These five appeals by the assessee are directed against the consolidated order of the Deputy Commissioner (Appeals), Surat, dated 11-11-1996 for the assessment years 1983-84 to 1987-88. As the grounds of appeal are identical for all the years, these appeals are being disposed of this common order for the sake of convenience.
The central issue in the present appeals involves the question whether the assessee is entitled to exemption under section 10(23) and/or section 11 of the Income Tax Act, 1961. Both the assessing officer and the Deputy Commissioner (Appeals) have field that the assessee is not entitled to exemption under the aforesaid provisions. The assessee has also disputed the rate of tax applied and the levy of interest under sections 139 & 215.
Before dealing with the arguments of the learned counsel for the assessee and that of the learned Departmental Representative, it is necessary for us to put in brief the facts of the case which should form a backdrop for the ensuing discussion about the controversies involved in these appeals.
The assessee under the name and style as 'Surat Tennis Club' was established in the city of Surat on 25-11-1974 and it was registered with the Registrar of Societies under the Society Registration Act, 1860 vide No. Guj/471/SRT dated 6-1-1984. The club has been granted registration under section 12A of the Income Tax Act by the Commissioner Surat on 8-4-1993 and the registration has been granted 20-12-1983 i.e., date of creation of the trust, the delay in filing the registration is seen condoned by the Commissioner. The objects of the club as narrated in para 3 of the assessment order read as under : (a) To provide facilities for different games and sports to the members and family with the object to develop physical strength, (b) To encourage and promote the sports and games organise coaching camps, exhibition matches, tournaments and competition, (c) To encourage love, brotherhood and unity among members, organize collectively programme such as picnic, dinners, cinema show, etc., (d) To participate in activity of other institutions having similar objects of the club, (e) To do any other activity which is consistent with abovesaid objects.
The main sources of revenue for the club are interest income from deposits with bank, general fees, various games fees, maintenance fees, guest fees, service charges, A.C. charges, etc. The main heads of expenditure are repairs and maintenance, salaries, various games expenses, lighting, club programme, etc.
The first ground of appeal is to the effect that the learned Deputy Commissioner (Appeals) erred in not granting exemption under section 10(23) of the Act when the necessary conditions for exemption were fulfilled. On perusal of the assessment order, we find that exemption under section 10(23) has been denied to the assessee by the assessing officer on the ground that the assessee has not obtained approval from the prescribed authority. The learned Deputy Commissioner (Appeals) has agreed with the finding of the assessing officer. In the present appeal before us, the learned counsel for the assessee has not produced any evidence to substantiate the claim that the assessee has been notified by the Central Government for exemption under section 10(23) of the Income Tax Act, 1961. In this context we consider it necessary to quote the relevant provisions of the above section which reads as under : In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included (23) any income of an association or institution established in India which may be notified by the Central Government in the Official Gazette having regard to the fact that the association or institution has as its object the control, supervision, regulation or encouragement in India of the games of cricket, footbal, tennis or such other games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf : that the association or institution shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under this clause : that the Central Government may, before notifying the association or institution under this clause, call for such documents (including audited annual accounts) or information from the association or institution as it thinks necessary in order to satisfy itself about the genuineness of the activities of the association or institution and that government may also make such inquiries as it may deem necessary in this behalf : (a) applies its income or accumulates it for application, wholly and exclusively to the objects for which it is established and the provisions of sub-section (2) and sub-section (3) of section 11 shall apply in relation to such accumulation subject to the following modifications, namely : (1) the words, brackets, letters and figure "referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section shall be omitted; (2) for the words "to charitable or religious purposes", the words `for the purposes of games or sports" shall be substituted; (3) the