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M/s. KORAMANGALA CLUB Versus THE INCOME-TAX OFFICER WARD-7 (3) , BANGALORE

2016 (3) TMI 286 - KARNATAKA HIGH COURT

Penalty under Section 271B - Tax Audit - Applicability of provision of Section 44AB on appellant Club - Held that:- The assessee was under the bonafide belief that the provisions of Section 44AB of the Act were not applicable to a Club, while supplying beverages, liquor etc., to its members as it was not engaged in any business, but only a mutuality. The authorities and the Tribunal failed to appreciate the vital aspect of the explanation offered by the appellant in a right perspective and as su .....

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ed to as the Act for short) are by the assessee against the orders passed by the Tribunal, Bengaluru Bench. 2. The following substantial question of law arises for adjudication before this court: 1. Whether the finding of the Income-tax Appellate Tribunal holding that the provisions of Section 44AB of the income Tax Act, are applicable to the appellant Club, which is a mutual concern, is perverse and arbitrary and contrary to law? 2. Whether in the facts and circumstances of the case, the order .....

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r games and amusements. 5. To conduct Exhibition, Excursions, Publication of Magazines, etc., 6. To give scholarships, Free ships, Prizes and Monetary assistance to poor students to help them in their studies and to render financial assistance to run free libraries and free reading rooms. 7. To contribute donations to social service organizations and for socioeconomic activity. 8. And generally to do all such other lawful things as are incidental, conducive, or may be necessary in the interest o .....

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ffered an explanation that the appellantclub was the mutual concern and was supplying the liquor and beverages only to its members and there was no business carried on by the appellant and accordingly, it was under the bonafide belief that the provisions of Section 44AB of the Act were not applicable to it. Consequently, the appellant did not obtain the audit report at the time of filing of the return of income. The assessing Officer rejected the explanation offered by the appellant and levied t .....

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hi along with K.V.Aravind for the respondent-revenue and perused the material on record. 6. The Apex Court in the case of JOINT COMMERCIAL TAX OFFICER vs. YOUNG MEN S INDIAN ASSOCIATION [AIR 1970 SC 1212], while considering the case of a club, supplying various refreshments prepared in the club to its members, whether involves a transaction of sale or not has held as under: The essential question, in the present case, is whether the supply of the various preparations by each club to its members .....

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n though a distinct legal entity is only acting as an agent for its members in the matter of, supply of various preparations to them no sale would be involved (1) [1968] 2 S.C.R.421. (2) [1924] 1K.B.390. as the element of transfer would be completely absent. This position has been rightly accepted even in the previous decision of this Court. 7. This Court in the case of CANARA BANK GOLDEN JUBILEE STAFF WELFARE FUND vs. DEPUTY COMMISSIONER OF INCOME TAX reported in [(2009) 308 ITR 202], while con .....

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a mutual concern can carry on an activity with its members, though the surplus arising from such activity is not taxable income or profit. The principle of mutuality has also been accepted in the case of a voluntary organization, which receives contributions from its members. 14. Thus, the crucial test of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. .....

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hat the provisions of Section 44AB of the Act had no application to the club and further held that even assuming the provisions were applicable, the appellant s bonafide belief that it did not required to get the accounts audited under section 44AB of the Act amounted to a reasonable cause for cancellation of penalty. 9. Indeed, these judgments referred to above, supports the contention of the assessee that Section 44AB of the Act is not applicable to the facts of the present case. 10. However, .....

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eneficial to extract para 19 of the judgment of this Court in the case of ASSISTANT COMMISSIONER OF INCOME TAX AND ANOTHER VS DR K SATISH SHETTY [(2009) 310 ITR 0366], which reads as under: 19. The Tribunal has also placed reliance on yet another judgment of the Supreme Court Hindustan Steel Ltd. vs. State of Orissa( 1972) 83 ITR 26 (SC), where it dealt with the provisions contained in the Orissa Sales-tax Act. While considering the general principles the apex Court has held that penalty can be .....

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bona fide belief and had no dishonest intention in not obtaining audit report for all the three businesses carried on by him . 12. It is also relevant to extract para 7 and 8 of the judgment of Gujarat High Court in the case of INCOME TAX OFFICE VS SACHINAM TRUST [(2010) 320 ITR 0445]: 7. In the circumstances, without entering into the analysis of provisions of Section 44AB of the Act, for the purpose of determining whether in the case of money lender, turnover would constitute the basis for in .....

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e referred to in the said provisions if it is proved that there was reasonable cause for the said failure. 8. Therefore, without entering into the larger issue as to whether there was, or was not, any failure, it is apparent that the assessee can be said to have been prevented by reasonable cause on the basis of a legal opinion published, which was produced before the first appellate authority. In fact, on a reading of provisions of Section 44AB of the Act, it is a moot question as to which of t .....

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