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Facts
The assessee, an AOP, claimed certain receipts as exempt under the principles of mutuality. The AO disallowed this claim, holding that the dominant activities were with non-members, violating the mutuality principle. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the assessee's business activities were primarily with non-members and not exclusively for the benefit of members, thus failing the conditions for the principle of mutuality. The discount/rebate given to members was considered a business expenditure and allowable.
Key Issues
Whether receipts from members, including donations and subscriptions, are exempt under the principle of mutuality when the assessee also conducts significant business with non-members. Whether discounts given to members are allowable business expenditure.
Sections Cited
143(1), 143(2), 143(3), 263, 36, 12AA
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI S.S. VISWANETHRA RAVI & SHRI S. R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM:
Both the appeals filed by the assessee are directed against separate orders both dated 22.12.2023 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi for the assessment year 2010-11 and 2011-12.
Since issues raised in both the appeals are similar based on the same identical facts, with the consent of both the parties, we proceed to hear the appeals together and pass consolidated order for the sake of convenience.
:-2-: ITA. Nos.:383 & 384/Chny/2024
First, we shall take appeal in AY 2010-11 for adjudication.
The assessee raised 9 grounds of appeal amongst which, the only issue emanates for our consideration as to whether the ld.CIT(A) is justified in confirming the addition of Rs.92,46,175/- by rejecting the claim of exemption of income on account of principles of mutuality in the given facts and circumstances of the case.
Brief facts relating to the case are that the assessee is an AOP and filed return of income for AY 2010-11 admitting an income of Rs.1,10,45,669/-. The return filed by the assessee was processed u/s.143(1) of the Income Tax Act, 1961 [“Act” in short]. Subsequently, the case was manually selected for scrutiny and the Assessing Officer(AO) issued notice u/s.143(2) of the Act dated 23.09.2011. While computing its taxable income, the assessee has claimed certain income, which is shown as receipts in the Profit and Loss Account, as inadmissible income and reduced the same from its gross total income and computed the tax on such net total income. The assessee claimed such inadmissible amounts representing members' subscription (Rs.88,580/- ), donation from members (Rs.82,55,600/-), New Member Donation (Rs.7,20,000/-), Five-rupee donation (Rs.1,80,795/-) and entrance Fees from Members (Rs.1,200/-) as inadmissible and exempt. On perusal of the Accounts and other relevant details filed by the assessee, the AO held that the dominant activities engaged by the assessee were not covered under the Principles of Mutuality to claim the said income as inadmissible and exempt. In view of the same, rejecting the claim of Principles of Mutuality, the AO disallowed the inadmissible claim of deduction of Rs.92,46,175/- and added to the total income of the assessee and completed the assessment u/s.143(3)
:-3-: ITA. Nos.:383 & 384/Chny/2024 of the Act dated 28.03.2013. On appeal, after considering the submissions, the ld.CIT(A) confirmed the addition made by the Assessing Officer. On being aggrieved, the assessee is in appeal before the Tribunal.
The ld.AR Shri T.Vasudevan, Advocate submits that the amount of Subscription, Entrance Fee, Donation from Existing and New members and Five Rupee Donation etc. received from members are kept as common fund along with the funds generated from the commercial transactions. He further submits that the receipts in the said accounts are recorded for the payments of various expenses of the sangam activities under the objects of the Sangam which are exclusively for the benefit of the members and also to meet the expenses on commercial activities including the payment of Discount to members and to pay the Rebates to the members on their purchases. The discount to non-members are accounted by deducting the same in the cash receipts on the sales. These above specific items of receipts from members and the receipts on commercial transactions with members and non-members are held together (as a single fund) and not separately. He argued that the Entrance fee, Subscription and Donation from members are only contribution by the members and not a revenue receipts or income from business. The income earned by the sangam on commercial transaction both with members and non-members are offered for taxation. The ld.AR submits that the receipts of the sangam are utilized as stated above both for commercial activities and for the activities directly for the benefit of the members of the sangam and hence the ultimate beneficiaries of the income and funds of the sangam are only the members. No separate account is maintained for the transactions with members and non-members to arrive at the direct benefit to the members.
