2018 (4) TMI 630 - AT - Income Tax

Eligibility to claim exemption u/s 11 & 12 - proof of charitable activity - identification of dominant activity of the assessee - Held that - Substantial portion of the income of the assessee came from stall charges, seminars, subscriptions and sponsorship. Asset base of the assessee was very small. However, it was holding substantial receivable of G24.83 lakhs and cash at bank of G18.79 lakhs as on 31.03.2010. Receivables as on 31.03.2011 came to G33.86 lakhs and cash at bank was G19.95 lakhs. In our opinion the question that ought have been addressed by the ld. Assessing Officer was whether the activities of the assessee as reflected in its income and expenditure accounts and its statement of affairs as reflected in the Balance Sheets, would show what was the dominant activity of the assessee. AO ought have identified the dominant activity of the assessee and verified whether such activity was in line with its objects and whether income earned through stalls, seminars, conferences, entrance fees etc were part of such dominant activity or ancillary to it. Unless a close examination of this nature is done, in our opinion, a conclusion as to whether assessee was hit by the proviso to Section 2(15) of the Act cannot be reached. None of the lower authorities had done this analysis. In the circumstances, we are of the opinion that the matter requires a fresh look by the ld. Assessing Officer. - Decided in favour of revenue for statistical purpose.

Issues Involved:

1. Applicability of the first proviso to Section 2(15) of the Income Tax Act.
2. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act.
3. Nature of activities conducted by the assessee and whether they constitute commercial activities.
4. Interpretation of "general public utility" as a charitable purpose.
5. Dominant purpose of the assessee's activities.

Detailed Analysis:

1. Applicability of the First Proviso to Section 2(15) of the Income Tax Act:

The Revenue contended that the assessee's activities were hit by the first proviso to Section 2(15) of the Income Tax Act, which states that the "object of general public utility shall not be a charitable purpose" if it involves carrying on any activity in the nature of trade, commerce, or business. The Assessing Officer noted that the assessee had receipts exceeding ?10,00,000/- from activities like conducting exhibitions, fairs, and renting out halls, which he considered commercial in nature. Consequently, the Assessing Officer denied the exemption under Sections 11 and 12.

2. Eligibility for Exemption under Sections 11 and 12 of the Income Tax Act:

The assessee, a society registered under the Registrar of Societies, Tamil Nadu, and having registration under Section 12A(a) of the Income Tax Act, claimed exemption under Sections 11 and 12, arguing that its activities were charitable in nature, aimed at promoting micro and small enterprises. The Commissioner of Income Tax (Appeals) accepted this argument, holding that the dominant purpose of the assessee was to promote micro and small scale industries, which qualified as a charitable activity.

3. Nature of Activities Conducted by the Assessee and Whether They Constitute Commercial Activities:

The Revenue argued that the assessee's activities, such as conducting exhibitions and trade fairs, were commercial. The assessee countered that these activities were ancillary to its primary objective of promoting micro and small enterprises and were not conducted with a profit motive. The Commissioner of Income Tax (Appeals) agreed with the assessee, stating that the activities were part of the main object and aimed at educating and promoting micro and small scale industries.

4. Interpretation of "General Public Utility" as a Charitable Purpose:

The Revenue contended that the assessee's activities fell under the category of "general public utility," which, according to the amended proviso to Section 2(15), should not be considered a charitable purpose if they involve trade, commerce, or business. The Commissioner of Income Tax (Appeals) held that the activities were not commercial but were aimed at promoting micro and small scale industries, thus qualifying as charitable.

5. Dominant Purpose of the Assessee's Activities:

The Tribunal emphasized the need to determine the dominant purpose of the assessee's activities. It noted that the Assessing Officer should have examined whether the income from stalls, seminars, and conferences was part of the dominant activity of promoting micro and small enterprises or ancillary to it. The Tribunal found that neither the Assessing Officer nor the Commissioner of Income Tax (Appeals) had conducted a thorough analysis of this aspect.

Conclusion:

The Tribunal set aside the orders of the lower authorities and remitted the matter back to the Assessing Officer for a fresh examination. The Assessing Officer was directed to closely analyze whether the assessee’s dominant activity aligned with its stated objectives and whether the income from various activities was part of or ancillary to this dominant activity. The Tribunal allowed the appeals of the Revenue for statistical purposes, indicating that the matter required further scrutiny.

Order Pronounced:

The order was pronounced on Thursday, the 5th day of April, 2018, at Chennai.

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