2019 (11) TMI 1460 - AT - Income Tax

Benefit of exemptions u/s. 11 - As per revenue assessee is involved in widespread commercial activities in nature of business and the activity of the assessee is covered under first and second proviso to sec.2(15) - advancement of general public utility - assessee is a company registered u/s. 25 of the Companies Act engaged in the activities of management of liquid and solid wastes in Naroda Industrial. Area company is registered u/s. 12AA and approved u/s. 80G(5) - HELD THAT - Activities of assessee company squarely falls u/s. 2(15) of the Income-tax Act. The proviso to Section 2(15) is applicable to objects of general public utility. The same was also clarified vide CBDT Circular No. 11 dated 19.12.2008. Since assessee company is directly engaged in preservation of environment as per Section 2(15), the proviso as pointed by AO is not applicable in the instant case. AO was not justified to conclude that assessee is not doing any charitable activity. With regards to AO's contention that assessee is carrying out business activity and is in the nature of profit making, we find that benefit of exemption cannot be denied on the ground that it had made surplus/pro fits as long as it is not meant for private profit of seller. Profit making is not predominant object of activity. CIT(A) was justified in holding that assessee is doing charitable activity as per Section 2(15) benefit of Section 11 12 is available to it. CIT(A) was justified in directing AO to treat the activity of assessee company as charitable and further rightly directed to delete the addition - Decided against revenue.

Summary

Issues Involved:
1. Applicability of the first and second proviso to Section 2(15) of the Income Tax Act on the assessee's activities.
2. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act.
3. Accumulation of income under Sections 11(2) and 11(1)(a) of the Income Tax Act.
4. Principle of consistency in tax assessments.

Detailed Analysis:

1. Applicability of the first and second proviso to Section 2(15) of the Income Tax Act on the assessee's activities:
The core issue revolves around whether the activities of the assessee, which involve the management of liquid and solid wastes, fall under the category of "advancement of general public utility" and are thus subject to the first and second proviso to Section 2(15) of the Income Tax Act. The assessee argued that their activities are primarily aimed at the "preservation of environment," which is explicitly listed as a charitable purpose under Section 2(15). The Assessing Officer (AO) contended that the assessee’s activities were commercial in nature and thus fell under the proviso, which disqualifies entities engaged in trade, commerce, or business from being considered as charitable organizations if their activities exceed specified monetary limits.

2. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act:
The AO denied the benefits of Sections 11 and 12, which provide tax exemptions to charitable organizations, on the grounds that the assessee was engaged in commercial activities. The assessee countered this by emphasizing their registration under Section 12AA and approval under Section 80G(5), which were granted after due verification by the concerned authorities. The assessee highlighted that their activities are not profit-driven and any surplus generated is not distributed to shareholders but reinvested in the charitable activities.

3. Accumulation of income under Sections 11(2) and 11(1)(a) of the Income Tax Act:
The AO also questioned the accumulation of ?4,16,24,503 under Section 11(2) and 15% of ?3,43,02,447 under Section 11(1)(a), arguing that once the proviso to Section 2(15) is applicable, the benefits of Sections 11 and 12 cannot be availed. The assessee maintained that their activities are squarely within the ambit of charitable purposes and thus eligible for the accumulations as per the provisions of the Act.

4. Principle of consistency in tax assessments:
The assessee argued that the principle of consistency should apply, as their activities had been consistently recognized as charitable in previous assessments, and there had been no change in the nature of their activities. The CIT(A) and the ITAT both upheld this principle, noting that similar assessments in prior years had granted the benefits of Sections 11 and 12, and there was no justification for a different treatment in the current year.

Judgment:
The CIT(A) granted relief to the assessee by deleting the addition of ?7,59,26,949, citing the principle of consistency and previous favorable rulings by the ITAT for earlier assessment years. The ITAT upheld the CIT(A)'s order, emphasizing that the assessee’s activities fall within the definition of charitable purposes under Section 2(15) and are not hit by the provisos. The ITAT noted that the AO's contention of the assessee engaging in commercial activities was not justified, as the surplus generated was not for private profit but for reinvestment in charitable activities. The ITAT also referenced the CBDT Circular No. 11/2008, which clarified that the proviso to Section 2(15) does not apply to entities engaged in the preservation of the environment.

Conclusion:
The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decision to grant the benefits of Sections 11 and 12 to the assessee. The judgment reinforces the principle of consistency in tax assessments and clarifies the applicability of Section 2(15) concerning entities engaged in environmental preservation. The order was pronounced in open court on 27-11-2019.