:-4-: ITA. Nos.:383 & 384/Chny/2024 6.1 Further, the ld.AR submitted the paper book consisting of 72 pages containing computation of total income, Statements of discount given, and also the submissions made before the lower authorities. The ld.AR also filed the tax audit report, Trading and profit and loss account, Balance sheet of the assessee for the year ending 31.03.2008, 31.03.2009, 31.03.2010 and 31.03.2011 in support of the investments made in the assets of the organisation out of the capital fund contributed by the members along with profits earned from business (after taxes).
The ld. DR Shri P. Krishna Kumar, JCIT submits that there is no clarity in the submissions of the assessee as to whether the said funds were utilized for welfare of the members. He referred to page No.12 of the order of the ld.CIT(A). The AO and the ld.CIT(A) discussed the same in detail and placed reliance on the finding of the ld.CIT(A). The ld.DR prayed to dismiss the grounds raised by the assessee.
Heard both the parties and perused the material available on record. We note that the assessee is a Lorry Owners Association registered as a Society with the Registrar of Societies and derives its major income from running of two Petrol bunks and trading of automobile spare parts in the Auto division and trading in oil stores. During the course of assessment proceedings, the assessee filed the Trading and Profit and Loss account, Balance Sheet, Schedules to Balance Sheet, Annual Report for the F.Y.2009-10 and other details and particulars as called for from time to time. On perusal of the financial statements, the AO noted that the assessee has income from the running of two petrol bunks, an oil stores and an automobile stores division trading in automobile spare parts. The assessee runs its business with the public at large in normal course in all the three units. The AO further noted that the assessee-
:-5-: ITA. Nos.:383 & 384/Chny/2024 society is not registered u/s.12AA of the Act. It is an Association of Persons consisting of members whose shares are not determined.
We find, during the course of assessment proceedings, the assessee was specifically asked to explain how the said income was being claimed as exempt from tax under the 'Principles of Mutuality' and why the same should not be brought to tax.
In response, the assessee filed its submissions before the Assessing Officer by furnishing statistical details such as sales made, donation received from various members on various dates, rebates paid and payable to various members in the two Petrol bunk sections and the automobile stores, list of members etc., Further, the ld.AR submitted that the Income from business has been offered to tax and the donations collected from the members are taken to capital by claiming the said receipts as exempt under the 'Principles of Mutuality'. On a close perusal of the conduct of the business by the assessee and the facts and circumstances surrounding the same, the AO observed that the ingredients of mutuality are missing in the present case on the ground that the major business activities of the assessee are being carried out with the public i.e., the non-members. However, we note that the receipts from members as donation, which is credited to Profit and Loss Account, has been reduced from the profit of the business, while computing the taxable income of the assessee. Further, we find that the assessee has given discount on purchase of fuel from the petrol bunks for both members and non-members. The Assessing Officer rejected the claim of allowing the excess of income as exempt under the 'Principles of Mutuality' and the reasons are reproduced hereinbelow: • For claiming any income as exempt under the "Principles of Mutuality", it must essentially be seen whether the 'contributors to the fund are the participators in the fund and that there should be complete identity between the "contributors" and the "participators". It is seen from the business activities of the assessee, that the total transactions include dealings with the members of the public as well as the members of :-6-: ITA. Nos.:383 & 384/Chny/2024 the Association. The 'participators in the fund' therefore, are not the 'contributors to the fund'. The carrying on of the business transactions by the assessee is like a commercial business activity of the assessee which is as much for the non-members (open market) as for the members. Therefore the claiming of any contribution by the members under the "Principles of Mutuality” is not correct and the same is