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Facts
The assessee, a non-profit organization, initially claimed exemption under Sections 11 & 12, which was denied due to lack of Section 12AA registration. An alternate claim of mutuality exemption was also made. The Assessing Officer denied both claims and levied penalty under Section 271(1)(c).
Held
The Tribunal held that the assessee was not governed by the principles of mutuality and that the initial denial of exemption under Sections 11 & 12 was correct. Therefore, the Assessing Officer correctly levied penalty for furnishing inaccurate particulars of income.
Key Issues
Whether the assessee is eligible for mutuality exemption and whether penalty under Section 271(1)(c) was rightly levied.
Sections Cited
25, 11, 12, 12AA, 271(1)(c), 271(1A), 148, 2(15)
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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2011-12) Income Tax Officer (Exemptions) Vs. The Gujarat Institute of Ward-2, Housing & Estate Developers, Ahmedabad GIHED Bhavan Site Office, GIHED Lane, Nr. Maple County, B/h. Ornet Park, Pakwan Sindhu Bhavan Road, Shilaj, Ahmedabad [PAN No.AACCT8104H] (Appellant) .. (Respondent) Appellant by : Shri Waghe Prasad Rao, Sr. DR Respondent by: Shri S. N. Soparkar, Sr. Advocate 15.10.2024 Date of Hearing Date of Pronouncement 08.01.2025 O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the penalty order passed by the Ld. Commissioner of Income Tax (Appeals)-9, (in short “Ld. CIT(A)”), Ahmedabad vide order dated 06.02.2017 passed for A.Y. 2011- 12.
The Revenue has taken the following grounds of appeal:-
“I. Whether on the facts and in the circumstances is the LD. CIT(A) justified in deleting the amount of penalty of Rs. 1,14,59,416/- by allowing the doctrine of mutuality. II. On the facts and circumstances of the case, the ld. Commissioner of Income- Tax (Appeal) ought to have upheld the order of the Assessing Officer.
ITO vs. The Gujarat Institute of Housing & Estate Developers Asst.Year –2011-12 - 2– III. It is, therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeal) may be set aside and that of the Assessing Officer be restored.”
The brief facts of the case are that the assessee is a company registered under Section 25 of the Companies Act, 1956 as a non-profit organization. During the course of assessment proceedings, the Assessing Officer came to know that the assessee is not registered under Section 12AA of the Act and accordingly, the benefit of deduction / exemption under Section 11 & 12 of the Act were denied to the assessee.
During the course of assessment proceedings, the assessee made an alternate claim before the Assessing Officer that it’s income from transaction with it’s members was exempt on the principles of mutuality. During the year under consideration, the assessee had carried out GIHED Fiesta property shows and Cricket Tournaments, for the purpose of which assessee received contribution from both members and non-members. During the course of assessment, the Assessing Officer denied exemption under Sections 11 & 12 of the Act on the ground that the assessee does not have registration under Section 12AA of the Act and a sum of Rs. 3,81,98,054/- was added to the income of the assessee. Penalty proceedings under Section 271(1)(c) of the Act also initiated for furnishing inaccurate particulars of income.
The assessee preferred appeal before CIT(A), who vide order dated 20.03.2014 upheld the order of the Assessing Officer in respect of quantum additions. Thereafter, the Assessing Officer upheld the levy of penalty under Section 271(1)(c) of the Act.
