Gulmarg Association and anr. Vs. Ito - Court Judgment

Excerpt:
all these appeals by the assessees are directed against the separate orders of the commissioner (appeals) for assessment years 1994-95 to 1998-99. since the grounds of all these appeals are based on identical set of facts, for the sake of convenience, these are being disposed of by a single order.the assessees are associations incorporated under the bombay non-trading corpn. act, 1959. the objects for which the association set up are described in clause (3) of memorandum of association. in short, the object of the society is to manage administration, operate and generally to supervise the common amenities of the members in the association. to collect contribution from members as and when required and determined by the association and to make therefrom a fund for attending general repairing, maintenance and replacement in the building, roads, common services. the other clauses of the memorandum of association are (clause 5), the association incorporated under the said act is not permitted to indulge in any earning activities of profit making activities. that no portion of income or property shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to persons who act any time or have been members of the association. in case of dissolution the clause 10 of memorandum of association provides as under : "if upon a winding or dissolution, there remains after the satisfaction of all the debts and liabilities, any property, whatsoever, the same shall not be distributed amongst the members of the association but shall be given or transferred to such other association ' having objects similar to the objects of their association to be determined by the registrar appointed under the bombay non-trading corporation act, 1959.the source of finance for incurring expenditure is contributions from the members. the association passed a resolution in this regard which reads as under : "the association jointly with ashima estate owners' association constructed a commercial property known as "aniket" on cg road, ahmedabad, for exclusive use by its members. allotment of space was made to members in accordance with the rules and regulations of the association.in order to ensure proper maintenance of building, it was decided vide resolution no. 5 passed by members of the association in their general meeting held on 14-6-1986, to collect maintenance deposit at rs. 25 per sq. ft. this was collected to provide for maintenance and administrative expenses of the association. a copy of resolution is enclosed herewith.as the amount of interest earned on deposit made out of maintenance deposit was inadequate to meet the increasing maintenance expenses and administration expenses, maintenance contribution was collected from the members, which was gradually increased from year to year on account of increasing expenses. entire amount of interest earned on deposits placed out of maintenance deposits as well as maintenance contribution collected from members was applied for maintenance of the building owned by the association and for exclusive use by its members as well as for administrative expenses of the association." the summary of income and expenditure of the years under consideration submitted by the learned authorised representative are as under : during the assessment the assessing officer noticed that the members' contribution was deposited with a limited company and bank. the assessing officer held that interest earned is in direct benefit to the members. the assessing officer treated surplus interest income as taxable in the hands of the assessee by treating aop status as shares of the members are not determinate.the commissioner (appeals) confirmed the action of the assessing officer by relying on the judgment of hon'ble supreme court in the case of cit v. bankipur club ltd. (1997) 226 itr 97 (sc) and the judgment of hon'ble gujarat high court in the case of rajpath club ltd. v. cit (1995) 211 itr 379 (guj).the learned authorised representative submitted that the association has constructed a building for the common use of its members.maintenance charges are collected from the members in lump sum as advance as well as annually. the maintenance charges collected annually as well as income derived from advance maintenance charges are applied for the purposes of maintenance of the building which is solely used by the members of the association. in view of the facts described above and considering the provisions of section 4 under which income-tax is chargeable on income of a person under income tax act, 1961, under the principles of general law and provisions of income tax act, 1961, the surplus accruing to a mutual concern cannot be regarded as income.there is complete identity between class of contributors to the common fund of the association and the class of participators of the activities of the association, its services, etc. it has been held in the case of cit v. shree jai merchants association (1977) 106 itr 542 (guj) that "a mutual association is an aop who agree to contribute funds for some common purposes mutually beneficial and receive back the surplus left out of those funds in the same capacity in which they made contribution. thus, they receive back what was already their own. they contribute not with an idea to trade, but with an idea of rendering mutual help. thus, the main test of mutuality is complete identity of the contributors with the recipients. if such a mutual concerns receives an income it is not liable to tax because on account of the operation of the principle of mutuality the income remains, in reality, the income of the contributors". it is submitted that income earned by the mutual concern from mutual activities is not taxable. different persons combine themselves into a distinct and separate legal entity for the purpose of rendering services to themselves, the resulting surplus is not assessable to tax. during the relevant previous year, the income earned by the association by way of interest on deposit with companies has been wrongly taxed by the assessing officer as the same is not an income under the provisions of income tax act, 1961. the fixed deposits were not made out of surplus funds of the association but were made out of maintenance contribution received from the members of the association to be utilised exclusively for the maintenance of the building used by the members of the association. the raising of deposits from deposit of maintenance contribution of commercial building or housing societies is a common mode of raising maintenance funds and interest earned thereupon is also part of the maintenance contribution fund only. as per the objects of ntc, no part of the amount of interest can be repaid by way of dividend, bonus or in any other manner. the learned authorised representative further submitted that the judgment relied upon by the commissioner (appeals) on