Madras H.C : When assessee is only a subscriber to a chit run by another concern, question of invoking mutuality principle does not arise by mere chance of other participants subscribing to chit scheme

High Court Of Madras

V. Rajkumar vs. CIT, Coimbatore

Assessment Year : 1996-97

Section : 4

Mrs. Chitra Venkataraman And T.S. Sivagnanam, JJ.

Tax Case (Appeal) No. 2601 Of 2006

February 13, 2014

ORDER

Mrs. Chitra Venkataraman, J. – The assessee is on appeal as against the order of the Income Tax Appellate Tribunal, dated 26.04.2006, relating to the assessment year 1996-97.

2. The assessee is an individual, who was a subscriber to a Chit scheme. During the assessment year 1996-97, the assessee received chit dividend of Rs.90,140/-. Placing reliance on the decision of the Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works v. CIT [1989] 179 ITR 588/46 Taxman 33, the assessee claimed exemption on the principle of mutuality. The assessee’s case was taken up for scrutiny and after hearing the assessee, the Assessing Officer held that the income derived in the form of chit dividend was taxable under Section 28(iii) of the Income Tax Act.

3. Aggrieved by the order of assessment, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who dismissed the assessee’s appeal by following the decision of this Court in the case of CIT v. Dr. Chinna Oomen [1984] 150 ITR 583.

4. Aggrieved by this, the assessee went on appeal before the Income Tax Appellate Tribunal by contending that the surplus received on the close of the chit was not income exigible to tax on the principles of mutuality. Thus, the assessee once again placed reliance on the decision of the Punjab & Haryana High Court in Soda Silicate Chemical Works case (supra), referred to above. In considering the said claim, the Income Tax Appellate Tribunal applied the decision of this Court in the case of in the case of Dr. Chinna Oomen (supra) and rejected the assessee’s contention. Aggrieved by this, the assessee has preferred the present Tax Case (Appeal).

5. Learned counsel appearing for the assessee submitted that going by the principle of mutuality, as pointed out in the Supreme Court decision in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97/92 Taxman 278, the Income Tax Appellate Tribunal committed a serious error in holding that the surplus received as by way of dividend was taxable under the provisions of the Income Tax Act. He submitted that the decision of this Court has no relevance to the case on hand, since, in the said case, the assessee therein considered the receipt as part of the character of income. Thus, he contended that the only decision that have relevance herein would be in the case of Soda Silicate & Chemical Works (supra).

6. Learned counsel appearing for the Revenue supported the order of the Income Tax Appellate Tribunal.

7. As far as the contention with regard to mutuality of the receipt is concerned, it is not denied by the assessee that it is not in the business of running chit, on the other hand, he is only a subscriber to the Chits Scheme floated by another person. It is not denied by the assessee, that what was received by the assessee as by way of dividend was over and above what was contributed by him under the Chit Scheme. Thus, the assessee being just a subscriber to the Chit Scheme, it is difficult for us to draw the principle of mutuality to hold that the surplus received as by way of dividend was merely distribution of what was contributed by the assessee.

8. In this connection, the decision relied on by the assessee in the case of Soda Silicate & Chemical Works (supra) merits to be considered. The assessee therein joined the chit fund and made contributions to it. He secured a chit at discounted amount and on the discount, he sought for deduction in computing the net assessable income. The Assessing Officer disallowed the claim on the ground that it was not the business of the assessee to contribute towards chit funds, thus, the loss incurred was neither incidental to the business nor even remotely related to the business. The Appellate Authority, however, allowed the claim on the ground that the loan raised from the chit fund was invested as business and it was incidental and related to the business. On appeal, the Tribunal restored the order of the Assessing Officer. On further appeal, at the instance of the assessee before the High Court, the Punjab & Haryana High Court pointed out that the contribution made to the chit fund could not be treated as revenue expenditure nor could the payment and receipt of any amount to and from the chit fund be treated to be the business activity of the assessee. Referring to the decision in the case of CIT v. Nataraj Finance Corpn. [1988] 169 ITR 732/[1987] 35 Taxman 280 (AP), the Punjab & Haryana High Court pointed out that in a Chit Scheme, the test of mutuality is that the entity would be a mutual benefit association, if all the participators to the common fund are also contributors and their identity is established. It observed that the member as a class should contribute to the common fund and participators as a class must be able to participate in the surplus; once again where such identity is established between the participants and the contributors to the common fund, the surplus income would not be exigible to tax on the principle of mutuality that no man can make a profit out of himself. It was further pointed out that a chit fund, no doubt, incidentally partake the character of a saving scheme too; yet, it is also primarily intended to operate as a scheme for advancing loans from common fund to subscribers, their turns for getting such loans, being determined either by auction or by drawing lots. Thus, the Punjab & Haryana High Court ultimately held that the transaction involved did not give rise to any income assessable to Income Tax nor any corresponding revenue loss considering for any deduction.

