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Facts
The assessee, a charitable organization registered under Section 12A, filed appeals against orders denying exemption under Section 11 of the Income Tax Act. The Assessing Officer (AO) and CIT(A) invoked the proviso to Section 2(15) and the principle of mutuality to tax interest and other income. The assessee contended that its activities were for general public utility and not in the nature of trade, commerce, or business for a fee.
Held
The Tribunal held that the proviso to Section 2(15) was not applicable as the assessee was not engaged in any activity of trade, commerce, or business for a fee. The Tribunal also found that the principle of mutuality was not sustainable because the assessee's activities, including seminars and events, were for the benefit of the general public, not exclusively for its members.
Key Issues
Whether the assessee's activities fall under the proviso to Section 2(15) and whether the principle of mutuality is applicable to deny exemption under Section 11.
Sections Cited
Section 11, Section 2(15), Section 142(1), Section 147, Section 10(23C)
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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI SANDEEP GOSAIN, JM &
(Assessment Year: 2018-19) Insurance Brokers Association of ITO (Exemption) Ward-1(3), 609, 6th Floor, Cumballa Hill India, 1st Floor, A-Z Industrial Premises, MTNL TE Building, Pedder Vs. Unit No. 165, G.K. Marg, Road, Dr. Gopalrao Deshmukh Lower Parel, Mumbai-400013. Marg, Cumballa Hill, Mumbai-400026. PAN : AAATI1580R Appellant) : Respondent) : Shri Nitesh Josh a/w Shri Mayank Appellant /Assessee by Thosar, AR Revenue / Respondent by : Shri Krishna Kumar, Sr. DR Date of Hearing : 07.11.2024 Date of Pronouncement : 13.11.2024 O R D E R Per Padmavathy S, AM: These two appeals by the assessee are against the separate orders of Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre (NFAC) Delhi [in short 'the CIT(A)'] dated 10.06.2024 for Assessment Year (AY) 2016-17 & dated 11.06.2024 for AY 2018-19. The common issue contended in both the appeals pertain to the Assessing Officer (AO) applying the principle of mutuality in assessee's case to bring to tax the interest and other income by denying benefit of exemption under section 11 of the Income Tax Act, 1961 (the Act). The assessee in both the appeals has also raised a without prejudice ground that if the interest and other income is to be taxed by applying principle of mutuality the proportionate expenses should be allowed to be claimed as deduction.
The assessee is a company registered under section 25 of the Companies Act, 1956 and is registered as a charitable organization under 12A of the Act with DIT(Exemption). For AY 2016-17 the assessee filed a return of income on 14.10.2016 and the return for AY 2018-19 was filed on 29.10.2018. In both the AYs the assessee declared Nil income after claiming exemption under section 11 of the Act. The case of the assessee for both AY 2016-17 & 2018-19 were selected for scrutiny and the statutory notices were duly served on the assessee. The AO for AY 2016-17 issued notice under section 142(1) by placing reliance on the CBDT circular No.11/2008 dated 19.12.2008, asking the assessee to explain why not 1st proviso to section 2(15) of the Act should not be applied as the assessee is engaged in the activity of providing / rendering services to Members / Non-members in relation to trade, commerce or business for a fee. The Assessing Officer (AO) further stated in the notice that the activity of the assessee is to be considered on principle of mutuality and therefore interest income, sponsorship, receipt and other income cannot be allowed as exempt. The assessee in response filed a detailed written submission explaining the objects of the assessee contending that the principle of mutuality cannot be applied since the assessee engaged in charitable activities in the field of education and for advancement of any other object of general public utility. The assessee further submitted that the 1st proviso to section 2(15) of the Act is not applicable to assessee since the assessee is not carrying any activity in the nature of trade, commerce or business for a fee or any other consideration. The AO did not accept the submissions of the assessee held that the principle of mutuality is applicable in assessee's case and brought to tax the interest income and other income to the tune of Rs. 79,03,912/- for AY 2016-17. For AY 2018-19 the AO made an addition of Rs. 92,94,352/- for the same reason. On further appeal the CIT(A) upheld the addition made by the AO on the same ground that the assessee is predominately a mutual association and that on the principle of mutuality the interest income and other income are taxable. The assessee is in appeal against the order of the CIT(A) before the Tribunal.
