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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM] I.T.A No. 466/Kol/2016 Assessment Year : 2011-12 M/s. Calcutta Cricket & Football Club -vs.- I.T.O., Exemption-I, Kolkata Kolkata [PAN : AACCC 6337 P] (Respondent) (Appellant) For the Appellant : Shri J.P.Khaitan, Sr.Advocate & Shri Manoj Kataruka, Advocate For the Respondent : Shri G.Mallikarjuna, CIT(DR) Date of Hearing : 01.08.2016. Date of Pronouncement : 05.08.2016. ORDER Per N.V.Vasudevan, JM
This is an appeal filed by the Assessee against the order dated 29.02.2016 of CIT (Exemption)-1, Kolkata passed u/s 263 of the Income Tax Act, 1961 (Act) relating to AY 2011-12.
The Assessee is a company incorporated on 15.06.2003 u/s 25 of the Companies Act, 1956 i.e. a company not existing for the purpose of profits. For A.Y.2011-12 the assessee filed return of income on 26.09.2011 declaring nil income. The same was processed u/s 143(1) of the Act. Thereafter an order of assessment was passed u/s 143(3) of the Act on 25.03.2014 accepting the total income of the assessee at ‘nil ‘. The AO has recorded the following aspects while completing the assessment u/s 143(3) of the Act. “The asessee has been incorporated under section 25 of the companies Act. Registration under section 25 of the companies Act is granted only where the Central Government is satisfied that the company is formed for promoting, inter alia, charity or any er useful
2 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 object and intends to apply its profits, if any or other income in promoting its objects and prohibits the payment of any dividend to its members. During the year under consideration the assessee was engaged in the activities of (1) to promote the playing and encouragement in India of the games of Cricket, ball, Hockey, Tennis, Golf, Cycle, Polo, Swimming, Rugby and other form of sports (2) To organize and participate in competitive tournaments in different sports and games with object of improving the standards of the same and encouraging the achievement of higher standards of excellence and (3) To take over the assets and liabilities of the Calcutta Cricket & Football Club, an unincorporated Association, including its outstanding debts its right to use the ground at Ballygunge and to continue carrying on all its current activities. The activities are also mentioned in the memorandum of the assessee. “
The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons :- “On further verification of records, it has the notice that the assessee company had income from trade/ commercial activities like ‘BAR, catering and events’ and 'sports event' during the year and gross receipts from such activities were Rs. 2,84,85,247/- and Rs. 2,07,15,987/- respectively. It is evident that the assessee company not being a mutual organization had gross receipt exceeding Rs. 10 lakhs from trade/ commercial activities and, therefore, exemption u/s. 11 of the Income Tax Act, 1961 was not applicable. The gross expenses from such activities were Rs. 2,78,26,773/- and Rs. 1,49,15,097/- respectively. This resulted in income from such activities of Rs. 64,59,364/- and the same was under assessed. On the basis of above observation, it is found that the order passed u/s. 143(3) come Tax Act, 1961 is erroneous and prejudicial to the interest of revenue, and as such posed to initiate proceedings u/s. 263 of the Act, 1961 for cancelling the original assessment order u/s. 143(3) of the 1. T. Act, 1961.”
The CIT accordingly issued a show cause notice dated 29.09.2015 u/s 263 of the Act. The assessee by its reply dated 02.12.2015 pointed out that it was incorporated on June 5, 2003 in terms of section 25 of the Companies Act, 1956 as a not for profit company and that the Assessee took over the unincorporated association, Calcutta Cricket & Football Club, a members' club which traces its origin to 1792. The Assessee
3 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 pointed out that the main objects to be pursued by us according to the memorandum of association was:- "1. To promote the playing and encouragement in India of the games of Cricket, Football, Hockey, Tennis, Golf, Cycle Polo, Swimming, Rugby and other forms of Sports.
To take over the assets and liabilities of the Calcutta Cricket & Football Club, an unincorporated Association, including its outstanding debts and its right to use the ground at Ballygunge, and to continue carrying on all its current activities.
To organize and participate in competitive tournaments in different sports and games with the object of improving the standards of the same and encouraging the achievement of higher standards of excellence".
