9911796707
TMI Blog2016 (8) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act. Registration under section 25 of the companies Act is granted only where the Central Government is satisfied that the company is formed for promoting, inter alia, charity or any er useful object and intends to apply its profits, if any or other income in promoting its objects and prohibits the payment of any dividend to its members. During the year under consideration the assessee was engaged in the activities of (1) to promote the playing and encouragement in India of the games of Cricket, ball, Hockey, Tennis, Golf, Cycle, Polo, Swimming, Rugby and other form of sports (2) To organize and participate in competitive tournaments in different sports and games with object of improving the standards of the same and encouraging the achievement of higher standards of excellence and (3) To take over the assets and liabilities of the Calcutta Cricket & Football Club, an unincorporated Association, including its outstanding debts its right to use the ground at Ballygunge and to continue carrying on all its current activities. The activities are also mentioned in the memorandum of the assessee. " 3. The CIT in exercise of his powers u/s 263 of the Act was of the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unincorporated association adverted to in the memorandum of association were that of a mutual association. The Assessee also pointed out that under Clause X of the Memorandum of Association upon winding up or dissolution, after satisfaction of all debts and liabilities, no property shall be distributed among members and the same shall be given or transferred to another company having similar objects. The Assessee further reiterated that the unincorporated association, Calcutta Cricket & Football Club, formed in 1792, was admittedly a members' club/mutual association and was assessed as such upto the assessment year 2004-05, i.e., till the time it was taken over by the Assessee when it was formed as a company. The Assessee drew the attention of the CIT to the various assessments in the case of the Assessee which were as given below:- "(i) Assessment order dated December 26, 2006 passed by the Deputy Commissioner of Income Tax, Circle 55, Kolkata, for the assessment year 2004- 05 holding that the unincorporated association was a members' club/mutual association but subjecting to tax interest on fixed deposit as non-mutual income. (ii) Order dated March 29, 2007 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is not a public place. The club's members are not its customers. The concept of consideration for provision of food or beverage is totally absent. The club is only an agent of its members and recoups itself for the expenses incurred and does not act as a commercial or business concern for the purpose of making any gain. 6. The Assessee also pointed out that it did not have any surplus from mutual activities for the year question. Attention in this behalf was invited to income and expenditure account read with Schedules 12 and 13 to the accounts and Details of Schedule 13. The figures in Schedules 12 and 13 are before deduction of the administrative and other expenses/overheads reflected in the income and expenditure account. The administrative and other expenses/overheads debited to the income and expenditure account for the said year is Rs. 2,13,37 263/- plus provision for leave encashment of Rs. 2,70,605/-, that was Rs. 2,16,07,868/-. The total of the income side of the income and expenditure account was Rs. 2,36,51,788/- which includes interest and dividend of Rs. 60,45,944/-. If such interest and dividend is excluded from income, one is left with a figure of Rs. 1,76,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re also involved in multifarious activities for improving the standards of different games and encouraging the achievement of higher standards of excellence by organizing various tournaments in which there are public participants as also inter- school tournaments. The Assessee's activities in that behalf cannot be considered as trade/commercial activities. It was pointed out that the Director of Income Tax (Exemptions) by his order dated October 21,2011 under section 12AA(3) of the Act held that primary object was the promotion of organized sports in the city of Kolkata and that exemption under section 11 was available to the Assessee. 7. It was reiterated that the Assessee was never engaged in any trade or commercial activity and have no receipt or income from any such activity. That it was a mutual organisation engaged in the promotion of sports and games and is entitled to the exemption under section 11 which has all along been granted to us. In the years in which exemption was not granted in the assessment, the same was allowed on first appeal, which decision was accepted by the revenue. It was emphasized that there has been no change in the facts or the law, which have remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Hon'ble Apex Court had very clearly held that doctrine of mutuality does not come into play when the earning is from third party/ outsiders, also. The most important aspect is the interplay of doctrine of mutuality and exemption u/s. 11. On one hand, the assessee is claiming exemption u/s. 11. On the other hand taking shelter behind doctrine of mutuality. Section 12AA/11 does not apply to organization whose work is limited for benefit/ welfare of members of closed group. Whereas doctrine of mutuality is applicable only for closely held societies. There cannot be an interplay between section 11 and doctrine of mutuality. As discussed above, the claim of the assessee for Section-11 is more relevant than its attempt to get covered by doctrine of mutuality. Further in the return of income also the 'a' claimed exemption u/s.11. Therefore, the assessee's claim is to be adjudicated following the provisions of Section-11. Provision to Section- 2( 15) read with Section-13(8) will come in play while allowing a claim of exemption u/s. 11. Promotion of sports is covered under the head "other objects of general public utility". But activities related to bar, cater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities in the nature of business and was not entitled to the benefit of exemption u/s 11 of the Act. For A.Y. 2009-10, similar order was passed by the AO in the assessment completed under the provision of Sec.143(3) of the Act. However on appeal by the assessee the CIT(A) vide order dated 19.02.2013 and 08.03.2013 for A.Y.2008-09 and 2009-10 respectively held that the assessee was entitled to the benfit of exempt u/s 11 of the Act. The order of CIT(A) in this regard for A.Y.2008-09 is reproduced herein below :- "4.1. As per the details submitted and as held by the Department for all earlier years, the assessee is a mutual organization. The Aa is directed to treat the assessee as mutual organization as there is no change in the status/activities of assessee in this year vis-a-vis earlier years. 4.2 As the assessee is held to be mutual organization, the admission fee received from any member including the corporate member cannot be taxed because of principle of mutuality. Aa is directed to remove the amount of admission fee from the receipts of the assessee for computing the income. 