hon'ble gujarat high court is distinguishable on facts as in that interest from bank was investment of surplus fund whereas in this case interest is out of the funds maintained by the assessee for the purpose of maintenance, otherwise which was to be contributed by the members.the learned departmental representative relied upon the orders of the lower authorities.we have heard the learned representatives of the parties and gone through the decisions cited. the admitted facts of the case are that a society is formed for maintenance of residential society of the members; maintenance charges are mutually collected from members. the object was not to earn any profit and distribution thereof to the members. even on dissolution the surplus will not be distributed to members. for the purpose of the object of society, i.e., maintenance, the society created a fund like construction fund and maintenance fund.the maintenance fund was deposited with bank and others; the interest income received. both the lower authorities have accepted the principles of mutuality in respect of contribution from members which is not under dispute. on the basis of that principle, the assessing officer has not charged tax on surplus. the dispute is only in respect of interest income. the judgment of hon'ble gujarat high court in the case of rajpat club (supra) is distinguishable on facts; in that case surplus fund was invested with the intention to earn interest income; further on dissolution, surplus shall be distributed to members, whereas in the case under consideration the interest income was directly charged for the maintenance expenses and not to earn interest as income. this observation is supported by the facts of this case that this income will not be given to the members even on dissolution of the association. under the circumstances, we find that the lower authorities have not properly appreciated the facts of the case. the peculiar fact of the case is that the society has decided to collect one time fund from members instead of periodical collection from the members and further decided that in case income falls short, the deficit will be collected from members. the above facts are summarised in figures for different years as under : from the above facts it is clear that the assessee-association has created charge on the maintenance fund collected from the members towards maintenance expenses. so, to that extent it is not income because it has been diverted by an overriding title. we find that the accrual of interest income itself is for the purpose of maintenance. as per the object and dissolution clauses, and connected resolution of the association, this income is never to be distributed to members of the association as income or otherwise. apart from above we find that in the case under consideration, the assessee has reduced the cost of maintenance which was to be contributed by the members. it is useful to refer the ruling laid down by the apex court in the case of cit v.bokaro steels ltd. (1999) 236 itr 315 (sc), wherein it has been held that the activities of the assessee were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. the receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. in the case under consideration the assessee created a fund for meeting the maintenance expenditure. on the basis of above ruling of the apex court the assessee is entitled for reduction of maintenance expenses. the interest income is first adjustable against expenses and if surplus is found that amount is certainly taxable. if it is found otherwise, we are of the view that such interest is not taxable.the controversy under consideration can be examined from one more angle, that is, that, for the sake of argument it is assumed that the association created a fund for maintenance on the basis of one time collection from the members and invested in the bank and others. this can be said to be one type of business activity of the association. for the purpose of calculation of profit the assessee is entitled for expenditure pertaining to that from the income/receipt of that activity. in the case under consideration interest income is income/ receipt and maintenance expense is expenditure of that activity. if income exceeds than expenditure that surplus is subject to tax. in the case under consideration there was loss as calculated above. on identical set of facts the hon'ble delhi high court in the case of director of it v. all india oriental bank & commerce welfare society (2003) 130 taxman 575 (del) has discussed the appeal of revenue as no question of law survives, with the following observations : "as is evident from the format of the questions, the only issue raised by the revenue is as to whether the interest income derived by the respondent-assessee on the contributions made by the members of the welfare society is to be taxed in the hands of the society or not.since in our view, the issue raised by the revenue is legal and is no more res integra, we deem it unnecessary to state the facts. suffice it to note that while completing assessment on the respondent-assessee, a co-operative society comprising of the employees of the bank, the assessing officer had held that the interest income earned by the society on the contributions received from the members was not exempt on the principle of mutuality.the issue with regard to the concept and principle of mutuality has been elaborately examined by the apex court in chelmsford club v. cit (2000) 243 itr 89 (sc). their lordships have held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus generated cannot in any sense be regarded as profits chargeable to tax. it has been observed that what is required to be seen is whether there is a complete identity between the contributions and participators. once the identity of the contributor to the fund or the recipients of the funds; the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obtained to their mandate; and the impossibility that the contributors should derive profit from contributions made by themselves to a fund which could only be expended or returned to themselves is established, the doctrine of mutuality is established.it is not the revenue's case that the aforenoted three conditions are not established in the instant case. as a matter of fact, before the tribunal, the learned departmental representative had conceded that the controversy sought to be raised again in this appeal, stands concluded against the revenue in chelmsford club v. cit (supra). in this view of the matter, no question of law, much less a substantial question of law, survives for our consideration." in the light of the above discussion and under the peculiar circumstances, we find that there is no justification in taxing income.we, therefore, set aside the orders of the lower authorities and the claim of the assessee is allowed. accordingly, the additions made by the assessing officer are deleted.

