2025 (11) TMI 147 - AT - Income Tax

Appeal allowed; activities qualify as 'advancement of general public utility' under s.2(15) and 12AA registration upheld

ITAT MUMBAI - AT allowed the appeal, quashing the revision u/s 263. The tribunal held the assessee's activities fall under 'advancement of objects of ... Revision u/s 263 - claim of exemption u/s 11 or 12 denied - Charitable activity u/s 2(15) - HELD THAT:- Admittedly, the charitable activities for which the assessee falls in the category of advancement of objects of general public utility. Undisputedly, registration u/s 12AA continues and not revoked by the Revenue which was granted for the stated charitable purpose. Coordinate Bench in assessee’s own case has dealt with the claim of exemption u/s 11 and 12 by taking into account stated charitable purpose for A.Y. 2010-11 and 2012-13 [2020 (7) TMI 245 - ITAT MUMBAI] It is also submitted before us that there is no stay granted by the higher forum on the operation of these decisions by the Co-ordinate Bench. In this regard, reference was made before us by in the case of N.N. Agarwal [1991 (1) TMI 119 - ALLAHABAD HIGH COURT] wherein it was held that just because an appeal was pending, the decision of the court could not be treated as not final nor could it be ignored. It was binding upon the authorities within the territories on this state. ITO had no option to follow this decision. Therefore, the notice issued by the Commissioner u/s 263 was not justified and the same was quashed. It was submitted that findings of the Co-ordinate Bench in assessee’s own case for A.Y. 2010-11 and 2012-13 squarely applied in the present case and ld. CIT(E) ought to have adhered to the said decision, there being no change in the material facts and stay by the higher judicial forum on their operation. We are in agreement with the submissions made by the ld. counsel to this effect to the extent that there is no stay operating on the decision of the Co-ordinate Bench (supra). There had been subsequent development by way of decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority [2022 (10) TMI 948 - SUPREME COURT] which ought to be factored in while concluding on the issue raised before us against the revisionary order passed by ld. CIT(E). In this respect, we have elaborately referred to the said decision to understand its implication in the present case. This judgement has discussed in detail, about the charitable purpose falling in the category of ‘advancement of any other objects of general public utility’ contained in section 2(15) along with amendments made thereto. A careful reading of the proviso to section 2(15) clearly indicates that it applies only to 'advancement of any other objects of general public utility’. The said proviso carves out an exception in the sense that advancement of any other object of general public utility shall not be regarded as charitable purpose in the following situations: i. if it involves any activity in the nature of trade, commerce or business. ii. or it involves any activity of rendering of any service in relation to any trade, commerce or business, iii. the activities in item (i) and (ii) are for a fee or cess or any other consideration except when the aggregate of these receipts during the year do not exceed 20% of the total receipts of that year. Meaning of the word 'trade', 'commerce' and 'business' have to be understood in their ordinary sense and as known in common parlance. The word 'trade' would mean exchange of goods for goods or for money. The word 'business', though, has been defined under section 2(13) of the Act, however, is generic. 'Business' in its ordinary sense would mean an occupation, or profession which occupies time, attention or labour of a person and is generally undertaken with a profit motive. The word 'commerce' again is of same connotation as 'trade' or 'business'. In the present case, as can be seen from the objects of the assessee mentioned in its MoA, it is not in any manner involved in any activity of trade, commerce or business. Further, it is necessary to see whether the second condition of any activity of rendering any service in relation to any trade, commerce or business is applicable. Since the assessee itself is not carrying on any trade, commerce or business, it cannot be said that it is involved in any activity of rendering service in relation to any trade, commerce or business. Correct interpretation and the intent of brining proviso to section 2(15) will meet its end only when the assessee carried out any other activity to fulfill its general public utility objects involving element of trade, commerce or business and its receipts from such activity are found to be in excess of the 20% threshold prescribed, of the total receipts. In this context, in the present case before us, the factual position on record