NLU Delhi not engaging in business; existing solely for educational purposes: ITAT quashes ₹1.5 lakh penalty

In a relief for National Law University, Delhi (NLU Delhi), the Income Tax Appellate Tribunal (ITAT) recently quashed a penalty imposed on the University under the Income Tax Act, holding that it is not engaged in business and rather exists only for educational purposes [NLU Delhi v. Additional Commissioner of Income Tax]..A Bench of Anil Chaturvedi (Accountant Member) and Anubhav Sharma (Judicial Member) noted that the preamble of the NLU Delhi Act makes it very apparent that the purpose of the University is the establishment of a national-level institution of excellence in the field of legal education and research."The object of the university as specified in section 4 of the University Act, the powers and function of the University defined under section 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 purpose of profit," the order stated..NLU Delhi had filed an appeal against the January 24, 2022 order passed by the Assessing Officer (AO), who imposed a ₹1,50,000 penalty on the University under Section 271B of the IT Act.The facts leading to this order were that the University had filed a tax return for the assessment year 2018-19 declaring a total income of Nil as it claimed exemption under Section 10(23C)(iiiab) of the IT Act for ₹28,69,49,640 in income for the said year.The case was assigned for faceless assessment and a notice under Section 143(2) of the Act was issued to the University. During the assessment proceedings, the AO was not satisfied with the claim of exemption as raised by the University. .In its May 24 order, the ITAT said that to justify invoking the mandate of Section 44AB (proper auditing of accounts), it was necessary to see if the University can be said to be engaged in "business" as defined under Section 2(13) of the Act. As per this provision, “business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."The penalty order and the assessment order, both specifically mention that assessee is a local authority. Once, the Revenue accepts assessee to be local authority then certainly it cannot be considered to be one engaged in ‘business’ or to be earning profit, in the ordinary course of it objectives and functions of imparting legal education and legal research in the NCT of Delhi," the Appellate Tribunal observed.The AO, the Bench said, has not at all examined the constitution and composition of various authorities of the University, its objectives, mode of achieving objective etc, to give a conclusive finding that it is engaged in "business" or is earning profits from the same."Thus on that account alone the penalty order is not sustainable," the ITAT held..[Read order]