2019 (5) TMI 1797 - AT - Income Tax

Exemption u/s 11 - denial of exemption on surplus as per Income Expenditure A/c under the head Income from business profession - Assessee working solely in the field of education for the deprived and under-privileged children since its inception in 1987 - assessee society has been registered u/s 12A as a charitable society and its objects and activities falls in the last limb of definition under section 2(15) i.e, advancement of any object of general public utility as the assessee society is engaged in ancillary activities which are supporting out of the school children - HELD THAT - Merely having a surplus is not an indicator of carrying out business activities, rather the real test is the dominant and purposive test which has been satisfied in the instant case where the intention is not to earn such surplus/profits but to carry out educational activities for the benefit of underprivileged children belonging to socially and economic weaker sections of the society and as part of such activities, where such surplus is generated and used for furthence of such educational activities, the assessee society doesn t loses its character of being charitable society engaged in educational activities. Objects so envisioned and activities of the assessee society are directed towards education of the socially and economically under-privileged children either directly imparting education through its network of Bodhshalas or by way of collaborating/partnering with the government and other non-governmental organizations/institutions and not to earn any profits. Incorrect to classify the objects and activities of the assessee society as objects and activities in nature of general public utility. The proviso to section 2(15) which can be invoked in case of objects of general public utility therefore doesn t apply and thus cannot be invoked in the instant case. The consequent action of the Assessing officer in withdrawing the exemption claimed by the assessee society u/s 11 12 is hereby set-aside and the matter is decided in favour of the assessee society.

Summary

Issues Involved:
1. Whether the surplus income of ?11,50,736/- should be assessed under the head "Income from business & profession" by invoking proviso to section 2(15) and denying the claim of application of surplus u/s 11 of the Act.
2. Whether the surplus arising from institutional and consultancy charges is incidental to the main object of the assessee without any profit motive, thereby making proviso to section 2(15) inapplicable.
3. Whether the surplus should be taxed at Maximum Marginal Rate (MMR) instead of the tax rate applicable to AOP (General) as per section 164(2) of the Act.

Detailed Analysis:

Issue 1: Assessment of Surplus Income and Denial of Exemption u/s 11
The assessee society, registered u/s 12A(a) of the Act, filed its return claiming exemption u/s 11 and 12. The Assessing Officer (AO) observed that the society received grants-in-aid and income from institutional charges, and categorized the society's activities under "general public utility" rather than "education." Consequently, the AO invoked the proviso to section 2(15) and denied the exemption u/s 11, assessing the surplus income of ?11,50,736/- as income from business and profession. The CIT(A) upheld this decision, leading to the present appeal.

Issue 2: Nature of Surplus Arising from Institutional and Consultancy Charges
The assessee argued that it has been working solely in the field of education for underprivileged children since 1987, receiving funds from various agencies for educational purposes. The society maintained that the surplus was incidental to its educational activities and not a result of any profit motive. The AO's reliance on the audit report's classification of certain activities as "consultancy, mess, accommodation" was challenged. The assessee cited various case laws to support its claim that incidental activities related to education should also be considered educational.

Issue 3: Taxation at Maximum Marginal Rate (MMR)
The AO taxed the surplus at MMR as per proviso to section 164(2), asserting that the assessee's case fell under the proviso. The assessee contested this, arguing that its activities did not involve any profit motive and thus should not attract MMR.

Tribunal's Findings:
1. Consistency with Past Assessments: The Tribunal noted that in previous assessment years, the assessee's activities were consistently recognized as educational, and exemptions u/s 11 and 12 were allowed. There were no changes in the nature of activities in the current year to warrant a different treatment.

2. Educational Activities: The Tribunal emphasized that the assessee's primary objective was education, directly imparted through its network of Bodhshalas and indirectly through partnerships with government and other NGOs. The activities under agreements with agencies like UNICEF were found to be educational, aimed at supporting out-of-school children.

3. Incidental Activities and Surplus: The Tribunal accepted that the institutional, consultancy, mess, and accommodation charges were part of the funding for educational projects and not independent business activities. The surplus generated was incidental and used for further educational purposes, which did not negate the charitable nature of the society.

4. Proviso to Section 2(15): The Tribunal held that the proviso to section 2(15) was inapplicable as the assessee's activities were not driven by profit motives but aimed at educational purposes. The dominant objective test was satisfied, and the society's activities could not be classified under "general public utility."

5. Taxation at MMR: Given the educational nature of the activities and the incidental nature of the surplus, the Tribunal ruled that the surplus should not be taxed at MMR.

Conclusion:
The Tribunal set aside the AO's decision to withdraw the exemption u/s 11 and 12 and ruled in favor of the assessee, allowing the appeal. The same findings and directions were applied to the subsequent assessment years 2013-14 and 2014-15, resulting in the allowance of those appeals as well.