SANJAY GARG,JM. -
(1.) THE present appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] dated 15.10.12 relevant to assessment year 2009 -10. The
Revenue has taken the following grounds of appeal:
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) Mumbai erred in holding that receipt of Rs.28,70,211/ - received by the assessee from Mahalaxmi Hospitality, Mahalaxmi Hotel and Resort and Mahalaxmi Food Link for Purposes of playing cards and also having Permit Room Bar and Restaurant for catering and soft drinks and hiring income from Marriage Hall/ground as exempt under principal of mutuality.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) Mumbai erred in holding that receipt of Rs.28,70,211/ - received by the assessee from Mahalaxmi Hospitality, Mahalaxmi Hotel&Resort and Mahalaxmi Food Link for Purposes of playing cards and also having Permit Room Bar and Restaurant for catering and softdrinks and hiring income from Marriage Hall/ground as exempt u/s 11 even though these activities of the assessee are hit by first proviso to section 2(15) of the IT Act.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) -1, Mumbai erred in not holding that assessee's activity with Mahalaxmi Group is in the nature of trade, commerce and business for which it received consideration and thus it is hit by first proviso to section 2(15) of the IT Act. "
(2.) THE brief facts are that the assessee trust, claiming itself to be a charitable trust, filed its return of income declaring the total income at nil. The Assessing Officer (hereinafter referred to as the AO) noticed
that though the assessee trust was granted registration under section 12A of the Income Tax Act
(hereinafter referred to as the Act), however, from the records it revealed that the assessee was imparting
the facilities of playing cards and was also having permit room bar & restaurant for catering and soft
drinks and was also having income from hiring of marriage hall/ground. The AO noticed that the above
activities of the assessee trust were not charitable activities. He therefore called for an explanation from
the assessee as to how the assessee was qualified for exemption under section 11 of the Act. The
assessee's explanation before the AO was that the object of the assessee trust was to encourage, develop,
extend and promote sports and recreational activities as well as social and friendly association, generally
among the residents of Navi Mumbai. It was further submitted before the AO that the assessee trust was
not involved in any activities in the nature of trade, commerce or business or any services in relation to
any trade, commerce or business. The AO, however, was not satisfied with the explanation given by the
assessee trust in this regard. He observed that as per income and expenditure accounts, activities of the
assessee trust were different from the objects of the trust. The benefits of the trust were not available for
all the persons of the society but to the limited persons i.e. members of the club house only. The club had
been providing facilities of playing cards and was also having permit room bar & restaurant for catering
and soft drinks and was also having income from hiring of marriage hall/ground which was totally
systematic profit earning business of the assessee trust. During the financial year 2008 -09 the assessee
had received royalty income of Rs.28,70,211/ - and income from other activities of Rs.47,85,514/ -. The
entry in the club was not open to general public. High premium was being accepted from the persons for
becoming the member of the club. The assessee had not carried out any activities which could be said to
be of charitable in nature. The membership of the club, though open to public, was restricted in many
ways and it was not easy to get membership of the club even for the persons who count in the society. He
further observed that from the examination of the assessee's actual activities, it revealed that the
predominant object of the assessee was to provide service to its members which do not constitute any
charitable activity. He therefore held that the assessee was not entitled to exemption under section 11 of
the Act. He held that the assessee trust was in fact not a charitable trust rather was a mutual
organisation. He accordingly taxed the assessee's receipts from non members and other sources, such as
dividend, interest etc. as income of the assessee during the year. He also noticed that the assessee had
received royalty income from restaurant, decorators, halls, swimming pool, club house, collection of room
rent, playing cards etc. and treated the said income of Rs.77,51,361/ - as business income of the assessee
and taxed it accordingly. Aggrieved against the order of the AO, the assessee filed appeal before the ld.
The ld. CIT(A) observed that the assessee trust had been conferred the benefit of exemption under section 11 up to assessment year 2008 -09. The sports and other activities carried out by the assessee trust partake the character of general public utility which term is included in the definition of charitable purpose as defined under section 2(15) of the Act. For the current financial year, there was no change of facts and circumstances which may lead tochange of status of the assessee trust. He therefore held that the assessee trust was eligible for exemption under section 11 of the Act. He also held that the assessee trust was entitled to the benefit of mutuality because there was a complete identity between the contributors and the members in the common fund. The facilities of the club were available to the members on contribution basis. He therefore held that the assessee was eligible for benefit of mutuality also. He also set aside the order of the AO levying interest under section 234A and 234B of the Act. He also dismissed the other additional/alternative grounds of the assessee trust being infructuous regarding the claim of depreciation and set off and carry forward of losses, in case, the income of the assessee trust was held to be as business income. Aggrieved against the order of the ld. CIT(A), the Revenue is thus in appeal before us.
(3.) WE have heard the ld. representatives of both the parties and also have gone through the records. So far the question of eligibility of the assessee trust under section 11 of the Act is concerned, we may
observe that the assessee trust has been involved in providing sports and recreational facilities to its
members only. The AO has given a categorical finding that though the membership of the club is open to
public but it has been restricted in many ways and it is not easy to get membership of the club even for
the persons who count in the society. Even the membership is offered on payment of very high premium.
High class premium services, such as facility of liquor bar, playing cards, restaurant, marriage hall,
catering services etc. have been provided to the members, which cannot be said to constitute any
charitable activity. Services can be availed for consideration only by members who constitute high class,
influential and rich persons that too on payment of high premium for getting membership of the club.
Though the assessee club is also offering the facility of sports to its members that itself, cannot partake
the character of charitable activity. It is not the case of the assessee trust that such sports activities
areprovided or have resulted into any benefit to the public at large or any section of the society. The
sports activities accompanied by facilities like liquor bar, playing cards, restaurant, marriage hall, catering
services etc. limited to a certain group of persons i.e. members of the club cannot be said to be a
charitable activity from which any benefit is derived by the public or section of the public rather the
benefits are limited to high and rich distinguishable group of persons i.e. members of the club only. There
is no element of charity involved in such an activity rather the activities of the club are meant for leisure
and pleasure of the members of the club and the membership has been restricted to certain individuals
not to any section of the society.
We therefore do not find any infirmity in the order of the AO in holding that the activities of the assessee trust do not fall in the definition of charitable purpose as defined under section 2(15) of the Act.
So far the reliance of the ld. A.R. on the decision of the Hon'ble Bombay High Court in the case of 'Director of Income Tax vs. Chembur Gymkhana' is concerned, we may find that the facts of the present case are quite distinguishable as compared to the said case as the AO has given a categorical finding in this case that the entry into the club for membership is restricted in many ways and even it is not easy to get membership of the club for the persons who count in the society. The membership of the club in this case as observed by the AO is restricted to a group of individuals only.
So far the contention relating to benefit of mutuality is concerned, we may observe that the AO himself has observed that the facilities of the club are restricted to its members only and are not open to general
public. However, he has observed that the assessee has earned some income from non members also. He
has also observed that the assessee has earned royalty income from restaurant, decorators and halls,
swimming -pools, club house, collection of room rent etc. We may point out that if the services of
restaurant, bar room,swimming -pool etc. are restricted to members or their family members or guests
only, then the income from those services cannot be said to be business income of the society and the
benefit of mutuality will be available to the assessee in relation to such facilities/services. However, the
income which has been earned by the assessee by providing facilities to non members is required to be
treated as business income of the assessee. We accordingly restore the matter back to the file of the AO
to distinguish the income from facilities/services which have been offered to non members as compared to
the income relating to the services/facilities which have been provided to members of the club. It will not
affect the concept of mutuality or benefit of mutuality even if the said services are offered by the club by
way of providing contracts etc. to private parties on commission basis or rent basis, for the benefit of
members/family members or guests of the club members only.;