evidently demonstrates that assessee has been passing on the benefit of economics of scale year-on-year basis to member banks for which it started initially with charge of Re.1 and in the present time, got reduced to Re.0.05. For this, relevant circular is already extracted in the above paragraphs. Considering the factual matrix and the judicial precedents discussed above as well as admitted position that this issue has been elaborately examined by the ld. A.O. in the course of original assessment proceeding, we do not find any justification for invocation of revisionary proceedings by the ld. CIT(E) by resorting to Explanation 2 to section 263 and basing his decision by referring to the treatment given in A.Y. 2017-18, 2018-91 and 2019-20, even though Bench had held in favour of the assessee while adjudicating for A.Y. 2010-11 and 2012-13. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether initiation of revisionary proceedings under section 263 was justified where the Assessing Officer (AO) after issuing specific notices and receiving detailed replies accepted exemption under section 11 for the year under consideration. 2. Whether the AO failed to apply the correct position of law regarding proviso to section 2(15) (advancement of any other object of general public utility) - specifically whether the assessee's activity amounted to trade, commerce or business or rendering service in relation thereto so as to disentitle it from charitable exemption. 3. Whether Explanation 2 to section 263 (permitting revision where AO failed to make inquiries or verifications) justified setting aside the assessment where earlier years' treatment by the department was adverse but the assessee held valid registration under section 12AA and had earlier Coordinate Bench decisions in its favour. ISSUE-WISE DETAILED ANALYSIS - (I) Validity of initiation of revisionary proceedings under section 263 Legal framework: Section 263 permits revision where an assessment is found to be erroneous and prejudicial to interest of revenue; Explanation 2 to section 263 clarifies that failure by the AO to make inquiries or verifications can render the assessment so. Precedent treatment: The Tribunal considered prior Coordinate Bench decisions in favour of the assessee for earlier assessment years and relied on principles that an AO's decision after making inquiries and considering replies cannot be lightly set aside under section 263. Interpretation and reasoning: The Tribunal examined the assessment record showing issuance of specific notices under sections 143(2)/142(1), detailed responses with documentary evidence (acknowledgement entries), and the AO's noting of compliance and application of mind when accepting exemption under section 11. Given the AO had made specific inquiries on business income, activities vis-à-vis proviso to section 2(15), and had adjudicated the issue, the Tribunal found no prima facie failure in inquiries or verification. The CIT (Exemptions) relied on adverse treatment in assessment years 2017-20 and invoked Explanation 2; the Tribunal held that mere existence of contrary treatment in other years does not ipso facto establish AO's failure in the year under consideration where record demonstrates enquiries and consideration. Ratio vs. Obiter: Ratio - where assessment proceedings record specific queries, considered replies and reasons for acceptance by the AO, initiation of revision under section 263 is unjustified; invocation of Explanation 2 requires demonstrable lack of inquiry/verification, not merely differing outcome in other years. (This is applied directly to decision.) Conclusions: Revision proceedings under section 263 were quashed because the AO had conducted requisite enquiries and applied mind before granting exemption; the CIT(E)'s reliance on Explanation 2 and prior adverse years did not justify setting aside the assessment. ISSUE-WISE DETAILED ANALYSIS - (II) Applicability of proviso to section 2(15) and characterization of receipts as business income Legal framework: Section 2(15) defines 'charitable purpose' including advancement of any other object of general public utility (GPU), subject to a proviso (w.e.f. 01.04.2009) excluding GPU where activities involve trade, commerce or business or rendering of services in relation thereto for consideration exceeding prescribed quantitative limits (20% threshold of aggregate receipts). Sections 10(23C), 11 and related provisos and section 11(4A) bear on the machinery to distinguish permissible incidental receipts from business income. Precedent treatment: The Tribunal analysed the Supreme Court's exposition on the proviso (Ahmedabad Urban Development Authority v. ACIT and related paragraphs), which clarifies that: (i) GPU entities may charge amounts at cost or marginal mark-up and still qualify as charitable provided receipts from