PYC Hindu Gymkhana,, Pune v. Deputy Commissioner of Income-tax,,

PER D. KARUNAKARA RAO, AM : These are the cross-appeals filed by Assessee and the Revenue for the assessment year 2010-11. ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana ITA No.179/PUN/2015 By Assessee AY. 2010-11

2. Grounds raised by the assessee are extracted as under : On facts and in law, 1.The learned CIT(A) erred in confirming the denial of exemption u/s. 11 to the assessee trust on the ground that the trust was carrying commercial activities and hence, the case of the assessee was clearly covered by the 'first proviso to Section 2(15).

2. The learned CIT(A) erred in not appreciating that the main object of the assessee trust was to promote sports which constituted an educational activity and therefore, the first proviso to Section 2(15) was not applicable to the assessee's case and hence, the exemption u/s.11 should have been allowed to the assessee trust.

3. The learned CIT(A) erred in holding that the exemption u/s.11 is not allowable to the assessee trust on the ground that the assessee trust was carrying out commercial activities in the form of running a restaurant, leasing conference hall etc. and charging hefty fees or the same and therefore, the exemption u/s.11 could not be allowed to the assessee.

4. The learned CIT(A) failed to appreciate that the assessee trust had not carried out any commercial activities and hence, the first proviso to Section 2(15) was not applicable to the assessee's case and thereby, the exemption u/s. 11 should have been allowed.

5. The learned CIT(A) ought to have appreciated that a. The various activities carried out by the assessee trust by charging fees were in order to achieve the objects of the trust and therefore, there was no reason to deny the exemption u/s. 11. b. The assessee had not carried out any activities in the nature of trade, commerce or business and the fees were charged to meet the administrative and other expenses required for providing the various facilities and therefore, the first proviso to Section 2(15) was not applicable to the facts of the assessees case. c. In the earlier years, the exemption u/s.11 was allowed and therefore, there was no reason to deny the exemption in this year.

6. The learned CIT(A) erred in not appreciating that the assessee was entitled to exemption u/s 11 and was entitled to claim deduction in respect of Capital expenditure of Rs.1,93,58,277/-as well as Rs. 57,45,439/- (being 15% of Rs. 3,83,02,928/-).

7. Without prejudice to Ground No.1 to 6, the learned CIT(A) erred in denying depreciation on the opening WDV of the assets on the ground that the cost of such assets was allowed as an application in the earlier years and therefore, it resulted in double deduction to the assessee which was not permitted as per law. ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana 7.1 The learned CIT(A) failed to appreciate that the assessee "vas entitled to claim depreciation on the assets whose cost was allowed as an application in the earlier years even in case where the assessee was entitled to claim exemption u/s.11 and hence, there was no reason to deny depreciation on such assets while computing the income assessee trust under the normal provisions of the Act.

8. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.

3. Assessee also raised the additional grounds and the same read as under : The appellant in the above referred appeal requests for admission of the following additional grounds of appeal which are raised without prejudice to the original grounds of appeal-

1. The learned CIT(A) erred in holding that the income from supply of drinks, refreshment, sport activity and letting out building on rent are not exempt on the grounds of mutuality.

2. The appellant request for grant of exemption on the above receipts in view of Supreme Court decision in the case of Bankipur Club [226 ITR 97] The assessee submits that the additional grounds raised are legal in nature and as all the facts are on record, the assessee requests for admission of the above grounds.

