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Income Tax Appellate Tribunal, “ C ” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI AMARJIT SINGH
आदेश / O R D E R
PER SHRI RAJPAL YADAV, JUDICIAL MEMBER :
The Assessee is in appeal before us against the order of Ld.Commissioner of Income Tax(Appeals)-XXI, Ahmedabad [‘CIT(A)’ in short] dated 05/02/2014 passed for Assessment Year (AY) 2010-11.
The Registry has pointed out that the appeal is time barred by 15 days. In order to explain the delay, assessee has filed an Affidavit of M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 2 - Shri Mehul Mahendrabhai Pandya who is the Accountant with the assessee-trust. In the Affidavit, it has been deposed that order of the Ld.CIT(A) was received on 16/02/2014. The appeal was required to be filed on 16/04/2014 but it was filed on 02/05/2014. According to the deponent, he was directed to handover the order of the Ld.CIT(A) to the concerned Chartered Accountant for filing the appeal but somehow inadvertently it slipped from his mind and he failed to deliver the order to the concerned Chartered Accountant. When an enquiry was made, then he realized his mistake and order was sent to the CA for filing the appeal. With this process, it became time barred by 15 days.
On due consideration of the above explanation, we are satisfied that assessee was prevented by sufficient reasons for not filing the appeal well on time before the Tribunal. Therefore, we condone the delay in filing the appeal and proceed to decide the appeal on merit.
The assessee has taken nine grounds of appeal. In ground No.1, it has pleaded that assessment was passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) without affording opportunity of hearing to the assessee.
5. In ground Nos.2 & 3, assessee has pleaded that ld.CIT(A) has erred in not treating the assessee as a charitable institution by invoking
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 3 - the provision appended u/s.2(15) of the Act. In ground No.3, assessee has pleaded that the Ld.CIT(A) has erred in law and on facts in holding that since assessee was not having a valid registration u/s.12A of the Act, therefore not entitled for benefits u/s.11, 12 & 13 of the Act.
As far as ground Nos.2 & 3 are concerned, the ld.counsel for the assessee did not seriously contest them because the registration under section 12AA was not granted to the assessee. In the absence of registration u/s.12A, assessee cannot claim benefit u/s.11, 12 & 13 of the Act. The assessee failed to produce valid registration certificate before us. Considering the above fact, were do not find any merit in ground Nos.2 & 3 of the assessee’s appeal.
As far as ground Nos.4 to 7 are concerned, the solitary grievance of the assessee is that the Ld.CIT(A) has erred in confirming the addition of Rs.54,87,950/-.
The brief facts of the case are that assessee is a trust who has filed its return on 19/07/2010 declaring NIL income. It has submitted that its nature of activities are society maintenance and society developments. Its case was selected for scrutiny assessment and a notice u/s.143(2) was issued and served upon the assessee. On perusal of the record, it revealed to the Assessing Officer that assessee has shown gross receipts of M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 4 - Rs.60,71,396/-. It claimed this amount as exempt u/s.11, 12 & 13 of the Act. It was also the case of the assessee that 85% of the gross receipt amounting to Rs.5,160,686/- be treated as exempt on being applied to the charitable or religious purposes. The Ld.AO has rejected all these contentions. He observed that assessee is not a charitable institution. It is not entitled benefit u/s.11, 12 & 13 of the Act. He treated the assessee as an AOP and maintenance fees received by it was treated as income.
On appeal, the assessee has raised three-fold submissions. Firstly, it pleaded for the benefit u/s.11 & 12 of the Act. Secondly, it pleaded that the receipts from the members be treated as a capital receipts and thirdly it pleaded that on the principle of mutuality the receipts collected for maintenance be excluded from taxation.
The Ld.CIT(A) has rejected the first fold contention on the ground that assessee failed to produce valid registration certificate. The registration granted to it was cancelled. With regard to the second fold and third fold contentions, the Ld.CIT(A) has rejected them by observing as under:-
“5. Ground of appeal Nos.5, 6 & 7 are relating to treating the appellant as ‘AOP’ and not treating the maintenance fee of Rs.54,897,950/- as a capital receipt and giving benefit principal of mutuality. The appellant has relied upon the following case-laws:
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 5 - (i) Hiralal Bhagwati Vs. CIT 246 ITR 188 (Guj.) (ii) ACIT vs. Surat City Gymkhana 300 ITR 214 (SC) (iii) CIT vs. Adarsh Co-operative Housing Soc.Ltd. 213 ITR 677 (Guj.) (iv) CIT vs. Manekbaug Co-operative Housing Soc.Ltd. 208 Taxman 5644 (Guj.) (v) Chelmsford Club vs. CIT [2000] 243 ITR 89/109 Taxman 215 (SC).
