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Income Tax Appellate Tribunal, MUMBAI “A” BENCH, MUMBAI
O R D E R Per Bench:
By way of this appeal, the assessee appellant has challenged correctness of the order dated 23rd January 2019, passed by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act 1961, for the assessment year 2011-12.
2. Grievance raised by the appellant is as follows:- The learned Commissioner of Income Tax (Appeals) {"Ld. CIT(A)"}has erred in confirming the action of the Ld. Assessing Officer in considering the activities of the appellant trust as that of a "mutual association" and denying the exemption under section 11 of the Act on the income aggregating to Rs. 1,04,48,658/- and taxing the Page 2 of 11 same as business income. On the basis of facts, in circumstances of the case and in law the exemption claimed under section 11 of the Act, ought to be allowed as the appellant is a charitable institution imparting education in the field of science of medicine.
Briefly stated, relevant material facts are like this. The assessee before us is a charitable trust registered with charity commissioner, under the Bombay Public Trust Act, as also under section 12A of the Income Tax Act 1961, with the Director of Income Tax (Exemptions). During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee’s object was “solidarity and endowment it’s members, to encourage and advance the knowledge, study and practice of the science of medicine in all ways among members”. The Assessing Officer proceeded to treat the claim of tax exempt on account of mutuality. The submission of the assessee that the assessee has been charitable in nature was simply brushed aside. The Assessing Officer proceeded to decide the matter, on the mutuality issue, against the assessee. While doing so, the Assessing Officer, inter alia, observed as follows:- 6. The above submissions of the assessee is considered but the same cannot be accepted as the assessee is based on the principle of mutuality and in view of the following facts:- The submission of the assessee is considered but the same cannot be accepted in the light of the CBDT's circular as under- The CBDT vide circular no. 11/ 2008 dated 19/12/2008 had come out with a clarification for the above proviso which is as under : "There are industry and trade associations who claim exemption from tax u/s 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)." ii. The assessee has described its objects as solidarity and endowment to its members only. Thus, all the persons of the society do not utilize the benefit of the trust. It is benefited to limited person i.e. Members of the assessee trust only. Even the submission of the assessee could not suffice as to how the activity of the assessee is beneficial to general public.
Page 3 of 11 iii. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial. In other words if all the participators the common fund are also contributors and their identity is established then the test of mutuality is satisfied. The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or put to reserve with the trust for its development and for providing benefits to its members. CIT v/s Natraj Finance Corporation 169 ITR 732, 735 Andhra Pradesh. iv. The application of the principle of Mutuality is not destroyed by the presence of transactions with, or profits derived from, non members. The said principle could apply to transactions with members. The two activities in appropriate cases be separated and the profits if any from the members can be taken for exemption on the basis of actual from the accounts or at any rate by estimate if it should become necessary (CIT v/s Madras Race Club 105 ITR 433 Madras) and the profits derived from non-members can be brought to tax (Sports Club of Madras Ltd. v/s CIT 171 ITR 504). v. CIT v/s Ranchi Club Ltd 196 ITR 137 (Patna Full Bench), Spl Leave petition granted by the Supreme Court 194 ITR (ST) 236 (SC). The surplus receipts of members over its expenses have been sought to be exempted from Income tax on the principle of Mutuality. This principle is based on the premise that no'man can make profit out of interest, but this principle cannot have any application in respect of the surplus received from non-members. It is not difficult to conceive of cases where one and the same concern may indulge in activities which are partly mutual and partly non-mutual. True, keeping in view the principle of mutuality, the surplus accruing to members from the subscription charges received from its members cannot be said to be income within the meaning of the Act. But, if such receipts are from sources other than members then no exemption can be claimed in respect of such receipts on the plea of mutuality. vi. The careful examination of the assessee's actual activities as well as the perusal of objects and objects incidental or ancillary to the attainment of the main object show that the dominant or rather the predominant object of the assessee is to provide benefit to its members. vii. It is pertinent to make mention here the famous case of Cricket Club of India, Bombay. The CCI has been conducting world class matches, test matches and Ranji Trophy Matches and other similar tournaments, from generations. The CCI is registered u/s.25 of Companies Act and was earlier