Whether contributions made by members to an Association can be a subject matter of tax, merely because part of Association’s excess income over expenditure is invested in mutual funds – NO: HC

THE issue is – Whether contributions made by the members to an association can be a subject matter of tax, merely because the part of Association’s excess income over expenditure is invested in mutual funds. NO is the verdict.

Facts of the case
The assessee is an association of Air Cargo Agents in India. During the subject A.Y 2007-08, it had received subscription/contribution from its members in three forms i.e. annual subscription, member’s annual convention and member’s training programmes aggregating to contribution from the members of Rs.54.07 lakhs. In its return, the assessee offered an amount of Rs.12.06 lakhs as its Income. However, the aforesaid contribution Rs.54.07 lakhs though credited to P&L A/c was not offered to tax by invoking the principle of mutuality. However, the AO did not accept the assessee’s contention and held that as its income over expenditure was of Rs.17.52 lakhs and out of it an amount of Rs.9.69 lakhs was invested in mutual funds. This investment not being the object of the association,the concept of mutuality would not apply. In the circumstances, the AO brought the entire contribution of Rs.54.07 lakhs received from its members as income chargeable to tax. On appeal, the CIT(A) deleted the addition made by AO of Rs.54.07 lakhs. On further appeal, the ITAT held that the contribution received by the members were utilized for the benefit of its contributors.
Having heard the parties, the High Court held that,
++ it is found that the contributions made by the members to the assessee cannot be a subject matter of tax merely because the part of its excess of income over expenditure is invested in mutual funds. It is also not the case of the Revenue that the dividend received from mutual funds have not been offered to tax by the assessee. The concept of Mutual concerns not being subject to tax is based on the principle of no man can profit out of itself. Therefore the test to be satisfied before an association can be classified as a Mutual concern are complete identity between the members i.e. contributors and the participants, the action of the mutual concern must be in furtherance of its objectives and there must be no scope of profiteering by the contributors from a fund. The case of the Revenue here is that having invested excess amounts in mutual funds the concept of mutuality would not extend to the contribution made by the members of the association even though the contributions are used to achieve the objectives of the association. In fact as pointed out above the Apex Court in Bangalore Club (case did not hold so but only brought to tax the interest earned on fixed deposit with member banks. In this case it is not disputed that the income earned on account of investments made in Mutual Funds has been offered to tax. The assessee has in effect followed the decision of the Apex Court in Bangalore Club case. Therefore, the issue is concluded in favour of the assessee.