9. On the question of mutuality, in the decision in the case of Bankipur Club Ltd. (supra), the Supreme Court had an occasion to consider the said concept. The Apex Court pointed out that when number of persons combine together and contributed to a common fund for financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons could not be regarded, in any sense, as profit. Where trade or activity is mutual, the fact that, as regards certain activities, only certain members of the association take advantage of the facilities which it offered does not affect the mutuality of the enterprise. The Supreme Court further pointed out to the leading decisions in English Law as well as the Law and Practice of Income Tax by Kanga and Palhivala, and held that where persons carrying on trade in such a manner that they and customers are the same persons, no profits or gains are yielded by the trade for tax purposes; such a surplus is regarded as their own money and returnable to them. Referring to the members’ club, the Supreme Court further pointed that in respect of profit is derived from affording its facilities on members, the income was assessable. The Apex Court further pointed out that the doctrine of ‘mutuality’ applied to mutual insurance companies to certain municipal undertakings and members’ clubs and mutual associations, whether incorporated or unincorporated, the only requirement is, there must be complete identity between the class of contributors and class of participators. Thus, the crucial issue for consideration in cases where it is claimed that on the basis of the principle of mutuality is as to whether, the receipts are exempt from taxation. The question has to be looked at, as to whether it is an activity on the one hand, a trade or adventure in the nature of trade producing a profit, or whether it is a mutual arrangement, which gives rise to surplus. In essence, the relationship between the club and its members should be of a non-trading character. The said issue arose in the context of a club wherein the members paid monthly subscription and in addition, they enjoy the benefit of this privilege of supply of drinks to them on additional payment. The Supreme Court pointed out that nobody was allowed to enjoy the privileges of the club other than its members and the bar, where drinks were sold, was open to its members, and that no outsiders would purchase from the said club.

10. In the back ground of the facts, thus, the Apex Court pointed out that if the object of the club claiming to be a “mutual concern” was to carry on a particular business and money was realised both from members and non-members for the same consideration by giving the same or similar facilities to all alike, the dealings as a whole discloses the same profit-earning motive and are tainted with commerciality. The Apex Court pointed out that at what point, relationship of mutuality ends and that of trading begin was a difficult and vexed question and a host of factors may have to be considered to arrive at a conclusion. Looking at the various objects and facts, ultimately, the Apex Court agreed with the Punjab & Haryana High Court that the receipts for various activities extended by the club to the members as part of the usual privileges and advantages attached to the membership of the club, could not be said to be a trading activity. The surplus-excess of receipts over the expenditure as a result of mutual arrangement, could not be said to be “income” for the purposes of the Act.

11. Extending the decision of the Apex Court to the case on hand, it is evident that the assessee had not come in association with any trading activity as a chit holder on any principle of mutuality. The mere incidence of the assessee participating in a scheme offered by the third party, wherein others also joined, does not, in any manner put forth a principle of mutuality to accept the plea of the assessee that like a mutual benefit club, the assessee should also be extended the benefit of mutuality for the purposes of excluding the dividend income received by the assessee in the chit scheme, participated by the assessee.

12. Learned counsel appearing for the assessee placed before us the unreported decision of this Court in T.C.(A).No.1023 of 2007, dated 22.08.2007, [Sunil Koliyot v. ITO].The facts therein were that the assessee was engaged in the business of interior decoration and the assessee was a member in chit fund; while completing the assessment, the Assessing Officer disallowed the claim of deduction in respect of chit loss on the ground that running a chit fund or being a member in a chit was not the business of the assessee; that the lumpsum amount received did not give rise to any income, assessable to Income Tax Act. Thus, the Officer rejected the contention of the assessee that he had been financing his business by subscribing to the chits; hence, the interest payment made on the chit bid was allowable as deduction. As against the assessment order, the appellant preferred appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) accepted the contention of the appellant and deleted the disallowance. Aggrieved by this, the Revenue preferred appeal to the Income Tax Appellate Tribunal. The Tribunal accepted the stand of the Revenue and allowed the Revenue’s appeal. Aggrieved by this, the assessee came on appeal before this Court. This Court pointed out that it was not the business of the assessee to be a member of a chit fund. It pointed out that chit transaction being one, where the members of the chit made contributions to the fund by monthly installments and receive lumpsum amount, but at a discount. The discounted amount would be distributed to the members as dividend and the contribution made to the chit fund. Hence, the contribution made to the chit fund could not be treated as business expenditure or the receipt of lumpsum amount or the dividend could be regarded as business activity of the assessee. In the context of the nature of the business of the assessee, this Court held that the receipt from the Chit fund could not be regarded as ‘income from business activity’. In the circumstances, this Court upheld the order of the Tribunal in disallowing the assessee’s claim of loss in the chit fund during the year in question. We do not find this judgment could be of any assistance to the assessee’s herein.

13. Admittedly, the assessee is an individual, as some one interested in participating in the chit scheme as a method of saving; the assessee joined in the chit scheme and in the process, earned dividend income. The question as to whether it was business income or not, on facts, does not arise.

14. The unreported decision of this Court in Sunil Koliyot’s case (supra), hence has to be seen in the background of the facts therein. The same could not be extended to the benefit of the assessee. On the other hand, going by the law declared by the Apex Court in the case of Bankipur Club Ltd. (supra), explaining the principle of mutuality, we hold that when the assessee is only a subscriber to a chit run by another concern, the question of invoking the mutuality principle does not arise by the mere chance of other participants subscribing to the chit scheme.

15. One has to look at the scheme of chit funds running chit schemes as a business, as given under the Chit Funds Act and going by the nature of chits run as a business by a third party and the assessee subscribing to that as a mere subscriber, the dividend income received over and above what had been subscribed by the assessee, hence deserves to be assessed as income of the assessee. Consequently, we do not find any error in the order of the Income Tax Appellate Tribunal.

In the circumstances, confirming the order of the Income Tax Appellate Tribunal, we dismiss the Tax Case (Appeal). No costs.

[Citation : 363 ITR 21]