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Income Tax Appellate Tribunal, “B”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAM LAL NEGI, JM
O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A)- Mumbai, dated 29-6-2012, for the assessment year 2009-2010, in the matter of order passed u/s.143(3) of the I.T.Act.
In this appeal the assessee is aggrieved for taxing the bank interest as income from other sources.
Facts in brief are that the assessee is a Club with the principal object of providing a Golf Course and allied facilities for the promotion of sport of Golf. The assessee was registered as a charitable organisation with DIT (E), Mumbai, under Section 12A under Registration No. INS/36487 dated 6th June, 2002. The assessee has been claiming 2 exemptions on the grounds of mutuality as well as under Section 11 on the basis that it exists for charitable purposes. The assessee filed its Return of income for AY 2009-10 declaring an income of NIL. The computation of total income filed by the assessee indicates that the only source of income declared for the purposes of Section 11 was interest on bank amounting to Rs.2,17,92,167. From this various expenditure and deprecation was claimed. A deduction under Section 11(1)(a) of 15% was claimed and having regard to the amounts spent on the objects of the Trust viz. the promotion of Golf, the income declared was NIL.
On scrutiny of the heads of income, AO observed that the assessee has received interest income of Rs.2,17,92,167/- which had been shown under the head ‘Other Income’. As per AO, the said income received by the assessee is not in the nature of mutuality and is from non members. In view of the decision of the Hon’ble Bombay High Court in the case of CIT V/s. Common Effluent Treatment Plant (Thane Belapur) Association (2010) 328 ITR 362, the interest so received from the non members was held to be taxable and there is no application of principle of mutuality for such earnings. Following the decision of jurisdictional High Court, the said interest incomes was brought to tax by the AO. The AO took up the assessment and was of the view that the assessee was not an entity set up for charitable purposes' as it violated the conditions prescribed in the proviso to Section 2(15) of the Income Tax Income Act, 1961 ('the Act') as it stood in Assessment Year 2009-10. The said proviso reads as follows. '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 3 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'. According to the Assessing Officer, the proviso was applicable with effect from AY 2009-10 and once an institution was hit by the aforesaid proviso, then it would follow that such an entity does not exist for a 'charitable purpose. In view of the above, the income of the assessee was computed as under: Income from interest (as discussed above) Rs.2,17,92,167/- -------------------- TOTAL INCOME Rs.2,17,92,167/- 5. By the impugned order CIT(A) confirmed the action of the AO, against which the assessee is in further appeal before us and has taken the following grounds:- “
1. The learned CIT(Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer holding that the assessee company is not carrying on any charitable purpose within the meaning of the proviso to section 2(15) of the Income Tax Act.
2. The learned CIT(Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer denying the benefit of section 11(1)(a) and section 11(2) of the Income Tax Act.”
6. At the outset Ld. AR drew our attention to the order of the Tribunal in assessee’s own case passed in ITA No.319/Mum/2012, dated 30-5- 2012, wherein the order passed by the Director of Income Tax(Exemption), Mumbai u/s.12AA(3) of the Act cancelling registration granted u/s.12AA was set aside and the appeal of the assessee was allowed.
In view of the aforesaid order of the Tribunal, dated 30-5-2012, it was contended by ld. AR that assessee is entitled for benefit u/s.11(1) and 12AA of the I.T.Act.
It was further submitted by ld. AR that investment made by Club with the bank is not an activity in the nature of trade, commerce business, but is income earned on application money as mandated u/s.11(5)(iii) of the I.T.Act. Our attention was invited to clause (iii) of Section 11(5) according to which assessee is statutorily required to deposit money with a schedule bank or a cooperative society engaged in carrying on business in banking. As per ld. AR assessee club was carrying on charitable activities u/s.13(1)(d)(ii), if the funds of a trust or institution is invested in assets other than those specified in Section 11(5), the exemption under sections 11 to 13 would be withdrawn. Reliance was placed on the decision of Hon’ble Delhi High Court in the case of GS 1 India Vs. DGIT 360 ITR 138(Del) in support of the proposition that proviso to section 2(15) even where assessee trust was charging a fee having regard to the economic status of the beneficiaries, it was necessary for the operation and running expenses and the sustenance of charitable activities, that a fee could be charged. And it cannot be said that assessee was carrying on any trade or commerce. He invited our attention to the observation of the AO to the effect that all other income other than interest income was held to be not taxable on the principle of mutuality. The deposit in the bank account and earning interest thereon which is basically passive income will not constitute any trade, commerce or business. He 5 accordingly submitted that interest earned on fixed deposit with bank complying with the provisions of Section 11(5) is exempt and proviso to Section 2(15) has no application to the facts of the instant case.
On the other hand, ld. DR relied on the order of lower authorities and contended that interest income earned from bank was income from other sources and therefore, in view of the proviso to Section 2(15), the AO has correctly brought to interest income as taxable as the same was not earned on mutuality.
