2016 (9) TMI 250 - AT - Income Tax

Rectification of mistake - Claim of section 11 exemption without section 12A registration after its conversion to a section 25 companies - mutuality principle application - Held that - There is no quarrel between that the assessee has raised its mutuality plea qua members contributions only as collected by organizing gala dinners, property shows and cricket tournaments. Shri Rajdeep Singh fails to rebut the factual position that all these events are in the nature of annual get together being organized for the purpose of promoting brotherhood. Nor is it his case that the relevant figures in this records point out losses really from these activities as evident in assessment year 2006-07. We notice from our order that we had considered case law of Bangalore Club vs. CIT (2013 (1) TMI 343 - SUPREME COURT ) propounding three essential conditions that there has to be a complete identity between the class of contributors and participators leaving the particular level or form by which a mutual association is known to be insignificant, the activities concerned should be in furtherance to mandate of the association and there should not be any scope of profiteering by the contributors from a fund made by them which could only be expanded or retuned to themselves. We deem it appropriate to observe that our order under challenge does not deal with the above stated third aspect of mutuality. As extracted clause reveals that assessee has to make and create from its members contributions a fund for above purposes. It is nowhere stipulated therein that these purposes would form the sole object for collection of funds from members whereas we interpreted the same on these lines only. We reiterate that the assessee has rather suffered losses in organizing the impugned fiestas negating possibility of having organized the same on commercial lines. Its purpose for having organized the activities as stated in the case records are annual get togethers for promoting brotherhood between members only. We observe in these peculiar facts that our appreciation of this clause is not as per the language incorporated in the relevant object clause. We admit our two findings hereinabove to be suffering from mistakes apparent on the face of record in view of all this detailed discussion. There is further no denial of the fact that our order does not deal with third aspect of mutuality principle ROM application allowed

Summary

Issues Involved:
1. Mutuality principle application.
2. Section 12A registration and Section 11 exemption.
3. Nature of assessee's activities (commercial vs. non-commercial).
4. Apparent error in the tribunal's order.

Detailed Analysis:

1. Mutuality Principle Application:
The assessee, a section 25 company, claimed exemption for contributions received from members, arguing these were for collective benefits without profit intention. The tribunal referenced the Supreme Court's decision in Bangalore Club v/s. CIT, which outlined three features for mutuality: complete identity between contributors and participators, actions in furtherance of the association's mandate, and no profiteering scope. The tribunal found that the assessee's contributions, including those from non-members, did not satisfy the complete identity requirement. Additionally, the assessee's activities (gala dinners, property shows, cricket tournaments) were deemed commercial, not in furtherance of the association's mandate, thus failing the mutuality test.

2. Section 12A Registration and Section 11 Exemption:
The CIT(A) noted that the assessee did not disclose true facts until the 2010-11 scrutiny and raised Section 11 exemption claims without Section 12A registration after converting to a section 25 company. The CIT(A) rejected the mutuality plea, emphasizing that the assessee's income primarily came from property shows, which were commercial activities.

3. Nature of Assessee's Activities:
The tribunal observed that the assessee's activities, such as organizing fiestas and property shows, were commercial exercises rather than services in furtherance of the association's mandate. This conclusion was supported by the absence of a mechanism in the objects clause for raising receipts from non-members and the commercial nature of the activities performed.

4. Apparent Error in Tribunal's Order:
The tribunal acknowledged an error in its earlier order by not considering the jurisdictional high court's decision in Junagarh Gymkhana, which held that non-mutual transactions involving non-members do not destroy the mutuality principle. The tribunal's previous order also misinterpreted the assessee's object clause, which did not restrict fund collection solely for office maintenance and related expenses. The tribunal admitted these errors and recalled its order to the extent discussed, restoring the appeals for further hearing.

Conclusion:
The tribunal concluded that the assessee's arguments claiming mutuality for members' contributions were to be rejected, confirming the CIT(A)'s orders. However, upon recognizing apparent errors in its judgment, the tribunal decided to recall its order and restore the appeals for further hearing, emphasizing the need for justice above technicalities.