reference to "assessing officer" in clause (a) thereof shall be construed as a reference to the "prescribed authority" referred to in the first proviso to this clause; (ii) in sub-section (3) in clause (a), for the words "charitable or religious purposes", the words, "the purposes of games or sports" shall be substituted; and (i) any assets held by the association or institution where such assets form part of the corpus of the fund of the association or institution as on the Ist day of June, 1973; (ii) any assets (being debentures issued by, or on behalf of, company or corporation), acquired by the association of institution before the lst day of March, 1983; (iii) any accretion to the shares, forming part of the corpus the fund mentioned in sub-clause (i) by way of bonus shares allotted to the association or institution; (iv) voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; and (b) does not distribute any part of its income in any manner to its members except as grants to any association or institution affiliated to it : also that the exemption under this clause shall not be denied in relation to any funds invested or deposited before the Ist day of April, 1989 otherwise than in any one or more of the fom is or modes specified in sub-section (5) of section 11 if such funds do not continue to remain so invested or deposited after the 30th day of March, 1993 : also that the exemption under this clause shall not be denied in relation to voluntary contribution, other than voluntary contribution in cash or voluntary contribution of the nature referred to in clause (b) of the third proviso to this clause, subject to the condition that such voluntary contribution is not held by the association or institution, otherwise that in any one or more of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31-3-1992, whichever is later : also that nothing contained in this clause shall apply in relation to any income of the association or institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and serparate books of account are maintained by it in respect of such business : also that any notification issued by the Central Government under this clause in relation to any association or institution shall, at any one time, have affect for such assessment year or years, not exceeding three assessment years (including an assessment year or years commencing before the date on which such notification is issued), as may be specified in the notification : Admittedly the assessee has not so far received any approval from the prescribed authority and is not able to produce copy of any Gazette Notification in support of the claim. In the circumstances we are of the view that the action of the assessing officer and of the Deputy Commissioner (Appeals) in denying the claim of exemption under section 10(23) cannot be faulted as one of the essential procedural requirements has not been fulfilled in the present case, however, legitimate and justified the assessee's claim may be.
The alternative submission of the assessee is to the effect that the assessing officer ought to have granted exemption under section 11 when the necessary conditions for exemption under that section are fulfilled. The Deputy Commissioner (Appeals) has dismissed the assessee's ground of appeal in this connection by confirming the order of the assessing officer. The learned counsel for the assessee, Shri R.N. Vepari vehemently disputed the findings given by the assessing officer and the first appellate authority. The learned counsel has relied on the order of the Tribunal, Ahmedabad Bench A in the case of Surat City Gymkhana v. Assistant CIT in IT Appeal Nos. 4747 to 4750 (Ahd) of 1995 dated 6-1-1999 wherein an identical issue was decided in favour of the assessee. Reliance is also placed on the decisions reported in the cases of ITO v. Ms. Dwarika Prasad Trust (1989) 30 ITD 84 (Del) (TM) and Audit Bureau of Circulations v. Assistant Director of Income Tax (1995) 55 ITD 408 (Bom-Trib) in support of the plea that once Certificate of Registration has been given by the Commissioner under section 12A, the assessee becomes entitled to exemption under section 11. The learned counsel further argues that the assessing officer and the first appellate authority have not properly dealt with the issue and the submissions made by the assessee and failed to appreciate the correct position of facts and of law in denying the exemption. It is further submitted that the object of the trust need not extend to the whole of mankind and that it was sufficient if a section of the public was benefited. In support of this contention Shri Vepari places reliance on the following decisions : CIT v. Andhra Pradesh Riding Club (1987) 168 ITR 393 (AP); CIT v.Ootacamund Gymkhana Club (1977) 110 ITR 392 (Mad); CIT v. Surji Devi Kunji Lal Jaipuria Charitable Trust (No. 1) (1990) 186 ITR 728 (All); Ahmedabad Rana Caste Association v. CIT (1971) 82 ITR 704 (SC); Addl.
