IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 30.08.2010 CORAM: THE HONOURABLE Mr. JUSTICE F.M.IBRAHIM KALIFULLA and THE HONOURABLE Mr. JUSTICE M.M.SUNDRESH TAX CASE (APPEAL) Nos.676 to 680 of 2010 The Commissioner of Income-Tax-II, Coimbatore. .. Appellant in all cases. /versus/ M/s. Wellington Gymkhana Club, Staff College Road, Wellington – 643 231. .. Respondent in all cases. Tax Cases (Appeal) filed under Section 260-A of the Income Tax Act against the order of the Income Tax Appellate Tribunal, Chennai 'B' Bench, in I.T.A.Nos.2317/MDS.2008, 704 to 707/Mds/2009, dated 28.08.2009 respectively against the order of the Commissioner of Income Tax Appeals in ITA.No.69/08-09 dated 17.10.2009 and ITA.Nos.175 to 178/08-09 dated 12.03.2009 respectively against the assessment order of the Income Tax Officer, Ward I(2) Ooty dated 10.12.2008 relating to the Assessment Years 2001-2002, 2002-2003, 2003-2004, 2004-2005, 2005-2006 respectively. For appellant : Mr.J.Naresh Kumar, Senior Standing Counsel for Income Tax. For respondent : Mr.V.S.Jayakumar, (JUDGMENT OF THE COURT WAS DELIVERED BY M.M.SUNDRESH,J.) These appeals are preferred by the Revenue for the assessment year 2001-02 to 2005-06, challenging the order of the Tribunal wherein, the Tribunal has allowed the appeals preferred by the assessee, in part by holding that receipts from investment with Bankss are covered by the Principle of Mutuality, by raising the following substantial questions of law:- "(i) Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in law in holding https://hcservices.ecourts.gov.in/hcservices/ that the income from interest on investments with Banks is exempt from tax on the Principle of Mutuality is valid? (ii) Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in law in holding that, Mutuality Principles will apply to the facts of this case, even though that the receipts did not arise from any dealing between the assessee club and its members, and the transactions were with third parties and were clearly tainted with commerciality?" 2. The facts of the cases are that the assessee is a social club formed for the benefit of its members. The Assessing Officer while completing the assessment brought to tax entire income from interest on investments made by the assessee with Banks, on the ground that the receipts did not arise from any dealing between the assessee club and its members and the said transactions were commercial transactions. The assessee's further appeal before the Commissioner of Income Tax (Appeals) was rejected. But the same was allowed by the Income-tax Appellate Tribunal on the ground that receipts from investmentS with Banks are covered by the Principle of Mutuality by holding that inasmuch as the concerned Bank is also a member of the Club and the said income was utilised by the assessee to its members, the Principle of Mutuality would apply. Challenging the said Order, the Revenue has filed the present appeal. 3. The questions of law raised by the Revenue are covered by the judgment of this Court in MADRAS GYMKHANA CLUB v. DY. CIT (Mad.) [2009 (226 CTR.,176)] wherein this Court has held that inasmuch as the surplus fund accrued from the investments made by the assessee with its member Bank and other institutions cannot be held to satisfy the Principle of Mutuality. It was further held that the Principle of Mutuality is confined to be income earned by the club out of the contributions received by the club from its members, but has no application in respect of the interest earned from the deposits of surplus funds in the Banks by way of income. It was held that the very fact that the Bank concerned was also an institution member of the assessee, cannot be a ground to hold that the Principle of Mutuality, would be applicable. This Court in paragraph Nos.27 and 37 of that judgment has observed as follows:- " (27) The above provisions contained in the rules, no doubt, enables the club to invest its surplus funds in the manner provided therein with the financial institutions who are members of the club. But when the object of the club and the provisions made under the rules for making the investments are read together, the position that https://hcservices.ecourts.gov.in/hcservices/ emerges is that the investment of surplus funds has nothing to do with the objects of the club. It is true that such investments can be made in the Government securities or its banking institution members or in the form of securities which can be only with its corporate members. The contention of the assessee clubs are that when enormous surplus amount is generated, such amounts cannot be kept in hot cash or even in the regular account which are being operated for the day-to-day administration and therefore such amounts had to be necessarily kept in fixed deposits or in the form of securities of longer duration, which funds ultimately are meant to be utilised for the improvement of the facilities of the club. (37) At the risk of repetition, it will have to be held that investment of surplus fund with some of the member banks and other institutions in the form of fixed deposits and securities which in turn result in earning of huge surplus amounts by way of interest cannot be held to satisfy the mutuality concept. As held in the decision of the Karnataka High Court reported in CIT vs. I.T.I.Employees Death & Superannuation Relief Fund (supra) the principle of mutuality could be confined in respect of the income earned by the club out of the contributions received by the club from its members but it will have no application in respect of the interest earned from the deposits of surplus funds in the banks by way of income." 4. Learned counsel appearing for the Revenue as well as the assessee submitted that the judgment rendered by this Court is squarely applicable to the said appeals also. Hence, considering the ratio laid down, we are of the considered opinion that the substantial questions of law are to be answered in favour of the Revenue and against the assessee. 5. For the above reasons, these Tax Case (Appeals) are allowed and the substantial questions of law are answered in favour of the Revenue. No costs. Sd/ Asst.Registrar /true copy/ Sub Asst.Registrar https://hcservices.ecourts.gov.in/hcservices/ sai To 1. The Commissioner of Income Tax - II, Coimbatore. 2. The Income Tax Officer, Ward I (2), Ooty, 3. Commissioner of Income Tax Appeals (I), coimbatore. 4. The Assistant Registrar, Income-Tax Appellate Tribunal Rajaji Bhavan, III Floor, Besant Nagar, Chennai - 90. 1 cc To Mr.J.Nareshkumar, Sr.Standing Counsel for Income Tax, SR.64330. 1 cc To Mr.V.S.Jayakumar, Advocate, SR.63918. T.C. Nos.676 to 680 of 2010 LA(CO) RVL 07.09.2010 https://hcservices.ecourts.gov.in/hcservices/