2020 (3) TMI 221 - AT - Income Tax

Exemption u/s. 11 - Charitable activity u/s 2(15) - mutuality concept applicability - as per revenue assessee has declared interest and miscellaneous income received from banks - HELD THAT - When the assessee was providing services to its members as well as non members, it can never be categorized under mutuality concept. The mutuality concept can be applied only when a mutual concern or AOP, who agree to contribute funds for common purpose and receive back the surplus left out in the same capacity in which they made the contribution. Therefore, the capacity as contributors and participants remain same. When they cannot separate the activities of participants and non members, they can never be considered as mutual concern. Therefore, in our considered view, the activities carried on by the assessee can never be assessed under the concept of mutuality. We notice that assessee company was established under section 25 of the Companies Act with the motive to carry on charitable activity and we also notice that assessee was granted registration u/s 12A of the Act. Since, assessee was carried on its affairs not keeping separate data for its members as well as non members and also we take note of the object clause para 1 of Memorandum of Association based on which, even Ld. CIT(E) has granted registration u/s 12A recognizing it as a charitable institution. We notice that AO has invoked the ratio of Banglore Club 2013 (1) TMI 343 - SUPREME COURT simply considering the fact that assessee has filed its return of income based on mutuality concept overlooking the actual facts. We are inclined to remit this issue back to the file of AO to verify the books of accounts and analyze with its objects and re-do the assessment as per law. It is not necessary that the assessment should be completed based on the return of income filed by the assessee or what stand taken by the assessee and we direct the AO to complete the assessment as per law. Therefore, we direct the AO to evaluate the facts of the case by considering the complete facts on record like assessee was granted registration u/s 12A of the Act and also assessee carried on activities based on its charitable objectives and needless to say, assessee should be given proper opportunity of being heard. - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Denial of exemption under section 11 of the Income Tax Act, 1961.
2. Applicability of the proviso to section 2(15) of the Income Tax Act.
3. Deduction of all expenses debited to the Profit & Loss Account while computing income under the principle of mutuality.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11:
The assessee, a company registered under section 25 of the Companies Act and recognized as a charitable organization under section 12A of the Income Tax Act, declared its income based on the mutuality concept. The Assessing Officer (AO) rejected the assessee's contention and assessed the income based on the mutuality concept, treating the interest and miscellaneous income received from banks as income from other sources. The CIT(A) upheld the AO's decision, stating that the assessee's activities, which included providing services for a fee, resulted in profit and thus attracted the proviso to section 2(15), making the activities non-charitable. The assessee argued that its activities were charitable and in line with its objectives, as recognized by the RBI and its registration under section 12A. The Tribunal noted that the assessee's activities aimed to bring uniformity in the market and were available to both members and non-members, thus not fitting the mutuality concept. The Tribunal remitted the issue back to the AO to verify the books of accounts and reassess the income based on the assessee's charitable objectives and registration under section 12A.

2. Applicability of the Proviso to Section 2(15):
The CIT(A) held that the proviso to section 2(15) was applicable as the assessee rendered services for a fee, resulting in profit. The assessee contended that its activities were charitable and aimed at the advancement of general public utility, as recognized by the RBI. The Tribunal observed that the assessee's activities, including providing valuation of investments, trade reporting platforms, and training, were in line with its charitable objectives. However, since the assessee provided services to both members and non-members, the mutuality concept did not apply. The Tribunal directed the AO to reassess the income, considering the complete facts on record, including the assessee's registration under section 12A and its charitable objectives.

3. Deduction of Expenses under the Principle of Mutuality:
The assessee argued that all expenses debited to the Profit & Loss Account should be considered while computing income under the principle of mutuality. The AO did not consider all the expenses, leading to the assessee's appeal. The Tribunal noted that the mutuality concept did not apply as the assessee provided services to both members and non-members. The Tribunal directed the AO to re-evaluate the facts and complete the assessment as per law, considering the assessee's registration under section 12A and its charitable objectives.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO to reassess the income based on the assessee's charitable objectives and registration under section 12A, and to provide the assessee with a proper opportunity of being heard. The Tribunal emphasized that the assessment should not be solely based on the return of income filed by the assessee or the stand taken by the assessee but should consider the complete facts on record.