M/S.the Coonoor Club v. The Income Tax Officer,Ward I (2) Ooty,The Nilgiris

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 24.09.2019CORAMTHE HONOURABLE DR. JUSTICE ANITA SUMANTH Writ Petition Nos.29164 to 29167 and 30572 of 2008& M.P.Nos.1,1,1,1 and 1 of 2008 M/s.The Coonoor Club,represented by its SecretaryClub Road, Coonoor – 643 101The Nilgiris. ...Petitioner in the above W.P.s Vs The Income Tax Officer,Ward I (2) Ooty,The Nilgiris. ... Respondent in the above W.P.s Prayer: PETITIONs filed under Article 226 of The Constitution ofIndia praying for the issuance of Writ of CertiorarifiedMandamus calling for the record of proceedings of the respondentin AO/Coonoor Club/01-02, 02-03, 03-04, 04-05 and 07-08 for theassessment years 2001-02, 2002-03, 2003-04, 2004-05 and 2007-08and quash the orders dated 28.10.2008 and 27.11.2008 passedtherein and further direct the respondent to decide the issueafresh in the light of the law laid down by the Income TaxAppellate Tribunal, Chennai Bench in I.T.A.No.1013/Mds/2001dated 21.07.2006, which has a binding effect on the petitioner. For Petitioner : No appearance For Respondent : Mr.A.P.SrinivasStanding Counsel--------------- C O M M O N O R D E R The petitioner challenges orders of assessment dated28.10.2008 and 27.11.2008 passed under the provisions of theIncome Tax Act, 1961 (in short 'Act') for the assessment years2001-02, 2002-03, 2003-04, 2004-05 and 2007-08. There is noappearance for the petitioner before me today. However, it isseen that the impugned order brings to tax, in the re-assessmentproceedings, income earned by the club from deposits made inbanks that were claimed to be exempt, applying the principal ofmutuality. 2. The taxability of income earned by similarly placed clubswas the subject matter of challenge before the Supreme Court inthe case of Bangalore Club V. Commissioner of Income Tax andothers (350 ITR 509) and the Supreme Court held that interestearned by clubs from banks would not fall within the ambit ofthe principles of mutuality and would thus be liable to tax inthe hands of the clubs. 3. The relevant portion of the aforesaid judgment isextracted below: '25. This brings us to the facts of the presentcase. As aforesaid, the assessee is an AOP. Theconcerned 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 duewas paid. Therefore, we are required to examine thecase of the assessee, in relation to the interestearned on fixed deposits with the member banks, on thetouchstone of the three cumulative conditions,enumerated above. 26. Firstly, the arrangement lacks a completeidentity between the contributors and participators.Till the stage of generation of surplus funds, thesetup resembled that of a mutuality; the flow of money,to and fro, was maintained within the closed circuitformed by the banks and the club, and to that extent,nobody who was not privy to this mutuality, benefitedfrom the arrangement. However, as soon as these fundswere placed in fixed deposits with banks, the closedflow of funds between the banks and the club sufferedfrom deflections due to exposure to commercial bankingoperations. During the course of their bankingbusiness, the member banks used such deposits toadvance loans to their clients. Hence, in the presentcase, with the funds of the mutuality, member banksengaged in commercial operations with third partiesoutside of the mutuality, rupturing the ‘privity ofmutuality’, and consequently, violating the one to oneidentity between the contributors and participators asmandated by the first condition. Thus, in the casebefore us the first condition for a claim of mutualityis not satisfied. 27. As aforesaid, the second condition demandsthat to claim an exemption from tax on the principle ofmutuality, treatment of the excess funds must be infurtherance of the object of the club, which is not thecase here. In the instant case, the surplus funds werenot used for any specific service, infrastructure,maintenance or for any other direct benefit for themember of the club. These were taken out of mutuality when the member banks placed the same at the disposalof third parties, thus, initiating an independentcontract between the bank and the clients of the bank,a third party, not privy to the mutuality. Thiscontract lacked the degree of proximity between theclub and its member, which may in a distant andindirect way benefit the club, nonetheless, it cannotbe categorized as an activity of the club in pursuit ofits objectives. It needs little emphasis that thesecond condition postulates a direct step with directbenefits to the functioning of the club. For the sakeof argument, one may draw remote connections with themost brazen commercial activities to a club’sfunctioning. However, such is not the design of thesecond condition. Therefore, it stands violated. 