Exemption u/s. 11 not deniable as no violation of proviso to provision of section 2(15)

Madras Motor Sports Club (AOP) Vs CIT (ITAT Chennai)

ITAT Chennai held that revision order u/s. 263 unjustified and liable to be quashed as no findings which proves that there is a violation of the proviso to provision of section 2(15) of the Income Tax Act, 1961. Accordingly, exemption u/s. 11 rightly claimed.

Facts- The assessee, a Society registered under the Tamil Nadu Society Act, was established in the year 1953. The assessee, M/s. MADRAS MOTOR SPORTS CLUB, is a registered Public Charitable Trust, u/s. 12AA of the Act. The primary object of the assessee is to promote the sports of Motor Car and Motor Cycle Racing.

The assessee filed its return of income for A.Y. 2018-19 on 29.09.2018 which was subsequently revised on 06.10.2018. The assessee claimed exemption u/s. 11 of the Act. Accordingly, the AO framed assessment u/s. 143(3) r.w.s. 143(3A) & 143(3B) of the Act and verified the claim of exemption u/s. 11.

Subsequently, the CIT(Exemption) on perusal of income and expenditure account and proposal sent by the Range Head u/s. 263 of the Act on 31.03.2022, a show cause notice dated 06.03.2023 was issued with a proposal to revise the assessment framed by AO allowing the claim of exemption u/s. 11 of the Act. In view of the amended provisions of section 2(15) of the Act, which had not been examined by the AO and hence, the said order is prejudicial to the interest of Revenue as per CIT(Exemption).

Conclusion- CIT(Exemption) while passing revision order has not at all examined the aspect of violation of the proviso to provision of Section 2(15) of the Act and moreover the AO while framing assessment u/s. 143(3) of the Act has examined the claim of exemption u/s. 11 of the Act.

Held that the CIT(Exemption) has not at all deliberated how the assessee has violated the proviso to the provision of Section 2(15) of the Act and how the AO had not examined the issue. We could not find anything which proves that there is violation of the proviso to provision of section 2(15) of the Act. Hence, we quash the revision order and allow the appeal of assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Exemption), Chennai in ITBA/COM/F/17/2022-23/1051790055(1) dated 31.03.2023. The assessment was framed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income-tax Officer, National e-Assessment Centre, Delhi for the assessment year 2018-19 u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 04.02.2021.

2. The only issue in this appeal of assessee is as regards to the revision order passed by CIT(Exemptions) u/s.263 of the Act revising the assessment order passed by AO for assessment year 2018-19 u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Act dated 04.02.2021 allowing the claim of exemption u/s.11 & 12 of the Act. For this issue, assessee has raised various grounds which are argumentative in nature but issue is only one and hence, need not be reproduced.

3. Brief facts are that the assessee, a Society registered under the Tamil Nadu Society Act, was established in the year 1953. The assessee, M/s. MADRAS MOTOR SPORTS CLUB, is a registered Public Charitable Trust, u/s.12AA of the Act vide proceedings of the Director of Income Tax (Exemptions), Chennai, in DIT (E) No.1212(54)/77 dated 06.09.2006. The primary object of the assessee is to promote the sports of Motor Car and Motor Cycle Racing. The other main objects of the assessee are as under:

1. To promote the sports of Motor Car and Motor Cycle racing and to further the interests of motorists and motor cyclist taking part in motor races and competitions in India or elsewhere to cooperate with others to this end.

2. To acquire, build or otherwise provide race tracks, club houses, dormitories, pavilions, motor house, workshops and other conveniences in connection therewith and to furnish, alter, enlarge, repair, uphold and maintain the same

3 To acquire by purchase, lease or otherwise any race track, land, buildings or hereditaments which may be deemed by the club likely to advance or benefit indirectly the objects.

4. To hire and employ all classes of persons considered necessary for the purpose of the club and to pay to them and to other persons in return for services rendered to the club, salaries, wages, gratuities and pensions.

5. To organise, promote and hold either alone or jointly with any other Association, Club or persons motor race meetings, competitions and reliability trials for motor vehicles or any other athletic sports or pass times and to offer, give or contribute towards prizes, medals and awards therefore and to promote, give or support dinners, balls, concerts and other entertainments arranged in connection thereto.

6. To establish, promote or assist in establishing or promoting, to affiliate with and to subscribe to or become a member of any other Associations or clubs whose objects are similar or in part similar to the objects of the club, or the establishment or promotion of which may be beneficial to the club. Provided that no subscriptions be paid to any such other Associations or club out of the funds of the club except bona fide in furtherance of the objects of the club.

The assessee filed its return of income for the assessment year 2018-19 on 29.09.2018 which was subsequently revised on 06.10.2018. The assessee admitted gross receipt of Rs.9,13,87,929/- and application of income was declared at Rs.7,26,47,493/- and net income was declared at ‘nil’ by claiming exemption u/s.11 of the Act. Accordingly, the AO framed assessment u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Act and verified the claim of exemption u/s.11 on the following issue:-

1. Increase in TDS/TCS claim in the revised return.

2. Continuous accumulation of profit in Trust.

3. High Refund claimed by Trust.

The AO while making computation of receipts and application of funds of the assessee, computed income as under:-

