2017 (2) TMI 496 - AT - Income Tax

Entitlement for exemption u/s 11 - Held that - The price of the goods is not fixed by the assessee at the time of its supply but it is fixed by the Govt. of A.P. depending on the expenditure incurred by the assessee and also its overhead which is also evident from the fact that the assessee suffered losses in certain years while it has excess of income over expenditure in certain other years. The excess of income over expenditure alone cannot be a determining factor as to the nature of the assessee s activities. The exemption u/s 11 depends on the nature of the activities carried on by the assessee and not as to whether the assessee is making profit out of such activity. The establishment of factories for manufacturing of the food articles is also one of the ancillary activities of the assessee. Therefore, we agree with the finding of the CIT (A) that the assessee is an institution engaged in the activities for relief of the poor and therefore, whether it is making profit or otherwise becomes irrelevant while granting exemption u/s 11 of the Act. Further, the CIT (A) had also called for a remand report from the AO about the application of income and has observed that it has complied with the provisions of section 11(4a) of the Act. Therefore, we see no reason to interfere with the order of the CIT (A) for all the A.Ys. - Decided against revenue

Summary

Issues Involved:
1. Entitlement of the assessee for exemption under Section 11 of the Income Tax Act, 1961.
2. Determination of whether the assessee's activities fall under the definition of "charitable purpose" as per Section 2(15) of the Income Tax Act, 1961.
3. Examination of the assessee's activities as a contractor supplying food products and its implications on tax exemption.
4. Consideration of the assessee's payment of other taxes (Sales Tax, Service Tax, VAT) and its impact on the exemption status.
5. Analysis of the assessee's income and profit margins in relation to its claimed charitable activities.

Detailed Analysis:

1. Entitlement for Exemption under Section 11:
The Revenue's appeals for the assessment years 2005-06 to 2007-08 and 2010-11 challenge the orders of the CIT (A), which held that the assessee is entitled to exemption under Section 11 of the Income Tax Act, 1961. The Revenue contends that the CIT (A) erred in granting this exemption, arguing that the assessee's activities constitute business income and not charitable activities.

2. Definition of "Charitable Purpose" under Section 2(15):
The core issue revolves around whether the assessee's activities qualify as "charitable purpose" under Section 2(15) of the Act. The assessee, a society registered under Section 12AA, provides nutritious food to undernourished children, pregnant women, and lactating mothers below the poverty line, as directed by the Department of Women & Child Welfare of the Government of Andhra Pradesh. The CIT (A) held that these activities fall under the "relief of the poor" category, which is a charitable purpose.

3. Assessee's Activities as a Contractor:
The Assessing Officer (AO) denied the exemption, arguing that the assessee acts as a contractor supplying food to various government departments, resulting in income over expenditure. The AO cited the Supreme Court decision in Indian Chamber of Commerce vs. CIT, which excluded activities involving profit from the definition of charitable purpose. However, the CIT (A) and the Tribunal found that the assessee's activities are directed towards serving the poor and not for profit, despite the government reimbursing the costs.

4. Payment of Other Taxes:
The AO also argued that the assessee's payment of Sales Tax, Service Tax, and VAT indicates its commercial nature, thereby disqualifying it from exemption. The CIT (A) countered that the payment of these taxes does not alter the charitable nature of the assessee's activities, which are aimed at providing relief to the poor.

5. Income and Profit Margins:
The AO pointed to the assessee's admission of business activity and a net profit margin of 6.36% as evidence against its charitable status. However, the Tribunal noted that the assessee's income and expenditure vary, with losses in some years and surpluses in others. The Tribunal emphasized that the nature of the activities, not the profit, determines eligibility for exemption under Section 11.

Conclusion:
The Tribunal upheld the CIT (A)'s decision, affirming that the assessee's activities qualify as charitable under Section 2(15) and are eligible for exemption under Section 11. The Tribunal dismissed the Revenue's appeals for all the assessment years in question, concluding that the assessee's primary objective is to serve the poor, particularly children and women, and that its activities, even if resulting in profit, do not negate its charitable purpose.

Order:
The appeals by the Revenue for all the assessment years are dismissed. The order was pronounced in the Open Court on 8th February, 2017.