2015 (5) TMI 863 - AT - Income Tax

Revision u/s 263 - DIT(E) erred in holding that Receipts of appellant from Test Laboratory Services and Consultancy Services do not fall within the ambit of Section 2(15) of the Income Tax Act - appellant is not eligible for claiming exemption u/s 11 on income derived from the above receipts - Held that - Assessing Officer raised query about the revenues received from test laboratory charges and consultancy charges and the assessee placed required details and explanation before the AO in this regard and this fact was also noted by the CIT(A) in paragraph 4.4 of the impugned order. We are unable to approve the observations of the CIT that the AO did not examine the issue of taxability of revenue from test laboratory and consultancy charges in the light of proviso to section 2 (15) of the Act. We may also point out that the AO has considered this issue in paragraph no. 2 and 3 of the assessment order and conclusion of the AO cannot be held as erroneous merely because the AO has not decided the issue in so many words as per expectation of the Ld. CIT. Thus the CIT was not justified in holding that the view taken by the AO was granting exemption u/s 11 of the act was not inaccordance with law and was unsustainable. Per contra, from bare reading of the assessment order, it is vivid that the assessing officer made reasonable inquiry on the issue of test laboratory charges and consultancy charges and the AO took a plausible and reasonable view that the revenue earn from these activities cannot be held as income with the main object to earn profits. We also clearly note that the activities of laboratory testing and consultancy was in furtherance of main and charitable object of the assessee association it cannot be termed as activities with the main object of profit earning motive. - Decided in favour of assesse.

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Taxability of receipts under Section 2(15) of the Income Tax Act.
3. Eligibility for exemption under Section 11 of the Income Tax Act.
4. Examination of taxability by the Assessing Officer (AO).
5. Validity of the order passed by the Director of Income Tax (Exemptions) [DIT(E)].

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The Assessee challenged the jurisdiction assumed by the DIT(E) under Section 263 of the Income Tax Act, arguing that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal noted that the DIT(E) issued a notice under Section 263, observing that the AO had not properly examined the taxability of the receipts from test laboratory services and consultancy services in light of the amended provisions of Section 2(15) of the Act. The Tribunal concluded that the assumption of jurisdiction by the DIT(E) was not valid as the AO had conducted a reasonable inquiry into the matter.

2. Taxability of Receipts under Section 2(15) of the Income Tax Act:
The DIT(E) held that the receipts from test laboratory services and consultancy services did not fall within the ambit of Section 2(15) of the Act, thus making the Assessee ineligible for exemption under Section 11. The Tribunal referred to the Hon'ble Delhi High Court's interpretation in the case of ICAI vs. DGIT (E), which stated that the expressions "trade," "commerce," and "business" in the first proviso to Section 2(15) must be interpreted restrictively. It was held that the activities carried out by the Assessee were incidental to its main charitable objects and did not constitute business, trade, or commerce.

3. Eligibility for Exemption under Section 11 of the Income Tax Act:
The Tribunal observed that the Assessee, an association of State Road Transport Undertakings (STUs), was registered under Section 12A and notified as a charitable organization under Section 10(23C)(iv) of the Act. The main object of the Assessee was to improve public transport systems, and the income from test laboratory and consultancy services was used to further this charitable purpose. The Tribunal concluded that the Assessee was eligible for exemption under Section 11 as its activities were not driven by a profit motive.

4. Examination of Taxability by the Assessing Officer (AO):
The DIT(E) contended that the AO had not examined the taxability of the receipts in light of the amended provisions of Section 2(15). However, the Tribunal found that the AO had indeed raised queries and considered the Assessee's submissions regarding the nature of the receipts during the assessment proceedings. The AO had taken a plausible view that the receipts were not taxable as business income, and the Tribunal held that this view could not be deemed erroneous.

5. Validity of the Order Passed by the Director of Income Tax (Exemptions) [DIT(E)]:
The Tribunal noted that the DIT(E) had set aside the AO's order and directed a de novo examination. However, the Tribunal found that the DIT(E) had misunderstood the proviso to Section 2(15) and failed to consider the Assessee's charitable status and the context of its activities. The Tribunal concluded that the DIT(E)'s order was not sustainable and quashed the notice and order under Section 263, declaring them void ab initio.

Conclusion:
The appeal of the Assessee was allowed, and the impugned notice and order under Section 263, along with all subsequent proceedings, were quashed. The Tribunal held that the Assessee's activities were charitable and not driven by a profit motive, thus eligible for exemption under Section 11 of the Income Tax Act.

← Previous Next →