V.V.S.Rao - (1.) THESE appeals by the revenue are against the orders of the Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, holding that the interest accrued to the assessee club from its deposits with banks and financial institutions, which are its corporate members, are not tainted with commerciality; and that such interest income is not taxable on the principle of mutuality. The question of law raised in these appeals by the revenue is whether interest accrued on the fixed deposits, parked with commercial banks, is liable to tax. I.T.T.A.Nos.422, 529, 530, 531, 532 and 533 of 2006 are filed against the Secunderabad Club, and the other three appeals, being I.T.T.A.Nos.443 of 2006, 78 and 81 of 2007, are filed against the Armed Forces Officers Cooperative Housing Society.
(2.) THE following factual matrix is with reference to I.T.T.A.No.422 of 2006. THE respondent Secunderabad Club (hereafter, the assessee) is a social and recreational club. It is not registered either as an association or a society. It is a mutual association, statedly, not a profit making concern. All their activities are allegedly not tainted with commerciality or business modalities. THE assessee receives monthly subscriptions, admission/entrance fee and payments made by its members for use of club facilities. During the assessment year 1996-97, the assessee earned interest on the fixed deposits kept by it with Andhra Bank, Lloyds Finance Limited, ITC Agrotech Limited, VST Industries Limited, Nagarjuna Finance Limited and Apple Credit Corporation Limited. In their return for 1996-97, the assessee sought exemption, of the interest received, from tax citing the principle of mutuality. THE banks/financial institutions, with whom the fixed deposits were made, are corporate members of the club. THE return for the year 1996-97, admitting Rs.1,22,700.00, was accepted under Section 143(1) of the Income Tax Act, 1961 (the Act, for brevity). However, the assessing officer issued notice under Section 148 of the Act on the ground that the exemption claimed with regard to the interest on fixed deposits from banks/companies is not a valid claim. During the enquiry, the assessee furnished information. THEy stated that the assessee started admitting corporate bodies/banks as members about twenty years ago, the members of all categories are governed by the rules/bye-laws of the club, the entrance fee payable by corporate members is Rs.3.5 lakhs for the first two nominees, and Rs.1 lakh for each subsequent nominee, who are whole time directors or senior executives, resident in Hyderabad. THEre could be upto 5 nominees if the paid up capital of the corporate member is Rs.5 crores, and upto 10 nominees if the paid up capital exceeds Rs.5 crores. Any company incorporated under the Companies Act or a statute of the State or Central Government or International Renowned Association including a cooperative society having its office or place of business in Hyderabad and Secunderabad and its suburbs is eligible for membership as a corporate member. THE club also benefits by the accrual of additional income by way of entrance fee; and nominees of the corporate members of the club enjoy the same facilities and privileges as other members. THEre were as many as 31 corporate members, but the assessee deposited their funds with the above named six banks/financial institutions. The contention was that the interest earned by the assessee from these corporate members is interest earned from its members and, consequently, the principle of mutuality applies. The assessee relied on the decision of the Supreme Court in Civil Appeal Nos.4777-4778 of 1998 dated 05.02.1998 (unreported Judgment in CIT, Cawnpore v M/s.Cawnpore Club Limited) and CIT v Bankipur Club Limited (1997) 5 SCC 394 : (1997) 226 ITR 97 (SC). The assessing officer came to the conclusion that the assessee did not deposit the amounts with the Banks treating them as corporate members; and the banks had not accepted the deposits from the assessee in their capacity as a member of the club.
(3.) THEY accepted the deposits from the assessee as any other depositor, and paid the same rate of interest as is payable to general public and, therefore, corporate membership in the club had no nexus whatever with their capacity of accepting deposits from the assessee. The assessing officer relied on the order of the Tribunal in I.T.A.No.819 and 820/Hyderabad/1994, dated 05.02.2002 wherein it was held that advancing loans or making fixed deposits is not one of the objects of the assessee club; the members of the assessee had a double role one as a member and the other as a member of the general public; the banks, while accepting deposits from the assessee, did not act in their capacity as members of the club but as members of the general public; and therefore, the principle of mutuality cannot be applied. The assessing officer also came to the conclusion that the unreported Judgment of the Supreme Court in Cawnpore Club did not lay down or enunciate a general proposition or applicability of the principle of mutuality to the interest income earned by a club on the deposits made. Further, after analyzing the decision of the Supreme Court, the assessing officer came to the conclusion that Bankipur Club nowhere dealt with the question of taxability of interest income on fixed deposits etc. The assessee also relied on CIT v Natraj Finance Corporation (1988) 169 ITR 732 (AP). The assessing officer opined that the said decision is of no avail to him as the High Court did not discuss whether the principle of mutuality applied to any interest income derived from money lying in deposit with any bank. Accordingly, the assessing officer added interest on deposits, and assessed them to tax. Being aggrieved by the assessment order dated 26.03.2004, the assessee went in appeal. This was heard along with four other appeals pertaining to the assessment years 1998-99, 1999-00, 2000-01 and 2001-02. The main ground for appeal was non-taxability of interest income derived from corporate deposits. Reliance was placed on the order of the Tribunal dated 13.08.2003 in the case of Fateh Maidan Club v Additional Commissioner of Income Tax (ITA Nos.937 to 939 and 947 to 952/Hyd/1995 and 716 to 720/Hyd/2000)and Natraj Finance Corporation. The Appellate Commissioner relied on the decision of the Tribunal dated 05.03.2002 for the assessment year 1990-91 and 1991-92, and held that the principle of mutuality cannot be applied to the interest income derived from investments. He came to the conclusion that the decision of the jurisdictional Tribunal on the specific issue in the appellants own case for earlier years is binding. He also discussed Natraj Corporation, Cawnpore Club and came to the conclusion that they do not lay down any ratio applicable to the case, and followed the decision of the Tribunal dated 13.08.2003 in the case of assessee itself. The appeal was, therefore, dismissed. The learned Tribunal, Hyderabad Bench, reversed the orders of the Commissioner of IT. Having come to the conclusion that the interest income earned by the assessee on the deposits made by its corporate members is not liable to be taxed, the learned Tribunal deleted the additions made by the assessing officer as confirmed by the CIT (A). The Tribunal referred to various precedents and held that the assessee did not engage in any business by parking their surplus money in the banks and that, even if it is held as a trade with members as no outsiders are involved, the income is not exigible to tax.;