Judgment:
All these appeals by the assessees are directed against the separate orders of the Commissioner (Appeals) for assessment years 1994-95 to 1998-99. Since the grounds of all these appeals are based on identical set of facts, for the sake of convenience, these are being disposed of by a single order.

The assessees are associations incorporated under the Bombay Non-Trading Corpn. Act, 1959. The objects for which the association set up are described in clause (3) of memorandum of association. In short, the object of the society is to manage administration, operate and generally to supervise the common amenities of the members in the association. To collect contribution from members as and when required and determined by the association and to make therefrom a fund for attending general repairing, maintenance and replacement in the building, roads, common services. The other clauses of the memorandum of association are (clause 5), the association incorporated under the said Act is not permitted to indulge in any earning activities of profit making activities. That no portion of income or property shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to persons who act any time or have been members of the association. In case of dissolution the clause 10 of memorandum of association provides as under : "If upon a winding or dissolution, there remains after the satisfaction of all the debts and liabilities, any property, whatsoever, the same shall not be distributed amongst the members of the association but shall be given or transferred to such other association ' having objects similar to the objects of their association to be determined by the registrar appointed under the Bombay Non-Trading Corporation Act, 1959.

The source of finance for incurring expenditure is contributions from the members. The association passed a resolution in this regard which reads as under : "The association jointly with Ashima Estate Owners' Association constructed a commercial property known as "ANIKET" on CG Road, Ahmedabad, for exclusive use by its members. Allotment of space was made to members in accordance with the rules and regulations of the association.

In order to ensure proper maintenance of building, it was decided vide resolution No. 5 passed by members of the association in their general meeting held on 14-6-1986, to collect maintenance deposit at Rs. 25 per sq. ft. This was collected to provide for maintenance and administrative expenses of the association. A copy of resolution is enclosed herewith.

