2018 (5) TMI 134 - AT - Income Tax

Registration u/s. 12AA - charitable activities or busniss activities - Sukhmani centers - formation of societies to take full advantage of the E-Governance in all citizens related services, providing for the same through a single window mechanism in an integrated fashion - society is to run on a self-sustaining basis - Held that - The society is to operate on the self-sustaining principle. The same itself implies being run on sound business principles in-asmuch as it would ensure recovery of cost which is not subject to any competitive pressure of the market, and a reasonable margin. Outsourcing is to be through the tendering process. A part (and not insubstantial) of the revenue generated is also to be given to Punjab E-Governance Society (refer object clauses 4(f),(g) & (h)). Fixing of the rate with the approval of the State Government, thus, would not detract from the fact that the activity is being run on sound business principles and, further, envisaged with reasonable continuity. The revenue comes from different avenues, which includes the sale of statutory forms. As such, nothing turns on the fact, as argued, that but for this, the business (undertaking) would not have returned a surplus (profit), which argument is though valid for only two years. How, one may ask, the sale of forms be ignored, which is an integral part of the assessee s undertaking? In fact, the service rates, which are in addition to the statutory fee being charged by the Government, could be increased at any time, of course following the procedure for the purpose. It is, as explained, the ability to produce profit from the stated/pursued (set of) activity/s, that is relevant. In our view, therefore, the assessee is undertaking business and, accordingly, is hit by the second proviso to section 2(15) of the Act. SEE Sukhmani Society for Citizen Services, Mansa 2012 (11) TMI 947 - ITAT AMRITSAR - Decided against assessee.

Issues Involved:
1. Entitlement to the benefit of Section 11 of the Income Tax Act, 1961.
2. Applicability of the first proviso to Section 2(15) of the Income Tax Act, 1961.
3. Examination of the genuineness of the activities of the assessee-society.
4. Whether the activities of the assessee-society constitute "business" under the Income Tax Act, 1961.

Detailed Analysis:

1. Entitlement to the benefit of Section 11 of the Income Tax Act, 1961:
The primary issue in both appeals was whether the assessee, a society registered under the Societies Registration Act, 1860, and further registered under Section 12AA of the Income Tax Act, 1961, was entitled to the benefit of Section 11 for the assessment years 2010-11 and 2014-15. The Revenue had denied this benefit, arguing that the first proviso to Section 2(15) was applicable, which excludes certain activities from being considered charitable if they involve trade, commerce, or business.

2. Applicability of the first proviso to Section 2(15) of the Income Tax Act, 1961:
The first proviso to Section 2(15) states that the advancement of any other object of general public utility shall not be considered a charitable purpose if it involves carrying on any activity in the nature of trade, commerce, or business, or any service in relation to such activities for a fee or consideration. The second proviso exempts this rule if the aggregate value of receipts from such activities is ten lakh rupees or less in the previous year, which was later amended to twenty-five lakh rupees by the Finance Act, 2011.

3. Examination of the genuineness of the activities of the assessee-society:
The Revenue relied on a previous tribunal decision in the case of Sukhmani Society for Citizen Services, Mansa, where the assessee-society was denied registration under Section 12AA due to failure to produce books of account, which made it impossible to verify the genuineness of its activities. The tribunal had found that the society was engaged in business activities rather than charitable activities. In the present case, the assessee argued that their situation was different as there was no adverse observation by the Assessing Officer regarding the genuineness of their activities.

4. Whether the activities of the assessee-society constitute "business" under the Income Tax Act, 1961:
The tribunal examined whether the activities of the assessee-society constituted business. The society's primary objective was to establish, manage, operate, maintain, and control service centers for providing integrated citizen services using Information Technology (IT). The tribunal noted that the society was to operate on a self-sustaining basis, charging user fees approved by the competent authority. The tribunal concluded that these activities fell within the ambit of "business" as defined under the Income Tax Act, 1961, which includes any activity carried on continuously and systematically with the application of labor or skill for earning income.

Conclusion:
The tribunal found that the activities of the assessee-society constituted business and were not charitable in nature as per the first proviso to Section 2(15). Consequently, the assessee was not entitled to the benefit of Section 11, and the appeals were dismissed. The tribunal upheld the Revenue's decision, aligning with the previous decision in the Sukhmani Society for Citizen Services, Mansa case. The order was pronounced in the open court on April 24, 2018.

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