2024 (7) TMI 1422 - AT - Income Tax

Advocates Welfare Fund surplus taxable as mutuality principles violated by collecting from non-members while benefiting only members

The ITAT Hyderabad dismissed the assessee's appeal regarding the Andhra Pradesh Advocates Welfare Fund. The tribunal held that despite limited scrutiny ... Scope of limited scrutiny - assessee argued that the case is selected only for limited scrutiny, and therefore, it should only limit to verifying “Deduction against Income” which are covered u/s 57 - Applicability of the principle of mutuality to the assessee's income and expenditures - conflict with the mutuality principle by enforcing contributions from nonbeneficiary advocates - whether the statutory provision allowing benefits only to members while extracting contributions from non-members could invoke the principle of mutuality ? - process of raising contributions to the Andhra Pradesh Advocates' Welfare Fund is comprehensively delineated in the State Act - HELD THAT:- The interconnected nature of deductions and the principle of mutuality means that the learned Assessing Officer shall examine the issue of mutuality since directly impacts the evaluation of the deductions claimed. In this case, the requirement to verify the deduction against Income, is the implicit requirement that the learned Assessing Officer shall touch upon the mutuality issue to ensure accurate assessment of deductions. Since it is not possible to evaluate the deductions claimed, without examining the mutuality, and violation of mutuality principle is apparent on the face of provisions of Sections 15A and Section 15(1) of The State Act, learned Assessing Officer is justified in examining such an incidental issue also. Since the issue relating to the principal of mutuality is sine qua non for determining the issue of deductions claimed by the assessee, and such an issue does not require any in-depth examination, question of obtaining the permission of higher authorities does not arise. . On this score, we reject the contention of the assessee. Principle of mutuality - The argument advanced by the learned AR that a statute's provisions override this requirement and allow benefits only to members is not convincing. Hon’ble Supreme Court’s rulings in Chelmsford Club [2000 (3) TMI 4 - SUPREME COURT] made it clear that any breach of the identity between contributors and beneficiaries transforms the transactions into commercial ones, subjecting the surplus to taxation. Thus, the statutory mandate allowing benefits only to members while compelling contributions from non-members would not suffice to invoke the principle of mutuality and exempt the surplus from tax. The doctrine of mutuality, which suggests that no person can trade with themselves, is breached when contributors to a common fund do not receive proportional benefits or when an entity operates with a profit motive. The Andhra Pradesh Advocates' Welfare Fund Act, 1987, inherently breaches mutuality by creating two classes of contributors: members and non-members. Members, who apply and are admitted to the Fund, are entitled to various benefits, while non-members are excluded. This differentiation disrupts the principle of mutuality, as not all contributors to the welfare mechanism receive reciprocal benefits. No doubt, the Welfare Fund's structure does not align with typical commercial entities, as it is intended for the welfare of advocates rather than profit generation, but, at the same time, the differential treatment of advocates and the Fund's independent financial operations suggest a quasi-commercial character. Under Section 10, the Fund engages in activities like borrowing and investment, which are characteristic of commercial enterprises. Although these activities are for welfare purposes, the financial autonomy and the ability to generate income from various sources, namely, donations, investments etc., impart a commercial aspect to the Fund's operations. Despite the statutory mandate and however high the primacy of statutory objectives and legislative intent in determining the character and legality of an entity’s operations, given the patent breach of mutuality, in the light of various decisions of Hon'ble apex court referred to above, the Fund is not entitled to the exemption on the ground of mutuality. The doctrine of repugnance, as outlined in Article 254 of the Indian Constitution, addresses conflicts between laws passed by both the Central and State legislatures. This doctrine is typically invoked when a State law is repugnant to a Central law, necessitating the determination of which law prevails. According to Article 254(1), if a State law is repugnant to a Central law, the Central law prevails, and the State law becomes void to the extent of the repugnancy. However, Article 254(2) allows a State law to prevail in that State if it has received the President’s assent, although Parliament can subsequently override such State law. When a Central Act explicitly states its non-application in areas where there is State legislation on the same subject, the invocation of the doctrine of repugnance is unnecessary. The Central Act's provision for its own non-application in the presence of State law avoids any conflict, thus negating the need for Article 254 to be applied. We, therefore, hold that the doctrine of repugnance does not apply when a Central Act contains a clause that excludes its application where State legislation exists on the same subject. This clause demonstrates a clear legislative intent to defer to State law, effectively resolving potential conflicts and making the invocation of the doctrine of repugnance superfluous. The scheme and framework of The State Act reinforces that expenditures are application of received funds, conducted in a structured and regulated manner, but does not grant an overriding title to any authority to spend the funds without leaving any discretion to the Committee. On the other hand, it mandates the collection, management, and application of receipts through a structured process governed by the Welfare Fund Committee, ensuring that