2022 (4) TMI 452 - AT - Income Tax

Tribunal rules for assessee on exemption, membership fees, mutuality principle, and Section 13 violation.

M/s Audit Bureau of Circulations Versus Income Tax Officer (Exemption) -1 (1), Mumbai

The Tribunal allowed the assessee's appeal concerning the denial of exemption under Section 11, the applicability of amended Section 2(15), and the ... Exemption under section 11 - As per AO assesseee’s activity of conducting circulation audit was clearly a business activity for which consideration in the form of membership subscription and one time entrance fees was received advertisers or advertising agencies that benefit from the circulation figure and this had no utility that benefit the general public as such - Violation of provision u/s 13 - AO also stated that assessee received a predetermined fees in accordance with the slabs depending upon the circulation figures for carrying out audit under the garb of annual membership subscription and this was nothing but the consideration received for carrying out the audit of the publishers - income of the assessee on account of members and entrance fees was exceeded ₹ 25,00,000/-, therefore, case of the assessee was not covered by the 2nd proviso to Sec.2(15) - assessee company was registered u/s 25 of the Company Act, 1956 without share capital and it was also registered as a charitable organization u/s 12 (a) HELD THAT:- The assessee company was established for the main object to secure accurate circulation figures and data relating to all periodicals and media that sell advertising space and in regard to such publication to obtain information as to area of distribution and fixed standard forms and methods for ascertaining the net sales figures and generally all information that will be of assistance to advertisers and estimating the value of any publication for advertising purposes and to record such information and circulate it to members of this association and generally to establish a bureau of information in regard to all publication and the circulation of them for the benefit of members of the this association. Identical issue on similar facts that the amended provision of Sec. 2(15) of the Act has not application in the case of the assessee had been adjudicated by the coordinate bench of the ITAT [2018 (8) TMI 1707 - ITAT MUMBAI] wherein held that the main object of the assessee is that the assessee has to secure accurate circulation figure and data relating to all periodicals and media that sell advertising space and in regard to such publication to obtain information as to area of distribution and fix standard forms and method of ascertaining the circulation figures. Bureau also records information and circulate it to the members which consist of publisher of newspaper/ magazines advertising and media agencies advertisers and Government publicity Department. It also distribute information relating to aforesaid matters to the Government and other association having objects and similar to those of this associations. The bureau certifies circulation figures of members publication based and on comprehensive audit by the auditor from a panel of approved auditors. This is one of the main activity of the assessee company. How the objects became commercial in nature is not understandable. The objects of the company are for the ultimate benefit of the public, but in what circumstances the objects of the assessee become commercial in nature, is not substantiated by the revenue in fact, even a single transaction of trade or commercial or business has not been referred to by the revenue. There was no change in the activity of the assessee since past years, and therefore, the amendment by insertion of the proviso u/s 2(15) of the Act would not make the activity of the assessee as trade, business and commerce in nature specifically in the circumstances when there is not a single instance of any business on record. The dominant purpose if any is charitable and incidental activities are not required to be treated as business in nature. Merely came into existence of provision of Section 2(25) of the Act nowhere makes the object of the Assessee commercial in nature. Instances of business and profession are also not on record. Taking into account all the facts and circumstances of the case, we are of the view that the CIT(A) has wrongly denied the claim of the assessee u/s 11 of the Act which is liable to be allowed in the interest of justice. - Appeal of assessee allowed. Invoking the provision of Sec. 13(1)(c) (ii) & Sec. 13(2)(g) r.w.s 13(3)(CC) - Section 164(2) provide for forfeiting of exemption for breach of Sec. 13(1)(d), resulting in levy of maximum marginal rates of tax only to that part of the income which has forfeited exemption. From the plain reading of this proviso it is evident that where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of Sec. 13(1)(c) or 13 (1)(d) then tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. However, in