2024 (2) TMI 990 - HC - Income Tax

Rejection of application for Revision u/s 264 - Exemption u/s 11 denied to assessee - benefits denied merely on the ground that the donor has deducted TDS u/s 194C and 194J while allocating requisite grants to the assessee - scope of principle of consistency in taxation matters - revisional authority dismissed the revision petition of the assessee while reiterating the conclusion arrived at by the AO inter alia holding that the assessee s foundation falls under the sixth limb of Section 2(15) of the Act i.e. Advancement of any other object of general public utility HELD THAT - Sole reason to construe the receipt Received by donors under the tax regime is founded on the assumption that the same is towards professional/technical services or contractual income as TDS was deducted under the Sections 194C and 194J is not acceptable sole reason firstly that alone cannot be the basis to conclude the aforesaid receipt to be considered under the category of consultancy fees and contractual income. Secondly there is no element of activity in the nature of trade commerce or business or any activity or rendering any service in relation to any trade commerce or business. Thirdly in absense of any cogent reason receipts in question cannot be advancement of any other object of general public utility . If the deductor in its Income Tax Return under misconception deducts TDS under Sections 194C and 194J of the Act the same would not disentitle the assessee to claim benefit under Sections 11 and 12 of the Act unless the case of assessee is specifically hit by the Proviso of Section 2(15) of the Act which is not the case here. Proviso to Section 2(15) of the Act would not get attracted merely on the basis of deduction of TDS by the donor under a particular head. Deduction of TDS by donor would not be the determinative factor for denial of benefits under Sections 11 and 12 of the Act. The respondent-Revenue in the instant case in the preceding years as well as in the succeeding years under almost similar circumstances has accepted the exemption claimed by the assessee under Sections 11 and 12 of the Act and therefore should not have deviated from its consistent approach in denying benefits to the assessee. Principle of consistency - The elementary need of following a consistent approach for subsequent AYs when there is no material change in the facts is also stressed upon by this Court in the case of CIT v. Neo Poly Pack (P) Ltd. 2000 (4) TMI 26 - DELHI HIGH COURT which clearly demonstrates the requirement to follow the principle of consistency in taxation matters. Also in case of Radhasoami Satsang v. CIT 1991 (11) TMI 2 - SUPREME COURT stressed on consistent approach by the respondent-Revenue in taxation matters held that as in the absence of any material change justifying the Revenue to take a different view of the matter - and if there was no change it was in support of the assessee - we do not think the question should have been reopened. Thus writ petition is accordingly allowed and the impugned orders are hereby set aside. The receipt of shall not be treated as income and the assessee is entitled for exemptions enshrined under Sections 11 and 12 - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

- Whether the assessee, a registered charitable institution, is entitled to exemption under Sections 11 and 12 of the Income Tax Act, 1961, for the Assessment Year (AY) 2017-18, despite the donor deducting Tax Deducted at Source (TDS) under Sections 194C and 194J of the Act on certain receipts classified as consultancy fees and contractual receipts.

- Whether the receipts characterized as consultancy fees and contractual receipts, constituting about 29.05% of the total receipts, fall within the ambit of "advancement of any other object of general public utility" under Section 2(15) of the Act, and if so, whether the proviso to Section 2(15) excluding activities involving trade, commerce, or business for a fee or consideration applies.

- Whether the consistent grant of exemption under Sections 11 and 12 to the assessee for preceding and succeeding AYs under similar factual circumstances precludes denial of exemption for the AY in question.

- Whether the deduction of TDS by donors under particular heads (Sections 194C and 194J) can be determinative of the nature of receipts and thereby disentitle the assessee from claiming exemption under Sections 11 and 12.

- Whether the revisional authority and Assessing Officer (AO) committed jurisdictional or material errors in denying exemption and classifying the assessee's receipts as business income under the proviso to Section 2(15) and Section 13(8) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to exemption under Sections 11 and 12 despite TDS deduction under Sections 194C and 194J

The legal framework revolves around Sections 11 and 12 of the Income Tax Act, which provide exemption to income derived from property held for charitable or religious purposes, and voluntary contributions respectively. Section 2(15) defines "charitable purpose" and includes advancement of any other object of general public utility, subject to the proviso excluding activities involving trade, commerce, or business for a fee or consideration beyond certain limits.

The AO and revisional authority relied heavily on the fact that donors deducted TDS under Sections 194C (contractual payments) and 194J (professional fees), interpreting the receipts as consultancy fees and contractual income. This led to the conclusion that the assessee carried out activities in the nature of trade or business, thus attracting the proviso to Section 2(15) and denial of exemption under Sections 11 and 12 by virtue of Section 13(8).

