2012 (11) TMI 948 - AT - Income Tax

Tribunal upholds re-assessment under Section 147, taxes income from non-members, exempts interest charges.

The Tribunal upheld the initiation of re-assessment proceedings under Section 147 based on the provision of services to non-members, dismissing the ... Initiation of Re-assessment proceedings u/s 147 - change of opinion - held that:- To bring a case within the ambit of change of opinion, it is essential that firstly, some opinion should be formed on a particular issue. Such an opinion can be formed only when assessment is taken up. In a case when no assessment has been framed, there can be no point to form an opinion on an issue concerning the assessment. - Decided against the assessee. Principle of mutuality - The survey divulged that the assessee was also entering into transactions with non-members. - Loss of Mutuality - held that:- in a case of a non-mutual organization, a few transactions with the members do not convert its non-mutual status to mutual. In the like manner, the otherwise status of mutuality of an organization cannot be destroyed because of a few transaction with the non-members. What extent of participation by non-members destroys the otherwise mutual status of an organization or what extent of participation by members changes the otherwise status of non-mutuality depends on the consideration of the totality of facts and circumstances of each case. The mere fact that a person at the time of resignation or retirement is not entitled to share in the reserves of the organization, would not damage the mutuality so long as the persons who are entitled to share such reserves continue to be the members as a class. TDS u/s 234B where no TDS was deducted by the deductor - held that:- when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee u/s 234B. - Decided in favor of assessee. Allocation of expend tire by Head office - application of section 40C - Estimation of income at 5% of the gross amount recovered from non-members - held that:- There can be no dispute about the fact that any amount received by way of reimbursement, not containing any element of profit, is not liable to tax. - if there is certain reimbursement of expenses as such, without there being any mark up included in such reimbursement, there cannot be any question of earning any income liable to tax from such reimbursement. - this principle is not applicable in the the instant case. - Not only the basis of allocation of expenses but also that of the revenue, as done by the HO is not known to the assessee. Under such circumstances, the contention that the assessee was only recovering costs from its non-members and there was no profit element in it, is not open for verification. Sec 44C only talks of HO expenses, which mean executive and general administrative expenditure incurred by the assessee outside India including expenditure in respect of rent, rates, repairs etc. It is only the allocation of general and administrative expenses which is covered within the purview of section 44C. In the present case the basis of allocation of expenses is not known, but the basis of allocation of income is equally unknown at India level i.e. where neither the income side nor the expenditure side of the assessee's Income and expenditure account is fully capable of verification. It is in such circumstances that Rule 10 of Income-tax Rules, 1962 comes to the rescue of the Revenue for determination of income in the case of non-residents. It is this very rule which has been invoked by the Assessing Officer and also applied by the learned CIT(A) in estimating the income of the assessee - CIT(A) was more than justified in estimating the income at 5% of the gross receipts from non-members - In the result Revenue's appeal and assessee's cross objection stand dismissed. Issues Involved:1. Initiation of re-assessment proceedings under Section 147.2. Applicability of the principle of mutuality for tax exemption.3. Estimation of income from transactions with non-members.4. Charging of interest under Section 234B.Detailed Analysis:1. Initiation of Re-assessment Proceedings under Section 147:The assessee challenged the initiation of re-assessment proceedings, arguing that no income had escaped assessment as it was not liable to tax in India based on the principle of mutuality. The Assessing Officer (AO) initiated re-assessment proceedings based on a survey which revealed that the assessee provided services to non-members, thereby violating the mutuality condition. The Tribunal held that the AO had a valid reason to believe that income had escaped assessment due to the assessee rendering services to non-members. The AO's intention to 'examine' whether the assessee had accumulated reserves was deemed insufficient for initiating re-assessment. The Tribunal upheld the initiation of re-assessment proceedings based on the first reason (loss of mutuality due to services to non-members), dismissing the second reason (examination of reserves).2. Applicability of the Principle of Mutuality for Tax Exemption:The principle of mutuality exempts income from transactions among members of an organization. The Tribunal noted that the assessee had previously been granted exemption based on mutuality. However, the survey revealed that the assessee also provided services to non-members. The Tribunal upheld the CIT(A)'s decision that the principle of mutuality applied to transactions with members but not to those with non-members. The Tribunal distinguished between mutual and non-mutual transactions, concluding that the mutuality principle remained intact for transactions with members, while income from non-members was taxable.3. Estimation of Income from Transactions with Non-members:The CIT(A) estimated the income from non-members at 5% of the gross recoveries, applying Rule 10 due to the lack of verifiable details on expenses and revenues. The assessee argued that recoveries from non-members were mere reimbursements of costs without profit. The Tribunal found that the basis of allocation of costs and revenues by the Head Office was unclear and unverifiable. Given the lack of transparency and verifiability, the Tribunal upheld the CIT(A)'s estimation of income at 5% of the gross recoveries from non-members.4. Charging of Interest under Section 234B:The CIT(A) directed not to charge interest under Section 234B. The Tribunal upheld this decision, referencing the jurisdictional High Court's ruling that when the duty to deduct tax at source lies with the payer, the payee cannot be charged interest under Section 234B for the payer's failure to deduct tax. This principle applied to the non-resident assessee, exempting it from interest charges under Sections 234B and 234C.Conclusion:The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection, affirming the CIT(A)'s decisions on all counts. The initiation of re-assessment proceedings was upheld based on the provision of services to non-members. The principle of mutuality was applied to transactions with members but not to those with non-members. The estimation of income at 5% of gross recoveries from non-members was justified due to unverifiable cost and revenue allocations. Lastly, the exemption from interest charges under Section 234B was confirmed.