2025 (6) TMI 1739 - AT - Income Tax

Denying benefit of exemption u/s 11 - charitable activity u/s 2(15) - assessee is predominately a mutual association and that on the principle of mutuality the interest income and other income are taxable - As per AO assessee is engaged in the activity of providing / rendering services to Members / Non-members in relation to trade commerce or business for a fee - AR submitted that the 1st proviso to section 2(15) cannot be applied in assessee s case for reason that the assessee is not involved in carrying on any activity in the nature of trade commerce or business for a cess or fee or any other consideration - HELD THAT - The assessee is a charitable trust existing since 2001 having registration under section 12A of the Act. In assessee s case it is not in dispute that it is a charitable organization since the assessee is registered under section 12A of the Act and that the revenue till now has not held the assessee to be otherwise. Now coming to the question of whether the assessee is a mutual organization from the perusal of the financial statements of the assessee we notice that the income of the assessee consist of subscription fee from members sponsorship fees for annual event and bank interest. Further from the perusal of the brochure of the annual event we notice that the event is held for the benefit of insurance consumers and brokers and that the events conducted without collecting any fees. Therefore in our considered view there is merit in the submission of the ld. AR that the assessee is not only for the benefit of members but is also for the benefit of insurance consumers from general public. In our view when the assessee is engaged in charitable activity in the nature of advancement of any other object of general public utility it cannot be said that the assessee is exclusively engaged in the activities beneficial only to its members. Therefore we are of the view that the action of the AO in applying the principle of mutuality in assessee s case is not sustainable and accordingly the addition made towards interest and other income on that ground is not tenable. Whether proviso to section 2(15) is applicable in assessee s case? - From the plain reading of the section it is clear that the Trust whose objects is for the advancement of any other object of general public utility shall be held to be not for charitable purpose if it involves the carrying on of any activity in the nature of trade commerce business for rendering of any service to any trade commerce or business for a cess or fee or any other consideration. We also notice that the income of the assessee does not contain any revenue from any activity in the nature of trade commerce or business. Further the participation in the annual meet for which the sponsorship fees is received is free of cost and therefore cannot be held to be a service for a fee for rendering service. Considering these facts we are of the view that the AO is not correct in stating that the 1st proviso to section 2(15) is applicable in assessee s case without bringing anything on record to substantiate the claim. See Ahmadabad Urban Development Authority 2022 (10) TMI 948 - SUPREME COURT We are of the view that the AO is not correct in denying the benefit of section 11 to the assessee by invoking the proviso to section 2(15) of the Act and in holding that the principle of mutuality is applicable to assessee to make an addition towards interest and other income. Accordingly the AO is directed to delete the addition made in this regard. Addition towards interest and other income by applying the principle of mutuality to the assessee - Since we have held that the assessee is entitled to claim exemption u/s 11 and that the principle of mutuality is not applicable in assessee s case. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

• Whether the principle of mutuality is applicable to the assessee, a charitable organization registered under section 12A of the Income Tax Act, 1961, for the purpose of taxing its interest and other income by denying exemption under section 11 of the Act;
• Whether the proviso to section 2(15) of the Income Tax Act, which excludes from charitable purpose any activity involving trade, commerce or business for a fee or other consideration, applies to the assessee's activities;
• Whether the assessee's activities constitute carrying on trade, commerce or business or rendering any service in relation thereto, thereby disentitling it from claiming exemption under section 11;
• Whether, if the principle of mutuality is applied to tax the interest and other income, the assessee is entitled to claim proportionate expenses as deductions against such income (raised as a without prejudice ground).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of the Principle of Mutuality to the Assessee

Relevant legal framework and precedents: The principle of mutuality exempts income arising from transactions exclusively among members of a mutual association, where there is complete identity between contributors and participants, from being taxed. Circular No. 11/2008 issued by the CBDT clarifies that mutuality applies to charitable organizations whose activities are restricted to members only, and that dealings with non-members attract the proviso to section 2(15).

Court's interpretation and reasoning: The Tribunal examined the nature of the assessee's income and activities. The income comprised membership subscription fees, sponsorship fees for annual events, and bank interest. The assessee conducted annual events free of cost for insurance consumers and brokers, indicating benefits extended beyond members. The Tribunal noted that the assessee's objects included imparting education, promoting interaction among members, and facilitating public benefit activities such as seminars and workshops.

Key evidence and findings: Financial statements showed income from members and sponsorships, but no income from trade or commerce activities. The brochure for the annual event demonstrated that the event was held for the benefit of insurance consumers and brokers without charging participation fees.

Application of law to facts: Since the assessee's activities benefited not only members but also the general public, the Tribunal held that the principle of mutuality did not apply. The organization was not exclusively serving its members but was engaged in charitable activities for general public utility.

Treatment of competing arguments: The Revenue argued that the principle of mutuality applied and relied on Circular No. 11/2008, asserting that the assessee's activities were mutual in nature and thus taxable. The assessee contended that the principle was inapplicable as it did not carry out activities in the nature of trade or commerce for a fee and that its activities benefited the public at large. The Tribunal found the assessee's submissions persuasive based on the nature of income and activities.

