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Facts
The assessee, Association of Consulting Civil Engineers, is a mutual, non-profit association. They filed their income tax return, but the Assessing Officer levied tax at the Maximum Marginal Rate (MMR). The Commissioner of Income Tax (Appeals) upheld the AO's order, leading to the present appeal.
Held
The Tribunal found merit in the argument that the CPC's adjustments should be examined by the jurisdictional assessing officer. The matter was remitted back to the AO to determine if the assessee is a mutual organization and if its contributions are from members. If found to be an AOP with such characteristics, MMR would be applicable.
Key Issues
Whether the Maximum Marginal Rate (MMR) is applicable to the income of a mutual association, and if interest and cess levied on such grounds are justified.
Sections Cited
143(3), 234A, 234B, 234C
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI, AM. &
आदेश / O R D E R PER DINESH MOHAN SINHA JM;
Captioned appeal filed by assessee pertaining to Assessment Year 2023-24, is directed against order passed by Commissioner Of Income Tax (Appeal), vide order dated 06/08/2024, which in turn arises out of an order passed by the Assessing Officer dated 06/01/2024 u/s 143(3) of the Income Tax Act, 1961.
Grounds of Appeals raised by the assessee are as follows: - 1. Erroneous Taxation at Maximum Marginal Rate(MMR)
Application of Interest under Sections 234A, 234B, and 234C
Brief facts of the Case that the assessee is a regular assessee. It is a mutual association (AOP) working for the common issues of consulting civil engineers. It is a non-trading and a non-profit organization and does not share the income. Thus the rules of mutuality principle are fully applicable to this AOP. It has filed return of income as per above details for the captioned year. The income consists of Interest & other income and therefore, as per present statutory provisions the tax liability is 59,446 for AY 2023-24 which is fully paid. The AO CPC has assessed the income as per the return. Hence as regards the assessment of total income, there is no dispute. However, the AO has levied the tax at 42.744% on total income (MMR) as per enclosed assessment order. The details of tax, interest and fees charged in AO is summarized as under:-
Sl Particular Reporting heads Amount in Rs. No. As As provided computed by u/s 143(1) taxpayer 01 Taxation Opted for 115BAD option 02 Income Total Income 6,82,230 6,82,230 detail 03 Tax Tax Liability after relief 50,904 2,91,613 details 04 Interest Total interest and Fee 8,537 56,990 and Fee (234A,234B,234C&234F) Payable 05 Pre-paid Total taxes paid (Advance 59,446 59,446 Taxes Tax, TDS, TCS, Self Assessment Tax) 06 Tax Net Amount Payable 0 2,89,160 Payable i. The AO CPC has ignored that the assessee being a non-trading, mutual organization without any distribution of income to the members, it has to be taxed at normal rates and not at MMR rates. This is by itself ipso-facto erroneous and hence, there is an appeal before you, Sir. The order is never served to the assessee on 09/01/2024. Based on the above facts, the assessee wants to raise following grounds
The appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] challenging the application of MMR, citing the principle of mutuality. The CIT(A), however, dismissed the appeal, upholding the CPC's order.
Aggrieved by the order of the CIT(A), the appellant seeks to file this appeal before the Hon'ble Income Tax Appellate Tribunal (ITAT), Rajkot. That the written of process u/s. 143 1 of the Income-tax and tax liability of Rs. 2,89,160/- against the assessee.
During the course of hearing, the Learned Appellant Representative (hereinafter to as the “Ld. AR”) of the assessee submitted that, we are consulting Engineers Association having is earned by way of interest income fee for consulting charges and argument of seminar etc. The assessee filed ITR and paid taxes on normal rate. Since our association is non-commercial of nonprofit motive.
Factual Background and Nature of the Association The Association of Consulting Civil Engineers (the "Appellant") is a mutual, non- profit association formed exclusively for the benefit and mutual welfare of its members, who are professional civil engineers. The Appellant's activities consist of collecting contributions and fees from its members to cover expenses for mutual services and benefits, in strict adherence to its constitutional objectives. The Appellant has no commercial purpose, no intent to make profit, and except 3
for obtaining special benefits to the members there is no dealing with non- members. Since the members are consulting civil engineers, the appropriate trade & techno-fairs are arranged. From the enclosed final accounts, it can be seen that the investment of the surplus is mainly in the Bank Deposits besides necessary infra-structure for running the office. The main fact to be emphasized is THERE IS NO DISTRIBUTION OF THE SURPLUS AMONG THE MEMBERS. [Paper Book Page No: 4, 7, 10-13, 38,45] For the judicial pronouncement sited before Ld. CIT-A, please refer Page No: 39-42, 46 & 50-56 of the Paper Book.
