2024 (6) TMI 920 - AT - Income Tax

ITAT allows exemption under sections 11 and 12 despite non-claim in original return, recognizes state instrumentality status

Dy. Commissioner of Income Tax (E) -2 (1) Mumbai Versus Maharashtra Labour Welfare Board And (Vice-Versa)

The ITAT Mumbai held that the assessee qualified for exemption under sections 11 and 12, despite not claiming it in the original return. The tribunal ... Eligibility for exemption u/s 10(23AAA), 11, and 12 - Status of the assessee as 'State' within the meaning of Article 289(1) of the Constitution of India - only reason for the denial of assessee claim by the AO is that such a claim has not been made in the original return filed before him - HELD THAT:- It is found that assessee was fulfilling all the conditions as laid down for the purposes of section 11 to 13 of the act. Assessee is applying its income derived from property held under trust for the purposes approved in the registration certificate u/s 12A. The only reason for the denial of assessee claim by the AO is that such a claim has not been made in the original return filed before him hence he relied upon the judicial pronouncement on honorable supreme court in the case of M/s Goetze (India) Ltd. [2006 (3) TMI 75 - SUPREME COURT] wherein it is provided that assessee cannot make any fresh claim before the assessing officer except by revising its return of income. As in this case no revised return has been filed by the assessee but the same case law doesn’t stop the CIT(A) and ITAT to entertain the fresh claim of the assessee whether a revised return has been filed or not. We have thoroughly gone through the order of AO and found that assessee is applying more than 85% of the gross income towards objects of the institution. The surplus of the institution has been invested in the modes prescribed u/s 11(5) of the act. Assessee filed an audit report to form no. 10B. In view of these facts and the reason given by AO for not applying provisions of section 11 and 12 in the case of assessee, we found that the order of CIT (A) is correct and we find no perversity in the order of CIT (A). we do not find any sustainable reason assigned by AO which can justify the denial of assessee’s claim for exemption under the provisions of sec 11 and 12 hence, ground nos. 1,2 and 3 raised by revenue are dismissed. Status of the Assessee as 'State' - As there is a thin line of demarcation between bodies of the State to whom for implementation of Government projects, work in relation thereto is assigned and as a result thereof, during the performance of such activity on behalf of the State, income is earned though utilised for the same purpose and instrumentalities carrying on trade and/or business activity of the State Government earning income. In both the cases aforesaid there is existence of deep and pervasive State Control. In the former case, the body to whom work has been entrusted and income is earned acts as a nodal agency of the State whereas in the latter case it is not so as the instrumentality having independent identity has income arising from its trading and/or business activity and conduct of such activity not being attributable to State in any manner. The aforesaid distinction is discernible from various cases decided by the Hon'ble Supreme Court as well as the High Courts. In the case of Andhra Pradesh State Road Transport Corporation [1964 (3) TMI 15 - SUPREME COURT], the Andhra Pradesh State Road Transport Corporation constituted under the Road Transport Corporations Act, 1950, by a notification issued by the Andhra Pradesh Government, was held not be immune from liability to income-tax on income derived from its trading activities, under article 289 of the Constitution of India for the reason that though the majority of its shares are owned by the Andhra Pradesh Government and its activities are controlled by the State, the Corporation has a separate personality of its own, the trading activities are the trading activities of the Corporation and the profit and loss arising therefrom are the profit and loss of the Corporation and therefore, the income derived by the Corporation from its trading activities cannot be said to be the income of the Andhra Pradesh State under Article 289. Thus, on the basis of the aforesaid observations, that a trading activity carried on by the corporation is not a trading activity carried on by the State departmentally, nor is it a trading activity carried on by a State through its agents appointed in that behalf, the Hon'ble Supreme Court held that the income derived by the Corporation from its trading activities cannot be said to be the income of the Andhra Pradesh State under Article 289(1) of the Constitution of India. The following principles deserve to be kept in focus while considering the question of taxability of interest earned on FDRs by an Instrumentality of the State and/or Department/Organization of the State: (1) Interest income arising out