2019 (6) TMI 1083 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) - earning profit despite no profit motive - main objective of the assessee is promotion of industrial growth in Karnataka - In the course of carrying on its activities, the benefit arising from such promotion - HELD THAT - As decided in assessee's own case 2015 (10) TMI 481 - ITAT BANGALORE Assessee does not driven primarily by desire or motive to earn profits but to do charity through advancement of an object of general public utility. The assessee is operating on no profit basis. This is substantiated by the actual income received on operations of the Assessee and the expenditure incurred set out in the earlier paragraphs of this order. The proviso to Sec.2(15) is therefore not applicable to the case of the Assessee. We therefore hold that the Assessee is entitled to the benefits of Sec.11 - AO has not disputed the conditions necessary for allowing exemption u/s.11 except the applicability of proviso to Sec.2(15). The said proviso is not applicable to the case of the Assessee, we hold that the Assessee s income is not includible in the total income and therefore the income returned by the Assessee is directed to be accepted. Allow the grounds of appeal of the assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act, 1961.
2. Applicability of the proviso to Section 2(15) of the Income-tax Act, 1961.

Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income-tax Act, 1961:

The assessee, an Association of Persons, filed its return of income belatedly, which was processed under Section 143(1) of the Income-tax Act, 1961. The case was subsequently selected for scrutiny, and notices under Sections 143(2) and 142(1) were issued. The case was referred for special audit under Section 142(2A), which was quashed by the High Court. Despite this, the Assessing Officer (AO) proceeded with the assessment and denied the exemption under Section 11, making significant additions to the total income.

The CIT(A) upheld the AO's decision, leading the assessee to appeal before the Tribunal. The Tribunal noted that the issue was identical to the assessee's previous assessment years (2009-10 and 2010-11), where the Tribunal had allowed the exemption under Section 11. The Tribunal emphasized that the assessee's purpose was for the "advancement of any other object of general public utility," and the withdrawal of registration under Section 12AA was only due to the introduction of the proviso to Section 2(15).

2. Applicability of the Proviso to Section 2(15) of the Income-tax Act, 1961:

The Tribunal referred to the decision of the Hon’ble Delhi High Court in the case of India Trade Promotion Organization vs. DGIT(Exemption) and others, which laid down principles for interpreting the proviso to Section 2(15). Key points included:

- The proviso has two parts: one concerning activities in the nature of trade, commerce, or business, and the other concerning services related to trade, commerce, or business, both subject to income generation through fees or other considerations.
- The element of profit-making is crucial in determining whether an activity is charitable.
- The nature of an institution's income does not affect its charitable status if it otherwise qualifies as a charitable institution.
- The dominant objective must be examined to determine if it is profit-making or charitable.

Applying these principles, the Tribunal observed that the assessee's dominant objective was not profit-making but charitable, focusing on promoting industrial development and infrastructure projects on a "No Profit - No Loss" basis. The Tribunal noted that the assessee's income was primarily from interest on fixed deposits and other sources inherently linked to its charitable activities, with no profit motive.

The Tribunal concluded that the proviso to Section 2(15) did not apply to the assessee, and the assessee was entitled to the benefits of Section 11. The AO was directed to allow the exemption under Section 11, and the appeals for both assessment years (2013-14 and 2014-15) were allowed.

Conclusion:

The Tribunal set aside the CIT(A)'s order, holding that the provisions of Section 2(15) were not applicable to the assessee. The Tribunal directed the AO to allow the exemption under Section 11 for both assessment years, thereby allowing the assessee's appeals.