Case Law Details
Uttaranchal Cooperative Sugar Factories Federation Limited Vs ACIT (ITAT Dehradun)
Bona Fide Mutuality Belief Shields from Penalty: 271(1)(c) Deleted on Bank Interest & Tender Fee
Dehradun ITAT deleted penalties levied u/s 271(1)(c) holding that penalty cannot be imposed where income was not offered due to a bona fide belief based on the doctrine of mutuality and the issue was debatable at the relevant time.
The Assessee, a Government-controlled cooperative federation, did not initially file returns on the belief that its income was exempt on principle of mutuality, a view supported by then prevailing law including Chelmsford Club (SC). After the Supreme Court ruling in Bangalore Club (350 ITR 509), holding that interest on bank deposits falls outside mutuality, the Assessee voluntarily started filing returns from AY 2014-15 and offered the entire bank interest to tax. For earlier years, returns were filed pursuant to reopening u/s 148, and tax on interest income was duly paid.
AO nevertheless levied penalty u/s 271(1)(c) on bank interest and tender fee, alleging concealment. ITAT observed that all primary facts were disclosed, income was offered once legal position became clear, and there was neither concealment nor furnishing of inaccurate particulars. Reliance was placed on the coordinate bench decision in Dehradun Club Ltd., holding that penalty cannot be fastened merely because a later Supreme Court judgment changes the legal position.
Accordingly, ITAT held that the case involved at best a wrong claim based on a bona fide understanding of law, not concealment, and deleted penalties for all three assessment years, allowing the appeals in full.
FULL TEXT OF THE ORDER OF ITAT DEHRADUN
The present appeals are filed by the assessee against the orders of the ld. Commissioner of Income Tax(Appeals) /National Faceless Appeal Centre [‘Ld.
CIT(A)/NFAC’ for short], Delhi dated 12.06.2025 pertaining to Assessment Years 2011-12 to 2013-14, respectively.
2. All the three appeals have been filed by the single assessee having similar set of facts, therefore, the appeals of the assessee are heard together and disposed in this common order. For the sake of convenience, the brief facts of the case as mentioned by the ld. CIT(A) in its order for A.Y. 2011-12 are considered which read as under:
“The appellant is a cooperative Society, set up by the Government of Uttarakhand to coordinate, assist and facilitate the working of Government owned sugar factories in the State of Uttarakhand. The main source of funds of the appellant is the contribution received from member factories, which is used for meeting out the common administrative cost in accordance with the objects enshrined in its constituting documents. The temporarily available funds are parked in fixed deposits with the scheduled commercial banks and the interest earned thereon comprises the second source of income. 3. The law relating to taxability of entities formed for the purpose of mutual benefits for its members has been a perpetual source of litigation. The accepted position in law earlier was that the entire income of such entities is exempt on account of principles of mutuality. This position was upheld even by the jurisdictional tribunal in the case of Dehradun Club Limited. It was only after the verdict of the Apex Court in Bangalore Club V Commissioner of Income Tax 350 ITR 509 that it was held that interest earned on deposits placed with banks would be outside the scope of principles of mutuality. Therefore it was bona fide belief of the appellant that it had no taxable income or liability to file tax returns. Subsequently, when the assessee was advised that the interest earned on deposits with bank is liable to tax, it voluntarily started filing the return of income from the A Y 2014-15, and offered the entire interest income to tax. However, the time limit to file the returns for the A Y 2011-12 had elapsed by then and therefore the return for that year could not be filed. On a notice being issued u/s 148, the appellant filed the return and paid the tax on interest earned from bank. The claim for exemption on account of mutuality was accepted by the learned AO and the assessment was completed on returned income, plus Rs 568817 being tender fee received. During the penalty proceedings, the appellant pleaded that penalty cannot be imposed on interest income from bank since the same has already been offered to tax in the return filed by the appellant. In respect of tender fee received, it was submitted that the expenditure on floating the tender was higher than the amount received from the bidders and hence no income was comprised in the tender fee. However, the learned AO held the entire interest income and tender fee as concealed income and imposed penalty u/s 271(1)(c)”.
3. Similar penalty orders have been passed u/s 271(1)(c) of the Act for A.Ys. 2012-13 and 2013-14 as well. Aggrieved by the orders of penalty dated 26.04.2019, Assessee preferred three appeals before the ld. CIT(A) and the ld. CIT(A) vide orders dated 12.06.2025 dismissed the appeals filed by the assessee. Aggrieved by the orders of the ld. CIT(A) dated 12.06.2025, Assessee preferred the captioned appeals.
