Income Tax Appellate Tribunal - Mumbai
Lions Club International Foundation, vs Department Of Income Tax on 10 October, 2007
1
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "B", MUMBAI
Before Shri J. Sudhakar Reddy, Accountant Member
& SHRI Vijay Pal Rao, Judicial Member.
S.No. I.T.A. No. Asstt. Appellant Respondent.
Year
1. 3861/Mum/2008 2004-05 Dy./Asstt. Lions Club International
Director of Foundation, Freepress
Income House,14th Floor,
Tax(IT),4(1) Freepress Jour
Mumbai. Mumbai -400 021.
2. 3862/Mum/2008 2005-06 -do- -do-
3. 2762/Mum/2009 2006-07 -do-
4. 5198/Mum/2007 1998-99 ADIT (IT)-
3(2), -do-
Mumbai.
5. 5199/Mum/2007 1999- -do- -d0-
2000
6. 5200/Mum/2007 2000-01 -do- -do-
7. 5201/Mum/2007 2001-02 -do- -do-
8. 5202/Mum/2007 2002-03 -do- -do-
9. 5203/Mum/2007 2003-04 -do- -do-
10. 5138/Mum/2007 1998-99 -do- Lions Club International,
Freepress House,14th
Floor, Freepress Jour
Mumbai -400 021.
11. 5139/Mum/2007 1999- -do- -do-
2000
12. 5140/Mum/2007 2000-01 -do- -do-
13. 5141/Mum/2007 2001-02 -do- -do-
14. 5142/Mum/2007 2002-03 -do- -do-
15. 5143/Mum/2007 2003-04 -do- -do-
2
S. C.O. No. Arising out of Asstt. Cross Objector Respondent.
No. ITA No. No.
1. 198/Mum/2008 3861/Mum/2008 2004-05 Lions Club Dy./Asstt.
International Diretor of
Foundation, Income Tax
Freepress (IT)-4(1),
House,14th Mumbai.
Floor, Freepress
Jour
Mumbai -
400 021.
2. 199/Mum/2008 3862/Mum/2008 2005-06 -do- -do-
3. 214/Mum/2009 2762/Mum/2009 2006-07 -do- -do-
Department by : Shri R.S. Rana.
Assessee by : Shri F.V. Irani.
ORDER
Per Bench :
All these appeals are filed by the Revenue and are directed against the separate but identical orders of the CIT(Appeals) passed on different dates i.e. on 31-03-2008, 25-05-2007, 09-03-2007, 15-05-2007 . As the issues arising in all these appeals are common, for the sake of convenience, they are heard together and disposed of by way of this common order.3
2. The assessee has filed cross objections for the assessment years 2004- 05, 2005-06 and 2006-07 in the case of Lions Club International Foundation. In the cross objections, the assessee challenged the reopening of assessments.
3. Facts in brief :
Before the CIT(Appeals) the assessee filed a statement of facts along with form 35. In the case of Lions Club International Foundation. The statement of facts reads as follows :
(1) Lions Clubs International Foundation, herein referred to as LCIF, is a public, non-profit, tax-exempt corporation as described in Section 501(c)(3) of the U.S. Internal Revenue Code of 1954. LCIF was incorporated in the United States on June 13, 1968, as the charitable arm of Lions Clubs International. LCIF is a vehicle by which contributions, large and small, are received and disbursed to aid Lions worldwise in humanitarian service endeavors.
The foundation's mission is to support the efforts of Lions clubs around the world in serving their local communities and the world community through humanitarian service, major disaster relief and vocational assistance programs.
(2) The members of the Board of Trustees of this corporation, as from time to time constituted, shall, by virtue of such positions, be voting members of this corporation, and shall comprise the entire voting membership thereof. Any person who ceases to hold a position shall cease, thereon, to be a voting member of this corporation. The executive administrator of The International Association of Lions Clubs (LCI) shall be the executive administrator of LCIF.
4(3) LCIF's grants given to member clubs have been utilized for distribution of food and clothing to victims of natural disasters, by way of donations for the Gujarat and Orissa Cyclone relief, Gujarat and Maharashtra Earthquake etc. besides providing vocational training and equipping clinics and hospitals for the youth and disabled. The Board of Trustees scrutinizes all applications for projects requiring donations and gives grants for deserving projects. LCI staff, with the approval of the LCIF chairperson, shall conduct site visits to selected grant funded projects to ascertain progress and verify appropriate use of awarded grant monies. (4) The source of funds for LCIF is only donations which are voluntary and grants from Headquarters to supplement shortfall, if any. (5) In the assessment, the Learned Assessing Officer rejected the applicability of the Principle of Mutuality to the appellants and further added a sum of Rs.14,72,32,660/- to the income of the appellant by applying the provisions of section 68 of the Act on the basis that the genuineness, identity and creditworthiness of the donors could not be established.
