TMI Blog2009 (8) TMI 839X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the case in computing the total income of your petitioners at Rs. 13,64,110 by denying exemption under section 11 and in holding that your petitioners are a mutual concern." 2. Further, the assessee also filed an additional ground before us and it reads that "The learned CIT(A) has erred in upholding the validity of intention of reassessment proceedings by the Assessing Officer." Considering the fact that the ground raises a legal issue, which does not call for any investigation on facts, the same is admitted and adjudicated in the following paragraphs. Before going into the adjudication of the grounds, brief facts of the case are given as under. 3. The facts in brief are that the assessee is a Trust registered under Bombay Public Trust (BPT) Act, 1950 in February 1975 and also under section 12A of the Income-tax Act in April 1981. Assessee did not file the return of income for the assessment years 1996-97 and 1997-98 and also for the earlier years. Assessee filed the returns for assessment years 1998-99, 1999-2000 and 2000-01 on 30-3-2001. This led to issue of notice under section 148 for assessment year 1996-97 and there was no immediate compliance from the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip to all State and Central Government Employees; ( iii ) Providing free coaching; ( iv ) Providing halls to Government during selection and other functions; ( v ) Honorary Membership to eminent sportsmen; ( vi ) Allowing educational institutions to avail the facilities free of cost; ( vii ) Sports facilities are provided to physically and handicapped children free of cost; ( viii ) Holding of Major Tournaments etc. All these activities are named to demonstrate that the objects of the club are to promote or encourage and the advancement of the sports, games and athletic activities and other social and cultural activities and they are charitable in nature for the general public utility. 5. Assessing Officer considered the above submissions and he is of the opinion that the assessee restricts the benefits of the club only to the club members, their family and their guests and held that the club is not meant for general public. His finding in this regard is mentioned on page 3 of the assessment order and it reads that "The only relaxation the club makes is that the senior citizens are permitted to enter the club without identity card for jogging purpose. Other than that, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64,110 against the nil return income. 6. Aggrieved with the above reassessment, the assessee filed an appeal before the CIT(A). During the first appellate proceedings, the assessee questioned the validity of the reopening proceedings and denial of exemption under sections 11 to 13 of the Income-tax Act. Assessee filed the written submissions on these issues: ( a )Briefly, regarding validity of the notice under section 148, the assessee objected to the basis for issue of notice and argued that the assessee is a charitable organisation and there is no issue of escapement of the concealed income as whole of the trust s income is tax exempt under section 11 of the Act. As per the assessee, once the club is registered under section 12A of the Income-tax Act the income of the club is exempt from income-tax and Assessing Officer cannot disturb the same during the assessment proceedings. ( b )Regarding charitable status of the assessee, it is mentioned that the assessee club is for general public utility and relied on the objects of the club. He also mentioned that the object of the club is ( a ) to provide as far as possible for general public utility grounds and buildings, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the Trust is actually applied for the charitable purpose of the trust as submitted during the registration under section 12A. Further, the CIT(A) held that registration of the trust under section 12A does not mean that Assessing Officer is precluded from looking into details coming to the conclusion relating to grant of exemption or otherwise. The CIT(A) held that the claim of the assessee cannot be allowed merely on the reason that assessee is registered under BPT Act and under section 12A of the Income-tax Act. ( b )Elaborating on the provisions of section 2(15) of the Income-tax Act relating to the definition of charitable purpose , in general, and the expression general public utility , in particular, the CIT(A) is of the opinion that the said charitable activities for the assessee s case are not directed towards general public but only towards itself i.e., its members and the relatives and guests. In this regard, the CIT(A) relied on the Apex Court judgment in the case of Ahmedabad Rana Cast Association v. CIT [1971] 82 ITR 704. After analysing the membership structure and after analysing the minutes of the meetings of the AGM and the Managing Committee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts. Thus, the Counsel prayed for admitting the same and learned DR for revenue did not differ with the said arguments. On accepting the above arguments of the assessee s counsel, the additional ground is admitted. After the admission of the said additional ground, in connection with the issue of the validity of notice under section 148 of the Act, the learned Counsel made various arguments and they are that: (1) the notice is bad in law as the proceedings are initiated only for verification only, (2) the Apex Court judgment in the case of Bankipur Club Ltd. ( supra ) is not applicable to the facts of the case of the assessee, and (3) having issued the notice for making a particular additions, Assessing Officer is not allowed to make addition on other accounts, for which the reasons were not recorded as held by the Bombay High Court judgment in the case of Hindustan Lever Ltd. v. Asstt. CIT [2004] 268 ITR 332 . The Counsel referred to the certain portions of the judgment that "it is needless to mention that reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the extent of the concealed income and thus, the same is not the sole basis for issue of notice under section 148. 