The Assessee submitted that its activities still continue to be that of the unincorporated association adverted to in the memorandum of association were that of a mutual association. The Assessee also pointed out that under Clause X of the Memorandum of Association upon winding up or dissolution, after satisfaction of all debts and liabilities, no property shall be distributed among members and the same shall be given or transferred to another company having similar objects. The Assessee further reiterated that the unincorporated association, Calcutta Cricket & Football Club, formed in 1792, was admittedly a members' club/mutual association and was assessed as such upto the assessment year 2004-05, i.e., till the time it was taken over by the Assessee when it was formed as a company. The Assessee drew the attention of the CIT to the various assessments in the case of the Assessee which were as given below:- “(i)Assessment order dated December 26, 2006 passed by the Deputy Commissioner of Income Tax, Circle 55, Kolkata, for the assessment year 2004- 05 holding that the unincorporated association was a members' club/mutual association but subjecting to tax interest on fixed deposit as non-mutual income.
(ii) Order dated March 29, 2007 under section 264 passed by the Commissioner of Income Tax, Kolkata - XX, inter alia, for the assessment year 2004-05 holding that even the interest on fixed deposit was not taxable.
4 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12
(iii) Grant of registration under section 12AA of the Act with effect from 1st April 2004.
(iv) The first assessment for the assessment year 2004-05, for which returns filed under section 139(4A) claiming exemption under section 11, was made subject matter of proceedings under section 147 for the purpose of bringing to tax, the surplus of Rs.6,67,907/- (before deduction of expenses/overheads debited to the Income and Expenditure account) in respect of provision of food and drinks to the members. By an order dated December 3, 2007 passed under section 147, the Assessing Officer accepted the returned income and did not make any addition in view of the judgment of the Hon’ble Supreme Court in CIT v. Bankipur Club Ltd.. (1997) 226 ITR 97 (SC).
(v) Assessment for the assessment year 2005-06 was made under sections 143(3)/11 of the Act and exemption under section 11 was allowed. The returns for the assessment years 2006-07 and 2007-08 claiming exemption under section ere accepted under section 143( 1).
(vi) In the assessment years 2008-09 and 2009-10 the Assessing Officer did not accept the Assessee’s claim for exemption and/or mutuality but such assessments were not sustained upon first appeal where it was held that the Assessee was a members' club engaged in the promotion of sports and games and are entitled to exemption under section 11. The revenue accepted the orders of the Commissioner of Income Tax (Appeals) for the assessment years 2008-09 and 2009-10 and no further appeal was preferred. In the assessments for the assessment years 2010-11, 2011-12 and 2012-13, all made under section 143(3), the Assessing Officer accepted that the Assessee was a members' club engaged in the promotion of sports and games and are entitled to exemption under section 11.
With regard to provision of food and drinks by the Assessee to members, it was submitted that it was a mutual activity and does not involve any sale. The Assessee's dining room where food and drinks are provided to the members is not a restaurant or a bar. A restaurant or a bar is a public place where food or beverages are served to customers for consideration. The club's dining room is for members only and is not a public place. The club's members are not its customers. The concept of consideration for provision of food or beverage is totally absent. The club is only an agent of its members 4
5 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 and recoups itself for the expenses incurred and does not act as a commercial or business concern for the purpose of making any gain.
The Assessee also pointed out that it did not have any surplus from mutual activities for the year question. Attention in this behalf was invited to income and expenditure account read with Schedules 12 and 13 to the accounts and Details of Schedule 13. The figures in Schedules 12 and 13 are before deduction of the administrative and other expenses/overheads reflected in the income and expenditure account. The administrative and other expenses/overheads debited to the income and expenditure account for the said year is Rs.2,13,37 263/- plus provision for leave encashment of Rs.2,70,605/-, that was Rs.2,16,07,868/-. The total of the income side of the income and expenditure account was Rs.2,36,51,788/- which includes interest and dividend of Rs.60,45,944/-. If such interest and dividend is excluded from income, one is left with a figure of Rs.1,76,05,844/- on the income side which is lower than the expenses/overheads of Rs.2,16,07 ,868/- by Rs.40,02,024/-. It was pointed out that in the show-cause notice, figures have been taken from Schedule 12 and details of Schedule 13, which are before deduction of the administrative and other expenses/overheads reflected in the come and expenditure account. There was in fact no income of Rs.64,59,364/- for the year in question and, on the other hand, there was a deficit of Rs.40,02,024/- from activities. The surplus of Rs.80,93,920/- which appears in the income and expenditure account is only because of the residuary interest and dividend income of Rs.20,43,920/- (Rs.60,45,944/- - Rs.40,02,024/-) and transfer of a portion of the admission fee received from the corporate members to the extent of Rs.60,50,000/- from Corporate Members' fund forming part of the Club's Capital Reserve to the income and expenditure account. The bonds, deposits and units which gave rise to income by way of interest and dividend are property held under trust for a public charitable purpose and the income there from is utilized for the promotion of sports and games. The admission fee received from the corporate members is actually a capital or corpus receipt. Reference was made 5
