Income Tax Appellate Tribunal - Delhi
Haryana Environmental Mangement ... vs Assessee on 16 September, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'C' NEW DELHI)
BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
I.T.A. No.4228/Del/2009
Assessment year : 2006-07
M/s Haryana Environment v. ITO,
Management Society, SCO No.45, Ward-2,
Ist Floor, Sector-1, HUDA Market, Gurgaon.
Gurgaon
AND
I.T.A. No.4489/Del/2009
Assessment year : 2006-07
ITO, M/s Haryana Environment
Ward-2, Management Society, SCO No.45,
Gurgaon. V. Ist Floor, Sector-1, HUDA Market,
Gurgaon.
(Appellant) (Respondent)
PAN /GIR/No.AAAAH
/GIR/No.AAAAH-
AAAAH-1608-
1608-Q
Appellant by : Shri Sachin Vasudeva, C.A.
Respondent by : Shri R.S. Gill, Sr. DR.
ORDER
PER TS KAPOOR, AM:
These are cross appeals filed by assessee and revenue against the impugned order of Ld CIT(A) dated 16.9.2009. The grounds of appeal filed by assessee and revenue are as under:-
2 ITA No4228 & 4489/Del/09 I.T.A. No.4228/Del/2009: (Assessee's appeal):
1. That the Ld CIT(A) was not justified in agreeing with the finding of Ld Assessing Officer that interest income is always taxable in the assessment year to which it relates on accrual basis without giving credence to the fact that the assessee follows the cash system of accounting and the interest income of `.270,619/- has been declared in the year of receipt.
2. Without prejudice to the contention raised in 1 above, the amount of interest is not taxable on the grounds of mutuality as the same represents interest earned on members subscription deposited with the bank.
3. That the Ld CIT(A) has erred both on facts and in law in treating the capital subsidy amounting to `.2 crore received from the State Government under the ASIDE Scheme as a revenue receipt as against the contention of the appellant that the same is a capital receipt which has to be reduced from the cost of the asset. The Ld CIT(A) has added the amount of subsidy while computing the taxable income on the alleged contention that the same has been received from a non member without giving credence to the fact that the same is a capital receipt and its treatment has to be in accordance with the provisions of the Act.
4. That the Ld CIT(A) in this connection has ignored the terms and conditions on the basis of which the amount of subsidy had been received which require that the amount so received cannot be utilized without the prior approval of the Haryana State Pollution Control Board and therefore the appellant was only a 3 ITA No4228 & 4489/Del/09 custodian of the amount so received. The overriding title of the said amount being with Haryana State Pollution Control Board, it could not have been treated as an income of the appellant.
5. That the Ld CIT(A) has erred in observing that all the amounts so received from non members are taxable in case of a mutual benefit society.
6. That the appellant craves leave to add, amend and/or alter the grounds at a late stage.
I.T.A. No. 4489/Del/2009 (Department's appeal):
1. On the facts and in the circumstances of the case, the Ld CIT(A) has erred on facts and in law in allowing the benefit of the concept of mutuality to the assessee without appreciating that the assessee had failed to establish the relationship of non trading character and there was n o complete identity between the contributors and the participator and also is in contravention of Hon'ble Supreme Court's decision in the case of CIT v.
Bankipur Club 226 ITR 97 (SC).
2. On the facts and in the circumstances of the case, the Ld CIT(A) has erred on facts and in law in deleting the addition of `.19,37,500/- made by the Assessing Officer on account of membership contribution even though the assessee society was not covered by the doctrine of mutuality and this amount was taxable.
4 ITA No4228 & 4489/Del/09
3. On the facts and in the circumstances of the case, the Ld CIT(A) has erred on facts and in law in deleting the addition of `.1,34,234/- made by the Assessing Officer on account of interest income even though the assessee society was not covered by the doctrine of mutuality and this amount was taxable.
