Case Law Details

Case Name : Amateur Riders’ Club Vs ADIT (ITAT Mumbai)
Appeal Number : ITA no. 48/Mum./2013
Date of Judgement/Order : 13/01/2020
Related Assessment Year : 2009-10
Courts : All ITAT (6798) ITAT Mumbai (1993)

Amateur Riders’ Club Vs ACIT (ITAT Mumbai)

Conclusion: Once the cancellation of registration had been set aside and registration granted under section 12A had been restored by the Tribunal, CIT(Appeals)’s decision for disallowance of exemption under section 11 became redundant, hence, had to be set aside.

Held: Assessee had come into existence in the year 1974 and was also granted registration under section 12A by recognizing it as a charitable institution. Till assessment year 2008–09, assessee’s claim of exemption under section 11 had been allowed by AO. However, in the impugned assessment year, AO disallowed assessee’s claim of exemption under section 11 on the reasoning that some of the income credited to the Income & Expenditure Account was earned from trading/commercial activities, hence, assessee did not qualify the test of charitable purpose as per section 2(15). Therefore, AO denying assessee’s claim of exemption under section 11 had computed the income of the assessee on commercial principles. It was held that Tribunal set aside the order of DIT (Exemp.) and restored the registration granted under section 12A. Tribunal while deciding the issue had categorically held that nothing had been brought on record to show or to prove that the activities carried out by the assessee were in violation of its objects. Thus, once the cancellation of registration had been set aside and registration granted under section 12A had been restored by the Tribunal, CIT (Appeals)’s decision for disallowance of exemption under section 11 became redundant, hence, had to be set aside. Accordingly, assessee’s claim of exemption under section 11 was allowable.

FULL TEXT OF THE ITAT JUDGEMENT

The aforesaid appeals relating to the same assessee consist of a set of cross appeals and an appeal by the assessee challenging two separate orders dated 15th October 2012 for the assessment year 2009–10 and dated 14th October 2015 for the assessment year 2011– 12, passed by the learned Commissioner of Income Tax (Appeals)–1, Mumbai.

ITA no.48/Mum./2013
Assessee Appeal for A.Y. 2009–10

2. Grievance of the assessee in the present appeal is against denial of exemption claimed under section 11 of the Income Tax Act, 1961 (for short “the Act”).

3. Brief facts are, the assessee, an Association of Persons (AOP), claims to be a ‘Charitable Institution’ as it is engaged in the promotion of equestrian sports viz. providing instructional course, lecture and demonstration, training, schooling and care, maintenance of horses & horsemanship and offered kind of equestrian sports and knowledge of horse and to give all facilities for practice thereof. It is stated that the assessee is a member of the Equestrian Federation of India (EFI) and Indian Polo Association (IPA). Looking at the objects of the assessee, it was granted registration as a Charitable Institution under section 12A of the Act. For the assessment year under dispute, the assessee filed its return of income on 30th September 2009, declaring nil income. In the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish the trust deed for verifying the objects of the assessee. After verifying the objects of the assessee and the details of income shown in the income and expenditure account, he found that the assessee has earned income from hire charges of horses for marriage ceremony, rental income from Olive Bar and Kitchen Pvt. Ltd. and riding fees and escort charges, recovery from members, proceeds from other activities, income from investment, other income, etc. After verifying the objects of the assessee and the income shown in the income and expenditure account, the Assessing Officer called upon the assessee to explain why the activities carried on by the assessee should not be treated as business activities and income derived therefrom should not be treated as business income as per the proviso to section 2(15) of the Act. In response to the query raised by the Assessing Officer, it was submitted by the assessee that since the objects of the assessee are of charitable nature, the income derived from such activity cannot be treated as income from business. Further, it was submitted, the rental income received from letting out the premises to Olive Bar and Kitchen Pvt. Ltd., is not in the nature of business, but is income from house property. Thus, it was submitted, the assessee fulfills the conditions of ‘charitable purpose’ as per section 2(15) of the Act, hence, eligible to claim exemption under section 11 of the Act. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, the assessee is basically a club and on the strength of registration granted under section 12A of the Act it has claimed exemption under section 11 of the Act. He observed, the entry to the club is not open to the general public and entry is restricted to the members and their family members and guests accompanying them. Non–members are admitted by charging coaching fee for the sections of game in which they are interested. The Assessing Officer observed, the membership of the club, though, open to the public, however, it is restricted in many ways and it is not easy to get membership of the club. He observed, the assessee is providing various facilities such as restaurant, residence room, hiring of horses for marriage ceremony, card room, sports related facilities, etc., to the members, though, to some extent, such facilities are also provided to non–members. Thus, he observed, the pre–dominant object of the assessee is to provide service to its members. The Assessing Officer observed, various income earning activities would indicate that it is not an association created / established for charitable purpose within the meaning of section 2(15) of the Act. Specifically referring to the rental income earned from Olive Bar and Kitchen Pvt. Ltd., as well as hiring charges for providing horses in marriage ceremony, the Assessing Officer held, even if they are not business activities, per se, but such activity carried on by the assessee in a regular and organized manner is in the nature of business by way of exploiting its assets commercially. Thus, he held that such income has to be treated as income from business. Accordingly, assessee’s claim of exemption under section 11 of the Act was disallowed and the Assessing Officer proceeded to compute the income of the assessee by on commercial principles after allowing expenditure. As a result, the taxable income was determined at ` 28,95,050. Against the assessment order so passed, the assessee preferred appeal before the first appellate authority.