6 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 in this regard to the decision of the Hon'ble Bombay High Court in CIT -vs- Diners Business Services Pvt. Ltd., (2003) 263 ITR 1 (Bom)]. It was reiterated that surplus, if any, from mutual activities (though in fact there is none in this year) as also investment income is used for promotion of sports and games. It was submitted that by circular bearing No. 11 of 2008 dated December 19,2008, reported in (2009) 308 ITR (Statutes) 5, it was clarified by the Board that mutuality and charity can co-exist in respect of the same institution/association. By circular No. :-5 dated September 24, 1984, reported in (1984) 150 ITR (Statutes) 74, it was clarified by the Board that an association or institution engaged in the promotion of sports and games can claim exemption under section 11 of the Act. The Assessee pointed out that it promotes sports and games by- (i) training and equipping players free of cost; and (ii) improving the standards of the game and encouraging the achievement of higher standards of excellence. It trains and equips players who are mostly from amongst the public free of cost and are also involved in multifarious activities for improving the standards of different games and encouraging the achievement of higher standards of excellence by organizing various tournaments in which there are public participants as also inter- school tournaments. The Assessee’s activities in that behalf cannot be considered as trade/commercial activities. It was pointed out that the Director of Income Tax (Exemptions) by his order dated October 21,2011 under section 12AA(3) of the Act held that primary object was the promotion of organized sports in the city of Kolkata and that exemption under section 11 was available to the Assessee.
It was reiterated that the Assessee was never engaged in any trade or commercial activity and have no receipt or income from any such activity. That it was a mutual organisation engaged in the promotion of sports and games and is entitled to the exemption under section 11 which has all along been granted to us. In the years in which exemption was not granted in the assessment, the same was allowed on first 6
7 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 appeal, which decision was accepted by the revenue. It was emphasized that there has been no change in the facts or the law, which have remained the same in all the years. The amended provisions of section 2(15) were also considered in the assessment year 2009-10 and subsequent years. It was pointed out that for the assessment year 2009-10 relief was granted by the Commissioner of Income Tax (Appeals) and his order was accepted by the revenue.
It was thus contended that the order passed by the Assessing Officer granting us exemption under section 11 of the Act is neither erroneous nor prejudicial to the interest of revenue. Exemption under section 11 was rightly allowed and there has been no under assessment of any income. It was submitted that the condition precedent for the assumption of jurisdiction under section 263 does not exist in the facts and circumstances of the instant case.
The CIT was however not convinced with the explanation given by the assessee and he held as follows :- “Having gone through the assessee's submission and the relevant provisions of the Act, I find that the AO while passing such order u/s 143(3) dt. 25.3.2015 failed to appreciate the provisions of the Act vis-a-vis the activity carried on by the assessee and as such the AO's order is erroneous and Prejudicial to the interest of the revenue. On perusal of accounts submitted by AR it was noticed that receipts from sports activities are mostly from outsiders/ non-members. And receipts from bar, catering and events are from members, their guests and outsiders. Assessee case is covered in 1st Proviso of Section-2(15). Since aggregate receipt is more than Rs.10 lakhs, they are also covered by 2nd Proviso of Section- 2(15) also. Assessee is not entitled to claim the benefit of Section- 11 . Assessee has also tried to claim both charitable as well as mutual organization in spite of the fact that they have dealings with non-members. Also they have sponsorship from non- members, interest income on fixed deposit which is beyond the perview of mutuality. However, the assessee failed to address the aspect of the income from sponsorship which were mostly earned from third parties/ outsiders. It has to be clearly understood that such earning cannot be treated as mutual activity as well since such earning is from outsider and has no link on mutuality and in such respect I firmly and fully rely on the judgment of Hon'ble Supreme Court in the case of Bangalore Club v. CIT (2013) 29 taxmann.com 29 7
8 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 (SC) wherein the Hon'ble Apex Court had very clearly held that doctrine of mutuality does not come into play when the earning is from third party/ outsiders, also. The most important aspect is the interplay of doctrine of mutuality and exemption u/s. 11. On one hand, the assessee is claiming exemption u/s. 11. On the other hand taking shelter behind doctrine of mutuality. Section 12AA/11 does not apply to organization whose work is limited for benefit/ welfare of members of closed group. Whereas doctrine of mutuality is applicable only for closely held societies. There cannot be an interplay between section 11 and doctrine of mutuality. As discussed above, the claim of the assessee for Section-11 is more relevant than its attempt to get covered by doctrine of mutuality. Further in the return of income also the 'a' claimed exemption u/s.11. Therefore, the assessee's claim is to be adjudicated following the provisions of Section-11. Provision to Section- 2( 15) read with Section-13(8) will come in play while allowing a claim of exemption u/s. 11. Promotion of sports is covered under the head "other objects of general public utility". But activities related to bar, catering and events are commercial activities. Assessee is hit by 2nd Proviso of Section- 2( 15) of Income Tax Act. And since the gross receipt in such respect is more than 10 lakhs in the previous year the exemption so granted by the Assessing Officer u/s 11 is not in accordance with the provisions of the Act and as such the action of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Hence the order of Assessing Officer is set aside and the Assessing Officer is dire ted to pass an order accordingly after giving opportunity to the assessee.”