trade/business activities do not exceed the quantitative ceiling; (ii) the activity must be intrinsically linked to attainment of GPU objectives; and (iii) the predominant-object test is no longer authoritative post-amendment. Interpretation and reasoning: The Tribunal applied the statutory proviso and the Supreme Court's interpretative guidance to the facts. It examined the assessee's MoA, section 12AA registration (not revoked), the nature of activities (building national payment infrastructure, providing services to member banks), the nominal fee structure (initially Re.1 per transaction, subsequently reduced significantly to pass on economies of scale, at times as low as Re.0.05), non-distribution of surplus, and the not-for-profit corporate form. The Tribunal concluded: (a) the assessee's objects and activities are in the GPU domain and were recognized as such by revenue earlier (12AA registration) and by Coordinate Bench decisions for earlier years; (b) receipts were charged only to recover costs and to plough back surplus for infrastructure - consistent with the concept of nominal/cost-based charges envisaged by the Supreme Court; (c) absent evidence that receipts from business-like activities exceeded the 20% threshold or that the activities were independent commercial ventures unconnected to GPU objects, proviso to section 2(15) did not disentitle the assessee to exemption. Ratio vs. Obiter: Ratio - an entity whose sole activity is the one for which it obtained 12AA registration and which charges only nominal/cost-recovery fees tied to the GPU object will not be treated as engaged in trade/business for purposes of the proviso unless receipts from such activities exceed the quantitative ceiling or the activities are commercial in nature unrelated to the GPU object. (Applied directly to the facts.) Conclusions: The proviso to section 2(15) did not operate to deprive the assessee of charitable status for the year under consideration. The activities were integrally linked to the GPU object and charged at cost/nominal rates; no material justified invocation of proviso or denial of exemption on those grounds in the year under appeal. ISSUE-WISE DETAILED ANALYSIS - (III) Relevance of earlier adverse departmental treatment and Coordinate Bench decisions Legal framework: Administrative or adjudicatory decisions for other assessment years may be relevant but cannot supplant year-specific record that demonstrates AO's enquiries and correct application of law. Binding effect of Tribunal/High Court decisions where no stay or reversal has been pronounced is recognized within territorial scope. Precedent treatment: The Tribunal acknowledged Coordinate Bench findings in favour of the assessee for A.Y. 2010-11 and 2012-13 and noted absence of any stay on those decisions. It also considered the Supreme Court's later exposition (Ahmedabad Urban Development Authority) and harmonized both streams of authority to interpret the proviso and its application. Interpretation and reasoning: The Tribunal balanced earlier favourable Coordinate Bench rulings and subsequent Supreme Court clarifications. It held that while the department's adverse treatment for A.Y. 2017-20 is a material consideration, it cannot alone establish that the AO in the year under appeal acted erroneously if the AO had performed specific inquiries, recorded reasons, and accepted the assessee's cost-based charging model. The Tribunal emphasized that the proviso should be applied where distinct commercial activities beyond the registered GPU object exist or where receipts breach the specified threshold; mere departmental decisions in other years do not automatically render the assessment erroneous. Ratio vs. Obiter: Ratio - prior decisions and later higher-court pronouncements must be considered in context, but they do not justify revision under section 263 absent demonstrable omission or failure by the AO to make requisite enquiries for the specific assessment year. Conclusions: The existence of adverse findings in other assessment years did not validate the CIT(E)'s revision where the AO had carried out specific inquiries and applied mind. Coordinate Bench decisions favourable to the assessee and continuing 12AA registration reinforced that setting aside the assessment was unwarranted. OVERALL CONCLUSION The Tribunal held that the assessment order was not erroneous and prejudicial to revenue: the AO had conducted requisite inquiries and applied his mind; the proviso to section 2(15) did not disentitle the assessee to exemption given the nature of activities, cost-recovery fee structure, non-distribution of surplus and existing 12AA registration; Explanation 2 to section 263 and reliance on adverse treatment in other years were insufficient to sustain revision. The revision under section 263 was quashed and the appeal allowed.