12. Under the above rival positions on the issue of the validity of the notice under section 148, we find it absolutely necessary to examine minutely the reasons recorded by the Assessing Officer which are reproduced in Para 3 of this order. From the expressions used in the said reasons such as income derived from the mutual activities is only exempt , income from the non-members , other income derived by the club is taxable , assessee has income from interest and club house activity amounting to Rs. 19,24,225 , it is evident that the Assessing Officer is under the belief that the club has taxable income over and above the prescribed limits and the same has escaped assessment. His opinion that the club is meant only for its members and their guest and not for public is also obvious. The verification purpose is only limited to for the purposes of segregating the income of the mutual activity of the members of the club from income of the other activity of the club relatable to the non-members. Further, it is noticed from the records that there is no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and not at the time of issue of notice. Regarding the argument of the Counsel on the issue that the notice under section 148 was issued only for Verification purposes , in our opinion the same is misplaced for the reason that the said verification is aimed as qualifying the extent of concealment. Therefore, we differ with this part of the argument of the Counsel for the assessee. Under these circumstances, in our opinion, the reasons recorded by the Assessing Officer are in order and issue of notice under section 148 is not bad in law. The decision of the CIT(A) in this regard does not call for any interference. Accordingly, additional ground filed in this regard is dismissed. 14. Second issue relates to the denial of the exemption under section 11 of the Income-tax Act and holding the assessee as a mutual concern against the assessee s claim of charitable trust. Relevant facts are already narrated in the opening paragraphs of this order. Therefore, the same are not reproduced to avoid repetition and however, the arguments of the parties in this regard are as follows : A.Essentially, the counsel for assessee reiterated all the arguments, which were put forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(15)." Thus, as per the assessee, a section of the public would meet the requirements of section 2(15) of Act. C.In connection with the relevance of the registration under section 12A to the facts of case, the Counsel relied on the decision of the Cochin Bench of the Tribunal in the case of Calicut Islamic Cultural Society v. Asstt. CIT [2009] 28 SOT 148 for the proposition that the registration granted under section 12A was not mere an empty formality as same is an essential requirement for claiming the exemption of section 11 of the Income-tax Act. He mentioned that the said decision was taken after considering the Apex Court s finding in the case of Surat City Gymkhana ( supra ). 15. On the other hand, the Learned DR for revenue argued stating that the assessee did not do anything charitable in nature in order to qualify the status of the charitable institution. Referring the meagre amounts of the expenditure and income spent on account of the sport related activities, the DR stated that assessee did nothing substantial to qualify for the status club engaged in the sports games related activities. What all that the club did during the year is mere catering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to impart training in the art of horsemanship is of general public utility. On the other hand, the case of the revenue is that the assessee did nothing charitable and the dominant object of the assessee to provide amenities and facilities to the members of the club, which is a characte-ristic feature of a mutual organisation. Regarding the activities enlisted above by the assessee, the revenue considers all of them as tall-claims and factually, the assessee did not carry out any activity which can be described as charitable nature. As per the revenue, the club did nothing extraordinary to qualify the charitable nature, which is not done by other agencies considered mutual organisations. As per the revenue, under the circumstances of the diversion of funds to the building funds and trading on alcohol to the members and their guest, the club does not become charitable entity and such activities are not of general public utility. Sports activities are not the dominant activity of the club. To become entitled for exemption under section 11 of the Act, the trust must exist wholly for charitable purposes. 