NLU not conducting 'Business', exists solely for Legal Educational Purposes: ITAT quashes Penalty for Failure to Audit [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has recently quashed the penalty demanded failure to audit the National Law University (NLU) under Section 271B of the Income Tax Act, 1961.

The appeal has been preferred by the Assessee against the order dated 20.07.2022 of CIT(A), National Faceless Appeal Centre (NFAC) in Order No. ITBA/ NFAC/S/250/2022-23/1043951594(1) arising out of an appeal before it against the penalty order passed by the AO of Rs. 1,50,000/- imposed under Section 271B of the Income Tax Act by way of an order dated 24.01.2022.

The facts in brief are that the assessee university filed a return of income for the assessment year 2018-19 declaring a total income of Rs. Nil. The assessee has claimed exemption under Section 10(23C)(iiiab) of the Act for Rs. 28,69,49,640/- in its return of income for the year under consideration. The case was assigned for faceless assessment.

Notice under Section 143(2) of the Income Tax Act was issued and the case was taken up for scrutiny. During the assessment proceedings AO was not satisfied with the claim of exemption for the purpose of Section 10(23C)(iiiab) of the Income Tax Act read with Rule 2BBB of the Income Tax Rules.

The reply of the assessee was not found sustainable and the AO held that the assessee was not eligible for the aforesaid exemption. At the same time, AO observed that the assessee university has not audited its account as per Clause (b) of sub-section (1) of Section 12A of the Income Tax Act despite the fact that its total income as computed under the Income Tax Act without giving effect to the provisions of Section 12 exceeds the maximum amount which is not chargeable to Income Tax in F.Y. 2017-18.

Therefore the AO initiated penalty proceedings under Section 271B of the Income Tax Act. Accordingly, notice under Section 271B was issued against the assessee, NLU which was taken to appeal in a futile attempt before the CIT(A), culminating in the present appeal.

The Authorized Representative of the National  Law University (NLU) repeated the contentions as raised before the Tax Authorities below. Annual accounts for the year 2017-18 and the National Law University Act, 2007 were also produced. The Departmental Representative, however, defended the order of Tax Authorities below.

The tribunal bench of Accountant Member Anil Chaturvedi and Judicial Member Anubhav Sharma observed that “It can be appreciated that the assessee university has been established by the Act of Legislative Assembly of the National Territory of Delhi, and Subsection (3) of Section 3 of the University Act, provides for the establishment of University and that “ The University shall be engaged in teaching and research in law and in allied disciplines.”. The preamble of the University Act makes it very apparent that the purpose of the establishment of a Law University is the establishment of a national-level institution of excellence in the field of legal education and research in the NCT of Delhi.’

It was also noted by the two-member tribunal that, “The object of the university as specified in section 4 of the University Act, the powers and function of the University defined u/s 5 grossly indicate that the University is not engaged in any ‘business’ as understood for the purpose of the Act. It is existing solely for educational purposes. It is not established for the purpose of profit.“

It was thus held that “Tax Authorities below have fallen in grave error on facts and law while invoking the penalty provisions”, allowing the appeal of the assessee-National Law University.

To Read the full text of the Order CLICK HERE

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