4. In the case of Lions Club International no statement of fact has been filed by the assessee before the CIT(Appeals). However, before the learned CIT(Appeals) the facts have been narrated. These are very elaborately stated. A brief background and facts are given in the opinion extracted by the learned CIT(Appeals) in his order. We extract the facts from this opinion :
Opinion of Bansi S. Mehta:
" The activities of LIC are comprise of administering the functioning of each and every member club ("Lions Club") and co-ordinating their activities. All individual members are required to pay dues (in the form of 5 entrance fees, membership fees etc.) The annual dues which are received from the Lion Members are used by LCI to defray subscription price of the Lion Magazine. Administrative and Annual convention costs of LCI and similar District costs LCI holds Programs, Seminars and Institutes for Leadership Development and other forums and these programmes are only for Lion members and non lions are not allowed to take part. Thus, funds received from members are utilized for mutual benefit of members.
Furthermore, on perusal of the Articles/Memorandum/Constitution & By Laws, it clearly indicates that the administration and working of the Association and implementation of policies are established and are implemented on the concept of mutuality. Each member is equally represented with individual identity and status thereby, establishing the fact of complete transparency i.e. the identity between the contributors and the participators of the Association and Foundation.
Opinion of Grant Thornton.
"Facts and Background
1. The International Association of Lions Clubs also known as Lions Clubs International (LCI) is a non profit making organization registered in llions, United States of America (USA) and has many members all over the glob.
2. Lions Club International Foundation (LCIF), charitable grant making arm of LCI is also a non profit making charity organization registered in the State of llinois USA.
3. LCI pursues its charitable objective through LCIF in multifarious ways by building / running hospitals, clinics, schools, playgrounds, etc. other health care, charitable activities.
4. LCI has an office in Mumbai that has been set up to assist the US head quarters' administration and to support and assist the Lions Clubs, in India and neighboring countries, in carrying out their charitable objectives.
5. The Mumbai office maintains separate NRO accounts with Union Bank of India for both LCI & LCIF, respectively for receipts of funds and for making eligible expenditure. The above accounts are exclusively operated by authorized persons from headquarters i.e. USA.
6. LCI and all its member clubs are required to maintain two separate bank accounts, one for administrative expenses and other for donations / 6 charity. The receipts in donation/charity account are used exclusively for the purpose of donation / charity and no amount is utilized for administration purposes.
7. The receipts in LCI's administrative NRO account are majorly comprised of the following :
Receipts from Indian Member clubs
(i) Annual membership fees,
(ii) Entrance fees from new member clubs.
(iii) Premium fees from few members opting to
become "founder members"
Remittance from LCI head quarters for Shortfall, if any in The administrative expenditure.
8. The payments from LCI's administrative NRO account can be broadly bifurcated as under :
- Administrative expenses (salaries etc) for assisting the member clubs in India and neighboring countries;
- If LCIF is short of funds or purposes to grant some funds to Lions Clubs in India for some charitable purpose and there are unutilized funds with LCI the same may be transferred to LCIF's NRO account.
9. We have been informed that LCI maintains adequate documentation for the receipts from the Indian member club.
10. LCIF is the charitable arm of LCI, providing grants for various charitable purposes including events like natural disasters by way of emergency grants.
11.The sources of deposits in LCIF's NRO account are;
- Donations received from various member clubs of LCI and
- Grants received from headquarters / Transfer from LCI's NRO account;7
12. All accounts received by LCIF as donation / grant in its NRO account have been expended towards giving grants to the Indian member clubs of LCI for charitable purposes.
5. The AO issued a notice u/s 148 asking the assesses to furnish their returns of income within a period of 30 days. The assessee filed a return declaring Nil income.