4. After considering the submissions of the assessee in the context of facts and material on record, the learned Commissioner (Appeals) upheld the denial of exemption claimed under section 11 of the Act, though, on a different reasoning. She held that since assessee’s registration granted under section 12A of the Act has been withdrawn, it will not be eligible to claim exemption under section 11 of the Act. However, as regards the rental income of ` 91,19,000, received from letting out a part of the premises to Olive Bar and Kitchen Pvt. Ltd., learned Commissioner (Appeals) held that such income has to be assessed as income from house property.

5. Shri S.E. Dastur, the leaned Sr. Counsel for the assessee submitted, assessee was formed in the year 1974 and till the assessment year 2008–09, its claim of exemption under section 11 of the Act has been accepted by the Department. He submitted, though after assessment year 2008–09, though, there was no change in the objects or activities of the assessee, merely due to introduction of proviso to section 2(15) of the Act, assessee’s claim of exemption under section 11 of the Act has been rejected. He submitted, the objects on the basis of which the assessee was created and granted registration under section 12A of the Act have remained unchanged even in the impugned assessment year. Therefore, merely due to introduction of proviso to section 2(15) of the Act, assessee cannot be treated as a non–charitable institution. He submitted, the only reason on the basis of which learned Commissioner (Appeals) has upheld the rejection of assessee’s claim of exemption under section 11 of the Act is withdrawal/cancellation of registration granted under section 12A of the Act. He submitted, while deciding assessee’s appeal challenging withdrawal/cancellation of registration granted under section 11 of the Act, the Tribunal in ITA no.324/Mum./2012, dated 3rd March 2016, has set aside the order passed by the DIT (Exemp.), Mumbai, cancelling registration under section 12A of the Act and restored the registration granted under section 12A of the Act. Thus, he submitted, the very reasoning on the basis of which learned Commissioner (Appeals) upheld the disallowance of assessee’s claim of exemption under section 11 of the Act, no more survives due to restoration of assessee’s registration granted under section 12A of the Act. Therefore, the order of learned Commissioner (Appeals) on this issue has to be set aside and assessee’s claim of exemption under section 11 of the Act has to be allowed. He submitted, in case of another assessee, namely, Cotton Textile Export Promotion Council, under identical facts and circumstances, the Tribunal in ITA no.317/Mum./2013, dated 28th November 2015, has allowed assessee’s claim of exemption under section 11 of the Act and the Revenue’s appeal against such order of the Tribunal was dismissed by the Hon’ble Jurisdictional High Court in ITA no.1250/2015, vide order dated 29th November 2017. Thus, he submitted, assessee’s claim of exemption under section 11 has to be allowed. Without prejudice, he submitted, the proviso to section 2(15) of the Act is applicable only to the activity of carrying out objects of general public utility. Whereas, the assessee, in essence, is providing education to riders regarding not only how to ride horses but in relation to horses. Thus, since the assessee is engaged in the activity of providing education, any income earned which is ancillary and incidental to its main object, it cannot be treated as business or trading activity. Thus, assessee’s claim of exemption under section 11 of the Act has to be allowed as it fulfills the conditions of ‘charitable purpose’ as per section 2(15) of the Act. In support of such contention, leaned Sr. Counsel for the assessee relied upon a number of decisions.

6. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and the learned Commissioner (Appeals) submitted, since the assessee has earned substantial income from various commercial activities, it is hit by the proviso to section 2(15) of the Act, hence, not eligible to claim exemption under section 11 of the Act.

7. We have considered rival submissions in the light of decisions relied upon and perused the material on record. Insofar as the factual aspect of the issue is concerned, there is no dispute that the assessee has come into existence in the year 1974 and was also granted registration under section 12A of the Act by recognizing it as a Charitable Institution. It has also been accepted before us that till assessment year 2008–09, assessee’s claim of exemption under section 11 of the Act has been allowed by the Revenue. However, in the impugned assessment year, the Assessing Officer disallowed assessee’s claim of exemption under section 11 of the Act on the reasoning that some of the income credited to the Income & Expenditure Account is earned from trading/commercial activities, hence, assessee does not qualify the test of charitable purpose as per section 2(15) of the Act. Therefore, the Assessing Officer denying assessee’s claim of exemption under section 11 of the Act has computed the income of the assessee on commercial principles. Be that as it may, while deciding assessee’s appeal contesting the disallowance of claim of exemption under section 11 of the Act, learned Commissioner (Appeals) has held as under:–

“3.3 I have carefully considered the assessment order, the detailed submissions made by the appellant and the facts of the case. The only contention of the appellant under this ground is that the A.O. ought to have granted exemption under sections 11 and 12 because they are carrying out charitable activities as mentioned in the various paragraphs of their submissions. The numerous case laws cited by the appellant do not advance the case of the appellant. It is further seen that the appellant is in appeal before the Hon’ble ITAT against the withdrawal of certificate under section 12A. In the instance when the certificate under section 12A has been withdrawn by the DIT(E) as aforesaid, the appellant would not qualify for any exemption under section 11 and 12 till the time the issue is resolved by the appropriate forum. It is settled law that registration under section 12A is one of the most vital conditions for availing of exemption under section 11 and 12. The Apex Court in the case of UP Forest Corporation and another v/s DCIT, 297 ITR 1 (SC) has held that for the purpose of claiming benefit under section 11 and 12, it is imperative that registration under section 12A is a condition precedent. Once the DIT exemption has withdrawn the registration under section 12A by a detailed order it was incumbent upon the A.O. to follow the same, till resolved further. I, therefore, uphold the order of the A.O. since the cancellation of certificate under section 12A would make the appellant ineligible for exemption section 11 and 12. Ground numbers 1 and 2 are dismissed.”

