2011 (9) TMI 44 - AT - Income Tax

Mutual Association - Concept of Mutuality - Specific services rendered by a Registered society to its members - taxability of amount received from members - Held that - It is undisputed that the assessee has not been registered u/s 12A of the Act and, therefore, it cannot be considered eligible for the benefit granted by Section 11 of the Act. The assessee in its return of income had claimed that benefit only. Therefore, the claim of the assessee has to be considered de hors the claim made by it u/s 11 of the Act. Provisions of Section 44A have overriding effect and therefore to be read independent to other provisiosn - it is an association related to trade and, therefore, it is not outside the scope of Section 44A of the Act - the assessee is not an association or institution referred to in clause 23A of Section 10 - the amount expended by the assessee for the purpose of protection or advancement of the common interest of its member will be allowable as deduction. - addition made by the AO for an amount of Rs.6,18,750/- received by the assessee from its members has been considered taxable is not justified. - Benefit of Section 44A allowed. - However amount not expended for the purpose of protection and advancement of the common interest of its members has not been granted exemption u/s 44A of the Act Surplus arrived at by the assessee (society) from the transactions with its members - Section 44A does not grant the exemption to the assessee with regard to the surplus shown by it being receipt excess of expenditure. It only describe that if such receipts fall short of expenditure, then, deduction regarding expenditure has to be allowed. - However, the resultant surplus is allowable on the basis of principle of mutuality as no material has been brought on record by the Assessing Officer to show that any of the receipt of the assessee pertains to non-members. Regarding interest on FDR - interest on FDRs has also been held to be covered by the doctrine of mutuality (COMMISSIONER OF INCOME TAX .VERSUS DELHI GYMKHANA CLUB LTD. (2010 -TMI - 205800 - DELHI HIGH COURT). Therefore, looking from any angle, we find no infirmity in the order of the CIT (A) vide which it has been held that no part of the income of the assessee is exigible to tax on the principle of mutuality.

Issues Involved:
1. Status of the society as a mutual association versus a charitable organization.
2. Taxability of corpus donations and surplus income.
3. Applicability of Section 44A and Section 28(iii) of the Income Tax Act.
4. Principle of mutuality and its relevance to the society's income.

Detailed Analysis:

1. Status of the Society:
The primary issue was whether the society should be considered a charitable organization or a mutual association. The CIT (A) held that the society was a mutual association, rejecting the assessee's claim of being a charitable organization. The assessee argued that if their claim of being a charitable organization was untrue, the alternative plea of being a mutual association should not have been considered.

2. Taxability of Corpus Donations and Surplus Income:
The CIT (A) deleted the additions related to corpus donations of Rs. 6,18,750/- and the surplus income over expenditure of Rs. 3,29,919/-, which the Assessing Officer had considered taxable due to the lack of registration under Section 12A. The assessee contended that these amounts should not be taxed under the principle of mutuality.

3. Applicability of Section 44A and Section 28(iii):
The Assessing Officer argued that the amounts received by the society were taxable under Section 28(iii) of the Income Tax Act, as they were for specific services rendered to its members. The CIT (A) disagreed, stating that the amounts were not for specific services but were received as part of the society's general activities. The CIT (A) also considered the applicability of Section 44A, which provides deductions for trade, professional, or similar associations.

4. Principle of Mutuality:
The principle of mutuality was central to the assessee's argument. The CIT (A) held that the society's income was exempt under this principle, as the income was derived from its members and used for their benefit. The Assessing Officer did not provide evidence that any part of the income was from non-members.

Judgment Summary:

Status of the Society:
The tribunal upheld the CIT (A)'s decision that the society is a mutual association and not a charitable organization. The assessee's claim of being a charitable organization was not accepted due to the lack of registration under Section 12A.

Taxability of Corpus Donations and Surplus Income:
The tribunal agreed with the CIT (A) that the corpus donations and surplus income should not be taxed. The corpus donations were considered part of the membership fees and not taxable under the principle of mutuality. The surplus income was also not taxable as it was not derived from specific services rendered to members.

Applicability of Section 44A and Section 28(iii):
The tribunal found that Section 44A applied to the society, allowing deductions for expenses incurred for the protection or advancement of the common interests of its members. The amounts received were not for specific services, so Section 28(iii) did not apply. The society's income fell under the principle of mutuality and was not taxable under Section 44A.

Principle of Mutuality:
The tribunal upheld the CIT (A)'s decision that the society's income is exempt under the principle of mutuality. There was no evidence that any part of the income was from non-members. The tribunal also noted that interest on FDRs is covered by the doctrine of mutuality, as per the Delhi High Court's decision in CIT vs. Delhi Gymkhana Club Ltd.

Conclusion:
The tribunal dismissed the departmental appeal, affirming that the society's income is not taxable under the principle of mutuality. The order was pronounced in the open court on 09.09.2011.

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