2016 (9) TMI 1330 - AT - Income Tax

Reopening of assessment - assessee being a mutual benefit organization, was not entitled for exemption u/s 11 in respect of interest income and rental income - Held that - It is undisputed that the receipt, other than the interest income and rental income, is from the members of the club and, therefore, would fall within the ambit of mutuality as defined by Hon ble Apex Court in the case of Bankipur Club Ltd. (1997 (5) TMI 392 - SUPREME Court). The Assessing Officer had also accepted that the assessee club is entitled to benefit of mutuality. In our opinion, the view taken by the Assessing Officer is well supported by the decision of Hon ble Apex Court in the case of Bankipur Club Ltd. (supra), Chelmsford Club (2000 (3) TMI 4 - SUPREME Court) as well as Bangalore Club (2013 (1) TMI 343 - SUPREME COURT). Therefore, on this point, we reverse the order of learned CIT(A) and restore that of the Assessing Officer i.e., all receipts of the assessee club except receipt from interest as well as rent is out of the purview of taxation on account of the doctrine of mutuality. Insofar as interest income and rental income are concerned, we, respectfully following the above hold that the same cannot be said to be governed by the concept of mutuality because the receipt is not from the members of the club. Accordingly, the assessment of these two incomes in the hands of the assessee is upheld.

Issues Involved:
1. Legality of reassessment proceedings under sections 147/148.
2. Validity of the assessment framed by CIT(A).
3. Taxability of gross receipts and corpus fund contributions.
4. Applicability of the doctrine of mutuality.
5. Taxability of interest income and rental income.
6. Consistency in the assessment of rental income across different assessment years.

Detailed Analysis:

1. Legality of Reassessment Proceedings under Sections 147/148:
The assessee challenged the reassessment proceedings initiated under sections 147/148, arguing that the reassessment was illegal and based on a mere "change of opinion." The tribunal noted that the original assessment was completed under section 143(3), and the reassessment was initiated on the grounds that the assessee, a mutual benefit organization, was not entitled to exemption under section 11 for interest and rental income. The tribunal found that the reassessment was justified as it was based on the decision of the Hon'ble Apex Court in Bangalore Club Vs. CIT, which clarified the taxability of interest income and rental income for mutual benefit organizations.

2. Validity of the Assessment Framed by CIT(A):
The assessee contended that the CIT(A) had failed to appreciate the written and verbal submissions and had unjustly enhanced the taxable income. The tribunal observed that the CIT(A) had enhanced the income to ?1,86,89,243 by including gross receipts and corpus fund contributions as taxable income. The tribunal found that the CIT(A)'s enhancement was not justified as it was based on an incorrect presumption that the benefit of mutuality was not claimed by the assessee in the return of income.

3. Taxability of Gross Receipts and Corpus Fund Contributions:
The CIT(A) had included gross receipts of ?1,17,47,593 and corpus fund contributions of ?69,41,650 as taxable income. The tribunal held that the gross receipts, except for interest and rental income, were governed by the doctrine of mutuality and were not taxable. The contributions to the corpus fund were also held to be exempt under the doctrine of mutuality.

4. Applicability of the Doctrine of Mutuality:
The tribunal emphasized that the doctrine of mutuality was well-established by the Hon'ble Apex Court in cases like Chelmsford Club Vs. CIT and Bankipur Club Ltd. Vs. CIT. The tribunal noted that the Assessing Officer had accepted the applicability of mutuality for all receipts except interest and rental income. The tribunal reversed the CIT(A)'s order and upheld the Assessing Officer's view that the assessee was entitled to the benefit of mutuality for all receipts except interest and rental income.

5. Taxability of Interest Income and Rental Income:
The tribunal agreed with the assessee's counsel that the issue of interest income was settled against the assessee by the Hon'ble Apex Court in Bangalore Club Vs. CIT. Therefore, the interest income was taxable. Regarding rental income, the tribunal noted that the rental income was received from non-members and thus, following the decision in Bangalore Club, it was also taxable.

6. Consistency in the Assessment of Rental Income Across Different Assessment Years:
For the assessment year 2007-08, the tribunal directed the Assessing Officer to determine the rental income in the same manner as done for the assessment years 2006-07, 2010-11, 2011-12, and 2012-13. The tribunal found that the Assessing Officer had assessed the gross receipt from rent for 2007-08, while for other years, the rental income was assessed after allowing certain deductions. The tribunal instructed the Assessing Officer to recompute the rental income for 2007-08 accordingly.

Conclusion:
The tribunal partly allowed the appeals of the assessee. It deleted the enhancement made by the CIT(A) and upheld the assessment of interest and rental income by the Assessing Officer. The tribunal directed the Assessing Officer to recompute the rental income for the assessment year 2007-08 in a manner consistent with other assessment years. The decision was pronounced in the open court on 23.09.2016.

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