6. The AO observed that the assessee is a trust registered in Illinois, USA. He further observed that as per notice to the computation of income, it was stated that the organization is a non profit making organization. As far as Lions Club International Foundation is concerned, the AO observed that it is a charitable grant making arm of Lions Club International. It was further observed that the assessee claimed that only source of receipt is voluntary donations from the members and in view of the principles of mutuality , no income arises out of these activities. The AO took into account the amounts received by the assessee in the bank statement. He noted that the representative of the assessee has stated that all the books of accounts were maintained in USA and that no India's specific account is maintained. He also recorded the submission that the grant received from USA and the sources of the same could not be furnished. The modus operandi of the Lions Club International and Lions Club International Foundation were explained to the AO. The AO rejected the contentions of the assessee that these are organizations governed by principle of mutuality. He observed that the assessee is a charitable organization and found that it has not taken registration with the Commissioner of Income Tax u/s 12A of the Act. Further he observed that the principle of mutuality does not apply and that the nature of grants received is taxable in India. He recorded that the assessee did not furnish the statement of donations nor could it furnish PAN and address of India specific donors. He held 8 that the provisions of section 68 are applicable. Thus he brought the total donations to tax. Aggrieved, the assessee carried the matter in appeal. The first appellate authority after elaborately considering the submissions of the assessee held that the assesses are covered by principles of mutuality and thus the income is not taxable. For the sake of brevity, the finding and conclusions of the learned CIT(Appeals) are not repeated. Suffice to say, the written submissions of the assessee are extracted and thereafter the same were forwarded to the AO, replies obtained. Reasons for admission of additional evidence were given. The learned CIT(Appeals) referred to various opinions obtained and case laws and ultimately arrived at a conclusion that the principles of mutuality apply. Aggrieved, the Revenue filed these appeals before us.
7. Shri S.S. Rana, learned DR, appeared on behalf of the Revenue and Shri F.V.Irani, learned counsel, appeared on behalf of the assessee. Both parties agreed that the wording of the learned CIT(Appeals) in all the orders are the same and that one lead order may be taken up and that this when adjudicated, can be applied to all cases.
8. Mr. Rana submitted that Lions Club International and Lions Club International Foundation are non Govt. Organizations (NGOs) which receives grants not only from the Govt. of USA but also from various other charitable institutions. He submitted that both these concerns are nonresident trust. He relied on the order of the Authority of Advance Rulings in the case of General Electric Pension Trust, In re 280 ITR 425 (AAR) and submitted that the income of both these nonresident trust are not taxable in USA and thus they do not get the benefit of double taxation avoidance agreement. Thus he submitted that the 9 income is subject to domestic law. He argued that the relevant sections that are to be considered are sections 5(2), 2(24)(ii)(a) and 10(21). He submitted that the case of the assessee is not covered by section 10 and as the assessee has not obtained registration u/s 12A of the Act, he cannot claim exemption u/s 11, 12, as a charitable organization.
9. Thus he submits that as per the definition given u/s 2(24), all Voluntary contribution received by the assessee are income. He vehemently contended that the principle of mutuality does not apply to the assessee. He submitted that the CIT(Appeals) at para 5.19 page 60 talked about only membership fee and not donations. He submitted that the assessments were completed u/s 144 and nobody verified whether the assessee received any voluntary contributions. He referred to the website of the assessee-Institutions and submitted that, it is stated therein, that the assessee has in fact inviteddonations. He pointed out that the Articles of Association of Lions Club of India and Lions Club of International Foundation have not been filed by the assessee either before the AO or before the CIT(Appeals) and thus they have remained unexamined. He vehemently contended that the principles of mutuality i.e. the contributors to the fund are the same persons who are also the participants of the fund, is not satisfied in these cases. In charitable organization as per the learned DR, the contributors are different from the recipients or beneficiaries of the fund. He pointed out thatin both these, the condition that the contributors to the fund must be entitled to participate in the surplus, is not satisfied. He referred to page 51 of the CIT(Appeals)' order and submitted that, it is recorded therein that the Internal Revenue Code (IRC) and Regulations of USA 10 Treasury Department would not permit any distribution that would inure to the benefit of any private interest, member or individual. It is also mandatory under the IRC and Regulations that on dissolution of a non profit entity, the remaining assets should be distributed for public charitable purpose. This as per the learned DR, is contrary to the principles of mutuality. He relied on the judgment of the Hon'ble Supreme Court in the case of Chelmsford Club vs. CIT 243 ITR 89 (SC) and submitted that surplus should be for members welfare and not for charity. He also relied on the judgment of Wankaner Social Welfare Society vs, CIT 260 ITR 241 (Mad). He pointed out that the benefit from the contribution of the members is for the public at large.
10. Mr. Rana further submitted that the assessee has not filed the bye- laws or the Articles of Association. Hence it is not known as to what is the type of Organization i.e. whether it is the society, trust, section 25 company etc. He pointed out that it is true that grate service is being rendered by both Lions Club of India and Lions Club International Foundation but submitted that the good work is not relevant to the decision on the issue. He submitted that the assessee has not furnished accounts and under those circumstances the first appellate authority was wrong and that his finding that this is a mutual organization is to be vacated.
