TMI Blog2016 (8) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... at decision is applicable only in respect of income earned by the Assessee from investments. We have already held that the income in respect of which principle of mutuality is not applicable, would nevertheless be entitled to exemption u/s.11 of the Act, subject to satisfaction of other conditions laid down in that section. We have also held that predominant purpose for which the Assessee exists is for charitable purpose and that the proviso to Sec.2(15) of the Act would not be applicable in the facts and circumstances of the present case, which we have discussed in the earlier paragraphs. Thus we hold that the order passed by the AO u/s.143(3) of the Act dated 25.3.2014 for AY 011-12, which was revised by the CIT u/s.263 of the Act by the impugned order was not erroneous and prejudicial to the interest of the revenue and therefore the exercise of jurisdiction by the CIT u/s.263 of the Act is held to be not sustainable. Consequently, the order u/s.263 of the Act is hereby quashed and the appeal of the Assessee is allowed. - I.T.A No. 466/Kol/2016 - - - Dated:- 5-8-2016 - Sri N. V. Vasudevan, JM And Dr. Arjun Lal Saini, AM For the Appellant : Shri J.P.Khaitan, Sr.Advocat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; during the year and gross receipts from such activities were ₹ 2,84,85,247/- and ₹ 2,07,15,987/- respectively. It is evident that the assessee company not being a mutual organization had gross receipt exceeding ₹ 10 lakhs from trade/ commercial activities and, therefore, exemption u/s. 11 of the Income Tax Act, 1961 was not applicable. The gross expenses from such activities were ₹ 2,78,26,773/- and ₹ 1,49,15,097/- respectively. This resulted in income from such activities of ₹ 64,59,364/- and the same was under assessed. On the basis of above observation, it is found that the order passed u/s. 143(3) come Tax Act, 1961 is erroneous and prejudicial to the interest of revenue, and as such posed to initiate proceedings u/s. 263 of the Act, 1961 for cancelling the original assessment order u/s. 143(3) of the 1. T. Act, 1961. 4. The CIT accordingly issued a show cause notice dated 29.09.2015 u/s 263 of the Act. The assessee by its reply dated 02.12.2015 pointed out that it was incorporated on June 5, 2003 in terms of section 25 of the Companies Act, 1956 as a not for profit company and that the Assessee took over the unincorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 1st April 2004. (iv) The first assessment for the assessment year 2004-05, for which returns filed under section 139(4A) claiming exemption under section 11, was made subject matter of proceedings under section 147 for the purpose of bringing to tax, the surplus of ₹ 6,67,907/- (before deduction of expenses/overheads debited to the Income and Expenditure account) in respect of provision of food and drinks to the members. By an order dated December 3, 2007 passed under section 147, the Assessing Officer accepted the returned income and did not make any addition in view of the judgment of the Hon ble Supreme Court in CIT v. Bankipur Club Ltd.. (1997) 226 ITR 97 (SC). (v) Assessment for the assessment year 2005-06 was made under sections 143(3)/11 of the Act and exemption under section 11 was allowed. The returns for the assessment years 2006-07 and 2007-08 claiming exemption under section ere accepted under section 143( 1). (vi) In the assessment years 2008-09 and 2009-10 the Assessing Officer did not accept the Assessee s claim for exemption and/or mutuality but such assessments were not sustained upon first appeal where it was held that the Assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 and details of Schedule 13, which are before deduction of the administrative and other expenses/overheads reflected in the come and expenditure account. There was in fact no income of ₹ 64,59,364/- for the year in question and, on the other hand, there was a deficit of ₹ 40,02,024/- from activities. The surplus of ₹ 80,93,920/- which appears in the income and expenditure account is only because of the residuary interest and dividend income of ₹ 20,43,920/- (Rs.60,45,944/- - ₹ 40,02,024/-) and transfer of a portion of the admission fee received from the corporate members to the extent of ₹ 60,50,000/- from Corporate Members' fund forming part of the Club's Capital Reserve to the income and expenditure account. The bonds, deposits and units which gave rise to income by way of interest and dividend are property held under trust for a public charitable purpose and the income there from is utilized for the promotion of sports and games. The admission fee received from the corporate members is actually a capital or corpus receipt. Reference was made in this regard to the decision of the Hon'ble Bombay High Court in CIT -vs- Diners Busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment year 2009-10 relief was granted by the Commissioner of Income Tax (Appeals) and his order was accepted by the revenue. 