Contractual Receipts Cannot Be Treated as Business Income Merely Because They Are Earned Through Agreement: ITAT Upholds CIT(A)’s Ruling

The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has dismissed the appeal filed by the Income Tax Department, which rejected the tax exemption of the assessee society under section 11 of the Income Tax Act, 1961.

The assessee, the Gujarat Environmental Service Society, is a charitable trust registered under the Bombay Public Trust Act and also under Section 12A/12AB of the Income-tax Act. The society is involved in environmental protection activities such as garden maintenance, plantation, sanitation work, etc.

The Assessing Officer denied the exemption under Section 11, holding that the society had earned income mainly from contractual work and that it was not derived from property held under trust. Concluding the same, the assessing officer rejected the exemption claimed by the assessee under section 11 and taxed the surplus income under “Income from Other Sources.”

The assessee challenged this addition before the CIT(A). The assessee argued that its activities were not carried out with a profit motive. The CIT(A) noted that the society’s activities fall under the ambit of “charitable purpose” as per section 2(15). The CIT(A) further observed that the society’s activities fall under the scope of the preservation of the environment.

It was also noted that similar issues had already been ruled in favour of the assessee in previous years by the ITAT, and the assessee’s registration under section 12A was not cancelled. Also, the contractual receipts earned by the assessee were in furtherance of its charitable objects. Considering all these facts, the CIT(A) allowed the assessee to claim the exemption under section 11 of the Income Tax Act, holding that the contractual receipts cannot be treated as business income just because the income was earned through contracts.

The ITAT upheld the CIT(A)’s decision, observing that the contractual receipts were only incidental and in the furtherance of the charitable objects of the society. The Tribunal also noted that the society’s registration under Section 12A had not been cancelled and there was no violation of Section 13. Since the issue was already resolved by the Tribunal in the assessee’s own case for the previous year, the Tribunal held that the assessee is eligible for exemption under section 11 of the Income Tax Act. Therefore, the revenue’s appeal was denied.