Aggrieved by order of CIT the assessee has preferred the present appeal before the Tribunal.
We have heard the submissions of the ld. Counsel for the assesee and the ld. DR. The ld. Counsel for the assessee drew our attention to the rules of the unincorporated assessment of the assessee in which under Rule-2 it has been specifically provided that the club shall be a private members club established for playing and encouragement in India of the games of cricket, hockey etc for recreation and for social amusement of such persons as shall be admitted to the membership under the subsequent provision of its rules. It was thus submitted by him that the assessee’s income was not chargeable to tax on the principle of mutuality. It was brought to our notice that upto A.Y.2004-05 assessee’s income remained not chargeable to tax on the principle of mutuality. However, in A.Y.2004-05 i.e., the first year in which the Assessee got incorporated as a 8
9 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 company, in the assessment completed u/s 143(3) of the Act, the income from activities of the members of the club was held to be not chargeable to tax. However, interest income on fixed deposits from banks which were members in the assessee’s club was held to be taxable and it was held that the members of mutuality will not extend to such interest income. This order of the AO was however reversed by the CIT in an order dated 29.03.2007 passed u/s 264 of the Act. For A.Y.2005-06, the assessment was completed u/s 143(3) of the Act treating the entire income of the assessee as exempt u/s 11 of the Act. For A.Y.2006-07 and 2007-08 the returns filed by the assessee claimed as exempt u/s 11 of the Act was accepted u/s 143(1) of the Act. For A.Y.2008-09 and 2009-10 in the orders passed u/s 143(3) of the Act, the AO held that the assessee was carrying on the activities in the nature of business and was not entitled to the benefit of exemption u/s 11 of the Act. For A.Y. 2009-10, similar order was passed by the AO in the assessment completed under the provision of Sec.143(3) of the Act. However on appeal by the assessee the CIT(A) vide order dated 19.02.2013 and 08.03.2013 for A.Y.2008-09 and 2009-10 respectively held that the assessee was entitled to the benfit of exempt u/s 11 of the Act. The order of CIT(A) in this regard for A.Y.2008-09 is reproduced herein below :- “4.1. As per the details submitted and as held by the Department for all earlier years, the assessee is a mutual organization. The Aa is directed to treat the assessee as mutual organization as there is no change in the status/activities of assessee in this year vis-a-vis earlier years. 4.2 As the assessee is held to be mutual organization, the admission fee received from any member including the corporate member cannot be taxed because of principle of mutuality. Aa is directed to remove the amount of admission fee from the receipts of the assessee for computing the income. 4.3 As per CBDT's Circular number 11 of 2008 dated 19-12-2008, mutuality and charity can co-exist. The assessee has no business dealings with non- members. The relations with non-members are limited to organization of sports activities on which the assessee' curs expenditure. Therefore, AO is directed to allow the exempt" as per section 11 on the income of assessee from investments.”
10 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 12. The above said order of the CIT(A) for A.Y.2008-09 and 2009-10 has been accepted by the revenue and no appeal was preferred before appellate forums. As far as A.Y.2010-11 is concerned, exemption u/s 11 was allowed to the assessee by the AO following the order of the CIT(A) for A.Y.2008-09 and 2009-10. As far as the A.Y.2011-12 is concerned the AO allowed the claim u/s 11 of the Act, after taking note of the history of assessment in the case of the Assessee. Therefore it cannot be said that the AO’s order is erroneous calling for revision by the CIT u/s 263 of the Act.
