PRABODHAN GOREGAON,MUMBAI vs. CIT (A) - 1, MUMBAI

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the appellant trust is registered u/s. 12A which indicates that the appellant trust is genuine and has charitable objects entitled to claim benefits of Sections 11 & 12, and, therefore, its fundamental status cannot be changed to mutual association to impose tax by denying exemption u/s.11 so long as registration u/s.12A is subsisting and in force.

2. The Ld, CIT(A) erred in not appreciating that the expression "any other object of general public utility" in Section-2(15) of the Income-tax Act, 1961 would prima facie include all objects which promotes the welfare of the general public. The Ld.CIT(A) failed to appreciate that the athletic & sports activities undertaken by the appellant trust promoted the welfare of the General Public.

3. Without prejudice to the above, Ld.CIT(A) erred in not appreciating that interest income arising out of Fixed Deposits at Rs.14,84,407/- made by the appellant trust in the manner laid down u/s.11(5) cannot be considered under the proviso to Section 2(15) since there is no commerciality in respect of the same. 4, Without prejudice to the above, Ld.CIT(A) erred in not appreciating that exemption u/s.11 could be denied only qua income of the activities falling out of the scope of proviso to Section-2(15) of the Income-tax Act, 1961 and since there was a deficit, no tax can be levied on the same.”

The additional grounds of appeal has been raised under Rule 11 of the Income-Tax (Appellate Tribunal) Rules, 1963 . The Ld. Counsel for the assessee submitted that these are legal grounds which goes to the root of the matter and does not require any investigation of fresh facts and same may be admitted in view of the decision of the Hon’ble Supreme Court in the case of National Thermal Power Company Limited v. CIT(1998) 229 ITR 383(SC).

The Ld. DR fairly did not raised any objection more so that similar additional grounds of appeal were admitted in the immediately preceding assessment year 2010-11 by the tribunal in vide orders dated 24-08-2017. Thus, after hearing both the parties we are of the considered view that these additional grounds of appeal bearing S.No 1 to 4 need to be admitted keeping in view ratio of the judgment of Hon’ble Supreme Court in the case of NTPC v. CIT(Supra), as these four additional grounds of appeal are purely legal in nature and hence we direct admission of these four additional grounds of appeal raised by the assessee. We order accordingly.

4. The main controversy in this appeal is with respect to the denial of the exemption to the assessee u/s. 11 as the assessee was held to be not an association created/established for charitable purposes within the meaning of provisions of Section 2(15) although assessee was registered under Section 12A of the Act, however the AO and the learned CIT(A) considered the assessee to be eligible for benefits of principle of mutuality by treating assessee trust as mutual association. We have observed that similar situation arose in the immediately preceding assessment year i.e. 2010-11 and tribunal has taken a view that matter need to be set aside and restored to the file of AO for denovo assessment. The well reasoned order of the tribunal in for AY 2010-11 vide orders dated 24.08.2017 in assessee’s own case is reproduced here under:-

“This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-1, Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).

2. The Ld. Counsel of the assessee submits before us that the assessee would press only 1st, 9th to 11th and 14th ground of appeal filed on 24.10.2016. The said grounds of appeal read as under: -

1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the action of the AO in treating the assessee trust as mutual association and confirmed addition of interest income at Rs.24,37,386/- and income from non- members at Rs.1,42,530/- relying on the various judgments.

9. The CIT(A) erred in not appreciating that the play ground plus hall of the assessee trust was let out only for sports activities to schools and colleges which is one of the main object of the assessee trust. Promotion of sports and games is a dominant activity of the assessee trust.

10. The CIT(A) erred in not appreciating that the assessee trust does not run any cafeteria but the same is run by professional caterer and he pays only rent to the assessee trust which is the essential requirement for running the assessee trust.

11. The CIT(A)erred in not appreciating that the assessee trust had charged following fees for a duration of 30 years at the time of construction of the swimming pool to meet partly the cost of construction:-

Category Duration Regn. Membership Security Building Fees deposit Fund Single 30 yrs Rs.5000/ Rs.5000/- Rs.5000/ Rs.60,000/- Family 30 yrs Rs.5000/ Rs.5000/- Rs.5000/ Rs.1,10,000/-

2.1 The assessee also filed on 01.03.2017 additional grounds of appeal which are as under:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the appellant trust is registered u/s. 12A which indicates that the appellant trust is genuine and has charitable objects entitled to claim benefits of Sections 11 & 12, and, therefore, its fundamental status cannot be changed to mutual association to impose tax by denying exemption u/s.11 so long as registration u/s.12A is subsisting and in force.

