2018 (2) TMI 1586 - AT - Income Tax

Income of the consumer co-operative society - chargeable to tax u/s 4 or not - Proof of mutual association - Claim of deduction u/s 80P - activity of purchase and distribution of electric power - mutuality concept - Held that - There is no dispute that the assessee is a mutual association established for the purpose of supply of electricity to the rural farmers at a reasonable price to improve the infrastructure. All the members and contributors are identifiable and the contributors as well as the consumers are the same. There is no other outsider is involved in the association. As in the case of Merchant Navy Club 1971 (9) TMI 59 - ANDHRA PRADESH High Court - and Royal Western India Turf Club Ltd. (1953 (10) TMI 9 - SUPREME Court) held that the income of the club was not profit from business assessable u/s 10 of the IT Act on mutuality basis. In the instant case there is no dispute that contributors and the consumers are one and the same. In the absence of bye laws regarding the disposal of surplus assets section 69B of AP Cooperative Societies Act 1964 would be applicable and in such case the surplus would be vested with the Registrar who shall hold it in trust and shall transfer it to the reserve funds of the society registered with the similar objects. In the similar circumstances in CIT Vs. West Godavari District Rice Millers Association 1983 (9) TMI 47 - ANDHRA PRADESH High Court held that income of the society is exempt even if the surplus goes to some other society with similar objects on dissolution. As the assessee has amended the bye laws and placed before the CIT(A) after got registered with the Registrar of society to enable the assessee to distribute the surplus assets among its members before completion of the appellate proceedings. Therefore we hold that the assessee is a mutual association and the income of the society is not chargeable to tax u/s 4 of the IT Act - Decided in favour of assessee.

Issues Involved:
1. Deduction under Section 80P of the Income Tax Act.
2. Concept of mutuality and its applicability to the assessee.
3. Amendments to the bye-laws and their effect on the mutuality principle.
4. Additional disallowances under Section 40(a)(ia) for professional charges and advertisement expenses.

Detailed Analysis:

1. Deduction under Section 80P of the Income Tax Act:
The assessee filed a return of income admitting a total income of ?44,57,100/- and claimed a deduction under Section 80P. The Assessing Officer (AO) disallowed the deduction claimed by the assessee under Section 80P, holding that the assessee is a consumer cooperative society and allowed the deduction only to the extent of ?1,00,000/-, bringing the balance amount to tax. The AO's decision was based on the absence of specific bye-laws regarding the distribution of assets on dissolution, invoking Section 69-B of the A.P. Cooperative Societies Act, 1964.

2. Concept of Mutuality and its Applicability to the Assessee:
The assessee argued that its income is exempt based on the mutuality concept, where contributors and recipients are the same. The assessee cited several judgments, including CIT Vs Merchant Navy Club and CIT Vs. Royal Western India Turf Club Ltd., to support the mutuality principle. The AO, however, relied on the Gujarat High Court decision in CIT Vs. Shree Jari Merchants Association, which emphasized the necessity of bye-laws for asset distribution on dissolution to maintain mutuality.

3. Amendments to the Bye-laws and their Effect on the Mutuality Principle:
During the assessment proceedings, the assessee submitted a Board Resolution to amend the bye-laws to enable the distribution of surplus assets among members on dissolution. However, the AO noted that the amendment was not approved by the Registrar, thus disqualifying the assessee as a mutual association. The CIT(A) upheld the AO's decision, noting that the amended bye-laws were registered only in 2014, affecting the assessment year 2010-11.

4. Additional Disallowances under Section 40(a)(ia):
The AO made additional disallowances of ?2,50,000/- for professional charges and ?3,11,724/- for advertisement expenses under Section 40(a)(ia).

Tribunal's Judgment:

Mutuality Principle:
The Tribunal examined the mutuality principle, noting that the assessee is a mutual association established to supply electricity to rural farmers at reasonable prices. The Tribunal found that all members and contributors are identifiable, and the contributors and consumers are the same. The Tribunal distinguished the assessee's case from the Shree Jari Merchants Association case, noting the absence of a rule or bye-law for asset distribution among non-members. The Tribunal relied on the jurisdictional High Court's decision in CIT Vs. West Godavari District Rice Millers Association, which upheld the mutuality principle even if surplus assets are transferred to similar associations.

Amendment to Bye-laws:
The Tribunal acknowledged that the assessee amended the bye-laws to distribute surplus assets among members, which was registered before the completion of appellate proceedings. Thus, the Tribunal held that the assessee is a mutual association, and its income is not chargeable to tax under Section 4 of the IT Act.

Additional Disallowances:
Given the Tribunal's decision that the society's income is exempt on the concept of mutuality, it deemed it unnecessary to adjudicate the remaining grounds of appeal related to additional disallowances under Section 40(a)(ia).

Conclusion:
The Tribunal set aside the orders of the CIT(A) and allowed the appeal of the assessee, holding that the income of the society is exempt based on the mutuality principle. The appeal was allowed, and the order was pronounced in the open court on 21st Feb 2018.

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