CIT v. Madras Jewellers & Diamond Merchants Association (1981) 129 ITR 214 (Mad); CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Bom) n the other hand, the learned Department Representative Shri K.V. Dave vehemently opposed the contentions raised on behalf of the assessee. He points out that registration under section 12A does not ipso facto mean that the assessee is entitled to exemption under section 11. The assessing officer is fully competent to examine the claim of the assessee to eligibility under section 11, at the time of doing the assessment. Shri Dave takes us through the detailed order passed by the assessing officer wherein the claim of the assessee has been examined at length. He points out that the assessee club caters to only a group of persons who happen to be members of the club and its activities are not meant for the benefit of the public at large. In the circumstances, the assessee club cannot be treated as a charitable eligible for exemption under section 11. The learned Departmental Representative has also drawn support from the observation of the Deputy Commissioner (Appeals) confirming the finding of the assessing officer on this point.
We have considered the rival submissions and the evidence on record with regard to the assessee's claim of exemption under section 11. We have also carefully studied the impact of the judgments relied on by the learned counsel for the assessee and those referred to by the assessing officer and the first appellate authority in their respective orders. With regard to the assessee's contention that registration under section 12A automatically entitles the assessee to exemption under section 11, we have to observe that such registration is depending on the fulfilment of certain conditions as laid down in that section. While registering the institution or trust under section 12A, the Chief Commissioner or the Commissioner will have to be satisfied that the assessee has fulfilled the essential prerequisites of section 11 and section 12A as evidenced by the application in the prescribed form along with accompanying documents. Therefore, the assessee has a strong case for claiming exemption when it has already got registered under section 12A of the Income Tax Act. However, we also find force in the arguments of the learned Departmental Representative to the effect that registration under section 12A does not ipso facto mean that the assessee is entitled to exemption under section 11 because this matter is to be looked into by the assessing officer at the time of making the assessment with respect to the return of income filed by the assessee trust or the institution for a particular assessment year. Exemption under section 11 even in the case of a charitable trust or institution is circumscribed by various conditions relating to the application of income, accumulation of the surplus income for specified purposes, audit of the accounts of the trust or institution, non diversion of the income of the trust or institution to any person or for any purpose as indicated in section 13, etc. Needless to say, the assessing officer has to examine the details of the nature of income, the application of income, the accumulation of surplus funds and the purposes for which income has been applied or the persons who are benefited by the application of the income of the trust. In this view of the matter, we hold that even though registration under section 12A is an essential factor, that itself does not mean that the assessing officer is precluded from looking into the details required for coming to a proper conclusion relating to the exemption or taxability of the whole or part of the income carried by the trust or institution claiming exemption under section 11.
On the basis of the above observations, we have to proceed further in order to see whether the assessing officer is justified in denying the claim of exemption in the case of the present assessce. The assessing officer has been fair enough to indicate in para 12 of the assessment order that promotion of sports or games is a charitable purpose. The CBDT Circular No. 395 dated 24-9-1984 reported at (1984) 150 ITR (St.) 74 reads as under : Subject : Promotion of sports - Whether a charitable purpose Clarification Regarding : The expression "charitable purpose" is defined in section 2(15) of the Income Tax Act, 1961, to include relief of the poor, education, medical relief and the advancement of any other object of general public utility.
