B.V. Nagarathna, J.

These two appeals are filed by the assessee being aggrieved by the order of the Appellate Tribunal, Bangalore Bench in ITA., Nos. 478/Bang/2001 and 479/Bang/2001, dated 13.5.2003 for the assessment years 1995-96 and 1996-97 respectively since the substantial questions of law framed in these two appeals are identical and parties are same, these appeals are disposed of by this common judgment.

2. The appellant is a registered society comprising of the employees of Canara Bank established with the object of promoting welfare among the members, who contribute towards the corpus fund. The welfare fund is utilized, inter alia, towards advance of loans to the members and receive interest, which is a major portion of its revenue. For the assessment year 1995-96 and 1996-97 in respect of excess income over expenditure of Rs.4,20,719/- and Rs.6,08,303/-. The appellant claimed exemption from tax on the basis of principles of mutuality. The assessment was processed under Section 143(1)(a) of the Income-Tax Act. Subsequently, the assessment was re-opened under Section 147 of the Act on 9.9.1999 and a notice under Section 148 was issued. In response to the said notice the appellant filed a return on 4.11.1999 declaring the same income as per the original return of the income. While completing the assessment under Section 143(3) read with Section 147 the Assessing Officer taxed the interest income on investments and dividend income on shares and arrived at an income of Rs.42,69,460/- and Rs.68,50,994/- respectively as per AnnexureA1.

3. Aggrieved by the said order of the Assessing Officer, the appellant filed appeals before the Commissioner of Income Tax (Appeals) -V in respect of the two assessment years who by order dated 29.3.2001 and 30.1.2001 dismissed the appeals. The appellant next filed appeals before the Income-Tax Appellate Tribunal challenging the taxing of the interest income and dividend income, which were also dismissed on 13.5.2003. Aggrieved by the said order of the Tribunal the assessee has filed this appeal raising the following substantial questions of law:

"1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the principle of mutuality does not apply to the certain income of the appellant and it is taxable income of the appellant

2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the decision of the Honble High Court of Karnataka in the case of CIT Vs. ITI Employees Death and Superannuation Relief Fund, 234 ITR 30 [LQ/KarHC/1998/347] is applicable for the appellant case while facts of that case are completely different from that of the appellant and whether on the facts of the appellant case and on account of the ratio of the decision of Supreme Court in case of Chelmsford Club Vs. CIT 234 ITR 89 the appellant is entitled to benefit of the principles of mutuality

3. Whether the Tribunal was justified in law in holding that levy of interest under Section 234-B under reassessment proceedings is valid in law and moreso for the period from April 1995 to October 2000 in contravention of the provision of Section 234-B(3)

4. Whether on the facts and circumstances of the case, is the Tribunal right in law in not canceling the assessment"

(Substantial question of law at para 23 of the Memorandum of Appeal has been given up by the appellant).

4. We have heard Sri A. Shankar, learned Counsel for the appellant and Sri Arvind for Sri M.V. Sheshachala, learned Counsel for the respondent.

5. It is submitted by the Counsel for the appellant that the appellant/ Society is established for the mutual benefit of its members and funds of the society, consisting of contribution from the members are used for lending loans to the members and in turn collect interest form the members, as such the income is exempted from tax on the principle of Doctrine of Mutuality in terms of Section 4 of the Income-Tax Act. It is further submitted that the funds collected by the appellant are used to provide monetary assistance to the members and as a matter of precaution the surplus fund was kept in the bank not with the primary object of earning interest, but to keep it in safe custody and that the interest earned has been used only for the ultimate benefit of the members. He further submitted that while applying the doctrine of mutuality it is the source of the deposit that has to be taken into consideration and not the manner in which the fund is applied. He has also referred to the objects of the appellant as stated in clause 3 of the Memorandum of Association of the appellant and has taken us through clauses 9 and 10 to highlight on the source of funds and as to how the income and property of the assessee is applied by way of loan to members, rehabilitation in distress, development and general welfare. He has also relied upon 243 ITR 89 and 169 ITR 732 to submit that in the instant case the authorities below failed to appreciate the Doctrine of Mutuality as applicable to the facts and circumstances of the case. The appellants Counsel has also submitted that the Assessing Officer was not right in levying interest from 1.4.1995, as this is a case under Section 147 of the Income-Tax Act and therefore, interest should be from the date of determination under Section 143(1)(a) to the date of order under Section 143(3).

