2015 (5) TMI 113 - AT - Income Tax

Denial of exemption being an income of mutual concern - Principle of mutuality - Income from the transaction of non members is outside the purview of the mutuality - Treatment of reimbursement cost as income - Estimation of profits at 5% of gross amount recovered from non-members - Applicability of provisions of section 44C - Interest u/s 234D of the Act - Held that Following the earlier order 2015 (5) TMI 114 - ITAT MUMBAI of this Tribunal, we hold that the assessee is covered by the principle of mutuality to the extent of its transaction with the members only and the income from the transaction of non members is outside the purview of the mutuality. Following the earlier order 2015 (5) TMI 114 - ITAT MUMBAI of the Tribunal, we find no merit in the ground no 1 to 9 of the CO raised by the assessee; accordingly, the same are dismissed. Regarding interest u/s 234D , We have heard the ld AR as well as the DR and considered the relevant material on record. At the outset, we find that this issue is covered against the assessee by the decision of the Honble jurisdictional High Court in the case of Indian Oil Corporation Ltd. 2014 (10) TMI 262 - BOMBAY HIGH COURT dated 12th Sept 2012. Following the decision of the Hon ble jurisdictional High Court, we decide this issue against the assessee. - In the result, the Revenue s appeal and the assessee s cross objection stand dismissed.

Issues Involved:
1. Principle of mutuality and its applicability to the assessee.
2. Reimbursement of costs and its taxability.
3. Applicability of section 44C of the Income Tax Act.
4. Requirement to withhold tax from interest payments.
5. Allowance of depreciation under Section 32.
6. Deduction under section 80-IA.
7. Levy of interest under section 234D.

Detailed Analysis:

1. Principle of Mutuality:
The primary issue raised by the revenue was whether the assessee is covered by the principle of mutuality. The Tribunal, following its decision in the assessee's case for the Assessment Year 1996-97, held that the assessee is covered by the principle of mutuality to the extent of its transactions with members. It was noted that "the otherwise status of mutuality of an organization cannot be destroyed because of a few transactions with the non-members." The Tribunal reiterated that income from transactions with non-members is outside the purview of mutuality, emphasizing that the principle of mutuality is applicable only to transactions with members.

2. Reimbursement of Costs:
The assessee argued that the company recovers its costs only, and such reimbursements should not be regarded as taxable income. The Tribunal acknowledged the principle that "any amount received by way of reimbursement, not containing any element of profit, is not liable to tax." However, it found that the basis of allocation of costs and revenues by the Head Office was not verifiable, leading to the conclusion that the accounts did not reflect the correct income. Thus, the Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) that the accounts of the assessee do not divulge the correct income.

3. Applicability of Section 44C:
The assessee contended that the provisions of section 44C should apply to the expenses incurred at the Head Office level. The Tribunal, however, clarified that section 44C pertains only to the allocation of general and administrative expenses. Since the basis of allocation of both expenses and income was unknown, the Tribunal found that the income had to be estimated under Rule 10 of the Income-tax Rules, 1962. The Tribunal upheld the estimation of income at 5% of the gross receipts from non-members.

4. Requirement to Withhold Tax from Interest Payments:
The assessee argued that it was not required to withhold tax from interest payments made to its members, as these payments were not liable to tax in India. The Tribunal, following its earlier decision, did not find merit in the assessee's contention and upheld the disallowance under section 40(a)(i) of the Act for failure to withhold tax.

5. Allowance of Depreciation Under Section 32:
The Tribunal did not specifically address the issue of allowance of depreciation under Section 32 in detail. However, it followed its earlier decision, which did not allow the assessee's claims regarding various deductions, including depreciation.

6. Deduction Under Section 80-IA:
The Tribunal did not find merit in the assessee's contention regarding the deduction under section 80-IA, following its earlier decision which had dismissed similar claims by the assessee.

7. Levy of Interest Under Section 234D:
The Tribunal addressed the issue of interest levy under section 234D, noting that this issue was covered against the assessee by the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Indian Oil Corporation Ltd. The High Court had held that Explanation 2 to section 234D, introduced by the Finance Act, 2012, is declaratory in nature and applies retrospectively. Thus, the Tribunal decided this issue against the assessee, affirming the levy of interest under section 234D.

Conclusion:
The Tribunal dismissed both the revenue's appeal and the assessee's cross-objection, upholding the findings of the Commissioner of Income Tax (Appeals) and following its earlier decisions on similar issues. The principle of mutuality was applied only to transactions with members, and the income from non-members was held to be taxable. The Tribunal also upheld the estimation of income at 5% of gross receipts from non-members and confirmed the levy of interest under section 234D.

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