Conclusion: The Tribunal concluded that the principle of mutuality was not applicable to the assessee, and therefore, the addition of interest and other income on this ground was not sustainable.

Issue 2: Applicability of the Proviso to Section 2(15) of the Income Tax Act

Relevant legal framework and precedents: Section 2(15) defines "charitable purpose" and includes a proviso excluding from charitable purpose any activity involving trade, commerce or business or rendering any service in relation thereto for a fee or other consideration, unless such activity is incidental and receipts do not exceed 20% of total receipts. The Tribunal also referred to the Supreme Court's ruling in a recent case which held that trade promotion bodies providing individualized or specialized services for a fee may lose charitable status under the amended section 2(15).

Court's interpretation and reasoning: The Tribunal analyzed whether the assessee's activities involved carrying on trade, commerce or business or rendering services for a fee. It was noted that the assessee's income did not include revenue from trade or commerce activities. The sponsorship fees related to events where participation was free, indicating no fee-based service rendered to trade or business entities.

Key evidence and findings: Income & Expenditure accounts showed no income from trade or commerce activities. The annual meet was held free of cost to participants, and the sponsorship fees did not amount to consideration for services rendered in relation to trade or commerce.

Application of law to facts: The Tribunal held that the proviso to section 2(15) was not applicable to the assessee as the activities did not involve trade or commerce or rendering services for a fee or other consideration. The assessee's objects were charitable and involved advancement of general public utility without commercial exploitation.

Treatment of competing arguments: The Revenue contended that the proviso applied and the assessee's activities were commercial in nature, thereby denying exemption. The assessee rebutted this by demonstrating the absence of trade or commerce activities and the public benefit nature of its work. The Tribunal accepted the assessee's position, noting the lack of evidence from the Revenue to substantiate the claim.

Conclusion: The proviso to section 2(15) was held not applicable to the assessee. The denial of exemption under section 11 on this ground was unsustainable.

Issue 3: Whether the Assessee's Activities Constitute Trade, Commerce or Business

Relevant legal framework and precedents: The amended section 2(15) excludes from charitable purpose any activity involving trade, commerce or business or rendering services in relation thereto for a fee or other consideration. The Supreme Court has clarified that incidental commercial activities must be scrutinized carefully to determine if they jeopardize charitable status.

Court's interpretation and reasoning: The Tribunal examined the nature, scope, and frequency of the assessee's activities. It found that the assessee's main activities were imparting education, conducting seminars, facilitating interaction among members and public, and providing scholarships and grants. The activities were not carried out for profit or commercial gain.

Key evidence and findings: Financial records and event brochures showed no commercial or business activity. The assessee's events were free for beneficiaries, and income was mainly from membership subscriptions and sponsorships, not from fees for services rendered in trade or commerce.

Application of law to facts: The Tribunal concluded that the assessee's activities did not amount to trade, commerce or business and were genuinely charitable in nature.

Treatment of competing arguments: The Revenue's contention that the assessee was engaged in business or commerce was unsupported by evidence. The assessee's detailed submissions and documentary evidence were accepted.

Conclusion: The assessee's activities were not trade, commerce or business and did not attract the proviso to section 2(15).

Issue 4: Allowability of Proportionate Expenses if Principle of Mutuality is Applied

This was raised as a without prejudice ground by the assessee in case the principle of mutuality was held applicable. Since the Tribunal rejected the applicability of the principle of mutuality and upheld exemption under section 11, this issue became academic and was not adjudicated.

3. SIGNIFICANT HOLDINGS

"The action of the AO in applying the principle of mutuality in assessee's case is not sustainable and accordingly the addition made towards interest and other income on that ground is not tenable."

"The AO is not correct in stating that the 1st proviso to section 2(15) is applicable in assessee's case without bringing anything on record to substantiate the claim."

"When the assessee is engaged in charitable activity in the nature of advancement of any other object of general public utility, it cannot be said that the assessee is exclusively engaged in the activities beneficial only to its members."

"The income of the assessee does not contain any revenue from any activity in the nature of trade, commerce or business."

"The denial of exemption under section 11 on the ground of applicability of proviso to section 2(15) and principle of mutuality is not sustainable."

"Our decision in assessee's case for AY 2016-17 as elaborated above is mutatis mutandis applicable to AY 2018-19 also."

Core principles established include that the principle of mutuality applies only where the association's activities are exclusively among members with no dealings with outsiders; that charitable organizations advancing general public utility must not engage in trade, commerce or business for a fee to retain exemption; and that mere receipt of sponsorship or membership fees does not convert charitable activities into commercial activities if the events or services benefit the public and are not fee-based.

Final determinations on each issue:

• The principle of mutuality does not apply to the assessee as it benefits the general public and is not exclusively mutual among members;
• The proviso to section 2(15) excluding from charitable purpose activities involving trade, commerce or business for a fee is not applicable as the assessee does not carry on such activities;
• The assessee's activities are charitable and for advancement of general public utility, not trade or commerce;
• The additions made by the AO and upheld by the CIT(A) on these grounds are deleted for both AY 2016-17 and AY 2018-19;
• The alternate ground relating to allowability of expenses against interest and other income is academic and not adjudicated.