of the business/trading activity carried out by the instrumentality of the State would be taxable in its hands; (2) The statute under which the instrumentality of the State is brought into existence must expressly provide for principal and agent relationship betwixt the State and such instrumentality; and in the absence thereof, any interest income derived by such instrumentality would be taxable as income in their hands.; (3) Any income by way of interest earned by the instrumentality of the State after having received any amount of grant or subsidy for the implementation of project/scheme i.e., earmarked purpose of the State would not be taxable as income in the hands of such instrumentality of the State or the State.; (4) Any income by way of interest much less any income earned by a Department/Organization of the State would not be taxable in the hands of either the State and/or such Department/Organization of the State. (5) Carrying on business activity for profit motive by an instrumentality and/or Department of the State is immaterial for determining the taxability of income. Thus we hold that assessee is a “State” within the meaning of Article 289(1) of the Constitution of India being an instrumentality of State within the meaning thereof. Here there is an existence of deep and pervasive State control may afford an indication that the assessee is a state agency or instrumentality. Here the assessee enjoys monopoly status which is State conferred or State protected. Here the functions of the assessee are of public importance and closely related to governmental functions. It would be a relevant factor in classifying the assessee as an instrumentality or agency of the Government. If a department of a government is transferred to an entity like assessee, it would be a strong factor supporting this inference of the assessee being an instrumentality or agency of the Government. Decided against revenue. Issues Involved:1. Eligibility for exemption under Section 10(23AAA) of the Income Tax Act.2. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act.3. Status of the assessee as a 'State' under Article 289(1) of the Constitution of India.4. Assessment time-barred under Section 153(3) of the Income Tax Act.Detailed Analysis:1. Eligibility for exemption under Section 10(23AAA) of the Income Tax Act:The assessee originally claimed its income to be exempt under Section 10(23AAA) of the Income Tax Act. The Assessing Officer (AO) denied this exemption, assessing the total income chargeable to tax at Rs. 1,71,63,060/-. The CIT (A) upheld the AO's order. Upon appeal, the Coordinate Bench restored the matter to the AO for a de-novo assessment, which again resulted in the denial of the exemption.2. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act:The CIT (A) allowed the assessee's appeal on the grounds that the assessee is eligible for exemption under Sections 11 and 12 of the Income Tax Act, without deciding on the exemption under Section 10(23C)(iv) and the additional ground of being a 'State.' The CIT (A) was convinced that the assessee satisfied the conditions for exemptions under Sections 11 and 12, as it applied more than 85% of its gross income towards its objects and invested the surplus in prescribed modes under Section 11(5). The ITAT found no perversity in the CIT (A)'s order and dismissed the Revenue's grounds, upholding the exemptions under Sections 11 and 12.3. Status of the assessee as a 'State' under Article 289(1) of the Constitution of India:The assessee raised the issue of being a 'State' within the meaning of Article 289(1) of the Constitution of India, claiming immunity from taxation. The Coordinate Bench restored this matter to the AO for examination. The ITAT analyzed the Maharashtra Labour Welfare Fund Act, 1953, and various legal precedents, including the Supreme Court's decision in APSRTC (52 ITR 524), which clarified that the income of a corporation is distinct from the income of the State. However, the ITAT concluded that the assessee qualifies as a 'State' under Article 289(1) due to deep and pervasive State control, monopoly status conferred by the State, and functions closely related to governmental functions. The ITAT allowed the assessee's cross-objections, recognizing it as an instrumentality of the State.4. Assessment time-barred under Section 153(3) of the Income Tax Act:The CIT (A) chose not to comment on the assessee's claim that the assessment was time-barred under Section 153(3). The ITAT did not specifically address this issue in the judgment.Conclusion:The ITAT dismissed the Revenue's appeals and allowed the assessee's cross-objections, recognizing the assessee as a 'State' under Article 289(1) of the Constitution of India and upholding the exemptions under Sections 11 and 12 of the Income Tax Act. The ITAT found no sustainable reason for the AO's denial of the assessee's claim for exemption. The judgment was pronounced in the open court on 25th September 2023.