2019 (4) TMI 769 - AT - Income Tax

Benefit of sections 11 and 12 - Charitable activity or not? - disallowance of capital expenditure and addition made on account of disallowance of ECP contribution expenses by applying provisions of section 2(15) - HELD THAT - The assessee trust is engaged in the activity of preservation of environment by treating and controlling pollution of environment i.e. land and water. As a part of its activities, trust is running a common effluent treatment plant for treatment of effluent and wastewater generated and discharged by the Industrial units situated in and around Nandesari Industrial Units, who are members of the assessee trust. This is in accordance with the requirement of Environment Protect Act and various notifications and guidelines issues by the Central, State Governments, and Pollution Control Boards. Assessee is charging fees from members for meeting operating costs. This factual position has not been disputed by the AO. According to the AO provision of section 2(15) is applicable to the assessee-trust, because the predominant object of the assessee is in the nature of trade, business or commercial activities and to make profit, and therefore, there is no exclusive usage of income or profit for the charitable purpose as defined in section 2(15) and therefore, the assessee is not entitled for benefit under section 11. CIT(A) has considered both the issues in detail and observed that the activities of the assessee trust clearly falls within the ambit of the clause of preservation of environment and the assessee is eligible for all the benefits under sections 11 and 12 and all the capital expenditure incurred by the assessee has to be considered as application of income. By holding so, CIT(A) has also treated ECP contribution as part of application of income, and accordingly disallowance to this extent also deleted. As decided in assessee s own case Asstt.Year 2010-11 the assessee and conclude that it was indeed not a fit case for invoking proviso to section 2(15) merely because the assessee was charging the fee for the services rendered to the industrial unit. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of capital expenditure.
2. Deletion of addition on account of disallowance of ECP contribution expenses.
3. Application of provisions of section 2(15) and rejection of benefits under sections 11 and 12 of the Income Tax Act.

Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Capital Expenditure:
The Revenue contested the deletion of an addition of ?3,28,75,751/- for the assessment year 2013-14 and ?1,52,43,275/- for the assessment year 2014-15, which was made on account of disallowance of capital expenditure. The AO had doubted the capital expenditure, arguing that the predominant object of the assessee-trust was to make a profit and not to spend income exclusively for charitable activities. The AO concluded that the activities carried out by the trust were in the nature of trade, business, or commercial activities, thus hitting the provisions of section 2(15) and making the trust ineligible for benefits under section 11 of the Act. However, the CIT(A) deleted these disallowances, observing that the activities of the trust fell within the ambit of preservation of the environment and were thus eligible for benefits under sections 11 and 12, considering all capital expenditures as application of income. The Tribunal upheld the CIT(A)'s decision, noting the trust's engagement in environmental preservation through a common effluent treatment plant, which is in accordance with environmental regulations.

2. Deletion of Addition on Account of Disallowance of ECP Contribution Expenses:
The Revenue also contested the deletion of an addition of ?77,43,658/- for the assessment year 2013-14 and ?90,45,483/- for the assessment year 2014-15, which was made on account of disallowance of ECP contribution expenses. The AO treated these expenses as capital expenditure and added them to the income of the assessee. The CIT(A) deleted these disallowances by treating the ECP contribution as part of the application of income. The Tribunal upheld the CIT(A)'s decision, noting that similar issues were raised in the assessee's case for the assessment year 2010-11, where the Tribunal allowed the claim of the assessee.

3. Application of Provisions of Section 2(15) and Rejection of Benefits Under Sections 11 and 12:
The AO applied the provisions of section 2(15), arguing that the trust's activities were in the nature of trade, business, or commercial activities, thus disqualifying it from benefits under sections 11 and 12. The CIT(A) observed that the trust's activities, which involved running a common effluent treatment plant, clearly fell within the clause of preservation of the environment, making it eligible for benefits under sections 11 and 12. The Tribunal agreed with the CIT(A), noting that the trust was engaged in preserving the environment by treating and controlling pollution, and charged fees from its members to meet operating costs. This factual position was undisputed by the AO. The Tribunal also referred to its previous order in the assessee's case for the assessment year 2010-11, where it allowed the assessee's claim, and similar judicial precedents supporting the trust's eligibility for benefits under sections 11 and 12.

Conclusion:
The Tribunal upheld the CIT(A)'s orders for both assessment years, rejecting the Revenue's grounds of appeal. The Tribunal found no reason to interfere with the CIT(A)'s findings, which were consistent with the facts of the case and supported by previous judicial decisions. The appeals of the Revenue were dismissed.