2019 (8) TMI 1821 - AT - Income Tax

Exemption u/s 11 - as per revenue appellant-Corporation cannot be treated as State within the Article 12 of the Constitution of India - claim denied assessee is engaged in commercial activity carrying out arranging tour and travel packages on commercial basis for fees/charges - scope of introduction of proviso to section 2(15) - assessee in this case is a Trust registered with DIT(E) Mumbai u/s. 12A - first contention of assessee that it is the agency of Government of Maharashtra and its income is not taxable - AO concluded that the assessee apart from running simple buses is also running luxury buses in large scale and is also engaged in providing parcel/courier service in large scale from one location to another for fees/charges - HELD THAT - As noted above the assessee is a State Corporation engaged in the business of public transportation. The objects of the corporation are development and growth of public trade and industry of the development of road transport facilities of road transport in any area and providing an efficient economical system of road transport services and coordination between any form and road transport or any other form of road transport. Surplus of receipts over expenses after payment of interest/dividend on capital as provided by Central/State Government and providing for depreciation and reserves etc. is to be applied for amenities to the passenger welfare of labour employed financing the expansion programme etc. as approved by the Government and remainder if any is to be handed over to the State Government for the purpose of development. It is noted that there is no change in the activity of the assessee since beginning and it is all along providing road transportation facility to the general public for a ticket as a token contribution. Prior to introduction of proviso to section 2(15) there was no dispute that the assessee was established for charitable purpose and assessee has all along been granted relief u/s. 2(15) and exemption under section 11 of the Act. Revenue s plea that amendment to section 2(15) of the Act shall take assessee s activity subject to denial of exemption u/s. 11 has been rejected by Hon ble Karnataka High Court in the case of Karnataka State Road Transport Corporation 2016 (2) TMI 1291 - KARNATAKA HIGH COURT - Also as relying on ANDHRA PRADESH STATE SEED CERTIFICATION AGENCY VERSUS CHIEF COMMISSIONER OF INCOME-TAX - III HYDERABAD 2013 (1) TMI 63 - ANDHRA PRADESH HIGH COURT we are of view taken by the authorities below that the assessee should be denied exemption u/s. 11 simply because of amendment to section 2(15) is not sustainable. Upto A.Y. 2011-12 there was no dispute that the assessee was entitled to exemption u/s. 11 of the Act. The dispute has only arisen pursuant to introduction of proviso to section 2(15) of the Act. Considering the objects for which the assessee is set up and manner in which it is managed and the manner in which funds generated are utilized there is no doubt that there is no profit motive in carrying out the activity of the assessee. No doubt there may remain some surplus but that by itself does not mean that the motive is to earn profit. Hon ble Apex Court in the case of American Hotel and Lodging Association ( 2008 (5) TMI 17 - SUPREME COURT has expounded that it may not be possible to carrying on activities in such a way that expenditure exactly matches income and there is no resultant profit. There is no case made out by the Revenue that the surplus is not applied for the purpose of company stated objects. When the assessee was accepted to be entitled to exemption upto preceding assessment year there is no case that the activities of the assessee have undergone a change which warrant denial of exemption. Assessee is engaged in commercial activity and that also in large scale - This so called large scale has been observed from the data of buses operated by the assessee. Out of 15500 buses from the website data gathered by the Assessing Officer himself this includes Deluxe buses-48 air conditioned buses-46 and midi-10. From the above how can the Assessing Officer make a deduction that the assessee is running luxury buses in large scale defers all sense of proportionality. To state the obvious assumption of the Assessing Officer is absurd. Assessee is engaging into profit oriented activities is that the assessee is arranging tour and travel packages on commercial basis for fees/charges - AO has noted eight trips from the website. How will these eight trips stand against thousands of trips undertaken by the assessee for transporting ordinary passengers is beyond comprehension. The Assessing Officer s inference is totally unjustified. Details of other income which has been considered by the Revenue to be of a large scale pale into absolute insignificance when the same is considered as percentage to the non-operative revenue to operating revenue which bring them to be lesser than 1% to the operating revenue. Hence figures quoted by the Assessing Officer for inferring that the assessee is engaged in profit motive activity in large scale is totally absurd - the finding given by the Assessing Officer that assessee is engaged commercial and profit motive activity is totally unsustainable. It may not be out of place to mention here that to remove/prevent the mischief which can be caused to the assessee such as the present large State the present proviso No. (ii) to section 2(15) provides that if the aggregate receipt from such activity or activities during the previous year do not exceed 25% of the total receipts of the entity the exclusion provision will not apply. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the appellant-Corporation can be treated as State within Article 12 of the Constitution of India.
2. Whether the activities of the appellant-Corporation are of commercial nature and can be considered as business activity.
3. Whether the appellant-Corporation is working with a profit motive.
4. Whether the appellant-Corporation has applied surplus generated towards charitable purposes.
5. Whether registration under section 12A of the Act entitles the appellant-Corporation to the benefit of sections 11, 12, and 13 of the Act.
6. Whether the appellant-Corporation is involved in activities attracting the proviso to section 2(15) read with section 13(8) of the Act.
7. Whether reliance on certain case laws by the CIT(A) and AO is misplaced.
8. Whether the rule of consistency is inapplicable in the context of Income Tax assessment proceedings.
9. Whether the benefit of set off of carry forward of losses of earlier years was wrongly denied.
10. Whether the benefit of carry-forward of losses not getting set off during the year was wrongly denied.
11. Whether the claim of depreciation was wrongly denied.
12. Whether services towards preservation of environment and ecosystem consideration come within the ambit of "charitable purpose" under clause (15) of section 2 of the Act.