4. Briefly stated, relevant facts include that the assessee-trust is a Public Trust registered under the Bombay Public Trust Act, 1950 and also registered u/s.12AA Act. Assessee-trust is a sport oriented public charitable trust. Assessee trust is also engaged in the activity of running restaurant, bar, card club, venue hall and sport activity. Assessee claimed that all these activities are covered u/s.2(15) of the Income Tax Act, 1962. Assessee claimed that the main object of the assessee relates to promotion of sports. Assessee filed the return of income declaring Nil. During the scrutiny assessment proceedings u/s.143 of the Act, the AO made addition of Rs.1,22,57,038/- as per the discussion given in Para 4 to 4.12 of the assessment order. The AO invoked the provisions of the proviso to section 2(15) of the Act and held that the income from commercial activities exceeds ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana the threshold limit of Rs.10,00,000/-. The AO noticed that the assessee earned income Rs.39,63,308/- from sport activity and Rs.11,26,846/- as income from booking of conference hall apart from others. The AO observed that the total gross receipts of the assessee is Rs.3.83 Crores and the total expenditure of the year was at Rs.2.41 Crores. The AO reasoned that the surplus amount of Rs.1,41,92,865/- constitutes the taxable income of the of the trust. Accordingly, the AO held that the said income is earned by the trust from the commercial activities of running restaurant, leasing conference hall, running card club, renting out of venue hall etc. Eventually, the AO denied the benefit of mutuality in respect of the said surplus income. The AO relied on the judgment of Hon'ble Supreme Court of India in the case of Indian Chambers of Commerce Vs. CIT, 101 ITR 796 and the decision of Tribunal in the case of Amritsar Improvement Trust reported in 56 SOT 106 in support of his decision. Relevant summary of the decision of the Assessing Officer is given in Para 4.10 to 4.12 of the assessment order and the same is extracted here in below: 4.10 I have carefully perused all the above precedents. Majority of these decisions were rendered in the context of pre-amended provisions of section 2(15) and before the insertion of proviso and in my humble opinion, the same cannot be applied to the facts of the present case and the year under consideration. The assessee has also relied upon the decisions of ITAT, Mumbai in the case of Bombay Presidency Golf Club Ltd. (ITA No.319 (Mum.) of 2013 dated 30.05.2012) and the decision of the Delhi High Court in the case of Institute Chartered Accountants of India (ICAI) (347 ITR 99), which were decided after the amendment and insertion of proviso to sec. 2(15). But the facts in the case of Bombay Presidency Golf Club Ltd. are totally different in the sense that firstly, in that case all the activities were restricted to members only and the expenditure incurred by the club is for more than the receipts. Secondly, there is a factual finding that all the activities carried on by the assessee were towards promotion of game of golf and hence the receipts were held to be incidental to the game of golf only. Whereas in the present case. the facilities and services of the centre are available to non members also and the activities of the assessee were done on sound and recognized business principles by collecting hefty fees or charges for the facilities and services. Therefore, the decision in the case of Bombay presidency Golf Club cannot be applied to the facts of the assessee trust. On tile contrary; this decision supports the case of the department as the tribunal has held that the applicability of the embargo in the proviso has to be examined in the course of assessment proceedings. (Para 10 of the ITAT order). In the second case of ICAI (347 ITR 99), the Delhi high Court observed that the coaching classes conducted by the institute cannot be ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana equaled with the coaching classes conducted by the private coaching institutions and it cannot be said that the institute was engaged in 'business' within the meaning of first proviso to section 2(15). This case is no way comparable with the case of assessee trust which is running restaurants, liquor bar, and card clubs and renting venue halls which are not at all incidental to the objects of the trust. Accordingly, all the decisions relied upon by the assessee are clearly distinguishable and the same cannot be applied to the facts of the present case. 4.11 To sum up, after going through the stated objects of the trust, considering the nature of activities being carried on by the assessee and the relevant provisions of law as reproduced hereinabove, I am of the considered opinion that the assessee trust has been involved in carrying on various activities which are in the nature of trade, commerce or business and the assessee is operating on commercial lines. Therefore, the case of the assessee is clearly hit by the first proviso to section 2(15) of the I.T Act inserted with effect from 01.04.2009 and the assessee is not entitled to exemption claimed under section 11 or under section 12 of the I .T Act in respect of its surplus income. 4.12 Once it is held that exemption under section 11 or 12 is not available to the assessee in respect of its surplus, the assessee has to be assessed like any other tax payer or business entity. Accordingly, the income of the assessee for the year is computed under the head Income from Business or Profession as under: The assessee has incurred capital expenditure of Rs.1,93,58,277/- for construction of building etc. during the year under consideration. Hence, accordingly, depreciation at 10% amounting to Rs.19,35,827/- is allowed to the assessee as indicated in the above table. The assessee has incurred capital expenditure in the earlier years also, but it is found that the assessee has claimed the entire capital expenditure as expenditure incurred on the objects of the trust in respective years and hence, the question of allowing depreciation on such expenditure does not arise as it amounts double deduction in respect of the same expenditure. Accordingly, the net profit of Rs.1,22,57,038/- ( Rs.3,83,02,928/- (-) Rs.2,60,45,890/-) is added back to the total income of the assessee. The penalty proceedings under section 271(1)(c) of the Act are initiated for furnishing inaccurate particulars of income. Expenditure Income Establishment expenses 1,85,46,114/- Sports activity 45,83,070/- Employment 20,81,654/- Membership fees 60,38,360/- Sports Expenses 34,82,295/- Income from investment 30,18,475/- Income from restaurant & 40,17,946/- Income from other sources 44,95,077/- Entrance fee 1,61,50,000/- Total 2,41,10,063/- Total 3,83,02,928/- ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana

5. Further, on the issue of allowing depreciation u/s.32 of the Act, in respect of the capital assets (building) purchased with exempt income, the AO held that the claim of depreciation is not allowable on the said assets. AO noted that the assessee incurred capital expenditure amounting to Rs.1,93,58,277/- on account of construction of building and claimed depreciation at 10% amounting to Rs.19,35,827/-. The AO discussed this issue in Para 4.12 which has already been extracted above. Thus, the AO allowed only the claim of depreciation on the capital expenditure of Rs.1,93,58,277/- and not the said capital expenditure. Accordingly, the net profit of Rs.1,22,57,038/- i.e. (Rs.3,83,02,928/- (-) Rs.2,60,45,890/-) is added back to the total income of the assessee.