Rival contentions have been considered on record and perused. We have also deliberated on judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR before us, in the context of factual metrics of the case. From the record we found that the assessee company is incorporated u/s. 25 of the Companies Act, 1956 and is having object of promoting golf. The assessee is registered as a charitable trust u/s. 12A of the Income Tax Act. The assessee company used to receive contribution from its members in the shape of entrance fees and monthly subscription. The assessee deposits entrance fees as a fixed deposit in schedule banks and earns interest thereon. The interest earned is spent towards the object of the company i.e. promoting golf. Even after earning interest income, the company has a deficit of Rs.10.97 crores. Thus, the interest so earned from banks helps the company to reduce its losses. The relevant Assessment Year under consideration is A.Y.2009-10. The assessing officer has taxed interest received from banks to the tune of 6 Rs.2,17,92,167/- relying on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Common Effluent Treatment Plant (Thane- Belapur) Association (2010) 328 ITR 362 and holding that interest income so received from bank i.e. non members is taxable and there is no application of principle of mutuality to such earnings. The AO took up the assessment and was of the view that the assessee was not an entity set up for charitable purposes’ as it violated the conditions prescribed in the proviso to Section 2(15) of the Income Tax Income Act, 1961 ('the Act') as it stood in Assessment Year 2009-10. The said proviso reads as follows. '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 '. According to the Assessing Officer, the proviso to section 2(15) was applicable with effect from AY 2009-10 and once an institution was hit by the aforesaid proviso, then it would follow that such an entity does not exist for a 'charitable purpose'. The second reason given by the Assessing Officer for denying the claim of the assessee was that the registration under Section 12A had been withdrawn by the DIT (Exemptions) by an order under Section 12AA(3) of the Act dated 8th December, 2011 with effect from AY 2009-10. The third reason given by the Assessing Officer was that the Bombay High Court in CIT vs. Common Effluent Treatment Plant, Thane Belapur Association (2010) 328 ITR 362 has held that the 7 principle of mutuality did not apply to interest received on surplus funds invested in Fixed Deposits.
Against the above order of AO, the assessee approached to the CIT(A) and it was submitted that the order made by the DIT (E) cancelling the registration under Section 12AA had been held to be not tenable either on law or on facts by the ITAT which vide its order dated 30th May, 2012, had directed that the registration granted earlier could not be cancelled by the OIT (E) for the reasons stated in that order. The CIT(A) was of the view that he could not with 'due deference' follow the findings of the ITAT as in his view the ITAT was not apprised of the facts correctly' and had not given 'a decisive finding' in this regard. The findings of CIT(A) are contained in paragraph 3.5 to paragraph 4.1 in his order.
We found that the AO has taxed interest income on the following three reasonings :- (i) the proviso to Section 2( 15) applies, (ii) the registration under Section 12A has been withdrawn by the OIT (E), and (iii) the decision of the Bombay High Court in Common Effluent Treatment Plant (2010) 328 ITR 362 hold that the interest received from non members is not exempt under the principle of mutuality. First we take the first objection of AO to the effect that proviso to Section 2(15) applies to the case of assessee. As per our considered view, the proviso denies an entity carrying on 'advancement of any other objects of general public utility' the benefit of the regime prescribed under Sections 11 to 13 of the Act if the entity concerned is involved in carrying on any activity in the nature of trade, commerce or business or any activity of 8 rendering any service in relation to any trade, commerce or business for a cess or fee or any consideration irrespective of the nature of use or application or retention of the income from such activity. The activity which according to the Assessing Officer has resulted in the application of the proviso and which is the subject matter of the assessment is the interest earned from banks. As per our considered view the investments made with banks is not an activity in the nature of trade, commerce or business but is income earned on application of moneys mandated under Section 11(5)(iii) of the Act which reads as follows :- "The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely:- (i) investment in savings certificates as defined in clause(c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Scheme of the Government; (ii) deposit in any account with the Post Office Savings Bank; (iii) deposit in any account with a scheduled bank or a co- operative society engaged in carrying on the business of banking (including a society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). Thus, as per the provisions of section 11(5), the assessee is permitted to deposit in any account with a scheduled bank on the deposits made therein and hence it cannot be said that interest received from the bank is in the nature of trade, commerce or business.
The investment in banks is not only authorised but mandated and is compulsory in so far as an entity carrying on charitable purposes concerned and in fact, under Section 13(1)( d)(ii), if the funds of a trust or institutions is invested in assets other than those specified in Section 11 9 (5), the exemption under Sections 11 to 13 would be withdrawn. It is therefore not only inexplicable, but absurd as to why the Assessing Officer has taken the stand that interest received from deposits in banks falls foul of the proviso to Section 2(15). It is to be noted that all the other activities and income streams received by the assessee have been held to be not taxable by the Assessing Officer himself in making his order dated 30th December, 2012 on the grounds of mutuality and the only amount which has been assessed to tax as income of the assessee is income from interest of Rs.2,17,92,167. Thus according to the AO compliance by a entity set up for charitable purpose with the provisions of section 11 (5) of the Act would result in its status of 'charitable purposes' being denied on account of the proviso to section 2( 15) of the Act. The direct consequence of such an interpretation would be that an otherwise 'charitable institution' would lose its status as a 'charitable institution' if it complied with section 11 (5) of the Act and if it did not comply with section 11 (5) of the Act it would be denied the benefit on the grounds that the entity has not complied with section 11 (5) of the Act.