4.3 As per CBDT's Circular number 11 of 2008 dated 19-12-2008, mutuality and charity c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s judicata are not applicable in the income tax proceedings and in each year the revenue is at liberty to take a view on taxability or otherwise of item of receipt. He pointed out that the assesse as per the memorandum of association of the Assessee, it also deals with the outsiders and it is clear from Clause-3 of the main objects of the assessee. There cannot be any dispute that in respect of income derived from the non members the principle of mutuality is not applicable and such receipts are chargeable to tax. It was his submission that the fact that the assessee obtained registration u/s 12AA of the Act is not conclusive and while concluding the assessment, whether the assesse is entitled to the benefits of section 11 of the Act or not is an issue which requires examination by the AO. Reference was made to the decision of the Hon'ble Supreme Court in the case of Bangalore Club case wherein it was held that interest received on deposits by the club in a bank which were its member is not exempt on the principles of mutuality. He also made a reference to the amendment to the provision to section 2(15) of the Act and submitted that the income derived from collecting fees from non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other income in promoting its objects and prohibits the payment of any dividend to its members. The main objects of the Assessee as per the Memorandum of Association, has already been set out in the earlier part of this order. The Assessee applied for grant of Registration u/s.12AA of the Income Tax Act, 1961 (Act) as institution which exists for charitable purpose. Sec.11(1) of the Act provides that income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property, shall not be included in the total income of the previous year of the person in receipt of the income. Sec.12A(1) provides that to Claim exemption u/s.11, the Assessee has to get registration u/s.12AA of the Act. Before granting registration, the Commissioner of Income Tax (CIT) has to be satisfied that the objects of the institution seeking registration u/s.12AA of the Act are Charitable and afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Bangalore Club v/s. CIT 350 ITR 509 (SC), the question for determination before the Hon'ble Supreme Court was as to whether or not the interest earned by the assessee on the surplus funds invested in fixed deposits with the corporate member banks is exempt from levy of Income Tax, based on the doctrine of mutuality? The Hon'ble Supreme Court answered the aforesaid question in favour of the revenue by holding that interest earned from deposits with banks who are members of the club would not be exempt on the principle of mutuality because the tests for application of the principle of mutuality were not satisfied. The Apex Court held that no sooner any amount is invested by an association claiming to be mutual concern in a fixed deposit with the banks the complete identity between the contributors and the participants in the fund on the amounts invested in member banks is ruptured. It held that till the surplus funds were generated and was used only amongst the members/contributors, the complete identity between contributors and participants continued. However the moment the funds are invested in fixed deposits with the banks and the funds are used for advancing loans etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified therein are satisfied. In fact the CBDT Circulars referred to by the Assessee in the submissions before CIT clearly support the aforesaid view. In circular bearing No. 11 of 2008 dated December 19,2008, reported in (2009) 308 ITR (Statutes) 5, it was clarified by the Board that mutuality and charity can co-exist in respect of the same institution/association. By circular No. :-5 dated September 24, 1984, reported in (1984) 150 ITR (Statutes) 74, it was clarified by the Board that an association or institution engaged in the promotion of sports and games can claim exemption under section 11 of the Act. Therefore, receipt which is treated as income because of non applicability of the mutuality principle will still be entitled to claim that income is not chargeable to tax because the income is applied for charitable purpose within the meaning of Sec.11 of the Act. It cannot therefore be said principle of mutuality and benefit of Sec.11 of the Act cannot be simultaneously claimed by an Assessee. 23. On the availability of exemption u/s.11 of the Act to the Assessee, the CIT has referred to the facility of bar and catering which generates income and according to the CIT, doing so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven to the proviso, then it may be concluded that this fact would have no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important. (iii) The meaning of the expression "charitable purposes" has to be examined in the context of "income", because, it is only when there is income the question of not including that income in the total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable purpose, receives income would not make it any less a charitable institution. Whether that institution, which is established for charitable purposes, will get the exemption would have to be determined having regard to the objects of the institution and its importance throughout India or throughout any State or States. (iv) Merely, because an institution derives income out of activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. (emphasis supplied) 25. The income stream of the Assessee in the present case is receipts in the form of subscription from members, receipts from organizing Sports and Events, interest and dividend and other income. All these total Rs. 2,36,51,788/-. The Expenditure of the Assessee is Rs. 2,13,37,263/-. The net surplus generated is Rs. 23,14,525/-. If the interest income of Rs. 60,45,944/- is disregarded as being a passive income, then it can be safely said that the Assessee has not generated any surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Assessee held that maintenance and service charges received by an Assessee were assessable under the head "business" and not assessable under the head "property". Following the decision of the Tribunal, the ITO in a subsequent AY proceeded to assess such income under the head "business". The CIT in exercise of his powers u/s.263 of the Act felt that such income should have been assessed to tax under the head "property" as in respect of the prior years' findings reference application was pending before the High Court. The Hon'ble High Court had to decide as to whether in those circumstances, can it be said that the ITO who had accepted the Tribunal's decision as correct and applied that decision to the facts of this case acted erroneously and his action caused prejudice to the interests of the Revenue. The Hon'ble High Court held that as a matter of fact whenever there is a decision of the higher appellate authority, the subordinate authorities are bound to follow the said decision if judicial discipline is to be maintained. In the aforesaid view of the matter the Hon'ble Court held that the conditions for exercise of the power under s. 263, namely, that there must be mat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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