2014 (5) TMI 1115 - AT - Income Tax

Eligibility for exemption under section 11 - receipt received from Mahalaxmi Hospitality Mahalaxmi Hotel & Resort and Mahalaxmi Food Link for Purposes of playing cards and also having Permit Room Bar and Restaurant for catering and soft drinks and hiring income from Marriage Hall/ground - Held that - The AO has given a categorical finding that though the membership of the club is open to public but it has been restricted in many ways and it is not easy to get membership of the club even for the persons who count in the society. Even the membership is offered on payment of very high premium. High class premium services such as facility of liquor bar playing cards restaurant marriage hall catering services etc. have been provided to the members which cannot be said to constitute any charitable activity. Services can be availed for consideration only by members who constitute high class influential and rich persons that too on payment of high premium for getting membership of the club. Though the assessee club is also offering the facility of sports to its members that itself cannot partake the character of charitable activity. It is not the case of the assessee trust that such sports activities are provided or have resulted into any benefit to the public at large or any section of the society. The sports activities accompanied by facilities like liquor bar playing cards restaurant marriage hall catering services etc. limited to a certain group of persons i.e. members of the club cannot be said to be a charitable activity from which any benefit is derived by the public or section of the public rather the benefits are limited to high and rich distinguishable group of persons i.e. members of the club only. There is no element of charity involved in such an activity rather the activities of the club are meant for leisure and pleasure of the members of the club and the membership has been restricted to certain individuals not to any section of the society. We therefore do not find any infirmity in the order of the AO in holding that the activities of the assessee trust do not fall in the definition of charitable purpose as defined under section 2(15) of the Act. Benefit of mutuality - We may point out that if the services of restaurant bar room swimming-pool etc. are restricted to members or their family members or guests only then the income from those services cannot be said to be business income of the society and the benefit of mutuality will be available to the assessee in relation to such facilities/services. However the income which has been earned by the assessee by providing facilities to non members is required to be treated as business income of the assessee. We accordingly restore the matter back to the file of the AO to distinguish the income from facilities/services which have been offered to non members as compared to the income relating to the services/facilities which have been provided to members of the club. It will not affect the concept of mutuality or benefit of mutuality even if the said services are offered by the club by way of providing contracts etc. to private parties on commission basis or rent basis for the benefit of members/family members or guests of the club members only. Since the grounds relating to above claim of the assessee were not adjudicated by the ld. CIT(A) but were dismissed being rendered infructuous and since we have restored the matter to AO to distinguish the income earned from non members hence we direct the AO to consider the above claim of depreciation etc. of the assessee accordingly as per law. - Decided in favour of revenue for statistical purposes.

Summary

Issues:
1. Exemption under section 11 of the Income Tax Act for a charitable trust.
2. Eligibility for benefit of mutuality.
3. Treatment of income earned from non-members.

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the exemption under section 11 of the Income Tax Act for a charitable trust for the assessment year 2009-10. The Revenue contested the receipt of a specific amount by the assessee from various sources, arguing that the activities of the assessee were not charitable and did not qualify for exemption under section 11. The Assessing Officer observed that the trust's activities, such as providing facilities for playing cards, having a permit room bar and restaurant, and earning income from hiring marriage halls, were profit-oriented and not charitable in nature. The AO held that the trust did not qualify as a charitable trust but rather as a mutual organization, thus taxing the receipts from non-members as income of the trust. The CIT(A), however, upheld the trust's eligibility for exemption under section 11, emphasizing the trust's activities as partaking the character of general public utility and entitling it to the benefit of mutuality.

2. The Tribunal noted that the trust's activities, although offering sports and recreational facilities, were limited to its members, who were required to pay high premiums for membership. The services provided, such as liquor bar, playing cards, restaurant, marriage hall, and catering services, were restricted to a select group of high-class individuals, indicating a lack of charitable intent. The Tribunal concurred with the AO's finding that the trust's activities did not align with the definition of charitable purpose under section 2(15) of the Act. The Tribunal distinguished the present case from a previous judgment, emphasizing the restricted membership and premium requirements of the trust.

3. Regarding the benefit of mutuality, the Tribunal acknowledged that the club's facilities were exclusive to its members, but income earned from non-members needed to be differentiated. Income from services exclusively offered to members or their associates could retain the benefit of mutuality, while income from services provided to non-members should be treated as business income. The Tribunal directed the matter back to the AO to segregate income earned from non-members and determine the appropriate treatment. The Tribunal also addressed the trust's application for depreciation, expenses, and losses, instructing the AO to consider these claims based on the final determination of the income sources.

In conclusion, the Tribunal allowed the Revenue's appeal for statistical purposes, emphasizing the need for a clear distinction between income sources related to members and non-members for tax treatment.