2022 (11) TMI 1028 - AT - Income Tax

Exemption u/s 11 - Scope of amendment to Section 2(15) - dominant object test is to be applied for determining whether an assessee is engaged in business, trade or commerce, and/or any activity in the nature of business, trade or commerce - as per AO after the insertion of First Proviso to Section 11 of the Act, the activities of the Appellant which earlier qualified as charitable were, on account of amendment to Section 2(15) of the Act effective from 01.04.2009, were rendered non-charitable - HELD THAT - The approach of the Revenue cannot be countenanced. Circular No. 11 of 2008 issued by the CBDT clearly provides that whether an assessee has for its object 'the advancement of any other object of general public utility' is a question of fact to be examined keeping in view the facts of each case. It is admitted position that the Appellant was registered under Section 12A of the Act since 09.01.1996 and was granted the benefit of exemption in terms of Section 11 of the Act in the preceding assessment years even though the Appellant had receipt registration fee for certified agents, certification test fee etc. It is admitted position that the registration and certification activities were carried out by the Appellant as per the directives of SEBI. Appellant has been holding investor education camps and publishes material/information. In our view, the aforesaid activities of the Appellant are directed towards the benefit of investors and potential investors forming part of the general public and are not limited to the benefit of its members. Appellant has also maintained separate accounts in respect of these activities. As regards activities of the Appellant directed towards the benefit of its members are concern, the Assessing Officer has granted the benefit of principle of mutuality in respect of the same. AO is directed to allow exemption under Section 11 of the Act to the Appellant. Appeal of assessee allowed.

Summary

Issues Involved:
1. Denial of exemption under Section 11 and 12 of the Income Tax Act.
2. Applicability of the first proviso to Section 2(15) of the Income Tax Act.
3. Classification of the appellant's activities as trade, commerce, or business.
4. Consideration of indirect benefits to the public.
5. Limitation of the appellant's activities to its members.
6. Interpretation of CBDT Circular No. 11 of 2008.
7. Allowance of expenses incurred in earning income.

Detailed Analysis:

1. Denial of Exemption under Section 11 and 12:
The appellant, a Section 25 Company registered under Section 12A of the Income Tax Act, claimed exemption under Section 11 and 12 for Assessment Years 2011-12, 2012-13, and 2013-14. The Assessing Officer (AO) denied this exemption, arguing that the appellant's income from registration fees, certification test fees, and other receipts were not covered by the principle of mutuality and thus taxable. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's order.

2. Applicability of the First Proviso to Section 2(15):
The AO and CIT(A) applied the first proviso to Section 2(15) of the Act, which excludes entities from being considered charitable if they engage in any trade, commerce, or business activities. The CIT(A) concluded that the appellant's activities, even if indirectly benefiting the public, facilitated trade, commerce, or business, thus disqualifying it from exemption under Section 11.

3. Classification of Activities as Trade, Commerce, or Business:
The appellant argued that its activities, including investor education programs, certification, and registration under SEBI directives, were charitable and not commercial. The CIT(A) disagreed, stating that the appellant's activities facilitated trade, commerce, or business, thus falling under the first proviso to Section 2(15).

4. Consideration of Indirect Benefits to the Public:
The CIT(A) rejected the appellant's claim that its activities provided indirect benefits to the public, stating that accepting such a claim would allow all mutual benefit organizations to qualify as charitable. The appellant contended that its activities, such as investor education and publishing information, benefited the general public and not just its members.

5. Limitation of Activities to Members:
The AO treated the appellant as a mutual association, not taxing receipts from its members but denying exemption for receipts from non-members. The CIT(A) upheld this view, stating that the appellant's activities were primarily for the benefit of its members.

6. Interpretation of CBDT Circular No. 11 of 2008:
The CIT(A) relied on CBDT Circular No. 11 of 2008, which clarifies that entities engaged in trade, commerce, or business activities are not eligible for exemption under Section 11. The CIT(A) concluded that the appellant's dealings with non-members were governed by the proviso to Section 2(15).

7. Allowance of Expenses:
The appellant argued that the CIT(A) erred in not allowing expenses incurred in earning income. The CIT(A) directed the AO to dispose of the appellant's rectification application without giving specific directions.

Tribunal's Findings:
The Tribunal examined the objects and activities of the appellant, noting that it was established without the object of earning profits and was registered under Section 25 of the Companies Act, 1956. The Tribunal found that the appellant's activities, including investor education and certification under SEBI directives, were for the benefit of the general public and not limited to its members. The Tribunal concluded that the appellant was engaged in charitable activities and directed the AO to allow exemption under Section 11.

Conclusion:
The Tribunal allowed the appeals for all three assessment years, directing the AO to grant exemption under Section 11 and 12 and dispose of Ground No. 8 as infructuous for the Assessment Year 2011-12. The findings for Assessment Year 2011-12 were applied mutatis mutandis to the appeals for Assessment Years 2012-13 and 2013-14.