India: Under The Income Tax - It Is The Object And The Intention To Determine Whether Activity Is To Be Construed As Commercial Or Not

Recently in the case of DCIT V. Bombay Gymkhana Ltd. reported in 2015-TIOL-331-ITAT-Mum, there were following two key issues before the Hon'ble Income Tax Appellate Tribunal [ITAT] Mumbai Bench to decide:

(1) Whether when the Assesee has utilized the contribution of non member sponsors for conducting events and the surplus if any, is accepted as exempt under the 'principle of mutuality'.

(2) Whether the value of complimentary liquor if sold at a price, is to be treated as a commercial in nature.

The brief facts of the case are that the Assesee is a mutual association and use to organize events with the help of sponsors for the mutual benefit of its members. The contribution, if any, received from the members was utilized for conducting such events and the surplus if nay, was accepted by the Income Tax department as exempt under the principles of mutuality.

For the Assessment Year 2007-08, the Assessing Officer [AO] observed that certain amounts were received by way of sponsorships from non members for various events organized by the Assesee. Since the contributors were non members, the AO assessed the same as the income of the Assesee and Ld. CIT[A] also confirmed the same.

It was the contention of the Assesee that the said companies have only contributed to the conducting of the events and thereby helped in reducing the cost of the expenditure occurred. Further that there was no element of income in theses receipts. Alternatively, the Assesee also pleaded that if these receipts were treated as income, then the corresponding expenditures should also allowed as deduction. The revenue on the other hand was adamant on the fact that as the receipts were from non members; the concept of mutuality will not apply.

The Tribunal on appeal took a view that one has to see the object behind the receipts of these contributions and not the fact that the same has been received from members or non members. The Hon'ble Mumbai ITAT observed that the said non member companies had partly sponsored the events as a part of their respective sale promotion activity. And the objective of the Assesee in receiving these contributions was to meet the part of the expenditure occurred in organizing such events. Hence, in the view of the ITAT there was no intention to earn any income and the said receipts on the other hand only reduced the expenditure. Therefore, they cannot be subjected to tax.

Alternatively while answering the second issue the Hon'ble ITAT was of the opinion that the complimentary liquor even if when sold for a price, clarifies that the intention of the Assesee was to earn profit out of the sale. Hence the view taken by the AO and the CIT[A] that since the Assesee had failed to furnish the details of persons who consumed the complimentary liquor, the same could have been used by non members was upheld and treated as the income of the Assesee.

Conclusion:

From the aforesaid judgments, it is clear that irrespective of the fact that the receipts was received from non members and the liquor was sold to members only, two seperate views were taken by the Hon'ble ITAT depending upon the intention of the Assesee while dealing with the transaction to decide whether transaction as to be treated as commercial or not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.