V.rajkumar v. The Commissioner Of Income Tax,Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRAS Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN andThe Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Appeal) No.2601 of 2006 V.Rajkumar... Appellant/ Appellant -vs- The Commissioner of Income Tax,Coimbatore. ... Respondent / Respondent Tax Case (Appeal) filed under Section 260A of the Income TaxAct, 1961, against the order of the Income Tax Appellate TribunalChennai Bench 'D', dated 26.04.2006, in I.T.A.No.2351/Mds/2003against the order of the Commissioner of Income Tax (Appeals) ICoimbatore dated 14.10.2003 and made in ITA.No.582 /2001-2002. against the order of the Assistant Commissioner of Income Tax,Company Circle II (2)/ Coimbatore dated 15.3.1999 and made inP.A.N/GIR.NO.PZ-8683/CO II (2) CBE. For petitioner : Mr.R.KumarFor Respondent : Mr.N.V.Balaji ORDER (The Order of the Court was made byCHITRA VENKATARAMAN, J.) The assessee is on appeal as against the order of the IncomeTax Appellate Tribunal, dated 26.04.2006, relating to the assessmentyear 1996-97. 2. The assessee is an individual, who was a subscriber to aChit scheme. During the assessment year 1996-97, the assesseereceived chit dividend of Rs.90,140/-. Placing reliance on thedecision of the Punjab & Haryana High Court in the case of SodaSilicate and Chemical Works vs. CIT, reported in 179 ITR 588, theassessee claimed exemption on the principle of mutuality. Theassessee's case was taken up for scrutiny and after hearing the https://hcservices.ecourts.gov.in/hcservices/ assessee, the Assessing Officer held that the income derived in theform of chit dividend was taxable under Section 28(iii) of theIncome Tax Act. 3. Aggrieved by the order of assessment, the assessee went onappeal before the Commissioner of Income Tax (Appeals), whodismissed the assessee's appeal by following the decision of thisCourt in the case of CIT, Tamil Nadu III, vs. Dr.Chinna Oomenreported in 150 ITR 583. 4. Aggrieved by this, the assessee went on appeal before theIncome Tax Appellate Tribunal by contending that the surplusreceived on the close of the chit was not income exigible to tax onthe principles of mutuality. Thus, the assessee once again placedreliance on the decision of the Punjab & Haryana High Court reportedin 179 ITR 588, referred to above. In considering the said claim,the Income Tax Appellate Tribunal applied the decision of this Courtin the case of in the case of CIT, Tamil Nadu III, vs. Dr.ChinnaOomen reported in 150 ITR 583 and rejected the assessee'scontention. Aggrieved by this, the assessee has preferred thepresent Tax Case (Appeal). 5. Learned counsel appearing for the assessee submitted thatgoing by the principle of mutuality, as pointed out in the SupremeCourt decision in the case of CIT vs. Bankipur Club Limited reportedin (1997) 226 ITR 97 (SC), the Income Tax Appellate Tribunalcommitted a serious error in holding that the surplus received as byway of dividend was taxable under the provisions of the Income TaxAct. He submitted that the decision of this Court has no relevanceto the case on hand, since, in the said case, the assessee thereinconsidered the receipt as part of the character of income. Thus, hecontended that the only decision that have relevance herein would bein the case of Soda Silicate and Chemical Works vs. CIT, reported in179 ITR 588. 6. Learned counsel appearing for the Revenue supported theorder of the Income Tax Appellate Tribunal. 6. Learned counsel appearing for the Revenue supported theorder of the Income Tax Appellate Tribunal. 7. As far as the contention with regard to mutuality of thereceipt is concerned, it is not denied by the assessee that it isnot in the business of running chit, on the other hand, he is only asubscriber to the Chits Scheme floated by another person. It is notdenied by the assessee, that what was received by the assessee as byway of dividend was over and above what was contributed by him underthe Chit Scheme. Thus, the assessee being just a subscriber to theChit Scheme, it is difficult for us to draw the principle ofmutuality to hold that the surplus received as by way of dividendwas merely distribution of what was contributed by the assessee. 8. In this connection, the decision relied on by the assesseein the case of Soda Silicate and Chemical Works vs. CIT, reported in179 ITR 588 merits to be considered. The assessee therein joinedthe chit fund and made contributions to it. He secured a chit atdiscounted amount and on the discount, he sought for deduction incomputing the net assessable income. The Assessing Officerdisallowed the claim on the ground that it was not the business ofthe assessee to contribute towards chit funds, thus, the lossincurred was neither incidental to the business nor even remotelyrelated to the business. The Appellate Authority, however, allowedthe claim on the ground that the loan raised from the chit fund wasinvested as business and it was incidental and related to thebusiness. On appeal, the Tribunal restored the order of theAssessing Officer. On further appeal, at the instance of theassessee before the High Court, the Punjab & Haryana High Courtpointed out that the contribution made to the chit fund could not betreated as revenue expenditure nor could the payment and receipt ofany amount to and from the chit fund be treated to be the businessactivity of the assessee. Referring to the decision in the case ofCIT vs. Nataraj Finance Corporation reported in [1988] 169 ITR 732(AP), the