In appeal, Ld. CIT(A) observed that in the appeal filled by the assessee before ITAT, against order of Ld. CIT(A) in quantum proceedings, ITAT vide order dated 25.11.2016 has accepted the stand of the assessee that it is governed by the principles of mutuality and accordingly, directed the Assessing Officer to re-compute the taxable income of the assessee with respect to income of the assessee from non- members, who were not given the benefit of mutuality. Ld. CIT(A) noted that while the penalty under Section 271(1)(c) was levied on the basis of additions which were made to the income of the assessee on account of denial of exemption under Sections 11 & 12 of the Act, however, subsequently, the Ahmedabad Tribunal allowed the applicability of principle of mutuality in respect of income from members. Therefore, Ld. CIT(A) was of the view that the very basis of levy of penalty viz. denial of exemption under Sections 11 & 12 of the Act on account non-registration under Section 12AA of the Act is no longer sustainable, and the basis of determination of income was altogether changed by the Tribunal, which was not the basis of levy of penalty by the Assessing Officer under Section 271(1)(c) of the Act. Accordingly, penalty was deleted by Ld. CIT(A) in the hands of the assessee. Ld. CIT(A) made the following observations:
“4.4 There is a categorical finding by Hon'ble ITAT that the principle of mutuality would be applicable to the appellant to the extent of income from its members. The income from the non-members would not attract the principle of mutuality and hence would be taxable. It is apparent from the facts mentioned above that the addition made by the A.O was on account of non-registration u/s.12AA of the Act. However, Hon'ble Tribunal has changed the basis of determination of income in respect of the appellant. Hon'ble Tribunal has allowed the applicability of principle of mutuality in respect of income from the members whereas the A.O has denied the benefit of exemption to the appellant because of non-registration u/s.12AA of the Act. In the penal proceedings, ITO vs. The Gujarat Institute of Housing & Estate Developers Asst.Year –2011-12 - 4– as well, the penalty has been levied by the A.O. on the basis of non-registration u/s.12AA of the Act. Although the Hon'ble Tribunal has confirmed that the appellant would have taxable income in respect of income received from non-members, the basis of determination of income that was changed by the Hon'ble ITAT has not been considered by the A.O at the time of levying of penalty u/s.271(1)(c) of the Act. The appellant has relied upon the judgment of CIT vs Lakhdirlalji (1972) 85 ITR 77 (Guj.) and CIT vs Anand Bazar Patrika (P) Ltd. 116 ITR 416. In both the cases it has been held that when the original basis of initiation of penalty proceedings is altered or modified by the appellate authority, the authority initiating the penalty proceedings has no jurisdiction, thereafter to proceed on the basis of findings of the appellate authority. In light of the above facts and circumstances, I am of the considered opinion that the A.O was not justified in levying the penalty of Rs. 1,14,59,416/- u/s.271(1)(c) of the Act and the same is hereby cancelled. Thus, the ground of appeal
No.1 to 3 are hereby allowed.
5. The last ground of appeal is residuary in nature. The appellant has not availed it, accordingly, the same is treated as dismissed.
6. In the result, the appeal is partly allowed.”
7. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A) deleting levy as penalty under Section 271(1)(c) of the Act. Before us, Ld. D.R. placed reliance on observations made by the Assessing Officer in the 271(1)(c) order. Ld. D.R. stated that in terms of Section 271(1A) of the Act, penalty with respect to income earned from non-members is liable to be sustained. Even if, the alternative claim of the assessee that the assessee is governed by the principles of mutuality is to be accepted, even then income earned by the assessee from non-members should have been offered for taxation and therefore, since the assessee has furnished inaccurate particulars of income and has not offered tax on income earned from non-members, penalty to that extent is liable to be sustained in the hands of the assessee.
9. In response, the Counsel for the assessee placed reliance on the case of CIT vs. Reliance Petroproducts Pvt. Ltd. 322 ITR 158 (SC) on the ITO vs. The Gujarat Institute of Housing & Estate Developers Asst.Year –2011-12 - 5– propostion that merely if the claim of the assessee is not accepted, it would not amount to automatic levy of penalty under Section 271(1)(c) of the Act. Further, the Counsel for the assessee placed reliance on the case of Greenwoods Govt. Officers Welfare Society vs. DCIT 160 taxmann.com 237 (Delhi Tribunal) wherein it was held that since the fact has been duly disclosed by the assessee in it’s accounts and it’s original return with full details, no penalty can be levied on the assessee. Therefore, this is case where there is no concealment of income or furnishing any inaccurate particulars of income so as to attract levy of penalty under Section 271(1)(c) of the Act. Secondly, the assessee submitted that at the time the assessee made claim for being governed by the principles of mutuality, the law on the subject was not clear and the law on the subject only got clarity vide order of the High Court of the Gujarat in the case of Junagadh Gymkhana vs. Income-tax officer 56 taxmann.com 281 (Gujarat) vide order dated 05.11.2015. Thirdly, the Counsel for the assesseee submitted that Ld. CIT(A) has correctly observed that once the very basis of initiation of penalty under Section 271(1)(c) of the Act has been altered by the Tribunal, there is no scope of levy of penalty in the instant facts.
We have heard the rival contentions and perused the material available on record.
