TAMIL SPORTS & RECREATION CLUB,KARAIKUDI vs. ITO, KARAIKUDI

Brief facts of the case are as follows: The assessee is an Association of Persons incorporated under the Tamil Nadu Societies Registration Rules, 1978. For the assessment year 2023-24, the assessee filed its return of income on 20.11.2023 declaring a total income of Rs.59,910/-. The case was selected for complete scrutiny under CASS and notices were issued calling for various details. After considering the submissions filed by the assessee, the Assessing Officer completed the assessment u/s.143(3) r.w.s 144B of the Act on 18.02.2025 accepting the returned income. During the course of assessment proceedings, the AO observed that the assessee had disclosed a sum of Rs.3,61,44,980/- under the head “Income from Other Sources” representing amounts received from members towards supply of liquor and claimed corresponding expenditure of Rs.3,44,36,926/- towards purchase of liquor on the basis of purchase receipts. The AO issued a show-cause notice asking the assessee to explain why the turnover of Rs.3,63,25,694/- arising from sale of liquor to members should not be assessed under the head “Income from Business or Profession” instead of “Income from Other Sources”. In response, the assessee submitted that the supply of

Aggrieved by the penalty order, the assessee preferred an appeal before the First Appellate Authority (FAA). Before FAA, the assessee contended that it is a non-profit organization and that its income is exempt on the principle of mutuality. It was further submitted that the club is not carrying on any business activity and,

Aggrieved, assessee is in appeal before the Tribunal. The Ld. AR submitted that the assessee is a Sports and Recreation Club and is not engaged in any business activity. Therefore, the assessee was under no obligation to get its accounts audited u/s.44AB of the Act, as its income was exempt on the principle of mutuality. It was contended that the activities of the club are governed by the principle of mutuality, and there exists no profit motive or commercial venture so as to constitute a business. The Ld. AR further submitted that the supply of liquor to members is only an incidental recreational facility provided by the club and forms part of the mutual activities carried on exclusively for its members. Such receipts, therefore, cannot be characterized as business receipts so as to attract the provisions of section 44AB of the Act. Consequently, the assessee had a bona fide

The Ld.DR supported the orders of the AO and the FAA.

We have heard rival submissions and perused the material on record. The penalty u/s.271B of the Act has been levied on the ground that the assessee failed to get its books of account audited as required u/s.44AB of the Act. The foundation for levy of penalty is the AO’s conclusion that the receipts arising from supply of liquor to the members constitute business receipts, thereby attracting the provisions of section 44AB of the Act. The consistent stand of the assessee is that it is a Sports and Recreation Club functioning on the principle of mutuality and is not engaged in any business activity. It has been contended that the supply of liquor and beverages to its members is only an incidental facility provided as part of its

We find that the issue is squarely covered by the judgment of the Hon'ble Karnataka High Court in the case of Koramangala Club v. ITO reported in [2016] 387 ITR 630 (Kar.). The Hon'ble High Court held that assessee-club had a bona fide belief that the provisions of section 44AB of the Act were not applicable, as it was supplying beverages and liquor only to its members on the principle of mutuality and was not carrying on any business. Accordingly, it was held that such bona fide belief constituted a reasonable cause under section 273B of the Act, and the penalty levied under section 271B was deleted.

In the instant case, the assessee is also a members' club claiming to be governed by the principle of mutuality, and the penalty has been levied solely on the premise that the supply of liquor to its members constituted a business activity attracting section 44AB of the Act. Respectfully following the ratio laid down by

In the result, the appeal filed by the assessee is allowed.