The Learned Assessing Officer (AO), however, treated the surplus arising from contributions, sponsorship and interest income as taxable at the MMR of 42.744%. This classification disregards the principle of mutuality, under which surplus income from mutual dealings is generally exempt from taxation.
The Doctrine of Mutuality and Its Relevance in Income Tax
The principle of mutuality exempts income generated through transactions solely between members contributing to and benefiting equally from a common fund. According to this doctrine, the contributors and beneficiaries of the association are the same, and any surplus or "income" is essentially redistributed to the members in mutual interest. Therefore, it cannot be considered taxable income.
To reinforce this, we draw attention to significant judicial decisions supporting the mutuality principle
CIT v. Bankipur Club Ltd. [1997] 226 ITR 97 (SC):
The Supreme Court held that a club or association not formed for profit, and engaging in mutual activities exclusively among members, does not generate taxable income under the Income Tax Act. The Hon'ble Court ruled that as long as there is an identity of contributors and participants, the surplus from members fees, subscriptions, and contributions remains exempt from tax.
Bhubaneswar Club Ltd. v. Asstt. CTT (2012)
The ITAT ruled that services or facilities extended to members by a club for mutual purposes are exempt from tax. The nature of the club's activities, aimed purely at providing mutual services, confirms that any resulting income does not arise from a trade or business but from the common contributions of members.
Chelmsford Club v. CIT [2000] 243 ITR 89 (SC)
In this case, the Supreme Court once again emphasized that clubs or associations carrying out mutual activities among members are not assessable for income tax, given the principle of mutuality.
Detailed Grounds of Appeal:
Ground 1: Erroneous Taxation at Maximum Marginal Rate (MMR) The levy of MMR on the appellant is erroneous and contrary to the established mutuality principle. As a non-commercial, mutual association operating solely for the benefit of its members, the appellant does not undertake any activities aimed at generating taxable profits.
Non-Commercial Nature: The appellant exists solely to serve its members' interests without profit motive, akin to the entities protected under CIT v. Bankipur Club Ltd.
No Income from Outside Sources other than fulfillment of objects: The appellant's income is derived solely from membership fees, subscriptions, and interest, used exclusively for mutual purposes. This aligns with the Bankipur Club Ltd. ruling, where income generated from member contributions was deemed non-taxable.
Absence of Profit Motive: Under Section 2(29C) of the Income Tax Act, income from activities conducted without profit motive and involving no third-party transactions should not be subject to MMR, as outlined in the Supreme Court's judgment in Chelmsford Club.
Ground 2: Application of Interest under Sections 234A, 234B, and 234C The interest levied under sections 234A, 234B, and 234C is also disputed. Given that the appellant's income should be exempt under the mutuality principle, interest penalties based on deemed taxable income is baseless. Unwarranted Liability: Imposing interest due to alleged non-compliance presumes the income's taxability. However, if the mutuality doctrine applies, the appellant's income is not liable to tax, and, therefore, interest should not be imposed on exempt income.
No Duty to Pay Advance Tax: It can be seen that since the appellant reasonably believed that its income was exempt, it did not foresee the need for advance tax payments. This supports the waiver of any penalties.
Application of Judicial Precedents to the Present Case The appellant's case aligns closely with several judicial precedents, demonstrating the common thread of mutuality and tax exemption.
In CIT v. Common Effluent Treatment Plant (Thane Belapur) Association, the Bombay High Court ruled that income contributed by members of an association for mutual benefits, with no dealings involving third parties, remains exempt under the mutuality doctrine.
Similarly, Bombay Gymkhana Ltd. v. Asst. CIT upheld the exemption of club income from tax due to the application of the mutuality principle, as the income was exclusively derived from members for mutual purposes.
These cases illustrate that, for mutual associations like the appellant, income from members contributions and internal activities falls within the mutuality exemption.
SUMMARY OF ARGUMENTS
Applicability of Mutuality Principle: The appellant is a mutual association, and the doctrine of mutuality applies to it. The principle of mutuality has been affirmed in various judicial pronouncements, including:
CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC): The Supreme Court held that the excess of receipts over actual expenditure incurred by a club, for facilities extended to its members, is not taxable as income under the mutuality principle.
Chelmsford Club v. CIT (2000) 243 ITR 89 (SC): The Supreme Court reiterated that where a club is formed for mutual benefit, any surplus arising to the club from its members is not taxable.
