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2016 (8) TMI 466 - ITAT KOLKATA

2016 (8) TMI 466 - ITAT KOLKATA - TMI - Revision u/s 263 - Eligibility of exemption u/s.11 - Held that:- 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 pr .....

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s of decision in the case of Bangalore Club (2013 (1) TMI 343 - SUPREME COURT ). As we have already explained, that 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 Asse .....

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IT 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.Advocate & Shri Manoj Kataruka, Advocate For the Respondent : Shri G.Mallikarjuna, CIT(DR) ORDER Per N. V. Vasudevan, JM This is an appeal filed by the Assessee against the order dated 29.02.2016 of C .....

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ee at nil . The AO has recorded the following aspects while completing the assessment u/s 143(3) of the Act. The asessee has been incorporated under section 25 of the companies 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 .....

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d 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 the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons :- On further ver .....

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961 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 orde .....

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to be pursued by us according to the memorandum of association was:- "1. To promote the playing and encouragement in India of the games of Cricket, Football, Hockey, Tennis, Golf, Cycle Polo, Swimming, Rugby and other forms of Sports. 2. To take over the assets and liabilities of the Calcutta Cricket & Football Club, an unincorporated Association, including its outstanding debts and its right to use the ground at Ballygunge, and to continue carrying on all its current activities. 3. To .....

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olution, 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 .....

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by the Commissioner of Income Tax, Kolkata - XX, inter alia, for the assessment year 2004-05 holding that even the interest on fixed deposit was not taxable. (iii) Grant of registration under section 12AA of the Act with effect from 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 .....

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e 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 a members' club engaged in the promotion of sports and games and are entitled to exe .....

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by the Assessee to members, it was submitted that it was a mutual activity and does not involve any sale. The Assessee's dining room where food and drinks are provided to the members is not a restaurant or a bar. A restaurant or a bar is a public place where food or beverages are served to customers for consideration. The club's dining room is for members only and is not a public place. The club's members are not its customers. The concept of consideration for provision of food or b .....

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fore 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 ₹ 2,13,37 263/- plus provision for leave encashment of ₹ 2,70,605/-, that was ₹ 2,16,07,868/-. The total of the income side of the income and expenditure account was ₹ 2,36,51,788/- which includes interest and dividend of ₹ 60,45,944/-. If .....

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,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 .....

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ess Services Pvt. Ltd., (2003) 263 ITR 1 (Bom)]. It was reiterated that surplus, if any, from mutual activities (though in fact there is none in this year) as also investment income is used for promotion of sports and games. It was submitted that by 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 .....

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lic free of cost and are 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 .....

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ich 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 remained the same in all the years. The amended provisions of section 2(15) were also considered in the assessment year 2009-10 and subsequent years. It was pointed out that for the assessment year 2009-10 relief was granted by the Commissioner of Income Tax (Appeals) and his order wa .....

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ver 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 receip .....

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ey have dealings with non-members. Also they have sponsorship from nonmembers, interest income on fixed deposit which is beyond the perview of mutuality. However, the assessee failed to address the aspect of the income from sponsorship which were mostly earned from third parties/ outsiders. It has to be clearly understood that such earning cannot be treated as mutual activity as well since such earning is from outsider and has no link on mutuality and in such respect I firmly and fully rely on t .....

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es 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 cla .....

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revious 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 h .....

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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 notice that upto A.Y.2004-05 assessee s income remained not chargeable to tax on the principle of mutuality. However, in A.Y.2004-05 i.e., the first year in which the Assessee got incorporated as a company, in the assessment completed u/s 143(3) of the Act, the income from activities of the members of the club was held to be not chargeable to tax. .....

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by the assessee claimed as exempt u/s 11 of the Act was accepted u/s 143(1) of the Act. For A.Y.2008-09 and 2009-10 in the orders passed u/s 143(3) of the Act, the AO held that the assessee was carrying on the 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 d .....

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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 can co-exist. The assessee has no business dealings with non- members. The relations with non-membe .....

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8-09 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 n .....

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dia vs A.Chowdhury, ACIT 109 ITR 229 wherein the Hon ble Calcutta High Court held that if the AO follows decision of Tribunal on an issue, the CIT cannot revise the same u/s.263 of the Act on the ground that an appeal has been filed against the order of the Tribunal. It was therefore submitted by the ld. Counsel for the assessee that the aforesaid decision will clearly apply to the facts and circumstances of the case, in as much as the AO in passing the order u/s 143(3) of the Act, has taken a v .....

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s 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 enti .....

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n members and allowing them to use the club was clearly in the nature of business and therefore the assessee would not be entitled 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 ha .....

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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 only amongst its members. The principle of mutuality will apply in such a situation and income or surplus of such association cannot therefore be regarded as income. The principl .....

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utuality has been applied to exempt from income-tax, the surplus arising to mutual associations in their joint endeavor. 16. On 5.6.2003, the Assessee got itself incorporated as a company under the Companies Act, 1956. The Assessee was incorporated u/s.25 of the Companies Act as it was formed for promoting, inter alia, charity or any other 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. The .....

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cumulated 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 t .....

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se 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 .....

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r fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity . 18. It can be seen from the proviso to Sec.2(15) which came into effect from 01-04- 2009 that 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 or business. It is not in dispute that the charitable purpose for which the Assessee was formed has t .....

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ub 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 .....

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ntity 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. by the Bank to its customers, the identity of participants and contributors is sapped. Thus 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 t .....

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ted 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 income in the case of the Assessee fo .....

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parties. For this category of income also the principle of mutuality will not apply as there is no identity between the contributors and participants. The second and third category of income would still be exempt u/s.11 of the Act. The observation of the CIT in the impugned order u/s.263 of the Act is that there cannot be any interplay between Section 11 and doctrine of mutuality. This conclusion in our view is erroneous. There is nothing in the Act or any other precedent which prohibits allowi .....

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(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 mutua .....

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om 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 approac .....

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2008 with effect from 01.04.2009 has two parts. The first part has reference to the carrying on of any activity in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service ―in relation to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income f .....

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d not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. If a literal interpretation is to be given 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 consi .....

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ncome 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 activities which may be commercial, that does, in any way, affect the nature of the Institution as a charitable institution if it otherwise q .....

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on 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 .....

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aritable purpose" by the revenue. (viii) The expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any .....

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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 .....

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lus at all. This by itself would demonstrate 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 .....

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se 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 in AY 08-09 & 09-10, the CIT(A) has already held that the Assessee is not hit by the proviso to Sec.2(15) of the Act. In fact in AY 2008-09 the issue was receipt of fee from Indian Cricket League for allowing use of the club ground for cricket practice f .....

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the CIT(A) and had completed assessment on that basis. In such circumstances, can the CIT in exercise of his powers u/s.263 of the Act term the action of the AO as erroneous? Such question had come for consideration before the Hon ble Calcutta High Court in the case of Russel Properties Pvt.Ltd. Vs. ACIT (supra). The facts of the case before the Hon ble Calcutta High Court was the Tribunal in the earlier AY of an Assessee held that maintenance and service charges received by an Assessee were as .....

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h 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 mainta .....

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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 t .....

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