4. On the facts and in the circumstances of the case, the Ld CIT(A) has erred on facts and in law in deleting the addition of `.3,57,681/- made by the Assessing Officer on account of misc. income even though the same was not added twice as the same had been substracted from the total income, thus there was no double addition of `.3,57,681/-.
5. That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal.
2. The brief facts of the case are that the assessee is a Society and it has filed return declaring income of `.3,57,681/-. The assessment in this case has been completed u/s 144 of the Act as according to Assessing Officer the assessee did not attend his office despite various notices and reminders. While framing the assessment order, the Assessing Officer noted from Schedule-G relating to Accounting Policies & Notes on Account attached with the return of income that assessee had not provided income tax provision on the advice of auditors of the assessee. The Assessing Officer further noted that assessee had received income by way of membership fee, interest, misc. income and financial assistance under ASIDE Scheme of Govt. of India. The Assessing Officer proceeded to add the whole of receipt of assessee to 5 ITA No4228 & 4489/Del/09 its income without allowing any expenses considering non applicability of concept of mutuality by making following observations:-
1) That the assessee has not furnished its Memorandum of Association and copy of aims and objects and in the absence of which the Constitution of Society and its aims and objects cannot be verified.
2) No where in the return, it has been mentioned that assessee society is being run on the concept of mutuality.
3) That the arrangement and relationship between the society and its members should be non trading of character and in the present case no such relationship has been found as no information with regard to the constitution of the society and aims and objects for which it was formed has been brought on record.
4) That principle of mutuality is not applicable in the assessee's case because there has to be complete identity between the contributors and the participators for following the concept of mutuality as held by Supreme Court in Bankipur Club case 226 ITR
97.
5). That the assessee has derived income not only from its members but also from other sources/agencies i.e. interest income from bank, misc. income and grants from Govt. of India.
Therefore, in view of the above, the Assessing Officer made the following additions:-
1) Membership subscription `.19,37,500/-
6 ITA No4228 & 4489/Del/09
2) Interest `. 1,34,234/-
3) Misc. income. `. 3,57,681/-
4) Interest from Corporation Bank. `. 2,47,113/-
5) Interest from Oriental Bank of Commerce. `. 23,506/-
6) Grant under AISDE Scheme of Govt. of India. `. 20,00,0000/-
3. Aggrieved, the assessee filed appeal before Ld CIT(A) and submitted the following submissions:-
1) That assessment u/s 144 was not warranted as various notices sent by the Assessing Officer were not received by the assessee and final notice dated 19.12.2008 fixing the hearing for 22.12.2008 was received by the assessee on 24.12.2008 and thereafter the representative of assessee appeared before Assessing Officer on 26.12.2008 and on that date he was informed that assessment has already been completed.
2) That there has to be failure on the part of the assessee to comply with the terms of notices issued u/s 142(1) or section 143(2) of the Act. The assessee should have received the notice and then only question of non compliance would arise. It was for the Department to prove that the notices issued were properly served on the assessee or not. Reliance was placed on the following cases:-
1. AA Kochandi v. ITO 110 ITR 406 (Ker.).
2. Lakshmi Narain Prashad Bhagat v. State of Wsst Bengal 118 ITR 454 (Cal.).
3. CIT v. K.C. Verma, 226 ITR 476 (Del.).
7 ITA No4228 & 4489/Del/09
3. That the Assessing Officer had assess to the audited accounts which were filed along with the return. The expenditure was duly reflected in the Expenditure Account, the Assessing Officer was not justified in disallowing the entire expenditure. Reliance was placed on the decision in the case of Addl. CIT v. Jai Engineering Works Ltd. 113 ITR 389 (Del.).
4. That Section 2(24) of the Act defines the word income and excludes all business based on principle of mutuality. When there is complete identity between the contributors and participators, the income of any Association is exempt. The appellant is a society registered under the Societies Act and has members which are industries operating in Haryana, they have come together for a common cause of building up an Integrated Waste Disposal Management System.
