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Facts
The assessee, a society formed by the Government of Tamil Nadu for promoting industrial growth and export, was registered under Section 12A of the Income Tax Act as a charitable institution. The assessee processed applications for setting up business establishments and charged a processing fee. The Assessing Officer (AO) disallowed the exemption claimed under Section 11 of the Act, holding that the assessee's activities fell under the category of 'general public utility' (GPU) engaging in trade or business for consideration, as per the amended proviso to Section 2(15). The CIT(A) confirmed this disallowance.
Held
The Tribunal noted that the appeals were time-barred by 6 days and condoned the delay. The primary issue was whether the assessee's activities constituted a charitable purpose under Section 2(15), especially considering the fees charged for services. The assessee argued that its activities were incidental to its charitable objects and relied on a recent Supreme Court decision. However, the Tribunal found that the case needed re-examination based on the Supreme Court's ruling.
Key Issues
Whether the assessee's activities of processing applications and collecting fees for services rendered fall under 'trade, commerce or business' as per the amended proviso to Section 2(15), thereby disentitling it from exemption under Section 11 of the Income Tax Act.
Sections Cited
Sec. 11 of the Income Tax Act, Sec. 2(15) of the Income Tax Act, Sec. 12A of the Income Tax Act, Sec. 13(8) of the Income Tax Act, Sec. 11(4A) of the Income Tax Act, Sec. 10(23C) of the Income Tax Act, Sec. 143(3) of the Income Tax Act, Sec. 12AA(3) of the Income Tax Act
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND
आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: These two appeals by the assessee are arising out of the different orders passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi in Order No.ITBA/NFAC/S/250/2023-24/1063403152 (1) & 1063404050(1) of even date 26.03.2024. The assessments were framed by the Income Tax Officer (Exemptions), Ward-1, Chennai, for the & 1660/CHNY/2024 assessment years 2013-14 & 2014-15 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide orders dated 23.03.2016 & 16.12.2016 respectively.
At the outset it is noticed that both the appeals are time barred by 6 days and assessee has filed affidavit along with condonation petition stating that the order of CIT(A) was received on 26.03.2024 and appeal was to be filed on or before 25.05.2024 but appeals were actually filed on 31.05.2024. We noted that the reason given by assessee in its affidavit is that the person who was in charge of filing the appeal had left the assessee’s organisation and therefore, there was delay in locating the connected files and later, appeals were filed. We see that the delay is very small and cause seems reasonable, which was not contested by the Revenue. Hence, we condone the delay in filing of these appeals by assessee and admit the appeals for adjudication.
The first common issue in these two appeals of assessee is as regards to the order of CIT(A)-NFAC confirming the action of the AO in disallowing the claim of exemption u/s.11 of the Act by holding that the assessee being a GPU in term of amended proviso to section 2(15) of the Act and therefore, not a charitable organisation. For this, assessee has raised various grounds which are argumentative,
Brief facts are that the assessee is a society formed by the Government of Tamil Nadu for promoting industrial growth and export potential in the State of Tamil Nadu and registered u/s.12A of the Act as a charitable institution vide DIT(E) No.2(88)/93-94 dated 16.08.1993. The assessee is also a registered society under the Societies Registration Act, 1975. The assessee society served as a nodal authority for both marketing and regulating development projects. This is done by vetting proposals and issuing clearances on behalf of various government authorities at one place. The assessee filed its return of income for the relevant assessment year 2013-14 declaring nil return income after claiming exemption u/s.11 of the Act for an amount of Rs.1.34 crores. The assessee admitted income under the head ‘single window’ at Rs.1.34 crores as against the total receipt during the year of Rs.1,71,49,921/-. As against this, assessee claimed expenditure i.e., administrative expenses of Rs.21,48,074/- and salaries & wages of Rs.67,25,255/-. The AO gathered during the course of assessment proceedings that the receipt of Rs.1.34 crores under the head ‘single window’ is a fee for services guided by investment bureau to the investors. The & 1660/CHNY/2024 assessee submitted copy of the order of Government of Tamil Nadu issued in G.O No.588 dated 10.09.1998, wherein the application processing fee fixed depending on the size of the project and the various statutory fees levied by the various government agencies. The AO issued show cause notice during the course of assessment proceedings that as to why the assessee’s case is not covered by the provisions of section 2(15) of the Act since the amount of Rs.1,71,49,921/- is received as a fee for services rendered through single window system. The AO also added corpus donations of Rs.25,00,000/- and disallowed depreciation also. The AO treated these receipts as income by disallowing exemption claimed u/s.11 of the Act by observing that the assessee’s case falls within the ambit of amended provision of section 2(15) of the Act and also referred the case to CIT(E) to cancellation of registration u/s.12AA(3) of the Act. Aggrieved, assessee preferred appeal before CIT(A).