the case of the assessee the assessee by filing of evidences/detail regarding qualification of the Secretary General and his working experience and valuable contribution towards attaining the purpose and object of the trustee, the assessee has satisfactorily proved that salary paid to the Secretary General was not excessive or not in violation of the provisions of Sec. 13(3) of the Act. Therefore, we consider that denial of exemption to the assessee u/s 11 without disproving the contrary evidence furnished by the assessee is not justified. Accordingly, the appeal of the assessee is allowed. Validity of reopening of assessment u/s 147 - HELD THAT:- It is evident from the material placed in the record that reopening u/s 147 in the case of the assessee was based on the tangible material i.e order of CIT(Exemption) dated 19.03.2016 by which the registration granted was cancelled. During the course of appellate proceedings before us the assessee failed to prove contrary that there was no tangible material. Therefore, the judicial pronouncement cited by the assessee are distinguishable from the facts of the case of the assessee. Accordingly, this ground of appeal of the assessee is dismissed. Issues Involved:1. Denial of exemption under Section 11 of the Income Tax Act, 1961.2. Applicability of amended Section 2(15) of the Income Tax Act, 1961.3. Treatment of membership subscription and entrance fees as income.4. Alleged violation of provisions under Section 13 of the Income Tax Act, 1961.5. Reopening of assessment under Section 147 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Denial of exemption under Section 11 of the Income Tax Act, 1961:The primary issue was whether the assessee was eligible for exemption under Section 11. The Assessing Officer (AO) denied this exemption, arguing that the assessee's activities were commercial in nature. The AO noted that the assessee received substantial membership fees and entrance fees, which were considered business income. However, the Tribunal found that the assessee's activities were charitable as per its registration under Section 12A and the Companies Act, 1956. The Tribunal concluded that the denial of exemption was unjustified, as the activities were not commercial but aimed at securing accurate circulation figures for the benefit of members.2. Applicability of amended Section 2(15) of the Income Tax Act, 1961:The AO applied the amended Section 2(15), which excludes entities involved in trade, commerce, or business from being considered charitable if their income exceeds Rs. 25,00,000. The Tribunal referred to the assessee's objects and activities, which included securing accurate circulation figures and data for periodicals and media. The Tribunal found no evidence of commercial transactions and ruled that the amended Section 2(15) did not apply to the assessee, as its activities were for the ultimate benefit of the public and not commercial in nature.3. Treatment of membership subscription and entrance fees as income:The AO treated the membership subscription and entrance fees as taxable income, arguing that these were commercial fees. The Tribunal, however, noted that these fees were used to cover the cost of services provided to members on a no-profit-no-loss basis. The Tribunal held that these receipts were exempt under the principle of mutuality, as the activities were carried out for the mutual benefit of members and did not constitute business, trade, or commerce.4. Alleged violation of provisions under Section 13 of the Income Tax Act, 1961:The AO observed that the assessee paid an unreasonable salary to its Secretary General, violating Section 13. The Tribunal examined the Secretary General's qualifications, experience, and the gradual increase in salary over the years. It concluded that the salary was reasonable and commensurate with the services rendered. The Tribunal ruled that there was no violation of Section 13, and the denial of exemption under Section 11 on this ground was not justified.5. Reopening of assessment under Section 147 of the Income Tax Act, 1961:The assessment was reopened based on the cancellation of the assessee's registration under Section 12A by the CIT (Exemption). The Tribunal found that there was tangible material (the CIT's order) to justify the reopening. The Tribunal dismissed the assessee's contention that the reopening was not based on tangible material, affirming the validity of the reopening under Section 147.Conclusion:The Tribunal allowed the assessee's appeal regarding the denial of exemption under Section 11, the applicability of amended Section 2(15), and the treatment of membership fees under the principle of mutuality. The Tribunal also ruled in favor of the assessee regarding the alleged violation of Section 13. However, the Tribunal upheld the reopening of the assessment under Section 147. The appeals were partly allowed, with specific grounds decided in favor of the assessee.