2018 (12) TMI 834 - HC - Income Tax

Obligation to seek exemption under Section 12AA - real income accrued to society - 'statutory levy' under the VAT Act, 2005 is being collected by virtue of the powers entrusted by the State Government to the respondent Assessee - surplus of income over expenditure - whether the retention of a part of the VAT collected by the respondent Assessee till the process of determination of its actual expenditure incurred on the collection, followed by deposit of balance surplus amount in the Government Treasury for onward transmission to the State Government, can be treated as the 'real income' in the hands of the respondent Assessee for the purpose of IT Act, 1961? Held that - Assessee continued to receive ₹ 5/ per Form till May, 2009 out of which Re.1/ was straightaway deposited in the Government Treasury and out of the balance of ₹ 5/ , only the actual expenditure incurred by it on collection process was deducted and the balance amount (80% as assessed by the authorities) was duly deposited in the Government Treasury to be paid to the Excise and Taxation Department of the State Government. In this entire process, the respondent Assessee neither gained anything nor earned any profit. The VAT amount recovered by the respondent Assessee was/is an entrustment of the statutory function of the State which alone is competent to levy VAT under Section 34 of the VAT Act, 2005. The respondent Assessee thus neither created any source of income nor generated any profit or gain out of such source. The Assessee merely performs the statutory functions under the VAT Act, 2005 and collects the tax amount for and on behalf of the State and transfers such collection to the Government Treasury. Even if the tax collection remains temporarily parked with the Assessee for some time, it cannot be treated as 'income' generated by the Assessee as the said amount does not belong to it. The Tribunal has thus rightly concluded that the surplus of income over expenditure, as reflected in the entries or the Returns filed by the respondent Assessee, also belonged to the State Government which was duly deposited in the Government Treasury. Hence, it does not partake the character of 'profit or gain' earned by the respondent Assessee. The non- registration of the respondent Assessee, under Section 12AA of the IT Act, 1961 is inconsequential, for an occasion to seek exemption from payment of tax on the income by a Trust or Institution serving the cause of general public utility would arise only when some actual income is derived. The respondent Assessee though is a 'juristic person' but in the absence of any income having been earned by it through 'profits or gains' within the meaning of Section 2 (24) of the IT Act, 1961, the respondent Assessee is indeed not obliged to seek exemption under Section 12AA of the IT Act, 1961, for it does not have any taxable income. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of income paid to the government by the assessee society.
2. The applicability of Section 12AA of the Income Tax Act, 1961 to the assessee society.
3. Whether the surplus income over expenditure constitutes taxable income.

Issue-wise Detailed Analysis:

1. Taxability of Income Paid to the Government by the Assessee Society:

The primary issue was whether the income of the assessee, which was paid to the government as per the bye-laws of the society, is taxable. The Tribunal examined the Memorandum of Association and the operational model of the society, concluding that the society was established to facilitate tax administration and not for profit. The society collected VAT and deposited a portion directly into the government treasury, with the remaining amount used for operational expenses and subsequently deposited in the government treasury. The Tribunal held that the surplus of income over expenditure belongs to the government and is not the income of the assessee.

2. Applicability of Section 12AA of the Income Tax Act, 1961:

The assessee society applied for registration under Section 12AA, which was rejected by the Commissioner of Income Tax, Shimla, on the grounds that the society's activities did not benefit the general public but provided infrastructural facilities to the Excise and Taxation Department. The Tribunal found that since the society did not generate any real income or profit, the non-registration under Section 12AA was inconsequential. The society was not required to seek exemption under Section 12AA as it did not have any taxable income.

3. Surplus Income Over Expenditure as Taxable Income:

The Tribunal analyzed whether the surplus income over expenditure, retained by the society until the determination of actual expenses, constituted real income. The Tribunal concluded that the VAT collected by the society was a statutory levy entrusted by the state government, and the society merely performed a statutory function without generating any profit or gain. The surplus amount, after deducting actual expenses, was deposited in the government treasury and did not constitute real income of the society. The Tribunal held that the surplus of income over expenditure does not partake the character of profit or gain earned by the society.

Conclusion:

The Tribunal ruled that the surplus of income over expenditure belongs to the state government and does not constitute taxable income. The non-registration under Section 12AA was deemed irrelevant as the society did not have any taxable income. The appeals were dismissed, and the substantial question of law was answered in favor of the assessee society.