Punjab & Haryana High Court pointed out that in a ChitScheme, the test of mutuality is that the entity would be a mutualbenefit association, if all the participators to the common fund arealso contributors and their identity is established. It observedthat the member as a class should contribute to the common fund andparticipators as a class must be able to participate in the surplus;once again where such identity is established between theparticipants and the contributors to the common fund, the surplusincome would not be exigible to tax on the principle of mutualitythat no man can make a profit out of himself. It was furtherpointed out that a chit fund, no doubt, incidentally partakes thecharacter of a saving scheme too; yet, it is also primarily intendedto operate as a scheme for advancing loans from common fund tosubscribers, their turns for getting such loans, being determinedeither by auction or by drawing lots. Thus, the Punjab & HaryanaHigh Court ultimately held that the transaction involved did notgive rise to any income assessable to Income Tax nor anycorresponding revenue loss considering for any deduction. 9. On the question of mutuality, in the decision in the case ofCIT vs. Bankipur Club Limited, reported in (1997) 226 ITR 97 (SC),the Supreme Court had an occasion to consider the said concept. TheApex Court pointed out that when number of persons combine togetherand contributed to a common fund for financing of some venture orobject and in this respect have no dealings or relations with anyoutside body, then any surplus returned to those persons could notbe regarded, in any sense, as profit. Where trade or activity ismutual, the fact that, as regards certain activities, only certainmembers of the association take advantage of the facilities which itoffered does not affect the mutuality of the enterprise. The 9. On the question of mutuality, in the decision in the case ofCIT vs. Bankipur Club Limited, reported in (1997) 226 ITR 97 (SC),the Supreme Court had an occasion to consider the said concept. TheApex Court pointed out that when number of persons combine togetherand contributed to a common fund for financing of some venture orobject and in this respect have no dealings or relations with anyoutside body, then any surplus returned to those persons could notbe regarded, in any sense, as profit. Where trade or activity ismutual, the fact that, as regards certain activities, only certainmembers of the association take advantage of the facilities which itoffered does not affect the mutuality of the enterprise. The Supreme Court further pointed out to the leading decisions inEnglish Law as well as the Law and Practice of Income Tax by Kangaand Palhivala, and held that where persons carrying on trade in sucha manner that they and customers are the same persons, no profits orgains are yielded by the trade for tax purposes; such a surplus isregarded as their own money and returnable to them. Referring tothe members' club, the Supreme Court further pointed that in respectof profit is derived from affording its facilities on members, theincome was assessable. The Apex Court further pointed out thatthe doctrine of 'mutuality' applied to mutual insurance companies tocertain municipal undertakings and members' clubs and mutualassociations, whether incorporated or unincorporated, the onlyrequirement is, there must be complete identity between the class ofcontributors and class of participators. Thus, the crucial issuefor consideration in cases where it is claimed that on the basis ofthe principle of mutuality is as to whether, the receipts are exemptfrom taxation. The question has to be looked at, as to whether it isan activity on the one hand, a trade or adventure in the nature oftrade producing a profit, or whether it is a mutual arrangement,which gives rise to surplus. In essence, the relationship betweenthe club and its members should be of a non-trading character. Thesaid issue arose in the context of a club wherein the members paidmonthly subscription and in addition, they enjoy the benefit of thisprivilege of supply of drinks to them on additional payment. TheSupreme Court pointed out that nobody was allowed to enjoy theprivileges of the club other than its members and the bar, wheredrinks were sold, was open to its members, and that no outsiderswould purchase from the said club. 10. In the back ground of the facts, thus, the Apex Courtpointed out that if the object of the club claiming to be a "mutualconcern" was to carry on a particular business and money wasrealised both from members and non-members for the sameconsideration by giving the same or similar facilities to all alike,the dealings as a whole discloses the same profit-earning motive andare tainted with commerciality. The Apex Court pointed out that atwhat point, relationship of mutuality ends and that of trading beginwas a difficult and vexed question and a host of factors may have tobe considered to arrive at a conclusion. Looking at the variousobjects and facts, ultimately, the Apex Court agreed with the Punjab& Haryana High Court that the receipts for various activitiesextended by the club to the members as part of the usual privilegesand advantages attached to the membership of the club, could not besaid to be a trading activity. The surplus-excess of receipts overthe expenditure as a result of mutual arrangement, could not be saidto be “income” for the purposes of the Act. 11. Extending the decision of the Apex Court to the case onhand, it is evident that the assessee had not come in associationwith any trading activity as a chit holder on any principle of 11. Extending the decision of the Apex Court to the case onhand, it is evident that the assessee had not come in associationwith any trading activity as a chit holder on any principle of mutuality. The mere incidence of the assessee participating in ascheme offered by the third party, wherein others also joined, doesnot, in any manner put forth a principle of mutuality to accept theplea of the assessee that like a mutual benefit club, the assesseeshould also be extended the benefit of mutuality for the purposes ofexcluding the dividend income received by the assessee in the chitscheme, participated by the assessee. 