Income tax - THE issues before the Bench are - Whether the word 'amount' in CBDT Instruction No 5 of 2008 means tax effect - Whether, for the purpose of filing appeal before HC, it is fair on part of Revenue to club tax effect of two appeals relating to same year to meet the guidelines prescribed by the CBDT – Whether the sum received by the co-operative assessee as transfer fees from its members is liable to be treated as its income and hence taxable. And the answers go against the Revenue.
Facts of the case
The assessee is a Co-operative Housing Society and derives income for hiring of hall, catering services, commission etc. The assessee had shown gross receipts of Rs. 21,56,766/- against which, it had shown net income of Rs. 4,02,182/-. During the course of the assessment proceedings, the AR of the assessee vide his letter dated December 29, 2005 claimed that the income derived by the assessee should be taken as ‘income from business’ instead of ‘income from other sources’ as shown by the assessee in its return of income. It was further contended that the AO was required to draw the attention of the assessee to the lawful relief or deduction although the assessee did not claim the same.
The AO, by his order dated March 24, 2006 passed an order u/s 143[3] of the Act by which he held that the income of the assessee should be treated to be under the head ‘income from other sources’ which had been rightly offered by the assessee in its return of income and consequently, all the expenses debited in its income and expenditure account cannot be said to be incurred for earning ‘income from other sources’. The AO was of the view that only some of the expenses can be considered allowable u/s 57[iii] of the Act for earning income from other sources. Accordingly, the AO held that total expenses of Rs.4,36,328/- were allowable and other expenses amounting to Rs. 1318256/- [Rs.1754584 - Rs. 436328] claimed by the assessee were disallowed and added to the total income of the assessee. The AO also initiated penalty proceedings for furnishing inaccurate particulars. The AO further held that the sum of Rs. 2.00 Lac received by the assessee as transfer fees from its members should also be treated as its income and those were also added.
The CIT(A) partly allowed the appeal of the assessee and was of the view that 90% of the salary and bonus should be considered as allowable against the income from Sanskrutik Hall instead of 50% as allowed by the AO. Over and above, the other expenses claimed by the assessee were allowed as deduction against the income from hiring of Sanskrutik Hall and decorators and caterer's commission. As regards the other sources of income, i.e., interest from banks, the CIT (A) held that as there was surplus of Rs. 10,870/-, the same should be taxed as income from other sources. As regards the other ground of appeal against the addition of Rs. 2.00 Lac being transfer fees received by the assessee on transfer of plots as income of the assessee, the CIT(A) was of the view that the same should be deleted. The Tribunal dismissed the appeal preferred by the Revenue and allowed the Cross-Objections filed by the assessee.
On further appeal by the Revenue before the High Court, the assessee, at the outset, raised a preliminary objection as regards maintainability of the Appeals on the ground that according to the Standing Instruction No. 5 of 2008 issued by the CBDT, the Revenue should not have preferred these Appeals as the tax-effect in the Tax Appeal No. 1847 of 2010 is less than Rs. 4.00 Lac. The Revenue, on the other hand, opposed the above contention by contending that if the total tax-effect of these two Appeals is taken into consideration, it would exceed Rs. 4.00 Lac. According to the Revenue, the total tax-effect involved in these two appeals should be considered for the purpose of the above Standing Instruction, because, by the common order, the Tribunal disposed of both the appeal and Cross-Objection.
On further appeal, the High Court held that,
The CIT(A) partly allowed the appeal of the assessee and was of the view that 90% of the salary and bonus should be considered as allowable against the income from Sanskrutik Hall instead of 50% as allowed by the AO. Over and above, the other expenses claimed by the assessee were allowed as deduction against the income from hiring of Sanskrutik Hall and decorators and caterer's commission. As regards the other sources of income, i.e., interest from banks, the CIT (A) held that as there was surplus of Rs. 10,870/-, the same should be taxed as income from other sources. As regards the other ground of appeal against the addition of Rs. 2.00 Lac being transfer fees received by the assessee on transfer of plots as income of the assessee, the CIT(A) was of the view that the same should be deleted. The Tribunal dismissed the appeal preferred by the Revenue and allowed the Cross-Objections filed by the assessee.
