2023 (11) TMI 1140 - AT - Income Tax

Exemption u/s 11 and 12 - Charitable Activity u/s 2(15) - Exemption denied invoking section 13(8) as there is no application of section 2(15) in the activity of the assessee - assessee is purely the urban development concern - addition made for payment towards public utility and towards Municipal Community - HED THAT - The assessee is an Urban Development Society, and the assessee is developing land provided by the municipal community with the motive for development of Fazilka City after development the land has to be sold, so, in such circumstance, the profit has to be computed on based on two methods only, i.e. percentage completion method or the project completion method. The assessee is purely the urban development concern and claimed exemption u/s 11 and 12. The observation of the revenue is dismissed. As the assessee is eligible for exemption u/s 2(15) of the Act related to its activities. We respectfully relied on the order of Ahmedabad Urban Development Authority 2022 (10) TMI 948 - SUPREME COURT that the activities of assessee is eligible for Section 2(15) of the Act. The Legal Ground of the assessee is adjudicated in favour of the assessee.

Issues Involved:
1. Applicability of proviso to section 2(15) and section 13(8) resulting in the denial of benefits under sections 11 and 12.
2. Confirmation of addition of Rs. 9,09,41,639/- by not allowing the benefit of sections 11 and 12.
3. Confirmation of addition based on the original audit report ignoring the revised audit report.
4. Ignoring the revised audit report by the assessing officer.
5. Disallowance of expenditure on beautification of the city and construction of a Hockey Stadium.
6. Confirmation of addition of Rs. 6,09,41,639/- instead of recognizing a loss of Rs. 38,76,965 as per the revised return.
7. Method of accounting for receipts and expenditures.

Summary:

Issue 1: Applicability of Proviso to Section 2(15) and Section 13(8)
The Tribunal addressed the issue of whether the assessee's activities fell under the proviso to section 2(15), which would invoke section 13(8) and result in the loss of benefits under sections 11 and 12 of the Income-tax Act, 1961. The Tribunal noted that the revenue's position was supported by the Supreme Court's decision in the case of ACIT (Exemption) vs. Ahmedabad Urban Development Authority, which clarified that statutory bodies performing public functions are generally not driven by profit motives and are eligible for exemptions under sections 11 and 12.

Issue 2: Confirmation of Addition of Rs. 9,09,41,639/-
The Tribunal found that the assessee's activities were indeed eligible for exemption under sections 11 and 12, given that they were in line with the Supreme Court's guidelines for entities advancing general public utility. The Tribunal allowed the assessee's appeal on this ground, overturning the CIT(A)'s decision.

Issue 3: Confirmation of Addition Based on Original Audit Report
The Tribunal noted that the original audit report was not correct and that the revised audit report provided a true state of affairs. The addition made based on the original audit report was deemed unjustified.

Issue 4: Ignoring Revised Audit Report
The Tribunal found that the CIT(A) had erred in ignoring the revised audit report, which was fully supported by the figures and explanations provided by the assessee. The Tribunal remitted this issue back to the CIT(A) for reconsideration in light of the revised audit report.

Issue 5: Disallowance of Expenditure
The Tribunal held that the expenditure on beautification of the city and construction of a Hockey Stadium was in line with the objects of the trust as envisaged by the Government of Punjab. Therefore, this expenditure was allowable under sections 28 to 44 of the Income Tax Act.

Issue 6: Confirmation of Addition Instead of Recognizing Loss
The Tribunal found that the CIT(A) had erred in confirming the addition of Rs. 6,09,41,639/- instead of recognizing a loss of Rs. 38,76,965 as per the revised return. This issue was remitted back to the CIT(A) for reconsideration.

Issue 7: Method of Accounting
The Tribunal noted that the assessee's method of accounting for receipts on an accrual/mercantile basis and expenditures on a cash basis was not justified. This issue was also remitted back to the CIT(A) for reconsideration.

Conclusion:
The Tribunal allowed the appeal of the assessee on the primary legal ground and remitted the other factual issues (Grounds 2 to 7) back to the CIT(A) for reconsideration in light of the Supreme Court's decision and the revised audit report. The appeal was partly allowed for statistical purposes.

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