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Income Tax Appellate Tribunal, C BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 1342/MUM/2023 (Assessment Year: 2011-12) (Assessment Year: 2015-16) ITA No. 1344/MUM/2023 (Assessment Year: 2016-17) (Assessment Year: 2017-18) & Indian Machine Tool Manufactures’ Association, M/s Kalyaniwalla & Mistry LLP, Esplanade House, 2nd Floor, 29, Hazarimal Somani Marg, Fort, Mumbai - 400001 [PAN: AAACI1369M] …………. Appellant Vs Dy. Commissioner of Income Tax (Exemption) – 1(1), Mumbai, Respondent …………. Peddar Road, Mumbai - 400026 Appearance For the Appellant/Assessee : Shri Jeet Kamdar; Ms. Yasmin Dastur For the Respondent/Department : Shri H.M. Bhatt Date Conclusion of hearing : 30.10.2023 Pronouncement of order : 30.11.2023
O R D E R Per Bench: 1. This is a batch of 5 appeals pertaining to Assessment Years 2011- 12, 2015-16, 2016-17, 2017-18 and 2018-19 preferred by the Assessee. Since identical grounds of appeal were raised by the Assessee in each of the five appeals, the appeals were heard -1344 & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) together and are being disposed off by way of a common order.
2. We would first take up appeal for the Assessment Year 2011-12 preferred by the Assessee challenging the order, dated 28/02/2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] dismissing the appeal of the Assessee against the Assessment Order, dated 02/12/2018, passed under Section 143(3) read with Section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2.1. Grounds of appeal raised in appeal for the Assessment Year 2011- 12 read as under:
“1) The learned Commissioner of Income-tax (Appeals) erred in holding that the income received by the Association from its members was not governed by the principle of mutuality. 2) The learned Commissioner of Income-tax (Appeals) erred in holding that the Appellant has not offered to tax the surplus generated by its members from the hire of the Exhibition Centre based on the principle of mutuality, whereas the Appellant has offered the entire income derived from members and non-members from the letting out of the Exhibition Centre. 3) The learned Commissioner of Income-tax (Appeals) erred in holding that separate books of account for members and non- members were not maintained by the Association. 4) The learned Commissioner of Income-tax (Appeals) erred in holding that the expenses pertaining to the holding of exhibitions were apportioned between members and non- members in the same ratio as the income attributable to them on a pro-rata basis without appreciating the fact that the gross receipts from members and non-members with respect & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) to the holding of exhibitions was accounted at actuals and the expenses were apportioned on the basis of the actual receipts from members and non-members. 5) The learned Commissioner of Income-tax (Appeals) erred in holding that all expenses were apportioned on the basis of estimates of the management when in actual fact, the direct expenses pertaining to the holding of exhibitions and seminars was allocated in the ratio of actual gross receipts from members and non-members and only certain indirect administrative expenses were allocated on management estimates. 6) The learned Commissioner of Income-tax (Appeals) erred in upholding the finding of the Assessing Officer that the identity between the contributors and the participants has broken down and hence, the Association is not covered by the principle of mutuality. 7) The learned Commissioner of Income-tax (Appeals) erred in not giving any specific finding as to why the income received from members towards the holding of exhibitions and organizing of seminars and related activities was not governed by the principle of mutuality. 8) The learned Commissioner of Income-tax (Appeals) erred in completely disregarding the Appellate Order dated November 14, 2022, and in ignoring the finding of the learned Commissioner of Income-tax (Appeals) for the Assessment Year 2014-15, wherein the income received from members as regards the holding of exhibitions and seminars, has been held to be governed by the general commercial principles of mutuality, and is hence not liable to tax.”
The relevant facts in brief are that the Appellant is a Section 25 Company incorporated and registered under the provisions of the Companies Act, 1956 with the object of, inter alia, promoting and protecting the machine tool industry, engaged in the manufacture and trade in machine tools, small tools, cutting tools, foundry, furnace and moulding equipment and machine tool accessories, etc. -1344 & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) and for rendering assistance to the machine tool industry in India. The objects of the Appellant also included promotion and development of exports of the products of the members of the industry and to render all the necessary services and guidance in this area. This required holding exhibitions and trade-fairs for which the Appellant constructed Exhibition Centre at Bangalore. When the aforesaid Exhibition Centre is not required by the Appellant for its activities, the same is also let out for few days.
During the previous year relevant to the Assessment Year 2011-12, the Appellant carried out following major activities – (a) holding exhibitions having members and non-members as participants, (b) organizing seminars & conferences for members and non-members,
(c) letting out the exhibition centre at Bangalore and (d) earning income from investments. While filing the return of income for the Assessment Year 2011-12, the Appellant did not claim benefits of Section 11 of the Act for any activity or income and offered to tax entire income from the letting out of the exhibition centre and Income derived from investments. However, in respect of Income from the holding of exhibitions, seminars and other related activities, the Appellant offered to tax the income arising from the participation by non-members while claiming exemption in respect of income arising from the participation of members of the Appellant-Association on the basis of the principle of mutuality.