As the amount of interest earned on deposit made out of maintenance deposit was inadequate to meet the increasing maintenance expenses and administration expenses, maintenance contribution was collected from the members, which was gradually increased from year to year on account of increasing expenses. Entire amount of interest earned on deposits placed out of maintenance deposits as well as maintenance contribution collected from members was applied for maintenance of the building owned by the association and for exclusive use by its members as well as for administrative expenses of the association." The summary of income and expenditure of the years under consideration submitted by the learned authorised representative are as under : During the assessment the assessing officer noticed that the members' contribution was deposited with a limited company and bank. The assessing officer held that interest earned is in direct benefit to the members. The assessing officer treated surplus interest income as taxable in the hands of the assessee by treating AOP status as shares of the members are not determinate.

The Commissioner (Appeals) confirmed the action of the assessing officer by relying on the judgment of Hon'ble Supreme Court in the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC) and the judgment of Hon'ble Gujarat High Court in the case of Rajpath Club Ltd. v. CIT (1995) 211 ITR 379 (Guj).

The learned authorised representative submitted that the association has constructed a building for the common use of its members.

Maintenance charges are collected from the members in lump sum as advance as well as annually. The maintenance charges collected annually as well as income derived from advance maintenance charges are applied for the purposes of maintenance of the building which is solely used by the members of the association. In view of the facts described above and considering the provisions of section 4 under which income-tax is chargeable on income of a person under Income Tax Act, 1961, under the principles of general law and provisions of Income Tax Act, 1961, the surplus accruing to a mutual concern cannot be regarded as income.

There is complete identity between class of contributors to the common fund of the association and the class of participators of the activities of the association, its services, etc. It has been held in the case of CIT v. Shree Jai Merchants Association (1977) 106 ITR 542 (Guj) that "a mutual association is an AoP who agree to contribute funds for some common purposes mutually beneficial and receive back the surplus left out of those funds in the same capacity in which they made contribution. Thus, they receive back what was already their own. They contribute not with an idea to trade, but with an idea of rendering mutual help. Thus, the main test of mutuality is complete identity of the contributors with the recipients. If such a mutual concerns receives an income it is not liable to tax because on account of the operation of the principle of mutuality the income remains, in reality, the income of the contributors". It is submitted that income earned by the mutual concern from mutual activities is not taxable. Different persons combine themselves into a distinct and separate legal entity for the purpose of rendering services to themselves, the resulting surplus is not assessable to tax. During the relevant previous year, the income earned by the association by way of interest on deposit with companies has been wrongly taxed by the assessing officer as the same is not an income under the provisions of Income Tax Act, 1961. The fixed deposits were not made out of surplus funds of the association but were made out of maintenance contribution received from the members of the association to be utilised exclusively for the maintenance of the building used by the members of the association. The raising of deposits from deposit of maintenance contribution of commercial building or housing societies is a common mode of raising maintenance funds and interest earned thereupon is also part of the maintenance contribution fund only. As per the objects of NTC, no part of the amount of interest can be repaid by way of dividend, bonus or in any other manner. The learned authorised representative further submitted that the judgment relied upon by the Commissioner (Appeals) on Hon'ble Gujarat High Court is distinguishable on facts as in that interest from bank was investment of surplus fund whereas in this case interest is out of the funds maintained by the assessee for the purpose of maintenance, otherwise which was to be contributed by the members.

The learned Departmental Representative relied upon the orders of the lower authorities.

We have heard the learned representatives of the parties and gone through the decisions cited. The admitted facts of the case are that a society is formed for maintenance of residential society of the members; maintenance charges are mutually collected from members. The object was not to earn any profit and distribution thereof to the members. Even on dissolution the surplus will not be distributed to members. For the purpose of the object of society, i.e., maintenance, the society created a fund like construction fund and maintenance fund.