liable to be taxed. • The claim of the assessee that the transaction with the non-Members are only incidental to the activities but the ultimate beneficiaries are the members lacks conviction in view of the following facts. A table briefly furnishing the details of the total sales and the sales effected to the members and the non-members is given below:- Products Total Sales Sales to Sales to Percentage Members Non-Members of Members’ In amount In amount In amount sales to total sales ₹.133,24,47,913 ₹.66,15,56,358 ₹.67,08,91,555 Diesel 49% ₹.9,15,17,708 ₹.3,75,57,490 ₹.5,39,60,218 Oil & Grease 41% ₹.9,42,07,297 ₹.2,88,37,187 ₹.6,53,70,110 Auto spares 30% • It is evident from the above details that in respect of Diesel sales, about 51 % of the sales were with the non-members, in respect of Oil and Grease Sales, about 59% was for the non-members and in the Auto division, about 70% was utilized by the non- members. On an average, the percentage of total sales effected to the Non- Members was about 60%. Hence the claim of the assessee that the business activities with non-members are only incidental is not correct. Further, the assessee's claim that the commercial activities with the non-members ultimately result in the benefits of the members is also too far-fetched. • The business transactions are with both the members and the non-members, more with the non-members as shown above. When such is the case, it is not possible that the ultimate beneficiaries are the members. • As is clearly evident from the above, the business activity of the assessee society is open market commercial activities and not for the exclusive benefit of the members. • The sales receipts from the non-members and the members are pooled together as a common fund' and the expenses also 'cannot be co-related to the receipts from members'. In such a situation the assessee's statement that the receipts from commercial activities are for the ultimate benefits of the members is a superficial statement without any basis. • The main objects as envisaged in its Bye-Laws which stood amended from time to time was to provide services to its members, which also included providing quality fuel and spare parts. The other objects of the Association as per the Bye- Laws are for establishing unity and camaraderie among the lorry owners, protection and development of the business of transportation by lorries, interaction with the Government relating to the business of transportation by lorries and also economic development of the member owners.
:-7-: ITA. Nos.:383 & 384/Chny/2024 • An examination of the Profit and Loss account of the Association for the relevant financial year and the preceding three to four financial years, shows that most of the expenses incurred in the Account is of administrative nature only like Salary Expenses, Office Expenses, General Body Meeting Expenses, Election Expenses, Sitting Fees for Board of Directors, Calendar Expenses, Telephone and Travelling Expenses, Postage and Printing Expenses, Advertisement Expenses, Refreshment Expenses, General Expenses, Audit Expenses, Rates and Taxes Expenses, etc. There was certain expenditure in the nature of death relief and insurance provided to the members but the quantum was much less in comparison to the volume of business done and the amount of funds generated.
On perusal of the above, we note that the case of the Assessing Officer is that for claiming any income as exempt under the "Principles of Mutuality", it must essentially be seen whether the 'contributors to the fund are the participators in the fund and that there should be complete identity between the "contributors" and the "participators" and we find the business activities of the assessee is not only with the members of the assessee but also non-members. The above referred tabular form consisting of products, total sales to members and non-members and percentage of member sales to total sales, clearly shows the business activity of the assessee is open to all like commercial activity, but, not only exclusively for members of the assessee. According to the Assessing Officer, there was much less expenditure with reference to death relief and insurance provided to the members as compared to other expenses like salary, office, general body, election, expenditure, etc. We find no dispute in this regard by the ld. AR as it is clear from profit and loss account. Therefore, the Assessing Officer held that there is no “Principle of Mutuality” as the amount claimed as inadmissible is not meant exclusively for members.