6. Per contra, Counsel for the revenue submitted that in the instant case the Assessing Officer was justified in issuing notice under Section 148 of the Act as the interest income on investments and dividends income on the shares had not been taken into consideration for the purpose of tax and by relying upon the Judgment of this Court reported in 234 ITR 308 [LQ/KarHC/1998/464] submitted that the appeal be dismissed as no substantial question of law arises for the consideration of this Court.

7. At the outset it is relevant to set out the objects of the assessee as well as clauses 3, 9 and 10, which deals with funds of the assessee.

"Clause 3: The objects of the Association are:

(a) Economic, social and moral advancement of the members and to encourage and help them to develop habits of thrift, self help and better living.

(b) To provide recreation and arrange outing and run holiday and convalescent homes for members.

(c) To give financial aid or loans with or without interest to members in case of sickness, disability or distress amongst the members or their families or for education of their children etc., and

(d) To carry on a scheme of relief for the benefit of the dependents of the members of the fund in the event of their death, while in the service of the Bank.

Clause 9: The funds for the Association shall be raised by:

(a) Donations received from the Bank or any of its Directors or any members of the staff or from others. Donations are not refundable.

(b) Entrance fees paid by members. Entrance fees are not refundable.

(c) Deposits by members. Members deposits are refundable with interest as hereinafter provided.

(d) Interest, dividends or other returns on loans and investments of the fund.

Items a, b and d are the absolute property of the Fund. In respect of item c, the fund shall have only the right of user for the duration of the respective membership of depositing members.

Clause 10: (i) All the properties and funds of the Association shall vest in the Managing Committee, who shall hold and administer the same in accordance with these presence for the furtherance of the objects set out in the Memorandum of Association. All monies and funds shall be invested in such manner and in such securities or investments or be deposited in such Banks as the Committee may from time to time determine.

(ii) The income and property of the Association howsoever derived shall be applied solely towards the promotion of the objects of this Association and no portion thereof shall be paid or transferred directly or indirectly by way of dividends, bonus or otherwise howsoever by way of profits to the persons who at any time are or have been members of the Association or to any one of them or to any person claiming through them, provided that nothing herein contained shall prevent the payment in good faith of any remuneration to the employees of the Association or to any member thereof or other person in return for any service rendered to the Association or payment of interest at rates to be determined from time to time, on amounts deposited with the fund by the members or repayments of such deposits with interest thereon."

8. A perusal of the objects of the appellant/assessee makes it apparent that it is to give assistance to its members towards economic, social and moral advancement and to work towards the welfare of the members whether singly or in collaboration with other institutions or associations. While adverting to the source of funds it is seen that it comprises mainly of donations received from the bank or any members of the staff which are non-refundable, entrance fees deposited by members and interest on dividends or other returns on loans and investment of the fund. It is brought to our notice by the learned Counsel for the appellant that during the two relevant assessment years in question the source of funds were all received from the members and no outsiders contributed to the funds and that interest, dividends or other returns of the loans and investments become part of the funds and under Clause 10 of the Memorandum of Association the properties and funds of the association vests in the Managing Committee which would administer the same for the furtherance of the objects of the appellant and that the income derived shall be applied solely towards the objects of the association.

9. At this stage, it is relevant to extract the details of the income for the assessment year 1995-96 and 1996-97 respectively:

Table

10. In relation to the interest on loans and investments amounting to Rs.4,78,77,448/- and Rs.42,13,690 and Rs.5,42,41,643/-; Rs.67,11,594/-for the assessment years 1995-96 and 1996-97 respectively the Assessing Officer was of the view that as the same was earned from outside sources and the principle of mutuality would not govern the same and hence the same were liable to be taxed as income from other sources.

11. The main reason for the reopening of the assessment is the escapement of income in respect of the interest on investments and the dividend on shares. The assessee treated these two incomes under one head along with other incomes and claimed exemption for the entire income under the Doctrine of mutuality.

12. The Commissioner of Income-Tax (Appeals) held that the Assessing Officers conclusion that there is profit motivation in respect of interest income and dividend income and thereby these two incomes are not exempt from tax because there is no mutuality with respect to these incomes. Accordingly, the appeal was dismissed.

