2017 (8) TMI 1381 - AT - Income Tax

Claim exemption u/s 11 - proof of charitable activities - Held that - The law in different facet in respect of mutual concerns is now well summed up by the Hon ble Supreme Court in CIT vs Bankipur Club 1997 (5) TMI 392 - SUPREME COURT held that the object of the assessee company claiming to be a mutual concern or a club , is to carry on a particular business and the money is realised both from the members and the non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole, disclose the same profit-earning motive and are alike tainted with commerciality and the resultant surplus is profit-income liable to tax. In respect of proviso inserted by the Finance Act 2008 to section 2(15), one has to keep in mind that such entities shall not be eligible for exemption u/s 11 or u/s 10(23C) of the Act, if they carry on commercial activities. One has to examine the nature, scope, extent and frequency of such activity. We have perused the relevant materials on record and find that neither the AO nor the Ld. CIT(A) has examined the above aspects while arriving at their conclusion. In view of the above, we set aside the order of the Ld.CIT(A) and restore the matter to the file of the AO to make a fresh assessment in the light of our observation at para 7.3 here-in-above and after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant details before the AO. Appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Treatment of the assessee trust as a mutual association.
2. Taxability of interest income and income from non-members.
3. Applicability of the proviso to Section 2(15) of the Income Tax Act, 1961.
4. Entitlement to exemption under Sections 11 and 12 of the Income Tax Act, 1961.
5. Nature and scope of activities undertaken by the assessee trust.

Issue-wise Analysis:

1. Treatment of the Assessee Trust as a Mutual Association:
The Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the action of the Assessing Officer (AO) in treating the assessee trust as a mutual association. The AO held that the predominant object of the assessee trust was to provide services to its members, including facilities such as a restaurant, residential rooms, swimming pool, and sports facilities. The AO concluded that the trust was not established for charitable purposes within the meaning of Section 2(15) of the Income Tax Act, 1961, and thus, not entitled to exemption under Section 11. The CIT(A) upheld this view, stating that the trust was engaged in commercial activities and, therefore, was a mutual association.

2. Taxability of Interest Income and Income from Non-Members:
The AO brought to tax interest income of ?24,37,386/- and income from non-members of ?1,42,530/-. The AO reasoned that the interest income was not covered under the principles of mutuality and relied on various judgments to support this view. The CIT(A) upheld the addition of interest income and income from non-members, agreeing with the AO's conclusion that the trust's activities were commercial in nature and not charitable.

3. Applicability of the Proviso to Section 2(15) of the Income Tax Act, 1961:
The proviso to Section 2(15) states that the advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on any activity in the nature of trade, commerce, or business. The CIT(A) noted that the assessee trust was engaged in activities such as letting out property and running a cafeteria, which were commercial in nature. The CIT(A) concluded that these activities had no relation to charity and thus, the trust was not eligible for exemption under Section 11.

4. Entitlement to Exemption under Sections 11 and 12 of the Income Tax Act, 1961:
The assessee trust argued that it was registered under Section 12A, indicating its charitable nature, and thus entitled to claim benefits under Sections 11 and 12. The CIT(A) disagreed, stating that registration under Section 12A does not automatically entitle the trust to exemption under Section 11. The CIT(A) relied on the decision in Surat Tennis Club vs. CIT to support this view.

5. Nature and Scope of Activities Undertaken by the Assessee Trust:
The assessee trust claimed that its activities, such as promoting sports and providing social services, were charitable in nature. The trust argued that its income from interest and non-members was used to cover operating deficits and support its charitable objectives. The CIT(A) found that the trust was charging high membership fees and engaging in commercial activities, which indicated a profit-earning motive rather than a charitable purpose.

Conclusion and Direction:
The Tribunal found that the contentious issues could have been resolved through a proper examination of the proviso to Section 2(15). The Tribunal noted that neither the AO nor the CIT(A) had adequately examined the nature, scope, extent, and frequency of the trust's activities. Therefore, the Tribunal set aside the order of the CIT(A) and restored the matter to the AO for fresh assessment, directing the AO to consider the Tribunal's observations and provide the assessee with a reasonable opportunity to present its case.

Outcome:
The appeal was allowed for statistical purposes, and the order was pronounced in the open court on 24/08/2017.