The question whether promotion of sports and games can be considered as being a charitable purpose has been examined. The Board are advised that the advancement of any object beneficial to the public or a section of the public as distinguished from an individual or group of individual would be an object of general public utility. In view thereof, promotion of sports and games is considered to be a charitable purpose within the meaning of section 2(15). Therefore, an association or institution engaged in the promotion of sports and games can claim exemption under section 11 of the Act, even if it is not approved under section 10(23) relating to exemption from tax of sports associations and institutions having their objects as the promotion, control, regulation and engcouragement of specified sports and games." Having conceded the point that promotion of sports and games as a charitable object in favour of the assessee, the assessing officer, however, has gone on examining the details relating to the membership for various years and has recorded a finding to the effect that number of members declined over a period. He has also observed that the membership fees has been increased at various intervals in respect of different categories of members. Based on these observations the assessing officer concluded that the club was not intended for the benefit of the public at large but really confined to a group of persons who could not be equated with the `general public' as envisaged in section 2(15) of the Income Tax Act, 1961. In para 10 of the impugned order learned Deputy Commissioner (Appeals) has concurred with the conclusion of the assessing officer, We are unable to uphold the views of the lower authorities in this connection. By now it is settled law that an object of general public utility need not be open to the benefit of the whole mankind or the public at large and that it is enough even if a section of the public is benefited by such object. The following observations of' the Honble Andhra Pradesh High Court in the case of Andhra Pradesh Riding Club (supra) are quite relevant for deciding the issue : "The immediate question, therefore, is whether the club restricted its membership only to a specified class of the public. It is true that there is a discretion given, under article 20 of the Constitution of the club, to the managing committee to reject application for membership if' it finds that the person who applied for the membership is not a desirable person to be admitted and the discretion is absolute and final. But it is not an arbitrary discretion. If a person satisfies all the requirements prescribed under the constitution of the club and if he is unjustly refused admission to the membership or there is a colourable exercise of power, it is always open to him to go to a court of law and establish his right to admission subject to satisfying the bye-laws of the club. If the bye-laws are bad, it is always open to assail the legality thereof. There is no prohibition as such under the articles or the rides of the club to any member of the public to become a member of the club. Public need not mean the entire public. A section of the public would be enough but admission must be thrown upon to the general public. We find no restriction. The club is also conducting annual meets in riding, mounted sports, racing and polo. It is open to all persons of general public, who have the art of' horsemanship, to participate in it. There is no prohibition for them to participate in the annual meets. Therefore, considered from any perspective, we are inclined to take the view that it is open to every member of the public to because a member of the club and as of right call upon the committee of the club to admit and impart training in the art of horsemanship in the equestrian games. The trust or association or club which ensures the development of sports can, therefore, legitimately be said to carry on an object of general public utility. Therefore, we have no hesitation in concluding that the object to promote and popularise equestrian games and to impart training in the art of horsemanship is of general public utility.
In CIT v. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) it was field that advancement or promotion of trade, commerce and industry leads to economic prosperity and, therefore, it is an object of general public utility. Similarly, participation in games by descernible sections of the public leads to physical well-being which is a sine qua non of a healthy society and so its of general public utiltiy.
In Southern India Mill OwnersAssociation v. CIT (1977) 110 ITR 871 (Mad), Addl. CIT v. Automobile Association of Sourthern India (1981) 127 ITR 730 (Mad) and CIT v. South Indian Film Chamber of Commerce (1981) 129 ITR 22 (Mad) though services were mainly confined to the members of the associations, it was held by the Madras High Court that the advantage to the members is only incidental and that a bench is sought to be given to the general public and, therefore, the object is of general public utility. We respectfully agree. In CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Bom), Chagla C.J., speaking for the Bench, held thus (p. 288): "The object of setting up the swimming bath especially in modern times is obviously to advance public health; and, as we pointed out, one must not forget that access to this swimming bath is open to a section of the public. It is true that the only section of the public that could be benefited by this bath would be the European public in Bombay but it is well settled that an object of public utility need not be an object in which the whole of the public is interested. It is sufficient if a well-defined section of the public benefits by the object, and the object of the trust in the case before us was to benefit clearly a defined section of the public living in Bombay." Though in Scottish Flying Club Ltd. v. IRC (1935) 20 TC 1 (C Sess), relied on by Sri Murthy, it was held that the benefit of imparting training in flying was confined to the members of the club and that, therefore, the club was not a body established for the general public nor a charitable purpose, but as held by Lord Wright in All India Spinners Association v. CIT (1944) 12 ITR 482 (PC) and followed by the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association (1980) 121 ITR 1, (SC) that the ratio in the English decision in respect of charities cannot be imported in extenso when considering the Indian statute in the context of relevant provisions in it. So, it is difficult to place reliance on the decision in Scotlish Flying Club Ltd.'s case (supra).
