2016 (5) TMI 812 - AT - Income Tax

Exemption under section 11 denied - assessee is registered under section 12AA - nature of object - Held that - Definitely the object of the society contains sale and purchase as one of its objects, still the ultimate object is not to give benefit to some specific person. Nowhere in his order, the Assessing Officer has been able to bring on record any material or evidence that the assessee is carrying on any activity which is driven by object of profit making. The assessee manufactures articles as required by the Government and sell those to the Government concern only. Another fact coming out from the order of the Assessing Officer that the assessee is making sales to the concern which was less than market rate, this fact also strengthens the case of the assessee that it is not driven by profit motive. No allegation of violation of any provision of section 13 of the Act is coming out from the order of the Assessing Officer nor it was contended before us. If the assessee does not do the activity of sale and purchase, it will come to a standstill and will not be able to work and the objects for which registration was granted to it will cease to exist. In order to attain its objects it has to in any case, carry on activities of sale and purchase. In this view, we do not find that the activities of sale and purchase which have been questioned by the Assessing Officer have been carried on by the assessee with the objective to earn profit. Once it is seen that the object of the assessee is not to carrying on the business for profit motive, we can very easily infer that whatever activities in the nature of business the assessee is carrying are all incidental to attainment of its main object. In such a scenario, the provisions of section 11(4A) of the Act comes into play and the assessee has to maintain separate books of account for said business. However, in the present case, the assessee is carrying all its activities out of grants received by the Government, therefore, there cannot be two separate set of books. This fact has not been controverted by the Assessing Officer, nor the learned D.R. while arguing before us, does the same. In view of the above, as per the proposition laid down by the Delhi High Court in the case of India Trade Promotion Organization (2015 (1) TMI 928 - DELHI HIGH COURT ), the case of the assessee is not hit by the proviso to section 2(15) of the Act. Therefore, for the assessment year under consideration, the assessee is eligible for exemption under section 11 of the Act. - Decided in favour of assessee.

Issues Involved:
1. Whether the activities of the assessee, a society under the Department of Space, qualify as charitable under section 2(15) of the Income Tax Act, 1961.
2. Applicability of section 40A(2)(b) regarding sales made at lower rates.
3. Eligibility for exemption under section 11 despite being registered under section 12AA.
4. Requirement of maintaining separate books of account as per section 11(4A).
5. Interpretation of the first proviso to section 2(15) and its impact on the assessee's activities.

Detailed Analysis:

1. Charitable Nature of Activities:
The assessee, a society under the Department of Space, aimed to promote research and development in semiconductor technology. The Assessing Officer (AO) argued that the society's activities were not charitable as it engaged in sales and purchases, invoking the proviso to section 2(15) of the Income Tax Act. The AO believed these activities were commercial in nature. However, the assessee contended that it was a public utility concern, not a profit-making entity, and its activities were for strategic national needs, falling under the definition of charitable purposes as per section 2(15).

2. Applicability of Section 40A(2)(b):
The AO applied section 40A(2)(b), suggesting that the sales made at lower rates to government departments were not at arm's length. The assessee rebutted, stating that sales to government departments cannot be considered transactions with sister concerns merely because they are government entities. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, noting that section 40A(2)(b) does not apply to sales transactions.

3. Exemption under Section 11:
The AO denied the exemption under section 11, arguing that the activities were commercial. The CIT(A) overturned this, stating that the AO cannot override the Commissioner of Income Tax's (CIT) decision to grant registration under section 12AA, which implied that the activities were charitable. The CIT(A) also noted that the surplus income was less than 15%, even without considering additions to capital assets, and thus, the exemption under section 11 was applicable.

4. Separate Books of Account:
The AO criticized the assessee for not maintaining separate books of account for grants. The assessee clarified that it operated entirely on government grants, making separate accounts unnecessary. The CIT(A) accepted this explanation, noting that the AO's observation was erroneous.

5. Interpretation of Proviso to Section 2(15):
The Tribunal examined whether the assessee's activities fell under the proviso to section 2(15), which excludes entities engaged in trade, commerce, or business from being considered charitable. The Tribunal referred to the Delhi High Court's judgment in India Trade Promotion Organisation Vs. DGIT, which stated that the dominant objective of the entity must be examined. If the primary aim is profit-making, the entity cannot be considered charitable. However, if the activities are primarily charitable, incidental business activities do not disqualify the entity from exemption under section 11.

Conclusion:
The Tribunal concluded that the assessee's primary objective was not profit-making but to fulfill strategic national needs. The activities of sale and purchase were incidental to its main charitable objectives. The Tribunal also noted that the assessee's operations were funded by government grants, negating the need for separate books of account. Consequently, the assessee was deemed eligible for exemption under section 11, and the appeals by the Revenue were dismissed.

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