ACIT (Exemptions), Circle-2(1), Delhi vs National Association Of Software And Service Companies

1.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the membership fees received by the appellant from its own members comes within the meaning of principle of mutuality and as such the net income of the appellant from its own members is exempt from tax?

2.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in ignoring the fact that the assessee is charging subscription fees on the basis of turnover and voting right is as per subscription of fees, hence on the basis of differentiated treatment to members, the assessee has violated the essence of principle of mutuality.

3.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the Assessing officer has erred in denying the deduction on account of gratuity and in not treating interest on tax free bonds as taxable in the hands of the Assessee without providing a proper opportunity of being heard OR without calling for remand report.

“2.

First and second grounds of appeal of the Revenue are with respect to action of the ld. CIT(A) in holding that the membership fees received from its own members under principle of mutuality and thus exempt from tax. Heard the parties and perused the material available on records. At the outset, it is observed that this is a legacy issue wherein for the first time in A.Y.2009-10, the subscription received from the members was held as non-taxable by ld. CIT(A) by observing as under:

“16.

Reference is made to AY 2009-10 wherein the Ld. CIT(A) upheld the applicability of the principle of mutuality to membership subscription fee received by the Assessee and also held that such income from members is not taxable under the Act. (Page 728 of Paperbook) The relevant extracts of the order are reproduced below:

“I have considered the order of the AO and the submissions of the assessee and Ifind considerablemerit in the submissions of the assessee. It is seen that the income of the assessee receivedfrom the non-members has been offered for tax by the assessee itself. It is only the membership fees from its own members which have been claimed as exempt by the assessee on the principle of mutuality.The assessee is a trade association of software industries and its main objective is to promote and protect the interest of its members. So the membership fees received by the assessee from its own members comes with the meaning of principle of mutuality and as such the net income of the assessee from its own member is exempt from tax. The case laws cited by the assessee as above also support the case of the assessee on the principle of mutuality. After considering all the facts and circumstances of the case, I am of the view that there is no proper justification for the addition made by the AO and accordingly the same is deleted.”

3.

Against the said order, Revenue preferred an appeal before the Tribunal wherein the Delhi benches of Tribunal in ITA No. 6521/Del/2013 confirmed the order of ld. CIT(A) by making following observations:

“17.

In Commissioner of Income-tax- Exemptions, New Delhi v. National Association of Software and Service Companies, ITA 6521/Del/2013, the Hon'ble Delhi bench of ITAT has upheld the above order of the Ld. CIT(A) holding as below (Page 684 of Paperbook):

“10.

In so far as the objection of the Id. AO based on the variance in the subscription fee and variance in voting rights is concerned, in ITO vs Venkatesh Premises Cooperative Society Ltd., 402 ITR 670 (Sc), the Hon'ble Apex court held that so long as the membership forms a class, the identity of individual member is irrelevant and any difference in the contributions payable by the members cannot fall foul of the law as sufficient classification exists. In CIT vs Hindustan Sports Club (supra), the Hon'ble Bombay High Court held that once the assessee is governed by the principle of mutuality, even if there are difference class of members, some of whom are not entitled to vote, the club would not be cease to be governed by principle of mutuality. In Ranchi Club (supra) and Standing Conference of Public Enterprises (supra), it is held that merely because the assessee had entered into transactions with non members and earned profits out of transactions held with them, it is right to claim exemption on the principle of mutuality in respect of transactions held by it with its members is not lost. The principle of establishing identity between the contributors and participators would apply only in respect of contributions made by the members. Hon'ble court concluded that the assessee being a mutual concern, the income derived from the property let out to its members and their guests and sale of liquor etc. to its members would not be taxable.

11.

In this case, as already stated, the assessee had offered to tax the income derived from the receipts from the non-members. In so far as the members are concerned, there is no dispute as to the identity between the contributors and the participators. …………

13.

For the above reasons, we concur with the findings of CIT(A) that the case law relied upon by the Id. AR supports the view taken by the Id. CIT(A) on the aspect of principle of mutuality” – and the entitlement of the assessee to claim the benefit of section 11 of the Act.”

