2016 (5) TMI 199 - AT - Income Tax

Exemption u/s. 11 - Held that - In order to deny the benefit of exemption the activity must be advancement of any other object of general public utility and the above two conditions i.e., (a) and (b) exist. As far as the first condition is concerned it is not in trading and it is a decided fact before various appellate authorities that the activities of the organization are charitable and hence the said proviso is not applicable. As far as the second condition is concerned ie. any activity of rendering of any service in relation to any trade commerce or business, for a fee or cess or any other consideration irrespective of the nature of use or application of the income from such activity, or the retention of such income by the concerned entity, it is essential that one should render any service in relation to any trade, commerce or business for a fee or cess or any other consideration and since assessee is neither a service organization nor rendering any services, this part of amendment is also totally not applicable to the case. - Decided in favour of assessee

Issues Involved:
- Eligibility for exemption under Section 11 of the Income Tax Act.
- Allowability of provisions for gratuity and leave salary.
- Allowability of loss on sale of fixed assets.

Detailed Analysis:

1. Eligibility for Exemption under Section 11:
The primary issue was whether the assessee, a government company engaged in providing essential commodities to the poor at subsidized rates, qualifies for exemption under Section 11 of the Income Tax Act, which pertains to income derived from property held under trust wholly for charitable or religious purposes.

Arguments by the Assessing Officer (AO):
- The AO denied the exemption on the grounds that the assessee's activities constituted trading, as they involved buying and selling commodities.
- The AO argued that the assessee's income was similar to that of any other business entity, and the fact that it was a government company did not inherently make its activities charitable.
- The AO highlighted that the assessee received subsidies and commissions from the government, which indicated a profit motive.

Arguments by the Assessee:
- The assessee contended that it was established to ensure the supply of essential commodities to the poor, and its activities were heavily subsidized by the government.
- It argued that without these subsidies, the corporation would incur significant losses, indicating a lack of profit motive.
- The assessee cited various judicial precedents, including the Surat Art Silk Cloth Mfrs. Association case, to argue that the predominant object of its activities was charitable, even if some profit was generated incidentally.

Findings of the Commissioner of Income Tax (Appeals) [CIT(A)]:
- The CIT(A) ruled in favor of the assessee, stating that the primary objective of the corporation was to provide essential commodities to the poor at subsidized rates, which fell within the ambit of Section 2(15) of the Income Tax Act.
- The CIT(A) noted that the activities of the corporation were aimed at providing relief to the poor, and the incidental commercial activities did not change the charitable nature of the organization.
- The CIT(A) referred to the CBDT Circular No. 11 of 2008, which clarified that entities providing relief to the poor would continue to be eligible for exemption even if they incidentally carried on commercial activities.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO had unnecessarily disturbed the settled position from earlier years where the assessee's activities were deemed charitable.
- The Tribunal referenced previous rulings, including a decision by the Andhra Pradesh High Court in the assessee's own case, which confirmed the charitable nature of the corporation's activities.
- The Tribunal concluded that the assessee's activities were indeed charitable, as they were aimed at providing essential commodities to the poor at subsidized rates, and any incidental profit did not negate this primary objective.

2. Allowability of Provisions for Gratuity and Leave Salary:
The AO disallowed the provisions for gratuity and leave salary, arguing that these were not allowable expenses.

Arguments by the Assessee:
- The assessee argued that these provisions were legitimate business expenses and should be allowed.

Findings of the CIT(A) and Tribunal:
- The CIT(A) and Tribunal did not specifically address this issue in detail, focusing primarily on the eligibility for exemption under Section 11.

3. Allowability of Loss on Sale of Fixed Assets:
The AO disallowed the loss on the sale of fixed assets, considering it to be capital in nature and not allowable as a deduction.

Arguments by the Assessee:
- The assessee did not provide specific arguments on this issue in the summarized judgment.

Findings of the CIT(A) and Tribunal:
- Similar to the provisions for gratuity and leave salary, the CIT(A) and Tribunal did not specifically address this issue in detail.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decision, confirming that the assessee's activities were charitable in nature and eligible for exemption under Section 11 of the Income Tax Act. The cross-objections raised by the assessee were treated as academic and were not specifically adjudicated. The order was pronounced in open court on 29th April 2016.

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