5.1. I have considered the assessment order and the submissions made by the appellant. It is evident from the income & expenditure statement that the appellant has credited Rs.54,87,950/- as a maintenance fee in the income side. The maintenance fee, by no stretch of imagination can be termed as a capital receipt, as maintenance is the regular activity of the appellant. Therefore, the ground that maintenance fee of Rs.54,87,950/- should be treated as capital receipt is rejected. 5.2. The appellant has further argued if it is being treated as AOP, as per principle of mutuality, the maintenance fee should not be taxed. The appellant has filed return of income as a Trust and collecting maintenance fee which is in surplus. In my opinion, principle of mutuality is nto applicable in this case. The case-laws relied upon by the appellant are not on the association which maintains property by charging fee on commercial line. The issue closer to the facts of the case has been decided by Mumbai ITAT ‘H’ Bench in order dated 04.09.2013 in the case of Hatkesh Co-Operative Housing Society Ltd. the Hon’ble ITAT has held that a co-operative housing society is not a mutual association because its member can earn income from its property. The transfer fee TDR Premium charged by the society from its member is a commercial transaction and not eligible for exemption on grant of mutuality. In view of the above, the ground is rejected.”
Before us, on the strength of Hon’ble Gujarat High Court’s decision in the case of Manekbaug Co-operative Housing Society Ltd. [2012] 208 Taxman 54 (Guj.), it was contended that maintenance receipts received from members cannot be brought to tax under the principle of mutuality
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 6 - because members could not be expected to earn profit from themselves. The ld.counsel for the assessee contended that in view of the decision of the Hon’ble High Court coupled with the decision of Hon’ble Supreme Court in the case of Chelmsford Club v. CIT [2000] 243 ITR 89, Royal Western Turf Club Ltd. - 24 ITR 551 (SC) and on the basis of decision of Hon’ble Gujarat High Court in the case of CIT vs. Adarsh Co-operative Housing Society - 213 ITR 677 (Guj.) even the surplus over expenditure of Rs.54,87,950/- be excluded from the taxable receipt.
On the other hand, Ld.DR relied upon the orders of revenue authorities and contended that this plea was not raised by the assessee before the Assessing Officer and, therefore, facts are not examined with this angle.
We have duly considered the rival contentions and gone through the record carefully. Before adverting to the facts and dispute in the present case, we would like to take note of the facts in the case of Manekbaug Co-op.Housing Society Ltd. In that case, assessee was a co- operative housing society and derives income from hiring of hall, catering services, commission etc. It had shown gross receipts of Rs.21,56,766/- against which it had shown net income of Rs.4,02,182/-. The Assessing Officer has passed the assessment order. He allowed the expenditure at Rs.4,36,328/- which were in the nature of repairing
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 7 - expenses of light, safai (cleaning), bore-well repairing, 50% of the salary and depreciation. The other expenses of Rs.13,18,256/- were disallowed to the assessee.
14. Dissatisfied with this action of the Assessing Officer, assessee went in appeal before the Commissioner. The Ld. Commissioner further granted opportunity to the assessee, particularly, assessee has claimed 90% of the salary and bonus which has been restricted to 50% by the Assessing Officer. He reduced the expenses required to be disallowed at Rs.7,61,826/-. Both Revenue and assessee went in appeals before the Tribunal. The Tribunal accepted the contention of the assessee that on the principle of mutuality as raised by the assessee its income was not taxable at all in any case even the surplus of Rs.4,02,182/- are not have been taxed because income of the assessee by way of an interest from a co-operative bank at Rs.4,78,317/- was exempt u/s.80P(2) of the Act.
In this background, Hon’ble High Court has discussed the principle of mutuality and the discussion made by the Hon’ble High Court read as under:-
“12. On merit, after hearing the learned counsel for the parties and after going through the materials on record, we find that there is no dispute that the assessee is a Co-operative Housing Society registered under the provisions of the Gujarat Cooperative Societies Act.