11. The learned counsel for the assessee Mr. F.V. Irani, submitted that the issue is covered in favour of the assessee by the decision of the Jodhpur Bench of the Tribunal in the case of various Lions Clubs vide ITA No. 519/JDPR/2007and others order dated 10-10-2007 a copy of which is furnished before us. He submitted that the assessee is not claiming exemption either u/s 10 11 or u/s 11, 12 & 13 and thus the arguments of the learned DR on this issue are not relevant. He submitted that the only controversy that is relevant, is whether the associations in question are mutual associations or not. He explained before the Bench the concept of mutuality. He referred to page 35 of the CIT(Appeals)' order, specifically to para 4.5 and argued that the main claim of the assessee is that the Lions Club all over the world have joined together for the development of their members and also to carry out the common objects of the association which includes the civil, cultural, social and moral for welfare of the community. He referred to the circumstances under which the assessee could not furnish certain details before the AO and justified the decision of the first appellate authority to accept the additional evidences and submissions of the assessee. He relied on the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Northern India Motions Pictures Association 180 ITR 160 and submitted that in this decision the Hon'ble Court held that just because the members agreed to contribute the surplus, in the event of dissolution of the association to a similar association or to a charitable trust, does not lead to a conclusion that the assessee would not be entitled to the benefit of principles of mutuality. Thus he submits that the argument of the learned DR that on dissolution, the assets have to be given to charity and hence the principles of mutuality is legally not correct. Mr. Irani submitted that the test in this case is whether the members have control on the disposal of the surplus. He submitted that the judgment of the Hon'ble Punjab & Haryana High court in the case of Northern India Motions Picture Association has been approved by the Hon'ble Supreme Court in the case of CIT vs. Bankimpur Club Ltd. 226 ITR 97 (SC).He submitted that the Jodhpur Bench was considering the case of individual Lions clubs at the bottom of the 12 three tire organization and it has taken a view that these are mutual organizations. He submitted that the tests are as to who has contributed and who is entitled to the surplus and that the purpose of which the association is formed is not important. He vehemently contended that it is not relevant to go into the issue as to who is the person who would beneficial in terms of the objects of the association. He filed a booklet containing bye-laws of Lions Club International and drew the attention of the Bench to the same. He further referred to page 9 of the CIT(Appeals)' order and submitted that the charity in question is done through members club only. On a query from the Bench he submitted that the full Bench of the Hon'ble Patna High Court in the case of CIT vs. Ranchi Club Ltd. 196 ITR 137 held that merely because the assessee had entered into transaction with non members and earned profit out of the transactions held with them, it's right to claim exemption on the principle of mutuality in respect of its transactions with its members was not lost and the assessee continues to be a mutual concern. He contended that as far as the receipts of this organization are concerned, the AO has only brought to tax membership fees only and argued that they cannot be taxed as the same would not be having the character of income. He relied on the judgment of the Hon'ble Andhra Pradesh High Court in the case of CIT vs. West Godavari District Rice Millers' Association 150 ITR 394 for the proposition that the test of mutuality of the participation of the member envisaged, is not that the member should take the surplus to themselves but it would be enough if they have a right of disposal over the surplus.
12. Mr. Irani submitted that the form of the organization, is not relevant for the purpose of deciding whether the Institution is governed by the principles 13 of mutuality or not. He submitted that the entity is just a methodology on convenience and is not relevant. Alternatively Mr. Irani submitted that without prejudice to his arguments, in case the Bench comes to a conclusion that the concerns are not governed by the principles of mutuality, then the propositions laid down by the Hyderabad B-Bench of the Tribunal in the case of Nirmal Agricultural Society vs. ITO 71 ITD 152 (Hyd) has to be applied for computation of income on commercial lines. He also relied on the decision of Hyderabad B-Bench of the Tribunal in the case of Society for Integrated Development in Urban and Rural Areas (SINDUR) vs. DCIT reported in 90 ITD 493 (Hyd.).
13. The learned DR, on the other hand, filed certain material papers down-loaded from the Internet to demonstrate that in the United States, the charitable organization is an organization, that is organized and associated for purposes that are beneficial to the public interest and took the Bench through the various classifications that are given in IRS of the USA. He also filed a document which is down loaded from the website of the Lions Club International which declares that the foundation is a non profit tax exempt corporation. He submitted that these organizations are only for charity and no individual can be benefited and hence the principles of mutuality do not apply. He also relied on the judgment of Hon'ble Supreme Court in the case of Bankimpur Club Ltd. (supra) specifically at page 7 para 12 and argued that the judgment of the Hon'ble Punjab & Haryana High Court has not been approved by the Hon'ble Supreme Court as claimed by the learned counsel for the assessee. On the other hand, he relied upon the judgment of the Hon'ble Punjab & Haryana High Court in the case of Haryana State Cooperative Labour and Construction Federation Ltd. vs. CIT 252 14 ITR 265 (P&H) (page 4 para 12) for the above proposition that the judgment of Northern India Motion Pictures Association (Supra) is not approved by the Supreme Court. He submitted that the decision of the Jodhpur Bench of the Tribunal does not apply to the facts of the case.
