Principle of Mutuality-Revision u/s 263 was bad When assessee claimed exemption on principle of mutuality in the return and AO also made detailed inquiries

When the assessee claimed exemption on the principle of mutuality in the return of income and the AO also made detailed inquiries on the issue of principle of mutuality and passed the order u/s. 143(3), the revision u/s 263 was bad in Law-ITAT Delhi

Case Law Details:
ITA No.2390/DEL/2015 AY: 2010-11
Date of Judgment/Order: 18/05/2016

Important Judgments Cited:
CIT vs. SCOPE 319 ITR 179 (Delhi)

Bankipur Club Ltd. 226 ITR 97 (SC)
CIT vs. Green World Corporation 314 ITR 81 (SC)

Brief Facts of the Case:
The case of the assesee society was selected for scrutiny u/s 143(2)/142(1). In the assessment order passed the AO stated that the Assessee Society was registered u/s 12A and had claimed the exemption on the ground that the activities of the assessee were covered by the purview of the principle of mutuality. The AO rejected the claim made under section 11 & 12 but held that the assessee was covered by the principle of mutuality and was entitled for exemption only in respect of income accruing from the members in the terms of the principles of mutuality. However, receipts attributable to outstanding or third parties, were not allowable under the same principle. Accordingly he brought the interest accured to the assessee from third parties being in the nature of bank interest to tax under the normal provisions of the Income Tax Act, 1961.

Later, CIT(E) observed that the AO gave the benefit of mutuality to the assessee and charged only interest income instead of taxing the whole excess of income over expenditure, which resulted the mistake in the assessment of income of Rs. 2,32,45,608/-.

Therefore, a show cause notice u/s 263 was issued to the assessee . In response to the same, the assessee contested the proposed action u/s 263 primarily on the ground that the assessment u/s 143(3) was not liable to be cancelled because the same had been framed by the AO after due application of mind and also that no prejudice had been caused to the revenue. However CIT(E) held that the assessment order u/s. 143(3) was erroneous and prejudicial to the interest of revenue and he set aside the assessment with the directions to the AO to examine the issue in details.

Against the above order of the CIT(E) u/s 263 the assessee appealed before the Tribunal.

Important Excerpts from ITAT Judgment:

…..the claim of the assessee regarding the applicability of ‘principle of mutuality’ in its return of income has been filed by the assessee alongwith the return of statement of account, meaning thereby the assessee has claimed the applicability of ‘principle of mutuality’ in its return of income. The AO during the course of assessment proceedings has also directed the assessee to explain the applicability of ‘principle of mutuality’ which we have seen at the assessment proceedings thereby the issue of ‘principle of mutuality’ has been discussed and detailed enquiry has been done at the level of the AO and assessee also filed its details before the AO in the assessment proceedings with regard to the applicability of ‘principle of mutuality’. After perusing the assessment order dated 07.3.2013 passed u/s. 143(3) of the I.T. Act, we have seen that AO has rightly considered the applicability of ‘principle of mutuality’ in the assessment order …..

We also find that the AO has consciously taken a view with regard to the “Principle of Mutuality”. The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) held as under:-

“The phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income Tax Officer, adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible in law and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law.”

Revision us 263 bad if AO inquired Principle of Mutuality

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