all actions are within the framework of The State Act. We, therefore, hold that The State Act does not provide an overriding title for spending funds for the objectives of the Fund, but rather outlines the application of receipts after they are received. In the framework of Income Tax Act, exemption provisions specifically Section 23, are conditional upon adherence to the mutuality principle and fulfilment of requirements set forth in Sections 11 and 12A. Conversely, Section 23 of the Andhra Pradesh Advocates’ Welfare Fund Act, 1987, also claims exemption from income tax, which poses a conflict due to the violation of the mutuality principle. Because of glaring breach of mutuality principle, despite the statutory objectives and legislative intent of the Andhra Pradesh Act, it cannot override or encroach upon the domain of central legislation concerning taxation. We accordingly find it difficult to accept the contention of the assessee. For the reasons recorded in the foregoing paragraphs, we are of the considered opinion that the impugned orders do not suffer any illegality or irregularity, and therefore, we uphold the same. Consequently, the appeal is found devoid of any merits and dismissed. Appeals of the assessee are dismissed. Issues Involved:1. Jurisdiction of the Assessing Officer to examine mutuality in limited scrutiny cases.2. Status of the assessee as a Local Authority or an instrumentality of the state.3. Applicability of the principle of mutuality.4. Applicability of the doctrine of repugnance.5. Tax exemption under Section 23 of the Advocates' Welfare Fund Act, 1987.6. Deductibility of expenses under Section 37 of the Income Tax Act.Detailed Analysis:1. Jurisdiction of the Assessing Officer to Examine Mutuality in Limited Scrutiny Cases:The assessee argued that the case was selected for limited scrutiny to verify deductions against income and that the Assessing Officer (AO) exceeded his jurisdiction by examining the principle of mutuality. The Tribunal held that the nature of deductions claimed was inherently dependent on understanding the nature of the income. Therefore, the AO was justified in examining the mutuality principle to determine the validity of the deductions. The Tribunal concluded that the interconnected nature of deductions and the principle of mutuality necessitated the AO's examination of mutuality to ensure accurate assessment of deductions.2. Status of the Assessee as a Local Authority or an Instrumentality of the State:The assessee claimed exemption under Section 10(20) of the Income Tax Act, asserting its status as a Local Authority or an instrumentality of the state. The Tribunal rejected this contention, stating that the Welfare Fund, governed by the Welfare Fund Committee, does not perform public administrative functions or possess jurisdiction over a geographical area, distinguishing it from entities considered local authorities under the Income Tax Act. The Tribunal referred to the Supreme Court's criteria in Ajay Hasia v. Khalid Mujib Sehravardi, concluding that the Welfare Fund does not meet these criteria.3. Applicability of the Principle of Mutuality:The Tribunal examined the principle of mutuality, emphasizing the necessity of complete identity between contributors and beneficiaries. The Tribunal referred to several Supreme Court rulings, including Chelmsford Club vs. CIT, Bankipur Club Ltd., and Bangalore Club vs. CIT, which underscored the requirement of identity between contributors and beneficiaries. The Tribunal found that the mandatory contributions from non-beneficiary advocates breached the mutuality principle, as not all contributors received reciprocal benefits. The Tribunal concluded that the statutory framework of the Andhra Pradesh Advocates' Welfare Fund Act, 1987, presents a conflict with the mutuality principle by enforcing contributions from non-beneficiary advocates.4. Applicability of the Doctrine of Repugnance:The assessee argued that the Central Act's provisions should prevail over the State Act, invoking the doctrine of repugnance. The Tribunal held that the doctrine of repugnance, as outlined in Article 254 of the Indian Constitution, addresses conflicts between Central and State laws. The Tribunal noted that the Central Act explicitly states its non-application where there is State legislation on the same subject, thereby precluding the need for the doctrine of repugnance. The Tribunal concluded that the doctrine of repugnance does not apply when a Central Act contains a clause that excludes its application where State legislation exists on the same subject.5. Tax Exemption under Section 23 of the Advocates' Welfare Fund Act, 1987:The Tribunal examined the claim for tax exemption under Section 23 of the Advocates' Welfare Fund Act, 1987. The Tribunal noted that the Central Act provides exemption under Section 23, but the statutory framework of the Andhra Pradesh Advocates' Welfare Fund Act, 1987, breaches the mutuality principle. The Tribunal concluded that despite the statutory objectives and legislative intent of the Andhra Pradesh Act, the glaring breach of the mutuality principle disqualifies the Fund from claiming exemption based on mutuality.6. Deductibility of Expenses under Section 37 of the Income Tax Act:The Tribunal addressed the deductibility of expenses claimed by the assessee, such as death benefits, financial assistance, funeral expenses, suspension of practice, and retirement benefits. The Tribunal agreed with the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] that these expenses are applications of income rather than expenses incurred exclusively for earning income. Consequently, these expenses were not allowable under Section 37 of the Income Tax Act. The Tribunal upheld the AO's decision to bring the surplus amount to tax.Conclusion:The Tribunal dismissed the appeals for the assessment years 2016-17, 2017-18, and 2018-19, upholding the orders of the AO and CIT(A). The Tribunal found no illegality or irregularity in the impugned orders and concluded that the assessee's claims were devoid of merit. The appeals were dismissed in their entirety.