5. That it is clear from the provisions of Memorandum of Association Rules & Regulations of the appellant that there is a prohibition on distribution of profit to any current and any past members on winding up of the appellant and the surplus remains at the disposal of its members as they can transfer the surplus funds to a society having similar objects. The clauses in the memorandum of the appellant meet the criteria as laid down by the Supreme Court in the case of Eccentric Club with regard to applicability of doctrine of mutuality. Reliance was also placed in the case of Chelmsford Club 243 ITR 89 (SC) where the Hon'ble court had laid down three conditions for applicability of doctrine of mutuality. The assessee meets all the three conditions which are that the assessee is a registered society, the members of which has come together for fulfillment of a common cause, secondly the appellant exists for the benefit of members only and thirdly 8 ITA No4228 & 4489/Del/09 there is prohibition on distribution of profit to any past or current members and on winding up, the surplus remains the properly of its members.
6. That the Assessing Officer made addition of `.19,37,500/-
which was received on account of membership subscription from its members whereas the appellant society is covered by the doctrine of mutuality and this amount was not taxable in view of judgment of CIT v. Willingdon Sports Club 302 ITR 279 (Bom.).
7.That the interest amounting to `.1,34,234/- is also exempt in view of judgment of Hon'ble Delhi High Court in the case of DIT v. All India Oriental Bank of Commerce Welfare Society 130 Taxman 575 (Del.).
8. That as regards addition of `.2,70,619/- as interest income from Corporation Bank and OBC Bank, it is submitted that appellant has not earned any interest from these banks as appellant was not having any bank account with these banks.
9. That based upon principles of mutuality, misc. income`.3,57,681/- is not taxable as the Assessing Officer had taken the income twice.
10. That the main object of the appellant was setting up of a common integrated waste management facility for all the members and for this the appellant had approached Govt. for assistance in funding the project. The appellant received a grant from Govt. of India amounting to `. 2 crores being 50% of cost of project. This was a capital grant which was received towards cost 9 ITA No4228 & 4489/Del/09 of setting up integrated waste management facility. Reliance was placed in the judgment of Hon'ble Supreme Court in the case of Sahni Steels v. CIT 228 ITR 253 in which it was held that amount received from Govt. towards meeting the cost of asset is a capital receipt. The Hon'ble court had held that in order to decide the nature of subsidy, whether the same is capital subsidy on a revenue receipt, what is material is the purpose for which the subsidy is granted and not the source of the grant. If the purpose is to help the assessee to set up its business or complete a project, the monies must be treated to have been received as capital receipt.
4. The Ld CIT(A) after calling remand report from the Assessing Officer decided the matter as under:-
"The assessment u/s 144 was upheld as according to Ld CIT(A) the assessee did not cooperate with the Assessing Officer and did not produce books of accounts from which genuineness of expenses could be verified. The Ld CIT(A) further held that appellant is a mutual concern and there is complete identity between the contributors and participators. The relevant portion of Ld CIT(A)'s order in this respect is reproduced below:-
"On careful consideration of the above facts, I find force in the arguments of the Ld counsel for the appellant that the appellant is a mutual concern and there is complete identity between the contributors and participators. There is force in the arguments of the Ld counsel for the appellant that the memorandum filed before the Assessing Officer clearly states that the objects for which the appellant was formed. The 10 ITA No4228 & 4489/Del/09 appellant is a society of industries of Haryana and the object is the treatment of waste produced by these industries to keep the environment clean. The argument of the Assessing Officer that it is not mentioned in the return that the principle of mutuality applies to the appellant has no merit because what is important is the actual conduct of the appellant and even if this is not mentioned in the return, it makes no difference to the status of appellant. Another argument of the Assessing Officer is that the appellant has earned income from persons other than members which show that the appellant is not covered by the concept of mutuality. This again is without any merit. The pre-dominant object of the appellant is the welfare of its members and in the process if any income is received from a person other than the members, it would not change the status of the appellant. The only thing being that such a receipt is taxable in the hands of the appellant. The argument of the Assessing Officer that there is no complete identity between the contributors and participators is without any basis. Thus in view of the factual position existing as discussed above, the appellant is held to be a mutual concern and is covered by the concept of mutuality.