We observe that initially, the assessee filed return of income claiming benefit of exemption under Sections 11 & 12 of the Act. However, the Assessing Officer observed that the claim of the assessee ITO vs. The Gujarat Institute of Housing & Estate Developers Asst.Year –2011-12 - 6– was incurred since the assessee was not registered under Section 12A of the Act in the first instance. Thereafter, alternatively, the assessee submitted before the Assessing Officer that it was governed by the principles of mutuality. Before us, the Counsel for the assessee submitted that the law on the subject got clarity only vide order of Gujarat High Court in the case of Junagadh Gymkhana (supra) and at the time the assessee made claim to be governed by the principles of mutuality, there was no clarity on the subject. However, we are unable to agree with the proposition of the Counsel for the assessee on the subject. Even in the order passed by Ld. CIT(A), we observe that various judicial precedents have clearly outlined the principle that when one is seeking to be governed by the principles of mutuality, only income from members is exempted from taxation and income from non-members is liable to be taxed in the hands of the assessee. However, another important aspect in the instant case is that the order passed by ITAT Ahmedabad dated 25.11.2016, which had taken the view that assessee is governed by the principels of mutuality has been set-aside by the Hon’ble High Court of Gujarat vide order dated 18.07.2017. While setting-aside the order, the Hon’ble High Court of Gujarat has made the following observations:
“5. Under the circumstances, in our opinion the Tribunal committed a serious error in allowing the assessee's rectification applications and recalling its earlier order of rejection of appeals. The impugned order dated 29.07.2016 is therefore set aside. Consequently, the order passed by the Tribunal of allowing all the tax appeals of the assessee by order dated 25.11.2016 would therefore automatically be rendered non-est. Resultantly, the Tribunal's original order dated 29.09.2015 would be restored. Needles to state that the assessee feeling aggrieved by the said order, it will always be open for the assessee to file tax appeals. The intervening facts and circumstances would certainly be relevant in the context of technical delay if any that may arise in the process of filing such tax appeals.”
We would also like to reproduce for ready the contents of the order of ITAT Ahmedabad dated 29.09.2015, wherein the alternate claim of mutuality was rejected by the Tribunal:
“5. We come to assessment year 2006-07 to 2011-12. The assessee carried out GIHED Fiestas, property shows and cricket tourneys. Its members and non members made contributions to the tune of Rs.37,08,050 and Rs.16,27,100/-; respectively in A.Y. 2006-07. The latter category of non members' income reads a figure of Rs.3,65,777/-. The assessee did not file return at the first instance in A.Ys. 2006-07 to 2008-09. The Assessing Officer took clue from his findings in a scrutiny assessment framed on 28-3- 2013 pertaining to assessment year 2010-11 holding it as an institution without section 12AA registration and also declining it mutuality exemption and issued section 148 notice on the same premise in these first three assessment years. The assessee claimed itself to be a charitable institution with an alternative plea of mutuality exemption since providing services to its members only. The Assessing Officer noticed its non registration under section 12A to deny the former plea. He opined qua the alternative mutuality plea that it conducted property shows and cricket tournaments resulting in excess over expenditure of Rs.1,21,54,592/- to be added back as its trading income in the hands of an AOP. He did not entertain the mutuality plea by calling it as an afterthought one. We find similar reasoning in A.Y. 2006-07 wherein the assessee filed its return in furtherance to section 148 notice dt.28-3-2013 stating income of Rs.7,47,319/- comprising interest income of Rs.3,77,280/-, miscellaneous income of Rs.2,750/-, kasar of Rs.504/- and the one from non members of Rs.3,65,777/-(supra). The Assessing Officer observed in scrutiny that the assessee had sought to avail mutuality exemption as a default measure without section 12A registration. He heavily relied upon findings recorded in A.Y. 2010-11 hereinabove and adopted the same course of action in A.Y.2006-07 and all other assessment years in question.
The assessee states in the course of hearing that both the lower authorities have wrongly denied mutuality exemption by holding that section 12A registration is not available in its case. It submits that this registration is only relevant in case an assessee claims itself to be a charitable institution performing alike activities as prescribed u/s. 2(15) of the Act and not for entertaining mutuality plea. The assessee's claim is that it fulfils all essential conditions of the mutuality concept. It is contended that this mutuality claim is confined only qua contributions made by its members towards property shows and other activities carried out. And those derived from non members already stand declared as income in the corresponding assessment years. A catena of case law is also quoted in support of this mutuality argument. The same shall be discussed hereunder. The assessee accordingly prays for acceptance of its appeal.
