2020 (1) TMI 21 - HC - Income Tax

Exemption u/s 11 - AO has proceeded to classify assessee s activities as hybrid , holding that part of the activities are covered by provisions of Section 11 r/w section 2(15) and partly by principle of mutuality - if the assessee has taken the plea of mutuality, whether it could be deprived of the benefit of Section 2(15)? - HELD THAT - Merely because the assessee is charging for certain goods and services, it does not render such activities as commercial activities and the fact that the AO has accepted that the assessee is promoting public interest as provided in the proviso to Section 2(15), there cannot be any doubt that the assessee should be regarded as charitable organisation and given the full benefit of exemption provided to such organisations under the Act. Relying on this premise, it has been held that since the assessee has not generated any surpluses from anyone-members or non-members, it was not correct to say that the assessee has claimed relief partly as charitable organisation and partly as mutual association. As rightly held that the principle of mutuality becomes superfluous in view of the fact that the activities were held to be charitable. Applying the principle of consistency, CIT(A) held that there is no fundamental change in the nature of activities of the assessee for the period prior to AY 2008-09 and subsequent years. The ITAT has confirmed the findings of the CIT(A). Though the principles of res judicata are not applicable to the income tax proceedings, however, at the same time, one cannot ignore the fact that there is no dispute with respect to the consistency in the nature of activities of the assessee. All the income tax authorities have held that the assessee is a charitable institution and this consistent finding of fact entitles the assessee to have its income computed under Section 11, 12 and 13 of the Act. It was imperative for the Revenue to establish that there was an element of profit motive in the activities of the assessee, to deny the benefit. If any surpluses have been generated on account of some of the activities of the assessee, it would not ipso facto be determinative of the fact that there was an element of profit motive. The contentions raised by the Revenue, do not impress this Court as no error has been pointed out with respect to the aforesaid finding of fact which would disentitle the assessee the benefit of Section 2(15) of the Act. In the present case, since the assessee is registered as a charitable trust, the application of principle of mutuality for the computation of its income is not required to be gone into as the income is to be computed as per Section 11, 12 and 13 of the Act - no ground to disentitle the assessee to the benefits of Section 2(15) - Decided against revenue

Issues Involved
1. Exemption Application
2. Condonation of Delay
3. Charitable Status and Tax Exemption
4. Principle of Mutuality
5. Interest Income Taxability

Detailed Analysis

1. Exemption Application:
The court allowed the exemption application (CM APPL. 51070/2019) subject to all just exceptions and disposed of it accordingly.

2. Condonation of Delay:
The court condoned the delay of 91 days in filing the application (CM APPL. 51069/2019) based on the reasons stated in the application and disposed of it in those terms.

3. Charitable Status and Tax Exemption:
The appeal under Section 260A of the Income Tax Act, 1961, was directed against the ITAT's order, which upheld the CIT (A)'s decision that the assessee is a charitable institution. The ITAT and CIT (A) found that the assessee's activities are charitable in nature and its income should be computed under Sections 11, 12, and 13 of the Act. The Revenue argued that the ITAT's order was perverse and that the principle of res judicata does not apply to income tax proceedings. The court noted that the CIT (A) and ITAT had consistently held the assessee as a charitable institution for several years and that there was no fundamental change in the assessee's activities to warrant a different view. The court upheld the findings that the assessee's activities are charitable and that it is entitled to tax exemptions under Sections 11, 12, and 13 of the Act.

4. Principle of Mutuality:
The Revenue contended that the assessee could not claim benefits under both Section 11 and the principle of mutuality. The court noted that the CIT (A) and ITAT had found that the assessee's activities are charitable, making the principle of mutuality superfluous. The court emphasized that the principle of mutuality does not apply if the assessee is registered as a charitable trust, and its income should be computed under Sections 11, 12, and 13 of the Act. The court also noted that the AO had erred in classifying the assessee's activities as "hybrid" and that the CIT (A) had correctly held that the assessee's activities are charitable and not commercial.

5. Interest Income Taxability:
The Revenue argued that the interest earned by the assessee on fixed deposits from its member bank should be taxable. The court referred to its decision in CIT vs. Delhi Gymkhana Club, which held that the principle of mutuality applies to interest income earned from deposits made out of contributions from members. The court distinguished the present case from Bangalore Club vs. CIT, noting that the assessee is a registered society and charitable trust. The court held that the interest income is not taxable and is covered by the principle of mutuality, but since the assessee is a charitable trust, its income should be computed under Sections 11, 12, and 13 of the Act.

Conclusion
The court dismissed the Revenue's appeal, finding no substantial question of law. The court upheld the ITAT and CIT (A)'s findings that the assessee is a charitable institution and entitled to tax exemptions under Sections 11, 12, and 13 of the Income Tax Act, 1961. The court also held that the principle of mutuality is superfluous given the charitable status of the assessee and that the interest income is not taxable.

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