The ld. AR submitted that the 1st proviso to section 2(15) of the Act cannot 3. be applied in assessee's case for reason that the assessee is not involved in carrying on any activity in the nature of trade, commerce or business for a cess or fee or any other consideration. The ld. AR drew our attention to the Income & Expenditure A/c of the assessee for the year ended 31.03.2016 to submit that the income of the assessee mainly consist of the Membership Subscription Fees, Sponsorship Fees and other income such as Bank Interest, etc. The ld. AR further submitted that from the perusal of the Income & Expenditure A/c, it is clear that the assessee is not earning any income by carrying on any activity in the nature of trade, commerce or business. The ld. AR argued that the assessee is in existence since the year 2001 registered under section 12A and that until now the revenue has been treating the assessee as a charitable institution and has been allowing the exemption under section 11 to the assessee. The ld. AR also submitted that for the AY 2010-11 there was a reassessment under section 147 of the Act in assessee's case and that the AO while completing the assessment under section 147 of the Act has accepted that the income of the assessee is exempt under section 11 of the Act and made no addition (page 78 to 80 of the PB). The ld. AR therefore, argued that the Revenue suddenly cannot claim that the principle of mutuality is applicable in assessee's case and accordingly tax the interest income and other income. The ld. AR further argued that Circular No. 11/2008 cannot be applied in assessee's case since as per the Circular the principle of mutuality should be applied only for those Trust who are carrying on activity in the nature of trade, commerce or business and are claiming exemption under section 11 on the ground that their objects are for chartable purposes as these are covered under any other object of general public utility. The ld. AR also argued that in assessee's case the assessee is not involved in any activity in the nature of trade, commerce or business and that the assessee's activity are not only beneficial to members but to public also which is substantiated by the fact that the assessee conducts annual meet for the benefit of general public without collecting any fee. In this regard the ld. AR drew our attention to the brochure for the annual meet of 2025 to submit that the object of the annual meet is to understand the needs of the customers, the roles of the brokers and to frame long term vision for the insurance brokers to drive customer centric growth. The ld. AR therefore submitted that the AO is not correct in applying the principle of mutuality in assessee's case to make addition towards interest and other income.
The ld. DR on the other hand relied on the order of the lower authorities.
We heard the parties and perused the material on record. The assessee is a charitable trust existing since 2001, having registration under section 12A of the Act. As per the submissions of the assessee the main objects of the assessee are as listed as under: To impart instructions & knowledge to further the objects of Association. To give grants or loans or scholarships for higher studies in insurance industry in India or abroad and for benevolent purposes. To promote interaction among the Insurance / Reinsurance Broker Members and to encourage, promote, facilitate & protect the interests of the members of the Company & to provide further education, training & research in all fields of insurance & reinsurance. To convene when thought necessary conference, seminars at such place and time as may be determined for the benefit of members and public at large and generally to do all other things incidental to the attainment of the above objects. To conduct, undertake the conduct of & participate in national & international seminars & conferences useful to the Members. To set up in association with the Insurance Institute of India and/or with the College of Insurance a system for dissemination of knowledge and technical expertise and skills and to hold examinations in order to ensure an adequate level of competence and professionalism.”
It is further submitted that the IRDAI has recognized the assessee as a professional body representing the interest of insurance intermediaries (brokers) and insurance consumers. It is also submitted that to attain the main objects the assessee is carrying on activities such as holding members meeting, holding meetings with officials of IRDAI to resolve issues, conduct seminars periodically to impart knowledge to members and for benefit of public at large, conduct workshops to educate members in complying regulatory compliances, at times of any legislative changes or guideline changes by IRDAI representing policy holders point of view to committee formed, etc. Accordingly it is contented that the assessee represents public at large in insurance matters and not only for the benefits of the members. The AO held that the assessee cannot claim exemption under section 11 of the Act since the 1st proviso to section 2(15) of the Act is applicable. The AO further held that the principle of mutuality is applicable in assessee's case and brought to tax the interest and other income earned by the assessee. The AO / CIT(A) placed reliance on Circular No. 11/2008 dated 19.12.2008 in this regard and therefore proceeding it is relevant to look at the relevant part of the Circular which reads as under –
“3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' Le., the fourth limb of the definition of 'charitable purpose contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section. 10(230) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 3.1 There are industry and trade associations who claim exemption from tax under section 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). 3.2 In the final analysis, however, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.”
