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2024 (8) TMI 501 - AT - Income TaxDenial of exemption u/s. 10(23C)(iv) - charitable activity u/s 2(15) - as per DR assessee s activities are in the nature of trade, business or commerce - AR stated that the assessee provides for rental space in Fairs and Trade shows receipts from such activity should also be considered for the purpose of complying with the limit of 20% of total receipts of the Council - HELD THAT - As the assessee is a non-profit organization sponsored by the Ministry of Commerce and registered u/s 25 of the Companies Act and it is approved u/s. 10(23C)(iv) of the Act, in notification No.23/2007 from the A.Y. 2004-05 and onwards. The main activity of the council is to promote exports of leather industries. It is facilitating the participation of its members in Trade fairs. About 2,850 exporters of leather, leather products and footwear spread all over India are members of this council. The Council serves as a bridge between Indian exporters and overseas buyers on one hand and between Government and industry on the other hand. The assessee has been granted exemption u/s. 10(23C)(iv) of the Act, for the earlier Assessment years upto 2015-16 based on the ITAT order on the ground that, Council is not carrying out any activity of business, trade or commerce and proviso to Sec. 2(15) will not apply. What is the receipts that has to be considered for the purpose of applying the Proviso 2 to sec.2(15) - As the assessee provides for rental space in Fairs and Trade shows receipts from such activity should also be considered for the purpose of complying with the limit of 20% of total receipts of the Council. While total receipts is to be taken as the denominator for the second proviso, whether total receipts from different activities has to be aggregated or only the profit element alone has to be taken into consideration as Numerator, for complying with the condition under second proviso? - As in respect of activities incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated, it can be granted exemption provided the quantitative limit of not exceeding 20% under second proviso to Section 2(15) for receipts from such profits, is adhered to. Therefore, if some profits (nominal) is earned in carrying out the objectives, then only the profits from such activities (and not the entire receipt) should be considered whether it is below the limit of 20% of the entire receipts of the institution. As noted that, from the financials of the activities in respect of participation in Trade fairs, Appellant charges/collects only the actual expenditure from Govt as grant and members as participation charges.(Receipts Rs. 24,07,51,794/- and expenditure 24,76,65,706/- Loss of Rs. 80,57,912/-). Therefore, in respect of these activities which is in furtherance of the objective of the Appellant as per Para 171 of the Hon ble Apex order referred to above, while the receipts are Rs. 24.07 Crores only, the profit (here a loss of Rs. 80,57,912/-) can be considered for Numerator for the purpose compliance of second Proviso to sec. 2(15). As per second proviso to sec. 2(15) these profits has to be maximum cap of 20% of the Total receipts of the Institution - As the net surplus of Rs. 7.62 crores is less than 20% of the total receipts of the Institution i.e., Rs. 42.82 Crores, by applying the ratio of the Apex Court, the exemption u/s.10(23C)(iv) cannot be rejected under second proviso to sec 2(15). We are of the considered view that, the orders of the lower authorities are erroneous in denying the exemption and hence, set aside the impugned order by allowing the grounds of appeal of the assessee.
Issues Involved:
1. Whether the Commissioner of Income Tax (NFAC) erred in dismissing the appeal ex-parte without giving an opportunity to the assessee of being heard. 2. Whether the Commissioner of Income Tax (NFAC) erred in rejecting the appellant's claim of exemption under Section 10(23C)(iv) of the Income Tax Act. 3. Whether the income from certification is exempt from tax on account of mutuality. 4. Whether the entire income of the appellant is not subject to tax under Section 13(8) read with Section 2(15) and exempt under Section 10(23C)(iv). Detailed Analysis: 1. Dismissal of Appeal Ex-parte: The assessee contended that the Commissioner of Income Tax (NFAC) dismissed the appeal ex-parte without providing an opportunity to be heard. The tribunal did not specifically address this procedural issue in its final judgment, focusing instead on the substantive issues. 2. Rejection of Exemption under Section 10(23C)(iv): The primary issue was whether the assessee's activities were in the nature of trade, business, or commerce, which would disqualify them from claiming exemption under Section 10(23C)(iv) of the Income Tax Act. The AO determined that the assessee's activities, including issuing certificates and collecting membership fees, constituted trade or business. The AO invoked the first proviso to Section 2(15), which states that advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on any activity in the nature of trade, commerce, or business. The CIT(A) upheld this view, noting that the assessee's receipts from these activities exceeded the statutory limit of Rs. 25 lakhs, thus disqualifying them from exemption. 3. Income from Certification and Mutuality: The assessee argued that the income from certification was exempt from tax on the grounds of mutuality, as the services were provided exclusively to its members. The assessee relied on CBDT Circular No. 11/2008, which clarifies that industry and trade associations claiming to be mutual organizations would not fall under the proviso to Section 2(15) if their activities are restricted to contributions from and participation of only their members. The tribunal found merit in this argument, noting that the assessee's activities were not in the nature of trade or business as they were carried out for the benefit of its members and not for profit. 4. Total Income and Applicability of Section 13(8) read with Section 2(15): The tribunal examined whether the total income of the assessee could be exempt under Section 10(23C)(iv) despite the AO's findings. The tribunal referred to the Supreme Court's decision in ACIT vs. Ahmedabad Urban Development Authority, which clarified that if an organization's activities involve charging amounts only at cost or with a marginal markup, the prohibition against carrying on business is not attracted if the profits do not exceed 20% of its overall receipts. The tribunal found that the assessee's surplus of Rs. 7.62 crores was less than 20% of its total receipts of Rs. 42.82 crores. Therefore, the exemption under Section 10(23C)(iv) could not be denied under the second proviso to Section 2(15). Conclusion: The tribunal concluded that the lower authorities erred in denying the exemption under Section 10(23C)(iv). The assessee's activities were not in the nature of trade, business, or commerce, and the surplus generated was within the permissible limit. Therefore, the tribunal set aside the orders of the lower authorities and allowed the appeal of the assessee.
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