2025 (4) TMI 1037 - AT - Income Tax

Exemption u/s. 11 - applicability of section 2(15) - claim denied no educational activities has been carried out by the Appellant and receipts of consultancy charges seminar fees sponsorship are in the nature of services provided to trade and commerce - HELD THAT - The arguments raised on behalf of the assessee with respect to non-applicability of Hon ble Apex Court case of AUDA 2022 (10) TMI 948 - SUPREME COURT are more convincing than the arguments raised by the revenue/appellant in that regard. The ratio of the Hon ble Jurisdiction High Court squarely covers the facts and circumstances of the case in hand. As is evident from the para 6.3 onwards of the impugned judgment as Ld. CIT(E) held that if 12A registration was not withdrawn on the date of the assessment order then the income of the assessee was exempt in entirety and the Ld. AO could not have travelled beyond the certificate of registration granted u/s 12A of the Act. It was further held by Ld. CIT(E) that once the 12AA registration is granted there is no power with the AO to ignore such registration and the Ld. AO was wrong in denying exemption u/s 11 when the appellant is approved u/s 12AA. CIT(E) further held that since the AO exceeded his authority in denying exemption u/s 11 he was not going into merit of whether the appellant was engaged in Education as contemplated in section 2(15) of the Act. While deciding so the Ld. CIT(E) has relied upon the judgment of Hon ble Supreme Court in Surat City Gymkhana 2008 (4) TMI 16 - SUPREME COURT wherein it was held that the registration u/s 12A was a fait accompli to hold the AO back from further probe into the objects of the trust. The Surat City Gymkhana case (supra) has been relied in Gemological Institute of India 2016 (4) TMI 1357 - BOMBAY HIGH COURT . It is to be noticed that the SLP filed by revenue against the Jurisdictional High Court judgment was dismissed by the Hon ble Supreme Court 2019 (5) TMI 1365 - SUPREME COURT OF INDIA . Only ground no. 1 pertains to the matter decided by Ld. CIT(E) and the ground no. 2 and 3 pertains to applicability of section 2(15) of the Act and the said aspect has not been decided by the Ld. CIT(E) because the AO has exceeded his authority in denying exemption u/s 11 and therefore the question of applicability of section 2(15) in the case of assessee was left open being academic as there was no need to decide the said question on merit. We do not find any illegality in the impugned order passed by Ld. CIT(E) which may warrant interference by this Tribunal. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

- Whether the Assessing Officer (AO) was entitled to deny exemption under section 11 of the Income Tax Act despite the assessee having a valid and subsisting registration under section 12AA, particularly when the AO found the activities to be commercial in nature invoking the proviso to section 2(15) of the Act.

- Whether the activities carried out by the assessee, specifically certification of courses and organizing seminars without imparting formal education, fall within the ambit of "charitable purpose" or are hit by the proviso to section 2(15) as being in the nature of trade, commerce or business, thus disqualifying the assessee from exemption under section 11.

- Whether the exemption claim under section 11 can be denied on the ground that the assessee's activities generate surplus and have commercial components, irrespective of the utilization of such surplus.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity and Effect of Registration under Section 12AA and AO's Power to Deny Exemption

Relevant Legal Framework and Precedents: Section 12AA of the Income Tax Act empowers the Commissioner to grant registration to charitable institutions after satisfying himself about the genuineness of objects and activities. The Supreme Court in Surat City Gymkhana held that once registration under section 12A is granted and subsisting, the AO cannot re-examine the objects of the trust or institution or deny exemption under section 11 on that basis. The AO's power to deny exemption is limited where valid registration exists, and cancellation of registration can only be done by the Commissioner under section 12AA(3).

Court's Interpretation and Reasoning: The Tribunal concurred with the CIT(E) that the AO exceeded his authority by denying exemption under section 11 despite the assessee's valid registration under section 12AA. The Tribunal relied on the Supreme Court's decision in Surat City Gymkhana, which was further endorsed by the Bombay High Court in Director of Income Tax (Exemption) vs. Gemological Institute of India. The Tribunal noted that the AO cannot ignore or override the registration certificate granted under section 12AA and that only the Commissioner has the jurisdiction to cancel such registration.

Key Evidence and Findings: The assessee had a valid and subsisting registration under section 12AA, which had not been cancelled at the time of assessment. The AO's denial of exemption was based on the nature of activities being commercial, but no cancellation of registration was effected.

Application of Law to Facts: Given the subsisting registration, the AO was precluded from denying exemption under section 11 on the ground of the nature of activities. The Tribunal held that the AO's order was ab initio invalid in denying exemption without cancellation of registration.

Treatment of Competing Arguments: The revenue argued that the AO was justified in denying exemption based on the commercial nature of activities and reliance on the Supreme Court's ruling in Ahmedabad Urban Development Authority (AUDA). However, the Tribunal distinguished AUDA, noting that it dealt with the scope of proviso to section 2(15) and not the AO's power vis-`a-vis a valid registration under section 12AA. The assessee's argument that AUDA was not applicable was accepted, supported by the binding precedent of Surat City Gymkhana and the Bombay High Court's decision in Gemological Institute of India.