The above circular provides that those institutions which are charitable institutions as well as mutual organizations where their activities are restricted to contributions from and participation of only their members the proviso to section 2(15) would not applicable owing to the principle of mutuality. The circular also provides that if such organizations have dealings with non-members, their claim to be charitable organizations have to be evaluated in the light of the conditions stipulated in the proviso to section 2(15) of the Act. In assessee's case it is not in dispute that it is a charitable organization since the assessee is registered under section 12A of the Act and that the revenue till now has not held the assessee to be otherwise. Now coming to the question of whether the assessee is a mutual organization, from the perusal of the financial statements of the assessee, we notice that the income of the assessee consist of subscription fee from members, sponsorship fees for annual event and bank interest (page 19 and 14 of PB). Further from the perusal of the brochure of the annual event, we notice that the event is held for the benefit of insurance consumers and brokers and that the events conducted without collecting any fees. Therefore, in our considered view there is merit in the submission of the ld. AR that the assessee is not only for the benefit of members but is also for the benefit of insurance consumers from general public. In our view when the assessee is engaged in charitable activity in the nature of advancement of any other object of general public utility, it cannot be said that the assessee is exclusively engaged in the activities beneficial only to its members. Therefore, we are of the view that the action of the AO in applying the principle of mutuality in assessee's case is not sustainable and accordingly the addition made towards interest and other income on that ground is not tenable.
The next issue is whether proviso to section 2(15) is applicable in assessee's case and in this regard we will look at the relevant provisions of section 2(15) of the Act. (15) "charitable purpose" includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:
Provided 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, unless— (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;
From the plain reading of the section, it is clear that the Trust whose objects is for the advancement of any other object of general public utility shall be held to be not for charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce business for rendering of any service to any trade, commerce or business for a cess or fee or any other consideration. We also notice that the income of the assessee does not contain any revenue from any activity in the nature of trade, commerce or business. Further the participation in the annual meet for which the sponsorship fees is received is free of cost and therefore cannot be held to be a service for a fee for rendering service. Considering these facts we are of the view that the AO is not correct in stating that the 1st proviso to section 2(15) is applicable in assessee's case without bringing anything on record to substantiate the claim. It is relevant here to consider the observations of the Hon'ble Supreme Court in the case of ACIT (E) Vs. Ahmadabad Urban Development Authority (2022) 143 taxmann.com 278 (SC) where it has been held that “200. Surat Art Silk (supra) and other decisions, had ruled that as long as the objects of trade promotion bodies were for general public utility wherein 'trade promotion' in itself, was held to be a GPU the fact that incidentally these bodies carried on some commercial activity, leading to profit, did not preclude them from claiming to be driven by charitable purpose. As observed earlier, the enunciation of those principles were in the context of the unamended section 2(15).
201.****** 202. In the opinion of this court, the change in definition in section 2(15) and the negative phraseology - excluding from consideration, trusts or institutions which provide services in relation to trade, commerce or business, for fee or other consideration has made a difference. Organizing meetings, disseminating information through publications, holding awareness camps and events, would be broadly covered by trade promotion However, when a trade promotion body provides individualized or specialized services - such as Conducting paid workshops, training courses, skill development courses certified by it, and hires venues which are then let out to industrial, trading or business organizations, to promote and advertise their respective businesses, the claim for GPU status needs to be scrutinized more closely. Such activities are in the nature of services "in relation to" trade, commerce or business. These activities, and the facility of consultation, or skill development courses, are meant to improve business activities, and make them more efficient. The receipts from such activities clearly are 'fee or other consideration' for providing service "in relation to" trade, commerce or business.
When we consider the facts in assessee's case in the light of the above observations of the Hon'ble Supreme Court we are of the view that the AO is not correct in denying the benefit of section 11 to the assessee by invoking the proviso to section 2(15) of the Act and in holding that the principle of mutuality is applicable to assessee to make an addition towards interest and other income. Accordingly, the AO is directed to delete the addition made in this regard.
For AY 2018-19 also the AO made the addition towards interest and other income by applying the principle of mutuality to the assessee. From the perusal of the Income & Expenditure A/c for the year ended 31.03.2018, we notice that the assessee derived income from member's subscription, sponsorship fees, bank interest and other income. In other words for the year ended 31.03.2018 also the assessee did not have any income arising from any activity in the nature of trade, commerce or business. Therefore, in our considered view our decision in assessee's case for AY 2016-17 as elaborated above is mutatis mutandis applicable to AY 2018-19 also. Accordingly, we direct the AO to delete the additions made towards interest and other income by invoking the principle of mutuality.
Since we have held that the assessee is entitled to claim exemption under section 11 and that the principle of mutuality is not applicable in assessee's case, the alternate ground raised by the assessee with regard to allowability of expenditure against the interest and other income have become academic not warranting any adjudication.
In the result, the appeals of the assessee for AY 2016-17 & 2018-19 are allowed. Order pronounced in the open court on 13-11-2024. Sd/- Sd/- (SANDEEP GOSAIN) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File