ANDHRA SOCIAL & CULTURAL ASSOCIATION,CHENNAI vs. ACIT NON CORPORATE CIRCLE 1, CHENNAI

Sh. P. Ranga Ramanujam, the Ld. representative for the assessee, submitted that the appeals of the assessee are directed against the order of the Commissioner of Income Tax (Appeals) confirming the penalty levied by the Assessing Officer under Section 271(1)(c) of the Income-tax Act, 1961 (in short 'the Act'). Referring to the penalty order, the Ld. representative submitted that the assessee is admittedly a cultural association known as club. By mistake, according to the Ld. representative, the assessee filed the return of income continuously before the Exemption Circle claiming exemption under Section 11 of the Act as if it was registered under Section 12A of the Act.

Referring to the paper-book, more particularly pages 73-77, the Ld. representative submitted that the Chartered Accountant at that point of time was Shri V. Anantharaman. On his advice, the return was filed before Exemption Circle. Subsequently, for the assessment year 2005- 06, the present auditor was engaged to file the return of income.

Sh. P. Ranga Ramanujam, the Ld. representative for the assessee further submitted that the assessee is a club, therefore, eligible for exemption under the “principle of mutuality”. In other words, according to the Ld. representative, when a group of people joined together to form an association for having their own engagements, there cannot be any profit accrued in respect of transactions among the members of the association. Therefore, according to the Ld. representative, income of the association is eligible for exemption in view of the mutuality involved in the transactions. According to the Ld. representative, the assessee-association made fixed deposit in the banks and interest income therefrom was disclosed to the Department and claimed exemption under Section 11 of the Act. According to the Ld. representative, the assessee has disclosed entire transactions, entire income and its sources and claimed exemption under Section 11 of the Act. The Assessing Officer rejected the claim of the assessee on the ground that assessee-association was not a registered one under Section 12A of the Act, therefore, not eligible for exemption under Section 11 of the Act. Referring to the claim of the assessee that it is a mutual association, therefore, principle of mutuality would be applicable, the Ld. representative submitted that the Assessing Officer found that the principle of mutuality may not be applicable in respect of interest income and rental income from land and STD booth. Therefore, she disallowed the claim of the assessee and also levied penalty under Section 271(1)(c) of the Act. The Ld. representative placed his reliance on various judgments of High Courts and Apex Court and submitted that the penalty under Section 271(1)(c) of the Act cannot be levied unless there was concealment of income or furnishing of inaccurate particulars of income by the assessee. In this case, according to the Ld. representative, entire income was disclosed and there was no concealment of income or furnishing of inaccurate particulars of income. Hence, according to the Ld. representative, the levy of penalty is not justified.

On the contrary, Shri AR.V. Sreenivasan, the Ld. Departmental Representative, submitted that the assessee-association is a club and it is not registered under Section 12A of the Act. According to the Ld. D.R., the assessee claimed exemption under Section11 of the Act and also claimed exemption on principle of mutuality. Since the interest income and rental income were received from third parties, who are not members of the association, the Assessing Officer by placing reliance on the various judgments of the High Court and Supreme Court, found that the assessee is not eligible for exemption. Therefore, according to the Ld. D.R., the Assessing Officer levied penalty under Section 271(1)(c) of the Act for not offering the income for taxation.

We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee-association / club is not registered under Section 12A of the Act. Therefore, the assessee is not eligible for exemption under Section 11 of the Act. However, it is an organization where mutuality is involved in the transactions. Whenever there were transactions among the members of the same association, there cannot be any profit available for taxation. In this case, the assessee received interest income from bank and rental income from third parties. The bank and the lessee are not members of the association, therefore, the rental income and interest income cannot be claimed as exemption under the principle of mutuality. This Tribunal is of the considered opinion that principle of mutuality is available only in respect of members of the club or association and not in respect of income accrued from third parties.

The question arises for consideration is when the assessee has disclosed the entire income and its sources and claimed the same as exemption either under Section 11 or under the principle of mutuality, whether any penalty under Section 271(1)(c) of the Act can be levied?

The Assessing Officer may levy penalty under Section 271(1)(c) of the Act if he is satisfied that the assessee has concealed the particulars of income or furnished inaccurate particulars of such income.

In view of the above discussion, this Tribunal is unable to uphold the orders of the authorities below. Accordingly, the orders of both the authorities below are set aside and the penalty levied by the Assessing Officer as confirmed by the CIT(Appeals) is deleted.

In the result, all the five appeals filed by the assessee stand allowed.