Applicability of proviso to section 2(15) should be based only on facts & circumstances of each case

Ride A Cycle Foundation Vs ITO (ITAT Bangalore)

ITAT Bangalore held that applicability of the proviso to 2(15) of the Act cannot be on the basis of the default of the parties in not participating in the proceedings but should be on the basis of facts and circumstances of each case. Accordingly, matter remanded for fresh consideration.

Facts- The main objects of the assessee-trust are creating awareness for the society about the virtues of using cycle and to make cycle as a popular mode of transportation that would lessen global warming, air pollution. The assessee has also object of making people understand the need for uncontaminated environment which in turn will lead to good quality of health. The assessee filed return of income declaring Nil income after claiming exemption u/s. 11 of the Act.

AO noticed that the assessee organizes trips and camps by way of “Cycle Rally” to tourist places such as Kalapetta, Ooty, Palakkad,, Valparai, Mysore, etc., and the participants pay for the cycle rides and for food and lodgings at designated places. According to the AO, the assessee was doing an activity which was akin to trade or business. According to the AO, the receipts from the participants are taken as donation but in reality, they were fees for participation in rallies disguised as donations. The AO therefore concluded that the assessee was hit by the proviso to section 2(15) of the Act and therefore the excess of receipts over expenditure was liable to be taxed and the assessee was not entitled to the benefit of exemption under section 11 of the Act.

The CIT(A) noticed that the case was fixed for hearing on 8 occasions and the assessee did not respond or participate in the proceedings before CIT(A). The CIT(A) has set out various dates in para 5.1 of the impugned order. The CIT(A) decided to proceed the appeal ex-parte observing that the assessee failed to explain as to how the activity undertaken by the assessee is not commercial or charitable. Accordingly, the appeal of the assessee was dismissed by the CIT(A).

Conclusion- I am of the view that the order of the CIT(A) has to be set aside and the issue remanded to CIT(A) for a decision on merits. The applicability of the proviso to 2(15) of the Act cannot be on the basis of the default of the parties but should be on the basis of facts and circumstances of each case. In the present case, the donations received by the assessee which was taken as receipts were prima facie donations and there is no material to show that the donations were not voluntary. Both the AO and the CIT(A) have called upon the assessee to demonstrate as to how the donations were voluntary and thereby the assessee was called upon to prove a negative fact. In the circumstances, I am of the view that the assessee should have an opportunity of hearing before the CIT(A) who can appreciate as to how the proviso to section 2(15) of the Act will operate on the facts and circumstances of the given case. In this regard, the contentions that the assessee may put forth should also be considered by the CIT(A) rather than deciding the appeal on the basis of default of parties. For the above reasons, I set aside the order of the CIT(A) and remand the issue of applicability of proviso to section 2(15) of the Act to the CIT(A) for fresh consideration, after affording the assessee opportunity of being heard.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal by the assessee against the order dated 10.10.2022 of NFAC, Delhi, relating to Assessment Year 2017-18.

2. The assessee is a registered trust and enjoys the benefit of registration under section 12A of the Income Tax Act, 1961 (hereinafter called ‘the Act’), by the CIT(A), Karnataka II, Bengaluru. The main objects of the trust are creating awareness for the society about the virtues of using cycle and to make cycle as a popular mode of transportation that would lessen global warming, air pollution. The assessee has also object of making people understand the need for uncontaminated environment which in turn will lead to good quality of health. The assessee filed return of income declaring Nil income after claiming exemption under section 11 of the Act. The AO noticed that the assessee organizes trips and camps by way of “Cycle Rally” to tourist places such as Kalapetta, Ooty, Palakkad,, Valparai, Mysore, etc., and the participants pay for the cycle rides and for food and lodgings at designated places. According to the AO, the assessee was doing an activity which was akin to trade or business. According to the AO, the receipts from the participants are taken as donation but in reality, they were fees for participation in rallies disguised as donations. The AO therefore concluded that the assessee was hit by the proviso to section 2(15) of the Act and therefore the excess of receipts over expenditure was liable to be taxed and the assessee was not entitled to the benefit of exemption under section 11 of the Act. Accordingly, the AO brought to tax the excess of receipts over expenditure as income of the assessee as follows:

3. Aggrieved by the order of the AO, assessee filed appeal before CIT(A). Assessee contended before CIT(A) that its receipts were in the nature of donation and voluntary and there is nothing brought on record by the AO to show that the donations were not in fact voluntary. The assessee contended as follows:

“[viii] Without prejudice accepting for argument sake but not conceding, even where the donation are considered as participating fee, the same are collected and spent in the course of carrying on charitable activity and not any commercial activity. The learned assessing officer failed to give any finding or corroborative evidence that the application and receipt of participation fee is not towards any charitable activity. Wherefore, where the receipt and application are in line with the definition of Section 2(15) of the Act, provisions of Section 11 & 12 of the Act have to be considered and applied to the facts on hand.

