2018 (8) TMI 1707 - AT - Income Tax

Denial of claim for exemption u/s 11 - Held that - The claim of the assessee u/s 11 of the I.T. Act 1961 was declined in the year of 1989- 90 15, 000/-. AO disallowed the same on the ground of claim of depreciation on the said amount. There is no claim of depreciation. Since there is no plausible reason on record to decline the claim of the assessee therefore we set aside the finding of the CIT(A) on this issue and restored this issue before the AO to decide the issue afresh in accordance with law.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income Tax Act, 1961.
2. Taxability of interest earned on fixed deposits.
3. Disallowance of capital expenditure as application of income.
4. Taxability of subscription and entrance fees under the principle of mutuality.

Issue-wise Detailed Analysis:

Issue No. 1: Denial of Exemption under Section 11 of the Income Tax Act, 1961
The assessee challenged the denial of exemption under Section 11 by invoking the amended proviso to Section 2(15) of the Act. The assessee, registered as a charitable organization, claimed that its activities did not change and continued to serve a charitable purpose by securing accurate circulation figures for periodicals and media. The assessee argued that the CIT(A)'s finding was incorrect and that the nature of its work remained non-commercial, supported by past ITAT rulings in its favor. The Tribunal observed that the objects of the assessee did not change and continued to benefit the public. The Tribunal found no evidence of commercial activities and ruled that the amendment in Section 2(15) did not alter the charitable nature of the assessee's activities. Thus, the Tribunal decided in favor of the assessee, allowing the exemption under Section 11.

Issue No. 2: Taxability of Interest Earned on Fixed Deposits
The assessee contended that the interest earned on fixed deposits should not be taxable under the principle of mutuality. However, the Tribunal referred to the Supreme Court ruling in Bangalore Club Vs. CIT, which held that interest income does not fall under the principle of mutuality. The Tribunal noted that the assessee had already offered the interest income to tax in its return for the relevant assessment year.

Issue No. 3: Disallowance of Capital Expenditure as Application of Income
The assessee claimed capital expenditure of ?15,000 as application of income for the objects of the trust, which was disallowed by the AO on the grounds of depreciation claims. The Tribunal found no evidence of depreciation claims and no valid reason for disallowance. Consequently, the Tribunal set aside the CIT(A)'s finding and restored the issue to the AO for fresh consideration in accordance with the law.

Issue No. 4: Taxability of Subscription and Entrance Fees under the Principle of Mutuality
The assessee argued that the subscription and entrance fees received from members should be exempt from tax under the principle of mutuality. The Tribunal supported this view, citing past ITAT decisions in the assessee's favor and the absence of any commercial activity. The Tribunal ruled that these receipts were not chargeable to tax, deciding the issue in favor of the assessee.

Conclusion:
The Tribunal allowed the appeals partly, ruling in favor of the assessee on the major issues of exemption under Section 11 and the principle of mutuality for subscription and entrance fees, while upholding the taxability of interest income on fixed deposits. The disallowance of capital expenditure was remanded to the AO for fresh consideration.