13. Before the Appellate Tribunal the appellant while re-iterating its stand before the lower authorities submitted that the income of the appellant comprised of interests received on loans dispersed with members and also a small portion represented the income from investments made with the banks and other non-member organizations and therefore, the Doctrine of Mutuality applied to the facts and circumstances of the case and when once the Principles of Mutuality were found to exist then the source of income becomes irrelevant and the affairs of the institution as a whole is covered by the Principle of Mutuality and therefore, any surplus derived by the assessee had to fall outside the tax net. Reliance was placed on the decision of the Honble Supreme Court in the case of Chelmsford Club Vs. C.I.T., (2000) 243 ITR 89 [LQ/SC/2000/446] and a decision of the Andhra Pradesh High Court in CIT Vs. Nataraj Finance Corporation, (1988) 169 ITR 732. The stand of the revenue before the Tribunal was based on the Judgment of the Division Bench of this Court in CIT Vs. ITI Employees Death and Superannuation Relief Fund, (1998) 234 ITR 308. [LQ/KarHC/1998/464] These decisions shall be considered later. The Tribunal while discussing on the principle of mutuality stated that in the instant case the impugned income did not arise out of a transaction amongst the mutuality of participants of the funds and while approving the action of the revenue by referring to the decision of this Court in ITI Employees Death and Superannuation Relief held that the principle of mutuality can be disregarded by the presence of certain activities of a fund which do not result out of the transactions amongst the members and that the principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character. But however, the principles of mutuality in such cases can be confined to transactions with members and by applying the Doctrine of Severance held that two activities can be separated for the purpose of dividing the profits derived from non-members which can be brought to tax and that in the instant case held that interest on investments and dividends could not be covered by the Principles of Mutuality and therefore, exempt from tax and the appeals filed by the assessee for the assessment year 1995-96 and 1996-97 were dismissed.

14. Being aggrieved by the said orders of the Tribunal the assessee has filed these appeals on the above noted substantial questions of law.

15. Under the general Law relating to mutual concerns, the surplus accruing to a mutual concern cannot be regarded as income, profits or gain for the purpose of the Act (Section 4), as where the contributors are to receive back a part of their own contributions, the complete identity between the contributors and recipients negatives the idea of any profit, for no man can make profit out of himself. Therefore a mutual concern can carry on an activity with its members, though the surplus arising from such activity is not taxable income or profit. The principle of mutuality has also been accepted in the case of a voluntary organization, which receives contributions from its members.

16. Thus the crucial test of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributions to the common fund. In other words there must be complete identity between the contributors and the participators. If this requirement is satisfied the particular form which the association takes is immaterial. Conversely, where there is no such identity between the class of contributors to the common fund and the class of participators in the surplus, the profits of the association would be assessable to tax.

17. The Supreme Court in C.I.T Vs. Royal Western India Turf Club Limited, (1953) 24 ITR 551 [LQ/SC/1953/95] reviewed the case law related to mutual concern and laid down that an incorporated company which carries on business and realize money both from members and from non-members for the same consideration, namely, the giving of the same or similar facilities to all alike in the course of one and the same business carried on by it, cannot be regarded as a mutual concern.

18. On the other hand in the case of C.I.T. Vs. Bankipur Club, 226 ITR 97 [LQ/SC/1997/863] followed in Chelmsford Club 243 ITR 89 [LQ/SC/2000/446] , the Honble Supreme Court summed up that where a number of persons combined together and contribute to the 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 returned to those persons cannot be regarded in any sense as profit.

19. Hence where an Association or company trades with its members only and the surplus out of the common fund is distributable among the members, there is no mutuality and the surplus is not assessable to tax as profit, the reason being that there is complete identity between the contributors and the participators for only those members would be entitled to be participate in the surplus who have contributed to it as customers.

20. The question whether the Doctrine of Mutuality applies to a particular activity is largely a question of fact.

21. Under the Doctrine of Mutuality, the following three conditions should exist before an activity could be brought under the concept of mutuality: (1) That no person can earn from himself; (2) That no profit motivation and (3) That no sharing of profits.

