ITO Vs Pransukhlal Mafatlal Hindu (ITAT Mumbai)
ITAT held that providing sports facilities to general public without restriction to any caste, creed, religion or profession is squarely comes within the definition of charitable purpose as defined u/s 2(15) of the Income-tax Act, 1961 and hence, the assessee is eligible for exemption u/s 11 of the Act. In this case, on perusal of the facts, it is abundantly clear that the assessee is running its activities in accordance with its main object and continued to provide services to its members by collecting nominal fee. We further observe that the assessee has deficits from its core activity of promoting swimming for all the years. The assessee’s collections from its members is less than the amount spent for its objects. But for income from investments, the assessee is always incurring deficit for all the years. Therefore, we are of the considered view that there is no merit in the findings of the AO that the assessee is carrying out its activities on commercial lines with an intention to earn profit. Accordingly, assessee was not hit by proviso to section 2(15) and, therefore, assessee was entitled for exemption under section 11.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-1, Mumbai dated 20.11.2018, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act,1961 (for short „Act‟), dated 29.03.2016 for A.Y. 201314. The revenue has assailed the impugned order on the following grounds of appeal before us:
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A), Mumbai was right in directing the AO to grant exemption u/s. 11 of the I.T. Act ignoring the detailed reasoning given by the AO.
2. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was right in holding that the assessee club is not covered by the principle of mutuality thereby violating provisions of section 13 which disentitles the trust from claiming exemption u/s. 11.
3. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was right in ignoring the ratio involved in the case of Bangalore Club vs. CIT & Anr. Being Civil Appeal No.124 of 2007 dated 14.01.2013 relied upon by the A.O., without even considering the same wherein the Hon’ble Apex Court has held that the interest earned by the assessee from the banks will not fall within the ambit of the mutuality principle and will therefore eligible to Income tax in the hands of the assessee which is squarely applicable to this case.
4. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) was right in ignoring the ratio involved in the case of CIT V/s. Common Effluent Treatment Plant (Thane-Belapur) Association reported at (2010) 328 ITR 362 (Bom) relied upon by the A.O., without even considering the same wherein the Hon’ble Bombay High Court has held that interest on surplus fund invested in fixed deposits in Banks is not income from receipt from members of the assessee but was from third party and therefore principle of the mutuality does not apply which is squarely applicable to this case .
5. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in following the decision of Hon’ble ITAT in assessee’s own case for A.Y.2012-13 in ITA No.511/Mum/2017 dated 30.07.2018 allowing the assessee exemption u/s 11 of the I.T. Act, 1961 ignoring the fact that the decision of the Hon’ble ITAT was not accepted by the department and appeal before the Hon’ble High Court has been filed on the similar grounds.
6. The appellant prays that the order of the Commissioner of Income Tax (Appeals)- 1, Mumbai be set aside and that of the Assessing Officer be restored.
7. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
2. Briefly stated, the assessee which is registered as a Charitable organisation with the Charity Commissioner, Mumbai had as on 30.09.2013 filed its return of income for A.Y. 201314 along with its Income and expenditure account, balance sheet and audit report in Form No. 10B, declaring a total income of Rs.1,37,18,722/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. During the course of the assessment proceedings it was observed by the A.O that the main object of the assessee trust was promotion of swimming and other allied sports on no profit basis. On a perusal of the financial statements, it was observed by the A.O that the assessee during the year in question had earned income by way of guest fee of Rs.47,27,014/- and learn to swim fee of Rs.2,77,261/-. Observing, that the assessee‟s object were in the nature of “advancement of any other objects of general public utility” and its activities were in the nature of trade, commerce, business etc. the DIT(Exemption), Mumbai, vide his order dated 16.12.2011 withdrew the registration granted to the assessee trust under Sec. 12AA of the Act w.e.f A.Y. 2009-10, and had also stated that the activities of the assessee trust were covered by the provision of Sec. 2(15) of the Act. On being queried as to why its interest income would not be hit by Sec. 2(15) of the Act and its claim for exemption under Sec.11 may not be disallowed as per the provisions of Sec.13(8) of the Act, it was