn utilised in developing the various activities of the Club by way of recreational facilities or in the form of boarding or lodging and such facilities are made available for the benefit of the members in equal proportion without there being any special benefit conferred on any particular member in either enjoying or availing the benefit in an exclusive manner. Para 23
       (C) Income Tax Act, 1961(43 of 1961)-Sec.2 (24)-Income-Taxable income-Clubs-Investments-Interest from deposits-Mutuality-Mere financial prudence of keeping the surplus income in deposits would not be the sole criteria to decide the eligibility to apply the concept of mutuality to the income generated out of such investments.
       When the object of the club and the provisions made under the Rules for making the investments are read together, the position that emerges is that the investment of surplus funds has nothing to do with the objects of the club. It is true that such investments can be made in the Government securities or its banking institution members or in the form of securities which can be only with its corporate members. The contention of the assessee clubs are that when enormous surplus amount is generated, such amounts cannot be kept in hot cash or even in the regular account which are being operated for the day to day administration and therefore such amounts had to be necessarily kept in fixed deposits or in the from of securities of longer duration, which funds ultimately are meant to be utilised for the improvement of the facilities of the club. Para 27
       Even though existence of the club and its activities and facilities are for the mutual interest of its members and such mutual interest in respect of its regular activities vis-a-vis its members continue to remain, based on that alone it cannot be held that its other activities such as its financial management of depositing the surplus funds in various banking institutions and thereby earning substantial amount by way of interest should also be held to have every nexus to the regular and normal activities of the club vis-a-vis its members. Para 29
       Investment of surplus fund with some of the member banks and other institutions in the form of Fixed Deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept. Para 37

       (D) Income Tax Act, 1961(43 of 1961)-Sec.2 (24)-Income-Taxable income-Clubs-Investments-Interest from deposits-Mutuality-When the assessee had no concrete plan for the utilisation of income generated out of the investments with its members to the benefit of the members who contributed such income, mere fact that it is a club would not entitle it to claim the benefit of mutuality.
       While the assessee clubs were able to generate substantial amount by way of contribution, donation etc., it had no corresponding plans or schemes to improve its infrastructure facilities or that such surplus funds were earmarked for any particular developmental activity in the interest of all the members of the assessee clubs and that since incurring of the expenses for such activities can be made in a phased manner, the amounts were being kept in such a way that it could be drawn for spending as and when the requirement for such spending is necessitated. Para 30
       What is relevant is to see as to how the funds generated by way of contribution, donation etc., from the members as well as the outsiders are expended and that utilisation of such funds were with a view to fulfil the object of providing various recreational and other facilities to the members and then alone it can be held that the principle of identity between the contributor and the participator is fulfilled which is the basic requirement in the concept of mutuality of the enterprise. Para 36

Judgment :-

(F.M. IBRAHIM KALIFULLA, J.):

These appeals arise out of orders passed by the Income Tax Appellate Tribunal, Chennai in various Income Tax appeals preferred by M/s.Madras Gymkhana Club, M/s. Madras Club and M/s. The Coonoor Club.

2. The common question of law involved in these appeals are as to "whether the Tribunal was right in holding that the interest income of the assessee clubs received from its corporate members, on the investment of surplus funds as Fixed Deposits with them, is not exempted from tax on the concept of Mutuality". In some appeals, a further question of law as to "whether the Tribunal is right in holding that the re-opening of the assessment under Section 147 of the Income Tax Act was valid in respect of the assessee clubs".

3. As far as the first question is concerned, the activities of the clubs viz., Madras Gymkhana Club, Madras Club and The Coonoor Club is for the benefit of its members, in as much as, the club members are provided with various facilities such as Restaurant, Gymnasium, Library, Bar, Coffee Shop, Swimming Pool and other facilities for indoor and outdoor games such as Table Tennis, playing of Cards, Tennis Court etc., In so far as the surplus funds derived by the clubs while running and maintaining the various above activities for the benefit of its members are concerned, the Revenue did not make any demand. Apart from such surplus funds derived from such activities, the clubs also made certain investments in the form of Fixed Deposits (Long Term/Short Term), discount bonds, security deposit and savings bank accounts as well as in granting advance/loans to its staff members. From and out of such deposits/investments/loans made and granted, the clubs earned some interest. It is also common ground that such deposits/investments were made with institutional members who were either banking institutions or Public Sector Undertakings.

.4. In fact in the case of the Madras Gymkhana Club is concerned, the order of the original authority viz., the Assistant Commissioner of Income Tax, dated 31.03.2004, disclose that various investments ranged between Rs.2,00,000/- to Rs.4,00,000/-in all a sum of Rs.2,11,17,711/- and interest earned from such deposits/investments/loans were to the tune of Rs.25,45,272/- which was the figure at the relevant point of time viz., the assessment year 1997-98 (previous year 1996-97).

5. In respect of such interest earned by the clubs, the clubs did not come forward to pay any tax while submitting their return of income by contending that the activities of the clubs and its income are covered by the concept of Mutuality and therefore exempted from tax. The Assistant Commissioner of Income Tax, issued notice under Section 148 of the 1961 Act to the assessee in so far as the Madras Gymkhana Club was concerned. Consequent to such notice, necessary enquiry was held and ultimately the order of assessment came to be passed determining a sum of Rs.25,45,272/- obtained by way of interest by Madras Gymkhana Club as income apart from certain other items such as interest on loans to several miscellaneous income and water charges in all a sum of Rs.27,15,353/-. The income tax payable thereon was assessed at Rs.10,60,141/- and by adding the interest worked out under Sections 234(A) and 234 (B), the total liability was determined at Rs.33,79,727/-.

6. The Madras Gymkhana Club preferred their appeal to the Commissioner of Income Tax, who also confirmed the order of the Assistant Commissioner of Income Tax and there was a further appeal by the appellant before the Income Tax Appellate Tribunal, which rejected the appeal preferred by the appellant and hence the present appeals have been preferred.

7. We heard Mr.T.V.Ramanujam learned senior counsel, Mr.J.Balachander and Mr.B.Raveendran learned counsel appearing for the appellants as well as Mr.K.Subramaniam, Mrs.Pushya Sitaraman and Mr.J.Naresh Kumar learned standing counsel appearing for the Income Tax Department.

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