Karnataka H.C : Whether a sum of Rs. 7,87,648 received by the assessee as interest from fixed deposit made by the assessee in four banks who are members in the assessee-club amounted to its income and constituted a revenue receipt as per the provision of the IT Act.

High Court Of Karnataka

CIT & ANR. vs. Bangalore Club

Section 4

Asst. Year 1989-90

R. Gururajan & Jawad Rahim, JJ.

IT Appeal Nos. 115 of 1999 & 70 of 2000

21st July, 2006

Counsel Appeared

M.V. Seshachala, for the Appellants : Ashok A. Kulkarni for K.R. Prasad, N. Nagaraju, Smt. Gayathri Sridharan, C.R. Sundaresh & George Mathan, for the Respondent


R. Gururajan, J. :

Revenue is before us challenging the order of the Tribunal dt. 7th Jan., 1999. The order of the CIT (A) dt. 30th Aug., 1991 is on the following facts.

The assessee is a club registered under the Societies Registration Act. It has several members. Four of its members are Vijaya Bank, Canara Bank, State Bank of Mysore, and State Bank of India. The club is running on commercial lines for the asst. yr. 1989-90. The assessee declared a total income of Rs. 2,26,991. The assessee deposited a surplus amount of Rs. 76,16,054 in fixed deposit with the above stated four banks. The fixed deposit earned an interest of Rs. 7,87,648. This interest was claimed as deduction by the assessee on the principle of mutuality. It was stated that the four banks being members of a club constitute a common entity and that therefore tax could not be levied as it would amount to levying tax on oneself. The assessing authority did not accept the same and he disallowed the claim. An appeal was filed and the Appellate CIT set aside the order of assessment. A second appeal was filed and it stood rejected. It is in these circumstances, appellant is before us.

The following questions of law arise for our consideration : “1. Whether a sum of Rs. 7,87,648 received by the assessee as interest from fixed deposit made by the assessee in four banks who are members in the assessee-club amounted to its income and constituted a revenue receipt as per the provision of the IT Act. 2. Whether the principle of mutuality can be made applicable to the fund deposited in the four banks who are also members of assessee-club, especially when the fund is raised from contribution of several members including the four banks and the interest derived from it is utilized by several members of assessee-club ?” Parties have entered appearance. Arguments were heard.

Learned counsel for the Revenue would contend that both the Tribunal and the appellate authority are wrong in accepting the principle of mutuality in the present circumstances. He would say that the amount deposited in the bank earned interest and that interest is taxable as rightly ruled by the assessing authority. He would also say that the relationship between club and the banks are the relationship of a customer and banker. He would rely on several judgments in support of his submission.

Per contra, learned counsel for the Club would take us through the material on record to say that there exists mutuality. He would elaborate by saying that the Club has deposits, and the interest earned from the amount deposited in non-member banks have been subjected to tax. It is only from member banks fixed deposit interest is claimed as deduction on the ground of mutuality. He would support the order. He also relies on several judgments.

After hearing, we have carefully perused the material on record. AO has chosen to disallow the claim of interest, i.e., on the deposit made in the member banks. He has noticed that there exists no mutuality in the case on hand. When the same was challenged, the CIT(A) holds that the activity of keeping the liquid asset, i.e., cash in the custody of its members for safe custody cannot be tainted with commerciality to come within the purview of business income. The appellate authority holds that the surplus fund of the club have been invested in the banks more for security and there was no business activity intended in this investment. This finding of the CIT(A) is accepted by the Tribunal. The Tribunal also holds that the activity of the club with such corporate members and vice-versa are clearly activities of mutual consent and interest. Mutual interest or mutuality has been considered by Courts of law in several judgments.

In CIT vs. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 (SC) the Supreme Court has considered the mutual benefit theory and ruled as under : “The essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed to shareholders as shareholders the principle of mutuality is not satisfied.” Subsequently, the Supreme Court in CIT vs. Bankipur Club Ltd. (1997) 140 CTR (SC) 102 : (1997) 226 ITR 97 (SC) has ruled as under : “A host of factors may have to be considered to arrive at a conclusion.

‘Whether or not the persons dealing with each other, are a ‘mutual club’ or carrying on a trading activity or an adventure in the nature of trade’, is largely a question of fact.” Therefore what is clear to us is that mutuality principle would depend upon the facts and circumstances of each case.

9. Sri Parthasarathi, learned counsel would rely on Chelmsford Club vs. CIT (2000) 159 CTR (SC) 235 : (2000) 243 ITR 89 (SC). A reading of the said judgment would show that in that case, the assessee, a members’ club, provided recreational and refreshment facilities exclusively to its members and their guests. The club house in the club was owned by the assessee. The club house was not assessable. The apex Court reversed the judgment of the High Court and ruled that the assessee’s business was governed by the doctrine of mutuality. The facts in that case are clearly distinguishable, since in that case what was involved was letting out of a building in terms of the findings of the Court.

In fact, in somewhat similar circumstances, the Gujarat High Court in Sports Club of Gujarat Ltd. vs. CIT (1988) 67 CTR (Guj) 233 : (1988) 171 ITR 504 (Guj) has considered the mutual concern theory in respect of a club in its judgment. In the said case, the Court noticed that the club was incorporated as a company and its main object was to promote the game of cricket and other games and sports. The objects clause in the memorandum and articles of association empowered those in the management of the club to invest and deal with moneys of the club not immediately required in such manner as may from time to time be determined by them. The assessee claimed exemption but the ITO rejected the same and (the Tribunal) held that the profits and gains of business or profession would not be exigible to tax on the principle of mutuality. The Gujarat High Court after noticing the (1964) 53 ITR 241 (SC) (supra), ruled that the assessee’s income from interest was not from mutual activity and as such it was exigible to tax. A Division Bench of this Court after referring to various case laws on the subject considered the principle of mutuality in CIT vs. I.T.I. Employees Death & Superannuation Relief Fund (1999) 153 CTR (Kar) 530 : (1998) 234 ITR 308 (Kar) and ruled as under : “The principle that no person can trade with himself does not arise in this case as the monies had been invested by the assessee with the bank to earn income to enable the assessee to discharge its obligations created under the trust. It is clear that 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.”

In the said judgment the Division Bench has made it very clear that income earned from outside agency on interest on securities from the bank would not be covered on the principles of mutuality for claiming exemption from tax. This judgment squarely applies to facts of this case.

On the facts of this case and in the light of the legal principles it is clear to us that what has been done by the club is nothing but what could have been done by a customer of a bank. The principle of ‘no man can trade with himself’ is not available in respect of a nationalised bank holding a fixed deposit on behalf of its customer. The relationship is one of a banker and a customer.

In these circumstances, we have no hesitation in accepting these appeals. The questions of law are answered in favour of the Revenue. The order of the CIT and the order of the Tribunal are set aside. The order of the AO is accepted. No costs.

[Citation : 287 ITR 263]

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