8. On a careful reading of the relevant extract from learned Commissioner (Appeals)’s order, it is very much clear that the only reasoning on the basis of which she has upheld the rejection of assessee’s claim of exemption under section 11 of the Act is due to withdrawal/cancellation of registration granted under section 12A of the Act, vide order dated 8th December 2011. Notably, against the aforesaid order of learned DIT (Exemp.) cancelling the registration granted under section 12A of the Act, the assessee approached the Tribunal and the Tribunal while deciding the issue in ITA no.324/Mum./2012, dated 3rd March 2016, set aside the order of learned DIT (Exemp.) and restored the registration granted under section 12A of the Act. It is relevant to observe, the reasoning on the basis of which learned DIT (Exemp.) withdrew/cancelled assessee’s registration under section 12A of the Act, were adopted by the Assessing Officer while rejecting assessee’s claim of exemption under section 11 of the Act in the impugned assessment year. However, the Tribunal while deciding the issue has categorically held that nothing has been brought on record to show or to prove that the activities carried out by the assessee are in violation of its objects. Be that as it may, as observed earlier, the only reasoning on the basis of which learned Commissioner (Appeals) has upheld the disallowance of assessee’s claim of exemption under section 11 of the Act is due to withdrawal/cancellation of assessee’s registration under section 12A of the Act. However, after restoration of the registration granted under section 12A of the Act by virtue of the order passed by the Tribunal, as referred to above, the reasoning of learned Commissioner (Appeals) in rejecting assessee’s claim of exemption under section 11 of the Act cannot be upheld. It is relevant to observe, in case of another assessee, viz. Cotton Textile Promotion Council, learned Commissioner (Appeals) had upheld rejection of claim of exemption under section 11 of the Act on identical reasoning for the very same assessment year. However, while deciding the appeal of the assessee in ITA no.317/ Mum./2013, dated 28th January 2015, the Tribunal having taken note of the fact that the registration granted under section 12A of the Act has been restored by the Tribunal, allowed assessee’s claim of exemption under section 11 of the Act by setting aside the order of learned Commissioner (Appeals). Against the order of the Tribunal, though, the Revenue went in appeal before the Hon’ble Jurisdictional High Court in ITA no.1250/2015, however, in order dated 29th November 2017, the Hon’ble Jurisdictional High Court upheld the decision of the Tribunal. Facts in the present case are identical as the only reasoning on the basis of which learned Commissioner (Appeals) has upheld the rejection of exemption under section 11 of the Act is due to cancellation of assessee’s registration under section 12A of the Act. Once the cancellation of registration has been set aside and registration granted under section 12A of the Act has been restored by the Tribunal, learned Commissioner (Appeals)’s decision for disallowance of exemption under section 11 of the Act becomes redundant, hence, has to be set aside. Accordingly, we set aside the impugned order of learned Commissioner (Appeals) and allow assessee’s claim of exemption under section 11 of the Act. In view of our decision above, we do not intend to deliberate further on various other arguments advanced by leaned Sr. Counsel for the assessee justifying the claim of exemption under section 11 of the Act.

9. In the result, appeal stands allowed in the terms indicated above.

ITA no.195/Mum./2013

Revenue’s Appeal for A.Y. 2009–10

10. The grounds raised by the Revenue are on the issue of proper head under which the rental income received from Olive Bar and Kitchen Pvt. Ltd. has to be assessed. While it is the claim of the assessee that the rental income has to be assessed under the head “Income From House Property”, the Assessing Officer has treated it as “Income From Business”. However, learned Commissioner (Appeals) agreed with the assessee’s claim.

11. Be that as it may, while deciding assessee’s appeal in ITA no.48/Mum./2013 as aforesaid, we have held that the assessee is eligible to claim exemption under section 11 of the Act. That being the case, this issue becomes redundant. Suffice to say, after analyzing the facts on record, we fully agree with learned Commissioner (Appeals) that, if at all, the rental income has to be treated as income from house property as the assessee has rented out his premises without carrying on any business activity itself.

12. In the result, appeal is dismissed.

ITA no.5610/Mum./2015

Assessee Appeal for A.Y. 2011–11

13. The grounds raised in this appeal are identical to the grounds raised in ITA no.48/Mum./2013, and are on the issue of rejection of exemption claimed under section 11 of the Act. The facts being identical, our decision in ITA no.48/Mum./2013, would apply mutatis mutandis to the issue raised in this appeal as well.

14. In the result, appeal is allowed.

15. To sum up, assessee’s appeals are allowed and Revenue’s appeal is dismissed.

Order pronounced in the open Court on 13.01.2020

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