The return of income filed by the Appellant for the Assessment Year 2011-12 was processed under Section 143(1) of the Act. However, subsequently reassessment proceedings were initiated under Section 147 of the Act and notice under Section 148 of the Act was issued on 26/03/2018. During the reassessment proceedings, the & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19)
Assessing Officer noted that while the Appellant has offered to tax income from exhibition and other related activities pertaining to participation by non-members, the Appellant has claimed income of identical nature from exhibition and other related activities pertaining to participation by members as exempt on the principle of mutuality. The Assessing Officer was of the view that the aforesaid receipts were covered by proviso under Section 2(15) of the Act and the nature of such receipts could not change merely because the receipts were from the members of the Appellant. According to the Assessing Officer, the identity between contributor and participator ceased to exists as the same services were provided to the members and non-members by the Appellant. Therefore, the Assessing Officer concluded that the Appellant was not a mutual concern and since the receipts of the Appellant were covered by the provisions contained in Proviso to Section 2(15) of the Act, the exemption under Section 11 of the Act could not be granted to the Appellant. Accordingly, the Assessing Officer assessed an income of INR 16,63,91,000/- in the hands of the Appellant vide Assessment Order, dated 02/12/2018, passed under Section 143(3) read with Section 147 of the Act.
Being aggrieved, the Appellant preferred appeal before CIT(A) against the above Assessment Order, dated 02/12/2018. Before the CIT(A), it was contended by the Appellant that the Appellant had not claimed benefit of Section 11 of the Act for any activity or income during the Assessment Year 2011-12. The Appellant had, on its own, offered the income related to non-members to tax being receipts covered under proviso to Section 2(15) of the Act. The receipts from members pertaining to holding of exhibitions, & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) seminars and other related activities were governed by the principle of mutuality and therefore, the same were not liable to tax in the hands of the Appellant. Merely because the Appellant has entered into transaction with non-members and had earned profit, the same would not take away the right of the Appellant to claim exemption on the principle of mutuality. Even as per Circular No. 11 of 2008 issued by Central Board of Direct Taxes (CBDT), in a case wherein trade association chooses to opt for exemption on the principle of mutuality (as opposed to the benefit of Section 11 of the Act), only the contributions from the members would be treated as exempt. The claim made by the Appellant is in line with the aforesaid Circular issued by CBDT as the Appellant had claimed benefit of mutuality only in respect of receipts from members. However, the aforesaid submissions did not find favour with the CIT(A) who dismissed the appeal vide order, dated 28/02/2023.
Being aggrieved by the above order of the CIT(A), the Appellant has preferred the present appeal before the Tribunal.
We have heard both the sides and perused the material on record. The Ld. Authorised Representative for the Appellant appearing before us placed reliance upon the decision of the Mumbai Bench of the Tribunal in the case of the Appellant in cross-appeals pertaining to Assessment Year 2014-15 (ITA No. 80 & 82/Mum/2023, dated 25/09/2023). The Ld. Authorised Representative for the Appellant submitted that separate books of accounts were maintained by the Appellant for each activities conducted by it and therefore, the finding by the Assessing Officer that separate books of accounts were not maintained for the activity exhibition, seminar and other activities was factually incorrect. The actual revenue receipt from & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) members and non-members was duly accounted for separately on actual basis. Since, the receipt from members and non-members were completely identified and accounted separately, there was no question of allocation or apportionment of any kind. Complete identity was maintained between the receipt of members and non- members. Even the expenditure related to each activity carried out by the Appellant was duly accounted for in the separate books of accounts maintained for each activity. The aforesaid expenses were allocated amongst members and non-members in the ratio of the actual receipts. Therefore, while the ratios were bound to stay the same for a particular exhibition, the same varied from exhibition to exhibition depending upon percentage of receipts from members and non-members. Since the expenses incurred by the Appellant for a particular exhibition as a whole (such as equipment hiring charges, site expenses, administrative expenses, staff cost, professional charges, design and construction cost, power and fuel charges) could not be bifurcated artificially on adhoc basis the same were apportioned on the basis of actual receipts a basis accepted as being reasonable in various judicial precedents. Reliance in this regard was placed upon the judgment of the Hon’ble Supreme Court in the case of Consolidated Coffee Ltd. Vs. State of Karnataka reported in ITR 248 ITR 432 (SC), and the judgment of the Hon’ble Bombay High Court in the case of Pr. Commissioner of Income Tax- 14 Vs. Godrej Sara Lee Ltd. (Income Tax Appeal No. 613 of 2016, dated 24/10/2018.