Further, according to the Assessing Officer, the allegation was that the rebates to the members were shown as payable in the books of accounts and were paid after the end of the financial year, the said rebates were brought back as donations to avoid
:-8-: ITA. Nos.:383 & 384/Chny/2024 tax liability; to support the same, we produce relevant part from the assessment order as below: The total of donations received in July 2009 was Rs.56,18,500/- and the total of rebates paid/payable in July 2009 was Rs.56,01,737/- (the paise of each day was not counted) Similarly the total of donations received for the month of August 2009 was Rs.26,37,100/- and the rebates paid / payable for this month was Rs.26,49,071/- (the paise being rounded off). This only goes to show that the amount of donations are allegedly the rebate payable or vice versa and the list of donors is prepared on this basis. Further, the list of donors as furnished is consisting of nearly 520 names and amounts ranging from Rs.2,000 to Rs.5,000. Hence physical examination of all of them is next to impossible. It is therefore seen that both on the basis of the nature and conduct of the business activities of the assessee and on the basis of the facts as arrived at on the analysis of the accounts, it is clear that the assessee s not entitled to claim these receipts as exempt.
On perusal of the above, which clearly shows that the nexus between the amount of donation and rebate payable. Admittedly, the list of donars was prepared on the basis of the amount of donation and rebate payable or vis-a-versa. Therefore, we find no infirmity in the order of the Assessing Officer in denying, in exempting the claim of inadmissible amounts, which was confirmed by the ld. CIT(A).
We note that the Assessing Officer relied on the judgement of the Hon'ble Supreme Court, in the case of M/s Bangalore Club v. CIT in Civil appeal No. 124 of 2007 dated 14.01.2013 and observed that for the applicability of the 'Doctrine of Mutuality', an assessee has to primarily satisfy the three conditions for entailing himself to avail exemption. First condition is that there must be complete identity between the contributors and the participators. Second condition is that the actions of the participators and the contributors must be in furtherance of the mandate of the Association. And third condition is that there must be no profiteering by the :-9-: ITA. Nos.:383 & 384/Chny/2024 contributors from a fund made by them which could only be expended or returned to themselves. The test of the applicability of the above conditions with reference to the case of the assessee as discussed by the Assessing Officer in page Nos. 13 & 14 of the assessment order are reproduced hereinbelow for better understanding: • Firstly, there should be complete identity between the contributors and the participators. As discussed in the very beginning of this order, it can be seen that the contributors to the income which is claimed to be exempt are not the participators. It was seen that the income included various receipts from the members in the form of donations, subscriptions etc. and the assessee himself stated that, "... The specific receipts from members, and receipt from members and non members under commercial transaction are ploughed as Working Capital fund of the Sangam which is used for purchases of Diesel, Petrol, Oil and Automobile spares and to meet expenses in the commercial transactions which commercial activities are established for the benefit of the members and are carried on with non members only under commercial consideration .....The Working capital fund available with the Sangam for all the transactions both for commercial and non-commercial activities are maintained as common fund and not to deplete the said Working Capital fund, voluntary donations were contributed by the members towards Capital fund to pay the liability for the earlier year ending (i.e.) y.e 31.03.2009 on commercial transactions with members and non-members. • From the above, it is clear that the 'contributors' to the fund i.e. the members are not the 'participators' in the fund, i.e., the members and the non-members who are benefitted by way of rebates and discounts from the commercial transactions of the two bunks and the automobile division to whom the excess funds are transferred from the Sangam Main Account. There is therefore a complete lack of identity between the contributors and the participators. To borrow the words of the decision, 'till the generation of the surplus funds, the setup resembled that of a mutuality, the flow of money was maintained within the closed circuit formed by the Association. However, once the excess funds were transferred to the bunks and the auto division for payment of rebates, for purchases and discharge the liabilities of those sections, the 'closed flow of funds suffered from deflections due to exposure to commercial operations'. During the commercial activities, the assessee used such funds to transact the regular business activities with the non-members, i.e "third parties", outside of mutuality, rupturing the 'privity of mutuality', and consequently violating the one to one identity between the contributors and the participators as mandated in the first condition. The first condition for a claim of mutuality is therefore not satisfied. • Secondly, the action of the participators and the contributors must be in furtherance of the objects of the Association, i.e. the treatment of the excess funds must be in furtherance of the objects of the Association. This is not so here. The surplus funds were not fully used for any specific service, infrastructure, direct benefit of the members etc. though it is stated that the members were given compensation during the strike period and death relief to the family of the deceased member and members' insurance etc. were paid, the details of such expenditure was not furnished. In this regard, the AR stated that, ... The receipts of the sangam are utilized as stated above both for commercial activities and for the activities directly for the benefit of the members of the sangam and hence the ultimate
