2016 (5) TMI 1026 - AT - Income Tax

Assessee's Commercial Activities Disqualify for Charitable Status

Ahmedabad Urban Development Authority Versus ACIT (Exemption), Ahmedabad

The Tribunal concluded that the assessee's activities did not qualify for charitable status under the Income Tax Act, as they were deemed commercial in ... Exemption u/s 11 denied - non charitable activity - Held that:- Huge profits have been made by the assessee in these years. If that be so, where is the element of charity? The activity of developing roads, park or laying of sewerage land are not to be seen representing a charitable act. These are just to demonstrate that the assessee shall perform the activity of advancement of any other objects of general public utility. But auction of land to the highest bidder is an activity, which is specifically, keeping in view, the profit in mind. As far as other circumstances are concerned, we are in agreement with the contentions of Shri G.C. Srivastava, which have been noticed by us by taking cognizance of the written submissions filed by the Revenue in para 16 of this order. There are surplus and reserves which are continuously swelling. These are generated by the assessee by way of this activity sale/lease of land and charging fees. The assessee has not been charging nominal fees or selling the land at a nominal rate. It has been making money by putting the land on auction after taking a reserve price. This activity cannot be said to be a charitable activity. In view of the above discussion, we do not find merit in the contentions of the assessee that there was no profit intention in the activities of the assessee. Therefore, it is not entitled for charitable status. The income has to be assessed under the normal provisions i.e. under sections 28 to 44 of the Income Tax Act. The assessee is not a “charitable institution”, therefore, it is not entitled for the alleged deduction at 15% from the receipt provided in section 11(1)(a). In other words, benefit of section 11 is not available to the assessee. Quantification of income of the assessee - Held that:- Keeping in view various discrepancies in determination of total income by treating the assessee as business entity and the stand of the respective parties, we deem it appropriate to set aside all the impugned orders and restore the issues to the file of the AO. The ld.AO shall treat the assessee as an “AOP” and determine the taxable income of the assessee under sections 28 to 44 of the Income Tax Act. The ld.AO shall compute the income under the normal provisions of the Income Tax Act, as if applied on a regular business entity. He will re-compute all the claims of the assessee with regard to the depreciation etc., after providing an opportunity of hearing to the assessee. Issues Involved:1. Denial of benefit under sections 11 and 12 of the Income Tax Act.2. Treatment of the assessee as an 'AOP' and assessment under sections 28 to 44.3. Disallowance of deductions claimed under various sections.4. Computation of income and quantification of taxable income.5. Levy of interest under sections 234A, 234B, 234C, and 234D.6. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Denial of Benefit under Sections 11 and 12:The core issue was whether the assessee's activities qualified as charitable under section 2(15) of the Income Tax Act, especially after the amendment effective from 1.4.2009. The Tribunal noted that the assessee's activities fell under 'advancement of any other object of general public utility.' However, due to the proviso to section 2(15), if the activities involved trade, commerce, or business, the charitable status could be denied. The Tribunal found that the assessee's activities, such as auctioning land to the highest bidder and generating substantial profits, indicated a profit motive. Therefore, the assessee was not entitled to the benefits under sections 11 and 12.2. Treatment as an 'AOP' and Assessment under Sections 28 to 44:The assessee was treated as an Association of Persons (AOP) instead of a charitable institution. The Tribunal upheld this treatment, noting that the assessee's activities were commercial in nature. Consequently, the income was to be assessed under the normal provisions of the Income Tax Act, specifically sections 28 to 44, which pertain to business income.3. Disallowance of Deductions:The Tribunal addressed various grounds related to the disallowance of deductions claimed by the assessee:- Section 11(1)(a): The assessee claimed a deduction of 15% of the receipts. Since the assessee was not considered a charitable institution, this deduction was disallowed.- Clause (2) of Explanation to Section 11(1): Similar to the above, this deduction was also disallowed.- Section 11(2): The assessee's claim under this section was rejected for the same reasons.4. Computation of Income and Quantification:The Tribunal noted discrepancies in the computation of income by the AO, such as disallowance of depreciation and addition of capital expenditure, leading to potential double additions. The Tribunal set aside the orders and remanded the matter back to the AO for re-computation of income as a business entity, ensuring proper consideration of all claims like depreciation.5. Levy of Interest:The levy of interest under sections 234A, 234B, 234C, and 234D was deemed consequential and thus upheld.6. Initiation of Penalty Proceedings:The initiation of penalty proceedings under section 271(1)(c) was considered premature as the issue of penalty was yet to be decided. Therefore, this ground was rejected.Conclusion:The Tribunal concluded that the assessee's activities were commercial in nature and did not qualify for charitable status under the amended section 2(15). Consequently, the assessee was to be treated as an AOP, and its income was to be assessed under the normal provisions of the Income Tax Act. The matter was remanded back to the AO for re-computation of income, considering all legitimate claims. The appeals were partly allowed, with specific instructions for re-assessment.