On further appeal by the Revenue before the High Court, the assessee, at the outset, raised a preliminary objection as regards maintainability of the Appeals on the ground that according to the Standing Instruction No. 5 of 2008 issued by the CBDT, the Revenue should not have preferred these Appeals as the tax-effect in the Tax Appeal No. 1847 of 2010 is less than Rs. 4.00 Lac. The Revenue, on the other hand, opposed the above contention by contending that if the total tax-effect of these two Appeals is taken into consideration, it would exceed Rs. 4.00 Lac. According to the Revenue, the total tax-effect involved in these two appeals should be considered for the purpose of the above Standing Instruction, because, by the common order, the Tribunal disposed of both the appeal and Cross-Objection.
On further appeal, the High Court held that,
++ by virtue of the clause-5 of the CBDT Instruction No. 5 of 2008, the Revenue was prohibited from preferring any appeal before this Court u/s 260A of the Act at the relevant point of time against any order of the Tribunal, where the tax-effect by virtue of the order of the Tribunal for a particular AY was less than Rs. 4.00 Lac. If the total tax-effect involved in these two Appeals is taken into consideration, it would definitely exceed Rs. 4.00 Lac. The contention of the assessee, thus, cannot be accepted that the tax-effect of the two Appeals should not be added but should consider the tax-effect separately for each of the appeals;
++ on a plain reading of the Instruction No.5 of 2008 in its proper perspective, the intention of the CBDT was clear that if the Revenue suffered an order in the Tribunal by virtue of which the total-effect would be less than Rs. 4.00 Lac in respect of any AY, no appeal should be preferred before this Court against such an order. Thus, for the purpose of interpretation of the said Standing Instruction, that amount has to be adopted as the tax-effect, which the Revenue would lose by way of tax for an AY by virtue of the order impugned irrespective of the fact whether the same is challenged by filing one appeal or by more than one appeals. Therefore, the preliminary objection raised by assessee was overruled;
++ the Supreme Court in the case of Chelmsord Club v. Commissioner of Income-tax has pointed out that, under the Income-tax Act, 1961, what is taxed is, the “income, profits or gains'' earned or “arising'', “accruing'' to a “person''. According to the said decision, where a number of persons combine and contribute to a common fund for the financing of some venture or object and in this respect, have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. The Supreme Court further pointed out that there must be complete identity between the contributors and the participators. If these requirements are fulfilled, the Supreme Court proceeded, it is immaterial what particular form the association takes. Trading between persons associating together in this way, according to the said decision, does not give rise to profits, which are chargeable to tax. Where the trade or activity is mutual, according to the Supreme Court, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities, which it offers, does not affect the mutuality of the enterprise;
++ the law, according to the said decision, recognizes the principle of mutuality excluding the levy of income tax from the income of such business to which the above principle is applicable. The Supreme Court referred to section 2(24) of the Act, which shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (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, 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;
++ by applying the aforesaid principles to the facts of the present case, it is found that the CIT [Appeals] and the Tribunal below rightly applied the above principles so far as the addition of Rs. 2 Lac as transfer fees are concerned as all the three conditions indicated above are satisfied;
++ however, so far as the finding of the CIT[Appeals] as regards the amount of Rs. 10,870/- as surplus from the interest income of Rs. 4,83,449/- are concerned, there was no justification on the part of the CIT [Appeals] in limiting the deduction to 90% of the expenditures in terms of Section 57[iii] of the Act instead of 100%. It is not the finding of the CIT [Appeals] that any of the expenditure was of the nature of capital expenditure so as to bring the case within the purview of exceptions as indicated in Section 57[iii] of the Act. Thus, if 100% deduction is given to the expenditure, a sum of Rs. 4,02,182/- remains as net surplus of income over expenditure. But the above amount of Rs. 4,02,182/- will not be taxable because the income of the assessee by way of interest from co-operative bank of Rs. 4,78,317/- is exempt u/s 80P[ii] of the Act which is more than Rs. 4,02,182/-;
++ therefore, the ultimate conclusion arrived at by the Tribunal below in dismissing the appeal by the Revenue and allowing the cross-objection by the assessee was quite justified.
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