2013 (12) TMI 302 - AT - Income Tax

Applicability of principle of mutuality The assessee is a sports club registered under section 12A The facilities provided by the club are for its members only - The banquet hall/ground are given only to the members of the club and their families - Only the members or their families and guests are allowed to participate in the club activities - Some professionals/contractors are engaged in organising the club activities from whom the club derives royalty/commission at fixed rate 20 per cent on total receipts - Held that - Following CIT v. Bankipur Club Ltd. 1997 (5) TMI 392 - SUPREME Court - the receipts for the various facilities extended by the clubs to its members, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, could not be said to be a trading activity . The surplus-excess of receipts over the expenditure as a result of mutual arrangement, could not be said to be income for the purpose of the Act Decided against Revenue. Applicability of section 11 to 13 Held that - Following Chembur Gymkhana 2009 (8) TMI 839 - ITAT MUMBAI - The appellant is holding a valid registration under section 12A - None of the terms of the registration is violated The assessee is entitled for exemption in respect of donation, annual subscription and entrance fees from the members under the provisions of sections 11 to 13 subject to compliance of other requirements Decided against Revenue. Disallowance of provision for expenses The assessee has made provision of Rs.77,209/- for payment of expenses Held that - The provision was made on the basis of actual liability and not on the estimation of unascertained liability The assessee has also produced the ledger accounts and vouchers clearly showing that the expenses of Rs. 74,509/- has actually been paid in next month Disallowance was restricted to Rs. 2700 - Decided against Revenue.

Summary

Issues Involved:
1. Applicability of the principle of mutuality to the assessee's receipts.
2. Applicability of sections 11 to 13 of the Income-tax Act, 1961.
3. Deletion of addition made on account of discrepancy in receipts of membership/entrance fees.
4. Disallowance of liability shown as provision for expenses.

Issue-wise Detailed Analysis:

1. Applicability of the Principle of Mutuality:
The Revenue challenged the applicability of the principle of mutuality to the assessee's receipts, arguing that the assessee was engaged in business activities and thus, the principle of mutuality was not applicable. The Assessing Officer observed that the assessee, a sports club registered under section 12A of the Act, claimed its income as exempt on the principle of mutuality. The AO noted that the club allowed third parties to operate yoga and karate classes and rented out its premises for marriages/parties, which amounted to commercial activity. The AO rejected the assessee's claim, stating that the club's activities extended to non-members, thus disqualifying it from the mutuality principle. However, the Commissioner of Income-tax (Appeals) (CIT(A)) held that the club's activities were for the benefit of its members and their families, and the principle of mutuality was applicable. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in CIT v. Bankipur Club Ltd., which stated that receipts from facilities extended to members as part of club privileges were not trading activities and thus not taxable. The Tribunal found no reason to tamper with the CIT(A)'s findings and dismissed the Revenue's appeal on this ground.

2. Applicability of Sections 11 to 13 of the Income-tax Act, 1961:
The Revenue contended that the CIT(A) erred in holding that sections 11 to 13 were applicable to the assessee. The CIT(A) noted that the assessee held a valid registration under section 12A and had not violated any terms of the registration. The CIT(A) referenced a similar case, Chembur Gymkhana, where the Mumbai Tribunal held that clubs were entitled to exemption under sections 11 to 13. The Tribunal found no distinguishing facts presented by the Revenue and upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

3. Deletion of Addition Made on Account of Discrepancy in Receipts of Membership/Entrance Fees:
This issue was consequential to the decision on the applicability of the principle of mutuality. Since the Tribunal upheld the CIT(A)'s decision that the principle of mutuality was applicable, the deletion of the addition made on account of the discrepancy in receipts of membership/entrance fees was also upheld. The Tribunal dismissed the Revenue's appeal on this ground.

4. Disallowance of Liability Shown as Provision for Expenses:
The AO disallowed a provision for expenses amounting to Rs. 77,209, arguing it was not allowable. The assessee explained that the provision was for actual liability, not an estimated unascertained liability, and provided evidence of payment in April 2007. The CIT(A) verified the evidence and restricted the disallowance to Rs. 2,700, deleting the addition of Rs. 74,509. The Tribunal found no reason to tamper with the CIT(A)'s findings and dismissed the Revenue's appeal on this ground.

General Grounds:
Ground Nos. 5 and 6 were general in nature and required no separate adjudication.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years 2007-08 and 2008-09, upholding the CIT(A)'s decisions on all grounds.