2021 (11) TMI 850 - AT - Income Tax

Exemption u/s 11 - claim denied relying on Principle of mutuality - AO considering the activities of the appellant trust as that of a mutual association - HELD THAT - Authorities below have proceeded on the misconception that the assessee trust has claimed tax exemption on the basis of mutuality principle alone. Learned CIT(A) has rather summarily dismissed the contention of the assessee with respect of exemption under section 11 by the virtue of being a charitable institution, and simply observed that all the case laws relied upon by the AR are distinguishable . In our considered view quite clearly the object of the appellant trust is to promote education in the field of science of medicine and the profit on sale of books/journals is incidental thereto. In this view of the matter, proviso to Section 2(15) will have no application in the present case. It may be borne in mind that proviso to Section 2(15) comes into play only in respect of any other object of general utility and not in respect of relief to poor, education, medical relief etc. As long as object of the institution is charitable, as in our considered view, in this case, exemption cannot be declined merely on the ground that the assessee has received consideration for sale of training material or journal etc. incidental to furtherance of it s objective of imparting education. Thus we uphold the plea of the assessee. The Assessing Officer is, accordingly, directed to allow exemption under section 11 in respect of income of the assessee.

Issues Involved:
1. Whether the appellant trust qualifies as a "mutual association" and is thereby ineligible for exemption under section 11 of the Income Tax Act.
2. Whether the appellant trust's activities can be considered charitable and thus eligible for exemption under section 11 of the Income Tax Act.
3. The applicability of the proviso to section 2(15) of the Income Tax Act to the appellant trust's activities.

Issue-wise Detailed Analysis:

1. Mutual Association and Denial of Exemption under Section 11:
The primary grievance of the appellant was that the learned CIT(A) erred in confirming the action of the Assessing Officer (AO) in considering the activities of the appellant trust as that of a "mutual association" and thereby denying the exemption under section 11 of the Income Tax Act on the income aggregating to ?1,04,48,658/-. The AO observed that the appellant’s object was “solidarity and endowment to its members” and treated the claim of tax exemption on the basis of mutuality, citing the CBDT’s circular no. 11/2008. The AO noted that the principle of mutuality applies when there is complete identity between contributors and participants, and since the appellant's activities were limited to its members, it was deemed a mutual association. Consequently, receipts from non-members, interest income, rent from mobile towers, and donations were taxed as business income.

2. Charitable Activities and Eligibility for Exemption under Section 11:
The appellant argued that it is a charitable institution imparting education in the field of science of medicine, and thus, its income should be exempt under section 11. However, the CIT(A) dismissed this argument, stating that the activities were for the benefit of its members and not the general public. The CIT(A) also noted that the appellant’s past acceptance as a charitable institution did not hold merit in the current assessment. The CIT(A) concluded that receipts from non-members were hit by the 6th limb of the amended proviso to section 2(15) of the IT Act and treated the income as business income.

3. Applicability of Proviso to Section 2(15):
The Tribunal noted that the authorities below proceeded on the misconception that the appellant trust claimed tax exemption solely on the basis of mutuality. The Tribunal observed that the aims and objectives of the appellant trust, as per the trust deed, were to promote education in the field of science of medicine and not restricted to its members. The Tribunal emphasized that the proviso to section 2(15) applies only to “any other object of general utility” and not to education, medical relief, etc. The Tribunal referred to the case of DIT vs Samudra Institute of Maritime Studies Trust, where it was held that exemption under section 11 could be claimed if the object of the institution is charitable. The Tribunal also cited the case of Gujarat Safety Council vs ITO to support its conclusion that the appellant’s activities were educational and not commercial.

Conclusion:
The Tribunal concluded that the appellant trust’s object of promoting education in the field of science of medicine qualifies as a charitable purpose. Therefore, the exemption under section 11 should not be denied merely because the appellant received consideration for incidental activities like the sale of training material or journals. The Tribunal directed the AO to allow the exemption under section 11 in respect of the appellant’s income. The appeal was allowed, and the order was pronounced in the open court on the 03rd day of March 2021.

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