In Ootacamund Gymkhana Clubs case (supra) relied on by Sri Murthy, the Madras High Court itself held that participation in games leads to the physical well-being of the society. As an additional factor it is found that it caters to the benefit of the public at large. But that does not mean that the learned judges intended to lay down that when admission into a club which imparts training in sports is thrown open to the public, it would be confined only to a specified section of the public but not to the general public. Each case is to be considered in the light of its own facts. The ratio in Cricket Association of Bengal's case (supra) cannot be followed for varied reasons. The learned judges have heavily drawn sustenance from English dicta which cannot be bodily imported and applied in considering the claims under the Act. Section 10(23) itself recognises exemption of income derived from sports and thereby emasculates the effectivity of the ratio in the Cricket Association of Bengal's case (supra). Moreover, in that case the ultimate proceeds would go to the benefit of the individuals as it is not a registered association. In CIT v. Andhra Pradesh Police Welfare Society (1984) 148 ITR 287 (AP), a Division Bench of the Andhra Pradesh High Court was called upon to consider whether the object is so general public utility if a section of the public alone is benefited by a lottery conducted by the police association. It was held (p. 295): ". . . . To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals. " Therefore, when the object is for the general public utility, it need not necessarily be for the benefit of the whole of the public. In Breach Candy Swimming Bath Trust's case (supra), the benefits are confined to a specified section of the European public and among them there is no prohibition for admission. The ratio with equal force applies to the facts in this case. The benefit to the individual members is incidental, flowing from their membership but not exclusively confined to them. It is open to every eligible member to exclusively confined to them. It is open to every eligible member to apply for admission and receive training. If the benefit is intended to percolate to a discernible section of the general public, the concept of general public utility is discernible therefrom and is satisfied.
The criterion prescribed under the fourth clause of section 2(15) of the Act is attracted and thereby it becomes all object of general public utility." (at pp. 400-402 of 168 ITR - (Emphasise, here italicized, in print supplied) It is also worth mentioning that the Hon'ble Supreme Court in the case of Ahmedabad Rana Caste Association (supra) has observed as under : "It is well-settled by now and the High Court also has rightly taken that view that an object beneficial to a section of the public is an object of general public utiltity. To serve a charitable purpose it is not necessary that the object should be to benefit the whole of mankind or all persons in a particular country or State. It is sufficient if the intention to benefit a section of the public as distinguished from a specified individual is present. This court in CIT v. Andhra Chamber of Commerce overruled the view of Beaumont C.J. in CIT v. Grain Merchants Association of Bombay on the point. It was, however, observed that the section of the community sought to be benefited must be sufficiently defined and identifiable by some common quality of a public or impersonal nature." Similar views have been held by the Hon'ble Madras High Court in the case of Madras Jewellers and Diamond Merchants Association (supra) and by the Allahabad High Court in Surji Devi Kunji Lal Jaipuria Charitable Trusts case (supra).
In view of the authorities cited above, it is clear that the reasons given by the assessing officer and the Deputy Commissioner (Appeals) do not justify denial of exemption claimed by the assessee under section 11. It is not at all disputed that the object of the assessee club is promotion of sports and games and such object is a charitable one in terms of the circular issued by the Central Board of Direct Taxes and also in view of the unambiguous judicial pronouncements with respect to the term 'charitable purpose as defined in section 2(15) of the Income Tax Act, 1961. By its very nature, a club exists mainly for the benefit of its members who are admitted to the membership of the club subject to certain terms and conditions including the payment of membership fees. Such terms and conditions, though restrictive in nature, cannot be regarded as excluding the public at large, because any member of the public can be admitted as a member subject to the terms and conditions prescribed in the Memorandum and Articles of Association of the Club which is open to public scrutiny and any violation of which is liable to be questioned in a court of law by any person of the public who is adversely affected. While making this observation, we have to emphasise the fact that we have also scrutinised the Memorandum and Articles of Association of the assessee club and have not found any clause which is repugnant to the main objects of the club which are considered of `general public utility' as referred to in section 2(15) read with section 11 of the Income Tax Act. In the circumstances we have no hesitation in holding that the club should not be denied the exemption claimed under section 11 for the reasons as stated by the assessing officer and the Deputy Commissioner (Appeals) in the impugned order.