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 8 - 13. As pointed out by a Division Bench of this Court in the case of CIT v. Adarsh Co-operative Housing Society Ltd. [1995] 213 ITR 677 / 81 Taxman 241 (Guj.), a co-operative society registered under the Bombay Cooperative Societies Act, 1925 should be treated as a a mutual concern and by virtue of the income which it received from its members should held to be "not liable to be taxed". It appears that the Supreme Court in the subsequent decision in the case of Chelmsford Club v. CIT [2000] 243 ITR 89/ 109 Taxman 215 has adopted the same principle. As pointed out in the above decision, under the Income-tax Act, 1961, what is taxed is, the "income, profits or gains'' earned or ''arising'', ''accruing'' to a ''person''. According to the said decision, where a number of persons combine 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 those persons cannot be regarded in any sense as profit. The Supreme Court further pointed out that there must be complete identity between the contributors and the participators. If these requirements are fulfilled, the Supreme Court proceeded, it is immaterial what particular form the association takes. Trading between persons associating together in this way, according to the said decision, does not give rise to profits, which are chargeable to tax. Where the trade or activity is mutual, according to the Supreme Court, 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. The law, according to the said decision, recognizes the principle of mutuality excluding the levy of income tax from the income of such business to which the above principle is applicable. The Supreme Court referred to section 2(24) of the Income-tax Act, 1961, which shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
In the said case, the assessee, a members' club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 9 - were not available to non-members. The club was run on "no profit no loss" basis and that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable. In such situation, the Supreme Court held that the assessee's business was governed by the doctrine of mutuality and it was admitted fact that the business of the assessee did not come within the scope of "business" referred to in section 2[24][vii] of the Act. It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, according to the Supreme Court, even the annual value of the club house, as contemplated in section 22 of the Act would be outside the purview of the levy of income-tax.
15. By applying the aforesaid principles to the facts of the present case, we find that the CIT [Appeals] and the Tribunal below rightly applied the above principles so far as the addition of Rs. 2 Lac as transfer fees are concerned as all the three conditions indicated above are satisfied. However, so far as the finding of the CIT[Appeals] as regards the amount of Rs. 10,870/- as surplus from the interest income of Rs. 4,83,449/- are concerned, we are of the view that there was no justification on the part of the CIT [Appeals] in limiting the deduction to 90% of the expenditures in terms of Section 57[iii] of the Act instead of 100%. It is not the finding of the CIT [Appeals] that any of the expenditure was of the nature of capital expenditure so as to bring the case within the purview of exceptions as indicated in Section 57[iii] of the Act. Thus, if 100% deduction is given to the expenditure, a sum of Rs. 4,02,182/- remains as net surplus of income over expenditure. But the above amount of Rs. 4,02,182/- will not be taxable because the income of the assessee by way of interest from co-operative bank of Rs. 4,78,317/- is exempt under Section 80P[ii] of the Act which is more than Rs. 4,02,182/-. Therefore, we find that the ultimate conclusion arrived at by the Tribunal below in dismissing the appeal by the Revenue and allowing the cross- objection by the assessee was quite justified.
16. We, thus, find that no substantial question of law is involved in these Appeals justifying interference. Consequently, we dismiss these Appeals preferred by the Revenue.”
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 10 -
A perusal of the above discussion would reveal that three conditions, the existence of which establishes the doctrine of mutuality are (a) the identity of the contributors to the fund and the recipients from the fund (b) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (c) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
In the present case, these aspects have not been gone through by any of the authorities. Firstly, no such specific plea was taken before the Assessing Officer. Secondly, assessee is a trust. It is not ascertainable who are contributors and for whom expenditure will be incurred. Society maintenance and society development activities are its business activities. If it is confined to for one society only and collecting the maintenance from that society members and spending those funds only for those members, then principally the three ingredients highlighted above could be fulfilled but in case assessee undertaken job of maintenance of number of societies, then how it will fulfill the principle of mutuality. Therefore, we deem it appropriate to remit this issue to the file of Assessing Officer for fresh adjudication particularly in the light of two decisions of Hon’ble Jurisdictional High Court, namely Manekbaug
M/s.Iscon Mega City Members vs. ITO Asst.Year – 2010-11 - 11 - Co-op. Housing Society(supra) and Adarsh Co-operative Housing Society Ltd. (supra). Needless to say that observations made by us will not impair or injure the case of the Assessing Officer and will not cause any prejudice to the defence/explanation of the assessee. The Ld.AO shall adjudicate the issue in accordance with law after providing due opportunity of hearing to the assessee.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Court on 22nd August-2019 at Ahmedabad.