The ld. Counsel for the assessee drew our attention to the accounts of the assessee and submitted that if the interest and dividend income earned on investments is excluded then there shall be deficit and no surplus whatsoever. He brought to our notice that the findings of the CIT in the impugned order of 263 wherein the CIT had made reference to the second proviso to section 2(15) of the Act as well as the first proviso to section 2(15) of the Act. It was the submission that all these aspects were dealt by the CIT(A) in the appellate order for A.Y.2008-09 and 2009-10. The ld counsel for the assessee relied on the decision of the Hon’ble Calcutta High Court in the case of Russel Properties Pvt. India vs A.Chowdhury, ACIT 109 ITR 229 wherein the Hon’ble Calcutta High Court held that if the AO follows decision of Tribunal on an issue, the CIT cannot revise the same u/s.263 of the Act on the ground that an appeal has been filed against the order of the Tribunal. It was therefore submitted by the ld. Counsel for the assessee that the aforesaid decision will clearly apply to the facts and circumstances of the case, in as much as the AO in passing the order u/s 143(3) of the Act, has taken a view which in keeping with the decision rendered by the CIT(A) in assessee’s own case for A.Y.2008-09 and 2009-10. It was submitted that in the given circumstances the conclusions of the CIT in the impugned order u/s 263 of the Act cannot be sustained.
The ld. DR submitted that the principles of res judicata are not applicable in the income tax proceedings and in each year the revenue is at liberty to take a view on 10
11 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 taxability or otherwise of item of receipt. He pointed out that the assesse as per the memorandum of association of the Assessee, it also deals with the outsiders and it is clear from Clause-3 of the main objects of the assessee. There cannot be any dispute that in respect of income derived from the non members the principle of mutuality is not applicable and such receipts are chargeable to tax. It was his submission that the fact that the assessee obtained registration u/s 12AA of the Act is not conclusive and while concluding the assessment, whether the assesse is entitled to the benefits of section 11 of the Act or not is an issue which requires examination by the AO. Reference was made to the decision of the Hon’ble Supreme Court in the case of Bangalore Club case wherein it was held that interest received on deposits by the club in a bank which were its member is not exempt on the principles of mutuality. He also made a reference to the amendment to the provision to section 2(15) of the Act and submitted that the income derived from collecting fees from non members and allowing them to use the club was clearly in the nature of business and therefore the assessee would not be entitled to the benefit of exempt u/s 11 of the Act. The ld. DR placed reliance on the decision of the ITAT Mumbai Bench in the case of ADIT(Exemption)(11)(2) Mumbai vs M/s. Navi Mumbai Merchants Gymkhana Club in ITA NO.196/Mum/2013 ‘B’Bench dated 21.05.2014 wherein it was held that receipts from non members cannot be regarded as exempt on the principle of mutuality.
We have given a very careful consideration to the rival submissions. The undisputed facts are that the Assessee was originally an unincorporated association which is claimed to have it’s origin from 1792 and established for the playing and encouragement in India of the game of Cricket, Hockey, Football, Tennis, Golf, Cycle Polo, Rugby and other forms of Sport for recreation and for the social amusement of such persons as shall be admitted to membership under the provisions of the Rules. The Rules of the Assessee were first adopted at the Inaugural meeting of the Club on 30th April, 1965 and was amended from time to time. As per the Rules so adopted, the 11
12 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 Assessee continued to have its object the playing of sports as aforesaid by members of the Assessee. It was therefore an association which restricted its activities only amongst its members. The principle of mutuality will apply in such a situation and income or surplus of such association cannot therefore be regarded as income. The principle of mutuality is based on the concept that no one can make profit out of himself. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and thus all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied the particular form which the association takes is immaterial. The principle of mutuality has been applied to exempt from income-tax, the surplus arising to mutual associations in their joint endeavor.
On 5.6.2003, the Assessee got itself incorporated as a company under the Companies Act, 1956. The Assessee was incorporated u/s.25 of the Companies Act as it was formed for promoting, inter alia, charity or any other useful object and intends to apply its profits, if any or other income in promoting its objects and prohibits the payment of any dividend to its members. The main objects of the Assessee as per the Memorandum of Association, has already been set out in the earlier part of this order. The Assessee applied for grant of Registration u/s.12AA of the Income Tax Act, 1961 (Act) as institution which exists for charitable purpose. Sec.11(1) of the Act provides that income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property, shall not be included in the total income of the previous year of the person in receipt of the income. Sec.12A(1) provides that to Claim exemption u/s.11, the Assessee has to get registration u/s.12AA of the Act. 12
13 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 Before granting registration, the Commissioner of Income Tax (CIT) has to be satisfied that the objects of the institution seeking registration u/s.12AA of the Act are Charitable and after satisfying himself about the objects of the institution and the genuineness of its activities, registration will be granted. The Assessee made application for grant of registration and was granted registration u/s.12AA of the Act vide certificate dated 18.2.2005 issued by the Director of Income Tax (Exemptions), Kolkata.