The first Indian case on the principle of mutuality was decided in CIT v. Royal Western India Turf Club Ltd (1953) 24 ITR 551 (SC) where the Supreme Court made reference of the 3 conditions stipulated in The English and Scottish Joint Co- operative Wholesale Society Ltd v. Commissioner of Agrl. IT (1948) 16 ITR 270 (PC) which was propounded after referring to various passages from the speeches of the different Law Lords in Styles (Surveyor of Texas) v. New York Life Insurance Co (1889) 2 TC 460 where Lord Narmand had given 3 conditions for satisfying the test of mutuality. They are (i) the identity of contributors to the fund and the recipients from the fund must be the same; (ii) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policyholders, in other words, as an instrument obedient to their mandate; and (iii) the Impossibility that contributors should dertee profits from the contributions made by themselves to a fand which could only be expended or returned to themsel For an Income of an Acme Court, in the case of lufi PACIT (1971) 82322(prescribed that the contributor and the recipient of the services with of CIT v Bandipur Chab Lad (2007) 226 ITR VN the Supreme Court held that excess of receipts over actual expenditure incurred by a club, for facilities extended to its members as part of the membership of the club, is not tatable at income. Likewise, while explaining the doctrine of mutuality, the Supreme Court, in the case of CTT Kumbakonam Murad Benefit PL 11964) 33 ITR 241 (SC), laid down that the essence of mutuality lies in the return of what one has contributed to a common fund. It further held that all participants must be contributors to the common fund.
Incorrect Application of MMR: 6 Please see our arguments above. The application of the Maximum Marginal Rate (MMR) to the appellant's income by the CPC is thus erroneous. The appellant's income should have been taxed at normal rates applicable to an Association of Persons (AOP) since it qualifies under the mutuality principle.
Sports Club of Gujarat Ltd. v. CIT (1988) 37 Taxman 38 (Guj): The Gujarat High Court held that the principle of mutuality applies where there is a complete identity between contributors and participants, and therefore, such income is not liable to be taxedat MMR.
Levy of Interest and Cess:
The interest levied under sections 234A, 234B, and 234C, along with the education cess, is based on the incorrect application of MMR. These should be recalculated based on the correct tax rate applicable to an AOP under the mutuality principle.
Relief Sought:
In view of the above facts, legal principles, and judicial precedents, the appellant respectfully requests this Hon'ble Tribunal to grant the following relief:
Exemption from Maximum Marginal Rate (MMR): We request that the appellant's income be taxed, if at all, at standard rates, considering its non-commercial, mutual association status.
Waiver of Surcharge, Cess, and Interest: As the appellant's income is derived from mutual activities, the imposition of interest and additional charges is unjustifiable under the mutuality principle. The Tribunal is respectfully requested to set aside these penalties.
Conclusion The appellant is a bona fide mutual association engaged solely in serving its members without any profit motive or external business activity. Based on the principle of mutuality, supported by authoritative judicial precedents, we submit that the income generated from members contributions is not taxable under the Income Tax Act.
We humbly request this Hon'ble Tribunal to allow this appeal, set aside the impugned order, and pass appropriate orders to uphold the doctrine of mutuality.
We shall be glad to submit further details as and when so required.”
On the contrary, the Learned Senior Department Representative (hereinafter referred to as the “Ld. Sr. DR”) for the revenue relied on the order of CIT(A) and the relevant part of the order is re-produced below; According to the Act the taxation can be based on share of beneficiaries are determinate or indeterminate and whether section 11/12 is applicable. In this classification only Trusts with shares of beneficiaries' determinate and none of the beneficiaries having taxable income are to be taxed at individual rates. All other Trust/ AOP/BOI/AJPincluding taxable income of Trustswith 12A registration are to be taxed at MMR. The Trust doing business is also to be taxed at MMR. In the case of AOP if the share of members is defined and none of the members are having taxable income this will be taxed at normal rates. The appellant has stated that none of the members of AOP has taxable income but the percentage of share is left blank that means shares are not determinate. The CPC has followed the provisions of the ACT only and the order u/s 143(1) is correct and requires no interference. Grounds raised by the appellant are dismissed.