4. Subsequently, the CIT(Exemption) on perusal of income and expenditure account and proposal sent by the Range Head u/s.263 of the Act on 31.03.2022, a show cause notice dated 06.03.2023 was issued with a proposal to revise the assessment framed by AO allowing the claim of exemption u/s.11 of the Act. In view of the amended provisions of section 2(15) of the Act, which has not been examined by the AO and hence, the said order is prejudicial to the interest of Revenue as per CIT(Exemption). The CIT(Exemption) after considering the submissions of the assessee concluded that in view of the decision of Hon’ble Supreme Court in the case of ACIT (Exemptions) vs. Ahmedabad Urban Development Authority, [2022] 449 ITR 1 (SC), the order of AO is erroneous insofar it is prejudicial to the interest of Revenue in term of section 263 of the Act. Hence, he directed the AO to make in depth enquiry with reference to the application of the provisions of section 2(15) of the Act, vis-à-vis nature of activities in light of the decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra. The CIT(Exemption) finally held in para 11 as under:-

“11) The Assessing Officer is directed to make in-depth enquiries with reference to application of the provisions of Sec.2 (1 5) of the Act, vis-à-vis nature of activities and receipts of the assessee in the light of the recent decision of the Hon ’ble Supreme Court in the case of Assistant Commissioner of Income-tax(Exemptions) vs Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278 (SC)/[2022] after affording sufficient opportunity to the assessee during the assessment proceedings.”

Aggrieved against the revision order passed by CIT(Exemption) u/s.263 of the Act, the assessee filed this appeal before us.

5. We have heard rival contentions and gone through facts and circumstances of the case. Before us, the ld.counsel for the assessee argued that the AO while framing assessment u/s.143(3) of the Act has gone into the receipts and application of funds of the assessee received during the year and examined the accumulation allowed u/s.11A of the Act and also examined each and every aspect of claim of exemption. The CIT(Exemption) only on the basis of the decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra, has issued show cause notice and finally passed revision order u/s.263 of the Act with a direction to decide the issue with reference to application proviso to the provision of section 2(15) of the Act in the light of the recent decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra. The ld.counsel for the assessee stated that the CIT(Exemption) apart from Ahmedabad Urban Development Authority, supra, has not examined any facet of the claim of exemption or applicability of proviso to provision of section 2(15) of the Act and simply set aside the assessment. The ld.counsel for the assessee filed copy of judgment of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra, i.e., Supreme Court clarifying its interpretation of the provisions of section 2(15) of the Act and applicability of judgment. The ld.counsel for the assessee took us through the judgment dated 03.11.2022, wherein they have clarified their own judgment and stated that how the judgment will be applied. He drew our attention to para 5, which reads as under:-

“5. The reference to application of the law declared by this court’s judgment, therefore, has to be understood in the context, which is that they apply for the assessment years in question, which were before this court and were decided; wherever the appeals were decided against the revenue, they are to be treated as final. However, the reference to future application has to be understood in this context, which is that for the assessment years which this court was not called upon to decide, the concerned authorities will apply the law declared in the judgment, having regard to the facts of each such assessment year. In view of this discussion, no further clarification is necessary or called for.”

6. On the other hand, the ld.CIT-DR relied on para 4 of the CIT(Exemption) order, which reads as under:-

4) However, in this case, it is seen that the scrutiny assessment has been completed for the A.Y. 2018-19 without examining the allowability of the claim of the assessee Trust for exemption u/s. 11 of the Act, in view of the amended provisions of Sec. 2(15) of the Act and hence the Order dated 04.02.2021 is found to be erroneous in so far as it is prejudicial to the interest of the Revenue.

Subsequently, he took us through the para 8.1 which reads as under:-

“8.1) To sum up, the assessee’s various activities as discussed above, are ‘commercial’ in nature and the same are conducted for a fees or consideration. For the A. Y.2018-19, the assessee trust has mainly generated income from collection of membership fee, entry fee, sponsorship, holding of events in different categories, etc. Thus, there is violation of Sec.2(15) of the Act. Hence, exemption u/s.11 of the Act claimed by the assessee for the A. Y.2018-19 ought to have been denied. Further, in this case, one more condition for denial of exemption u/s. 11 of the Act, as per section 2(15) is also satisfied viz., the aggregate receipts from the activities of the assessee exceeds twenty per cent of the total receipts.”

In view of the above, the ld.CIT-DR stated that CIT(Exemption) has not simply revised the assessment on the basis of decision of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra, but he has given independent finding as regards to applicability and violation of proviso to the provision of section 2(15) of the Act. Hence, he urged the Bench to affirm the order of CIT(Exemption) revising the assessment.

7. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the CIT(Exemption) while passing revision order has not at all examined the aspect of violation of the proviso to provision of section 2(15) of the Act and moreover the AO while framing assessment u/s.143(3) of the Act has examined the claim of exemption u/s.11 of the Act, as is evident from the above computation reproduced from the assessment order. We noted that the Hon’ble Supreme Court while delivering judgment vide order dated 19.10.2022 in the case of Ahmedabad Urban Development Authority, supra has elaborately laid down certain principles and legal position was interpreted vis-a-vis the claim of exemption u/s.11 & 12 r.w.s. 2(15) of the Act. But subsequently vide order dated 03.11.2020, it is clearly clarified that interpreting ‘charity’ under section 2(15) by holding that law declared in its judgment had to be understood in context that they were applicable for assessment years in question, however, future applications had to be understood in context for assessment years which were not called upon and accordingly law declared in said judgment would be applicable, as per facts of each such assessment year. Hence simply on the judgment of Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority, supra, the revision is not possible. We also noted from the revision order apart from that the CIT(Exemption) has not at all deliberated how the assessee has violated the proviso to the provision of section 2(15) of the Act and how the AO has not examined the issue. We have gone through para 4 & 8.5 referred by CIT-DR but we could not find anything which proves that there is violation of the proviso to provision of section 2(15) of the Act. Hence, we quash the revision order and allow the appeal of assessee.

8. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 18th October, 2023 at Chennai.