2014 (1) TMI 1227 - AT - Income Tax

Application of principle of mutuality Transactions with non-members also Failure to produce documentary evidences - The survey divulged that the assessee was also entering into transactions with non-members Held that - The decision in Deputy Director of Income-tax (International Taxation)-21, Mumbai Versus Societe International De Telecommunication 2012 (11) TMI 948 - ITAT MUMBAI followed - In a case of a non-mutual organization, a few transactions with the members do not convert its non-mutual status to mutual also, the otherwise status of mutuality of an organization cannot be destroyed because of a few transaction with the non-members - What extent of participation by non-members destroys the otherwise mutual status of an organization or what extent of participation by members changes the otherwise status of non-mutuality depends on the consideration of the totality of facts and circumstances of each case - mere fact that a person at the time of resignation or retirement is not entitled to share in the reserves of the organization, would not damage the mutuality so long as the persons who are entitled to share such reserves continue to be the members as a class. The assessee is covered by the principle of mutuality to the extent of its transactions with the members - Income from transactions with non-members is outside the purview of mutuality thus, the income is exempt from taxation and only the income from the transactions from non-members is outside the purview of principles of mutuality Decided against Revenue. Reimbursement of cost to income Error in Calculating net income - Application of section 44C of the Act Application of section 40(a)(iii) of the Act - Estimation of income at 5% of the gross amount recovered from non-members Disallowance made u/s 32 of the Act Held that - the decision in Deputy Director of Income-tax (International Taxation)-21, Mumbai Versus Societe International De Telecommunication 2012 (11) TMI 948 - ITAT MUMBAI followed - Both the sides of the assessee s Income and expenditure are matching paisa to paisa and there is no under-recovery or over-recovery shown as an asset or a liability in its balance sheet - the accounts of the assessee were maintained at the HO level, there remains nothing to doubt the correctness view taken by the CIT(A) that the accounts of the assessee do not divulge the correct income - Not only the basis of allocation of expenses but also that of the revenue, as done by the HO is not known to the assessee. Section 44C only talks of HO expenses, which mean executive and general administrative expenditure incurred by the assessee outside India including expenditure in respect of rent, rates, repairs etc - It is only the allocation of general and administrative expenses which is covered within the purview of section 44C - neither the income side nor the expenditure side of the assessee s Income and expenditure account is fully capable of verification - It is in such circumstances that Rule 10 of Income-tax Rules, 1962 comes to the rescue of the Revenue for determination of income in the case of non- residents - It is this very rule which has been invoked by the Assessing Officer and also applied by the learned CIT(A) in estimating the income of the assessee thus, the CIT(A) was more than justified in estimating the income at 5% of the gross receipts from non-members there was no merit in the grounds of the assessee Decided against Assessee. Levy of interest u/s 234D of the Act Held that - The decision in CIT v/s Common Effluent Treatment Plant, (Thane-Belapur) Association, 2010 (6) TMI 52 - BOMBAY HIGH COURT followed - interest received from F.D. with the bank does not possess the same character of Mutuality and the interest income would, therefore, be taxable under the head Income From Other Sources Decided against Assessee.

Issues Involved:
1. Principle of Mutuality
2. Reimbursement of Costs as Income
3. Computation of Total Income
4. Application of Section 44C of the Income Tax Act
5. Withholding Tax on Interest Payments
6. Non-taxable Income and Depreciation Allowance
7. Interest Income and Principle of Mutuality

Detailed Analysis:

1. Principle of Mutuality:
The primary issue revolved around whether the assessee was covered by the principle of mutuality. The Revenue argued that the assessee engaged in transactions with non-members and failed to produce documentary evidence matching revenue with expenses. The Tribunal, referencing earlier decisions, reiterated that the principle of mutuality applies when an organization conducts transactions solely with its members. It was held that a few transactions with non-members do not destroy the mutual status of an organization. The Tribunal upheld that the assessee is covered by the principle of mutuality for transactions with members, making such income exempt from taxation. However, income from transactions with non-members is taxable.

2. Reimbursement of Costs as Income:
The assessee contended that reimbursements of costs from non-members should not be regarded as taxable income. The Tribunal noted that reimbursement of expenses without any profit element is generally not taxable. However, in this case, the basis of allocation of costs and revenues by the head office was not transparent or verifiable, leading to the conclusion that the reimbursement could not be accepted as non-taxable without proper verification.

3. Computation of Total Income:
The Tribunal upheld the action of the Assessing Officer in estimating the profits of the assessee at 5% of the gross amount recovered from non-members. This estimation was justified due to the lack of clarity in the allocation of costs and revenues by the head office, making it difficult to verify the actual income.

4. Application of Section 44C of the Income Tax Act:
The assessee argued that section 44C, which pertains to the allocation of head office expenses, should apply. The Tribunal clarified that section 44C only covers executive and general administrative expenses. Since both the income and expenditure sides of the assessee's accounts were unverifiable, Rule 10 of the Income-tax Rules, 1962, was invoked to estimate the income, leading to the 5% estimation of gross receipts from non-members.

5. Withholding Tax on Interest Payments:
The Tribunal noted that the Assessing Officer had erred in holding that the assessee was required to withhold tax from interest payments made to its members. The payments were not liable to tax in India, and thus, no disallowance could be made under section 40(a)(i) of the Act.

6. Non-taxable Income and Depreciation Allowance:
The assessee claimed that its net income was nil as it operated on a cost recovery basis and thus had no taxable income. Additionally, the Tribunal found that the Assessing Officer had erred in not allowing depreciation allowance under Section 32 of the Act while computing the net income of the assessee.

7. Interest Income and Principle of Mutuality:
The Tribunal held that interest income, including bank interest and interest on income tax refunds, is not covered by the principle of mutuality. This decision was based on precedents from the Hon'ble Jurisdictional High Court and the Hon'ble Supreme Court, which stated that interest income does not possess the same character of mutuality and is taxable under "Income From Other Sources."

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding that the assessee's transactions with members are covered by the principle of mutuality and exempt from taxation. However, income from transactions with non-members is taxable. The cross objection by the assessee was also dismissed, affirming that reimbursements from non-members are taxable, and interest income does not fall under the principle of mutuality. The Tribunal also upheld the 5% profit estimation on non-member transactions and clarified the application of section 44C and withholding tax provisions.

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