2015 (10) TMI 1896 - AT - Income Tax

Application u/s 12AA rejected - applicability of Principles of mutuality - Held that - A perusal of the Clauses demonstrate that the principles of mutuality are not attracted in this case, for the reason that, there is no identity between the contributor and the participant of the funds. The main object, does not lay down, that the participants are confined to the persons who are Members of the Society. The argument of the Ld.Counsel for the assessee, that Clauses 10 (rules and regulations) and Clause 12 of the MOA cannot be applied, for the reason that no such activity has taken place during the year, or that the happening of dissolution is hypothetical is not correct. When the constitution of the Society authorizes receipt of money by way of funds, donations, contributions, grants, in addition to subscription and charges received by the Members, then non receipt of the amounts during the year, cannot be a ground to come to a conclusion that the concept of mutuality applies to the assessee. Similar is my view on Clause 12 of the MOA read with Clause 18 of the Rules and Regulations in Annexure-I, lead me to a conclusion that concept of mutuality claimed by the assessee was rightly rejected by the Revenue. The Hon ble Supreme Court in the case of Chelmesford Club (2000 (3) TMI 4 - SUPREME Court) held that where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves . Their Lordships have laid down the three tests before the principle of mutuality can be applied. In a nutshell, these tests are (i) the identity of the contributors to the fund and the recipients from the fund; (ii) the organization exists only for mutual benefit; (iii) the funds can be expended for mutual benefit or returned to the contributors. It is only when these tests are fulfilled that the principle of mutuality can be applied. In the present case, the assessee is under no obligation to return the funds to the contributors. - Decided against assessee.

Summary

Issues:
1. Whether the income of the assessee is exempt under the principles of mutuality.
2. Challenge against the levy of interest under sections 234A and 234B of the Act.

Analysis:
1. Exemption under the Principles of Mutuality:
- The appellant, an Association of Person (AOP) established by Electricity regulators of SAARC countries, claimed its income to be exempt based on the principle of mutuality.
- The Assessing Officer (AO) rejected the claim by emphasizing clauses 10 and 12 of the Memorandum of Association (MOA) of the Society.
- The appellant argued that no funds or donations were received during the year, and the authorization in clause 10 of the MOA does not affect the concept of mutuality.
- The appellant distinguished its case from precedents cited by the AO, emphasizing the control of members over the society's funds.
- The Tribunal analyzed the aims and objectives of the Society, clauses related to funds and donations, utilization of funds, and dissolution provisions to conclude that the principles of mutuality did not apply.
- Referring to the three tests laid down by the Supreme Court for the application of mutuality, the Tribunal noted that the appellant was not obligated to return funds to contributors, leading to the dismissal of the appellant's claim.

2. Levy of Interest under Sections 234A and 234B:
- The appellant challenged the levy of interest under sections 234A and 234B.
- The Tribunal directed the AO to implement the directions given by the First Appellate Authority regarding the levy of interest under section 234A.
- The Tribunal upheld the taxation of interest received on surplus placed in Fixed Deposits in banks, dismissing the appellant's grounds on this issue.

In conclusion, the Tribunal dismissed the appeal of the assessee, ruling that the income was not exempt under the principles of mutuality and upholding the levy of interest under sections 234A and 234B. The judgment was pronounced on 7th October 2015.