14. On a query from the Bench, the learned DR Mr. Rana, though not leaving his ground, agreed that in case the Bench holds that these are not mutual organizations, then gross receipts cannot be brought to tax and that income should be computed as per commercial principles and other well settled principles of determining income, as brought out by the decision of the Tribunal in Nirmal Agrl. Society as well as in SINDUR (supra).
15. Mr. Irani referring to the cross objections, submitted that there are issue of reopening for the assessment years 2004-05, 2005-06 and 2006-07 in the case of Lions Club International Foundation. The learned counsel for the assessee has not made any arguments on the issue of reopening.In the absence of any arguments on the validity of re-opening, we dismiss these cross objections.
16. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and orders of the authorities below as well as the case laws cited, we hold as follows :
17. The Hon'ble Supreme Court in the case of Chelmsford Club vs. CIT 243 ITR 89, after considering a number of decisions on the issue of mutuality, at page 97, held as follows :
15" From the above extract of the judgment, it is crystal clear that the law recognizes the principles of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. In the above case, this court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. Of Agrl. I.T. (1948) 16 ITR 270 (PC); existence of which establishes the doctrine of mutuality. They are as follows (page 559) :
" (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policyholders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves."
18. In the case of CIT vs.Bankimpur Club Ltd. 226 ITR 97 also the Hon'ble Court discussed the principles of mutuality and at page 103 held as follows :
" It should be noticed that in the case of a "mutual society or concern"
(including a "members' club"), there must be complete identity between the class of contributors and the class of participators. The particular label or form by which the mutual association is known, is of no consequence. The said principle which has been laid down in the leading decisions and emphasized in the leading English text books mentioned above, has been explained with reference to Indian decisions in "The Law and Practice of Income-tax" (English edition, Volume I, 1990) by Kanga and Plkhivala at page 113, thus :
"...... The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he was paid.' The Madras, Andhra Pradesh and the Karnataka High Courts have held that the test of mutuality does not require that the contributors 16 to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that non winding up the surplus will be transferred to a similar association or used for some charitable objects......"
19. Now we examine the Articles of Incorporation of Lions International Foundation a copy of which is filed with us. Article II reads as follows :
" The purpose or purposes for which the corporation is formed are as follows :
"To operate exclusively for charitable, scientific, literary or educational purposes, or for the prevention of cruelty to children or animals, including but not limited to making gifts and contributions to one or more organizations (other than organizations testing for public safety) described in Section 501 (c)(3) of the Internal Revenue Code of 1954"
Sub-clause 4 of Article II reads as follows :
"4. No compensation or payment shall ever be paid or made to any member, officer, director, trustee, creator, or organizer of this corporation, or substantial contributor to it, except as a reasonable allowance for actual expenditures or services actually made or rendered to or for this corporation; and neither the whole nor any part or portion of the assets or net earnings, current or accumulated, of this corporation shall ever be distributed to or divided among any such person; provided further, that neither the whole nor any part or portion of such asset or net earning shall ever be used for, accrue to, or inure to the benefit of any member or private individual within the meaning of Section 501 (c)(3) of the Code."
Clause 6 of Article II reads as follows :
"6. In the event of termination, dissolution or winding up of this corporation in any manner or for any reason whatsoever, its assets remaining after the payment of all debts and charges against the 17 corporation, if any, shall be distributed to (and only to) one or more organizations organized and operated exclusively for one or more purposes within the meaning of Section 501 (c)(3) of the Code, as the Board of Trustees of the corporation shall determine."
Article VII reads as follows :
" The number and names and addresses of the first Board of Trustees are as follows:
1) Edward E. Davis M. Lindsey, 226 Waterloo Street, Lawrenceburg, Tennessee 38464
2) Finis E. Davis, 1701 Spruce Lane,Luuisville, Kentucky 40207.
3) William K. Richardson, Knox Country Court House, Galesburg, Illinois 61401.
4) Josep W. Ganim, Post Office Box "A", Stratford, Connecticut 06497
5) William C. Frogala, 7120 Little River Turnpike, Annandale, Virginia.
Article VIII reads as follows :
"The term of this corporation is perpetual. "
20. This organization has been registered as State of Illinois, Office of the Secretary of State under the "General not for profit Corporation Act."
