2015 (5) TMI 515 - AT - Income Tax

Revision u/s 263 - AO failed to examine the applicability of 1st and 2nd proviso of Section 2(15) of the Income Tax Act read with 3rd proviso to Section 143(3) and provisions of Section 13(8) although neither 3rd proviso to Section 143(3) nor Section 13(8) were on statute book when AO. passed the assessment order - income not being returned by assessee in its incometax return or in form 10BB - Held that - Objection of ld. DIT(E) as regards the income not being returned by assessee in its incometax return or in form 10BB is concerned the same was claimed as exempt on account of concept of mutuality as in earlier years and therefore there was no basis for the AO to take any contrary view on the same. Accordingly the proceedings u/s 263 initiated by ld. DIT(E) on this count is not at all tenable in law particularly when this view has been taken by the department since inception. The primary object of insertion of proviso to section 2(15) was to curb the practice of earning income by way of carrying on of trade or commerce and claiming the same as exempt in the garb of pursuing the alleged charitable object of general public utility. This proviso never meant to deny the exemption to those institutions where the predominant object is undeniably a charitable object and in order to achieve the same incidental activities essential in the given circumstances are carried on.In view of the above discussion we hold that the proviso to section 2(15) is not at all applicable in the present case and therefore ld. DIT(E) was not at all justified in invoking the proceedings u/s 263. We fail to understand as to how these activities can be said to have an iota of commercial/ trade colour. The dominant object of the assessee is definitely for the well being of public at large by organizing various seminars for the welfare of people by disseminating knowledge in various fields in order to uplift the social consciousness of the society at large. (The composition of membership clearly exemplifies the real intention of assessee. We fail to understand as to how the hostel accommodation provided to various invitees could be considered as a commercial activity. Before any activity can be branded as being in the nature of trade or commerce the AO has to demonstrate the intention of parties Backed with facts and figures of carrying out activities with profit motive. Mere surplus from any activity which undisputedly has been undertaken to achieve the dominant object does not imply that the same is run with profit motive. The intention has to be gathered from circumstances which compelled the carrying on an activity. In the present case ld. counsel has clearly demonstrated that surplus was generated from interest income and not from catering or hostel activities. Therefore the objection of ld. DIT(E) does not survive on this count also. Assessee s case is squarely covered by the decision of India Trade Promotion Organization Vs. Director General of incomew Tax 2015 (1) TMI 928 - DELHI HIGH COURT .Thus in the facts and circumstances of the present case the ld. DIT(E) was not justified in initiating revisionary proceedings u/s 263 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:

1. Legality of the order passed by the AO under Section 143(3).
2. Applicability of the first and second proviso to Section 2(15) read with the third proviso to Section 143(3) and Section 13(8) of the Income Tax Act.
3. Validity of the exemption claimed under Sections 10(23C)(iv), 11, and 12.
4. Application of the principle of mutuality.
5. Dominant object of the assessee and whether activities like accommodation, food, and beverages represent trade and business.
6. Justification of invoking Section 263 by the DIT(E).

Detailed Analysis:

1. Legality of the Order Passed by the AO under Section 143(3):

The assessee filed a return declaring Nil income, which was accepted by the AO after examination. The DIT(E) later issued a notice under Section 263, deeming the AO's order erroneous and prejudicial to the interests of revenue. The tribunal found that the AO had indeed examined the details and explanations provided by the assessee, thus the order was not erroneous.

2. Applicability of the First and Second Proviso to Section 2(15) Read with the Third Proviso to Section 143(3) and Section 13(8):

The DIT(E) argued that the assessee's activities, such as providing accommodation and catering services, fell within the mischief of the proviso to Section 2(15). However, these provisions were introduced by the Finance Act, 2012, with retrospective effect from 1-4-2009, and were not on the statute book when the assessment order was passed. The tribunal held that the AO's order was based on the law prevalent at the time and could not be revised under Section 263, citing the Supreme Court's decision in CIT Vs. Max India Ltd.

3. Validity of the Exemption Claimed under Sections 10(23C)(iv), 11, and 12:

The DIT(E) contended that the assessee's claim of exemption was not tenable as the activities were not purely charitable. The tribunal, however, noted that the assessee's activities were primarily charitable and that the income from mutual activities was exempt. It was also observed that the assessee was registered under Sections 12A, 80G, and 10(23C)(iv), and these registrations were still subsisting.

4. Application of the Principle of Mutuality:

The DIT(E) argued that the principle of mutuality did not apply to the assessee's activities. The tribunal found that the assessee's activities were consistent with the principle of mutuality, as accepted in previous years. The surplus generated was primarily from interest income, not from hostel or catering activities.

5. Dominant Object of the Assessee and Whether Activities Like Accommodation, Food, and Beverages Represent Trade and Business:

The DIT(E) argued that the assessee's activities were commercial in nature. The tribunal found that the dominant object of the assessee was charitable, aimed at promoting understanding and amity between different communities. The incidental income from providing hostel and catering facilities was necessary to support the charitable activities and did not imply a profit motive.

6. Justification of Invoking Section 263 by the DIT(E):

The tribunal held that the DIT(E) was not justified in invoking Section 263, as the AO had conducted a proper inquiry and taken a possible view. The tribunal also noted that the DIT(E) had relied on provisions that were not part of the initial or revised notice under Section 263, which was not permissible.

Conclusion:

The tribunal quashed the order passed by the DIT(E) under Section 263 and restored the assessment order passed by the AO. The assessee's appeal was allowed, and it was held that the proviso to Section 2(15) was not applicable in the present case. The tribunal emphasized that the dominant object of the assessee was charitable and that incidental activities necessary to achieve this object did not constitute trade or business.