6. Aggrieved with the order of the AO, the assessee filed an appeal before the CIT(A). The assessee made elaborate submissions vide letters dated 21.01.2013 and 22.02.2013 which are extracted in verbatim in para 4.3 and 4.4 of the assessment order. In his order, the CIT(A) discussed this aspect vide para 4 to 4.3 of his order. The CIT(A) observed that the assessee trust was engaged in carrying the commercial activities which are covered by the first proviso to section 2(15) of the Act. Assessee trust earned huge surplus of Rs.1,41,92,865/- from various activities such as restaurant charges, training charges, conference charges, event charges etc during the year under consideration. The CIT(A) analyzed the gross collections of the assessee-trust and found that it collected higher sums of fees from guests and non-members vis a vis the members of the trust. In view of the analysis of the facts, the CIT(A) held that the motive of the assessee behind such activities was not merely to promote the charitable objects of the trust but also to operate the same on commercial lines for profit motive. Assessee runs restaurants and ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana casino and leases the conference hall and the same does not constitute charitable activity. Thus, the CIT(A) came to the conclusion that the objects of the assessee trust are in the nature of trade and commerce. Eventually, CIT(A) held that the assessee trust is attracted by the proviso to section 2(15) of the Act and as the commercial receipts exceeded the specified sum of Rs.10,00,000/-, the assessee would not be entitled to claim exemption u/s.11 of the Act. For the sake of completeness, the relevant para i.e.4.2 of the order of CIT(A) is extracted as under: 4.2 I have considered the submissions made by the appellant and perused the material on record. The only issue contested by the appellant in the grounds of appeal relates to the denial of exemption u/s.11 to the appellant trust on the ground that the trust was carrying commercial activity hence covered by the first proviso to section 2(15). The material brought on record clearly indicate the appellant trust to have been engaged in the activity of running restaurants, liquor bar, hiring of cricket grounds and running sports activities though the appellant trust is primarily stated to be a sports oriented public charitable trust. It is also apparent that the appellant charged fees from the members as well as the non members by way of charges from restaurant, training, conference, events etc. and such facilities have been also provided to the non members and the charges collected from such guests have been double the fees charged and collected from the regular members. The AO has clearly pointed out that on an average nearly 40 to 50 guests visited the club and availed the services therein. The aforesaid fact clearly point to the fact that the appellant's motive behind such an activity is only to maximize the profit as the charges for the various services and facilities provided to them is substantially higher than the members of the club. Thus, in the given facts and material on record, I tend to agree with the observation and analysis and the conclusion drawn by the AO that the activity of the trust are in the nature of trade, commerce of business and it cannot be said to be for charitable purpose as contemplated u/s. 2(15) of the Act. The contention raised by the appellant that these activities are incidental to the attainment of the main objects of the trust is not found to be justified and acceptable if the scale and magnitude and the nature of their activities carried out by the appellants is taken into consideration such as running the restaurant and casino, letting out of the conference hall, visit of the non -members and guests for availing the facilities and services and charges of hefty fees etc do not justify the stand taken by the appellant and thus it is also not a case where surplus is only incidental to the charitable activity. Moreover, the material on record also do not apparently indicate any such activity reserved for the economically / socially lower strata of society or any element of any donation or support for any cause which clearly establish the fact that the element of charity is clearly absent from the activities of the trust and hence is certainly contrary to the provisions of S.2(15). The decision relied upon by the appellant in the case of DIT Vs. Sabarmati Ashram Gaushala Trust cited supra is distinguishable on fact and hence not applicable as in that case many activities were of genuine charitable purpose and the activity created/ generated certain incidental surplus whereas in the present case on hand the activities carried can hardly be categorized as of charitable in nature as the activity of running the restaurant and casio and leasing of conference hall is a substantial activity of the club and cannot be considered to be mere incidental one. The appellant has earned substantial income from the aforesaid activities ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana which is in the nature of commercial activity and its receipt is in the nature of receipts from business. The appellant trust is thus is found to have involved in carrying on activities which are in the nature of trade, commerce or business and the appellant is operating them on commercial basis and therefore, I am of the considered opinion that the appellant trust is hit by the proviso to section 2(15) of the Act and as the receipts exceeds Rs.10 Lakhs the appellant would not be entitled to claim exemption u/s. 11 of the Act and the AO has rightly denied the claim of exemption u/s. 11A.