The CIT(A) confirmed the disallowance by holding that the nature of activities and rendering of services are in relation to trade, commerce or business and hence, assessee’s case clearly falls under the provision of section 2(15) of the Act and this being a GPU is not in the nature of charitable activities. For this, the CIT(A) observed in para 5.2 & 5.3.1 as under:-
& 1660/CHNY/2024 “5.2 I have gone through the facts of the case, the assessment order and written submissions filed by the appellant. During the course of appellate proceedings the appellant submitted the appellant merely processes the applications submitted by these investors to the Government of Tamil Nadu for the purpose of setting up the business establishments and supervises the verification of the said application in order to ensure that it is in conformity with the rules and regulations relating to the environment, local authority, fire protection, etc. Subsequent to the verification of the said application, the appellant processes and submits the same to the Government of Tamil Nadu. If the aforementioned application is in adherence with the various rules and regulations and the project is accepted by the Government, the investor is asked to pay the fees. If the proposal is rejected, then no fees is received by the Appellant. If and when the application is accepted, the Appellant collects a processing fee as fixed by the Government of Tamil Nadu. It was submitted that the appellant as a nodal authority for both marketing and regulating developmental projects. This is done by vetting proposals and issuing clearances on behalf of various Govt. Authorities at one place. 5.3..... .... 5.3.1 The activities of the appellant are clearly in the nature of rendering services in relation to trade, commerce or business and also that the appellant is charging fee for such services, irrespective of nature of use of application. I hold that the provisions of section 2(15) of the Act clearly attract the case of the appellant. Further, once the provisions of Section 2(15) of the Act becomes applicable, Section 11 will not operate and the income of the appellant cannot be excluded u/s 11 of the Act in view of provisions of Section 13(8) of the Act, as rightly held by the Assessing Officer. Accordingly, there is no infirmity in the action of the Assessing Officer in computing the excess income over expenditure and the same is confirmed. These grounds of appeal are dismissed.” Aggrieved, assessee is in appeal before us.
At the time of hearing, the ld.counsel for the assessee admitted that this is falling under GPU and assessee’s case is already covered by the Tribunal decision in the assessee’s own case & 1660/CHNY/2024 for the assessment year 2012-13 in dated 05.09.2019, wherein the Tribunal has held that the assessee is not eligible for exemption u/s.11 of the Act, as being covered by the provisions of section 2(15) of the Act. The Tribunal observed in para 7 as under:-
“We heard the rival submissions and perused the material on record. Assessee before us is a society formed by Government of Tamil Nadu with an object of promoting industrial growth and exports in the state of Tamil Nadu. It process the application submitted by the industrial organization and verify whether the applications are in conformity with the rules relating to environment, local authority, fire protection, water, forest, police etc. Fees were charged for rendering this services as prescribed by the Tamil Nadu Government from the industrial organization. Assessee is duly registered u/s.12A of the Act. It is not the case of the assessee that it falls within the preview of first three limbs i.e. relief for poor, education and health but under public general utility. Therefore the provisions of Section 2(15) of the Act are squarely applicable. According to AO, proviso to Section 2(15) of the Act are applicable as it charges fees from the business organizations for the services rendered by it. Even the ld. CIT(A) confirmed the findings of the Assessing Officer following the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case for earlier years. No argument were advanced as to how the proviso to Section 2(15)of the Act is not applicable to the case of the assessee. The whole case of the assessee is premised on the argument that it is instrumentality of the State coming within the meaning of Article 12 of the constitution and therefore it is not an assessable entity. Submissions made by the ld. Counsel cannot be accepted even the State Corporation Societies cannot be equated with State Government though it is instrumentality of the State as held by Hon'ble Supreme Court in the case of Arun Kumar and Others vs. Union of India and Others, (2006) 286 ITR 89. Further, the Bangalore Bench of the Tribunal in the case of National Diary Research Institute vs. ACIT (TDS), Circle 18(1), Bengaluru (2018) 171 ITD 271, wherein it was held as follow. ‘7. We heard rival submissions and perused material on record. The only issue in the present case is, for the purpose of valuing & 1660/CHNY/2024 perquisites of the accommodation, provided to employees of the assessee society should be done under clause (i) or clause (ii) of table 1 of rule 3 of the Income-tax rules 1962. Clause (i) of sub-rule (1) of rule 3 of Income-tax Rules is applicable in case of employees of Central Government or State Government. Clause (ii) of sub-rule (1) of rule 3 of Income-tax Rules is applicable in case of other than Central and State Government employees. Therefore, the issue which requires to be adjudicated is whether the employees of assessee- society are employees of Central Government or not. Needless to say that once the employees of the society are treated as employees of the Central Government for the purpose of evaluating perquisites of rent free accommodation, rules prescribed under clause (i) of sub- rule (1) of rule 3 of Income-tax rules are to be adopted. Otherwise clause (ii) of sub-rule (1) of rule 3 of IT Rules is to be adopted. An identical