Police Canteen Transactions with Members Not Business Activity, No Audit Required u/s 44AB: ITAT [Read Order]
The Tribunal held that the police canteen was not liable for a tax audit under Section 44AB and the penalty imposed under Section 271B was unsustainable.
The Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the transactions of a police canteen with its members are governed by the principle of mutuality and do not constitute a “business activity” under the Income Tax Act, 1961.
The Tribunal ruled that no audit is required under Section 44AB, and the penalty imposed under Section 271B for non-filing of a tax audit report was deleted.
The Commissioner of Police, Coimbatore City Tamil Nadu Police Canteen, which was established by the State Government to provide groceries and household goods to police personnel at cost price through a network of nine unit canteens.
The canteen filed a nil income return for AY 2022-23, citing its operations as mutual and non-profit. The Assessing Officer, however, noticed that the canteen had reported a turnover exceeding ₹32 crore in its GST filings and initiated penalty proceedings under Section 271B for failure to furnish an audit report as required under Section 44AB.
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While completing the assessment under Section 143(3), the Assessing Officer accepted the concept of mutuality and assessed the income at nil, but simultaneously levied a penalty of ₹1.5 lakh under Section 271B for non-compliance with the audit requirement. The CIT(A), NFAC, upheld the penalty order.
Before the Tribunal, the assessee argued that its activities were purely mutual and carried out for the benefit of its members without any profit motive. It relied on several judicial precedents including the Supreme Court’s ruling in Joint Commercial Tax Officer v. Young Men’s Indian Association (AIR 1970 SC 1212), which held that when an association or club acts merely as an agent for its members, the transactions cannot be considered sales or business.
The assessee also cited ITAT Bangalore’s decision in Century Club and the Karnataka High Court’s ruling in Koramangala Club v. ITO, both of which confirmed that the provisions of Section 44AB do not apply to entities functioning on the mutuality principle.
The Department contended that since the canteen had substantial turnover and regularly purchased and sold goods, it was carrying on a business within the meaning of Section 2(13) of the Act and was therefore required to comply with Section 44AB.
However, the Tribunal rejected this argument, observing that all transactions were confined to members and that the Assessing Officer himself had accepted the nil income on mutuality. Once mutuality is established, there is no element of “business” or “profession” under the Act.
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Accordingly, the bench said that Section 44AB applies only to persons carrying on business or profession, and the principle of mutuality excludes such characterization. The Tribunal held that the police canteen was not liable for a tax audit under Section 44AB and the penalty imposed under Section 271B was unsustainable.
Consequently, the Tribunal allowed the appeal, setting aside the orders of the AssessingOfficer and CIT(A), and directed deletion of the penalty
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