21. On a perusal of these documents, we are not able to persuade ourselves to agree with the conclusions of the first appellate authority that the principles of mutuality apply in this case. This is a charitable organization. The Foundation has no members. It has only members who are Trustees and are to manage the affairs of the trust. This is not an association or organization formed by the members. In our considered opinion, the principle that the contributors to the common fund and the participators in the surplus must be an identical body is not met in this case of LCIF. The Board of Trustees are empowered to manage the 18 affairs and business of the foundation. The organization has been founded for undertaking charity for the public at large. When such is the object and purpose of the organization, the fact that the Board of Trustees shall be composed of all voting members of the Board of Directors of the International Association of Lions Clubs etc. does not come to the rescue of the assessee. When an organization is not a members organization, the question of holding such an organization as a mutual concern by the learned CIT(Appeals), in our opinion, is erroneous.
22. In view of our above finding that the above organization is a charitable organization and is not formed by members, but is a TRUST, the principle that no person can make a profit out of himself, does not apply, and thus, we need not go into the other propositions canvassed by both the parties. Suffice to say that the principles of mutuality cannot be applied to this organization i.e. Lions Club International Foundation. Thus we reverse the order of the learned CIT(Appeals) on this issue. At the same time, we set aside the matter to the AO for fresh adjudication of quantum of income for the reasons given in the last two paras of this order.
23. Now we consider the case of the International Association of Lions Club. The Articles of Association of the International Association of Lions Club has been filed before us. Article 2 and 3 are extracted below for ready reference :
ARTICLE II Purposes.
The purposes of this association shall be :19
a) To organize, charter and supervise service clubs to be known as Lions Clubs.
b) To coordinate the activities and standardize the administration o f Lions clubs.
c) To create and foster a spirit of understanding among the peoples of the world.
d) To promote the principles of good government and good citizenship.
e) To take an active interest in the civic, cultural, social and moral welfare of the community.
f) To unite the clubs in the bonds of friendship, good fellowship and mutual understanding.
g) To provide a forum for the open discussion of all matters of public interest; provided, however, that partisan politics and sectarian religion shall not be debated by club members.
h) To encourage service-minded people to serve their community without personal financial reward, and to encourage efficiency and promote high ethical standards in commerce, industry, professions, public works and private endeavors.
i) ARTICLE III Membership.
The membership of this association shall consist of Lions clubs, duly organized and chartered under the provisions hereof.
It has been held by the learned CIT(Appeals) at para 5.8 to 5.11at pages 53 to 55 for A.Y. 2002-03 as follows:
"5.8 Lions Club International is essentially a members club. It is not a trade or professional association. The character of the club is not that of trade or professional club. The club was formed to carry out the mutual aim of the members to carry out the charitable activities as well as the activities connected with the personality development of the members. The club exists for the members and not to carry on any business. The Hon'ble Delhi 20 High Court in the case of CIT Vs. Delhi Race Club (1940) Ltd. 75 ITR 111 has held as follows :
" The privilege in the case of the Royal Western Indian Turf Club was limited to admission into a separate enclosure where they were not disturbed by the intrusion of non members. They, like the non members, however, paid an admission fee in that case. The privilege in the present case is extended further to similar admission in the enclosures for viewing and participating in the races, being free. This extra facility in the present case is incidental to membership and is, therefore, completely immune from every taint of commerciality. The character of the subscription paid by the members in this case cannot be said to undergo a change merely because the facilities or the privileges enjoyed by the members of the assessee are more than the facilities and privileges enjoyed by the members of the Royal Western India Turf Club. These facilities and privileges may be more or less in a given case. The test is whether they are referable to the contributions by members as such and are immune from the taint of commerciality. The entrance fees and periodical subscriptions paid by the members for obtaining membership of the assessee club in the present case and which remain payable even if the racing is stopped or suspended, cannot be said to be received by the assessee out of any profit motive; and they remain immune from the taint of commerciality even when the members are allowed the privilege of a free admission into stands, where non members would be required to pay, the said members' privileges being clearly referable to their membership of the club. The receipts from members' subscriptions or entrance fees by the assessee cannot, therefore, form part of its assessable income; and the sum of Rs.11000 received by the assessee is subscription from its members is not taxable."
5.9 From the above discussion, it is very clear that the membership fee in a members club is not taxable if it is immune from the taint of commerciality. It is very pertinent to note that Lions Club International does not carry out any commercial activity.
215.10 The Hon'ble Madras High Court in the case of CIT Vs. Madras Race Club 105 ITR 433 has observed in page 444 as follows :
"The second aspect relates to cases of absence of a trade or business which produced profits. For instance, a members' club is intended to promote social intercourse among the members' club is intended to promote social intercourse among the members. It does not purchase or sell commodities. It is merely a convenient instrument for the purpose of providing facilities for the members. There is no element of profit or concept of trade in such a club. Unless the statute itself intervenes and says that the transaction between the club and the members shall be treated as a sale as has been done by the Tamil Nadu General Sales Tax Act, there will be no question of any trading between the club and its members. Any surplus realised from the members would not have the character of income liable to be taxed."
