Director of Income Tax (Exemptions) vs Chembur Gymkhana

This appeal by the Revenue arises out of an order of the Tribunal dt. 24th Aug., 2009 for asst. yr. 1996-97. Though three questions of law have been framed in the appeal by the Revenue, the following substantial questions of law arise in this appeal :

(1) Whether in the facts and circumstances of the case and in law, the Tribunal was right in holding that the assessee performs a charitable purpose within the meaning of s. 2(15) of the IT Act, 1961, and

(2) In the event that the answer to the first question is in the affirmative, whether a remand of the proceedings would be necessitated in order to enable the AO to determine whether the application of funds has been made in accordance with the provisions of s. 11.

The appeal is admitted on the aforesaid questions of law, and is by consent taken up for hearing and final disposal.

The assessee is a trust registered under the Bombay Public Trust Act, 1950. The assessee is also registered under s. 12 of the IT Act 1961. The assessee initially did not file a return of income for asst. yrs. 1996-97 and 1997-98 and for earlier years. On 30th March, 2001, the assessee filed returns for asst. yrs. 1998-99, 1999-2000, and 2000-01. A notice was issued under s. 148 for asst. yr. 1996-97. The assessee filed a return of income on 14th Jan., 2004 declaring a nil return of income. The AO by his order dt. 30th March, 2004 held that the assessee is a mutual organization and not a charitable trust. The AO held so on the basis of the objects of the trust which were as follows :

(a) To provide as far as possible for general public utility grounds and buildings convenient desirable or necessary for games and sports, generally both indoor and outdoor and things commonly or conveniently used for the same.

(b) To promote or manage or assist in the promotion or management of all forms of social intercourse of athletic sports, pastimes and/or cultural and educational activities for its members.

In the light of these objects, the AO held that the dominant object of the assessee is to provide amenities and facilities to the members of the club. Consequently, the assessee was held to be a mutual organization. The income of the assessee was computed at Rs. 13.64 lakhs. In appeal, the CIT(A) held that the promotion of sports is a charitable activity, but in order to avail of the exemption under s. 11, the promotion of such a charitable object should be directed by an association or trust towards the general public and not towards itself. The CIT(A) held that all the activities of the assessee are controlled by its members through a managing committee and the majority of its activities are carried out only for the purposes of the members. Moreover, the CIT(A) held that a major part of the expenditure is incurred on salaries and wages, security charges and telephone expenses. The CIT(A) further noted that the assessee provided for the sale of alcohol in its restaurant. This activity, it was held, is not of a charitable nature nor is it incidental to any other main activity. Since the true nature and character of the assessee was held to be that of a mutual concern, the CIT(A) held that the AO was justified in taxing interest receipts in the hands of the assessee. Similarly, receipts which had resulted from the canteen facilities which were provided on rent to an outsider, were held to be taxable in the hands of the assessee.

In appeal, the Tribunal has reversed the findings of the CIT(A). The Tribunal noted that the definition of the expression "charitable purpose" in s. 2(15) includes inter alia, "any other object of general public utility". In this regard, the Tribunal relied upon the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax, Andhra Pradesh Vs. Andhra Pradesh Police Welfare Society, and of this Court in the case of CIT vs. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Bom) and held that ''general public'' does not mean necessarily the entire public. Reliance was also placed on the judgment of the Madras High Court in Commissioner of Income Tax Vs. Ootacamund Gymkhana Club, . The activities of the assessee, the Tribunal held, are to encourage or promote and to advance games, sports, athletic activities and cultural activities which are of a general public utility. Activities engaged in for the benefit of a section of the public at large were held to meet the requirement of s. 2(15). The Tribunal held that the club has a variety of members drawn from a diverse cross section of the public at large and is not meant for a group or a private family. This was held to meet the test spelt out by the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. Andhra Pradesh Riding Club, ; since it was open to every member of the public to become a member of the club. The Tribunal noted that the assessee had made a disclosure of the details of its sports activities and of the relevant income and expenditure figures. During the year, the assessee was engaged in various sports activities including badminton, billiards, lawn tennis, cricket, table tennis and roller skating and an amount of Rs. 52 lakhs was expended on the construction of a swimming pool. As regards the issue relating to serving alcohol in the restaurant attached to the club, the Tribunal held that this was part and parcel of the activities of any club. In these circumstances, the appeal by the assessee was allowed.

Since the decision of the Supreme Court in Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, it is a settled principle of law that the primary or dominant purpose of the institution must be charitable. The test to be applied is whether the object which is pursued is of the main or primary object or whether it is ancillary to a dominant object. These principles were reiterated by the Supreme Court in Director of Income Tax Vs. Bharat Diamond Bourse, . In Commr. of Income Tax Vs. Gujarat Maritime Board, , the Supreme Court, after adverting to its earlier decision, interpreted the words "any other object of public general utility" in s. 2(15) and held that the following principle emerges :

From the said decisions it emerges that the said expression is of the widest connotation. The word ''general'' in the said expression means pertaining to a whole class. Therefore, advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose-- Commissioner of Income Tax, Gujarat-III, Ahmedabad Vs. Ahmedabad Rana Caste Association, . The said expression would prima facie include all objects which promote the welfare of the general public. It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be served. If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose. When an object is to promote or protect the interest of a particular trade or industry that object becomes an object of public utility, but not so if it seeks to promote the interest of those who conduct the said trade or industry [CIT vs. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) ]. If the primary or predominant object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the institution from being a valid charity [ Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, ].

In the present case, it is evident from the material before the Tribunal that the assessee under its memorandum as amended established that the aims and objects are to provide for general public utility, grounds and buildings, convenient, desirable or necessary for games and sports both indoor and outdoor and to promote, manage or assist in the promotion or management of all forms of social intercourse of athletic sports, pastimes and/or cultural and educational activities for its members. There is a finding of fact that the assessee is providing sports facilities as a part of its activities consisting of badminton, table tennis, billiards, cricket and skating among others. During the assessment year, the assessee had expended an amount of nearly Rs. 50 lakhs on constructing a swimming pool. The fact that the assessee provides service to its members does not detract from the position that it advances a general public utility. The advancement of any object of benefit to the public or a section of the public as distinguished from a benefit to an individual or a group of individuals would be a charitable purpose [CIT vs. Gujarat Maritime Board (supra)]. As the Tribunal noted, the membership of the society is drawn from a diverse cross section of the society. The assessee does not exist only for an individual or a group of individuals. On these facts, the primary issue which has been decided by the Tribunal must be answered by holding that the assessee for asst. yr. 1996-97 fulfilled the definition of the expression "charitable organization" in s. 2(15). The first question of law would, accordingly, have to be answered in the affirmative. Sec. 11(1)(a) of the Act provides inter alia that income derived from property held under trust wholly for charitable purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property shall not be included in the total income of the previous year. The quantum of fifteen per cent was substituted by the Finance Act, 2002 w.e.f. 1st April, 2003, prior to which the prescribed percentage was twenty-five per cent. The AO in the present case, did not determine whether the requirements of s. 11 were fulfilled in view of the fact that he came to the conclusion that the assessee would be governed by the principle of mutuality and is not a charitable organization. The same finding was affirmed by the CIT(A). In the view which we have taken, we have confirmed the finding of the Tribunal that the assessee for the relevant assessment year fulfilled the requirements of s. 2(15). The AO would, however, have to determine whether the requirements of s. 11 of the IT Act, 1961 were duly fulfilled. In order to enable the AO to do so, we remand the proceedings back to the AO. The questions of law as framed shall stand answered accordingly. The appeal is accordingly disposed of. There shall be no order as to costs.