10. We come to the second feature of the mutuality concept as to whether action of the participators and contributors is in furtherance to mandate of the association or not. Their lordships observe that the same can be determined from the memorandum of articles of associations, rules of membership and rules of the organization etc. The ITO vs. The Gujarat Institute of Housing & Estate Developers Asst.Year –2011-12 - 8– assessee’s objects stand reproduced hereinabove. Clause “J” thereof stipulates that the assessee may collect and accept contributions from members as and when required as determined by the association and to make and create therefrom a fund for office maintenance, salary to employees, provide essential services to members and raise a sinking fund for emergency and or other contingencies. There is no mechanism provided in the above stated objects for raising receipts from non members. And also in carrying out any activities of fiestas, property shows and cricket tournaments. The assessee's explanation does not prove any live nexus between objects and impugned activities. These activities carried out are more in the nature of commercial exercises performed in view of contributions received from members and non members than services being performed in furtherance to the mandate of the association. We accordingly hold that the assessee’s activities involving action of the participators and contributors do not satisfy its objects/mandate of the association. Thus, the assess fails qua this second feature. We case law of CIT v/s. Royal Western Turf Ltd. (1953) 24 551 (SC) holding money realised from both members and in lieu of the very services rendered in course of the same business thereby denying mutuality exemption. Their lordships quote absence of any mutual dealing between the members interse and no putting up of a common trend for discharging common obligations undertaken by the contributors for their mutual benefits. The said assessee; an incorporated authorized to carry on an ordinary business of a racecourse company and that of victuallers and refreshment purveyors and if fact carrying on such a business. It was held that this company’s dealings with non members took place in the ordinary course of business carried on with a view to earning profits as any other commercial concern. The mutuality exemption was accordingly denied to the said assessee. We reiterate the facts of the instant case wherein the assessee has dealt with members and non members in raising the impugned contributions qua its activities of organizing fiestas, property fair and cricket tournaments. … We again revert back to the facts of the present case wherein the assessee has carried out property fairs, fieastas and cricket tournaments without proving nexus thereof with the above extracts objects and also received contributions from members and non members. We accordingly conclude that the assessee’s arguments claiming its receipts from embers as covered by mutuality concept have to be rejected. We order accordingly. The assessee’s corresponding grounds raised
in all six appeals declined. The CIT (A)’s orders under challenge are confirmed.”
13. From the above observations, it is observed that the order the order which stands as on date is the earlier order of the Tribunal dated 29.09.2015 wherein on appreciation of the facts of the assessee’s case, the Tribunal had taken a considered view that the assessee is not governed by the principles of mutuality. Therefore, as of now, as per the order of Hon’ble High Court of Gujarat, it is only order dated 29.09.2015 which is ITO vs. The Gujarat Institute of Housing & Estate Developers Asst.Year –2011-12 - 9– applicable for the impugned assessment year under consideration, in which it was held that the assessee is not governed by the principles of mutuality. Notably, while admitting the SLP, Hon’ble Supreme Court has not granted any stay on the operation of the aforesaid order passed by Hon’ble ITAT, Ahmedabad dated 29.09.2015. Therefore, we are of the considered view that the order of the Ld. CIT(A) wherein relief has been granted to the assessee on the reasoning that when the original basis of initiation of penalty has been altered or modified by Tribunal the Assessing Officer initiating penalty proceedings has no jurisdiction, not sustainable since the very order passed by Tribunal dated 25.11.2016 in which it was held that the assessee is governed by the principles of mutuality has been set-aside as being non-est by the Gujarat High Court. Accordingly, looking into the instant facts, we of the considered view that the Assessing Officer has correctly levied penalty for furnishing inaccurate particulars of income. We also note that initially, the assessee had claimed exemption under Sections 11 & 12 of the Act which was denied to the assessee on discovery of the fact that it did not have a valid registration under Section 12AA of the Act. Thereafter, the assessee made an alternate claim that it is governed by the principles of mutuality. However, as noted above, the Hon’ble High Court of Gujarat has upheld the validity of the original order passed by Ahmedabad Tribunal order dated 29.09.2015 wherein it was held that the assessee is not governed by the principles of mutuality. In view of the above, when the order on the basis of which relief has been granted by Ld. CIT(A) itself has been set-aside as non-est, the order passed by Ld. CIT(A) giving relief to the assessee is not liable to be sustained. Further, the claim of exemption under Sections 11 & 12 was also found to be fallacious and the alternate claim of mutuality has also been rejected by Tribunal in assessee’s own case. Therefore, the appeal of the Department is allowed.
In the result, the appeal of the Department is allowed. This Order is pronounced in the Open Court on 08/01/2025
Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 08/01/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,