The next dispute is with regard to the charge of tax and the determination of taxable income as done by the assessing officer in the concluding paragraph of the assessment order. After recording his finding that the assessee is not entitled to get exemption under section 10(23) or under section 11, the assessing officer proceeded to compute the taxable income of the assessee club by considering the income under the head 'other sources' by way of guest fees and interest income. From the receipts under this head he has deducted 10 per cent on estimate basis towards expenses and the balance amount has been brought to tax. While doing so the assessing officer has been fair enough to remark that the contribution from the members cannot partake of the character of income on the principle of mutuality as enunciated by the Gujarat High Court in the cases of Shri Jari Merchani Associalion v. CIT (1977) 106 ITR 542 (Guj) and Sports Club of Gujarat Ltd. v. CIT (1988) 171 ITR 504 (Guj). On the taxable income as determined above, the assessing officer has charged the tax at the maximum marginal rate on the ground that the individual shares of the members are indeterminate. The learned Deputy Commissioner (Appeals) confirmed the finding of the assessing officer with respect to the computation of taxable income but he agreed with the assessee's contentions that the assessing officer was wrong in applying the provisions of section 167B of the Act and directed the assessing officer to charge the tax under section 164(2) as if such income is to be charged as income of an association of persons.
We have already given our finding with regard to the claim of exemption of the assessee under section 10(23) and section 11. In view of our finding that the assessee's claim under section 11 is justified, the manner of computation of taxable income and the rate of tax on such income has to be considered in fresh light in view of the specific provisions of section 11 read with section12 and 13. In other words the assessee has to be treated as a charitable institution or trust eligible for exemption under section 11 and all income which is applied for charitable objects of the trust is to be held as exempted. In case of any surplus fund the assessee has to comply, with the provisions relating to accumulation of such funds for specified purposes and investment of such funds in specified securities as per the relevant provisions in section 11(2) and other relevant provisions. Any income which has been applied or diverted for non-charitable purpose during the year under consideration will have to be brought to tax and in that case the correct rate of tax is to be applied under the provisions of section 164(2). Even the guest fees and interest income which have been considered separately by the assessing officer will have to be considered as part of the gross receipts of the assessee for the purpose of applying the test relating to application of income for charitable purposes as indicated above. Since such an exercise has not been done by the assessing officer and since the full details relating to the income and expenditure/receipts and payments account are not before us, we consider it necessary to restore this matter to the file of the assessing officer for fresh computation of the taxable income, if any, in the hands of the assessee trust in accordance with the provisions of sections 11, 12 & 13 of the Income Tax Act, 1961.
Accordingly, the issue of fresh computation of taxable income, if any, is restored to the file of assessing officer for fresh decision in accordance with law in the light of our foregoing discussion. While doing so, the assessing officer should give the assessee an opportunity of being heard.
The other remaining two grounds relate to charging of interests under sections 139 and 215. Since these grounds are consequential in nature, depending on the computation of income for taxable purpose as indicated above, we direct the assessing officer to consider the issue of levy of interest while doing the recomputation of income and the charging of tax under section 164(2), keeping also in mind the decision of the Hon'ble Gujarat High Court in the case of CIT v. Bharat Machinery & Hardivare Mart (1982) 136 ITR 875 (Guj).