28. The facts at hand also fail to satisfy thethird condition of the mutuality principle i.e. theimpossibility that contributors should derive profitsfrom contributions made by themselves to a fund whichcould only be expended or returned to themselves. Thisprinciple requires that the funds must be returned tothe contributors as well as expended solely on thecontributors. True, that in the present case, the fundsdo return to the club. However, before that, they areexpended on non- members i.e. the clients of the bank.Banks generate revenue by paying a lower rate ofinterest to club-assessee, that makes deposits withthem, and then loan out the deposited amounts at ahigher rate of interest to third parties. This loaningout of funds of the club by banks to outsiders forcommercial reasons, in our opinion, snaps the link ofmutuality and thus, breaches the third condition. 29. There is nothing on record which shows thatthe banks made separate and special provisions for thefunds that came from the club, or that they did notloan them out. Therefore, clearly, the club did notgive, or get, the treatment a club gets from itsmembers; the interaction between them clearly reflectedone between a bank and its client. This directlycontravenes the third condition as elucidated in Stylesand Kumbakonam Mutual Benefit Fund Ltd. cases (supra).Rowlatt J., in our opinion, correctly points out thatif profits are distributed to shareholders asshareholders, the principle of mutuality is notsatisfied. In Thomas Vs. Richard Evans & Co. (supra),at pp. 822-823, he observed thus : "But a company can make a profit out of itsmembers as customers, although its range ofcustomers is limited to its shareholders. If a "But a company can make a profit out of itsmembers as customers, although its range ofcustomers is limited to its shareholders. If a railway company makes a profit by carrying itsshareholders, or if a trading company, by tradingwith the shareholders - even if it limited totrading with them - makes a profit, that profitbelongs to the shareholders, in a sense, but itbelongs to them qua shareholders. It does not comeback to them as purchasers or customers. It comesback to them as shareholders, upon their shares.Where all that a company does is to collect moneyfrom a certain number of people - it does notmatter whether they are called members of thecompany, or participating policy holders - andapply it for the benefit of those same people, notas shareholders in the company, but as the peoplewho subscribed it, then, as I understand the NewYork case, there is no profit. If the people wereto do the thing for themselves, there would be noprofit, and the fact that they incorporate a legalentity to do it for them makes no difference,there is still no profit. This is not because theentity of the company is to be disregarded, it isbecause there is no profit, the money being simplycollected from those people and handed back tothem, not in the character of shareholders, but inthe character of those who have paid it. That, asI understand it, is the effect of the decision inthe New York case." (Emphasis supplied) In the present case, the interest accrues on thesurplus deposited by the club like in the case of anyother deposit made by an account holder with the bank. 30. An almost similar issue arose in KumbakonamMutual Benefit Fund Ltd. case (supra). The facts inthat case were that the assessee, namely, KumbakonamMutual Benefit Fund Ltd., was an incorporated companylimited by shares. Since 1938, the nominal capital ofthe assessee was Rs.33,00,000/- divided into shares ofRs.1/- each. It carried on banking business restrictedto its shareholders, i.e., the shareholders wereentitled to participate in its various recurringdeposit schemes or obtain loans on security. Recurringdeposits were obtained from members for fixed amountsto be contributed monthly by them for a fixed number ofmonths as stipulated at the end of which a fixed amountwas returned to them according to published tables. Theamount so returned, covered the compound interest ofthe period. These recurring deposits constituted the main source of funds of the assessee for advancingloans. Such loans were restricted only to members whohad, however, to offer substantial security therefor,by way of either the paid up value of their recurringdeposits, if any, or immovable properties within aparticular district. Out of the interest realised bythe assessee on the loans which constituted its mainincome, interest on the recurring deposits aforesaidwas paid as also all the other outgoings and expensesof management and the balance amount was divided amongthe members pro rata according to their share-holdingsafter making provision for reserves, etc., as requiredby the Memorandum or Articles aforesaid. It was notnecessary for the shareholders, who were entitled toparticipate in the profits to either take loans or makerecurring deposits. 