Section 2 (15) of the Act, which defines the expression “Charitable purpose” for the purpose of the Act had undergone an amendment by the Finance Act, 2008 with effect from 01-04-2009. The expression of charitable purpose, prior to the aforesaid amendment read as follows; “(15) “Charitable purpose” includes relief to the poor, education, medical relief and the advancement of any other object of general public utility” The definition after the amendment reads as follows;
“Charitable purpose” includes relief of the poor, education, 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”. 18. It can be seen from the proviso to Sec.2(15) which came into effect from 01-04- 2009 that 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. It is not in dispute that the charitable purpose for which the Assessee was formed has to be regarded as falling within the category “any other object of general public utility”. 13
14 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 19. A second proviso was inserted to the provisions of section 2(15) of the Act by the Finance Act, 2010 w.e.f. 1.4.2009, which provided as follows;
“Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year”. (it became Rs.25 lakhs w.e.f. 1-4-2012) 20. In the case of Bangalore Club v/s. CIT 350 ITR 509 (SC), the question for determination before the Hon’ble Supreme Court was as to whether or not the interest earned by the assessee on the surplus funds invested in fixed deposits with the corporate member banks is exempt from levy of Income Tax, based on the doctrine of mutuality? The Hon’ble Supreme Court answered the aforesaid question in favour of the revenue by holding that interest earned from deposits with banks who are members of the club would not be exempt on the principle of mutuality because the tests for application of the principle of mutuality were not satisfied. The Apex Court held that no sooner any amount is invested by an association claiming to be mutual concern in a fixed deposit with the banks the complete identity between the contributors and the participants in the fund on the amounts invested in member banks is ruptured. It held that till the surplus funds were generated and was used only amongst the members/contributors, the complete identity between contributors and participants continued. However the moment the funds are invested in fixed deposits with the banks and the funds are used for advancing loans etc. by the Bank to its customers, the identity of participants and contributors is sapped. Thus the interest earned on fixed deposits is to be brought to tax. However, it is to be noted that it did not result in the Bangalore Club being taxed on all contributions of its members. In other words income which is not exempt on the principle of mutuality will still be eligible for exemption u/s.11 of the Act, if the conditions laid down therein are satisfied.
15 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 21. Even after incorporation as a company, the activities of the Assessee continue to be with its members only. The use of the club facilities is restricted only to members. Guests of the members are allowed to use the facility, provided the guests are accompanied by the members. Therefore the element of mutuality is not lost after the Assessee got itself incorporated as a company. As already mentioned the principle of mutuality does not vanish because of the form i.e., from an Association to a Company. The main objects of the Assessee as incorporated in the memorandum of association, continues to retain the element of mutuality. In fact in the assessment completed after the Assessee became a company, the revenue has accepted in the assessment completed for AY 2004-05 that the Assessee is a mutual association.
The income in the case of the Assessee for the relevant previous year is in the form of surplus generated from mutual activities which would be exempt by applying the principle of mutuality. The second category of income is income from investments in the form of interest etc. This would not be exempt on the principle of mutuality on the principle laid down by the Hon’ble Supreme Court in the case of Bangalore Club (supra). The third category of income is income generated by organising sports and events, where the participants are third parties. For this category of income also the principle of mutuality will not apply as there is no identity between the contributors and participants. The second and third category of income would still be exempt u/s.11 of the Act. The observation of the CIT in the impugned order u/s.263 of the Act is that there cannot be any interplay between Section 11 and doctrine of mutuality. This conclusion in our view is erroneous. There is nothing in the Act or any other precedent which prohibits allowing the benefit of Sec.11 of the Act to an Assessee, if the conditions specified therein are satisfied. In fact the CBDT Circulars referred to by the Assessee in the submissions before CIT clearly support the aforesaid view. In circular bearing No. 11 of 2008 dated December 19,2008, reported in (2009) 308 ITR (Statutes) 5, it was clarified by the Board that mutuality and charity can co-exist in respect of the 15
16 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 same institution/association. By circular No. :-5 dated September 24, 1984, reported in (1984) 150 ITR (Statutes) 74, it was clarified by the Board that an association or institution engaged in the promotion of sports and games can claim exemption under section 11 of the Act. Therefore, receipt which is treated as income because of non applicability of the mutuality principle will still be entitled to claim that income is not chargeable to tax because the income is applied for charitable purpose within the meaning of Sec.11 of the Act. It cannot therefore be said principle of mutuality and benefit of Sec.11 of the Act cannot be simultaneously claimed by an Assessee.
