2022 (10) TMI 27 - AT - Income Tax

Denial of exemption u/s 11 - whether nature of receipts is from the services rendered to the builders and developers for smooth development of residential and commercial building in slum areas and therefore, these activities are directly hit by the proviso to section 2(15)? - HELD THAT - Lower authorities have not examined whether these receipts arose on carrying out of the activities integral to assessee s functions or its principal objects or as to whether the same was necessary for furtherance of objects for which the assessee was established. In fact, the continuation of principal / main activity and the direct correlation between the two is relevant to decide whether assessee s case fall within the category of advancement of any other object of general public utility . Therefore, we remand this issue also to the file of AO for de novo adjudication after necessary examination of the aforesaid aspects. We further direct the assessee to provide details as may be required by the AO for complete adjudication of aforesaid aspects. Since, various aspects pertaining to section 2(15) of the Act have been remanded to the AO for de novo adjudication and once the assessee satisfies those aspects, it can be said to be eligible to claim exemption u/s 11 - The ground raised by the assessee pertaining to denial of exemption u/s 11 is also remanded to the file of AO for de novo adjudication in light of the conclusion reached in the remand proceedings. In these appeals, revolve around assessee s claim of exemption u/s 11 of the Act, therefore, these grounds are also remanded to the AO for de novo adjudication. Accordingly, all the grounds raised by the assessee, in these appeals, are allowed for statistical purpose.

Issues Involved:
1. Denial of exemption under section 11 of the Income Tax Act.
2. Applicability of proviso to section 2(15) of the Income Tax Act.
3. Nature of activities and income of the assessee.
4. Rule of consistency in assessment years.
5. Examination of whether activities fall under 'relief of the poor' or 'advancement of general public utility'.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue in these appeals is the denial of exemption under section 11 of the Income Tax Act to the assessee. The assessee, a local authority created under the Maharashtra Slum Area (Improvement, Clearance, and Rehabilitation) Act, 1971, claimed exemption under section 11. However, the Assessing Officer (AO) denied this exemption, stating that the assessee's activities were in the nature of business, thus invoking the proviso to section 2(15) of the Act. The AO argued that the assessee was engaged in commercial activities, such as charging fees from developers and earning interest, which do not qualify as charitable activities under section 11.

2. Applicability of Proviso to Section 2(15):
The AO and the learned Commissioner of Income Tax (Appeals) [CIT(A)] held that the assessee's activities fall under the proviso to section 2(15), which excludes entities engaged in trade, commerce, or business from being considered as charitable if their activities involve charging fees. The assessee argued that its primary objective is the rehabilitation of slum dwellers, and any fees charged are incidental to this main objective. The Tribunal noted that the applicability of the proviso to section 2(15) was not previously considered in the assessee's case for earlier years, and thus, the issue needed fresh examination.

3. Nature of Activities and Income:
The AO and CIT(A) observed that the assessee's income was primarily derived from fees and levies charged to developers, which were considered commercial activities. The Tribunal noted that the assessee's functions, as per the Maharashtra Slum Area Act, include surveying slum areas, formulating rehabilitation schemes, and implementing these schemes. The Tribunal directed the AO to examine whether the fees and charges collected by the assessee were integral to its main objectives and necessary for furthering its statutory functions.

4. Rule of Consistency:
The assessee argued for the application of the rule of consistency, stating that in earlier years, its activities were considered charitable, and there was no change in facts or circumstances. However, the CIT(A) and AO held that each assessment year is independent, and the principle of res judicata does not apply to income tax proceedings. The Tribunal upheld this view, noting that the proviso to section 2(15) was introduced from assessment year 2009-10, and thus, the earlier assessments were not relevant to the current issue.

5. Examination of 'Relief of the Poor' or 'Advancement of General Public Utility':
The Tribunal directed the AO to re-examine whether the assessee's activities could be categorized as 'relief of the poor' or 'advancement of general public utility.' The Tribunal noted that the term 'relief of the poor' includes a wide range of activities for the welfare of economically and socially disadvantaged groups. The AO was instructed to verify the actual activities and expenditures of the assessee to determine if they align with this definition. If the activities are found to be for 'relief of the poor,' the proviso to section 2(15) would not apply. Otherwise, the AO must examine if the activities fall under 'advancement of general public utility' and meet the conditions of the proviso.

Conclusion:
The Tribunal remanded the case to the AO for de novo adjudication on all aspects, including the nature of activities, applicability of proviso to section 2(15), and eligibility for exemption under section 11. The AO was directed to examine the details and activities of the assessee comprehensively and allow the assessee to present any additional evidence or arguments. All grounds raised by the assessee were allowed for statistical purposes, and the appeals were remanded for fresh consideration.

← Previous Next →