2017 (5) TMI 537 - AT - Income Tax

Appeal allowed, denial of exemption not in accordance with law. Dominant object test crucial for charitable activities.

The Fertilizer Association of India C/o Sh. Mayank Jain, Advocate Jain Singh & Company Versus Income Tax Officer (Exemption)

The Fertilizer Association of India C/o Sh. Mayank Jain, Advocate Jain Singh & Company Versus Income Tax Officer (Exemption) - TMI Issues Involved:1. Denial of benefit under Sections 11 and 12 of the Income Tax Act, 1961.2. Confirmation of addition under Section 13(8) of the Act.3. Additions on account of unreported interest income and corpus under agriculture promotional practice.4. Interpretation of the amendment to Section 2(15) of the Act.5. Invocation of the first proviso to Section 2(15) against the appellant.6. Interpretation of 'trade, commerce and business' in the context of the appellant's activities.7. Legality of the addition made by the AO and confirmed by the CIT(A).8. Denial of exemption under Section 11(1) and 11(1)(d) of the Act.9. Assessment of income at Rs. 3,42,30,880/- against a nil return filed by the appellant.Issue-wise Detailed Analysis:1. Denial of Benefit under Sections 11 and 12:The Tribunal found that the assessee was denied the benefit under Sections 11 and 12 solely due to the amendment in Section 2(15) of the Act. It was noted that neither the AO nor the CIT(A) pointed out any specific object violated by the assessee or under which clause of Section 13 the assessee would fall to invite denial of exemption. The assessee had been granted registration under Section 12A since 1994, and this registration had not been canceled under Section 12AA(3). Thus, the denial of exemption was not in accordance with law.2. Confirmation of Addition under Section 13(8):The AO added Rs. 2,61,95,214/- to the income under Section 13(8), citing that the assessee's activities included elements of trade, commerce, or business. However, the Tribunal referred to the assessee's objects, which aimed at promoting agriculture and fertilizer industries, and found that these activities were charitable and did not primarily aim to earn profit. The dominant object was charitable, and incidental activities generating income did not alter this character.3. Additions on Account of Unreported Interest Income and Corpus:The AO added Rs. 2,98,932/- for unreported interest income and Rs. 77,36,734/- for corpus under agriculture promotional practice. The Tribunal found that these additions were not justified as the dominant object of the assessee remained charitable, and these were incidental receipts.4. Interpretation of the Amendment to Section 2(15):The Tribunal discussed the amendment to Section 2(15) and noted that the dominant object test remained relevant. The amendment aimed to exclude entities primarily engaged in trade, commerce, or business. The Tribunal cited the Delhi High Court's decision in India Trade Promotion Organization vs. DGIT (Exemptions), which emphasized that incidental activities generating income do not alter the charitable nature if the dominant object is charitable.5. Invocation of the First Proviso to Section 2(15):The AO invoked the first proviso to Section 2(15) against the appellant, arguing that the assessee's activities involved trade, commerce, or business. The Tribunal disagreed, stating that the dominant object was to promote agriculture and fertilizer industries, which benefited the public at large. The incidental income-generating activities did not change the charitable nature.6. Interpretation of 'Trade, Commerce, and Business':The Tribunal emphasized that the terms 'trade, commerce, and business' should be interpreted in the context of the intent and purpose of Section 2(15). The dominant object of the assessee was charitable, and incidental activities for consideration did not change this character. The Tribunal referred to the Supreme Court's decision in CIT vs. Andhra Chamber of Commerce, which supported this view.7. Legality of the Addition by AO and Confirmation by CIT(A):The Tribunal found that the additions made by the AO and confirmed by the CIT(A) were not in accordance with law. The dominant object of the assessee was charitable, and the incidental income-generating activities did not alter this character.8. Denial of Exemption under Section 11(1) and 11(1)(d):The Tribunal held that the denial of exemption under Sections 11(1) and 11(1)(d) was not justified as the assessee's activities were charitable, and the incidental income-generating activities did not alter this character.9. Assessment of Income at Rs. 3,42,30,880/-:The Tribunal found that the assessment of income at Rs. 3,42,30,880/- against a nil return filed by the appellant was not justified. The dominant object of the assessee was charitable, and the incidental income-generating activities did not alter this character.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the denial of exemption under Sections 11 and 12 was not in accordance with law, and the additions made by the AO and confirmed by the CIT(A) were deleted. The Tribunal followed the precedent set in the assessee's own case for the preceding assessment year and emphasized the importance of the dominant object test in determining the charitable nature of activities.