assessed to tax in this Range only and it was also claiming Exemption u/s. 11 & 12 of the Income Tax Act, 1961. In this case, it has been held by the Hon'ble Supreme Court that it is mutual organization Page 4 of 11 (refer the case of Bankipur Club Ltd. 226 ITR 97 wherein the CCI Club was also a party). The object of solidarity and endowment for its members clearly show that the dominant object of the assessee is to provide amenities and facilities to the members of the assessee trust only. It is, therefore, held that the assessee is a mutual organization. viii. The assessee is predominantly a mutual association. The charitable objects and the object of mutual benefits are contradictory to each other. It must be appreciated that Exemption u/s. 11 as a charitable trust and principles of mutuality are mutually exclusive of each other. In the mutual association the members subscribe for the primary purpose of benefiting themselves, while in a charitable institution people subscribe for charitable object without any expectation in return. In the case of the assessee, the members have contributed only for the purpose of their own benefit and for acquiring certain benefits. Therefore, the assessee is treated as mutual association and not as charitable institution. ix. It may also be stated that the concept of charity is necessarily altruistic in nature and involves the idea of benefit to others. The essence of charity is that the person(s) doing charity exclude themselves from the benefits of the charity. Non exclusion of contributors to 'charity' fund from the benefits arising out of that is nothing but serving the interest of self in an organized manner. In fact the entire scheme of sec 11 to 13 and particularly sec. 13(l)(c) and 13(3) is based on this basic principle or essence of 'charity'. Thus in a case of even charitable institution, if benefit is proved to be for certain categories of people referred to in sec. 13(3) the Exemption u/s. 11, 12 is not admissible. Therefore, the question of granting benefit to such Institution where the objects themselves are not charitable and are for the benefit of its members, cannot be considered as charitable objects. The concept of charity and mutuality are mutually exclusive of each other. A charitable Institution is for the benefit of the public and not for the mutual benefit of the contributors to the common fund. To quote from Kanga & Palkhivala. "The Law and Practice of Income-tax" Vol- 1 Eighth Edition, Page 381. x. "Such a mutual association is held non charitable for two reasons, as Baron Pollock pointed out 'in Linen & Wollen Drapers Institution VIR, first, although a member, according to his poverty or misfortune, might share in the funds held by the society for the mutual benefit of the subscribing members, it cannot be said that he had subscribed for a charitable purpose, whereas in the trust he had subscribed for the primary purpose of protecting himself or his family in periods of age, sickness or distress. Secondly, in a mutual society a member can claim benefits as of right in return for his own and his considered-member's subscription. Charity must be by way of bounty, it cannot be by way of bargain. Under this act a mutual association would be non charitable on the further ground that the benefit of the subscribing members is not public benefit, whereas the definition in sec. 2(15) requires charity to be a public character."
7. In view of the facts mentioned above, the assessee is a mutual association and not a charitable one. Respectfully, following Apex Court decision in the case of CIT vs. Bankipur Club Ltd. 226 ITR 97, applying the doctrine of mutuality, assessee's receipts
Page 5 of 11 from non members and other sources such as interest income and royalty etc. are treated as income of the assessee during the year and taxed accordingly. The assessee is an organization, which is limited to the benefits of its members. By virtue of which principal of mutuality applies. In this regard, it is pertinent to mention here that the interest income by no stretch of reasoning and imagination can be said to have been received from the members. At this juncture, it is relevant to mention here the law laid down by the Hon’ble Apex Court in the case of Bangalore Club vs. CIT & Anr. Being Civil Appeal No. 124 of 2007 dated 14.01.2013 wherein it is held that the interest earned by the assessee from banks will not fall within the ambit of the mutuality principle and will therefore, be eligible to Income-tax in the hands of the assessee. This view is also supported by the decision of the Hon’ble Bombay High Court in the case of CIT V/s Common Effluent Treatment Plan (Theme-Belapur) Association reported at (2010) 328 ITR 362 (Bom.) wherein it has been held that interest on surplus fund invested in fixed deposits in Banks is not income from receipt from members of the assessee but was from third party and therefore principle of mutuality does not apply. In the light of these judicial pronouncements, the rent received from Mobile Towers the donation received are also not he receipt from members. Thus interest income, the rent received from Mobile Towers and the donation received by the assessee is brought to tax separately and no expenses are allowed as no real expenditure in incurred to earn these incomes.