5.11 Lions club International is a members club and there is no element of profit or concept of trade. Hence any surplus received from the members' contribution cannot be taxed. It is also seen that the funds are utilized to carry out the programmes of the members clubs. The contributions to the fund are member clubs and the user of the funds are also members club. There is complete identity between the contributors and the participators.
The item of receipt in LCI NRI account, which are brought to tax are 1) Annual membership fees, 2) Entrance fee from new members club and 3) Premium fees from few member opting to become "founder members"
All these amounts of fees from the Members, in our considered opinion, being contributed by members, are governed by the principle of mutuality. We uphold these findings of the CIT(A) on this issue Now let us look into the payment from LCI NRO account. There are a) Administrative expenses (Salaries etc.) for assisting the member clubs in India and neighboring countries, b) Magazine, c) Special programmes for members, d) Liability insurance, e) DG and DGE expenses, f) Convention fund.22
24. It is also stated that there are remittances from LCI Head Quarters for any shortfall in administrative expenditure. On these facts, we come to the following conclusions :
As the organization in question, is an organization by the members, and as, in our considered opinion, there is complete identity between the members contributing to the fund and the members participating in the activities of the association, Lions Club International is a mutual organization. On a perusal of the articles, memorandum, constitutional by-laws of Lions Club International, it leads to a conclusion that the working of the Association and implementation of policies are governed by the concept of mutuality. It has been already pointed out that the form of organization is not relevant in deciding the concept of mutuality. It has also been pointed out that the test of mutuality is whether the members have a right of participate in the surplus. The fact that they are not beneficiaries of the surplus is not relevant. Thus we hold that as far as annual membership fee, entrance fee from new club members and premium fee from founder members are exempt from principle of mutuality.
Neverthless we find from the submissions and the papers on record that LCI is required to maintain two separate accounts, one for administrative expenses and other for donation/charity. The receipt of donations/charity cannot be governed by principles of mutuality. Even the remittances from LCI Head Office have to be viewed as non mutual income. Thus Lions Club International has both income which is exempt on the ground of mutuality and income from transactions with non-members, which is not governed by the principles of mutuality and is 23 assessable as income. The Hon'ble Patna High Court in the case of CIT vs. Ranchi Club Ltd. 296 ITR 137 at page 139 held as follows :
Held that merely because the assessee-company had entered into transactions with non-members and earned profits out of transactions held with them, it is right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost. The assessee was a mutual concern.
Thus applying the above principles to the facts of the case, the right to claim exemption on the principle of mutuality in respect of the transaction held by LCI, with its members, is to be upheld. At the same time, as far as transactions with non-members are concerned, income has to be ascertained by following and applying commercial principles and other doctrines such as doctrine of override title etc. As in this case, the AO has brought to tax only fees received from members to tax, we uphold the CIT(Appeals)' order that the same cannot be taxed on the principle of mutuality.
In view of our above discussion, we conclude that in the case of LCIF, the income is not governed by principle of mutuality and in the case of LCI, receipts from members are governed by the principle of mutuality. As far as arriving at the taxable income of LCIF is concerned this year, we hold that a fresh exercise has to be done by the AO while applying the propositions laid down by the Hyderabad Bench of the Tribunal in the case of Nirmal Agricultural Society vs. ITO 71 ITD 153 (Hyd) as well as the judgment of the Hyderabad Bench of the Tribunal in the case of Society of Integrated Development in Urban and Rural Areas (SINDUR) vs. DCIT 90 ITD 493 (Hyd), wherein it is held as follows :
24. Coming to the second limb of the argument of the learned counsel for the assessee that the entire receipts cannot be taxed, we find that the issue is covered by the judgment of this Bench in Nirmal Agricultural Society vs. ITO (supra). In that case, it has been held (as per head note) as under :24
"The assessee had not been granted registration under s. 12A, as the CIT thought it fit to refuse to condone the long delay caused by the assessee in applying for the registration. Therefore, the AO had no other option but to complete the assessments in the status of AOP also closing his eyes towards s. 11 and s. 13. To that extent, the AO was right as he had acted only according to will of law.