22. With regard to the first condition i.e., no person can earn from himself means that, there should be a complete identity between the contributors and participators. In this case, there is identity between contributors and participators as far as interest income earned from members and rental income earned on Holiday Home are concerned as the interest income has arisen out of the loans given to its own members. The rental income from Holiday Home has again arisen out of Holiday Home given on hire to its own members. Thus, these two incomes come under the doctrine of mutuality.

23. But the question is as to whether interest and dividend income on shares also come under the doctrine of mutuality on the ground that there is complete identity between the contributors and the participators.

24. Before answering the substantial questions of law raised in this appeal, it is necessary to state that the source of funds in the instant case is only from the members of the assessee and that it has not received any donations or other monetary grants from any outside source apart from the members during the two relevant assessment years. It is the members contribution which has become the corpus fund and the same was utilized to advance loan to the members and interest was received on the said loans and that portion of the fund which was not advances to the members was invested as a precaution for the purpose of keeping it in safe custody and not with an intention to derive a profit by way of interest or dividend of the surplus corpus fund. Further the rent received is by hiring the Holiday Homes to its members and no outside agency has been involved in the receipt of this income. It is also submitted by the learned Counsel for the appellant that for the relevant assessment years there was no donation or receipt of money from any third party including the bank which has not been controverted by the revenue.

25. It is noticed that the funds of the Assessee have been invested in a term deposit with a bank which is not a member of the Assessees welfare fund and earned interest on the investment made. The Bank, in which the surplus fund is deposited, no doubt, forms a third party viz-a-viz the assessee, but, in our view it cannot be said that, the identity between the contributors and the recipients is lost. Accordingly, the interest on investments of Rs.42,13,690/- and dividend income on shares of Rs.55,760/ - have to be treated as non-taxable incomes.

26. While distinguishing the judgment of this Court in the case of ITI Employees Death and Superannuation Relief Fund, learned Counsel for the appellant has relied upon the decisions in Chelmsford Club and Nataraj Finance Corporation.

27. In ITI Employees Death and Superannuation Relief Fund, this Court while examining the Trust Deed and its various clauses and after referring to several decisions on the concept of mutuality held that the ingredients of mutuality were missing in the said case as apart from the contribution made by the members, there were other sources of funding of the trust fund, the trust fund could be augmented by contribution made by the ITI Management, donations, interest or other income accrued or earned from the said fund or any investments thereof and investments made from out of the funds. This Court further held as follows:

"The object of the trust is to invest the funds of the trusts in banks and securities for earning interest to discharge the liabilities and obligations created under the trust. The fund is a welfare fund established for providing benefit to the employees on retirement/termination of service/death, etc., of such employees. It is not a case of surplus from the contributions made by the members. It is also not a case where the assessee had advanced its funds to its members and had earned interest of those loans. As already observed the income was earned by making deposits by way of investments in the bank. It is a case where the assessee had invested its surplus funds in various banks and earned interest on the deposits. As was held in C.I.T Vs. Ranchi Club Limited, (1992) 196 ITR 137 (Patna) (FB) by the Patna High Court, the principle of mutuality could be confined in respect of surplus accrued to the club out of the contributions received by the club from its members. But his principle would have no application in respect of surplus received from non-members. In the case on hand, the tax sought to be levied is not on the surplus from out of the contributions made by the members or from the interest earned on the money advanced to its members. The deposits in the banks were made for earning interest by way of income. 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.

For the reasons stated, it is held that the assessee was not entitled to exemption from tax on the principle of mutuality."

(underlining by us)

28. In the case of Nataraj Finance Corporation the question arose as to whether the assessee which was described as a partnership firm and had been carrying out the business activities of lending out money to its members was not liable for tax on the principle of mutuality. In the said case after looking into the Memorandum of Association the High Court of Andhra Pradesh held that it was an Association of persons and that there was nothing on record to show that the assessee had been carrying out the business activity of lending money to any person other than its 19 members and there was no indication from the records to the effect that in the past years the assessee had carrying out the activities of lending money to any person other than the members constituting an association. The assessees claim that it confined its money lending activity only to its members and not to outsiders was accepted. The Court further held as follows:

"We have seen in the present case that the members of the association constituting the assessee carry on the activity among themselves. Unless it is possible to state that a person derives income by trading with himself it is not possible to consider that the income derived from transactions between members inter se possessed the character of income of a non-mutual benefit concerned. It is difficult to subscribe to the view canvassed by learned Counsel for the Revenue that the 19 members in the case of the assessee should be held to be carrying on business with themselves in order to derive income of Rs.48,000/- odd. On the fact and circumstances above stated, we are equally of the view that the Appellate Authorities below were justified in coming to the conclusion that the assessee is a mutual benefit association and its income is not liable to be taxed."

