2023 (10) TMI 840 - AT - Income Tax

Exemption u/s 11 - income from holding of exhibitions and organising of seminars arising from participation by non-members - applicability of the principle of mutuality in respect of income from members - differential treatment of income from non-members and members by the assessee - HELD THAT - As there is no dispute as regards the income from non-members, letting out of exhibitions centre, and the income derived from investments, which have already been offered to tax by the assessee. AO only disagreed with the contention of the assessee that income from members in respect of holding exhibitions and organising seminars is not taxable on the principle of mutuality. As per the AO, complete identity between the contributor and participators ceases to exist when the same type of services are provided to members and non-members. As per the assessee, since it is an association to protect the machine tool industry engaged in the manufacture and trade in machine tools, small tools, cutting tools, etc., therefore number of persons combine together and contribute to a common fund for a common venture or the object. The surplus from activities by those persons cannot be regarded in any sense as profit. As per the assessee, the income from members is non-taxable not u/s 11 of the Act but the same is not taxable as per the principle of mutuality. An activity between persons associated together does not give rise to profit which is chargeable to tax, as the members cannot trade with themselves. No person or body of persons can earn profit out of himself or themselves jointly. We find from the Memorandum of Association that it was also resolved that upon winding up or dissolution of the assessee if any property whatsoever remains then the same shall not be distributed amongst the members of the assessee but shall be given or transferred to such other association having similar objects. On the basis of the principle of mutuality, the income earned from members in respect of holding seminars, exhibitions, and other activities is not taxable. Accordingly, the plea of the assessee regarding the non-taxability of receipts from members is upheld on the basis of the principle of maturity. Since the AO on the erroneous assumption that the assessee has claimed exemption under section 11 of the Act treated the income from members to be of the same category as income from non-members and taxed the same and the details as provided on page 26 of the paper book regarding bifurcations of income and expenditure amongst members and non-members were not examined during the assessment proceedings, therefore we direct the AO to examine the allocation of income and expenditure amongst members and non-members as submitted by the assessee and grant the relief to the assessee to the extent the income is earned from the members in light of the principle of mutuality. As a result, the grounds raised by the Revenue are partly allowed for statistical purposes. As we have accepted the plea of the assessee regarding the applicability of the principle of mutuality with respect to income earned from members, we deem it appropriate to restore the issues raised in assessee s appeal to the file of AO for de novo adjudication, since the assessee has been found to not have claimed exemption under section 11 of the Act

Summary

Issues Involved:
1. Exemption under Section 11 of the Income Tax Act.
2. Applicability of the principle of mutuality.
3. Rate of tax applicable to the assessee.

Summary:

Exemption under Section 11 of the Income Tax Act:
The Revenue challenged the CIT(A)'s direction to allow the benefit of exemption under Section 11 of the Income Tax Act, 1961, arguing that the income from exhibitions and seminars, primarily benefiting members, should not be exempt as it falls under "advancement of any other object of general public utility" and involves trade, commerce, or business activities. The Tribunal noted that the assessee did not claim any exemption under Section 11 for the year in question, thus finding no basis for the AO's conclusion that the assessee was not entitled to such exemption.

Applicability of the Principle of Mutuality:
The CIT(A) upheld the principle of mutuality for the income received from members, exempting it from tax. The Tribunal agreed, noting that the assessee, an association promoting the machine tool industry, operates on mutuality principles where members contribute to a common fund for common activities, and any surplus is not considered profit. The Tribunal directed the AO to examine the bifurcation of income and expenses between members and non-members, granting relief to the assessee for income earned from members based on mutuality principles.

Rate of Tax Applicable to the Assessee:
The assessee contended that it should be taxed as an Association of Persons (AOP) eligible for slab rates and minimum threshold limits, rather than a flat rate applicable to companies. The Tribunal restored this issue to the AO for de novo adjudication, directing the AO to determine and apply the appropriate tax rate as per law.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, upholding the principle of mutuality for income from members, and restored the issue of the applicable tax rate to the AO for fresh adjudication. The assessee's appeal was allowed for statistical purposes, directing the AO to examine the allocation of income and expenditure and apply the appropriate tax rate.