On the availability of exemption u/s.11 of the Act to the Assessee, the CIT has referred to the facility of bar and catering which generates income and according to the CIT, doing so violates the 1st as well as the 2nd proviso to Sec.2(15) of the Act, i.e., the activities were in the nature of carrying on business and hence cannot be regarded as “Charitable”. As we have already seen the income or surplus from these activities has always been regarded as falling within the principle of mutuality and therefore cannot be regarded as income.
As far as the income generated by organising of events of sports in which outsiders participate, the conclusion of the CIT is that such activity was in the nature of carrying on business and therefore the Assessee cannot be regarded as existing for “Charitable Purpose” and therefore exemption u/s.11 of the Act ought not to be allowed to the Assessee. The approach to be adopted in coming to the conclusion as to whether the proviso to Sec.2(15) of the Act will be applicable has been laid down by the Hon’ble Delhi High Court in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others 371 ITR 333 (Delhi). The Hon’ble Delhi High Court has laid down the following very important principles as to how the proviso to Sec.2(15) of the Act has to be interpreted:-
17 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 (i) The proviso to Sec.2(15) of the Act introduced by virtue of the Finance Act, 2008 with effect from 01.04.2009 has two parts. The first part has reference to the carrying on of any activity in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service ―in relation to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess‘ or fee‘ or any other consideration, income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retention of such income is irrelevant for the purposes of construing the activities as charitable or not. (ii) If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. If a literal interpretation is to be given to the proviso, then it may be concluded that this fact would have no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important. (iii) The meaning of the expression "charitable purposes" has to be examined in the context of “income”, because, it is only when there is income the question of not including that income in the total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable purpose, receives income would not make it any less a charitable institution. Whether that institution, which is established for charitable purposes, will get the exemption would have to be determined having regard to the objects of the institution and its importance throughout India or throughout any State or States. (iv) Merely, because an institution derives income out of activities which may be commercial, that does, in any way, affect the nature of the Institution as a charitable institution if it otherwise qualifies for such a character. (v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity 17
18 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 would also not fall within the categories of trade, commerce or business. If the driving force is not the desire to earn profits but to do charity, the exception carved out in the first proviso to Section 2(15) of the said Act would not apply. (vi) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above. (vii) Section 2(15) is only a definition clause. Section 2 begins with the words, ―in this Act, unless the context otherwise requiresǁ. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression "charitable purpose", as defined in Section 2(15) of the said Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression "charitable purpose" by the revenue. (viii) The expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. (emphasis supplied)
19 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 25. The income stream of the Assessee in the present case is receipts in the form of subscription from members, receipts from organizing Sports and Events, interest and dividend and other income. All these total Rs.2,36,51,788/-. The Expenditure of the Assessee is Rs.2,13,37,263/-. The net surplus generated is Rs.23,14,525/-. If the interest income of Rs.60,45,944/- is disregarded as being a passive income, then it can be safely said that the Assessee has not generated any surplus at all. This by itself would demonstrate that the Assessee does not exist for profit. The use of the club facility by outsiders on payment of a fee would clearly fall within the ambit of its main object viz., organize and participate in different sports and games with the object of improving the standard of the same and encouraging the achievement of higher standards of excellence. The fact that a fee is charged from outsiders does not take away the character of the Assessee as predominantly existing for charitable purpose. Thus the Assessee continues to exist for charitable purpose. under Clause X of the Memorandum of Association upon winding up or dissolution, after satisfaction of all debts and liabilities, no property shall be distributed among members and the same shall be given or transferred to another company having similar objects. It cannot be said that the Assessee is driven primarily by a desire or motive to earn profit but has to be considered as existing for the purpose of carrying on charitable activity viz., the advancement of any other object of general public utility. The Assessee has therefore to be regarded as existing for carrying on activities for charitable purpose.
