2018 (11) TMI 1551 - AT - Income Tax

Penalty proceedings u/s 271(1)(c) - benefit of section 11 - disallowance of interest and disallowance of entire receipts shown by the assessee and disallowing the expenditure claimed - principle of mutuality - Held that - If the appellant society has been formed by way of association of members for maintenance of the housing society for the benefits of all the members, then it cannot be held that all the members of the association are the persons as defined in Sub section (3) of Section 13. Nowhere it has been spelt by the Ld. CIT(A) as to which of the conditions laid down in section 13 (1) has been violated. Nowhere there is any finding that the amount has been spent for benefit of any particular individual member. The entire mandate of appellant association was that the amount received by way of interest would be spent only for the maintenance and upkeep of common area facilities of the building and of common services for the benefit of all the members and not to any individual member. Thus, such an allegation of the Ld. CIT(A) deserves to be rejected. Accordingly, we hold that entire receipts by the Ld. CIT(A) is unsustainable in law and on facts. Even when the Ld. CIT(A) has held that assessee is neither eligible for benefit u/s 11 nor its receipts fall within the doctrine of mutuality, then its income should have been computed under the normal provision of Act and only the net income could have been brought to tax. Here in this case the net income for the assessment year is ₹ 5,44,992/- and in the other years, as stated above, is much below that. Hence, the action of the Ld. CIT(A) in taxing the entire income is not justified under any provisions of law. Accordingly, we hold that the entire interest income earned by the assessee is eligible for benefit of section 11; and since the net income as per expenditure account is much below the prescribed limit of 15%, therefore, no income is held to be taxable and consequently in all the years income has to be assessed at nil and consequently the entire addition made by the AO and CIT(A) is directed to be deleted. Lumpsum maintenance charges collected from the members at the time of allotment is the corpus which has been put at the disposal of the appellant association with the mandate that the interest income earned from corpus would only be utilised only for the maintenance of the housing society, i.e., the purpose for which it was found. Nothing has been brought on record or any material has been found that the interest income received has not been utilised for the benefit of the members, i.e., for the maintenance and upkeep of the residential and common area and facility. It is also not the fact that the banks in which FDR was kept was also a member of the appellant association. The question of commerciality arises only where entities claiming to be mutual concern have an object to carry on a particular business and generate income from members and non-members through their business. Here appellant does not run any activity or profit earning with a profit motive or from which it can derive any profit. The club has claimed interest earned on fixed deposits kept with certain banks which were corporate members of the assessee and claim exemption on the basis of doctrine of mutuality on the interest earned on fixed deposits kept with non-member banks which were offered to tax. Here all the ingredients of applicability of mutuality exists; and accordingly, no such income can be taxed in view of the principle of mutuality. Thus, on this score also, we hold that no income is chargeable to tax in the case of assessee. In so far as the appeals relating to penalty proceedings u/s 271(1)(c) is concerned, in view of our finding given above that no income is taxable in the hands of the appellant association, then levy of penalty u/s 271(1)(c) has no legs to stand and accordingly, penalty levied in all the years impugned before us stands deleted. - decided in favour of assessee.

Issues Involved:
1. Disallowance of interest income.
2. Enhancement of taxable income by CIT(A).
3. Applicability of the principle of mutuality.
4. Eligibility for exemption under Section 11.
5. Violation of Section 13.
6. Levy of penalty under Section 271(1)(c).

Detailed Analysis:

1. Disallowance of Interest Income:
The AO disallowed the interest income of ?17,06,920 (bank interest ?16,92,520 and interest from cable operator ?14,400) for the assessment year 2012-13, arguing that the income was not utilized for charitable activities but for the benefit of society members, thus violating the principle of mutuality. The AO taxed the interest income as 'income from other sources' since it did not satisfy the principle of mutuality.

2. Enhancement of Taxable Income by CIT(A):
The CIT(A) upheld the AO's decision and further enhanced the taxable income to ?36,00,387 by disallowing the entire amount received from members and the entire expenditure incurred. The CIT(A) argued that mutuality and charitable activity do not coexist and criticized the granting of registration under Section 12A, alleging misrepresentation by the appellant society.

3. Applicability of the Principle of Mutuality:
The appellant argued that the principle of mutuality should apply as the association was created for the maintenance of common areas and facilities for its members. The interest income from the corpus fund, contributed by members and used for their benefit, should be exempt under mutuality. The Tribunal had accepted this claim in earlier years. The appellant cited judgments supporting the principle of mutuality, including cases from the Delhi High Court.

4. Eligibility for Exemption under Section 11:
The appellant contended that once granted registration under Section 12A, the AO must compute income under Section 11. The AO and CIT(A) cannot question the charitable status granted under Section 12A. The appellant emphasized that charitable activities need not benefit the entire public but can benefit a section of the public. The income, as per the income and expenditure account, was below the statutory deduction of 15%, making it exempt under Section 11.

5. Violation of Section 13:
The CIT(A) alleged that the appellant violated Section 13, as the funds were used for the benefit of its members. The Tribunal rejected this reasoning, stating that the funds were used for the maintenance of common areas and facilities, benefiting all members and not any individual. The Tribunal found no specific violation of Section 13 conditions.

6. Levy of Penalty under Section 271(1)(c):
Given the Tribunal's findings that no income is taxable, the penalty under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars was deemed unsustainable and was deleted.

Conclusion:
The Tribunal held that the entire interest income is eligible for exemption under Section 11, and the principle of mutuality applies, making no income chargeable to tax. The Tribunal directed the deletion of all additions made by the AO and CIT(A). Consequently, the penalty levied under Section 271(1)(c) was also deleted. The appeals of the assessee were allowed, and the stay applications were dismissed as infructuous.

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