7. Regarding the applicability of principle of mutuality to the said surplus receipts, the CIT(A) examined this issue in para 5.1 of his order. The assessee placed reliance on the various decisions in the cases viz. (i) CIT Vs. Bankipur Club Ltd, 226 ITR 97(SC) (ii) Chelmsford Club Vs. CIT, 243 ITR 89 (SC) and

(iii) DCIT Vs. Gymkhana Club, 6 ITR ( Trib.) 808 (Del.) and submitted that the said excess is exempt in view of the principles of mutuality. Per contra, the CIT(A) observed that entrance fees, the membership fees and other receipts received exclusively from the members of the club, qualifies with respect to the principle of mutuality and hence, the same is not taxable. However, relying on the decision of Hon'ble Apex Court in the case of Bangalore Club Vs. CIT, 350 ITR 509, wherein it has been held that interest income earned by mutual concern from the bank is liable to be taxed, CIT(A) held that the surplus is outside the scope of the principle of mutuality. Regarding the receipts from supply of drinks, refreshment and other grounds, sports activity, letting out building on rent for conference etc, it is found by the CIT(A) that the net income from such receipts is chargeable to tax. 7.1 Accordingly, the AO is directed vide para 5.4, to exclude the entrance fees and also the membership fees received exclusively from members on principles of mutuality while determining the net taxable income after carrying out necessary verification. Eventually, the CIT(A) dismissed the appeal of assessee vide para 6 of his order i.e. the assessee is not entitled to claim the capital exemption of Rs.1,93,58,277/-. ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana

8. With respect to allowing depreciation, during the First Appellate proceedings, the assessee, relying on the decision of Hon'ble Supreme Court of India in the case of Escorts Ltd. Vs. UOI, 193 ITR 343 submitted before the CIT(A) that the inference of double deduction is judicially unsustainable in view of various judgments as well as the similar claim u/s.35(1)(iv) of the Act. The assessee further submitted that depreciation is allowable on capital assets from the income of the charitable trust. The CIT(A) discussed this issue vide para 7.2 and 7.2.1 of his order and rejected the said arguments. The said paras are extracted as under: 7.2 I have considered the submission made by the appellant and perused material on record. It has already been held that the appellant is not entitled to claim exemption u/s. 11 of the Act and therefore, I find that the AO has rightly not allowed the depreciation on the capital expenditure incurred in earlier years as allowing the same could certainly amount to double deduction. The reliance placed on the judicial decisions does not apply to the facts of the present case. 7.2.1 In view of the above facts the ground of appeal No. 9 raised by the appellant is dismissed.

9. Aggrieved with the findings / directions of the CIT(A), the assessee is in appeal before us by raising grounds and additional grounds as extracted above.

10. The summary of the grounds and additional grounds includes, if the CIT(A) rightly denied the claim of exemption u/s.11 of the Act on the ground that the assessee is involved in carrying on the activities, which are in the nature of trade and commerce. Therefore, the same attracted the provision of the proviso to section 2(15) of the Act.

11. The case of the Ld. Counsel for the assessee is that running the sport activities, running restaurant and leasing of conference etc does not amount to engaging in commercial activities for profit motive. These activitites ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana constitute incidental activities for the benefit of the members of the Trust. The profit earned out of these activities is exempt in view of the Principle of Mutuality. The main object of the assessee is to promote sports and the Revenue Authorities failed to recognize and appreciate the objects of the trust in correct perspective. Further, the assessee is also aggrieved with the decision of denial of depreciation on the capital expenditure. We shall now take up ground wise adjudication in the following paragraphs.

