Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER D.S. SUNDER SINGH, Accountant Member:
This appeal is filed by the assessee against the order of the Commissioner of Income-Tax (Appeals) [CIT(A)]-2, Guntur vide ITA No.653/2014-15 dated 22.03.2016for the assessment year 2012-13.
2 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
The assessee filed return of income admitting total income of Rs.44,57,100/- and claimed the deduction u/s 80P. The assessee is engaged in the activity of purchase and distribution of electric power. The main objective of the assessee is to make electric energy available to its members and other consumers in its area at a low cost as practicable. The assessee purchases electricity from APEPDCL and distributes the same among the members. The assessee admitted income of Rs.44,57,100/- after claiming the deduction of Rs.2,35,68,262/-. The AO completed the assessment disallowing the deduction claimed by the assessee u/s 80P of IT Act holding that the assessee is a consumer cooperative society which runs it for the benefit of its members and allowed the deduction of 80P to the extent of Rs.1,00,000/- and brought to tax the balance amount. During the assessment proceedings, the assessee explained that the assessee’s income is not taxable as the assessee is a mutual cooperative society and all members and their shares are identifiable. The assessee purchases electricity from the APEPDCL and distributes to its members. The assessee submitted before the AO that as per the mutuality concept, the assessee’s income is exempt on the concept of no one can trade with himself. The assessee further submitted that the income from mutual association does
3 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
not fall within the ambit of section 4 of IT Act and also relied on the decision of Hon’ble Supreme Court and the High Courts as under : (1) CIT Vs Merchant Navy Club (1974) 96 ITR 261 (AP) (2) CIT Vs.Royal Western India Turf Club Ltd. (1953) 24 ITR 551(SC) (3) CIT Vs. Shree Jari Merchants Association (1977)106 ITR 542(Guj) (4) CIT Vs. West Godavari District Rice Millers Association (1984) 150 ITR 394 (AP) 3. Not being convinced with the assessee’s explanation, the AO relied on the decision of Hon’ble Gujarat High Court in the case of CIT Vs. Shree Jari Merchants Association [106 ITR 542] (Guj) which has tested the concept of mutuality on the basis of dissolution of an association. The Hon’ble High Court held in the case cited supra, if the assets of the association are not liable to be returned to the members on dissolution, the identity between the contributors and recipients would be lost and this would militate against the very basic principle of mutuality. Since there is no bye law regarding distribution of assets on dissolution of society, the AO held that in the absence of bye laws regarding disposal of surplus assets, section 69- B of A.P.Cooperative Societies Act, 1964 will be applicable in the assessee’s case for distribution of assets as under : “69-B. Disposal of Surplus Assets : Surplus assets as shown in the final report of the liquidator of a society which has been wound up shall be utilized for such purposes as may be specified in the bye-laws. Where the society has no such bye-laws, the surplus assets shall vest in the Registrar who shall hold it in trust and shall transfer it to the reserve funds of a new
4 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
society registered with a similar object and serving more or less an area which the society to which the surplus belonged was serving”
3.1. During the course of assessment proceedings, the assessee submitted Board Resolution dated 14.10.2010, wherein it was decided to amend the bye law No.47, so as to enable the assessee to distribute the surplus assets amongst its members at the time of dissolution. However, the AO observed that as per the bye law No.48 of the society, no amendment to the bye laws shall take effect ,until it has been approved and registered by the Registrar. Since the Board Resolution was not approved by the Registrar, the AO held that the assessee society is not a mutual association, but consumer cooperative society which runs its activity for the benefit of its consumers accordingly allowed the deduction u/s 80P(2)(c) of Rs.1,00,000/- and disallowed the balance amount of Rs.2,34,68,262/- and added back to the returned income. The AO also made the additions of Rs.2,50,000 u/s 40(a)(ia) in respect of professional charges and Rs.3,11,724/- u/s 40(a)(ia) in respect of advertisement expenses.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) dismissed the appeal of the assessee holding that the bye laws have been amended and registered with the Dy.Registrar
5 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
of Cooperative Society on 18.10.2014 which means that the income for the assessment year 2010-11 held to be of consumer cooperative society which required to be taxed.
