TMI Blog2018 (11) TMI 1551X X X X Extracts X X X X X X X X Extracts X X X X ..... egation 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. 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 ₹ 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 entire income is not justified under any provisions of law. Accordingly, we hold that the entire interest income earned by the assessee is eligible for benefit of section 11; and since the net income as per expenditure account is much below the prescribed limit of 15%, therefore, no income is held to be taxable and consequently in all the years income has to be assessed at ‘nil’ and consequently the entire addition made by the AO and CIT(A) is directed to be deleted. Lumpsum maintenance charges collected from the members at the time of allotment is the corpus which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018 in relation to the penalty proceedings u/s 271(1)(c) for the same assessment years. Since the issues involved in all the appeals are common arising out of identical set of facts, therefore, they were heard together and are being disposed of by way of this consolidated order. 2. First, I will take up the quantum of appeals for the assessment years 2012-13 to 2014-15, wherein the 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 ₹ 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 ₹ 17,06,920 to ₹ 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 incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus fund would not satisfy the principle of mutuality . After referring to various decisions, he taxed the entire interest income of the assessee. 5. Now from the stage of first appeal, Ld. CIT(A) not only the action of the AO in taxing the entire interest receipts was upheld but he has also enhanced the income by further disallowing the entire amount /contribution received by the assessee from its members on the ground 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived from its members which has been deposited in the bank in the form of FDRs and the interest accrued thereon has been applied for the maintenance and welfare of the members only. In support, he relied upon the judgment of Hon ble Jurisdictional High Court in the case of CIT vs. Delhi Gymkhana Club Limited (2011) 339 ITR 525; and CIT vs. Talangang Cooperative Group Housing Society Ltd. (2010) 195 Taxman 110 (Delhi). He pointed out 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owners created at the behest of IRWO to look after the welfare of residents by providing necessary services and facilities to enable funds being made available to such societies. IRWO had created an onetime maintenance fund from the contribution of the respective flat owners prior to handing over of flats so that the interest income from such fund is contributed towards the welfare and maintenance of the housing society. This onetime maintenance fund was kept in a joint account with the nationalised bank as a fixed deposit in joint names of IRWO and the appellant. The interest accruing from such fund was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with section 11. Accordingly, we hold that entire interest income is eligible for computation and benefit of section 11. 11. In so far as the allegation of Ld. CIT(A) that there is a violation of section 13, because the entire fund and the interest has been utilised for its members and therefore, benefit of section 11 gets forfeited. I am unable to appreciate such line of reasoning, because, if the appellant society has been formed by way of association of members for maintenance of the housing society for the benefits of all the members, then it cannot be held that all the members of the association are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed has not been utilised for the benefit of the members, i.e., for the maintenance and upkeep of the residential and common area and facility. It is also not the fact that the banks in which FDR was kept was also a member of the appellant association. The question of commerciality arises only where entities claiming to be mutual concern have an object to carry on a particular business and generate income from members and non-members through their business. Here appellant does not run any activity or profit earning with a profit motive or from which it can derive any profit. Much emphasis has been laid by the Ld. DR upon the 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. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not privy to the mutuality. This contract lacked the degree of proximity between the club and its member, which may in a distant and indirect way benefit the club, nonetheless, it cannot be categorized as an activity of the club in pursuit of its objectives. It needs little emphasis that the second condition postulates a direct step with direct benefits to the functioning of the club. For the sake of argument, one may draw remote connections with the most brazen commercial activities to a club s functioning. However, such is not the design of the second condition. Therefore, it stands violated. The facts at hand also fail to satisfy 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ators and contributors must be in furtherance of mandate of association, i.e., activity which gives the benefit to its members. Here in this case, the appellant association has been found purely for the benefit of members and interest income earned from onetime contribution has been utilised purely and exclusively for the benefit of the members, i.e., maintenance and upkeep of the residential flats and maintenance of the area and common services. The bank in which money was deposited in the form of FDR was neither a member of the appellant association nor was I any way participating in the activity of the association nor being benefited by any of the activities. Thus, the facts of the present case are clearly different and hence the ratio and the principle laid down by the Hon ble Apex Court as discussed above is not applicable at all. Here all the ingredients of applicability of mutuality exists; and accordingly, no such income can be taxed in view of the principle of mutuality. Thus, on this score also, we hold that no income is chargeable to tax in the case of assessee. 16. In the result appeal of the assessee is allowed. 17. In so far as the appeals relating to penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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