29. We observe that in ITI Employees Death and Superannuation Relief Fund this Court has referred to Nataraj Finance Corporation but has not applied the latter decision as the facts and circumstances of the two cases are different.

30. Learned Counsel for the appellant also relied upon a decision of the Supreme Court in the case of Chelmsford Club which is also discussed by the Tribunal as well as the Commissioner of Appeals and held not to be applicable to the facts of the present case. In the case of Chelmsford Club it is held as hereunder:

"The Assessee, a members club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on `no profit no loss basis in that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The clubhouse was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the clubhouse was not assessable. The claim was rejected by the High Court on appeal to the Supreme Court"

The meanings of "mutual concern and principle of mutuality" were explained by stating that Section 2(24) of the Act shows that the Act recognized the principles of mutuality and has excluded all business involving such principle from the purview of the Act, except those mentioned at clause (vii) of the section. After referring to its earlier decision in CIT Vs. Royal Western India Turf Club Limited, (1953) 24 ITR 551 (SC) the Supreme Court stated that

"It is crystal-clear that the law recognizes the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. In the above case, this Court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Limited Vs. Commissioner of Agricultural, LT. (1948) 16 ITR 270 (PC); existence of which establishes the doctrine mutuality. They are as follows (page 559);

"(1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves."

If we apply the above three criteria to the facts of the case in hand then we find that the appellants business is governed by the doctrine of mutuality."

It was further held that even the deemed income from its property is governed by the said principle of mutuality and the questions were answered in favour of the assessee.

31. A comparison of the facts and circumstances of the above noted three decisions has enabled us to conclude that the facts and circumstances of the instant case is squarely covered by the decision of the Andhra Pradesh High Court in Nataraj Finance Corporation and we are supported in our view by the principles laid down by the Honble Supreme Court in the case of Chelmsford Club on the doctrine of mutuality. Taking into consideration the objects of the assessee, its source of funds during the relevant years and the applicability of said funds for the benefit of its members and keeping in mind the interest on investments and dividend earned on shares which is only a portion of the total earned by investment of the surplus fund which is wholly contributed by the members of the assessee during the relevant assessment years, we conclude that the income earned on the said two heads namely interest on investment and dividend on shares is deemed income from the property of the assessee (funds contributed by its members) and is governed by the principle of mutuality. Therefore, the income on the aforesaid two heads is not taxable for the relevant assessment years. In coming to this conclusion we are supported by the decisions in Nataraj Finance Corporation and Chelmsford Club and we distinguish the decision of this Court in ITI Employees Death and Superannuation Relief Fund as being not a applicable to the facts and circumstances of the instant case.

32. We therefore, answer the substantial question of law by holding that the Tribunal was not right in stating that the Principle of mutuality did not apply to income of the appellants derived from interest on investments and dividend on shares and is therefore, non-taxable income and that the decision in ITI Employees Death and Superannuation Relief Fund is not applicable to the facts and circumstances of this case as far as the two relevant assessment years are concerned. We however, make it clear that our conclusion is based on the source of funds of the assessee during the two relevant assessment years.

33. In view of our finding that the principles of Doctrine of mutuality are wholly applicable to the relevant assessment years, the contention of the appellant regarding the date of commencement of interest does not survive for our consideration.

34. Accordingly, the appeal of the assessee is allowed by setting aside the order of the Tribunal in I.T. A. No. 478Bang/2001 and I.T.A. No. 479/ Bang/2001 dated 13.5.2003 as well as the order of the Commissioner of Income Tax (Appeals) in Appeal No. 78/C-I/CIT (A)-V/2000-01 dated 30.1.2001 and the assessment order dated 31.10.2000 and order in Appeal No. 77/C-I/CIT (A)-V/2000-01 dated 30.1.2001 and assessment order dated 31.10.2000. The Assessing Officer is directed to re-assess the income of the assessee for the year 1995-96 and 1996-97 in the light of the observations made above. Parties to bear their own costs.