12. The ground Nos. 1 to 5 raised by assessee in appeal relates to claim of exemption u/s. 11 of the Act. The written submissions have been filed on this issue by the assessee and the same are extracted herein below: Arguments for the assessee 1.5] At the outset it was submitted that PYC Hindu Gymkhana is open to all and is not restricted by reason of caste, creed, race, faith and religion. This is as per clause X - Eligibility of Membership of the Constitution. An Affidavit of the Hon. Secretary of the assessee was also filed wherein the following points were affirmed: a. It was stated that on page no. 11 of the assessment order and page no. 27 of the learned CIT(A) order, there is a reference that the assessee trust is engaged in running the restaurant and casino. It was affirmed that the assessee has never run any casino and the A.O. is grossly incorrect. b. In the assessment order and CIT(A) order there are references regarding members, non members and guests. It was affirmed that PYC allows its facilities to be used only by the members, their guests and reciprocal club members. It was affirmed that the club is not open to non members at all. c. On page no. 7 of the assessment order there is a reference of charges recovered from members and charges recovered from non members. It was affirmed that the non members referred to on page no. 7 of the assessment order are the members who fall in the category of Gymkhana subscribers. The Gymkhana subscriber is one of the categories of members as given in clause IX- Membership of our constitution. 1.6] As already stated, the club facilities are for the members and their guests only. The A.O. held that even non-members are allowed the facilities. This is incorrect. Thus, if the facilities are provided to the members and their guests, the income is exempt on the principle of mutuality. On page 90 in the legal compilation, the assessee has placed decision of ITAT, Pune in the case of Poona Club and it is clearly held therein that the receipts from the guests of the members are covered by principle of mutuality. Similarly, in the case of ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana Bankipur Club (page 77), SC held that if the facilities are availed of by the friends of the members, the principle of mutuality applies and the surplus generated cannot be an income (para 14, page 83). Thus, the assessee submits that the various facilities including the sports facilities are available to its members and the guests and therefore, there is no question of any business being carried out by the assessee. 1.7] Undisputably, the assessee was always treated as a charitable trust because its main objects are to promote and encourage sports activities. The decision of Bombay H.C. in the case of the assessee granting registration is given on page 23 to 26 of the Paper Book. Similarly, the decisions of Bombay H.C. in the case of Deccan Gymkhana an0 the clubs floated or promotion of sports and the facilities are given only to the members and wherein the H.C. held that they are charitable trusts are placed on page 1 and page 6 of the legal compilation. In these cases also, the court held that simply because, the sports activities are provided to the members only do not mean that the clubs are not charitable trusts as persons from various cross sections of the society can become members of the club. Thus, undisputedly, the assessee is a charitable trust. 1.8] We have already clarified that the assessee provides sports facilities as its main object and in the course thereof, the assessee has also provided the restaurant, bar, rooms, etc. for the benefit of its members. On page 85, the Income and Expenditure Account clearly shows that all these facilities are provided without any profit motive as the assessee has always provided such facilities at competitive rates and incurred a loss from such activities. The Income and Expenditure Account on page 85 clearly indicates a loss. Thus, there is no Profit making intention. Bombay H.C. in the case of Willingdon Sports Club (page 85) has held that the facilities are provided to the members without any profit earning motive, the principle of mutuality is attracted. There is no question of any trading or business activity on the part of the assessee. Hence, it is submitted that the proviso to section 2(15) does not apply in this case. This issue was clarified by the Hon'ble Finance Minister in his budget speech (page 97) wherein he clarified that organizations like Chamber of Commerce or a similar organization rendering services to its members would not be affected by the amendment of the proviso to section 2(15) and they would continue to be regarded as charitable trusts. The circular No. 11/2008 dated 19.12.2008 has also supported the above view that such organizations would not be hit by the proviso to section 2(15) (page No. 95, 96, para No. 3.1). Accordingly, the assessee submits that it is a charitable trust and the proviso to section 2(15) is not applicable in this case and it should be granted the exemption u/s 11. 1.9] A similar controversy came up in a number of cases of the clubs which are governed by the principle of mutuality and are charitable trusts. The courts therein held that just because these clubs earn some receipts by providing facilities to its members, the proviso to section 2(15) should not be attracted and the income of such clubs should continue to be exempted u/s 11. These decisions are a. Japanese Chamber of Commerce (page 19)- In this case, it was held that profit is the essence of trade, commerce or business and where the services are rendered without any profit motive, the element of trade, business disappears. It was held that the activities of the chamber were not hit by the proviso to section 2(15). b. Nashik Panchvati Panjarapol (page 38) (Bombay H.C.) ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana The trust was formed for protecting cows and oxen. The trust sold milk of these cows. It was held that it was an incidental activity of selling milk and that itself would not make it trade, commerce or business to be hit by the proviso to section 2(15) and the trust was granted the exemption. c. Women's India Trust (page 47) (Bombay H.C.)- In this case, the trust was formed to carry out the objects of development of special skills amongst the women. The trust sold certain finished products through the shops, exhibitions, etc. It was held that the proviso to section 2(15) is not applicable as the motive was not to generate profit. d. Indian Trade Promotion Organization (Delhi H.C.) (Page 51)- In this case, the activity of the assessee was to organize trade fairs and exhibitions in order to promote trade or commerce. In carrying out these activities, it earned income from letting out space, sale of publications and from food and beverage outlets in Pragati Maidan. It was held that the assessee trust was not hit by the proviso to section 2(15) and its income was exempted. Thus, it is submitted in view of the above case laws, board circular and FMs speech that the assessee trust is wrongly denied exemption u/s.11 by invoking the proviso to section 2(15) by the A.O. and CIT(A). Hence, the exemption u/s.11 is allowable to the assessee and may kindly be granted and it be held that the proviso to section 2(15) is not attracted in the case of the assessee. 1.10] Without prejudice to the above ground, the assessee submitted the additional ground that if the income is not exempted u/s.11, in that event, the income from the restaurant, bar, sports activities and rent should be exempted on the ground of mutuality. 1.11] It is already submitted that the club provides facilities to its members and their guests only. Accordingly, all the above income is exempt on the grounds of mutuality. The assessee relies on the decision of SC in the case of Bankipur Club (page 77), decision of Bombay H.C. in the case of Willing don Club (page 85) and the decision of ITAT, Pune in the case of Poona Club (Page 90) in which the above income has been exempted on the ground of mutuality. The CIT(A) granted exemption on account of mutuality on the entrance fee but taxed the above income. It is submitted that the above income is also exempt on the grounds of mutuality.

