TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 949
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.... 92,46,175/- by rejecting the claim of exemption of income on account of principles of mutuality in the given facts and circumstances of the case. 5. Brief facts relating to the case are that the assessee is an AOP and filed return of income for AY 2010-11 admitting an income of Rs. 1,10,45,669/-. The return filed by the assessee was processed u/s. 143(1) of the Income Tax Act, 1961 ["Act" in short]. Subsequently, the case was manually selected for scrutiny and the Assessing Officer(AO) issued notice u/s. 143(2) of the Act dated 23.09.2011. While computing its taxable income, the assessee has claimed certain income, which is shown as receipts in the Profit and Loss Account, as inadmissible income and reduced the same from its gross total income and computed the tax on such net total income. The assessee claimed such inadmissible amounts representing members' subscription (Rs.88,580/- ), donation from members (Rs.82,55,600/-), New Member Donation (Rs.7,20,000/-), Five-rupee donation (Rs.1,80,795/-) and entrance Fees from Members (Rs.1,200/-) as inadmissible and exempt. On perusal of the Accounts and other relevant details filed by the assessee, the AO held that the dominant a....
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....horities. The ld.AR also filed the tax audit report, Trading and profit and loss account, Balance sheet of the assessee for the year ending 31.03.2008, 31.03.2009, 31.03.2010 and 31.03.2011 in support of the investments made in the assets of the organisation out of the capital fund contributed by the members along with profits earned from business (after taxes). 7. The ld. DR Shri P. Krishna Kumar, JCIT submits that there is no clarity in the submissions of the assessee as to whether the said funds were utilized for welfare of the members. He referred to page No.12 of the order of the ld.CIT(A). The AO and the ld.CIT(A) discussed the same in detail and placed reliance on the finding of the ld.CIT(A). The ld.DR prayed to dismiss the grounds raised by the assessee. 8. Heard both the parties and perused the material available on record. We note that the assessee is a Lorry Owners Association registered as a Society with the Registrar of Societies and derives its major income from running of two Petrol bunks and trading of automobile spare parts in the Auto division and trading in oil stores. During the course of assessment proceedings, the assessee filed the Trading and Profit a....
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....'contributors to the fund are the participators in the fund and that there should be complete identity between the "contributors" and the "participators". It is seen from the business activities of the assessee, that the total transactions include dealings with the members of the public as well as the members of the Association. The 'participators in the fund' therefore, are not the 'contributors to the fund'. The carrying on of the business transactions by the assessee is like a commercial business activity of the assessee which is as much for the non-members (open market) as for the members. Therefore the claiming of any contribution by the members under the "Principles of Mutuality" is not correct and the same is liable to be taxed. * The claim of the assessee that the transaction with the non-Members are only incidental to the activities but the ultimate beneficiaries are the members lacks conviction in view of the following facts. A table briefly furnishing the details of the total sales and the sales effected to the members and the non-members is given below:- Products Total Sales Sales to Members Sales to Non-Members Percentage of ....
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....rs, shows that most of the expenses incurred in the Account is of administrative nature only like Salary Expenses, Office Expenses, General Body Meeting Expenses, Election Expenses, Sitting Fees for Board of Directors, Calendar Expenses, Telephone and Travelling Expenses, Postage and Printing Expenses, Advertisement Expenses, Refreshment Expenses, General Expenses, Audit Expenses, Rates and Taxes Expenses, etc. There was certain expenditure in the nature of death relief and insurance provided to the members but the quantum was much less in comparison to the volume of business done and the amount of funds generated. 10. On perusal of the above, we note that the case of the Assessing Officer is that for claiming any income as exempt under the "Principles of Mutuality", it must essentially be seen whether the 'contributors to the fund are the participators in the fund and that there should be complete identity between the "contributors" and the "participators" and we find the business activities of the assessee is not only with the members of the assessee but also non-members. The above referred tabular form consisting of products, total sales to members and non-members and per....
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....sible amounts, which was confirmed by the ld. CIT(A). 13. We note that the Assessing Officer relied on the judgement of the Hon'ble Supreme Court, in the case of M/s Bangalore Club v. CIT in Civil appeal No. 124 of 2007 dated 14.01.2013 and observed that for the applicability of the 'Doctrine of Mutuality', an assessee has to primarily satisfy the three conditions for entailing himself to avail exemption. First condition is that there must be complete identity between the contributors and the participators. Second condition is that the actions of the participators and the contributors must be in furtherance of the mandate of the Association. And third condition is that there must be no profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. The test of the applicability of the above conditions with reference to the case of the assessee as discussed by the Assessing Officer in page Nos. 13 & 14 of the assessment order are reproduced hereinbelow for better understanding: * Firstly, there should be complete identity between the contributors and the participators. As discussed in the very beginning of thi....
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....he participators as mandated in the first condition. The first condition for a claim of mutuality is therefore not satisfied. * Secondly, the action of the participators and the contributors must be in furtherance of the objects of the Association, i.e. the treatment of the excess funds must be in furtherance of the objects of the Association. This is not so here. The surplus funds were not fully used for any specific service, infrastructure, direct benefit of the members etc. though it is stated that the members were given compensation during the strike period and death relief to the family of the deceased member and members' insurance etc. were paid, the details of such expenditure was not furnished. In this regard, the AR stated that, ... The receipts of the sangam are utilized as stated above both for commercial activities and for the activities directly for the benefit of the members of the sangam and hence the ultimate beneficiaries of the income and funds of the sangam are only the members. No separate account is maintained for the transactions with members and non-members to arrive at the direct benefit to the members. * A perusal of the finan....
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....Bangalore Club v. CIT reported in 350 ITR 509, we note that the question before the Hon'ble High Court of Karnataka, which led to the Civil Appeal before the Hon'ble Supreme Court was that whether the Principle of Mutuality can be made applicable to the fund deposited in the four banks were also members of the club, especially, when the fund is raised from contribution of certain members including the four banks and the interest derived from it is utilized by several members of the assessee club? The Hon'ble High Court of Karnataka held that what has been done by the club is nothing but what could have been done by a customer of a bank. The principle of "no man can trade with himself" is not available in respect of a nationalized bank holding fixed deposits on behalf of its customers. Consequently, the Hon'ble High Court was pleased to reverse the order of the Tribunal and restore the order of the Assessing Officer. The Hon'ble Supreme Court, while dealing with the above stated issue in batch of Civil Appeals No. 124 of 2007 with ors., held the amount of interest earned by the assessee therein from the above noted four banks will not fall within the ambit of the Principle of Mutual....
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....t given to the member customers cannot be allowed and the same has to be added back. When the assessee challenged the order u/s. 263 of the Act before the coordinate bench of this Tribunal vide ITA No.1574/Chny/2018 dated 22.12.2021 for the A.Y.2013-14, the order of the ld.PCIT has been quashed by clearly stating that "the discount given to the members particularly for the business purposes and therefore, it cannot be said that the discount is not allowable u/s. 36 of the Act. Due to business exigencies, the assessee wanted to reduce its profits by making more turnover by giving discount to the members. Therefore, it is business decision of the assessee for the purpose of its business". The relevant paragraph of the decision is given below: "6. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below along with paper book filed by the assessee. During the course of assessment proceedings, the Assessing Officer has issued notice on 12.06.2015, wherein, the assessee was asked vide question No. 4 to explain the discount given to non-members and IC Limited lorries and also vide question No. 5 to explain the discou....