issue had come before the co-ordinate bench of this Tribunal in the case of Central Food Technology Research Institute (supra) wherein this Tribunal took a view that the employees of the corporation fully controlled by the Central Government cannot be equated with Central Government employees though it is instrumentality of the State within the meaning of Article 12 of the Constitution of India. '10. We are of the view that the reliance placed by the learned counsel for the Assessee on the aforesaid decision is of any help to the present case. The question in the case of Pradeep Kumar Biswal (supra) was regarding as to whether CSIR is "State" within the meaning of Article 12 of the Constitution of India. As by the learned DR before us, the meaning of the word "State" has been defined in Article 12 of the Constitution of India and the decision has to be confined to those cases and cannot extent to interpretation of Rule 3 of the IT Rules, 1962. Public corporations are established by Government to achieve purpose of welfare state. Financial autonomy and functional autonomy are required for such purpose. These corporations are commercial corporations, development corporations, social services corporations or Financial corporations. Such corporations have all trappings of Government but their, employees cannot be equated with employees either holding office or post in connection with the affairs of the Union or of such State. Eminent Author Seervai in his book Constitutional Law of India, 1984 Vol. II pp. 2578-79 has deducted the following principles with regard to the status of employees of a statutory corporation a statutory corporation has a separate and independent existence and is a different entity from the Union or the State Government with its own property and its own (i) fund and the employees of the corporation do not hold civil post under the Union or the State; makes little difference in this respect, whether the Union or the State holds the (ii) majority share of the Corporation and controls its administration by policy directives or otherwise; (iii) it also makes little difference if such a statutory corporation imitates or adopts the Fundamental Rules to govern the service conditions of its employees; although the ownership, control and management of the stator corporation may be, in fact, vested in the Union or State, yet in the eye of law the corporation is its (iv) own master and is a separate entity and its employees do not hold any civil post under the Union or the State; if, however, the State or the Union controls a post under a stator corporation in such a manner that it can create or abolish the post or can regulate the conditions subject to which the post is or will be held and if the Union or the State pays the holder the post out of its own funds, then although the post carries the name of an office of the statutory corporation, it may be a civil post under the State or the Union’’. In the light of the above settled legal positions of law, we do not find any reason to interfere with the orders of the lower authorities.”
6.1 The ld.counsel stated that the assessee has already moved to Hon’ble High Court of Madras and its tax appeal has been admitted and hence, he want to distinguish the Tribunal’s decision for the reason that the recent decision of Hon’ble Supreme Court in the case of ACIT(E) vs. Ahmedabad Urban Development Authority reported in [2022] 449 ITR 1, wherein the Hon’ble Supreme Court has considered the issue of GPU and held that so long as GPU’s charities object involves activities which also generates profit (incidental), it can be granted exemption provided quantitative limit under second proviso to section 2(15) of the Act, for receipts from such profits is
In view of the foregoing discussion and analysis, the following conclusions are recorded regarding the interpretation of the changed definition of “charitable purpose” (w.e.f. 01.04.2009), as well as the later amendments, and other related provisions of the IT Act.
A. General test under Section 2(15) A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”);
A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected (“actual carrying out…” inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016);
A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment.
& 1660/CHNY/2024 A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions.
............ ........... D. Trade promotion bodies Bodies involved in trade promotion (such as AEPC), or set up with the objects of purely advocating for, coordinating and assisting trading organisations, can be said to be involved in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature. In that event, the claim for tax exemption would have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act.”
The ld.counsel stated that, in case the matter is restored back to the file of the AO in both the years to decide the issue in term of the decision of Hon’ble Supreme Court as noted above, he will explain the case before the AO. On the other hand, the ld.Senior DR has not objected to the same.
After hearing rival contentions and going through the facts of the case, we noted that this case needs re-examination at the level of AO to be adjudicated in term of principle laid down by Hon’ble & 1660/CHNY/2024 Supreme Court in the case of Ahmedabad Urban Development Authority, supra. Hence, we set aside the orders of AO as well as the CIT(A) in both the years and restore these two years back to the file of the AO for fresh adjudication.
The next common issue raised by the assessee in both the appeals is as regards to the addition of corpus donations. Since, we have remanded back the main issue of claim of exemption u/s.11 of the Act to the file of AO for fresh adjudication, this issue is also consequently remanded back to the file of the AO to decide accordingly.
In the result, both the appeals filed by the assessee are allowed for statistical purposes.
Order pronounced in the open court on 11th September, 2024 at Chennai.