2020 (9) TMI 1095 - AT - Income Tax

Exemption u/s 11 - charitable or commercial activities - assessee was earning huge profits by providing data connectivity to its subscribers in lieu of consideration as per its objects and nowhere, charity can be seen in the whole process - charitable or commercial activities - assessee is an autonomous society established under the aegis of Department of Information Technology, Ministry of Communications and Information Technology, Government of India, as a non-profit organization - HELD THAT - As decided in own case 2018 (1) TMI 189 - ITAT DELHI activity of the petitioner involves promotion, propagation and spreading awareness and knowledge about global coding identification system GS1. The entire expenditure of the petitioner has to be taken into consideration and cannot be ignored. There are stipulations in sections 11, 13, etc., of the Act to prevent misuse of or siphoning of funds, bar/prohibit gains to related persons, stipulations of time limits for use of funds, which are effective checks and curtail and deny benefit in cases of abuse. There is no such allegation or contention of the Revenue in the present case. Fee charged and the quantum of income earned can be indicative of the fact that the person is carrying on the business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long-term and should not depend upon the Government, in other words, taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under the residuary clause general public utility . The impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, substantially or in part must be funded by voluntary contributions. No such requirement has been pointed out or argued. A practical and pragmatic view is required when we examine the data, which should be analyzed objectively and a narrow and coloured view will be counter-productive and contrary to the language of section 2(15) - Decided in favour of assessee.

Issues Involved:
1. Whether the activities of the Society are commercial in nature despite its charitable objects.
2. Whether the Society is earning huge profits, negating its charitable status.
3. Whether the capital expenditure for earlier years should be considered as application of income.
4. Whether the Society is governed by independent provisions of sections 11, 12, 12A, 12AA, and 13 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Commercial Nature of Activities
The Revenue argued that the Society's activities, which yielded income, were commercial despite its charitable objects. The Tribunal noted that the Society, established under the Department of Information Technology, Ministry of Communications and Information Technology, Government of India, was a non-profit organization with the primary objects of running a nation-wide academic and research network. The Assessing Officer had observed that the Society's activities were commercial in nature due to its receipts. However, the Tribunal found that the Society's activities fell within the ambit of "charitable purposes" under section 2(15) of the Act. The Tribunal referenced its earlier decision in the Society's case for the Assessment Years 2009-10 and 2010-11, which was affirmed by the Hon’ble Delhi High Court, concluding that the Society was not involved in trade, commerce, or business activities, and thus, the provision to Section 2(15) was not attracted.

Issue 2: Earning Huge Profits
The Revenue contended that the Society was earning huge profits by providing data connectivity to its subscribers, which negated its charitable status. The Tribunal examined the Society's activities and found that its primary and dominant purpose was not profit-making. The Society's surplus was incidental and not indicative of a profit motive. The Tribunal emphasized that merely generating surplus does not imply that the Society is functioning with a profit motive. The Society's activities were primarily for the advancement of computer communication and education, which are charitable in nature.

Issue 3: Capital Expenditure as Application of Income
The Revenue argued that capital expenditure for earlier years should be considered as application of income in the year of purchase of fixed assets. The Tribunal found that the Society's capital expenditure was indeed for charitable purposes and should be considered as application of income under section 11(1). The Tribunal reiterated that the Society's activities were charitable, and thus, the capital expenditure should be treated accordingly.

Issue 4: Governance by Independent Provisions
The Revenue contended that the Society, like other charitable or religious institutions, should be governed by the independent provisions of sections 11, 12, 12A, 12AA, and 13 of the Income Tax Act, 1961. The Tribunal found that the Society was indeed governed by these provisions and that its income and expenditure were computed on the basis of the entire expenditure, including capital expenditure for the purchase of capital assets. The Tribunal noted that the Society's activities were charitable and fell within the scope of these sections.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the Society's charitable status and entitlement to exemption under section 11. The Tribunal's decision was based on the precedent set in the Society's earlier cases for the Assessment Years 2009-10 and 2010-11, which were affirmed by the Hon’ble Delhi High Court. The Tribunal concluded that the Society's activities were not commercial in nature, its surplus did not negate its charitable status, and its capital expenditure should be considered as application of income. The Society was found to be governed by the independent provisions of sections 11, 12, 12A, 12AA, and 13 of the Income Tax Act, 1961.

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