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The Gujarat Institute of Housing and Estate Developers Versus DDIT, Exemption Ahmedabad

2016 (11) TMI 1312 - ITAT AHMEDABAD

Benefit of principle of mutuality - receipts from the members and taxes the surplus income from non-members - Held that:- If the objects of the assessee are looked into cumulatively, then it would spell out that in order to appraise members about the latest technology in construction activities, market trend, it would not be futile to organize property show. As far as cricket match is concerned, it was not organized on commercial basis, rather participators are mainly from among the members. It .....

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t has not spell out how these propositions are applicable on the facts of the present case. It is pertinent to observe that facts of all other years are identical. Therefore, we allow all the appeals of the assessee for statistical purpose. - ITA. No. 1051 to 1056/Ahd/2015 - Dated:- 25-11-2016 - Shri Rajpal Yadav, Judicial Member And Shri Manish Borad, Accountant Member Assessee by : Shri S.N. Soparkar Revenue by : Shri Prasoon Kabra, Sr.DR ORDER Per Rajpal Yadav, Judicial Member Present six app .....

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pening of the assessment. It is pertinent to observe that in those assessment years, the ld.AO has passed assessment order on 27.3.2014 under section 143(3) r.w.s. 147 of the Income Tax Act, 1961. However, during the course of hearing, the ld.counsel for the assessee did not press this ground of appeal, and therefore, this ground in all four years is rejected. 3. Next common issue which is involved in all these years is whether the assessee is entitled to compute its income on principle of mutua .....

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nder Non-Trading Corporation Act of Government of Gujarat. This NTC Act was repealed, therefore, on 1-9-2007, GIHED was registered as non-profit organization as per section 25 of the Companies Act, 1956. Thus, the assessee is a section 25 company. The AO has passed a regular assessment in the Asstt.Year 2010-11 under section 143(3) on 28.3.2013, there he formed an opinion that income of the assessee is taxable, and accordingly recorded reasons for reopening of assessment in Asstt.Year 2006-07 to .....

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see is that its income is exempt from taxation on the principle of mutuality. This claim of the assessee has been rejected. Appeal to the CIT(A) did not bring any relief to the assessee. 5. With the assistance of the ld.representatives, we have gone through the record carefully. Before embarking upon an inquiry on the facts of the present case, in order to find out whether principle of mutuality is available to the assessee or not, for computing its income, we think it appropriate to bear in min .....

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e Bombay High Court in the case of CIT Vs. Air Cargo Agents Association of India in order to canvas his argument that if a part of income was not covered by the principle of mutuality, then that part would be taxable. He placed on record copies of these decisions. Other decisions relied upon by the ldc.ounsel for the assessee are as under: i) CIT Vs. Bankipur Club Ltd., 226 ITR 97 (SC); ii) Chemford Club Vs. CIT, 243 ITR 89 (SC); iii) Prabhukunj Co-op. Hsg. Society Ltd., 59 taxmann.com 104 iv) J .....

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or the assessee is that of the Hon ble Supreme Court in the case of CIT Vs. Bankipur Club Ltd., has decided a batch of 16 appeals which have been categorized in different groups i.e. A to D . These clubs were registered under section 25 of the Companies Act, 1956 as non-profit companies. They have claimed exemption on their surplus receipts on the ground that they are clubs - a species of mutual undertaking and did not carry on any trade or business. They did not earn any profit. The income rece .....

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ird Edn. as well as the Law and Practice of Income Tax , 8th Edn., Vol., 1, 1990 by Kanga & Palkhivala. The Hon ble Court has noted the concept of mutuality explained in these commentaries extensively. It is pertinent to take note finding of the Hon ble Supreme Court in this connection. It reads as under: 7. In Halsbury Laws of England, 4th Edition Reissue Volume 23 paras 161 and 162 (pages 130 and 132), the relevant law is stated thus: "Where a number of persons combine together and co .....

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hich are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. **** Members clubs are an example of a mutual undertaking, but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting............. "(Emphasis supplied) Simon's Taxes Vol.B 3rd Edition, paragraphs .....

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f requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered. ......................." It has been held that a company conducting a members' (and not a proprietary) club, the members of the company and of the club being identical, was not .....

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was assessable to income tax. But there is no liability in respect of profits made from members who avail themselves of the facilities provided for members." (emphasis supplied) The said principle which has been laid down in the leading decisions and emphasised in the leading English text books mentioned above, has been explained with reference to Indian decision in "The Law and Practice of Income Tax" (8th edition vol. 1, 1990) by Kanga & Palkhivala at page 113, thus:- " .....

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t is enough if they have a right of disposal over this surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects " 8. The crucial issue that arises for consideration in cases where it is claimed that on the basis of the principle of mutuality, the receipts by the "society" or "club" is exempt from taxation, has been succinctly stated by the judicial Committee of th .....

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of a non-trading character. 9. The next decision referred to by the ld.counsel for the assessee is also of Hon ble Supreme Court in the case of Chemsford Club(supra). In this case, the assessee provides recreational and refreshment facilities exclusively to its members and their guests. These facilities are not for non-members. The club was being run on no-profit no-loss basis. The surplus, if any is used for maintenance and development of the club. The club house was owned by the assessee-club .....

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n the case of Junagadh Gymkhana(supra). In this case, issue before the Hon ble High Court was whether the Tribunal was justified in law in upholding the action of the AO of taxing card guest income and general guest fee which are charges paid by the members of the assessee. The Hon ble Court has ultimately held that just because transactions which are non-mutual in character, would not destroy principle of mutuality. The Hon ble Court has considered the judgment of the Hon ble Supreme Court in t .....