4. The ld. Counsel for the assessee vehemently submitted that the assessee has not concealed or withheld any material and the authorities below have not considered the fact that the assessee had voluntarily started filing the return of income from A.Y. 2014-15, which is much before issuance of notice u/s 148 of the Act. Further submitted that after the verdict of Hon’ble Apex Court in case of Bangalore Club Vs. CIT (350 ITR 509) wherein it was held that deposit of surplus funds in FDRs are held to be not covered by doctrine of mutuality, the assessee suo motu and voluntarily started filing the return of income and offered the entire interest income to tax and the claim the exemption on account of mutuality was accepted by the AO. Ld. AR further submitted that the issue involved in the present appeals is squarely covered by the order of Tribunal in the case of ACIT, Circle-1 Vs. M/s Dehradun Club Ltd. in ITA No. 5360/Del/2015 and connected appeals vide order dated 14.05.2018, thus sought for allowing the appeal.
5. Per contra, the ld. DR relying on the orders of the lower authorities sought for dismissal of the appeals.
6. We have heard the parties and perused the material available on record. The Co-ordinate bench of the Tribunal in the case of Dehradun Club Ltd. (supra) while deciding the similar issue, held as under:
“5. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
6. Undisputedly, at the time of filing the original return of income, the captioned issue was debatable. It is also not in dispute that the assessee has brought on record all the necessary details in its return of income on the basis of which the AO has made disallowances and then proceeded to initiate the penalty proceedings u/s 271(1)(c) of the Act.
7. In the backdrop of the aforesaid facts and circumstances of the case, order passed by the lower Revenue authorities and arguments addressed by the ld. AR to the parties, the sole question arises for determination in this case is:-
“as to whether the assessee has concealed particulars of income or has furnished inaccurate particulars of income during assessment proceedings?”
8. When as on the date of filing the original return it was settled proposition of law that the assessee’s business was governed by the Doctrine of Mutuality and its activities of business and annual value of the club house was outside the purview of levy of income-tax, we are of the considered view that it does not amount to concealment of particulars of income or furnishing of inaccurate particulars of income by the assessee particularly when it has given all the necessary details regarding interest income of FDRs and messing up charges. This proposition of law was settled by the Hon’ble Apex Court in Chelmsford Club vs. CIT – 243 ITR 89 (SC), the operative part of which is reproduced as under :-
“Held, reversing the decision of High Court, that the assessee’s business was governed by the doctrine of mutuality. It was an admitted fact that the business of the assessee did not come within the scope of business referred to in section 2(24) (vii). It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, even the annual value of the club house, as contemplated in section 22 of the Act, would be outside the purview of the levy of income-tax.”
9. The Revenue swan ged into action only after the decision of Hon’ble Apex Court in case of Bangalore Club vs. CIT – 350 ITR 509 (SC) by way of reopening the assessment u/s 148 of the Act.
10. It is the case of the assessee that at the time of filing the return consequent upon the issue of notice u/s 148 of the Act, he was not aware of the decision rendered by Hon’ble Apex Court in Bangalore Club (supra). When the assessee has accepted the quantum, paid the taxes as well as interest pursuant to the decision rendered by Hon’ble Uttarakhand High Court and confirmed by Hon’ble Apex Court whereby deposit of surplus funds in FDRs are held to be not covered by Doctrine of Mutuality, we are of the considered view that it does not amount to concealment of particulars of income and furnishing of inaccurate particulars of income particularly when all the necessary details were already furnished by the assessee at the time of filing original return in accordance with the settled principles of law as per decision rendered by Hon’ble Apex Court in Chelmsford Club (supra) case. AT the most, assessee has put forth a wrong claim at the time of filing return pursuant to the reopening u/s 148 and has never concealed the particulars of income nor has furnished inaccurate particulars of income.
11. In view of what has been discussed above, we are of the considered view that AO has failed to make out the case of concealment of income or furnishing of inaccurate particulars of such income by the assessee rather it is a case of imposing penalty on the basis of decision rendered by the Hon’ble Apex Court in Bangalore Club (supra) case which was not in the notice of assessee at the time of filing the return pursuant to the notice u/s 148 of the Act sufficient to attract the provisions contained u/s 271(1)(c), so we find no illegality or perversity in the deletion of penalty made by the ld. CIT (A). Consequently, all the aforesaid appeals filed by the Revenue are hereby dismissed.”
7. In view of the above, by respectfully following the order of the Tribunal in the case of Dehradun Club Ltd., the impugned orders of penalty are hereby deleted and the Appeals in ITA No. 162 to 164/DDN/2025 are allowed.
8. In the result, the Appeals of the Assessee are allowed.
Order Pronounced in the Open Court on 17/12/2025.
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