2017 (9) TMI 833 - AT - Income Tax

Denying exemption U/s 11 - proof of charitable activities - nature of activities - principle of mutuality violation - Held that - The receipt from member, fees from guest of members, compensation from caterers, locker rent, sundry receipts nowhere falls in the category of trade business and commerce. Nothing came into notice that the assessee has changed its object. The object of the assessee trust has duly been described in the memorandum of association and the expenditure seems to its ancillary sports activities as mentioned in the memorandum of association which fail in the nature of general public utility ancillary to a dominant object. Assessing Officer nowhere gave his finding that the trust was providing the service to the outsider also and was involved in the activity of profit and also nowhere pointed out that the service of the restaurant, swimming pool etc. was provided to the outsider other than the member and family members and guest of the members also. Since, the principle of mutuality was not violated then in the said circumstances the case of assessee is liable for exemption u/s 11. Even a single instance is not on the file which may describe this fact that the assessee has been involved in the trade, business and commerce. It is also came into notice that the revenue allowed the claim of the assessee in the earlier years and also allowed the claim of the assessee for the A.Y. 2010-11 u/s 143(3). There is no factual change in the activity of assessee in the current year. Taking into account of all the facts and circumstances of the case, we are of the view that the claim of the assessee has wrongly declined, therefore, the finding of the CIT(A) is wrong and against law and facts and is not liable to be sustainable. - Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income Tax Act.
2. Classification of activities as charitable or commercial under Section 2(15) of the Income Tax Act.
3. Application of the principle of mutuality for tax exemption.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income Tax Act:
The assessee, registered as a charitable organization under Section 12A, filed returns declaring total income as nil, claiming exemption under Section 11. The Assessing Officer (AO) denied this exemption, asserting that the assessee's activities were commercial rather than charitable. The assessee argued that it had been consistently granted exemption in prior years and that its activities aligned with charitable purposes as defined in Circular No. 395 dated 24.09.1984. The Tribunal found that the AO did not provide evidence of the assessee engaging in trade, commerce, or business activities. Therefore, the claim for exemption under Section 11 was allowed.

2. Classification of Activities as Charitable or Commercial under Section 2(15) of the Income Tax Act:
The AO classified the assessee's activities—such as running a recreation club, providing gymnasium and sports facilities, and operating a restaurant—as commercial, thus falling under the fourth limb of Section 2(15). The Tribunal examined the Memorandum of Association, which outlined the assessee's objectives, including promoting education and sports, and determined that these activities were ancillary to the main charitable purpose. The Tribunal noted that the AO failed to prove that the assessee provided services to outsiders or engaged in profit-making activities. Consequently, the Tribunal concluded that the assessee's activities did not fall under the exception to Section 2(15) and were indeed charitable.

3. Application of the Principle of Mutuality for Tax Exemption:
The assessee also claimed that it should be considered a mutual concern, thereby qualifying for tax exemption based on the principle of mutuality. The Tribunal observed that the assessee's receipts from members, fees from guests, compensation from caterers, locker rent, and sundry receipts did not constitute trade, business, or commerce. The AO did not demonstrate any violation of the mutuality principle, as the services were provided only to members, their families, and guests. The Tribunal cited several precedents supporting the assessee's position, including cases from the Calcutta Cricket & Football Club, Navi Mumbai Gymkhana, and Chembur Gymkhana. Thus, the Tribunal upheld the assessee's claim for exemption under the principle of mutuality.

Conclusion:
The Tribunal allowed the appeals, setting aside the CIT(A)'s findings and granting the assessee exemption under Section 11 of the Income Tax Act. The Tribunal determined that the assessee's activities were charitable and not commercial, and the principle of mutuality was not violated. The judgment was pronounced in open court on 13.09.2017.