Aggrieved by the order of the CIT(A), the assessee is in appeal before this Tribunal. Appearing for the assessee, the Ld.AR argued that the assessee is a mutual cooperative society engaged in serving the rural people and farmers to enable them to have qualitative power at reasonable price. This is one of the three societies in the state of AP established long back as on experimental basis by the Govt. of AP and constituted as society. The assessee admits the consumers as members of the society before electricity connection is given to him and supply electricity. The assessee purchases the electricity from APEPDCL as per the fixed tariff by Govt. of AP and collects the electricity charges from consumer at marginal rates. The assessee supplies electricity to members in Anakapalle area and distributes electricity only to the members. The consumers and contributors of the assessee’s society are the same and therefore the surplus arising out of the activity carried by society does not fall within the ambit of section 4 of IT Act on the principle of mutuality. The assessee society is not promoted to make the profit but with an idea of rendering
6 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
mutual help. The surplus of the assessee society cannot be taxed since it is formed on the concept of mutuality and with the principle that no man can make profit out of himself and there is a complete identity of contributors and their beneficiaries. The Ld.AR relied on the judgement of Hon’ble Supreme Court in the case of CIT Vs.Merchant Navy Club [96 ITR 261] (AP), and CIT Vs. Royal Western India Turf Club Ltd. [24 ITR 551] (SC). The Ld.AR distinguished the reliance placed by AO on the Hon’ble Gujarat High Court in the case of Shree Jari Merchants Association and stated that in the case of Shree Jari Merchants Association, as per Rule 38 of its constitution, at the time of dissolution of the assessee society, its surplus is liable to be distributed even amongst non members. The same is not so in the case of assessee society hence argued that the case law relied upon by the AO is distinguishable and not applicable in the assessee’s case. It is presumed that if there is no rule or bye law regarding distribution of assets at the time of dissolution, as per AP Cooperative Societies Act assets required to be placed at the disposal of the Registrar which will be distributed to the societies with similar objects or to the Federal society, hence argued that non inclusion of clause in the bye laws does not affect or vitiate the mutuality concept as understood by the AO, since the funds would be vested with the Registrar. Ld.AR further submitted that merely because of
7 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
no clause or no rule with regard to distribution of assets on it’s closure it cannot be presumed that the surplus would be distributed amongst the non members. The Ld.AR further submitted that during the pendency of assessment proceedings, the society had amended the bye laws so as to enable the society to distribute the surplus assets among its members on dissolution of the society. Though it was not registered at the assessment stage, the same was got registered during the appellate stage and placed before the Ld.CIT(A), before finalizing the appeal. The Ld.AR submitted that neither the society is dissolved nor the assets are distributed amongst the members and the bye laws were duly amended so as to enable the society to distribute the surplus on dissolution to the members before the amendment to bye law, hence argued that the case law relied up on by the AO in the case of Shree Jari Merchants Association has no application. The Ld.AR further submitted that Hon’ble jurisdiction High Court in the case of CIT Vs. West Godavari District Rice Millers Association held that in spite of surplus would not go to members but would be based on to some other association with similar objects, the income of the assessee would be immune from tax on the principle of mutuality and argued that assessee has rightly claimed the income as exempt on the principle of mutuality,
8 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
hence requested to set aside the orders of the CIT(A) and allow the appeal of the asssessee.
On the other hand, Ld.DR supported the orders of the lower authorities .
We have heard both the parties and perused the material placed on record. There is no dispute that the assessee is a mutual association established for the purpose of supply of electricity to the rural farmers at a reasonable price to improve the infrastructure. All the members and contributors are identifiable and the contributors as well as the consumers are the same. There is no other outsider is involved in the association. Hon’ble Supreme Court in the case of Merchant Navy Club and Royal Western India Turf Club Ltd. (supra) held that the income of the club was not profit from business assessable u/s 10 of the IT Act on mutuality basis. In the instant case, there is no dispute that contributors and the consumers are one and the same. In the case of Shree Jari Merchants Association, Hon’ble Gujarat High Court held that there is no basis for principle of mutuality because of Rule 38 at its constitution, wherein it shows that at the time of dissolution of the association its surplus would be distributed
9 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
amongst non members. The case law relied upon by the AO is distinguishable since there is no such rule or bye law in the case of the assessee. In the absence of bye laws regarding the disposal of surplus assets, section 69B of AP Cooperative Societies Act 1964 would be applicable and in such case, the surplus would be vested with the Registrar who shall hold it in trust and shall transfer it to the reserve funds of the society registered with the similar objects. In the similar circumstances, Hon’ble Jurisdictional High Court in the case of CIT Vs. West Godavari District Rice Millers Association held that income of the society is exempt even if the surplus goes to some other society with similar objects on dissolution. For the sake of clarity and convenience we reproduce relevant part of the Hon’ble jurisdictional order which reads as under: 7. A mutual association is an association of persons who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out in the same capacity in which they have made the contributions. Therefore, the capacity as contributors and participants remains the same. They contribute not with an idea to trade but with an idea of rendering of mutual help. They