4. Aggrieved, assessee carried the matter in appeal but without any success. The Learned CIT(A) confirmed the exemption being declined on the ground of mutuality. As for the plea of the assessee that the assessee was pursuing charitable activities, the learned CIT(A) did briefly deal with the same, and observed as follows:- Further, there is no merit in the argument of the appellant that all along in the past, the activities of the trust have been accepted as engaged in imparting education in the field of science of medicines and exemption has been granted under section 11 of the Income Tax Act, 1961. During the course of the appellate proceedings also, the appellant contended that the appellant is a charitable organization and reiterated the same submissions. And AR of the appellant also placed reliance on various case laws and argued that the income mentioned in the table above were exempt u/s 11 of the Act. All the cases laws relied upon by the AR are distinguishable and also considered the contentions of the AO and arguments of the appellant. In view of the discussion at length in preceding paras, the receipts from non-members hit by the 6th limb of the amended proviso to section 2(15) of the IT Act. Therefore I find the AO is right in rejecting the claim of exemption u/s. 11 of the IT Act. And treated the same i.e. Rs. 1,04,48,660/- as business income within the meaning of the proviso to section 2(15) of the IT Act.
The assessee is aggrieved and is in further appeal before us.
Page 6 of 11 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
We have noted that while the Assesssing Officer has categorically observed that “the object of the assessee trust is solidarity and endowment to it’s members” (emphasis supplied by us), and that this object extends “to encourage and advance the knowledge, study and practice of the science of medicine in all” ways among members (emphasis supplied by us), the aims and objectives of the assessee trust make no mention about restricting the beneficiaries to the members of the assessee trust. The aims and objectives of the assessee trust are as evident from the trust deed on record, are as follows:-
PART I : MEMORANDUM OF THE ASSOCIATION 1. The name of the Association is "The Association of Physicians of India."
The registered office of the Association shall be situated at Madras for the present.
3. The headquarters of the Association shall be at Mumbai.
Aims and Objectives 4.1 To encourage and advance the knowledge, study and practice of the science of medicine in all ways. 4.2 To encourage research, including experimental work, in the science of medicine. 4.3 To organize, establish, conduct, superintend or control institutions for promoting, whether directly or indirectly, the study of and research in problems, prevention and control of various diseases relating to the science of medicine. 4.4 To hold meetings and organize conferences, exhibitions, study circles or conventions for the study and discussion of problems relating to and allied with the science of medicine. 4.5 To provide instruction and education to deserving persons in the science of medicine. 4.6 To make pecuniary grants by way of scholarships, donations, subscriptions, allowances, gratuities, guarantees arid otherwise to and for the benefit of deserving students, scholars and other persons who are worthy of receiving such grants by reasons of their skill and proficiency in the science of practice of medicine or their contribution to the cause of promotion of learning, research and practice of the science of medicine 4.7 To award prizes, medals or other certificates or diploma of proficiency in the science of medicine to persons found deserving after such tests, examinations or other forms of scrutiny as may be prescribed from time to time. 4.8 To make rules, prescribing standards of professional conduct for members of the Association in conformity with the relevant provision of Medical Council of India.