31. On these facts, as already noted, the Courtdistinguished Styles case (supra) and opined that theposition of the assessee was no different from anordinary bank except that it lent money and receiveddeposits from its shareholders. This did not by itselfmake its income any less income from business. In ouropinion, the ratio of the said decision is on all foursto the facts at hand. The interest earned by theassessee even from the member banks on the surplusfunds deposited with them had the taint ofcommerciality, fatal to the principle of mutuality. 31. On these facts, as already noted, the Courtdistinguished Styles case (supra) and opined that theposition of the assessee was no different from anordinary bank except that it lent money and receiveddeposits from its shareholders. This did not by itselfmake its income any less income from business. In ouropinion, the ratio of the said decision is on all foursto the facts at hand. The interest earned by theassessee even from the member banks on the surplusfunds deposited with them had the taint ofcommerciality, fatal to the principle of mutuality. 32. We may add that the assessee is alreadyavailing the benefit of the doctrine of mutuality inrespect of the surplus amount received as contributionsor price for some of the facilities availed by itsmembers, before it is deposited with the bank. Thissurplus amount was not treated as income; since it wasthe residue of the collections left behind with theclub. A façade of a club cannot be constructed overcommercial transactions to avoid liability to tax. Suchsetups cannot be permitted to claim double benefit ofmutuality. We feel that the present case is a clearinstance of what this Court had cautioned against inBankipur Club (supra), when it said: “… if the object of the assessee company claimingto be a "mutual concern" or "club", is to carry ona particular business and money is realised bothfrom the members and from non- members, for thesame consideration by giving the same or similarfacilities to all alike in respect of the one andthe same business carried on by it, the dealingsas a whole disclose the same profit earning motiveand are alike tainted with commerciality. In other words, the activity carried on by the assessee insuch cases, claiming to be a "mutual concern" orMembers' club" is a trade or an adventure in thenature of trade and the transactions entered intowith the members or non- members alike is atrade/business/transaction and the resultantsurplus is certainly profit - income liable totax. We should also state, that "at what point,does the relationship of mutuality end and that oftrading begin" is a difficult and vexed question.A host of factors may have to be considered toarrive at a conclusion. "Whether or not thepersons dealing with each other, is a "mutualclub" or carrying on a trading activity or anadventure in the nature of trade" is largely aquestion 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 surplusamount itself, which is exempt from tax under thedoctrine of mutuality, the amount of interest earned bythe assessee from the afore-noted four banks will notfall within the ambit of the mutuality principle andwill therefore, be exigible to Income-Tax in the handsof the assessee-club. 34. In light of the afore-going discussion, theseappeals are bereft of any merit and are thus, liable tobe dismissed. Accordingly, we dismiss all the appealswith costs.' 4. Even in this case, the exemption is sought on identicalfacts, that is, on income that has been earned by the petitionerclub from its investments made with banks. Thus the judgmentand the ratio thereof as extracted above will cover the factsand circumstances of the present case on all fours. These WritPetitions are thus dismissed. No costs. Consequently,connected Miscellaneous Petitions are also dismissed. Sd/-Assistant Registrar(CS-) // True Copy// sl Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To The Income Tax Officer,Ward I (2) Ooty,The Nilgiris. +1CC to Mr.B.Raveendrtan, SR.No.82164. Writ Petition Nos.29164 to 29167 and 30572 of 2008& M.P.Nos.1,1,1,1 and 1 of 2008RR (CO)CSR(10/12/2019)