:-10-: ITA. Nos.:383 & 384/Chny/2024 beneficiaries of the income and funds of the sangam are only the members. No separate account is maintained for the transactions with members and non-members to arrive at the direct benefit to the members. • A perusal of the financial statements show that the expenses shown to have been directly used for the members' benefit was miniscule compared to the funds given for the commercial transactions of the bunks and the auto stores. Though it is also averred that the income arising out of the commercial transactions, in a distant and indirect way, is for the benefit of the members, the direct step with a direct benefit, as postulated by the second condition is missing and therefore the second condition was also not satisfied. • Thirdly, the principle of this condition requires that the funds must be returned to the contributors as well as expended solely on the contributors. In this connection it was stated that, ......The amount of Subscription, Entrance Fee, Donation from Existing and New members and Five Rupee Donation etc, received from members are kept as common fund along with the funds generated from the commercial transactions....... The receipts in the said accounts are recorded for the payments of various expenses of the sangam activities under the objects of the Sangam which are exclusively for the benefit of the members and also to meet the expenses on commercial activities including the payment of Discount to members and to pay the Rebates to the members on their purchases. The discount to non-members are accounted by deducting the same in the cash receipts on the sales. These above specific items of receipts from members and the receipts on commercial transactions with members and non-members are held together (as a single fund) and not separately. Hence co-relating the expenses with specific receipts from members is not possible...." • Though the excess income does come back to the association, before that, the said funds are expended on the third parties, i.e., the non-members (public at large) who also make their purchases from the two bunks and the auto division. Though the assessee states that the members are given additional rebate in the two bunks and rebate in the auto stores, such benefit is enduring to them after the funds have been utilized for commercial transactions with the third parties, i.e. the public and this dealing with outsiders is against the principles of mutuality and therefore the third condition is also not satisfied in this case.
On careful reading of the decision of the Hon’ble Supreme Court in the case of Bangalore Club v. CIT reported in 350 ITR 509, we note that the question before the Hon’ble High Court of Karnataka, which led to the Civil Appeal before the Hon’ble Supreme Court was that whether the Principle of Mutuality can be made applicable to the fund deposited in the four banks were also members of the club, especially, when the fund is raised from contribution of certain members including the four banks and the interest derived from it is utilized by several members of the assessee club? The :-11-: ITA. Nos.:383 & 384/Chny/2024 Hon’ble High Court of Karnataka held that what has been done by the club is nothing but what could have been done by a customer of a bank. The principle of “no man can trade with himself” is not available in respect of a nationalized bank holding fixed deposits on behalf of its customers. Consequently, the Hon’ble High Court was pleased to reverse the order of the Tribunal and restore the order of the Assessing Officer. The Hon’ble Supreme Court, while dealing with the above stated issue in batch of Civil Appeals No. 124 of 2007 with ors., held the amount of interest earned by the assessee therein from the above noted four banks will not fall within the ambit of the Principle of Mutuality and exigible to income tax in the hands of the assessee club.
In the present case, we note that the assessee is carrying on the business of the petrol bunks and selling to both members and non-members. Similarly, the assessee is giving discount/rebate to members as well as non-members. The entire profit earned by the assessee from business has been offered to tax independently. The discount/rebate given to members were returned to the assessee as donation and added to the corpus of the assessee. We find there is complete identity of the members i.e. contributors and the same will be used for the benefit of the members only. Further, we note that the net profit of the business also added to the capital of the assessee and utilised for the development of the organisation in the interest of members by the elected body of the organisation. On perusal of the financials it is evident that the assessee has invested the contributions of the members along with the profit earned (after tax) from business in the land, building and other assets of the business, in turn used for the welfare of the members. Therefore, the decision of the Hon’ble Supreme Court in the case of Bangalore Club v. CIT reported in 350 ITR 509 is distinguishable to the present case.