The maintenance fund was deposited with bank and others; the interest income received. Both the lower authorities have accepted the principles of mutuality in respect of contribution from members which is not under dispute. On the basis of that principle, the assessing officer has not charged tax on surplus. The dispute is only in respect of interest income. The judgment of Hon'ble Gujarat High Court in the case of Rajpat Club (supra) is distinguishable on facts; in that case surplus fund was invested with the intention to earn interest income; further on dissolution, surplus shall be distributed to members, whereas in the case under consideration the interest income was directly charged for the maintenance expenses and not to earn interest as income. This observation is supported by the facts of this case that this income will not be given to the members even on dissolution of the association. Under the circumstances, we find that the lower authorities have not properly appreciated the facts of the case. The peculiar fact of the case is that the society has decided to collect one time fund from members instead of periodical collection from the members and further decided that in case income falls short, the deficit will be collected from members. The above facts are summarised in figures for different years as under : From the above facts it is clear that the assessee-association has created charge on the maintenance fund collected from the members towards maintenance expenses. So, to that extent it is not income because it has been diverted by an overriding title. We find that the accrual of interest income itself is for the purpose of maintenance. As per the object and dissolution clauses, and connected resolution of the association, this income is never to be distributed to members of the association as income or otherwise. Apart from above we find that in the case under consideration, the assessee has reduced the cost of maintenance which was to be contributed by the members. It is useful to refer the ruling laid down by the Apex Court in the case of CIT v.Bokaro Steels Ltd. (1999) 236 ITR 315 (SC), wherein it has been held that the activities of the assessee were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. In the case under consideration the assessee created a fund for meeting the maintenance expenditure. On the basis of above ruling of the Apex Court the assessee is entitled for reduction of maintenance expenses. The interest income is first adjustable against expenses and if surplus is found that amount is certainly taxable. If it is found otherwise, we are of the view that such interest is not taxable.

The controversy under consideration can be examined from one more angle, that is, that, for the sake of argument it is assumed that the association created a fund for maintenance on the basis of one time collection from the members and invested in the bank and others. This can be said to be one type of business activity of the association. For the purpose of calculation of profit the assessee is entitled for expenditure pertaining to that from the income/receipt of that activity. In the case under consideration interest income is income/ receipt and maintenance expense is expenditure of that activity. If income exceeds than expenditure that surplus is subject to tax. In the case under consideration there was loss as calculated above. On identical set of facts the Hon'ble Delhi High Court in the case of Director of IT v. All India Oriental Bank & Commerce Welfare Society (2003) 130 Taxman 575 (Del) has discussed the appeal of revenue as no question of law survives, with the following observations : "As is evident from the format of the questions, the only issue raised by the revenue is as to whether the interest income derived by the respondent-assessee on the contributions made by the members of the welfare society is to be taxed in the hands of the society or not.

Since in our view, the issue raised by the revenue is legal and is no more res integra, we deem it unnecessary to state the facts. Suffice it to note that while completing assessment on the respondent-assessee, a co-operative society comprising of the employees of the bank, the assessing officer had held that the interest income earned by the society on the contributions received from the members was not exempt on the principle of mutuality.

The issue with regard to the concept and principle of mutuality has been elaborately examined by the Apex Court in Chelmsford Club v. CIT (2000) 243 ITR 89 (SC). Their Lordships have held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus generated cannot in any sense be regarded as profits chargeable to tax. It has been observed that what is required to be seen is whether there is a complete identity between the contributions and participators. Once the identity of the contributor to the fund or the recipients of the funds; the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obtained to their mandate; and the impossibility that the contributors should derive profit from contributions made by themselves to a fund which could only be expended or returned to themselves is established, the doctrine of mutuality is established.

It is not the revenue's case that the aforenoted three conditions are not established in the instant case. As a matter of fact, before the Tribunal, the learned Departmental Representative had conceded that the controversy sought to be raised again in this appeal, stands concluded against the revenue in Chelmsford Club v. CIT (supra). In this view of the matter, no question of law, much less a substantial question of law, survives for our consideration." In the light of the above discussion and under the peculiar circumstances, we find that there is no justification in taxing income.

We, therefore, set aside the orders of the lower authorities and the claim of the assessee is allowed. Accordingly, the additions made by the assessing officer are deleted.