17. We have considered the above rival views and also examined the annual ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the light of these basic facts on the objects of the club as well as the legal provisions, we need to examine the scope of the expression general public utility as well as if the objects of the club are covered by the said expression. ( iii ) On the scope of the expression general public utility , it is relevant to mention that this phrase has two shades i.e., what constitutes the general public and the general public utility . In this regard, there is lot of information in the form of judicial pronouncements. Insofar as general public is concerned, it is a decided issue that, where a section of people alone are benefited, the requirements of said expression are met and the judgment in the case of CIT v. Andhra Pradesh Police Welfare Society [1984] 148 ITR 287 (AP) is relevant. The AP High Court ruled that "to serve a charitable purpose, it is not necessary that the object should be to benefit the whole of the mankind or all persons living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals (page 295)". On the issue of general public utility , the Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral public as the benefits are largely aimed at the members of the club along with the families and friends and guest of the members of the club, ( ii ) the activities of the club are essentially not for advancement of the sport games activities and it is merely for providing eatable and providing alcohol to the members and their guests and ( iii ) sports activities are very marginal and negligible. A.Regarding the arguments on the issue at ( i ) above, it is relevant to mention that the club has variety of members namely, old and young, men and women, rural and metropolitan, corporate and non-corporate, public servants and private, permanent and temporary, service membership or otherwise etc. The club is not meant for a group of private families. In our opinion, such variety of members represents a cross section of the public at large. Under these circumstances, it cannot be held that club s object of general public is faulty. On the issue of restriction on the membership admission, it is a decided issue and so long as the members admission into the club is not arbitrary, the committee s discretion to restrict the membership does not interfere with the object of general pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say that the club and its assets, if any, are not meant for sports and games and the club has failed to promote or manage or assist in the promotion or management of all forms of social intercourse or athletic sports, pastimes and of cultural and educational activities for its members . Further, the revenue has not gathered any evidences to demonstrate that the sports and games related activities and their promotion for the members of the club are not in the nature of general public utility . It is also relevant to mention that the clause 98 of the trust provides for the transfer of the assets of the trust on dissolution to the entity with similar objects i.e., charitable objects. Therefore, we find no reason to deny the benefits available to any club for charitable purpose to the assessee. B.Regarding the other issue at ( ii ) above that the activities of the club are essentially not for advancement of the sport games activities and it is merely for providing eatable and providing alcohol to the members and their guests, we have examined the settled position of law on the subject. As already stated, the object of constructing a swimming pool for European public, object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue in disqualifying the assessee - trust/club to the benefits of the provisions of section 2(15) of the Act is unapproved. Thus, this part of the argument of the revenue is dismissed. C.On the issue of generation of income and the application of the same, it is noticed that the annual accounts for the assessment year 1996-97 reflect that the value of the total assets of the assessee is Rs. 8.59 lakhs. Total gross income is Rs. 19,24,225 and source of the income is interest income from the FDRs. Out of the same, Rs. 10.27 lakhs was diverted towards various funds and the balance was spent on sports activities and the various overheads. The expenditure on account of sports activities is above Rs. 66,000. Further, as mentioned above, the assessee spent Rs. 52,00,588 during the assessment year 1996-97 and Rs. 96,15,780 for the assessment year 1997-98 (page 11 of the paper book) on the construction of swimming pool. The above figures demonstrate that the assessee is factually engaged in the objects of the Trust. Therefore, it cannot be said that the club has not spent for the object of sport s activities of the club. Thus, relevant argument of the revenue is not approved. D.Whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 994/M/2006 - Assessee s appeal - Assessment year 1997-98 21. The facts relating to this appeal are identical to the ones described in the earlier paragraphs of the order in connection with the ITA No. 1567/ Mum./2006. The assessee raises the ground on ( i ) the validity of the issue of the notice under section 148, ( ii ) charitable nature of the trust s object, ( iii ) taxability of the interest income on FDRs and NSCs. These issues are identical to the ones raised, discussed and adjudicated in connection with the said appeal ITA No. 1567/Mum./2006. Thus, our decisions given in the said appeal are equally relevant for the present appeal. Accordingly, the additional ground raised on the issue of validity of notice is dismissed. The other grounds relating to charitable nature of the objects and the status of the club as charitable organisation, which is eligible for exemption under section 11 of the Act in respect of the income disclosed by the assessee, are allowed. 22. In the result, the appeal of the assessee is partly allowed. ITA No. 3899/Mum./2006 - Revenue s Appeal - Assessment year : 1997-98 23. The only ground in this appeal of revenue refers to the finding ..... 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