We have already seen that in AY 08-09 & 09-10, the CIT(A) has already held that the Assessee is not hit by the proviso to Sec.2(15) of the Act. In fact in AY 2008-09 the issue was receipt of fee from Indian Cricket League for allowing use of the club ground for cricket practice for five days, for a fee of Rs.25 lacs. The CIT(A) in the appellate orders for both the AY 08-09 & 09-10 held that the Assessee cannot be denied the benefit of exemption u/s.11 as well as on the principle of mutuality. The facts of the case in the present AY are identical. In fact the AO when he completed the assessment for AY 2011-12 i.e., the assessment which is the subject matter of question by the CIT 19
20 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 in the impugned order passed u/s.263 of the Act, was fully aware of the decision of the CIT(A) and had completed assessment on that basis. In such circumstances, can the CIT in exercise of his powers u/s.263 of the Act term the action of the AO as erroneous? Such question had come for consideration before the Hon’ble Calcutta High Court in the case of Russel Properties Pvt.Ltd. Vs. ACIT (supra). The facts of the case before the Hon’ble Calcutta High Court was the Tribunal in the earlier AY of an Assessee held that maintenance and service charges received by an Assessee were assessable under the head "business" and not assessable under the head "property". Following the decision of the Tribunal, the ITO in a subsequent AY proceeded to assess such income under the head "business". The CIT in exercise of his powers u/s.263 of the Act felt that such income should have been assessed to tax under the head "property" as in respect of the prior years' findings reference application was pending before the High Court. The Hon’ble High Court had to decide as to whether in those circumstances, can it be said that the ITO who had accepted the Tribunal's decision as correct and applied that decision to the facts of this case acted erroneously and his action caused prejudice to the interests of the Revenue. The Hon’ble High Court held that as a matter of fact whenever there is a decision of the higher appellate authority, the subordinate authorities are bound to follow the said decision if judicial discipline is to be maintained. In the aforesaid view of the matter the Hon’ble Court held that the conditions for exercise of the power under s. 263, namely, that there must be material for the CIT to consider that the order passed by the ITO was erroneous in so far as it is prejudicial to the interests of the Revenue were not fulfilled. The proposed exercise of the power under s. 263 was held to be illegal and without jurisdiction.
The aforesaid decision of the Hon’ble Calcutta High Court is squarely applicable to the facts of the present case. The decision of the ITAT Mumbai in the case of Navi Mumbai Merchants Gymkhana, referred to by the learned DR before us is a case where the club gave its facilities for use by outsiders for social functions. This was held by the Tribunal to be not eligible for exemption u/s.11 of the Act. Similarly, income from 20
21 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 earned from use of the club facilities by non members for purpose of playing cards and use of permit room, catering etc., was held to be hit by the proviso to Sec.2(15) of the Act. In the present case, we have already seen that use of club facility by non members is prohibited by the Rules of the Assessee. The use by outsiders of the facilities of the club is in connection with promotion of sports which is a charitable purpose and which is well within the main objects of the Assessee. Therefore the decision relied upon by the learned DR before us is not of any assistance to the case of the revenue. The principle of res judicata is no doubt not applicable in income tax proceedings, but the admitted position in the past assessments have not been shown by the CIT in the impugned order as unsustainable. The whole approach of the CIT in the impugned order has been on the basis of decision in the case of Bangalore Club (supra). As we have already explained, that decision is applicable only in respect of income earned by the Assessee from investments. We have already held that the income in respect of which principle of mutuality is not applicable, would nevertheless be entitled to exemption u/s.11 of the Act, subject to satisfaction of other conditions laid down in that section. We have also held that predominant purpose for which the Assessee exists is for charitable purpose and that the proviso to Sec.2(15) of the Act would not be applicable in the facts and circumstances of the present case, which we have discussed in the earlier paragraphs.
For the reasons given above, we hold that the order passed by the AO u/s.143(3) of the Act dated 25.3.2014 for AY 011-12, which was revised by the CIT u/s.263 of the Act by the impugned order was not erroneous and prejudicial to the interest of the revenue and therefore the exercise of jurisdiction by the CIT u/s.263 of the Act is held to be not sustainable. Consequently, the order u/s.263 of the Act is hereby quashed and the appeal of the Assessee is allowed.
22 ITA No.466/Kol/2016 M/s. Calcutta Cricket & Football Club. A.Yr.2011-12 29. In the result, appeal by the Assessee is allowed.
Order pronounced in the Court on 05.08.2016.
Sd/- Sd/- [Dr.Arjun Lal Saini] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 05.08.2016. [RG PS]
Copy of the order forwarded to:
M/s. Calcutta Cricket & Football Club, 19/1, Gurusaday Road, Kolkata-700019. 2. I.T.O., Exemption-I, Kolkata. 3. CIT(DR), Kolkata Benches, Kolkata.