2025 (2) TMI 863 - AT - Income Tax

Local authority wins exemption under Sections 11 and 12 despite fee collection for statutory responsibilities

Magadi Planning Authority Versus The Income Tax Officer, Ward -3, Bengaluru

ITAT Bangalore ruled in favor of the assessee, a local authority managing rural town affairs in Karnataka. The tribunal held that denial of exemptions ... Denial of benefit of Sections 11 and 12 - 'charitable purposes' under Section 2(15) - assessee claims to be a local authority responsible for the administration, development, and monitoring of affairs in rural Magadi town, located in the Ramanagar district of Karnataka - HELD THAT:- Assessee operates under stringent Government regulation. All its receipts and expenditures are deposited into the Magadi Planning Authority Fund, and the budget is subject to approval by the State Government. The assessee's accounts are audited annually by Government agencies, and any surplus or assets, upon dissolution, revert to the State Government. These factors unequivocally demonstrate the non-commercial character of the assessee’s activities. We, accordingly, concur with the assessee's argument that the imposition of income tax on its operations would contradict statutory mandate and undermine its role as a state instrumentality serving public welfare. AO’s invocation of Section 13(8) of the Act, citing that the assessee’s fee-earning activities constitute trade or business, lacks sufficient merit. The activities cited by the AO - such as layout plan approvals, betterment fees, and lake conservation fees are intrinsic to the assessee’s statutory responsibilities and do not exhibit the characteristics of a profit-driven enterprise. These fees are charged to ensure accountability and fund public welfare initiatives, not to generate profit. As such, the AO’s interpretation of the assessee’s activities as trade or commerce is inconsistent with the intent and purpose of Sections 11 and 12 of the Act. CIT(A) further erred in concurring with the AO without adequately addressing the assessee's submissions, including its reliance on the BDA case. The appellate authority failed to provide a reasoned explanation for dismissing the precedent, despite the AO’s admission of factual similarity. Given the admitted identical nature of the facts and the binding judicial precedent set by the Bangalore ITAT in the BDA case [2019 (6) TMI 429 - ITAT BANGALORE] we hold that the denial of exemptions under Sections 11 and 12 of the Act is unjustified. The assessee’s activities are undeniably charitable, and the provisions of the Act support its exemption claim. The addition made by the AO and upheld by the learned CIT(A) is, therefore, quashed. The findings of the lower authorities are reversed, and the assessee is entitled to exemptions under Sections 11 and 12 - Decided in favour of assessee. Whether assessment proceedings can be considered pending as on the date of approval of registration under Section 12AA of the Act, for the purpose of extending the benefit of exemption under Sections 11 or 12 of the Act? - It is a settled position of law that when there are conflicting views on the same issue by different non-jurisdictional High Courts, the view favoring the assessee shall prevail. Therefore, we are inclined to follow the view taken in the case of M/s Shree Shayam Mandir Committee [2017 (10) TMI 1450 - RAJASTHAN HIGH COURT] Appellant assessee is entitled to the benefit of the provisions of section 11 of the Act for the year under consideration. Accordingly, the ground of appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are as follows:1. Whether the assessee, a statutory authority, is entitled to the benefit of exemptions under Sections 11 and 12 of the Income Tax Act for the assessment years 2014-15, 2016-17, and 2017-18.2. Whether the activities of the assessee qualify as 'charitable purposes' under Section 2(15) of the Act, thereby exempting it from income tax.3. Whether the appellate proceedings pending before the CIT(A) can be considered as assessment proceedings for the purpose of extending exemptions under Sections 11 and 12 of the Act.ISSUE-WISE DETAILED ANALYSIS1. Entitlement to Exemptions under Sections 11 and 12 of the Act- Relevant Legal Framework and Precedents: Sections 11 and 12 of the Income Tax Act provide exemptions for income derived from property held under trust wholly for charitable or religious purposes. The definition of 'charitable purposes' under Section 2(15) includes relief of the poor, education, medical relief, and advancement of any other object of general public utility.- Court's Interpretation and Reasoning: The Tribunal observed that the assessee's activities, such as town planning and water conservation, align with the definition of 'charitable purposes' as they advance public utility without a profit motive. The Tribunal emphasized the principle of judicial discipline and consistency, referring to the precedent set by the ITAT in the Bangalore Development Authority (BDA) case, which held similar activities as charitable.- Key Evidence and Findings: The Tribunal noted that the assessee's activities are regulated by the Government, with funds deposited into a designated account and subject to annual audits. The Tribunal found no evidence of profit-driven activities.- Application of Law to Facts: The Tribunal applied the precedent from the BDA case, finding the activities of the assessee to be charitable. The Tribunal rejected the AO's interpretation that fee-earning activities constituted trade or business.- Treatment of Competing Arguments: The Tribunal dismissed the AO's reliance on the pending appeal in the BDA case as a reason to deny exemption, emphasizing the need for consistency in judicial decisions.- Conclusions: The Tribunal concluded that the assessee's activities are charitable, and thus, the denial of exemptions under Sections 11 and 12 was unjustified.2. Qualification as 'Charitable Purposes' under Section 2(15)- Relevant Legal Framework and Precedents: Section 2(15) defines 'charitable purposes' and includes activities that advance general public utility without a profit motive.- Court's Interpretation and Reasoning: The Tribunal found that the assessee's activities, such as water conservation and lake rejuvenation, align with the definition of 'charitable purposes' as they serve public welfare.- Key Evidence and Findings: The Tribunal highlighted the non-commercial nature of the assessee's activities, regulated by the Government and aimed at public welfare.- Application of Law to Facts: The Tribunal applied the legal definition of 'charitable purposes' to the facts, finding the assessee's activities to be consistent with this definition.- Treatment of Competing Arguments: The Tribunal rejected the AO's argument that the activities were commercial, emphasizing the public welfare focus of the assessee's operations.- Conclusions: The Tribunal concluded that the assessee's activities qualify as 'charitable purposes,' supporting its claim for exemptions under Sections 11 and 12.3. Consideration of Appellate Proceedings as Assessment Proceedings- Relevant Legal Framework and Precedents: The proviso to subsection (2) of Section 12A allows for exemptions if registration is granted while assessment proceedings are pending.- Court's Interpretation and Reasoning: The Tribunal referred to the Rajasthan High Court's decision in Shree Shyam Mandir Committee, which held that appellate proceedings are a continuation of assessment proceedings.- Key Evidence and Findings: The Tribunal noted that the assessee's registration under Section 12AA was granted while the appeal was pending, qualifying it for exemptions.- Application of Law to Facts: The Tribunal applied the Rajasthan High Court's reasoning, treating the pending appeal as assessment proceedings, thus extending exemptions to the assessee.- Treatment of Competing Arguments: The Tribunal acknowledged conflicting views from different High Courts but chose the interpretation favoring the assessee.- Conclusions: The Tribunal concluded that the assessee is entitled to exemptions under Sections 11 and 12, as appellate proceedings qualify as assessment proceedings.SIGNIFICANT HOLDINGS- The Tribunal held that the assessee's activities are charitable in nature, aligning with the definition of 'charitable purposes' under Section 2(15) of the Act.- The Tribunal emphasized the need for consistency in judicial decisions, applying the precedent from the BDA case to the assessee's case.- The Tribunal concluded that appellate proceedings are a continuation of assessment proceedings, thereby extending exemptions under Sections 11 and 12 to the assessee.- The Tribunal reversed the findings of the lower authorities, granting the assessee exemptions under Sections 11 and 12 for the assessment years in question.