2. The Ld. CIT(A) erred in not appreciating that the proviso to Section- 2(15) which denies exemption to a charitable institution carrying on commercial activities does not apply to institutions carrying out relief to the poor, education or medical relief but applies only to sports and athletic activities carried out by the appellant trust and even there the dominant and prime objective of the appellant trust was not to earn any profits but to do charity through advancement of an object to general public utility.

3. The Ld. CIT(A) erred in not appreciating that the expression "any other object of general public utility" in Section-2(15) of the Income-tax Act, 1961 would prima facie include all objects which promotes the welfare of the general public. The Ld. CIT(A) failed to appreciate that the athletic & sports activities undertaken by the appellant trust promoted the welfare of the General Public.

4. The Ld. CIT(A) erred in not appreciating that the business and charity could co-exist provided business is subservient to the charity.

5. Without prejudice to the above, Ld. CIT(A) erred in not appreciating that interest income arising out of Fixed Deposits at Rs.24,37,386/- made by the appellant trust in the manner laid down u/s.11(5) cannot be considered under the proviso to Section 2(15) since there is no commerciality in respect of the same.

6. Without prejudice to the above, Ld. CIT(A) erred in not appreciating that exemption u/s.11 could be denied only qua income of the activities falling out of the scope of proviso to Section-2(15) of the Income-tax Act, 1961 and since there was a deficit, no tax can be levied on the same.

5. Briefly stated, the facts of the case are that the Assessing Officer (AO) on verification of the details found that the assessee-trust had received interest income of Rs.24,37,386/- on investments. The AO took into account the fact that the predominant object of the assessee-trust was to provide service to its members. The assessee was providing various facilities such as restaurant, residential rooms, swimming pool, card rooms, sports facilities to its members. To some extent, such facilities were also provided to non-members. Membership to this Gymkhana or Club is extremely difficult and expensive thereby making it exclusive. Therefore, the AO held that the assessee-trust was not an association created/established for charitable purpose within the meaning of the provisions of section 2(15) of the Act. Therefore, he held that the assessee-trust was not entitled to exemption u/s 11 of the Act. The AO held that the income of by way of interest is clearly taxable as the same is not covered under the principals of mutuality. He relied on the decision in the case of Rajpath Club Ltd. 17 ITD 192, Bangalore Club vs. CIT350 ITR 509 and CIT vs. Common Effluent Treatment Plant (Theme-Belapur) Association reported at (2010) 328 ITR 362 (Bom.).

In view of the above, the AO brought to tax interest income of Rs.24,37,386/- and income from non-members of Rs.1,42,530/-.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that in the statement of facts filed before the CIT(A), the assessee- trust has stated that (i) it is registered as a public charitable trust under the Societies Registration Act, 1860, (ii) it is a registered u/s 12A of the Income Tax Act 1961 and its owners are entitled to exemption u/s 80G, (iii) none of its activities are restricted to any members and it is open to the benefit of general public, (iv) it has never claimed any income as arising out of ‘mutuality’ and exempt from tax.

However, the Ld. CIT(A) was not convinced with the above submission of the assessee and he held that registration u/s 12A would not ipso facto entitle the assessee to claim exemption u/s 11 in view of the decision in the case of Surat Tennis Club vs. CIT (2000) 75 ITD (Ahd).