We have heard both party and perused all the records available before us. We note that the assessee is assessee to Income-tax with the status of AOP. The assessee is The Association of Consulting Civil Engineers (the "Appellant") is a mutual, non-profit association formed exclusively for the benefit and mutual welfare of its members, who are professional civil engineers. The Appellant's activities consist of collecting contributions and fees from its members to cover expenses for mutual services and benefits, in strict adherence to its constitutional objectives. The Appellant has no commercial purpose, no intent to make profit, and except for obtaining special benefits to the members there is no dealing with non-members. Since the members are consulting civil engineers, the appropriate trade & techno- fairs are arranged. From the enclosed final accounts, it can be seen that the investment of the surplus is mainly in the Bank Deposits besides necessary infra-structure for running the office. The main fact to be emphasized is there is no distribution of the surplus among the members.
(i) identity between the class of contribution and the class of participator: 8
“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. The Madras. Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves: it is enough if they have a right of disposal over this surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects”
(iii)The association protected the rights of, its members in return for admission fees and periodical subscription and also rendered specific services in return for separate charges. The Income-tax Officer wanted to subject the assessee to tax on the income derived from the admission fee, periodical a subscriptions and specific service charges received from the members. The assessee pleaded that the receipts were exempt from tax on the general principle of mutuality.
(iv)Law relating to mutual trading or mutual undertaking or members club: Principle of mutuality: “There is no provisions in the Income Tax Act exempting the incomes of a mutual undertaking or members club. The principle of mutuality is based on the extended commonsense understanding that nobody can earn a profit by trading with himself. The law relating to mutual trading or mutual undertaking has been discussed in detail in the landmark decision of the Hon’ble Supreme Court in the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC).”
(v) The law relating to the principle of mutuality as per the above decision of the Hon’ble Apex Court is as follows: a. Where a number of persons combine together and contribute to a common fund for the financing or some venture or objects, and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. Trading between persons associating in this way does not give rise to profit chargeable to tax. b. For the doctrine of mutuality to apply, it is essential that all the contributors to the common fund are entitled to participate in the surplus, and that all the participators in the surplus are contributors and participators. This means identity as a class. c. Members club is an example of a mutual undertaking, but where a club extends facilities to non-members, to that extent the element of mutuality is wanting. d. It is settled law that if the persons carrying on the trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes, and therefore, no assessment in respect of the trade can be made. e. A member club is assessable in respect of profits derived from affording its facilities to non-members. f. The arrangement of relationship between the club and its members should be of a non-trading character. g. If the object of the assessee company claiming to be a mutual concern or club is to carry on a particular business and money is realized both from members and non-members for the same consideration by giving same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealing as a whole disclosed the same profit earning motive, and are alike tainted with commerciality. In such cases, the activity carried on by the assessee is a trade or an adventure in the nature of trade, and as such, the surplus is certainly profit liable to tax. h. At what point of time, does the relationship of mutuality ends and that of trading begins is a difficult and vexed question. A host of factors have to be considered to arrive at a conclusion. Whether or not the persons dealing with each other are a mutual club, or carrying on a trading activity or an adventure in the nature of trade is largely a question of fact.
We have given our thoughtful consideration and perused material available on record. Admittedly, the assessee filed its return of income on 30.12.2023 and admitting total income of Rs.6,82,230/-. The same was processed under section 143(1) on 06.01.2024. The said intimation is in the form of calculation in tabulated columns running into seven pages. There are two main columns; one column description showed "as provided by Taxpayer in Return of Income" and another column showed "As computed under section 143(1)". There is no description in this intimation or explanation/note why such disallowance or addition made by the CPC in the 143(1) proceedings. For better understanding of the intimation proceedings, section 143(1) of the IT Act is reproduced as
We note the argument of the Ld. Counsel for the assessee that AOP status of the assessee need not to be registered. The Ld. Counsel of the assessee also argued that assessee under consideration it engaged for the benefit of members, therefore, to tax the income of the assessee, the maximum marginal rate (MMR) should not be used. However, on the other hand, the Ld. DR for the revenue submitted that CPC (AO) has made the adjustment and additions. The CPC (AO) is nothing but a machine, therefore all these adjustment made by the CPC – AO, should be examined by jurisdictional assessing officer. Therefore, we find merit in the argument advanced by Ld. DR for the revenue and hence, we remit the matter back to the file of the Jurisdictional Assessing Officer to examine the factual position, whether the assessee is a mutual organization, and the contribution made by the members. If the Assessing Officer finds that assessee is a (AOP) association of persons, therein these circumstances MMR would be applicable to tax on the AOP’s income. Therefore, we set aside the order of the Ld. CIT(A) and remit the issue back to the file of the jurisdictional Assessing Officer for fresh adjudication on merit.
In result the appeal of the assessee allowed for statistical purpose.
Order pronounced in the open court on 05/ 05/2025.