2024 (11) TMI 774 - HC - Income Tax

Deduction u/s 80IA - Application of the principle of mutuality - Disallowance of depreciation - as submitted that where non-members are offered facilities on payment of charge then the assessee is liable to be taxed on the income generated therefrom but there is no liability in respect of the profits made by the assessee company from the members who avail themselves of the facilities provided for members - HELD THAT - Tribunal has rightly followed the decision of this Court in the case of Sports Club of Gujarat Limited 1987 (10) TMI 21 - GUJARAT HIGH COURT which now stands fortified by the Hon'ble Apex Court in the case of Secunderabad Club 2023 (8) TMI 925 - SUPREME COURT by remanding the matter to the Assessing Officer to verify the claim of the assessee company as to whether any outsider is provided service or not so as to tax accordingly. In the facts of the case, the assessee company has received the contribution from its members for the services to be provided for the treatment of the effluent. The company is formed pursuant to the directions/suggestions made by this Court so as to reduce the pollution which is in the public interest and therefore, the form in which the company is incorporated is irrelevant. The objects of the company also makes it clear that the surplus, if any, would not be paid to its members and in case of dissolution of the respondent company, only Rs. 100/- would be paid to its members. Thus, the submissions made by the learned advocate for the appellant revenue relying upon the findings arrived at by the CIT (Appeals) are contrary to the settled legal position and the Tribunal has rightly therefore held in favour of the assessee by applying the principle of mutuality by holding that the income/surplus of the respondent assessee company would not be liable to tax on principle of mutuality. We are therefore, of the opinion that no question of law much-less and substantial question of law has arisen from the impugned orders passed by the Tribunal. Disallowance of depreciation - Tribunal has also rightly held that if the entire income/surplus of the respondent assessee company is not liable to be taxed on the principle of mutuality, the disallowance of depreciation and deduction under section 80IA of the Act is not required to be considered. The questions are answered accordingly against the revenue and in favour of the Assessee.

Summary

Issues Involved:

1. Application of the principle of mutuality to the income/surplus of the assessee company.
2. Disallowance of depreciation under Section 80IA of the Income Tax Act, 1961.
3. Determination of whether the income is business income or exempt under the principle of mutuality.

Issue-wise Detailed Analysis:

1. Application of the Principle of Mutuality:

The primary issue in these appeals was whether the Tribunal erred in applying the principle of mutuality to the income/surplus of the assessee company. The Tribunal had allowed the appeal of the assessee by applying the principle of mutuality, relying on the decision in the case of Sports Club of Gujarat Limited v. CIT. The Tribunal remanded the matter to the Assessing Officer to verify if any services were provided to outsiders, which would be taxable. The principle of mutuality postulates that there must be a complete identity between the contributors to the common fund and the recipients from the fund, and the contributors should not derive profits from their contributions. The Tribunal found that the assessee company, formed by the members of the Vapi Industrial Association, provided services for the treatment of effluent waste and was not profit-oriented. The Tribunal concluded that the income/surplus was exempt from tax under the principle of mutuality.

2. Disallowance of Depreciation:

The issue of disallowance of depreciation was raised in Tax Appeal Nos. 690 of 2012, 691 of 2012, and 1379 of 2018. The CIT (Appeals) had upheld the disallowance of depreciation under Section 80IA, asserting that the principle of mutuality was not applicable. However, the Tribunal did not decide on the allowance of depreciation since it held that the entire income/surplus was exempt under the principle of mutuality. The Tribunal's decision was based on the understanding that if the income is not taxable, the question of depreciation does not arise.

3. Determination of Business Income:

The Tribunal was tasked with determining whether the income of the assessee company was business income or exempt under the principle of mutuality. The CIT (Appeals) had argued that the company was profit-oriented and included non-members in its operations, which would negate the principle of mutuality. However, the Tribunal found that the company was incorporated to fulfill a common mutual concern of treating effluent waste, as directed by the Court, and not for profit-making purposes. The Tribunal noted that any income generated from services provided to non-members would be taxable, but the income from members was exempt under the principle of mutuality. The Tribunal's decision was consistent with the legal position that mutuality excludes the levy of income tax on such income.

In conclusion, the Tribunal upheld the application of the principle of mutuality to exempt the income/surplus of the assessee company from tax, dismissed the appeals filed by the revenue, and affirmed that no substantial question of law arose from the Tribunal's orders.