Testing and Consultancy Services provided for a fees without profit motive not falls within the ambit of Section 2(15) of Income Tax Act
Brief Facts of the Case and Question
Brief Facts: The assessee is registered under the provisions of Section12A of the act with effect from 27.4.1982 and the assessee has also been notified as a charitable organization u/s 10(23C) (iv) of the Act vide notification no. 1348 dated 31.10.2007 and these registration, approval and notification are still subsisting as on the date. Assessee filed its return of income on 30.3.2010 declaring return income at nil. Thereafter the assessment in this case was completed on 28.12.2011 at an income of Rs. 4,39, 07,729/- being accumulated amount in financial year 2003-04 not utilized within a period of 4 years which was expired on 31.3.2009.
Assessing Officer accepted nil return of income u/s 143(3) of the act but made addition of accumulated amount as per Clause (a) given after third proviso to section 10 (23C) (iv) of the Act. Subsequently on going through the records it was noticed by the DIT (E) that the assessee had received under the head of “revenue from tax laboratory” of Rs. 7.72 crores and “consultancy receipts” of Rs. 62.47 lakhs which were found to be commercial in nature by the DIT (E). The DIT (E) proceeded to issue notice u/s 263 of the Act in pursuance by observing that as per amended provisions of Section (2) (15) of the Act.
a. Whether Receipts of appellant from Test Laboratory Services of Rs. 7.72 crores and Consultancy Services of Rs. 62.47 lakhs do not fall within the ambit of Section 2(15) of the Income Tax Act.
b. Whether the appellant is not eligible for claiming exemption u/s 11 of the Act on income derived from the above receipts.
c. Whether In proceedings u/s 143(3), the AO had not examined the issue of taxability of above receipts in light of provisions of section 2(15) of the Act.
Contention of the Assessee:
The Ld. Assessee’s Representative (AR) submitted that the assessment order passed u/s 143(3) of the Act was neither erroneous nor prejudicial to the interest of Revenue and the DIT(E) erred in holding and observing that the receipts of the assessee appellant from test laboratory services and consultancy services do not fall within ambit of Section 2(15) of the Act and therefore, the Assessee is not eligible from claiming exemption u/s 11 of the Act on the income derived from the above receipts. The Ld. AR vehemently contended that during the assessment proceedings u/s 143(3) of the Act, the AO examined and verified the issue of taxability of above receipts in the light of provisions of Section 2(15) of the Act and the DIT (E) was not justified in holding that the AO had not examined the same.
The Ld. AR also placed reliance on various decisions including decision of Hon’ble Delhi High Court in the case of Institute of Chartered Accountant of India Vs. DGI reported in 347 ITR 99(Delhi) and submitted that the first proviso to Section 2(15) of the Act to include any transaction for a fee or money and the activity would be “business” if it is undertaken with a profit motive, but in some cases this may not be determinative and the profit motive test should be specified in the context of Section 10(23C) (iv) of the Act. The Ld. AR further pointed out that the Assessee association was established with the main object of improving public transport system in the country.
The Ld. AR strenuously contended that for providing these kind of services to the State Transport Undertakings which provide transport facility to a common public, a very nominal and economical rate is charged. The AR lastly pointed out that these activities are being carried out in the furtherance and advancement of the object of the assessee as set out in the Memorandum of Association and that too not on commercial lines.
Contention of Revenue:
The Ld. DIT(E) issued a notice u/s 263 of the Act vide dated 06.02.2014 to the assessee and after considering the written submissions of the assessee filed on 10.3.2014 the DIT(E), rejected the submissions and objection of the assessee and passed impugned order by holding that the order passed by the AO is erroneous inasmuch as it is prejudicial to the interest of the Revenue and the DIT(E) set aside the original assessment order with the directions to the AO to frame the assessment afreshing after due application of mind and law and after calling and examining necessary details / evidences and giving due opportunity of hearing to the assessee.
It is noted that the assessment of the above mentioned assessee was completed in December, 2011 at an income of Rs. 4,39,07,729/- as the assessee has failed to utilize the accumulated sum within the specified period. Activities of the Trust are covered under the last limb of amended section 2(15) i.e. “Advancement of any other object of general public utility”. A perusal of TDS certificates and Income & Expenditure A/c revealed that the assessee had receipts under the heads “Revenue from Test Laboratory” of Rs. 7.72 crores and “Consultancy receipts” of Rs. 62.47 lacs, which were commercial in nature and their aggregate sum exceeded Rs. 10 Lacs
Held by Apex court:
We have heard the rival submissions that the assessee association was established with the main object of improving public transport system in the country and its objects as per memorandum of association clearly reveals that the objects of the assessee association are dedicated towards improving road safety standards and to promote facilities for advancing the skill of employees of State Transport Undertakings Through regular training and research which cannot be held as business activities. It is also pertinent to note that the Ld. DR has not disputed this fact that the assessee association was provided exemption u/s 11 of the act in the earlier assessment orders on the revenue receipts from test laboratory charges and consultancy charges.
Now we consider the effect of insertion of proviso to section 2(15) of the Act. As per recent judgment of Hon’ble High Court of Delhi in the case of ICAI Vs. DGIT (Supra). It was held that the first proviso to section 2(15) of the Act carves out and exception which excludes advancement of any object of general public utility from the scope of charitable purpose to the extent that it involves carrying on any activity in the nature of “Trade”, “Commerce” or “business” or any activity of rendering certain services in relation to any “trade”, “commerce” or “business” for a cess or fee or any other consideration, irrespective of the nature of the use or obligation or retention of income from such activity After going through the objects and activities of the assessee association it is clear that the assessee association did not carry on any “business”, “trade” or “commerce” with the main object of earning profit. The activity of imparting support services to State Road Transport Undertakings without any profit motive are being conducted in furtherance of the object for which assessee association had not constituted by the Government of India.
Accordingly, appeal of the assessee is allowed and impugned notice and order u/s 263 of the act and all subsequent proceedings and orders in pursuant thereto are quashed. In the result, the appeal of the assessee association is allowed.
Analysed by our Team Member Shruti Juneja
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