M/S CALCUTTA CRICKET & FOOTBALL CLUB,KOLKATA vs. ITO, EXEMPTION-1, KOLKATA, KOLKATA

3 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.

2. 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.

3. 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.

(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.

5 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.

6 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.

7 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.

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.”

9 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 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.

11 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.

12 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.

13 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.

14 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 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.

16 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.

17 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 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 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.

20 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.

21 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.

Order pronounced in the Court on 05.08.2016.