8. It was thus contended that the order passed by the Assessing Officer granting us exemption under section 11 of the Act is neither erroneous nor prejudicial to the interest of revenue. Exemption under section 11 was rightly allowed and there has been no under assessment of any income. It was submitted that the condition precedent for the assumption of jurisdiction under section 263 does not exist in the facts and circumstances of the instant case. 9. The CIT was however not convinced with the explanation given by the assessee and he held as follows :- Having gone through the assessee's submission and the relevant provisions of the Act, I find that the AO while passing such order u/s 143(3) dt. 25.3.2015 failed to appreciate the provisions of the Act vis-a-vis the activity carried on by the assessee and as such the AO's order is erroneous and Prejudicial to the interest of the revenue. On perusal of accounts submitted by AR it was noticed that receipts from sports activities are mostly from outsiders/ non-members. And rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch respect is more than 10 lakhs in the previous year the exemption so granted by the Assessing Officer u/s 11 is not in accordance with the provisions of the Act and as such the action of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Hence the order of Assessing Officer is set aside and the Assessing Officer is dire ted to pass an order accordingly after giving opportunity to the assessee. 10. Aggrieved by order of CIT the assessee has preferred the present appeal before the Tribunal. 11. We have heard the submissions of the ld. Counsel for the assesee and the ld. DR. The ld. Counsel for the assessee drew our attention to the rules of the unincorporated assessment of the assessee in which under Rule-2 it has been specifically provided that the club shall be a private members club established for playing and encouragement in India of the games of cricket, hockey etc for recreation and for social amusement of such persons as shall be admitted to the membership under the subsequent provision of its rules. It was thus submitted by him that the assessee s income was not chargeable to tax on the principle of mutuality. It was brought to our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sports activities on which the assessee' curs expenditure. Therefore, AO is directed to allow the exempt as per section 11 on the income of assessee from investments. 12. The above said order of the CIT(A) for A.Y.2008-09 and 2009-10 has been accepted by the revenue and no appeal was preferred before appellate forums. As far as A.Y.2010-11 is concerned, exemption u/s 11 was allowed to the assessee by the AO following the order of the CIT(A) for A.Y.2008-09 and 2009-10. As far as the A.Y.2011-12 is concerned the AO allowed the claim u/s 11 of the Act, after taking note of the history of assessment in the case of the Assessee. Therefore it cannot be said that the AO s order is erroneous calling for revision by the CIT u/s 263 of the Act. 13. The ld. Counsel for the assessee drew our attention to the accounts of the assessee and submitted that if the interest and dividend income earned on investments is excluded then there shall be deficit and no surplus whatsoever. He brought to our notice that the findings of the CIT in the impugned order of 263 wherein the CIT had made reference to the second proviso to section 2(15) of the Act as well as the first proviso to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to the benefit of exempt u/s 11 of the Act. The ld. DR placed reliance on the decision of the ITAT Mumbai Bench in the case of ADIT(Exemption)(11)(2) Mumbai vs M/s. Navi Mumbai Merchants Gymkhana Club in ITA NO.196/Mum/2013 B Bench dated 21.05.2014 wherein it was held that receipts from non members cannot be regarded as exempt on the principle of mutuality. 15. We have given a very careful consideration to the rival submissions. The undisputed facts are that the Assessee was originally an unincorporated association which is claimed to have it s origin from 1792 and established for the playing and encouragement in India of the game of Cricket, Hockey, Football, Tennis, Golf, Cycle Polo, Rugby and other forms of Sport for recreation and for the social amusement of such persons as shall be admitted to membership under the provisions of the Rules. The Rules of the Assessee were first adopted at the Inaugural meeting of the Club on 30th April, 1965 and was amended from time to time. As per the Rules so adopted, the Assessee continued to have its object the playing of sports as aforesaid by members of the Assessee. It was therefore an association which restricted its activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted. The Assessee made application for grant of registration and was granted registration u/s.12AA of the Act vide certificate dated 18.2.2005 issued by the Director of Income Tax (Exemptions), Kolkata. 17. Section 2 (15) of the Act, which defines the expression Charitable purpose for the purpose of the Act had undergone an amendment by the Finance Act, 2008 with effect from 01-04-2009. The expression of charitable purpose, prior to the aforesaid amendment read as follows; (15) Charitable purpose includes relief to the poor, education, medical relief and the advancement of any other object of general public utility The definition after the amendment reads as follows; Charitable purpose includes relief of the poor, education, medical relief, (preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility; Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest earned on fixed deposits is to be brought to tax. However, it is to be noted that it did not result in the Bangalore Club being taxed on all contributions of its members. In other words income which is not exempt on the principle of mutuality will still be eligible for exemption u/s.11 of the Act, if the conditions laid down therein are satisfied. 