13. We have analysed the relevant facts which led the AO to deny the claim of exemption u/s.11 of the Act on the ground of provisions of the proviso to section 2(15) of the Act and the alleged commercial activities of the Trust. The case of the Revenue is that as the assessee runs Restaurant, leasing of conference hall and collecting huge fee from the customers/non-members constitute running commercial activities for profit motive. The objects of the Trust are compromised and assessee turned to the commercial activities and therefore, the surplus is taxable as the same is outside the scope of the ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana Principles of Mutuality and invoked the provisions of the proviso to section 2(15) of the Act. Undisputedly, the surplus of Rs.1.22 crores for the year exceeded the specified limit of income of Rs.10 lakhs for this year.

14. Per Contra, the case of the Assessee is that all such so called objections raised by the AO are decided issues in favour of the assessee that those activities are within the scope of the objects of the Trust and also the purview of the provisions of the proviso to section 2(15) of the Act.

15. In the light of the above divergent stands of the parties to the litigation, we find it is a decided issue that the running of restaurants, hiring rooms to members and non-members, hiring of the conference halls, sale of sports goods through its outlet in the club, running bars etc., being auxiliary activities to the core objects of the Trust, constitute incidental activities to the objects of the Gymkhana. For this, we rely on catena of decisions and binding judgments cited by the Ld. AR for the assessee before us and also in its written submissions. Therefore, on the issues of commercial nature of the said activities of the Trust, the ground Nos. 1 to 5 and all the additional grounds raised by the assessee are allowed in principle. However, the taxation of the surplus income is subjected to the finding on the profit motive of the said activities. Relevant discussion is given in the succeeding paragraphs.

16. It is the allegation of the AO that the assessee collected huge fee from the clients and the profit motive is the dominant one in charging such hefty fee in all these incidental activities of the Trust. With regard to these allegation/arguments of the Revenue relating to the profit motive, we find that the assessee reported earning of Rs.1.22 crores out of the gross receipts of Rs.3.83 crores (i.e. 32%). Although, prima-facie, the profit @32% is on higher side, there is no data on the profit percentage in the earlier and later ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana years of the Trust. Further, there is no details on the appropriation of such huge profits too. Therefore, though the so called commercial activities are incidental to objects of the Trust, we find there is need for reading into the profit motive of the assessee with respect to the profits from such activities. Further, there is need for examining the appropriation of these funds from the perspective of the objects of the Trust too. For these reasons, the matter needs to be remanded to the file of the AO.

17. Further, from the legal perspective too, we would like to mention here that the activities of the Trust are favourably covered by the main provisions of section 2(15) of the Act and in favour of the assessee. However, the provisions of proviso to section 2(15) of the Act recognize the fact that in principle, such commercial activities can be undertaken by the Trust. The same is evident from the provisions of the proviso. However, the income earned from such activities may not exceed the specified limit of Rs.10 lakhs. What happens, if the said limit is exceeded, as in the case of the assessee, where the income earned out of profit motive is more than the specified limit of Rs.10 lakhs? Why did assessee earn such abnormal profits? Undisputedly, we find the same is not properly addressed by the AO/CIT(A) in their orders with the help of the facts and figures. Further, the CIT(A) hurriedly dismissed the relevant ground against the assessee merely stating that the activities of the Trust are commercial in nature. In principle, we do not agree with his finding. Therefore, in our opinion, these parts of the issue need to be remanded to the file of the AO for deciding (1) what exactly is the income relatable to the said incidental or auxiliary activities; (2) How they were utilized and what are the surplus after the utilization for the purpose of the objection; (3) what is the history of the Trust so far as making of the profits over the years are concerned. AO should also examine, if the assessee ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana is consistently making huge profits qua the other club in the country with similar objects. AO should also examine the consequences of exceeding the set limit of Rs.10 lakhs. With these remarks, we remand this part of the issue to the file of AO for fresh adjudication. AO shall grant reasonable opportunity of being heard to the assessee.

18. Ground No.6 relates to non appreciation of assessees claim with reference to the claim of capital expenditure of Rs.1,93,58,277/- as well as Rs.57,45,439/- (being 15% of the gross receipts of Rs.3,83,02,928/-). From the assessment order specially, Para No.4.12 does not deal with this issue elaborately. AO referred this issue of capital expenditure only for the purpose of disallowing excess claim of depreciation on the ground of double deduction. Relevant lines are extracted here as under : 4.12.. The assessee has incurred capital expenditure of Rs.1,93,58,277/- for construction of building etc. during the year under consideration. Hence, accordingly, depreciation at 10% amounting to Rs.19,35,827/- is allowed to the expenditure in the earlier years also, but it is found that the assessee has claimed the entire capital expenditure as expenditure incurred on the objects of the trust in respective years and hence the question of allowing depreciation on such expenditure does not arise as it amounts double deduction in respect of the same expenditure. The above extract is not clear as to the implications of the assessee. However, one thing is clear, eventually, the addition of Rs.1,22,59,038/- was arrived at after adding depreciation expenditure of Rs.19,35,827/- (i.e. 10% of the capital expenditure) to the total expenditure of Rs.2,41,10,663/-. To some extent, there is ambiguity in the mind of the AO qua the conclusions on the claim of the assessee with reference to the capital expenditure. CIT(A) has dealt with this issue vide Ground No.8 of the assessee in Para No.6 and 6.1 of his order. The issue is understood as a case of non allowance of capital expenditure of Rs.1,93,58,277/- and CIT(A) confirmed the AOs decision in ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana denial of claim of capital expenditure as a deduction. Contents of Para No.6.1 of the order of CIT(A) are relevant in this regard and the same are extracted here as under : 6.1 I have considered the submission made by the appellant and perused material on record. The appellant trust has already been held to be not entitled to claim exemption u/s.11 of the Act hence it will not be entitled to claim the capital exemption of Rs.1,93,58,277/- as a deduction while computing its total income and hence the contention raised by the appellant is found to be not tenable.