receive back the surplus, which is left after meeting the expenditure of the association which is incurred for the common purpose in the same capacity in which they have contributed. Thus, they receive back what was really their own. The receipt in their hands is not really a profit as no man can make a profit out of himself, just as he cannot enter into a trade or business with himself. Thus, the main test of mutuality is complete with the identity of contributors with the recipients. It is well settled that the identity need not be necessarily of individuals because it is the identity of status or capacity which matters more. The individual members of an association may be different; but so long as the contributors and recipients are both holding the membership status in the association, their identity would be available to them if such a mutual concern receives any income the surplus of which goes back to the contributors of the said income. Now these are the well settled principles on the question of mutuality. But, Mr. M.S.N. Murthy, the learned counsel for the department, relied upon rule 21 of the memorandum of
10 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
association which says that the surplus should be transferred to some other association having similar objects. He admits that since there is a ban on the surplus going to the members, there is no identity between the contributors and the recipients. In support of this contention, the learned counsel relied upon a decision of the Gujarat High Court in CIT v. Shree Jari Merchants Association [1977] 106 ITR 542 . In this case rule 38 of the constitution of the assessee-association provided that the-surplus assets should be used as per the decision of the association at the time of its dissolution. On a construction of this rule, the Gujarat High Court held that there was no identity between the contributors and the recipients and the assessee, therefore, could not claim exemption from the tax on that ground. But Shri Anjaneyulu, the learned counsel for the petitioner, strongly relied upon the decision of the Madras High Court in CIT v. Madras Race Club [1976] 105 ITR 433 and two decisions of this Court in CIT v. Merchant Navy Club [1974] 96 ITR 261 and Addl. CIT v. Secunderabad Club [RC No. 10 of 1974 dated 3-12-1975]. We shall refer to the decision of the Madras High Court in Madras Race Club's case (supra). In this case, the contention of the revenue was that the application of principle of mutuality was excluded because the memorandum of association provided that there could be no distribution of profits and that at the time of winding up the surplus was not divisible among the members, but had to be made over to entities having similar objects. The Madras High Court repelled this contention and observed as follows: "The memorandum and articles of association of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot be said that they are not participators in the surplus. This clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should willy-nilly take the surplus to themselves. It is enough if they had a right of disposal over the surplus to show that they were the participators." (p. 434). 8. This case, in our opinion, is directly applicable to the facts of the present case. Rule 21 of the memorandum of association says that the surplus should not go to the members and it should be made over to the associations with similar objects by a decision of the 3/5ths majority of the association in almost identical terms. As the owners of the property, they have the right to dispose of the same in the manner they choose and if they decided that it should be given to associations with allied objects, it is difficult to say that the doctrine of mutuality is not attracted. The Madras High Court quoted with approval the ratio of the decision in IRC v. Eccentric Club Ltd. [1925] 12 TC 657 (HL). In that case, there was a club which was incorporated as a company. The object of the company was to promote social relations amongst gentlemen connected with literature, art, music, drama, etc., and conduct a club of non-political character. The members and their friends were to be given the privileges, advantages, convenience and accommodation of the club. Similar to our clause 21, there was clause 6 of the memorandum which provided that no member of the club in his character as such
11 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
member was entitled to receive, directly or indirectly, any dividend, bonus or other profit out of such income or property of the club. On the winding up of the club, the surplus, if any, was not to be distributed among the members but was to be given or transferred, as the committee of management might determine. With all these features, it was held that the doctrine of mutuality would apply and the amount was not liable to be taxed.
7.1. The decision of Hon’ble Jurisdictional High Court is squarely applicable to the facts of the assesses case. Further the assessee has amended the bye laws and placed before the CIT(A), after got registered with the Registrar of society to enable the assessee to distribute the surplus assets among its members before completion of the appellate proceedings. Therefore, we hold that the assessee is a mutual association and the income of the society is not chargeable to tax u/s 4 of the IT Act, accordingly, we set aside the orders of the Ld.CIT(A) and allow the appeal of the assessee.
Since we have held that the society’s income is exempt on the concept of mutuality, we consider it is not necessary to adjudicate the remaining grounds of appeal.
In the result, appeal of the assessee is allowed.
12 ITA No.297/Viz/2016 Anakapalle Rural Electric Cooperative Society Ltd., Visakhapatnam
The above order was pronounced in the open court on 21st Feb 2018.
Sd/- Sd/- (िी. दुगााराि) (डड.एस. सुन्दर ससंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याययक सदस्य/JUDICIAL MEMBER ऱेखा सदस्य/ACCOUNTANT MEMBER ववशधखधऩटणम /Visakhapatnam: ददनधंक /Dated : 21.02.2018
आदेश की प्रनतलऱवऩ अग्रेवषत/Copy of the order forwarded to:- 1. अपीलार्थी / The Appellant- Anakapalle Rural Electric Cooperative Society Ltd., B-1539, Kasimkota Village, Visakhapatnam 2. प्रत्यधथी / The Respondent– The ACIT, Circle-(1), Kakinada 3. The Pr.Commissioner of Income Tax-2, Visakhapatnam 4. The Commissioner of Income Tax(Appeals)-1, Guntur, Camp : Visakhapatnam 5. ववभधगीयप्रनतननधध, आयकरअऩीऱीयअधधकरण, ववशधखधऩटणम /DR, ITAT, Visakhapatnam 6. गधर्ाफ़धईऱ / Guard file आदेशधनुसधर / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM