FACTS
- The Appellant, a Section 25 Company registered under Section 12A of the Act and incorporated under the provisions of the Companies Act, 1956, filed its return of income on September 30, 2011, declaring "Nil" income after claiming exemption from Sections 11 and 12 of the Income Tax Act, 1961.
- The appellant's case was chosen for examination.
- The Appellant was questioned during the assessment proceedings about why the income from registration fees, certification test fees, sales receipts from publications, and other income as shown in the Income & Expenditure Account should not be taxed in the Appellant's hands because they did not fall under the principle of mutuality.
- By letter dated 21.03.2014, the appellant responded that the provisions of Section 2(15) of the Act's First Proviso are not applicable because the appellant is involved in charitable activities. Under Section 11 read with Section 2(15) of the Act, the registration fee, certification fee, sales receipts from publications, etc., were excluded.
- However, the Assessing Officer dismissed the Appellant's request for an exemption under Section 11 of the Act in relation to receipts from non-members totalling INR 4,78,98,410/- in an Assessment Order dated 28.03.2014 issued under Section 143(3) of the Act.
- The Assessing Officer pointed out that when a business or trade association makes the claim to be both a charitable institution and a mutual organisation, their claim to be a charitable organisation will be governed by the rules outlined in the First Proviso to Section 2(15) of the Act with regard to their interactions with non-members. The Appellant is primarily a mutual association where members only contribute for their own benefit; as a result, it is not a charitable institution because a charitable institution exists for the benefit of the public, not for the mutual benefit of the contributors to the common funds as in the case of the Appellant. In light of this, the Assessing Officer recognised the Appellant as a mutual association and exempted the receipts from its members from taxation. The Assessing Officer brought to tax non-member gross receipts without allowing any deduction for expenses incurred, however, and refused exemption under Section 11 read with Section 2(15) of the Act.
- Affirming its grievances, the Appellant appealed the Assessment Order before the CIT(A) and provided thorough documentation outlining its goals and the crucial part it plays in the mutual fund ecosystem.
- However, the CIT(A) rejected the appeal because he was unpersuaded.
- The Income Tax Appellate Tribunal's Mumbai Bench is now hearing the case of the aggrieved appellant (ITAT).
CONTENTION OF THE PLAINTIFF
- Before CIT, the appellant filed an appeal regarding the Assessment Order (A). The appellant claimed that by conducting investor education programmes, publishing investor education materials, disseminating crucial data and information relevant to investment decisions, resolving investor complaints, and carrying out the work undertaken by the Appellant in accordance with the mandate received from the Securities and Exchange Board of India (SEBI), including certification and registration, the Appellant played a crucial role in the mutual fund ecosystem.
- A yearly review and evaluation of the appellant's operations, activities, and claim of exemption under Section 11 was required.
- The appellant argued that the work they did should be viewed as public service and that it cannot be compared to private efforts carried out for profit.
- The mere fact that the receipts surpass the predetermined threshold will not cause the appellant's objects to change from charitable to non-charitable.
- Only those entities that engage in commercial activity and seek exemption on the grounds that such activity advances purposes of public utility are affected by the addition of the proviso to section 2(15).
CONTENTION OF THE RESPONDENT
- The Assessing Officer made the point that if a business or trade association makes the claim that they are both mutual organisations and charitable institutions, their claim to be a charitable organisation will be governed by the rules in the First Proviso to Section 2 (15) regarding their interactions with outside parties.
- The appellate is mostly a mutual organisation where members solely contribute for their personal gain. Since a charitable institution exists for the public's benefit rather than the mutual advantage of the contributors to the common funds, the appellant is not one.
- The Assessing Officer viewed the Appellant as a mutual association and did not impose taxes on member dues. The Assessing Officer brought to tax non-member gross receipts without allowing any deduction for expenses incurred, however, and refused exemption under Section 11 read with Section 2(15).
JUDGMENT & ANALYSIS BY THE CIT(A)
- The CIT(A) ruled that just because the Appellant has been registered under Section 12A of the Act, this does not automatically entitle them to an exemption under Section 11 read with Section 2(15) of the Act; rather, the Appellant's operations and activities, as well as their claim of exemption under Section 11 of the Act, must be examined and verified on an annual basis.
- The CIT(A) came to the conclusion that even the aforementioned circular stated that a trade or industry association that claimed to be both a mutual organisation and a charitable institution would not be subject to the proviso to Section 2(15) of the Act because of the mutuality principle, but that their interactions with non-members would be governed by the additional conditions co As a result, the CIT(A) dismissed the appeal submitted by the appellant in a decision dated October 26, 2015.
JUDGMENT & ANALYSIS BY ITAT
- The ITAT determined that the appellant was performing charitable work. The appellant was not founded with the intention of making money. The Appellant was registered in accordance with Section 25 of the Companies Act of 1956, which applies particularly to organisations that plan to use their profits, if any, and other income to further their objectives and forbids the payment of any dividend to their members.
- Regarding the nature of the actions committed by the appellant, there is no disagreement. The department did not have any doubts about the appellant's activities' sincerity.
- The tribunal instructed the Assessing Officer to grant the Appellant an exemption under Section 11.