19. It is in this context assessee raised Ground No.6 which is extracted above. Assessee also filed the written submissions and the same are extracted here as under : 2.1. If the assessee is allowed exemption u/s. 11 of the Income Tax Act, 1961, then as a logical corollary the capital expenditure incurred during the relevant year of Rs.1,93,58,277/- should be allowed as an application of income while computing total income. 2.2 If the assessee is allowed exemption u/s.11, then 15% of the income should be allowed as a statutory deduction u/s.11(1) (a). 2.3. The learned CIT(A) has not allowed these deductions on the ground that the assessee is not entitled to exemption u/s. 11. It is submitted as explained above that the assessee is a charitable trust and the proviso to section 2(15) is not applicable in this case and thus, the above deduction u/s. 11 are to be allowed. From the above extract, the assessee is of the opinion that, so long as the assessee is entitled to claim exemption u/s.11 of the Act and the proviso to section 2(15) of the Act is not applicable to this case, the said capital expenditure is an allowable expenditure.

20. On hearing both the parties on this issue, we find that there is no finding of fact on this claim of capital expenditure for the purposes of the objects of the trust. What is the nature of the capital asset and purpose thereof? The proviso to the provisions of section 2(15) recognizes the fact that the assessee is entitled to be involved in the commercial activities and ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana however, the limit of Rs.10 lakhs or 25 lakhs, as the case may be, is provided in the statute. Therefore, it is not correct to interpret that in cases where the limits are exceeded, and the assessee earns the income out of the commercial activities with profit motive as discussed by us in the preceding paragraphs of this order in connection with Ground Nos. 1 to 5. Therefore, we are of the view that this issue is required to be remanded to the file of AO for fresh adjudication if the capital expenditure is allowable if the income is out of commercial activities such as running of restaurants, trading of activities etc. AO shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, Ground No.6 is allowed for statistical purposes.

21. With regard to ground Nos. 7 and 7.1, the assessee filed the written submissions and the same are extracted as under: Arguments for the assessee 3.2] It is submitted that a wrong inference of double deduction is sometimes drawn on the basis of decision in Escorts Ltd. Vs. UOI (1993) 199 ITR 343 (SC) which was rendered in the context of deduction of scientific expenditure u/s.35(1)(iv) which allows the entire cost of asset so that depreciation was statutorily barred. However, in the case of an assessee being a charitable trust, the capital expenditure incurred is allowed as an application of income and that tax depreciation was allowable on the assets the cost of which has been fully allowed as an application of income u/s.11. 3.3. In the following cases it has been held that depreciation is allowable on capital assets whose cost is allowed as an application of income u/s.11 because, the income of the trust has to be calculated after allowing depreciation on the assets. a. CIT v. Institute of Banking Personnel Selection (2003) 264 ITR 110 (Born) held that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under Section 11 in past years. b. CIT v. Market Committee Pipli (2011) 330 ITR 16 (P&H) 3.4] Further the Finance (No.2) Act, 2014 w.e.f. 01.04.2015 inserted sub- section (6) to provide that depreciation shall not be allowed as deduction in respect of any asset, acquisition of which has been claimed as an application of income u/s.11. However the above amendment is applicable only from Assessment Year 2015-16 and the following High Courts have confirmed that this amendment will not apply to the preceding Assessment Years viz. ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana a. Director of Income Tax(Exemptions) Vs Shri Vile Parle Kelavani MandaI (2015) 378 ITR 0593 (Born). b. Director of Income Tax (Exemption) Vs Indraprastha Cancer Society (2014) 112 DTR 0345 (Del) c. Director of Income Tax (Exemption) V AI-Ameen Charitable Fund Trust 67 Taxmann.com 160 (Karnataka High Court) From the above, it is a settled issue by the judgment of Honble Jurisdictional High Court in the case of CIT v. Institute of Banking Personnel Selection (supra) that the assessee is entitled to depreciation on the capital assets even though the said assets are acquired using the funds considered exempt. Therefore, Ground Nos. 7 and 7.1 raised by the assessee are allowed.

