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TMI Blog2018 (11) TMI 1551X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue involved is addition on account of disallowance of interest and disallowance of entire receipts shown by the assessee and disallowing the expenditure claimed. For the sake of ready reference, the grounds of appeal for the assessment year 2012--13 are reproduced hereunder: - "1. That the AO erred in disregarding the nature of the Appellant society and adding back the amount of Rs. 17,06,920 being bank interest (Rs. 16,92,520) and interest income from cable operator (Rs. 14,400) to the income of the Appellant. 2. That the CIT (A) grossly erred in enhancing the income of the appellant from Rs. 17,06,920 to Rs. 36,00,387 by treating the entire receipts, including amounts received from its members, as income of the Appellant, in addition to disallowing the entire expenditure incurred. 3. That the claim of exemption of' income on the ground of principle of mutuality nr on the ground that the Appellant society was entitled to the benefit of Section 11 have already been examined by the Hon'ble ITAT in Appellant's own case for previous years and that AO and CIT (A) grossly erred in not following the rule consistency. 4. That the AO and CIT (A) disregarded various judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that, on the one hand assessee holds registration u/s 12A and on the other benefit of exemption under 'principle of mutuality' is claimed. He held that same would not available to it, because mutuality and charitable activity do not go hand in hand. Accordingly, he enhanced the taxable income to Rs. 36,00,387/-. Not only that, he also commented upon granting of registration by the CIT that assessee was not AT ALL eligible for granting of registration u/s 12A as appellant has mislead the authority while getting the registration u/s 12A that it is carrying out charitable activity. Though he made very serious allegation as to how the appellant society has made misrepresentation for obtaining the registration u/s 12A. However, he did not adjudicate the said issue which otherwise also he could not have overridden the order passed by his coordinate authority in granting registration u/s 12A. Further, he held that assessee is not doing any charity by helping the poor and needy person, but in fact he is helping to itself, i.e., to its members and held that being a charitable society it cannot claim benefit of 'principle of mutuality'. He also defied the earlier Tribunal order passed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that all these decisions have been referred and relied upon by the Tribunal in the earlier years. On the issue of benefit of exemption u/s 11, he submitted that, whence assessee was granted registration u/s 12A, then it is incumbent upon the AO to compute the income in accordance with Section 11. Even if principle of mutuality is not held to be applicable, then also assessee is entitled for exemption /benefit u/s 11 and two alternative claims can always be advanced. Once registration u/s 12A is continuing then it is not open for the AO or Ld. CIT(A) to show that assessee association is not a charitable institution. The charitable activity need not be for the benefit of whole mankind but it would be sufficient if the intention is to benefit a section of the public as distinguished from individuals. In so far as applicability of section 13 as invoked by the Ld. CIT(A), he submitted that, first of all, no amount has been spent for the benefit of any individual members of the association, because the mandate of the association was that amount will be spent only for the maintenance and upkeep of common area facilities of the building and of common services. None of the provisions cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used entirely towards maintenance of the housing society. In the case of Bangalore Club, members had breached the privity attached to their membership of the club by earning profits for themselves from the amounts placed with them as FDs, which goes against the principle of mutuality. Thus, the judgment of Hon'ble Apex Court would not be applicable on the facts of the assessee's case and neither the ratio of principle laid down therein. 9. I have heard the rival submissions and also perused the relevant finding given in the impugned order. First of all, it is an undisputed fact that assessee was granted registration u/s 12A by the CIT and such a registration has neither been revoked nor cancelled by any competent authority. Hence it is a fait accompli. Once the assessee has been granted registration u/s 12A, then it is an incumbent upon the AO to mandatorily compute the income u/s 11 to 13. Such a benefit can only be denied if the conditions laid down u/s 11 to 13 are not fulfilled. AO or Ld. CIT(A) cannot sit upon or review the registration order granted by the authority granting registration u/s 12A and hold that assessee is not carrying out any charitable activities or it has m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'persons' as defined in Sub section (3) of Section 13. Nowhere it has been spelt by the Ld. CIT(A) as to which of the conditions laid down in section 13 (1) has been violated. Nowhere there is any finding that the amount has been spent for benefit of any particular individual member. The entire mandate of appellant association was that the amount received by way of interest would be spent only for the maintenance and upkeep of common area facilities of the building and of common services for the benefit of all the members and not to any individual member. Thus, such an allegation of the Ld. CIT(A) deserves to be rejected. Accordingly, we hold that entire receipts by the Ld. CIT(A) is unsustainable in law and on facts. 12. Even when the Ld. CIT(A) has held that assessee is neither eligible for benefit u/s 11 nor its receipts fall within the doctrine of mutuality, then its income should have been computed under the normal provision of Act and only the net income could have been brought to tax. Here in this case the net income for the assessment year is Rs. 5,44,992/- and in the other years, as stated above, is much below that. Hence, the action of the Ld. CIT(A) in taxing the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment of Hon'ble Apex Court in the case of Bangalore Club vs. CIT (supra), wherein Hon'ble Supreme Court on the facts of that case found the club from time to time was depositing surplus income in the form of fixed deposits of member banks, as an investment to earn higher return. The club has claimed interest earned on fixed deposits kept with certain banks which were corporate members of the assessee and claim exemption on the basis of doctrine of mutuality on the interest earned on fixed deposits kept with non-member banks which were offered to tax. On these facts, the Hon'ble Supreme Court had held that the condition of claim of mutuality is not satisfied. In sum and substance, the observations and the findings of the Hon'ble Apex Court can be summarised as under: - Coming to the facts of the case, the assessee is an AOP. The concerned banks are all corporate members of the club. The interest earned from fixed deposits kept with non-member banks was offered for taxation and the tax due was paid. Therefore, it is necessary to examine the case of the assessee, in relation to the interest earned on fixed deposits with the member banks, on the touchstone of the three cumulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the third condition of the mutuality principle i.e. the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. This principle requires that the funds must be returned to the contributors as well as expended solely on the contributors. True, that in the instant case, the funds do return to the club. However, before that, they are expended on non-members i.e. the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, snapped the link of mutuality and thus breaches the third condition. There is nothing on record which shows that the banks made separate and special provisions for the funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client. This directly co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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