2024 (7) TMI 580 - AT - Income Tax

Revenue wins challenge against charitable exemption for excessive 86.18% profit margin on general utility activities

Dy. Commissioner of Income Tax, Exemption-Circle, Ghaziabad Versus Jhansi Development Authority

Dy. Commissioner of Income Tax, Exemption-Circle, Ghaziabad Versus Jhansi Development Authority - TMI Issues Involved:1. Determination of whether the activities of the assessee constitute 'charitable purpose' under Section 2(15) of the Income Tax Act.2. Examination of the applicability of the judgment passed by the Hon'ble Apex Court in the case of ACIT (E) vs. Ahmedabad Urban Development Authority (AUDA).3. Reassessment of the assessee's activities and income to determine compliance with the quantitative limits specified in the proviso to Section 2(15) of the Act.Detailed Analysis:1. Determination of whether the activities of the assessee constitute 'charitable purpose' under Section 2(15) of the Income Tax Act:The appellant, engaged in the development and sale of properties, declared its income as NIL for the assessment year 2014-15, claiming exemption under Sections 11 and 12 of the Act. The Assessing Officer (AO) disallowed this exemption, determining the total income at Rs. 17,04,37,602/- by making various additions, including disallowance of Rs. 9,11,22,877/- under Section 11, addition of Rs. 7,87,64,299/- from the Infrastructure Development Fund, and disallowance of Rs. 5,50,426/- towards depreciation. The AO opined that the assessee was engaged in activities in the nature of trade, commerce, or business, as the receipts exceeded the Rs. 25 lakh ceiling stipulated in the second proviso of Section 2(15) of the Act. The First Appellant Authority deleted these additions, relying on the ITAT's order in the assessee's own case and judgments from the Gujarat High Court and Karnataka High Court.2. Examination of the applicability of the judgment passed by the Hon'ble Apex Court in the case of ACIT (E) vs. Ahmedabad Urban Development Authority (AUDA):The Departmental Representative argued that the impugned order is unsustainable in light of the Apex Court's judgment in the AUDA case, which held that profits significantly higher than nominal markup indicate non-charitable activities. The Apex Court clarified that organizations advancing general public utility cannot engage in trade, commerce, or business for any consideration unless the activities are incidental to their primary objective and the receipts do not exceed the specified limits. The AR conceded that the authorities below had not verified the assessee's activities in line with the AUDA judgment and requested a remand to the AO for re-examination.3. Reassessment of the assessee's activities and income to determine compliance with the quantitative limits specified in the proviso to Section 2(15) of the Act:The Tribunal, considering the rival contentions and the Apex Court's guidelines, decided to remit the issue back to the AO. The AO is directed to re-examine the nature of the assessee's activities and pass a reasoned order in light of the AUDA judgment. The AO must scrutinize whether the assessee's activities amount to trade, commerce, or business based on its receipts and income, and whether the quantitative limits have been breached. The AO is also instructed to provide the assessee an opportunity to be heard and consider any additional evidence presented.Combined Result:All the appeals of the Revenue are allowed for statistical purposes, with the issues remitted back to the AO for fresh examination in accordance with the Apex Court's guidelines in the AUDA case. The AO must ensure a thorough reassessment, considering the nature of the assessee's activities and compliance with the quantitative limits under Section 2(15) of the Act.Order Pronounced:The order was pronounced in Open Court on 08/07/2024.