4.

Thereafter for subsequent years, AO treated the subscription from the members as taxable however, the same was held as non-taxable by ld. CIT(A) and such orders were confirmed by the Tribunal. In AY 2011-12, revenue has challenged the order of Tribunal before the Hon’ble jurisdictional High Court wherein ITA No. 22/2024,the hon’ble high court by referring the observations made by the Tribunal in ITA No. 6521/Del/2013 for Ay 2009-10 has confirmed the order of the Tribunal and held the membership fees received from the members as exempt/non-taxable. Further in subsequent assessment years, the co-ordinate bench of the Tribunal had confirmed the orders of the ld. CIT(A) and held the membership fee received from the members as non-taxable/exempt by a common order for Assessment Years2013-14, 2014-15 and 2015-16 in ITA Nos. 173, 174 & 175/Del/2014 respectively. As fairly admitted by both the parties before us, the facts are identical thus by respectfully following the observations made in the aforesaid orders, we find no error in the order of the ld. CIT(A) in holding the membership fees received from the members as exempt.Thus, the grounds of appeal Nos. 1 & 2 of the Revenue are dismissed.

5.

Ground of appeal No. 3 of the Revenue is against the order of ld. CIT(A) holding the interest received from tax free bonds of Rs.77,86,770/-as exempt u/s 10(15)(iv)(h) of the Act. Heard the parties at length. It is observed that ld. CIT(A) in paragraph 5.5 of the order has followed the notifications issued by the central government notified the tax free bonds for the purpose of the aforesaid section. Therefore, we find no error in the order of the ld. CIT(A) in holding the interest received from tax free bonds as exempt. Accordingly, this ground of appeal of the Revenue is dismissed. With respect to the argument of ld. CIT DR that that no opportunity was provided to the Assessing Officer for remand report on this issue, it is observed that the CPC in the intimation order passed u/s143(1) has treated the interest income tax free bonds as taxable without providing an opportunity to the assessee. In appellate proceedings, the assessee in terms of the directions given by ld. CIT(A)videletter dated 25.05.2025,has filed all the relevant interest certificates which were examined by ld. CIT(A) in terms of the power conferred upon him u/s 250(4) of the Act. Since the ld. CIT(A) has invoked the powers conferred by him by the statute and after examining the certificates filed with the respective notifications issued by the central Govt. held the interest income as exempt, under these circumstances, ld. CIT(A)was under no obligation to obtain the report from the AO in particularly when this issue has already been settled by the Hon’ble jurisdictional High Court in the case of CIT Vs. Manish BuildWell Pvt. Ltd.(2011) 16 taxmann.com 27 (Del.) wherein the Hon’ble jurisdictional High Court explained the difference between powers of Ld. CIT(A) under Rule 46A(4) and a situation where assessee has itself filed additional evidence as below:

“24.....In our opinion and with respect, the error committed by the Tribunal is that it proceeded to mix up the powers of the CIT (A) under sub- section (4) of Section 250 with the powers vested in him under Rule 46A. The Tribunal seems to have overlooked sub-rule(4) of Rule 46A which itself takes note of the distinction between the powers conferred by the CIT (A) under the statute while disposing of the assessee's appeal and the powers conferred upon him under Rule 46A. The Tribunal erred in its interpretation of the provisions of Rule 46A vis-à-vis Section 250(4). Its view was no violation of Rule 46A is erroneous. The Tribunal appears to have not appreciated the distinction between the two provisions. If the view of the Tribunal is accepted, it would make Rule 46A otiose and it would open up the possibility of the assessees' contending that any additional evidence sought to be introduced by them before the CIT (A) cannot be subjected to the conditions prescribed in Rule 46A because in any case the CIT(A) is vested with conterminous powers over the assessment orders or powers of independent enquiry under sub-section (4) of Section 250. That is a consequence which cannot at all be countenanced."

6.

Accordingly, we find no merits in this argument of the Revenue and the same is hereby dismissed.”