22. In the result, the appeal of the assessee is partly allowed for statistical purposes. ITA No.187/PUN/2015 ( By Revenue) A.Y. 2010-11

23. Grounds raised by the Revenue are extracted as under :

1. Whether in the facts and in the circumstances of the case and in law the Ld.CIT(A) was correct in accepting the benefit of mutuality, never claimed earlier in any/ year or in this year before the AO without any opportunity to the Revenue in violation of principle of natural justice and the Rule 46A binding on him?

2. Whether in the facts and in the circumstances of the case and in law the Ld.CIT(A) was correct in accepting the alternate plea of the assessee to allow the benefit on the Principle of Mutuality without putting the applicant trust to test the conditions of mutuality viz.

(i) Transactions solely with or as between its members,

(ii) Incorporation of clauses in the instruments of creation and management in alignment with the concept of mutuality,

(iii) Absence of commercial connotation in its affairs,

(iv) Distribution of surplus to members on dissolution or winding up of the body.

(v) The complete identity of contributors and recipients;

(vi) The instrumentality of the assessee in the matter of carrying out the mandates of its members and; ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana

(vii) The impossibility of the assessee deriving any profits from contributions made to it etc.

3. Whether in the facts and in the circumstances of the case and in law the Ld.CIT(A) was right in allowing entrance fees received and membership fees under principle of mutuality when the participators and contributors are not clearly identifiable?

4. Whether in the facts and in the circumstances of the case and in law the Ld.CIT(A) was right in allowing entrance fees received and membership fees under principle of mutuality when the assessee failed to establish that its activities are charitable in nature and it is an afterthought on the part of the assessee trust?

5. The appellant craves to leave, to add, alter, amend or delete any of the above grounds of appeal.

24. The issue raised in ground No. 1 of cross appeal by Revenue is that the CIT(A) entertained the claim relating to Principle of Mutuality and therefore, the Revenue has invoked the provision of Rule 46A of the I.T. Rules, 1962. It is the grievance of the Revenue that while entertaining such claim and adjudicating of the issue relating to Principle of Mutuality, the CIT(A) erred in examining various aspects mentioned in ground No. 2 of the Revenue appeal. Further, Revenue is aggrieved with the order of CIT(A) in granting part relief to the assessee with respect to the huge entrance fees and membership fees as per Principle of Mutuality. The Revenue has also argued in ground Nos. 3 and 4 that the claim relating to Principle of Mutuality of the assessee is an afterthought and the assessee failed to establish the activities of the Trust are charitable in nature.

25. In response to the grounds raised in cross appeal by the Revenue, the assessee made the following written submissions: In all these cases, it has been held that the income of a club providing facilities to its members is exempt on the grounds of mutuality. Secondly, the admission fee (entrance fee) from its members is also exempt in its hands. Accordingly, the decision of CIT(A) is a correct decision. If the appeal of the assessee is allowed and the income is exempted u/s 11, in that case, further exemption on the ground of mutuality is not necessary. However, if the assessee's appeal is not allowed, the deptl. appeal deserves to be dismissed. ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana

26. On hearing both the representatives, we find that the issue of applicability of Principle of Mutuality to the excess profits of Rs.1.22 crores is linked to the excess earning of the Trust as well as the profit motive of the Trust. We dealt with this issue while adjudicating the Ground Nos. 1 to 5 along with the additional grounds raised by the assessee. While holding that the so called commercial activities constitute incidental activities to the objects of the Trust, we remanded the issue of profit motive, surplus funds and the related issues of exempt nature of such profit in view of the Principle of Mutuality, to the file of AO for want of facts and conclusions of the AO on these issues.

27. Further, we find the issues raised by the Revenue in its appeal are linked to the above referred issues mentioned in the preceding paragraphs of this order. Therefore, we are of the opinion that the issues raised in the ground of the Revenue should also be recommended for fresh examination. AO shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, all the grounds of Revenue are allowed for statistical purposes.

28. In the result, appeal of the assessee is partly allowed for statistical purposes and appeal of the Revenue is allowed for statistical purposes. Order pronounced on 23rd day of July, 2018. Sd/- Sd/- (  /VIKAS AWASTHY) (. /D. KARUNAKARA RAO)  /JUDICIAL MEMBER  /ACCOUNTANT MEMBER / Pune;  / Dated : 23rd July, 2018. SB/Satish ITA No. 179 & 187/PUN/2015 PYC Hindu Gymkhana  # / Copy of the Order forwarded to :

1.  / The Appellant.

2.   / The Respondent.

3. The CIT(Appeals)-II, Pune.

4. The CIT-II, Pune.

5. , , , / DR, ITAT, B Bench, Pune.

6.  / Guard File. / BY ORDER, // True Copy // Senior Private Secretary , / ITAT, Pune.