2013 (9) TMI 570 - HC - Income Tax

Charitable activity u/s 2(15) - applicability of proviso of ection 2(15) - Exempted Income u/s 11 - Registration u/s 12AA - denial of exemption on the ground of commercial transactions - According to revenue The assessee is engaged in the activity of acquiring land, development of plots and construction residential as well as commercial places and sale thereof. The sales are also undertaken through auction process and sold to the highest bidder to earn more and more profits. The said activities are trade in nature and liable to tax. Held that - For the applicability of proviso to Section 2(15), the activities of the trust should be carried out on commercial lines with intention to make profit. Where the trust is carrying out its activities on non-commercial lines with no motive to earn profits, for fulfillment of its aims and objectives, which are charitable in nature and in the process earn some profits, the same would not be hit by proviso to section 2(15). The aims and objects of the assessee-trust are admittedly charitable in nature. Mere selling some product at a profit will not ipso facto hit assessee by applying proviso to Section 2(15) and deny exemption available under Section 11. The intention of the trustees and the manner in which the activities of the charitable trust institution are undertaken are highly relevant to decide the issue of applicability of proviso to Section 2(15). Registration u/s 12AA - Held that - The effect of such a certificate of registration under Section 12AAA cannot be ignored or wished away by the Assessing Officer by adopting a stand that the trust or institution was not fulfilling the conditions for applicability of Sections 11 12. Proceedings u/s 143(2) - Whether the ITAT was correct in law in holding that without exhausting the provisions contained in section 143(2) of the Act the proceedings initiated by the Assessing Officer by issuing notice u/s 148 of the Act were not valid - Held that - The Assessing Officer had not given any defective in computation of income as per Section 11 as submitted in Form-XB, but observed that the activities of the assessee were not charitable - The activities of the assessees were genuine Following CIT vs. Andhra Pradesh State Road Transport Corporation 1986 (3) TMI 1 - SUPREME Court . Exemption allowed - Decided in favour of Assessee.

Summary

Issues Involved:
1. Exemption under Section 11 of the Income Tax Act.
2. Registration under Section 12AA of the Income Tax Act.
3. Validity of proceedings initiated by the Assessing Officer under Section 148 without exhausting the provisions of Section 143(2).

Comprehensive, Issue-Wise Detailed Analysis:

1. Exemption under Section 11 of the Income Tax Act:
The primary issue was whether the assessee's income was exempt under Section 11 of the Income Tax Act. The assessee, an "Authority" notified by the Government of Uttar Pradesh, filed its return showing NIL income and claimed exemption under Section 11. The Assessing Officer (AO) denied this exemption, assessing the income as business income. The CIT(A) and the Tribunal, however, directed the AO to compute the income under Section 11, given the assessee's registration under Section 12AA. The department argued that the assessee's activities, including acquiring land, developing plots, and selling them, were commercial and profit-oriented. However, the court held that the assessee's activities were for "charitable purposes" as defined in Section 2(15) of the Act, which includes "advancement of any other object for General Public Utility." The court noted that the assessee's income was used for public welfare and not for profit distribution, thus qualifying for exemption under Section 11.

2. Registration under Section 12AA of the Income Tax Act:
The second issue was whether the Tribunal acted arbitrarily or illegally by assuming registration under Section 12AA and exempting the assessee's income without considering Sections 11, 12, and 13. The court emphasized that once registration under Section 12AA is granted, the AO is bound by it. The court cited various precedents, including CIT vs. Lucknow Industrial Development Authority and CIT vs. Krishi Utpadan Mandi Samiti, which supported the registration of statutory bodies under Section 12AA. The court concluded that the assessee, being a statutory authority with charitable objectives, was rightly registered under Section 12AA, and its income was eligible for exemption under Sections 11 and 12.

3. Validity of proceedings initiated by the Assessing Officer under Section 148 without exhausting the provisions of Section 143(2):
The third issue was whether the Tribunal was correct in holding that the proceedings initiated by the AO under Section 148 were invalid without exhausting the provisions of Section 143(2). The court upheld the Tribunal's decision, emphasizing that the AO must follow the procedural requirements, including issuing a notice under Section 143(2), before initiating proceedings under Section 148. The court found no procedural lapses in the Tribunal's decision and upheld its validity.

Conclusion:
The court dismissed all appeals filed by the department, sustaining the Tribunal's orders. The court concluded that the assessee's activities were charitable, the registration under Section 12AA was valid, and the AO's proceedings under Section 148 were procedurally flawed. The substantial questions of law were answered in favor of the assessee and against the department.