2022 (8) TMI 126 - AT - Income Tax

Exemption u/s 11 - Exemption denied as income allegedly constitute commercial activity and therefore provisions of first proviso to clause (15) of Sec 2 r.w.s. 13 (8) becomes applicable to it - assessee argued that activities are for advancement of General Public Utility and not of trade/ commerce for profit motive - whether assessee income is exempt on principal of mutuality? - HELD THAT - The issue raised by the assessee is fully covered by the decision of ITAT Mumbai Bench in the case of All India Rubber Industries Association 2018 (10) TMI 1172 - ITAT MUMBAI - In this view of the matter, the above assessee association is primarily and mainly carrying out its activity for advancement of any other object of general public utility and any activity by it even if regarded as business or commerce if such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility cannot be held as that income received from such activity constitutes commercial activity and so provision of first proviso to clause (15) of Section 2 read with Section 13 (8) are inapplicable. Accordingly the ground Nos. 1 and 2 of the assessee are allowed. Life membership fees/ corpus donation which are in the nature of capital receipt and not chargeable to tax - HELD THAT - The issue in question is already mentioned in the Rules and Regulation of the Society which indicates that the fees like entrance fees as well as life membership are part of the corpus fund and accordingly are in the nature of capital receipt. As such, there is no relevance by the ld. CIT(A) to restore the same to the AO for verification. Keeping in view the rules and regulation of the society as well as submission of the ld. AR of the assessee, we do not concur with the findings of the ld. CIT(A) to restore the issue to the AO. Thus Ground No. 3 of the assessee is allowed. Disallowance towards late deposit of PF, prior period expenses and disallowance of donation u/s 80G are only academic in nature and does not fall under the law while computing the income u/s 11

Issues Involved:
1. Denial of exemption under sections 11 and 12 of the Income Tax Act, 1961.
2. Rejection of the plea that the appellant is a mutual organization.
3. Taxability of life membership fees/corpus donations.
4. Disallowance of expenses: Employees' contribution to PF and prior period expenses.
5. Non-allowance of deduction under section 80G.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Sections 11 and 12:
The primary issue was whether the appellant association was entitled to exemption under sections 11 and 12 of the Income Tax Act, 1961. The Assessing Officer (AO) denied the exemption, asserting that the association's activities were commercial in nature, invoking the first proviso to clause (15) of Section 2 read with Section 13(8). The AO identified various income sources such as advertisement receipts, subscription fees, room facility charges, and participation charges from trade shows, claiming these constituted commercial activities. The CIT(A) upheld this view, stating that the association's activities predominantly involved trade, commerce, and business, thus disqualifying it from the exemption.

However, the Tribunal found that the activities were carried out with the larger objective of general public utility, not for profit. It emphasized that the association's main object was the advancement of general public utility, and any incidental business activities were subservient to this main objective. The Tribunal referred to several case laws, including the ITAT Mumbai Bench's decision in the All India Rubber Industries Association case, which supported the view that incidental business activities do not disqualify an entity from being considered charitable. Consequently, the Tribunal allowed the exemption under sections 11 and 12, reversing the AO's and CIT(A)'s decisions.

2. Rejection of the Plea of Mutual Organization:
The appellant argued that it was a mutual organization, with participation only from its members, and thus its income should be exempt under the principle of mutuality. The Tribunal noted the CBDT Circular No. 11 of 2008, which clarified that industry and trade associations claiming to be mutual organizations would not fall under the proviso to section 2(15) if their activities were restricted to contributions from and participation of only their members. The Tribunal agreed with the appellant's contention, highlighting that the association's activities were for the benefit of its members and aligned with the principle of mutuality. Therefore, this ground was allowed in favor of the appellant.

3. Taxability of Life Membership Fees/Corpus Donations:
The appellant contended that life membership fees and corpus donations were capital receipts and not chargeable to tax. The CIT(A) partially accepted this, directing the AO to dissect the life membership fees into capital and revenue components. The Tribunal, however, found that the association's rules and regulations clearly indicated that such fees were part of the corpus fund, thus constituting capital receipts. It disagreed with the CIT(A)'s decision to remit the matter to the AO for verification, and instead, allowed the entire amount as capital receipt, exempt from tax.

4. Disallowance of Expenses:
The AO disallowed Rs. 19,064 towards late deposit of PF and Rs. 16,545 towards prior period expenses. The CIT(A) upheld these disallowances. However, since the Tribunal granted the exemption under section 11, these disallowances became academic. The Tribunal noted that once the income is exempt under section 11, the specific disallowances under other sections do not impact the computation of income. Therefore, these grounds were allowed in favor of the appellant.

5. Non-Allowance of Deduction under Section 80G:
The AO disallowed a deduction of Rs. 40,072 under section 80G for donations. The CIT(A) upheld this disallowance. The Tribunal, however, noted that with the exemption under section 11 being granted, the issue of deduction under section 80G became academic. Thus, this ground was also allowed in favor of the appellant.

Conclusion:
The Tribunal allowed the appeal, granting the exemption under sections 11 and 12, recognizing the appellant as a mutual organization, and treating life membership fees as capital receipts. The disallowances of expenses and the non-allowance of the section 80G deduction were rendered academic and thus allowed. The Tribunal's decision was based on a thorough analysis of the facts, the association's objectives, and relevant case laws, ensuring that genuine charitable activities were not penalized under the amended provisions of the Income Tax Act.

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