In view of the above findings, the Ld CIT(A) deleted the addition on account of membership subscription amounting to `.19,37,500/- and interest amounting to `.1,34,234/- on the basis of concept of mutuality.
5. As regards interest from Corporation Bank amounting to `.2,47,113/- and interest from OBC Bank amounting to `.23,506/-, the Ld CIT(A) held that these are taxable as during the year it had accrued to the assessee. The assessee had claimed that it is following cash system of accounting and interest as and when is received is booked 11 ITA No4228 & 4489/Del/09 as income. However, the ld CIT(A) did not agree with the contention of Ld AR and upheld the additions made by the Assessing Officer in respect of `.2,47,113/- and `..23,506/- earned from City Bank and OBC Bank. The Assessing Officer inadvertently mentioned the name of Corporation Bank instead of City Bank which he rectified in the remand report.
6. As regards receipt of `.2 crores as grant for meeting part cost of project, the Ld CIT(A) upheld the decision of Assessing Officer. The relevant portion of Ld CIT(A)'s order is reproduced below:-
"On careful consideration of the above position, it is held that there is no force in the arguments of Ld counsel for the appellant. The appellant is a mutual concern and is covered by the principle of mutuality. In the case of mutual concern, income received from the members is exempt and the income received from non members is taxable. Further in the case of mutual concern, there is no distinction between the capital receipt and the revenue receipt. The test is very simple that any amount received from the members is exempt and any amount received from non members is taxable. The amount of `.2 crores has been received by the appellant from the Central Govt. may be as a capital receipt but the same has been received from non members, the receipt of `.2 crores is clearly taxable. The Assessing Officer in the remand report has rightly mentioned that the case laws cited by the appellant relates to business assets and where profit motive is the main consideration and in the appellant's case there is no such profit motive and hence it is not a business asset.
12 ITA No4228 & 4489/Del/09
7. As regards misc., income, Ld CIT(A) held that it has been added twice to the income of the assessee and therefore he ordered it to be deleted.
8. Aggrieved, the assessee as well as revenue has filed separate appeals against the impugned order.
9. The Ld DR at the very outset stated that nowhere in the return it was mentioned that principle of mutuality applies to the assessee and moreover, the assessee had received contributions from other than members in the form of Govt. assistance and therefore concept of mutuality is not applicable. Therefore, he argued that order of ld CIT(A) be reversed and that of Assessing Officer be upheld and consequently the deletion made by the Ld CIT(A) be reversed.
As regards double addition of `.3,57,681/-, the Ld Dr argued that though addition of `.3,57,681/- has been made to the declared income, the same has been reduced also at the end. Therefore, there is no double addition. In this respect, he took u/s to page 7 of assessment order.
10. The Ld AR, on the other hand, argued that the assessee is a registered society under the Societies Act and various industries in the State of Haryana had come together to form this society and its objective was treatment of waste through setting up of integrated waste management facility and as per Memorandum of Association, there is prohibition on distribution of profit to any current or past member and moreover on winding up or on dissolution the surplus remains the property of the members. Therefore, he pleaded that all necessary contentions for applying doctrine of mutuality as laid down 13 ITA No4228 & 4489/Del/09 by the Hon'ble Supreme Court in the case of Chelmsford Club 243 ITR 89 exists in the case of assessee. In this respect he invited our attention towards clauses XXII & XXIII of Memorandum of Association.
11. As regards interest income earned by society whether on cash basis or accrual basis, the Ld AR argued that in view of various judicial pronouncements these are not taxable. He specifically brought before our notice the case of DIT v. All India Oriental Bank of Commerce Welfare Society 130 Taxaman 575 (Del.) wherein it was held that interest income derived by the assessee cooperative society from deposits made by it out of contribution made by members is exempt.
12. As regards taxability of Govt. grant of `. 2 crore, the Ld AR pleaded that amount was part of setting up of the project and is of capital nature. In this respect, he invited our attention to Explanation 10 to the provisions of section 43(1)of the Act wherein it is mentioned that where a portion of cost of an asset acquired has been met directly or indirectly by the Central Govt. or State Govt. or any authority established by law then so much of the cost as is relatable to such subsidy or grant shall not be included in the actual cost of the asset. He also brought before our notice the judgment of Hon'ble Supreme Court in the case of Sahni Steels Ltd. v. CIT 228 ITR 253 wherein the Hon'ble Court had held that if the purpose of grant of subsidy is to help the assessee to set up its business or complete the project, the monies must be treated to have been received as capital receipt only. In view of the above, the Ld AR argued that grant from Govt. for setting up of industry goes towards reducing the cost of project and does not par take the character of a revenue receipt.
14 ITA No4228 & 4489/Del/09
13. The Ld DR in his rejoinder relied upon the order of the Assessing Officer.
14. We have heard the rival submissions of both the parties and have gone through the material available on record. We have observed from the reading of Memorandum of Association placed at pages 54 to 69 of paper book that the assessee is a cooperative society with a common purpose and for the benefit of its members only and with a prohibition of distribution of profits to past or present members and as per clause -X, XXIII of Memorandum of Association, upon winding up the members has the final say of transferring surplus to another society with similar objects and therefore the concept of principle of mutuality squarely applies to the assessee society and therefore we agree with the order of ld CIT(A) in so far as mutuality is concerned.
15. The judgment of the Ld CIT(A) in respect of treatment of interest income are contradictory. He has deleted interest income of `.1,34,234/- and has upheld the addition of interest income of `.2,47,113/- and `.23,506/- which is not correct. In view of existence of concept of mutuality and in view of various judicial pronouncements relied upon by assessee, the interest income whether booked on cash basis or on receipt basis is exempt in the case of assessee.
16. As regards the receipt of grant of `.20,00,0000/- for setting up of the project, we hold the view that the amount is a capital receipt and is not liable to tax. The findings of Ld CIT(A) that in case where concept of mutuality exist revenue or capital receipt does not matter and taxability depends upon whether it was received from members or non members is not correct because as per the provisions of Income tax charging of tax comes into picture only when the nature of receipt is 15 ITA No4228 & 4489/Del/09 revenue and no capital receipts are taxed. The ld CIT(A) has not doubted the nature of receipt as a capital nature. Therefore, we hold that the addition of `.20,00,0000/- upheld by Ld CIT(A) be deleted.
17. As regards inclusion of `.3,57,681/- in the income of the assessee, we find that assessee had himself offered this amount as income as is apparent from computation of total income placed at page 91 of the paper book. The Assessing Officer in his assessment order has first added the amount to the income of assessee and then reduced it at the end thus making no difference. Thus contention of Ld DR that there was no double addition is correct and therefore we hold that groundNo.4 of revenue's appeal succeeds.
18. In view of the above, the appeal filed by the assessee is allowed and the appeal filed by the revenue is partly allowed.
19. Order pronounced in the open court on the 6th day of July, 2012.
Sd/- Sd/- (R.P.TOLANI) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dt.06.7.2012. HMS Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.
By Order (ITAT, New Delhi).
16 ITA No4228 & 4489/Del/09
Date of hearing 23.5.2012
Date of Dictation 28.6.2012
Date of Typing 29.6.2012
Date of order signed by 6.7.2012
both the Members &
pronouncement.
Date of order uploaded on net/. 6.7.2012
& sent to the Bench concerned.