Page 7 of 11 4.9 To establish and maintain libraries and reading rooms. 4.10 To print, publish, distribute or sell books, pamphlets, notices, pictures, periodicals, newspapers or magazines or any other literature on any matter concerning or relating to the science or practice of medicine or the life or work of eminent persons. 4.11 To suggest, study, offer opinion and advise on, or take part in, the framing of laws affecting the science of practice of medicine, medical education, health policies and health care activities. 4.12 To promote esprit de corps among persons studying or practicing the science of medicine and good feelings between them and members of the general public or public authorities. 4.13 To co-operate with other associations or individuals to promote the objects of the Association. 4.14 To construct, provide, regulate and maintain buildings, rooms or other structures for the purpose of the Association and to alter, add to or remove any of them. 4.15 To receive any gift or legacy of moveable or immovable assets with or without conditions for promoting the objects of the Association. 4.16 To acquire by purchase, lease, or otherwise, any property, rights, or privileges for the purposes of the Association. 4.17 To improve, manage, develop, sell, mortgage, lease or let, under-lease or sub-let, dispose of, turn to account or otherwise deal with, all or any part of the property of the Association. 4.18 To act as trustees, agents or managers of property endowed by any person for objects similar to those of the Association, 4.19 To encourage formation of chapters/branches at local and state level and to appoint agents and correspondents whether in India or abroad for promoting all or any of the objects of the Association. 4.20 To draw, make, accept, endorse, execute, negotiate, purchase, lend money upon, discount, hold and dispose of cheques, promissory notes, bills of exchange, drafts and other instruments and to cancel or change such instruments as per statute of Government. 4.21 To lay out, advance, invest, and deal with the Association's funds for such investments and securities and generally in such manner as may be determined from time to time. 4.22 To engage such officials, servants or other persons as may be found necessary or useful for the conduct and management of the affairs of the Association. 4.23 To make bye-laws, rules and regulations of the Association and to delete, change, or add to the same from time to time.
Page 8 of 11 4.24 To do all such other acts as may be necessary, incidental, conducive or convenient to the attainment of the above objects or any of them. EXPLANATION It is hereby declared that none of the objects or powers enumerated above shall be deemed subsidiary or auxiliary to the objects mentioned in any one or more them. 88 8. It is thus clear that the authorities below have proceeded on the misconception that the assessee trust has claimed tax exemption on the basis of mutuality principle alone. Learned CIT(A) has rather summarily dismissed the contention of the assessee with respect of exemption under section 11 by the virtue of being a charitable institution, and simply observed that “all the case laws relied upon by the AR are distinguishable”. Learned CIT(A) has observed that “in view of discussions at length in the preceding paras, the receipts from non-members hit by 6th limb of the amended proviso to Section 2(15) of the Income Tax Act”, but has hardly elaborated upon that reasoning. Be that as it may, in our considered view quite clearly the object of the appellant trust is to promote education in the field of science of medicine and the profit on sale of books/journals is incidental thereto. In this view of the matter, proviso to Section 2(15) will have no application in the present case. It may be borne in mind that proviso to Section 2(15) comes into play only in respect of “any other object of general utility” and not in respect of relief to poor, education, medical relief etc. As long as object of the institution is charitable, as in our considered view, in this case, exemption cannot be declined merely on the ground that the assessee has received consideration for sale of training material or journal etc. incidental to furtherance of it’s objective of imparting education. We may, in this regard, refer to the following observations made by Hon’ble Jurisdictional High Court in the case of DIT vs Samudra Institute of Maritime Studies Trust [(2014) 369 ITR 645 (Bom)] as follows:- 5. We are of the opinion that the Tribunal has applied the correct test in concluding that the exemption under section 11 of the Act can be availed of by the Respondent – Assessee. In doing so, the Tribunal referred to the objects as set out in the Trust Deed of the Respondent – Assessee. They are to set up, administer and maintain technical training institution at various places in India for pre-sea and post-sea training for the ships and maritime industry as a Public Charitable Institute for education. That is to provide on-board and offshore training and continuing technical education for Officers, both on the deck and engine side. One of the object was to register with the Director General of Shipping and obtain other necessary approvals at the State and Central levels. We do not find that the ratio of the judgment of the Hon'ble Supreme Court or of this Court, which may be dealing with section 10(22), has been applied to such an extent as complained by Mr Malhotra. In the present case, the Tribunal in paragraph 9.6 of the impugned order concludes that the Assessee is giving training in the above area to seamen. All the courses may not be approved by the Director General of Shipping but that by itself is no ground to hold that the purpose is not charitable. The exemption under section 11 can be claimed and bearing in mind the object of the Trust. We are of the opinion that the Tribunal and the CIT (Appeals) have approached the issue correctly and in the light of the definition so also the tests laid down came to a factual conclusion that the Respondent is entitled to exemption under section 11 of the Act. This is not a case where the purpose can be said to run a coaching class or a centre. This is an institution which imparts education in the area
Page 9 of 11 of pre-sea and post-sea training to seamen so as to prepare them for all duties. In such circumstances, we do not find that the concurrent findings of fact are vitiated by error of law apparent on the face of the record or perversity enabling us to entertain this Appeal. There is no substantial question of law. The Appeal is therefore dismissed with no order as to costs.