21. Even after incorporation as a company, the activities of the Assessee continue to be with its members only. The use of the club facilities is restricted only to members. Guests of the members are allowed to use the facility, provided the guests are accompanied by the members. Therefore the element of mutuality is not lost after the Assessee got itself incorporated as a company. As already mentioned the principle of mutuality does not vanish because of the form i.e., from an Association to a Company. The main objects of the Assessee as incorporated in the memorandum of association, continues to retain the element of mutuality. In fact in the assessment completed after the Assessee became a company, the revenue has accepted in the assessment completed for AY 2004-05 that the Assessee is a mutual association. 22. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were in the nature of carrying on business and hence cannot be regarded as Charitable . As we have already seen the income or surplus from these activities has always been regarded as falling within the principle of mutuality and therefore cannot be regarded as income. 24. As far as the income generated by organising of events of sports in which outsiders participate, the conclusion of the CIT is that such activity was in the nature of carrying on business and therefore the Assessee cannot be regarded as existing for Charitable Purpose and therefore exemption u/s.11 of the Act ought not to be allowed to the Assessee. The approach to be adopted in coming to the conclusion as to whether the proviso to Sec.2(15) of the Act will be applicable has been laid down by the Hon ble Delhi High Court in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others 371 ITR 333 (Delhi). The Hon ble Delhi High Court has laid down the following very important principles as to how the proviso to Sec.2(15) of the Act has to be interpreted:- (i) The proviso to Sec.2(15) of the Act introduced by virtue of the Finance Act, 2008 with effect from 01.04.2009 has two parts. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Institution as a charitable institution if it otherwise qualifies for such a character. (v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. If the driving force is not the desire to earn profits but to do charity, the exception carved out in the first proviso to Section 2(15) of the said Act would not apply. (vi) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above. (vii) Section 2(15) is only a definition clause. Section 2 begins with the words, ―in this Act, unless the context otherwise requiresǁ. The expression charitable purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessee does not exist for profit. The use of the club facility by outsiders on payment of a fee would clearly fall within the ambit of its main object viz., organize and participate in different sports and games with the object of improving the standard of the same and encouraging the achievement of higher standards of excellence. The fact that a fee is charged from outsiders does not take away the character of the Assessee as predominantly existing for charitable purpose. Thus the Assessee continues to exist for charitable purpose. 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. It cannot be said that the Assessee is driven primarily by a desire or motive to earn profit but has to be considered as existing for the purpose of carrying on charitable activity viz., the advancement of any other object of general public utility. The Assessee has therefore to be regarded as existing for carrying on activities for charitable purpose. 26. We have already seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order passed by the ITO was erroneous in so far as it is prejudicial to the interests of the Revenue were not fulfilled. The proposed exercise of the power under s. 263 was held to be illegal and without jurisdiction. 27. The aforesaid decision of the Hon ble Calcutta High Court is squarely applicable to the facts of the present case. The decision of the ITAT Mumbai in the case of Navi Mumbai Merchants Gymkhana, referred to by the learned DR before us is a case where the club gave its facilities for use by outsiders for social functions. This was held by the Tribunal to be not eligible for exemption u/s.11 of the Act. Similarly, income from earned from use of the club facilities by non members for purpose of playing cards and use of permit room, catering etc., was held to be hit by the proviso to Sec.2(15) of the Act. In the present case, we have already seen that use of club facility by non members is prohibited by the Rules of the Assessee. The use by outsiders of the facilities of the club is in connection with promotion of sports which is a charitable purpose and which is well within the main objects of the Assessee. Therefore the decision relied upon by the learned DR b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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