12. Learned counsel appearing for the assessee placed before usthe unreported decision of this Court in T.C.(A).No.1023 of 2007,dated 22.08.2007, [Shri Sunil Koliyot vs. The Income Tax Officer].The facts therein were that the assessee was engaged in the businessof interior decoration and the assessee was a member in chit fund;while completing the assessment, the Assessing Officer disallowedthe claim of deduction in respect of chit loss on the ground thatrunning a chit fund or being a member in a chit was not the businessof the assessee; that the lumpsum amount received did not give riseto any income, assessable to Income Tax Act. Thus, the Officerrejected the contention of the assessee that he had been financinghis business by subscribing to the chits; hence, the interestpayment made on the chit bid was allowable as deduction. As againstthe assessment order, the appellant preferred appeal before theCommissioner of Income Tax (Appeals). The Commissioner of IncomeTax (Appeals) accepted the contention of the appellant and deletedthe disallowance. Aggrieved by this, the Revenue preferred appealto the Income Tax Appellate Tribunal. The Tribunal accepted thestand of the Revenue and allowed the Revenue's appeal. Aggrievedby this, the assessee came on appeal before this Court. This Courtpointed out that it was not the business of the assessee to be amember of a chit fund. It pointed out that chit transaction beingone, where the members of the chit made contributions to the fund bymonthly installments and receive lumpsum amount, but at a discount.The discounted amount would be distributed to the members asdividend and the contribution made to the chit fund. Hence, thecontribution made to the chit fund could not be treated as businessexpenditure or the receipt of lumpsum amount or the dividend couldbe regarded as business activity of the assessee. In the context ofthe nature of the business of the assessee, this Court held that thereceipt from the Chit fund could not be regarded as 'income frombusiness activity'. In the circumstances, this Court upheld theorder of the Tribunal in disallowing the assessee's claim of loss inthe chit fund during the year in question. We do not find thisjudgment could be of any assistance to the assessee's herein. 13. Admittedly, the assessee is an individual, as some oneinterested in participating in the chit scheme as a method ofsaving; the assessee joined in the chit scheme and in the process,earned dividend income. The question as to whether it was businessincome or not, on facts, does not arise. 14. The unreported decision of this Court in T.C.(A).No.1023 of2007, dated 22.08.2007, [Shri Sunil Koliyot vs. The Income TaxOfficer], hence has to be seen in the background of the factstherein. The same could not be extended to the benefit of theassessee. On the other hand, going by the law declared by the ApexCourt in the case of CIT vs. Bankipur Club Limited reported in(1997) 226 ITR 97 (SC), explaining the principle of mutuality, wehold that when the assessee is only a subscriber to a chit run byanother concern, the question of invoking the mutuality principledoes not arise by the mere chance of other participants subscribingto the chit scheme. 14. The unreported decision of this Court in T.C.(A).No.1023 of2007, dated 22.08.2007, [Shri Sunil Koliyot vs. The Income TaxOfficer], hence has to be seen in the background of the factstherein. The same could not be extended to the benefit of theassessee. On the other hand, going by the law declared by the ApexCourt in the case of CIT vs. Bankipur Club Limited reported in(1997) 226 ITR 97 (SC), explaining the principle of mutuality, wehold that when the assessee is only a subscriber to a chit run byanother concern, the question of invoking the mutuality principledoes not arise by the mere chance of other participants subscribingto the chit scheme. 15. One has to look at the scheme of chit funds running chitschemes as a business, as given under the Chit Funds Act and goingby the nature of chits run as a business by a third party and theassessee subscribing to that as a mere subscriber, the dividendincome received over and above what had been subscribed by theassessee, hence deserves to be assessed as income of the assessee.Consequently, we do not find any error in the order of the IncomeTax Appellate Tribunal. In the circumstances, confirming the order of the Income TaxAppellate Tribunal, we dismiss the Tax Case (Appeal). No costs. Sd/- Asst.Registrar (CS V )Dated: 19.3.2014 /true copy/Sub Asst. RegistrarpbnTo 1.The Income Tax Appellate Tribunal Chennai Bench D 2.The Commissioner of Income Tax (Appeals) – I, Coimbatore. 3.The Assistant Commissioner of Income Tax, Company Circle II(2)/Coimbatore. Tax Case (Appeal) No.2601 of 2006 UG (CO)kk 20/2