The Court, however, rejected this rationale, holding that mere deduction of TDS by the donor under a particular head cannot be the sole basis to classify the receipts as business income. The Court emphasized that the assessee's activities did not involve carrying on trade, commerce, or business, nor rendering services for a fee in relation to such activities. The Court noted the absence of any cogent reason or material indicating that the receipts were other than grants for charitable purposes.

The Court underscored that the proviso to Section 2(15) would not be attracted merely by the nature of TDS deduction by donors, especially when the assessee's activities remained charitable.

Issue 2: Classification of receipts as "advancement of any other object of general public utility" and applicability of proviso to Section 2(15)

The AO and revisional authority found that the assessee's activities fell under the sixth limb of Section 2(15) - advancement of any other object of general public utility. They concluded that since receipts from such activities exceeded twenty percent of total receipts, and the activities involved rendering services for consideration, the proviso to Section 2(15) applied, excluding such receipts from charitable purpose exemption.

The Court analyzed the proviso, which excludes charitable status if activities involve trade, commerce, or business or rendering services for a fee, unless such activities are undertaken in the course of actual advancement of public utility and aggregate receipts from such activities do not exceed twenty percent of total receipts.

The Court found no evidence that the assessee's activities constituted trade, commerce, or business. The mere deduction of TDS under Sections 194C and 194J by donors was insufficient to establish such nature. The Court held that the receipts in question should not be treated as fees for rendering services but as grants for charitable activities. Therefore, the proviso to Section 2(15) was not attracted.

Issue 3: Consistency in grant of exemption in earlier and subsequent assessment years

The assessee had been granted exemption under Sections 11 and 12 for multiple prior AYs (2011-12, 2012-13, 2013-14, and 2015-16) and for the subsequent AY 2018-19, despite similar TDS deductions by donors. The Court examined these assessment orders and found that the Revenue had accepted the charitable nature of the receipts and activities, allowing exemption accordingly.

The Court relied on established principles of consistency in taxation matters, citing precedents which emphasize that in the absence of any material change in facts or law, the Revenue should follow a consistent approach in subsequent AYs. The Court referred to authoritative decisions underscoring that while res judicata does not strictly apply to income tax proceedings, fundamental facts consistently accepted should not be reopened arbitrarily.

The Court found the Revenue's deviation in denying exemption for the AY in question without any material change to be unjustified and contrary to principles of transparency, predictability, and certainty in tax administration.

Issue 4: Whether the AO and revisional authority committed jurisdictional or material errors

The Court scrutinized the assessment and revisional orders and found that the AO's conclusion was based on an erroneous interpretation of the nature of receipts, relying solely on the TDS deduction heads without substantive evidence of trade or business activity by the assessee. The revisional authority upheld this flawed reasoning without jurisdictional or legal justification.

The Court held that such approach amounted to material perversity and jurisdictional error, warranting interference under Article 226 of the Constitution. The Court noted that the assessee's activities were consistent with charitable purposes and that the receipts were tied-up grants monitored by donors for specific projects, not fees for services rendered.

Issue 5: Treatment of tied-up grants vis-`a-vis voluntary contributions

The Court referred to the precedent where tied-up grants received for specific projects, monitored by donors, were held to be non-taxable under Sections 11 and 12, distinguishing them from voluntary contributions which are at the free disposal of the charitable institution.

The Court observed that the assessee acted as an implementing agency, utilizing grants for welfare activities as per donor conditions, with no element of freedom to use the funds arbitrarily. This reinforced the charitable nature of the receipts and negated the characterization of such receipts as business income.

3. SIGNIFICANT HOLDINGS

- "If the deductor in its Income Tax Return, under misconception, deducts TDS under Sections 194C and 194J of the Act, the same would not disentitle the assessee to claim benefit under Sections 11 and 12 of the Act unless the case of assessee is specifically hit by the Proviso of Section 2(15) of the Act, which is not the case here."

- "The proviso to Section 2(15) of the Act would not get attracted merely on the basis of deduction of TDS by the donor under a particular head."

- "When a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."

- "The elementary need of following a consistent approach for subsequent AYs, when there is no material change in the facts, is also stressed upon... The Revenue goals apart, the primary need of good tax administration remains transparency, predictability and certainty."

- "The receipt of Rs.5,90,42,892/- shall not be treated as income and the assessee is entitled for exemptions enshrined under Sections 11 and 12 of the Act."

The Court conclusively held that the assessee's receipts, including those on which TDS was deducted under Sections 194C and 194J, were in the nature of grants for charitable purposes and not fees for rendering services or business income. Consequently, the proviso to Section 2(15) and Section 13(8) did not apply, entitling the assessee to exemption under Sections 11 and 12 for the AY 2017-18. The impugned orders denying exemption were set aside due to material perversity and failure to follow consistent approach.