Per contra, the Ld. Departmental Representative placed reliance upon the order passed by the Assessing Officer and the CIT(A). The Ld. Departmental Representative submitted that the benefit of ITA Nos.1341-1344 & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19)
principle of mutuality is available only when the transactions take place amongst the members with no dealings or relations with any outside body/non-members. There being complete identity between the contributors and the participants. Whereas in the present case, the Appellant has been providing the same facility/services to members and non-member alike. The Appellant had failed to maintain separate books of accounts for transactions with members and non-members. While the receipts from the members and non- members have been accounted separately, the expenses have been merely apportioned on estimate basis. As a result, the identity between contributor and the participants of the activities carried out by the Appellant had broken down. Therefore, the benefit of mutuality has been correctly denied by the Assessing Officer and the CIT(A). In this regard, the Ld. Departmental Representative placed strong reliance on paragraph 5.1 and 5.2 of the order passed by the CIT(A).
We have heard the rival contention and perused the material on record. We find that the Appellant had maintained separate accounts for the different activities carried out during the relevant previous year. Separate accounts were maintained for the activity of exhibitions, conferences, seminars and other related activities in which, both, members and non-members participated in the following manner – (a) receipts from members and non-members were clearly identifiable and were recorded separately, and (b) majority of the expenses incurred for a exhibition/conferences/seminar as a whole were apportioned between members and non-members on the basis of actual receipts while some minor expenses were apportioned on the basis of & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) management estimates. Thus, the income arising from participation of members and non-members was determined separately. The Assessing Officer did not raise any concerns regarding accounting for receipts. As regards the accounting for expenses, the Assessing Officer concluded that the expenses were apportioned on the basis of receipts and therefore, separate books of accounts for different activities were not maintained by the Appellant. The contention of the Revenue is that the Appellant should have maintained separate books of accounts for activities involving members and non- members. Whereas the contention of the Appellant is that the Appellant had maintained separate books of accounts in respect of each activity and had maintained accounts from which the income derived from activities involving members and non-members could be ascertained clearly. In our view, even if the separate books of accounts were maintained by the Appellant for activities involving members and non-members, the common expenses pertaining to holding of conferences, exhibitions, seminars and other related activities as a whole such as equipment hiring charges, site expenses, administrative expenses, staff cost, professional charges, design and construction cost, power and fuel charges would have been required to be bifurcated or apportioned between members and non-members. Even Circular No. 11 of 2008 issued by the CBDT, which has been relied upon by the Assessing Officer, does not bar a trade association, having general public utility as its objects, from carrying out activities with non-members in case it wishes to claim benefit of principle of mutuality in respect of its dealings with its members. On the other hand, the circular provides the manner in which the claim made by such trade association under Section 11 of the Act needs to be examined by the Assessing ITA Nos.1341-1344 & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19)
Officer. The relevant extract of the aforesaid circular read as under: “3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' i.e., the fourth limb of the definition of 'charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.
3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).
3.2 In the final analysis, however, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.” (Emphasis Supplied)
In the case before us, the Appellant has not claimed any benefit under Section 11 of the Act. Entire income from income from the letting out of the Exhibition Centre has been offered to tax. Even the income from exhibition, seminar and other activities to the extent it pertains to the participation of non-members has been offered to tax. The Appellant has claimed benefit of principle of mutuality only in respect of surplus from exhibition, seminar and other activities to the extent the same pertains to the participation of members. Therefore, in our view, the action of the Assessing Officer of rejecting the Appellant’s claim of availing the benefit of principle of mutuality was premised upon incorrect understanding of the aforesaid circular issued by CBDT. We note that identical issue had travelled to the Tribunal in the case of the Appellant for the Assessment Year 2014-15. While disposing of the cross appeals (ITA No. 80 & 82/Mum/2023) vide common order, dated 25/09/2023, the Tribunal rejected identical contentions of the Revenue and decided the issue as under:
“11. From the computation of total income, for the year under consideration, forming part of the paper book on page 9, it is clearly discernible that during the year under consideration, the assessee did not claim the benefits of section 11 of the Act for any activities or income. Thus, at the outset, we find no basis in the findings of the AO that the assessee claimed exemption under section 11 of the Act, to which it is not entitled.
