2015 (1) TMI 518 - AT - Income Tax

Tribunal denies tax exemption, deems activities commercial not charitable. Precedent from Greater Cochin case cited.

The Asst. Director of Income Tax (Exemption) Versus Kerala Industrial Infrastructure Development Corpn.

The Tribunal ruled against the assessee, denying exemption under Section 11 of the Income Tax Act, as it deemed the activities to be commercial rather ... Exemption claimed u/s 11 withheld - Whether AO has wrongly added back a sum of ₹ 1,01,06,162/- as capital expenditure incurred during the year which has not been debited to profit and loss account at all? Held that:- It can be said that objects/activities of the assessee are more of commercialized nature and no charity is involved in it. At the time, if these facilities are not provided, then nobody will purchase a plot. It can be said that it is a means of attracting the people so that maximum people may apply for the same and the hidden cost is already added, so no charity is involved. At best, the assessee can be said to be an authority created to help it to achieve certain objects. It can be said that it is the duty of the Government to create / provide all these facilities to public large, which is being done through is agency in a particular area. At the same time, the funds which are provided to the assessee by the Government is again a public money or generated from public itself. The objects of the assessee, though claimed to be charitable, but actually are of purely commercial nature where profit motive is involved. In view of the above discussion, we are inclined to hold that the CIT(A) is justified in rejecting the claim of exemption u/s. 11 of the I.T. Act. The CIT(A) ought to have noted that capital expenditure has not been debited to the Income and Expenditure AI c. for the year of the appellant at all and if for any reason it is ultimately held that the appellant is not entitled to exemption ss] S.ll and 12 of the Act, the addition I disallowance of the capital expenditure should have been directed to be deleted. For the above and other grounds that may be adduced at the time of hearing, the order of the CIT(A) may be modified to the extent prayed for as above. Since the issues raised by the assessee are not adjudicated by the CIT(A) for the reasons that the main claim of exemption u/s 11 has been allowed. Since we have reversed the order of the CIT(A) upholding the exemption u/s 11, the grounds raised by the assessee in the Cross Objection would go back to the file of the CIT(A) for fresh adjudication. - Decided in favour of revenue whereas the Cross Objection of the assessee is allowed for statistical purpose. Issues Involved:1. Whether the activities of the assessee corporation qualify as 'charitable' under Section 2(15) of the Income Tax Act.2. Whether the assessee is entitled to exemption under Section 11 of the Income Tax Act.3. Whether the addition of Rs. 10,01,06,162 as capital expenditure by the Assessing Officer was justified.Issue-Wise Detailed Analysis:1. Charitable Nature of Activities under Section 2(15):The primary issue revolves around whether the assessee's activities fall under the definition of 'charitable purpose' as per Section 2(15) of the Income Tax Act. The Assessing Officer (AO) argued that the assessee's income from trade, leasing, and interest should be treated as business income, thereby disqualifying it from being considered charitable. The CIT(A) countered this by noting that the assessee is a government-owned corporation with objectives aimed at promoting industrial infrastructure in Kerala, funded by state and central grants. The CIT(A) emphasized that the activities were not profit-oriented but aimed at achieving broader social objectives. However, the Tribunal referred to a precedent set by the Greater Cochin Development Authority case, which held that similar activities were commercial in nature and not charitable, thus ruling against the assessee's claim of charitable status.2. Entitlement to Exemption under Section 11:The AO denied the exemption under Section 11, arguing that the assessee's activities were commercial. The CIT(A) disagreed, stating that the assessee's activities were aimed at public utility and funded by government grants, thus qualifying for exemption. However, the Tribunal, relying on the Greater Cochin Development Authority case, concluded that the assessee's activities were profit-driven and commercial, thereby disqualifying it from exemption under Section 11. The Tribunal noted that the assessee consistently earned substantial profits, akin to a private builder, and thus did not meet the criteria for charitable activities.3. Addition of Rs. 10,01,06,162 as Capital Expenditure:The CIT(A) did not address the issue of the addition of Rs. 10,01,06,162 as capital expenditure, considering it infructuous after allowing the main ground of exemption under Section 11. However, since the Tribunal reversed the CIT(A)'s decision on the exemption, it remanded this issue back to the CIT(A) for fresh adjudication. The assessee argued that this capital expenditure was not debited to the profit and loss account and should not have been added back by the AO.Conclusion:The Tribunal ruled in favor of the revenue, denying the assessee's claim for exemption under Section 11 and holding that the activities were commercial in nature. The issue of capital expenditure was sent back to the CIT(A) for fresh consideration. The Tribunal's decision was heavily influenced by the precedent set in the Greater Cochin Development Authority case, which similarly denied exemption to an entity with comparable activities.