submitted by the assessee that its activity of earning interest income fell within the realm of Sec.2(15) of the Act and was not in the nature of business, trade or commerce. Observing, that as per the post amended Sec.2(15) of the Act wherein the definition of the term „advancement of any other object and general public utility‟ was narrowed down a/w insertion of Sec.13(8) w.e.f 01.04.2009 as per which no exemption under Sec. 11 was to be allowed to such entities which were hit by the „first proviso‟ to Sec.2(15) of the Act, the A.O was of the view that though development of sports was a charitable object however, as in the case of the assessee the dominant, substantial or main object of the club was to provide services to its members thus, it cannot be said to have been created for a charitable purpose. Observing that the actual activities of the assessee revealed that its dominant or rather the predominant object was to provide services to its members, viz. facilities such as restaurant, residential rooms, swimming pool, card rooms, sport related facilities etc. which to some extent were also provided to the non-members, the A.O held a conviction that the assessee could not be held to be a charitable association within the meaning of Sec. 2(15) of the Act. Insofar the income by way of interest, house property, capital gains and income from other sources were concerned, the A.O was of the view that the same were clearly taxable. Backed by his aforesaid observations it was concluded by the A.O that the assessee club was not an organisation created for a charitable purpose within the meaning of the provisions of Sec. 2(15) of the Act. Accordingly, in the backdrop of his exhaustive deliberations in the assessment order, the A.O was of the view that as the assessee was a mutual association and not a charitable trust therefore, as per the doctrine of mutuality its receipts from non-members and other sources such as dividend, interest, etc, were to be brought to tax during the year in question. Observing, that the assessee‟s object were in the nature of advancement of any other objects of general public utility and its activities were in the nature of trade, commerce, business etc the A.O was of the view that the assessee would not be covered by the provisions of Sec. 2(15) and thus, as per Sec. 13(8) would not be entitled for exemption under Sec. 11 of the Act. Apart from that, it was observed by the A.O that the assessee‟s registration under Sec. 12A had been cancelled by the DIT(E), Mumbai, w.e.f A.Y. 2009-10. Further, taking note of the CBDT Circular 11/2018, dated 19.12.2018 as per which the principle of mutuality was to be followed, the A.O worked out the ratio of mutual to non-mutual income by excluding the interest income from its total income. Observing, that the ratio of mutual to non-mutual income worked at 86:14, the A.O allowed the expenditure to the extent of Rs.71,41,764/-. It was further noticed by the A.O that the assessee during the year in question had earned interest income of Rs.1,51,72,750/-.
Observing, that the assessee was an organisation which was limited to its members and the principle of mutuality applied, the A.O was of the view that the interest income could by no stretch of reasoning be said to have been received by the assessee from its members. As such, the A.O was of the view that the interest earned by the assessee from the bank would not fall within the ambit of the principle of mutuality and thus would be exigible to tax in its hands. Accordingly, the A.O subjected the interest income to tax in the hands of the assessee. It was further observed by the A.O that the assessee was in receipt of an entrance fee of Rs.65,10,000/- during the year in question. On being queried, it was stated by the assessee that the aforesaid amount was received on account of entrance fee from new members during the year. Observing, that the fees raised by the assessee at the time of the entrance of new members was a receipt of a revenue nature and was chargeable to tax in its hands, the A.O brought the aforesaid amount to tax in the hands of the assessee. On the basis of his aforesaid deliberations the A.O vide his order passed under Sec. 143(3), dated 29.03.2016 assessed the income of the assessee trust at Rs.2,16,82,750/-.
3. Aggrieved, the assessee carried the matter in appeal before the CIT(A). It was observed by the CIT(A) that the facts and the issue involved in the case before him remained the same as were therein involved in the assessee’s own case for A.Y. 2012-13. It was noticed by the CIT(A) that the Tribunal in the assessee’s case for A.Y. 2010-11 to A.Y. 2012-13 had decided the issue of exemption under Sec. 11 in favour of the assessee. Accordingly, taking note of the fact that the issue involved in the year in question i.e A.Y. 2013-14 was identical to that as was there before the Tribunal in the assessee’s own case for A.Y. 2012-13 in ITA No. 511/Mum/2017, dated 30.07.2018, the CIT(A) followed the view therein taken by the Tribunal and allowed the assessee’s appeal.
4. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. At the very outset of the appeal it was submitted by the ld. A.R that the issue involved in the present appeal was squarely covered by the order of the Tribunal in the assessee’s own case for A.Y. 2010-11, A.Y. 2011-12 and A.Y. 2012-13. In order to fortify his aforesaid contention the ld. A.R took us through the respective orders of the Tribunal (copies placed on record). It was submitted by the ld. A.R that as the CIT(A) had followed the view taken by the Tribunal in the assessee’s own case for A.Y. 2010-11 to A.Y. 2012-13 thus, no infirmity did emerge from his order. Ld. A.R. specifically drew our attention to the observations of the CIT(A) wherein he had observed that the conclusion reached by the A.O and also the reasoning adopted by him during the year in question was the same as was adopted by him in A.Y. 2012-13. It was submitted by the ld. A.R that now when the issue of exemption under Sec. 11 had been decided by the Tribunal in favour of the assessee while disposing off the appeal for A.Y. 2010-11 to A.Y. 2012-13 in ITA No. 1039 and 1040/Mum/2016, dated 21.03.2018 AND ITA No. 511/Mum/2017, dated 30.07.2018 thus, following the said view the declining of the assessee’s claim for exemption under Sec. 11 by the A.O had rightly been vacated by the CIT(A).
5. Per contra, the ld. Departmental Representative (for short „R’) had relied on the assessment order.
6. We have deliberated at length on the issue under consideration and concur with the view taken by the CIT(A) that the issue as regards the assessee’s entitlement for exemption under Sec. 11 had been decided in its favour by the Tribunal while disposing off the appeals of the assessee for A.Y. 2010-11 and 2011-12 in ITA Nos. 1039 and 1040/Mum/2016, vide its order dated 21.03.2018. In fact, the Tribunal had thereafter followed the aforesaid order while disposing off the assessee’s appeal for A.Y. 2012-13 in ITA No.511/Mum/2017, dated 30.07.2018. For the sake of clarity, we herein cull out the observations that were recorded by the Tribunal while disposing off the assessee’s appeal for AYs. 2010-11, 2011-12 in ITA No. 1039 and 1040/Mum/2016, dated 21.03.2018, wherein the exemption under Sec.11 was restored to the assessee, as under:
“11. Having considered relevant facts, we do not find any merit in the findings of the lower authorities for the reason that providing sports facilities to general public without restriction to any caste, creed, religion or profession is squarely comes within the definition of charitable purpose as defined u/s 2(15) of the Income-tax Act, 1961 and hence, the assessee is eligible for exemption u/s 11 of the Act. In this case, on perusal of the facts, it is abundantly clear that the assessee is running its activities in accordance with its main object and continued to provide services to its members by collecting nominal fee. We further observe that the assessee has deficits from its core activity of promoting swimming for all the years. The assessee’s collections from its members is less than the amount spent for its objects. But for income from investments, the assessee is always incurring deficit for all the years. Therefore, we are of the considered view that there is no merit in the findings of the AO that the assessee is carrying out its activities on commercial lines with an intention to earn profit.
12. Coming to the case laws relied upon by the assessee. The Pransukhlal Mafatlal Hindu Swimming Bath & Boat Club Trust assessee has relied upon the decision of ITAT, Mumbai Bench in the case of Chembur Gymkhana (supra). We find that the co-ordinate bench of ITAT, under similar set of facts has held that in order to invoke First Proviso to section 2(15), it is necessary and incumbent on the part of the AO to give a factual finding that assessee has derived income by engaging itself in trade, business or commercial activity. The relevant portion of the order is extracted below:-
Undisputedly, the assessee has been registered as a charitable trust not only with the Charity Commissioner but also under section 12A. Though, the registration granted under section 12A was subsequently cancelled by the DIT(E) under section 12AA(3), however, the Tribunal, while setting aside the order of the DIT(E) restored the registration granted under section 12A. Thus, the grant of registration under section 12A to the assessee pre-supposes that the objects of the assessee are for charitable purpose.
