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July 14, 2023

Reconsideration of the Section 11 Exemption is required by the ITAT

Reconsideration of the Section 11 Exemption is required by the ITAT

Fact and issue of the case

These appeals at the instance of the assessee are directed against five orders of CIT(A), passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’) (for Assessment Year 2018-19, the CIT(A)’s order is dated 23.12.2022 and for Assessment Years 2013-14, 2015-16 to 2017-18, all the orders of CIT(A) are dated 27.01.2023).

Common issue is raised in these appeals, hence, these appeals are disposed off by this consolidated order. Identical issues are raised except for variation in figures. The assessee has raised 15 grounds. All the grounds relate to the solitary issue whether CIT(A) is justified in confirming the AO’s order in denying the benefit of exemption under section 11 of the Act.

Since identical facts are involved in all the cases, for the sake of convenience, the facts pertaining to Assessment Year 2018-19 are narrated.

The assessee is a registered society. It functions as a nodal agency for e-Governance established by Government of Karnataka. For the Assessment Year 2018-19, the return of income was filed on 17.09.2018, declaring total income at Rs.‘Nil’, after claiming exemption under section 11 of the Act. The case was selected for complete scrutiny and assessment was completed under section 143(3) r.w.s 144B of the Act on 20.08.2022, wherein the total income was determined at Rs.101,93,88,732/-. In the said Assessment Order, the claim of exemption under section 11 was denied and total income was computed as per the Income and Expenditure accounts after disallowing the claim of depreciation. The claim of accumulation of the 85% of the income under section 11(2) of the Act was also disallowed on the ground that no specific purpose for which such accumulation was mentioned in Form 10.

Aggrieved by the Assessment Orders completed for Assessment Years 2013-14, 2015-16 to 2018-19, assessee filed appeals before the First Appellate Authority. The CIT(A) held that the assessee’s activities fall within the last limb of definition of charitable purposes i.e., advancement of any other objects of general public utility. Therefore, it was concluded by the CIT(A) that the assessee is hit by proviso to section 2(15) of the Act since the gross receipts from the activities which are of commercial nature exceeds the prescribed limit. The CIT(A) relied on various case laws in support of his view.

Aggrieved by the orders of CIT(A), assessee has filed the present appeals before the Tribunal. Assessee has filed two sets of Paper Books, one enclosing the case laws relied on and the other comprising of 67 pages, enclosing therein copy of the notification dated 09.10.2012 of setting up of the assessee society, copy of the registration of the society along with the Memorandum of Association, copy of the Certification of Registration under section 12AA of the Act, copy of Form 10B along with P & L A/c and Balance Sheet of the assessee, the written submissions filed before the CIT(A), etc. The learned AR submitted that assessee is a nodal agency set up by Government of Karnataka and hence will be covered by the judgment of the Hon’ble Apex Court in the case of ACIT(E) Vs. Ahmedabad urban Development Authority reported in 449 ITR 01 (SC). The learned AR submitted that the judgment of the Hon’ble Apex Court had clearly laid down the dictum as regards interpretation of proviso to section 2(15) of the Act. It was stated by the learned AR that since judgment of the Hon’ble Apex Court was not available either before the AO or the CIT(A), the matter may be remanded to the AO for fresh consideration of the issue in light of the dictum laid down by the Hon’ble Apex Court. The learned AR further submitted that the gross receipts of the assessee society would not exceed 20% if interest income is to be excluded. It was stated by the learned AR that assessee receives grant from government and the funds which are not required are placed in fixed deposits and interest income earned. It was submitted that such interest income earned cannot be taken as income generated out of commercial activity of the assessee society. Further, learned AR submitted that since assessee is set up by Government of Karnataka vide GO dated 26.09.2005 and are doing state functions, the assessee society though registered under the Karnataka Societies Registration Act, ought to be considered as a State under article 289 of the Constitution.

The learned DR, on the other hand, submitted that the activities of the assessee society fall in the last limb of the definition of charitable purposes under proviso to section 2(15) of the Act and since assessee is receiving income from a commercial activity above the threshold limit, proviso to section 2(15) of the Act would be applicable to the facts of the instant case. The learned DR strongly relied on the orders of the AO and the CIT(A).

Observation of the court

We have heard the rival submissions and perused the material on record. The Hon’ble Apex Court in the case of Ahmedabad Urban Development Authority (supra) had laid down various principles as regards the interpretation of proviso to section 2(15) of the Act and section 11 of the Act. The said judgment of the Hon’ble Apex Court was rendered recently on 19.10.2022 and the benefit of the same was not available before the AO (there is no reference to the said judgment in the impugned orders of the CIT(A) though the same were passed after the judgment of Hon’ble Supreme Court). Since Hon’ble Apex Court has laid down principles as regards the interpretation to proviso to sections 2(15) and 11 of the Act, we are of the view that the entire issue raised before us needs to be reexamined by the CIT(A).

Moreover, the learned AR had submitted that the assessee’s receipts from the commercial activities, if any, is much below the threshold limit as prescribed under proviso to section 2(15) of the Act and this aspect has not been considered by the CIT(A). In this context, the learned AR, during the course of hearing, had taken us through the P & L A/c to drive home his contention that interest income from bank deposits is also taken for considering the gross receipts from commercial activities of the assessee. Further, the learned AR had also argued that assessee society is established by Government of Karnataka vide GO dated 29.09.2005 for implementing various e-Governance initiatives in the State to facilitate rapid and effective use of information technology for the benefit of the common man. It is stated that assessee’s activities / functions are that of State functions and would be governed by article 289 of the constitution. Though this contention of the assessee has not been raised before the AO nor CIT(A), the same being purely a legal issue, also needs to be addressed while the matter is being reconsidered by the CIT(A). With these observations, we restore the matter to the file of the CIT(A). The CIT(A) shall take a decision in accordance with law after affording reasonable opportunity to the assessee to present its case. The assessee shall co-operate with the Revenue for an expeditious disposal of the case and shall not seek unnecessary adjournment. It is ordered accordingly.

Since we have disposed off the appeal on merits, Stay Petitions filed before the Tribunal are rendered infructuous and the same are dismissed.

In the result, all the appeals are filed by the assessee are allowed for statistical purpose and the Stay Petitions are dismissed.

Order pronounced in the open court on this day of 2nd June, 2023.


In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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