We find support for our conclusion from a co-ordinate bench decision in the case of Gujarat Safety Council vs ITO [(2020) 180 ITD 711 (Ahd)] wherein our esteemed colleagues have, inter alia, observed as follows:- 11.1 The main thrust being on the objects of trust, will be apposite to reproduce the stated objects of the trust: “The objects of the Gujarat Safety Council is in general to promote the message of safety and to engage itself in safety activities as mentioned below within Gujarat State. 1. To devise effective method of safety protection and propagate them among employees, workers and public at large in factories, on roads, in homes and in farms. 2. To organise safety programmes, lectures, conferences and other activities. 3. To conduct educational campaigns, to arouse public opinion and interest of the employers and workers. 4. To enlist the co-operation of public and private organizations interested in the promotion of Safety. 5. To suggest improvements in the Central and State laws to prevent accidents. 6. To organize local Safety Centres in the State of Gujarat and to provide them organizational help and materials to promote the objects of the Safety. 7. To do all such work in the field of Safety.” 11.2 Section 2(15) of the Act which defines the term ‘charitable purpose’ was substituted vide Finance Act, 2008 w.e.f. 2009-10 to provide that advancement of object of general public utility shall not be a ‘charitable purpose’, if it involves carrying on of any activity in the nature of trade, commerce or business. This amendment has given rise to the present litigation. It is the case of the assessee that in order to carry on the charitable object, it is necessary to charge certain fee or consideration for the services rendered and such an act of trust cannot give colour of trade, commerce or business to the solemn objects carried out just for the reason that fee or charges are being recovered. 11.3 The courts have stated that if the activities are being carried on as part of charitable object, it cannot be said to be in the nature of trade, commerce or business. The Hon’ble Supreme Court in the case of Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC) has held that a surplus arising from activities would not necessarily mean that institution is being carried on ‘for profit’. The Hon’ble Gujarat Page 10 of 11 High Court in the case of DIT(Exemption) vs. Gujarat Cricket Association Tax Appeal No. 123 of 2014 judgment dated 27.09.2019 inter alia observed that the profits, if any, ploughed back into the very activities of promotion and development of sport of Cricket and therefore, the assessee cannot be termed to be carrying out commercial activities in the nature of trade, commerce or business. Drawing parallel in the instant case as the income of the trust are being stated to be ploughed back for the furtherance of objects of the trust, such activities would not portray the character of commercial nature. Therefore, applying the principles, the activities of the trust cannot be deemed to be a commercial venture. Thus, in our considered view, the activities of the assessee cannot be excluded from the ambit of definition of Section 2(15) of the Act where the registration of the assessee is in force. The assessee, in our view, would be entitled to deduction under s.11 of the Act on surplus as claimed. 11.4 Viewed from a different angle, multifaceted activities in the form of handbook/literature published together with stated activities like holding conferences on industrial safety programmes, public talks, seminars, workshops etc. on ongoing basis to inculcate safety measures would also be bracketed in the league of ‘educational activities’ when tested in the light of the decision of the Hon’ble Gujarat High court in the case of Ahmedabad Management Association (supra). The Hon’ble Gujarat High Court took note of the changing times and ever widening of horizon of knowledge, rapid changes in the method of teaching for constituting the word ‘education’ used under s.2(15) of the Act. Thus, on a fair reading of the activities carried out, the assessee, in our view, would be entitled for exemption under s.11 of the Act without any demur.
In the result, Ground No.1 of the assessee’s appeal is allowed.
In view of the above discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee. The Assessing Officer is, accordingly, directed to allow exemption under section 11 in respect of income of the assessee.
In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 03rd day of March 2021.