Issue-wise Detailed Analysis:

1. State within Article 12:
The appellant-Corporation contended that it is an agency of the Government of Maharashtra and thus should not be taxable. The Assessing Officer (AO) referred to the Supreme Court's decision in APSRTC (52 ITR 524), which held that the income of APSRTC cannot be considered as income of the State Government. The AO concluded that the appellant-Corporation cannot be treated as an agent of the Government.

2. Commercial Nature and Business Activity:
The AO held that the appellant-Corporation is engaged in commercial activities, including running various types of buses, parcel/courier services, and arranging tour and travel packages. The AO concluded that these activities are conducted on a large scale and should be considered business activities.

3. Profit Motive:
The AO observed that the appellant-Corporation had significant surplus invested in fixed deposits and earned substantial interest income, indicating a profit motive. The AO noted that the existence of a profit motive disqualifies the appellant-Corporation from being considered a charitable entity under the amended definition of section 2(15).

4. Application of Surplus:
The AO contended that the appellant-Corporation failed to apply its surplus for charitable purposes year after year, as required under section 11 of the Income Tax Act. This failure was another reason for denying the appellant-Corporation's claim for exemption under section 11.

5. Registration under Section 12A:
The appellant-Corporation argued that its registration under section 12A entitles it to exemption under sections 11, 12, and 13. However, the CIT(A) held that registration under section 12A does not automatically entitle the appellant-Corporation to these benefits, especially if other provisions like sections 11 and 13 are not met.

6. Proviso to Section 2(15):
The AO held that the appellant-Corporation's activities fall under the category of "advancement of any other object of general public utility" and are subject to the proviso to section 2(15), which disqualifies entities engaged in commercial activities from being considered charitable.

7. Misplaced Reliance on Case Laws:
The appellant-Corporation argued that the CIT(A) and AO's reliance on certain case laws was misplaced. The CIT(A) and AO cited cases like Jammu Dev. Authority and others to support their conclusions, but the appellant-Corporation contended these cases were out of context.

8. Rule of Consistency:
The CIT(A) held that the rule of consistency is inapplicable in the context of Income Tax assessment proceedings, rejecting the appellant-Corporation's argument that its activities had not changed and should continue to be considered charitable.

9. Set Off of Carry Forward of Losses:
The appellant-Corporation argued that the CIT(A) erred in denying the benefit of set off of carry forward of losses from earlier years. The CIT(A) did not adjudicate this ground raised by the appellant-Corporation.

10. Carry-Forward of Losses:
Similarly, the appellant-Corporation contended that the CIT(A) erred in not adjudicating the ground related to the benefit of carry-forward of losses not getting set off during the year.

11. Claim of Depreciation:
The appellant-Corporation argued that the CIT(A) erred in not adjudicating the ground in respect of the claim of depreciation, holding that it did not arise from the assessment order.

12. Preservation of Environment and Ecosystem:
The appellant-Corporation contended that its services include activities towards the preservation of the environment and ecosystem, which should be considered a "charitable purpose" under clause (15) of section 2. The CIT(A) did not agree with this contention.

Judgment:
The Tribunal concluded that the appellant-Corporation is a State Corporation engaged in public transportation and its activities are charitable in nature. The introduction of the proviso to section 2(15) does not automatically disqualify the appellant-Corporation from exemption under section 11. The Tribunal set aside the orders of the authorities below, allowing the appellant-Corporation's appeal and granting the exemption under section 11. The Tribunal found no merit in the AO's findings that the appellant-Corporation is engaged in commercial activities with a profit motive. The Tribunal also noted that the appellant-Corporation's surplus is applied for its stated charitable objects, and there is no evidence to suggest otherwise.