Conclusions: The Tribunal concluded that the AO was not empowered to deny exemption under section 11 without cancellation of registration under section 12AA. The CIT(E) rightly allowed the appeal on this ground, and the Tribunal upheld this conclusion.

Issue 2: Applicability of Proviso to Section 2(15) and Nature of Activities as Charitable or Commercial

Relevant Legal Framework and Precedents: Section 2(15) defines "charitable purpose," and its proviso excludes activities that are in the nature of trade, commerce or business, even if the surplus is applied for charitable purposes. The Supreme Court's AUDA judgment clarified that fees or consideration received for commercial activities indicate profit motive and fall outside charitable purposes. The Chennai Tribunal in FRP Institute also denied exemption for paid workshops held to be inherently commercial.

Court's Interpretation and Reasoning: The AO held that the assessee's activities-consultancy charges, seminar fees, sponsorships-were commercial and did not constitute educational activities under section 2(15). However, the CIT(E) did not decide on the merits of this issue because the AO had exceeded his authority in denying exemption despite valid registration. The Tribunal agreed that since exemption was rightly allowed on the basis of registration, the question of applicability of proviso to section 2(15) was academic and did not require adjudication.

Key Evidence and Findings: The assessee's Memorandum of Association detailed objects related to education, research, consultancy, and dissemination of knowledge in human settlements. The consultancy and seminar activities were claimed to be incidental to the main object of education. The financial statements showed consultancy income from government and non-profit entities, with expenditures exceeding receipts, indicating no profit motive.

Application of Law to Facts: While AO found the activities commercial, the Tribunal accepted the assessee's contention that the activities were educational and incidental to the main charitable purpose. The Tribunal relied on the Bombay High Court's judgment in Gemological Institute of India, which upheld that a valid registration under section 12AA limits AO's inquiry into the nature of activities.

Treatment of Competing Arguments: The revenue emphasized the commercial nature of consultancy fees and surplus generation, relying on AUDA and other precedents to argue denial of exemption. The assessee countered that the activities were educational, not commercial, and that the AO could not re-examine objects post-registration. The Tribunal found the assessee's arguments more persuasive and consistent with binding precedents.

Conclusions: The Tribunal did not decide on the applicability of proviso to section 2(15) due to the overriding effect of valid registration under section 12AA. The question was left open as academic, with the Tribunal affirming the CIT(E)'s decision not to delve into this issue.

Issue 3: Whether Surplus Generation and Profit Motive Affect Exemption

Relevant Legal Framework and Precedents: The proviso to section 2(15) excludes activities with profit motive from charitable purposes. The Supreme Court in AUDA held that fees or consideration received for commercial activities indicate profit motive, disqualifying exemption.

Court's Interpretation and Reasoning: The AO pointed to surplus generation and minimal expenditure relative to receipts as evidence of profit motive. However, the CIT(E) and Tribunal noted that the AO's denial of exemption was invalid due to the subsisting registration. The Tribunal accepted the assessee's submission that the surplus was incidental and the activities were in furtherance of charitable objects.

Key Evidence and Findings: The assessee's financials showed consultancy income and expenses, with claimed deficits. The consultancy services were provided to government and non-profit entities, not commercial businesses, supporting the absence of profit motive.

Application of Law to Facts: The Tribunal concluded that the presence of consultancy income and surplus alone could not override the effect of valid registration and the nature of objects as educational and charitable.

Treatment of Competing Arguments: The revenue's reliance on surplus and profit motive was rejected on the ground that the AO could not deny exemption without cancelling registration. The Tribunal followed the principle that registration under section 12AA is a fait accompli and fetters AO's power.

Conclusions: The Tribunal dismissed the argument that surplus generation automatically disqualifies exemption where valid registration exists and activities are charitable in nature.

3. SIGNIFICANT HOLDINGS

- "Once the 12AA registration is granted there is no power with the AO to ignore such registration."

- "The AO was wrong in denying exemption under section 11 when the appellant is approved under section 12AA."

- "Registration under section 12A is a fait accompli and puts fetters on the powers of the assessing officer to re-examine the objects of the trust or institution."

- "The question of applicability of proviso to section 2(15) was left open being academic as the AO exceeded his authority in denying exemption without cancellation of registration."

- "The Supreme Court decision in Ahmedabad Urban Development Authority does not affect the power of the AO to deny exemption in the presence of valid registration under section 12AA."

- "The only examination to be carried out by the AO is whether the provisions of section 11 have been complied with by the assessee for purpose of extending benefit of the exemption, not to revisit the objects of the trust once registration is granted."

- The Tribunal confirmed the CIT(E)'s order allowing exemption under section 11 and dismissed the revenue's appeal.