All India Oriental Bank of Employees Welfare Society vs ITO (Exemption) Ward-1(1)

PER ANUBHAV SHARMA, JM:

This appeal is preferred by the assessee against the order dated 27.09.2018 of Ld. Commissioner of Income Tax(A)-40, Delhi (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in Appeal No : CIT(A), Delhi-40/10135/2017-18 arising out of the assessment order dated 11.12.2017 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by ITO, Ward-1(1) for AY: 2015-16.

Heard and perused the record. Appellant, All India Oriental Bank of Commerce Employees Welfare Society, is registered with the Registrar of Societies since 27.12.1976 and has been assessed to tax since then. The Memorandum of Association of the Society inter alia states the aims and objects of the Society as under:-

As for the subject assessment year, Appellant submitted a return of income on 16.03.2016 declaring Nil income but the Appellant was assessed at an income of Rs. 2,86,64,884 as the ld. AR held that the subscriptions received from members during the year in a sum of Rs. 2,57,88,398/-was covered by the 'Principle of Mutuality', which as per the decision of the apex Court in Chelmsford Club vs. CIT (2000) 243 ITR 89, was not taxable. However, the AO held, that the other component of interest received on the FDR's from banks amounting to Rs. 2,86,60,231/- and the savings bank interest of Rs. 4,653/- were not covered by the 'Principle of Mutuality', having been received from a third party, which amount therefore, was taxable as income, in terms of the ruling of the apex Court in Bangalore Club vs. CIT (2000) 350 ITR 509. The same is sustained by CIT(A) for which assessee/appellant is in appeal and has raised following grounds;

The contention of ld. Counsel is that the AO completely missed out the fact that, in pursuance of the objectives of the Society, the Appellant had paid claims, benefits including retirement benefits and pension as under all of which had to be set off against the taxable receipts:-

Ld. Counsel has submitted that the AO erred in not providing deduction for the outgoings of the Appellant on account of death claims, employees VR, pension and retirement benefits of the members aggregating to Rs.3,35,46,040/- as detailed in the table above in para 4 appearing as part of para 2 above from the gross receipts of interest of Rs. 2,86,64,884/-. That is urged so because the income of the Society for the year had to be computed after deducting the outgoings from the gross taxable income of Rs. 2,86,64,884/-. As submitted that an income of Rs. 2,57,88,398/- representing the subscriptions received from the members of the Society is exempted from tax on mutuality principles. Thus it is the rest of the income viz. from interest which according to the AO would be taxable. That is in a sum of Rs. 2,86,60,231/- on account of interest received on FDRs and Rs. 4,653/- on account of interest received on savings bank account. That would result in a total addition of Rs. 2,86,64,884/-. Even if taxability is enforced, it is against this receipt of Rs. 2,86,64,884/- that the outgoings of the Society (in terms of its objectives) in a sum of Rs. 3,35,46,040/- would have to be set off.

Ld. DR on the contrary has relied the impugned orders and submitted that assessee is not entitled to any payments in regard to interest income taxable under the head income from other sources and it is only expenditure made in order to earn that income is allowable.

It comes up admittedly, the subscriptions which have been received from the members of the Employees Welfare Society is in the nature of corpus. In that way it lies in the field of capital and, therefore, it is not income in the commercial sense. It is also governed by the Principle of Mutuality and is thus immune from taxation. The Ld. AO has impliedly conceded this point in to consider that subscriptions forming part of gross receipts of Rs. 2,57,88,398/- is immune from taxation.

As with regard to impugned addition, what is material is that ld. tax authorities has heavily relied Hon’ble Supreme Court decision in the case of Bangalore Club (supra) to hold that the interest earned on fixed deposit with bank are not exempt from tax on the basis of doctrine of mutuality.

In this context, we are of the considered vie that Hon’ble Supreme Court in Bangalore Club case (supra) was considering taxability of interest income from fixed deposit kept in bank with regard to groups of persons in nature of corporate bodies, clubs, friendly societies, credit unions automobiles associations, insurance companies and finance organizations and based upon the first principles of the mutuality as applicable in cases of such assessee, has observed that ‘mandate’ of such assessee is vital to understand the element of mutuality in regard to the incomes, if any generated, and para 20 as such is reproduced below:

The assessee before us is not a group of persons like club with mandate to give services which other wise may be commercial in nature but one show only aim is to generate corpus for benefits of employees and what appears is that benefit was also in nature of death and retirement benefits to members or their families. Assessee has settled claims in the nature of employees voluntary retirement, pensions and other retirement benefits totaling to Rs.335,46,040/-. These payments have been made by the assessee and reflected in the income and expenditure account for the year ending 31.03.2015. Department has not doubted these payments or that these payments were beyond the scope of memorandum of association of the assessee. Admittedly on the income side assessee has shown the subscription received and the interest income of FDR and saving bank account.

In Bangalore Club case (supra) Hon’ble Supreme court has accepted the general principle of doctrine of mutuality that any amount surplus to that needed to pursue common purpose is said to be simply increase of the common fund and as such neither considered income nor taxable. Thus, where on principle of mutuality, the surplus can be distributed among the members or used for the benefit of members then it is discretion of the assessee to apply the interest income towards expenditures towards attainment of its object on heads of death claims, pensions, voluntary retirement benefit of the members.

We are of the considered view when assessee has only subscription and interest income as part of accumulated surplus or common fund to be used for object of society, then assessee’s claim to first appropriate the payments made to members during the year, against taxable income earned during the year is justified. Right of apportionment of these payments towards interest income for the benefit of the members first and thereafter if needed the subscription received during the year, which form the corpus, can be used is quite reasonable way to attain the objective of society in long run when annual subscriptions may fall short but there is larger liability towards such payments in coming years.

As the ultimate beneficiary of common fund, corpus or accumulated interest, will be members or their families and the surplus cannot be used otherwise. Therefore, we are of the considered view that assessee had right to set off the claims made for the benefit of the members against the taxable receipts which is erroneously denied below.

Accordingly, we sustain the ground and allow the appeal of the assessee and Assessing Officer is directed to set off the claims of the assessee to its members, as application of the taxable receipts, and thereafter complete assessment.