Several decisions have considered and interpreted the scope, purpose and limits of the proviso to Section 2(15). In GS 1 India Vs. DGIT 360 ITR 138 (Del), the term trade, commerce or business was interpreted, and in that case even though the assessee was charging a fee having regard to the economic status of the beneficiaries, it was held that it was necessary for the operation and running expenses and the sustenance of charitable activities, that a fee could be charged. In the case of the 10 assessee on the other hand, there is no fee whatsoever and in fact, it is passive income not involving any activity whatsoever. Therefore, the AO was not correct in holding that act of deposit of money in scheduled bank account and receipt of interest thereon an activity in the nature of trade, commerce or business. The same view was taken by the Delhi High Court in Institute of Chartered Accountants of India Vs. DCIT 358 ITR 91 (Del), where the Institute was taxed by the Assessing Officer on the grounds that fees were charged by the Institute for providing coaching classes and for holding interviews with respect to campus placement. The Court held that such activities cannot be stated to be rendering service in relation to any trade, commerce or business at all. This was reiterated by the Delhi High Court in Bureau of Indian Standards v. DGIT 358 ITR 78 and in PHD Chamber of Commerce 357 ITR 296. The Gujarat High Court in DGIT Vs. Sabarmathi Ashram Gaushala Trust 44 Taxman 141 took the view that a Trust registered with the objects of breeding cattle and cows and oxen cannot be said to be carrying on activities of trade, commerce or business merely because considerable income was generated on account of production and sale of milk. The same view was taken by the Tribunal in DD!T Vs. All India Football 1 Federation 62 Taxmann.com 362 (Del Trib) dealing with a case of an Association having as its object the promoting of the game of footfall, organising tournaments, training players, coaches etc. The Tribunal held that the receipts by way of sponsorship do not alter the character of the main objects and is not affected by the proviso as it 11 cannot be said to be engaged in any activity which is in the nature of trade, commerce or business.
The second objection of AO was that the registration u/s.12A has been withdrawn by the DIT(E). At the time at which the Assessment Order was passed viz. 30th December, 2011, that fact was correct. However, the order withdrawing the registration under section 12A has been cancelled by the Tribunal and the Appeal of the assessee has been allowed by the Tribunal vide its order dated 30th May, 2012. Therefore, the second reason given by the Assessing Officer that the registration has been withdrawn is no longer valid as the registration, withdrawn by DIT(E) has been cancelled by the Tribunal vide its order dated 30-5-2012. Thus, the objection taken by the AO for declining of registration for exemption has been withdrawn has no legs to stand in view of the decision of the Tribunal in assessee’s own case in ITA No.311/Mum/2012, dated 30-5- 2012, wherein the order passed by DIT(E) u/s.12A(3) of the Act cancelling registration granted u/s.12AA was set aside and appeal of the assessee was allowed.
The last objection of AO was that decision of Hon’ble Bombay High Court in the case of Common Effluent Treatment Plant 328 ITR 362 was applicable and the interest received from non-members is not exempt under the principle of mutuality. From the record we found that the assessee has in fact complied and applied the decision of the Bombay High Court in Common Effluent in so far as in its return, the interest earned on fixed deposit with banks has not been claimed as exempt on 12 the grounds of mutuality. That is the reason why the assessee offered income of Rs.2,17,92,167 as income in the computation of total income for Assessment Year 2009-10 and thereafter claimed various deductions under section 11 of the Act. Thus, the AO has wrongly applied the proposition of law laid down by Hon’ble Bombay High Court to the facts of the assessee which are quite distinguishable.
In view of the above, we can safely conclude that the activity of the assessee depositing money in the bank does not constitute trade, commerce or business. The Assessing Officer has in fact gone much beyond and held that the interest itself constitutes taxable income falling foul of the proviso to section 2(15). If the Assessing Officer's view is correct, it will militate against the mandate requirement and object of Section 11 (5) of the Act read with Section 13 of the Act. These Sections require an entity seeking the shelter of Sections 11 to 13 to deposit its surplus funds in specified assets and it cannot be that the mandate requirement and object of Section 11 (5) which serves to put in place a mechanism to regulate the funds of the charitable institutions are overcome, overridden and nullified by an interpretation so that the very mandate of Section 11 (5) if complied with results in the institutions being declared to be non-charitable. This is a contradiction in terms and therefore must be rejected. Accordingly, we hold that the interest earned on fixed deposit with banks complying with the provisions of Section 11 (5) is exempt and the proviso to Section 2( 15) has no application to the facts of the assessee's case.