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rs on behalf of the guests. This itself goes contrary to the facts and the decision of the Apex Court in BANGALORE CLUB VS. COMMISSIONER OF INCOME TAX & ANR. , 350 ITR 509(SC), on which reliance has been placed by Mr. Desai. In the said case, the Apex Court observed that the first condition to invoke the principle of mutuality requires that there must be a complete identity between the contributors and the participators. However, in the very judgment, the Apex Court spelt out that caution to .....

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elied upon by the authorities below and Mr. Desai, this Court held that the assessee s income from interest was not from a mutual activity and as such it was exigible to tax, and therefore, the assessee was not entitled to the benefit under Section 44A and that the entire expenditure incurred in all activities was not deductible from the assessee s taxable income. In the said case, this Court further held that the contributors to the common fund are entitled to participate in the surplus, thereb .....

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estion posed before us is answered in affirmative and in favour of the appellant-assessee and against the respondent revenue. No order as to costs. 10. Other judgment referred to by the ld.counsel for the assessee in the case of Cochin Oil Merchants Association, West Godavari Dist. Rice Millers Association and M/s.Air Cargo Agents Association are concerned, we do not deem it necessary to recapitulate and recite all these decisions on this legal aspects, but suffice to say that core of these deci .....

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ike to take note of finding of the Bombay High Court in the case of Air Cargo Agents Association. The findings of the Hon ble High Court read as under: 7. We find that the contributions made by the members to the respondent -assessee cannot be a subject matter of tax merely because the part of its excess of income over expenditure is invested in mutual funds. It is also not the case of the Revenue that the dividend received from mutual funds have not been offered to tax by the respondentassessee .....

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Club case (supra). However, the facts therein are completely distinguishable. Amongst the members of the Bangalore Club were certain banks. The Bangalore Club have invested its excess funds in member banks as well as non member banks in form of fixed deposits atM earned interest thereon. The assessee thereon paid tax on the interest earned on fixed deposit with non member banks. However, so far as interest, earned from member banks was concerned, the assessee therein sought to apply the doctrin .....

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ed only amongst the members/contributors, the complete identity 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 contribution .....

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e earned on account of investments made in Mutual Funds has been offered to tax. The respondent has in effect followed the decision of the Apex Court in Bangalore Club (supra). However as held in Bangalore Club (supra), it cannot result in the respondent being charged to tax on the contribution received from its members. In fact: the decision of this Court in Common Effluent (supra) concludes the issue in favour of the respondent - assessee. 8. Accordingly the question as framed does not give ri .....

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os.3 to 5 of its memorandum of association, because clause-5 of memorandum of association contemplates that its income and property whenever derived shall be applied solely for purpose of its objects as set forth in this memorandum and no portion of income or property shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise or by way of profit to a person who at any time or have been member of this institution. These objects read as under: 3. The objects for whi .....

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of Gujarat. (c) To remove the difficulties in the construction of housing. (d) To look after the progress of all the members in the profession of construction. (e) To foster goodwill amongst the members by arranging meetings and discussions periodically etc. of common interest. (f) To protect the interest and rights of members and for the purpose of the said association to make correspondence, presenting applications to such officers or offices as may be necessary and make representations. (g) T .....

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mbers as and when required and determined by the association and to make and create therefrom a fund for office maintenance, salary to employees, provide essential service to the members, and raise a sinking fund for emergency and/or contingency expense. (k) To carry on activity for the purpose of the education, medical relief to poor and needy, to help in natural calamities and for such other objects for attaining uplift of general public and for those purpose to start and maintain recreation, .....

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derived, shall be applied solely for the promotion of its objects as set forth in this memorandum. (ii) No portion of income and property aforesaid shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to persons who at any time are/or have been member of the institution or to any one or more of them or to any person claiming through any one or more of them. 12. The ld.CIT(A) while concurring with the AO has basically assigned three reasons, .....

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Restaurants (Marketing) P. Ltd. Vs. CIT, 180 TAXMAN 7 (Del), CIT Vs. Royal Western India Turf Club Ltd., 24 ITR 551 (SC) in order to bring point at home that if identity between contributors and participators is not proved then benefit of mutuality was not available. According to the ld.CIT(A), in order to claim principle of mutuality, trust or society should fulfill essential elements viz. (a) it is an association of people called members, there is common cause. Every member makes its contribut .....

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ete identity between classes of contributors and participators. There should be a common cause for the members of the association, and the third condition is that aim of the activity is not to earn profit or loss. Then, how this aspect has been disputed in the present case ? At page no.27 of the paper book, the assessee has compiled details of its receipts and expenditure pertaining to the Asstt.Year 2006-07. Such details read as under: Particulars Member Non- Member TOTAL EXPENSES FOR EVENT Pro .....

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sessee has demonstrated that in Festa the assessee has received contribution from the members as well as non-members. These events are organized for the objects of the assessee, because, its members would get interaction and benefit of commercial exposure. The members would be appraised with latest technology in construction activities. Non-members contribution is of those entities who want to participate in this organization viz. (a) bank wants to erect its stall in a property show so that publ .....

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ociation of India, it was demonstrated before us that if a small part of the receipts are with respect to transactions which are nonmutual in character would not destroy the principle of mutuality. The assessee has pointed out that it has already segregated receipts which are nonmutual and has paid taxes. The next objections of the Revenue is that in the object clause nowhere it has been provided to organize property show, Festa or cricket matches. It is pertinent to observe that these are perip .....

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