But as far as the contents of the assessments were concerned, even when the assessee had been assessed as AOP and deprived of s. 11 benefits, the AO could assess only net income of the assessee and not gross receipts. As far as the assessee was concerned, construction of houses, reclamation of land, etc., were part of its regular activities. Houses were built on the land of poor agriculturists. The assessee-society had no legal title or right over the land or houses of those villagers/agriculturists who were the beneficiaries. The purpose and activity of the assessee-society was to engage in such charitable activities. Whatever amount had been spent on those programmes/projects, it was spent in the usual course of carrying on its acclaimed objects. Therefore, there was no basis whatsoever, factual or legal, to hold that the amounts spent by the assessee in constructing houses or reclaiming land were capital expenditure. As far as the assessee was concerned, those expenses were revenue expenses. The assessee had no right or title over those properties. Those expenses were incurred as part of its normal activities for which the society was formed. Therefore, the money spent by the assessee-society in constructing houses, reclaiming the land, for non-formal education, etc., had to be allowed as deduction in the computation of income.
The grants received from foreign donor were for specific purposes. The grants which were for specific purposes did not belong to the assessee-society; such grants did not form corpus of the assessee or its income. Those grants were not donations to the assessee so as to bring them under the purview of s. 12. Voluntary contributions covered by s. 12 are those contributions freely available to the assessee without any stipulation, which the assessee can utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee which was a voluntary organisation, had agreed to act as a trustee of a special fund granted by donor with the result that it need not be pooled or integrated with the assessee ' s normal income or corpus. In the instant case, the assessee was acting as an 25 independent trustee for that grant, just as same trustee could act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which were required to be considered for assessment for ascertaining the amount expended or the amount to be accumulated.
The assessee should have actually credited the grant in the personal account of the donor and any amount spent against that grant should have been debited to that separate account of the donor. That incoming and outgoing need not be reflected in the income and expenditure account of the assessee. At the end of the project, the balance, if any, available to the credit of the donor, could be treated as income of the assessee, if the donor did not insist for the repayment of the balance amount.
Therefore, the AO was to be directed to redo the assessment on the following lines :
(1) The tied-up grants received from the donor, Bread for the World, will be taken out of the computation of income from the income-side.
(2) All the money spent under the tied-up programmes directed by the donor also will be taken out of the computation of income from the expenses-side. (3) Any non-refundable credit balance in the personal account of Bread for the World will be treated as income in the year in which such non-refundable balance was ascertained.
(4) The expenses incurred by the assessee for house construction, reclamation of land, non-formal education programme (other than covered by the tied-up grants) will be deducted as revenue expenses."
25. Hon ' ble Rajasthan High Court in the case of Sukhdeo Charity Estate vs. CIT (supra), held as follows (as per head note) :
"It was for the specific purposes of implementation of the water supply scheme that the request for contribution had been made by the assessee-trust and it was in response to that request that the amount had been given by the Calcutta trust. It was clear that the intention of the donor and the donee was to treat the money as capital to be spent for the water supply scheme. The fact that the amount had not been paid over to the State Government and was kept unutilised in the account of the assessee-trust was not relevant.26
The amount could not be said to be "income" and could not be included as part of the assessable income of the trust under the provisions of s. 12(2)."
In yet another judgment in the case of Sukhdeo Charity Estate vs. ITO (supra), Hon ' ble Rajasthan High Court held as follows (as per head note) :
"The intention of the donor-trust as well as the donee-trust was to treat the money as capital to be spent for the Ladnu Water Supply Scheme. It was of no significance whether the amount had since been paid to the State Government or kept in the account of the said scheme by the assessee- trust. The amount of Rs. 70,000 did not constitute income of the petitioner. The reassessment proceedings were not valid and were liable to be quashed."
This Bench of the Tribunal in the case of Arya Vysya Abhyudaya Sangham vs. Dy. CIT (supra) to which one of us was a party was inclined to uphold the view of the CIT(A) in that case by holding in para 15 of that order as follows :
"Though we find considerable force in the other argument of the assessee ' s counsel, i.e., the income should be computed on commercial principles, as we have held that the assessee-society is eligible for exemption under s. 11 of the Act and we have also held that the objects of the society were of charitable nature within the meaning of s. 2(15) of the Act, and as we have further held that there is no violation, whatsoever of the provisions of ss. 13(1)(c) and (d) of the IT Act, 1961, the other grounds of the assessee need not be gone into, as it would be of academic interest only."
25. We direct the AO to follow the principles laid down in the above two decisions and recompute the income of L.I.C.F. for all these years. In the case of LCI, if the AO has originally brought to tax any other receipts, other than membership fees to tax, only in such cases the other receipt cannot be taxed on gross basis and the above principle of computation of income has to be followed. This is a limited remand.
2726. In the result, the appeals filed by the Revenue are allowed for statistical purposes and the cross objections filed by the assessee are dismissed.
Order pronounced on this 15th day of Oct., 2010.
Sd/- Sd/-
(Vijay Pal Rao) (J. Sudhakar Reddy)
Judicial Member Accountant Member
Mumbai, Dt: 15th Oct. , 2010.
Wakode
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, F-Bench
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai Benches