2009 (8) TMI 839 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the notice under section 148.
2. Denial of exemption under section 11.
3. Status of the assessee as a charitable trust or mutual concern.
4. Taxability of interest income on FDRs and NSCs.
5. Allocation of expenditure between members' receipts and non-members' receipts.
6. Failure in allocating common expenditure on establishment and administrative expenses to non-members.

Detailed Analysis:

1. Validity of the Notice under Section 148:

The Tribunal examined whether the notice issued under section 148 was valid. The assessee argued that the notice was bad in law as it was issued only for verification purposes and relied on the Supreme Court judgment in Bankipur Club Ltd. The Tribunal noted that the Assessing Officer had reasonable belief that income had escaped assessment due to non-filing of returns and substantial income from interest and club house activities. The Tribunal held that the reasons recorded by the Assessing Officer were adequate for forming a 'reason to believe' that income had escaped assessment. Therefore, the notice under section 148 was deemed valid.

2. Denial of Exemption under Section 11:

The assessee claimed exemption under section 11, arguing that it was a charitable organization. The Assessing Officer and CIT(A) denied this exemption, stating that the club was a mutual concern benefiting only its members. The Tribunal examined the objects and activities of the club, noting that they included providing coaching facilities, honorary memberships, and free use of facilities for educational institutions and physically handicapped children. The Tribunal concluded that these activities were of general public utility and charitable in nature, thus qualifying for exemption under section 11.

3. Status of the Assessee as a Charitable Trust or Mutual Concern:

The Assessing Officer treated the club as a mutual organization, not a charitable trust. The Tribunal analyzed the club's activities and membership types, concluding that the club served a cross-section of the public and engaged in activities of general public utility. The Tribunal held that the club was a charitable organization and not a mutual concern, thus entitled to exemption under section 11.

4. Taxability of Interest Income on FDRs and NSCs:

The Assessing Officer taxed the interest income from FDRs and NSCs, arguing it was outside the scope of mutuality. The Tribunal referred to various judicial pronouncements, including Secunderabad Club v. ITO and Rajpath Club Ltd. v. CIT, which supported the assessee's claim that such income was not taxable. The Tribunal held that the interest income was exempt under section 11, as the club was a charitable organization.

5. Allocation of Expenditure between Members' Receipts and Non-Members' Receipts:

The CIT(A) directed the allocation of expenditure between members' receipts and non-members' receipts. The Tribunal found that since the club was a charitable organization entitled to exemption under section 11, there was no need to allocate income and expenditure between members and non-members. Therefore, this issue did not require separate adjudication.

6. Failure in Allocating Common Expenditure on Establishment and Administrative Expenses to Non-Members:

The Tribunal reiterated that the club's status as a charitable organization meant that the principle of mutuality did not apply. Consequently, there was no requirement to allocate common expenditure on establishment and administrative expenses to non-members.

Conclusion:

The Tribunal concluded that the assessee was a charitable organization entitled to exemption under section 11. The notice under section 148 was valid, and the interest income on FDRs and NSCs was not taxable. The issues of expenditure allocation did not require separate adjudication due to the club's charitable status. All appeals were partly allowed, with the assessee's grounds on exemption and charitable status being upheld.