:-12-: ITA. Nos.:383 & 384/Chny/2024
The discount / rebate given to the members and non-members are claimed as an expenditure of the petrol bunk in the profit and loss account is an allowable expenditure in the normal course of business. Therefore, disallowance of such discount / rebate by the AO is not acceptable in the eyes of law. The AO cannot judge the business decision of rate of discount / rebate to the members and non-members. Since, the assessee has offered the net profit of the organisation as taxable income and discharged the taxes, we do not find any merit in disallowing the discount / rebate given to the members, merely for the reason that the same amount has been contributed by the members to the organisation as donation.
We also find that the assessee’s case was selected for scrutiny assessment and completed the assessment by passing an order u/s.143(3) of the Act dated 05.08.2015 for the A.Y.2013-14 by accepting the return of income. Later the ld.PCIT exercised the power u/s.263 of the Act and set aside the assessment order passed by the AO on the ground that the AO has not made proper enquiry, since the discount given to the member customers cannot be allowed and the same has to be added back. When the assessee challenged the order u/s.263 of the Act before the coordinate bench of this Tribunal vide dated 22.12.2021 for the A.Y.2013-14, the order of the ld.PCIT has been quashed by clearly stating that “the discount given to the members particularly for the business purposes and therefore, it cannot be said that the discount is not allowable u/s.36 of the Act. Due to business exigencies, the assessee wanted to reduce its profits by making more turnover by giving discount to the members. Therefore, it is business decision of the assessee for the purpose of its business”. The relevant paragraph of the decision is given below:
:-13-: ITA. Nos.:383 & 384/Chny/2024
“6. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below along with paper book filed by the assessee. During the course of assessment proceedings, the Assessing Officer has issued notice on 12.06.2015, wherein, the assessee was asked vide question No. 4 to explain the discount given to non-members and IC Limited lorries and also vide question No. 5 to explain the discounts given to member customers and also submit the member wise discounts given for the financial year concerned. Accordingly, vide letter dated 09.07.2015, the assessee has submitted its detailed explanations before the Assessing Officer. By filing copy of the explanations offered against question No. 4 and 5, the ld. Counsel for the assessee has submitted that after considering the above explanations of the assessee and making due enquires in respect of discounts to members as well as non-members, the Assessing Officer has completed the assessment. Therefore, the assessment order passed by the Assessing Officer cannot be said that it is neither erroneous nor prejudicial to the interest of the Revenue. That apart, the discount given to the members particularly for the business purposes and therefore, it cannot be said that the discount is not allowable under section 36 of the Act. In this case, due to business exigency, the assessee wanted to reduce its profit by making more turnovers by giving discounts to the members. Therefore, it is a business decision of the assessee for the purpose of its business. In view of the above facts and circumstances, we are of the opinion that the ld. PCIT was not correct in setting aside the assessment order dated 05.08.2015 passed by the Assessing Officer. Thus, the revision order passed under section 263 of the Act directing the Assessing Officer to complete the assessment afresh stands quashed.”
Therefore, in the present facts and circumstances of the case, we are of the considered view that the lower authorities have erred in disallowing the discount / rebate given by the assessee and hence we direct the AO to delete the disallowances / Additions made by accepting the return of income filed by the assessee. Thus, the grounds raised by the assessee are allowed.
Since the identical issue raised by the assessee in the appeal in AY 2010-11 in similar facts and circumstances, the decision for the assessment year 2010-11 is equally applicable to the above appeal filed by the assessee for assessment year 2011-12 as well.
:-14-: ITA. Nos.:383 & 384/Chny/2024
In the result, both the appeals filed by the assessee are allowed.
Order pronounced on 10th October, 2025 at Chennai.