2021 (1) TMI 176 - AT - Income Tax

Exemption u/s 11 - Charitable activity u/s 2(15) - as per CIT- A assessee is a Government organization especially formed to implement Rail components of MUTP and has taken projects funded fully by the Government and using all its funds without any profit markup - whether CIT(A) is right in allowing the exemption u/s 11 of the IT. Act in view of proviso to section 2(15) of the I.T. Act, when the receipts from the business of developing, coordinating plants and implementing the rail infrastructure projects, etc. for Indian Railways, exceeded the limit provided in proviso to section 2(15)? - HELD THAT - Finding given by the Assessing Officer that assessee is engaged commercial and profit motive activity is totally unsustainable. It may not be out of place to mention here that to remove/prevent the mischief which can be caused to the assessee such as the present large State, the present proviso No. (ii) to section 2(15) provides that if the aggregate receipt from such activity or activities during the previous year do not exceed 25% of the total receipts of the entity, the exclusion provision will not apply. In any event, having carefully perused the impugned order of the learned CIT(A) which deals with all the points raised by the Assessing Officer in a fair and comprehensive manner, we are inclined to endorse the well-reasoned findings and conclusions arrived at by the learned CIT(A).In view of these discussions, bearing in mind entirety of the case, and respectfully following decision of the coordinate bench- as referred to above, we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. The appeal of is, therefore, dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) was correct in allowing exemption under Section 11 of the Income Tax Act, 1961, considering the proviso to Section 2(15).
2. Whether the CIT(A) was right in treating the assessee as a government organization formed to implement rail projects without profit markup.
3. Whether the CIT(A) ignored judicial precedents cited by the AO while allowing exemption under Section 11.
4. Whether reliance on the Mumbai Tribunal decision in Shanmukhananda Fine Arts was appropriate.
5. Whether the CIT(A) correctly directed the AO to allow exemption under Section 11 despite the decision in Maharashtra Industrial Development Corporation.

Detailed Analysis:

1. Allowing Exemption under Section 11 Considering Proviso to Section 2(15):
The CIT(A) allowed the exemption under Section 11, despite the proviso to Section 2(15), which restricts charitable purpose if it involves trade, commerce, or business activities exceeding ?25 lakhs. The CIT(A) reasoned that the assessee's activities, including developing rail infrastructure, are in public interest and not for profit. The assessee, a government company, is funded by the government and World Bank, and its surplus is ploughed back into projects, not distributed as profit.

2. Treating the Assessee as a Government Organization:
The CIT(A) noted that the assessee was established to implement railway projects under the Mumbai Urban Transport Project (MUTP) and operates under the Ministry of Railways' control. The funds received are used for public infrastructure projects, and any surplus is reinvested in these projects. The CIT(A) emphasized that the assessee's activities are not commercial but aimed at public utility.

3. Ignoring Judicial Precedents Cited by the AO:
The CIT(A) reviewed the judicial precedents cited by the AO, such as the decisions in Jammu Development Authority, Jalandhar Development Authority, and others. However, the CIT(A) found that these cases were distinguishable and not directly applicable to the assessee's situation. The CIT(A) relied on the decision in the assessee's own case by the Mumbai ITAT, which restored the registration under Section 12A.

4. Reliance on Mumbai Tribunal Decision in Shanmukhananda Fine Arts:
The CIT(A) referred to the Mumbai Tribunal's decision in Shanmukhananda Fine Arts, which held that incidental commercial activities do not disqualify an entity from being considered charitable if the primary purpose remains charitable. The CIT(A) applied this principle, noting that the assessee's primary purpose is public utility, and any incidental income is used for its charitable objectives.

5. Exemption under Section 11 Despite Decision in Maharashtra Industrial Development Corporation:
The CIT(A) distinguished the assessee's case from the Maharashtra Industrial Development Corporation case, where activities were deemed commercial. The CIT(A) highlighted that the assessee's activities are government-funded, aimed at public infrastructure, and not profit-oriented. The CIT(A) concluded that the proviso to Section 2(15) does not apply, and the assessee is eligible for exemption under Section 11.

Conclusion:
The Tribunal upheld the CIT(A)'s order, emphasizing that the assessee's activities are charitable and aimed at public utility, not profit. The Tribunal noted that the proviso to Section 2(15) does not apply as the activities are government-funded and non-commercial. The appeal by the AO was dismissed, and the cross-objection by the assessee was also dismissed as not pressed.