It is evident from the record that there is no dispute as regards the income from non-members, letting out of exhibitions centre, and & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) the income derived from investments, which have already been offered to tax by the assessee. The AO only disagreed with the contention of the assessee that income from members in respect of holding exhibitions and organising seminars is not taxable on the principle of mutuality. As per the AO, complete identity between the contributor and participators ceases to exist when the same type of services are provided to members and non-members. However, as per the assessee, since it is an association to protect the machine tool industry engaged in the manufacture and trade in machine tools, small tools, cutting tools, etc., therefore number of persons combine together and contribute to a common fund for a common venture or the object. The surplus from activities by those persons cannot be regarded in any sense as profit. Thus, as per the assessee, the income from members is non-taxable not under section 11 of the Act but the same is not taxable as per the principle of mutuality. Further, an activity between persons associated together does not give rise to profit which is chargeable to tax, as the members cannot trade with themselves. No person or body of persons can earn profit out of himself or themselves jointly. During the hearing, reference was also made to page 26 of the paper book to submit that revenue from members and non-members in respect of the activities of the holding of exhibitions and seminars and other activities have been duly accounted separately in its books of accounts and the related expenditure to each activity has also been duly accounted and bifurcated between members and non-members in the ratio of actual receipts.
13. We find from the Memorandum of Association that it was also resolved that upon winding up or dissolution of the assessee if any property whatsoever remains then the same shall not be distributed amongst the members of the assessee but shall be given or transferred to such other association having similar objects. Further, it is also undisputed that the assessee is registered under section 25 of the Companies Act, 1956, and thus surplus, if any, can be applied only for the furtherance and attainment of its objects alone. Therefore, we find merit in the submissions of the assessee that on the basis of the principle of mutuality, the income earned from members in respect of holding seminars, exhibitions, and other activities is not taxable. Accordingly, the plea of the assessee regarding the non-taxability of receipts from members is upheld on the basis of the principle of maturity. Since the AO on the erroneous & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) assumption that the assessee has claimed exemption under section 11 of the Act treated the income from members to be of the same category as income from non-members and taxed the same and the details as provided on page 26 of the paper book regarding bifurcations of income and expenditure amongst members and non- members were not examined during the assessment proceedings, therefore we direct the AO to examine the allocation of income and expenditure amongst members and non-members as submitted by the assessee and grant the relief to the assessee to the extent the income is earned from the members in light of the principle of mutuality. As a result, the grounds raised
by the Revenue are partly allowed for statistical purposes.”
12. On perusal of above, it can be seen that in the case of the Assessee for the Assessment Year 2014-15 the Tribunal held that (a) the findings of the Assessing Officer that the Appellant had claimed exemption under Section 11 of the Act was factually incorrect; and (b) the Appellant is registered under Section 25 of the Companies Act, 1956 and therefore, the surplus, if any, would not be distributed to any third party and had to be expended on the members as per the objects. Keeping in view the aforesaid, the Tribunal concluded that the Appellant was entitled to claim benefit of mutuality in respect of receipts from the members. However, since the bifurcation of income and expenditure amongst members and non-members were examined during the assessment proceedings the Assessing Officer was directed examined the allocation/apportionment and grant relief to the extent of income earned from the members as per the principle of mutuality.
There is no change in facts and circumstances of the case in the assessment year before us and there is nothing on record to persuade us take a view different from the view taken by the Tribunal while adjudicating the appeal for the Assessment Year & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19)
2014-15. Accordingly, we hold that the Appellant is entitled to claim exemption in respect of income from members as per the principle of mutuality and direct the Assessing Officer to quantify the same after verification of the break-up of income from members furnished by the Appellant and examining the basis of allocation of expenses. In terms of the aforesaid, Ground No. 1 to 8 raised by the Appellant are partly allowed for statistical purposes. (Assessment Year 2016-17) ITA No. 1644/Mum/2023 (Assessment Year 2018-19)
We would now take up the remaining four appeals. Both the sides agreed that our findings/adjudication in appeal for the Assessment Year 2011-12 shall apply mutatis mutandis to appeals pertaining to Assessment Years 2015-16 to 2018-19 since the CIT(A) has confirmed the order of Assessing Officer rejecting the claim of exemption on the principle of mutuality by following the order passed by the CIT(A) in appeal for the Assessment Year 2011-12. Accordingly, keeping in view the fact that it is admitted position that there is no change in the facts/circumstances of the case and adopting the reasoning given while deciding the appeal for the Assessment Year 2011-12, we hold that the Appellant is entitled to claim exemption in respect of income from members as per the principle of mutuality for the Assessment Years 2015-16 to 2018-19 and direct the Assessing Officer to quantify the same after verification of the break-up of income from members furnished by the Appellant and examining the basis of allocation of expenses. In terms of the aforesaid, Ground No. 1 raised in each of the four appeals are partly allowed for statistical purposes while rest of the & 1644 /Mum/2023 (AYs: 2011-12, 2015-16, 2016-17, 2017-18 & 2018-19) grounds raised by the Appellant are dismissed as being infructuous.
In result, all the five appeals preferred by the Assessee are partly allowed for statistical purposes.