The Ld. CIT(A) further found that the assessee-trust is engaged in ‘activity of rendering any service in relation to the business for a cess or fee’. According to him, this is evident from the fact that in object clause (h) of the assessee-trust, it is mentioned that it may give its property on rent. As per the copy of ‘hall booking form’ in Prabodhan Kridabhawan filed, the assessee-trust lets out the hall along with Mandap decoration, sound system services etc. through the authorized contractor appointed by it. The assessee is having income from letting out its hall/space for which rent is being charged. It is also running a cafeteria by the swimming pool from which rental income has been received as per Schedule 9 to the accounts. Accordingly, the Ld. CIT(A) held that these were commercial activity having no relation to charity. Also he noted from the accounts of the assessee-trust that it was charging up to Rs.1,25,000/- as membership fee (Ozone Club) which could not be afforded by a common man. In view of the above, the Ld. CIT(A) held that the assessee-trust was not a charitable organization, hence not eligible for exemption u/s 11. However, since it was engaged in providing services to its members it was a mutual association. Thus the Ld. CIT(A) held that the AO was right in holding that its income arose out of mutuality. The Ld. CIT(A) followed the decision in Bangalore Club (supra) and upheld the addition of interest income of Rs.24,37,386/- made by the AO. He also upheld the addition of income from non-members of Rs.1,42,530/-.

5. Before us, the Ld. counsel of the assessee submits in respect of interest income of Rs.24,37,386/- that (i) the assessee-trust is in existence since 1972, (ii) all the investments made by the assessee-trust are as per the mode specified u/s 11(5), (iii) the assessee-trust has operating deficit of Rs.4,817,606/- in AY 2010-11 and it attempts to cover its operating deficits out of other receipts such as interest on investments, donation, grants and other ancillary revenues, (iv) all these receipts are meant to assist the assessee-trust to fulfil its charitable objects and not generated with the intention of earning profits, (v) the assessee-trust is not in the business of investment, the surplus amount is invested in Bank FDs, (vi) the interest amount earned on the FDs is used for the activities of the assessee-trust.

5.1 In respect of income from non-members of Rs.1,42,530/- the Ld. counsel submits that the assessee-trust is serving members of general public for over 40 years and has been actively involved in many activities like promotion of sports, providing several social services to members of general public.

6. Per contra the Ld. DR relies on the order passed by the Ld. CIT(A). He submits that a club is generally a mutual association as its membership is restricted to a particular section and only the members and their guests are entitled for the services of the club. A charitable institution can run a club but the income attributable to the activities of the club would be governed by the principles of mutuality and not charitable purpose as its activities are not meant for the advancement of any other object of general public utility.

The Ld. DR further submits that since the assessee is engaged in providing services to its members these activities are not for charitable purpose but hit by the proviso to section 2(15) of the Income Tax Act.

7. We have heard the rival submissions and perused the relevant materials on record. In Sree Anjaneya Medical Trust vs. CIT [2016] 67 taxmann.com 230 (Kerala),it is held that “while granting registration to a trust, authority is empowered to examine only genuineness of trust and its activities; during assessment only eligibility in terms of sections 10, 11 and 12 is to be verified as to whether or not what was professed was indeed in Deed of trust.”

7.1 We find that the contentious issues in the instant appeal could have been resolved through a proper examination of the proviso inserted by the Finance Act 2008 in section 2(15) of the Act. It is pertinent to mention here that section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that “the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.”* Emphasis supplied] 7.2 The above proviso to section 2(15) shall apply to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entitles will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities.

7.3 We now sum up the issue. A. After an exhaustive survey of most of the landmark rulings, the law in different facet in respect of mutual concerns is now well summed up by the Hon’ble Supreme Court in CIT vs Bankipur Club(1997) 226 ITR 97, thus : “Where a number of persons combine together and contribute to a common fund for financing of some venture or object and 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. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associated together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. *But+ if the object of the assessee company claiming to be a ‘mutual concern’ or a ‘club’, is to carry on a particular business and the money is realised both from the members and the non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole, disclose the same profit-earning motive and are alike tainted with commerciality and the resultant surplus is profit-income liable to tax.”

B. In respect of proviso inserted by the Finance Act 2008 to section 2(15), one has to keep in mind that such entities shall not be eligible for exemption u/s 11 or u/s 10(23C) of the Act, if they carry on commercial activities. One has to examine the nature, scope, extent and frequency of such activity. We have perused the relevant materials on record and find that neither the AO nor the Ld. CIT(A) has examined the above aspects while arriving at their conclusion. In view of the above, we set aside the order of the Ld.CIT(A) and restore the matter to the file of the AO to make a fresh assessment in the light of our observation at para 7.3 herein-above and after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant details before the AO. As we have restored the matter to the file of the AO, we are not adverting to the case laws relied on by the Ld. counsels.