[ix] Hence, it is prayed that the provisions of Section 11 & 12 be applied and the income be computed accordingly.”

4. The CIT(A) noticed that the case was fixed for hearing on 8 occasions and the assessee did not respond or participate in the proceedings before CIT(A). The CIT(A) has set out various dates in para 5.1 of the impugned order. The CIT(A) decided to proceed the appeal ex-parte observing that the assessee failed to explain as to how the activity undertaken by the assessee is not commercial or charitable. Accordingly, the appeal of the assessee was dismissed by the CIT(A).

5. Aggrieved by the order of the CIT(A), the assessee preferred the present appeal before the Tribunal. There is a delay of 20 days in filing the appeal by the assessee which has been explained by the assessee in an affidavit filed by the trustee of the assessee as follows:

“That the said ex-parte order passed by the learned Commissioner of Income-tax [Appeals], dated 10/10/2022 was communicated by the Petitioner / Appellant only on 10/10/2022. Soon after the receipt of the impugned appellate order passed by the learned Commissioner of Income-tax [Appeals], the Managing Trustee i.e. Deepak Majipatil of Petitioner / Appellant spoke to the present counsel and appraised about the situation and the present counsel advised the Petitioner / Appellant to prefer an appeal before the Hon’ble Tribunal and requested to send the requisite/necessary papers to prepare the appeal papers to the Tribunal. The Managing Trustee of the Petitioner / Appellant had entrusted one of his staff to co-ordinate with the present counsel by providing the complete papers for preparation of appeal papers to the Hon’ble Tribunal.

The said staff of the Petitioner / Appellant due to certain miscommunication and due to inadvertence could not provide the requisite papers to the present counsel as instructed by the Managing Trustee of Petitioner / Appellant. The Managing Trustee of the Petitioner / Appellant was under a bonafide belief that the papers have been handed over to the present counsel for preparation of papers and when the Managing Trustee of the Petitioner / Appellant enquired about the filing of appeal to the Hon’ble Tribunal with the staff, it came to the knowledge that the said papers were not sent to the present counsel for preparation of appeal papers to the Tribunal.

Soon after learning the fact that the papers were not sent to the present counsel the Managing Trustee provided the requisite papers to the present counsel for preparation of the appeal to the Hon’ble Tribunal. The present counsel after verifying the papers and studying the entire files prepared the appeal papers to this Hon’ble Tribunal. By the time the requisite papers were handed over the present counsel there arose a delay for filing the appeal before this Hon’ble Tribunal. The Petitioner / Appellant within reasonable time has made all the efforts to file this present appeal before this Hon’ble Tribunal with the help of the present counsel.

In view of the above fact, the Petitioner / Appellant could not file the appeal before this Hon’ble Income Tax Appellate Tribunal, well in time within 60 i.e., days from the date of communication of order i.e., the impugned order of the Commissioner of Income-tax [Appeals] was communicated on 10/10/2022 i.e., the Petitioner / Appellant ought to have filed the appeal on or before09/12/2022 and by the time the Petitioner / Appellant could get the appeal papers for filing the present appeal, there arose a delay of about 20 days in filing this present appeal before this Hon’ble Income-tax Appellate Tribunal as per the provisions of the Act.”

6. I have considered the submissions made by the assessee for condoning the delay in filing the appeal and I am satisfied that there is no willful delay on the part of the assessee. Keeping in mind the principle that substantive justice should prevail over technicalities, I condone the delay of 20 days in filing the appeal by the assessee.

7. In so far as the merits of the appeal is concerned, it is no doubt true that notices were issued to the assessee on several occasions. The assessee had requested for adjournment in the hearing fixed on 25.05.2022 and the case was adjourned to 10.08.2022. On that date also, the assessee did not appear before CIT(A) and the case was adjourned to 16.10.2022 on which date also neither the assessee nor his Authorized Representative appeared before CIT(A). I am of the view that the order of the CIT(A) has to be set aside and the issue remanded to CIT(A) for a decision on merits. The applicability of the proviso to 2(15) of the Act cannot be on the basis of the default of the parties but should be on the basis of facts and circumstances of each case. In the present case, the donations received by the assessee which was taken as receipts were prima facie donations and there is no material to show that the donations were not voluntary. Both the AO and the CIT(A) have called upon the assessee to demonstrate as to how the donations were voluntary and thereby the assessee was called upon to prove a negative fact. In the circumstances, I am of the view that the assessee should have an opportunity of hearing before the CIT(A) who can appreciate as to how the proviso to section 2(15) of the Act will operate on the facts and circumstances of the given case. In this regard, the contentions that the assessee may put forth should also be considered by the CIT(A) rather than deciding the appeal on the basis of default of parties. For the above reasons, I set aside the order of the CIT(A) and remand the issue of applicability of proviso to section 2(15) of the Act to the CIT(A) for fresh consideration, after affording the assessee opportunity of being heard.

8. In the result, appeal of the assessee is treated as allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.