Court: Supreme Court of Nepal, Joint Bench  

Decision Date:2070/09/03 

Petitioner: Pitambar Prasad Acharya (Founder Chairman and Executive Director), on behalf of Development Project Service Center (DEPROSC Nepal) – a non-profit organization registered under the Association Registration Act, 2034.

Defendant

• Government of Nepal, Ministry of Finance, Singha Durbar, Kathmandu  
• Inland Revenue Department (Tax Office)

Facts of the Case 

DEPROSC Nepal is a non-profit organization (NPO) registered under the Association Registration Act, 2034. It obtained a tax‑exemption certificate from the Tax Office after necessary inquiry. DEPROSC also engaged in microfinance activities after obtaining permission under the Financial Intermediary Organization Act, 2055. For the fiscal years 2057/58 to 2067/68, the Tax Office issued an amended assessment imposing income tax on DEPROSC, taking the stance that its income derived from activities outside its declared objectives and was therefore taxable. DEPROSC had been submitting annual reports to the Tax Office regularly since FY 2055/56, and the Tax Office had never previously disputed its tax‑exempt status. The amended assessment was made on 2069/03/24. Instead of pursuing the administrative review and appeal mechanism under the Income Tax Act, DEPROSC directly filed a writ petition in the Supreme Court.

Arguments

Petitioner’s Claims

Under Section 42(1)(f) of the Income Tax Act, 2031 and Section 2(s)(1)(a) of the Income Tax Act, 2058, DEPROSC qualifies as an NPO and is entitled to tax exemption. The Tax Office itself had issued the exemption certificate after due inquiry and had never objected to DEPROSC’s tax‑exempt status in its annual reviews for over a decade. The amended assessment covering 12 years in one go was arbitrary and made without effective remedy under the ordinary process, justifying the invocation of writ jurisdiction under Article 32 and Article 107(2) of the Interim Constitution of Nepal, 2063 and Section 5(2) of the Association Registration Act, 2034.The decision of the Tax Office should be quashed.

Defendant’s Claims

DEPROSC failed to exhaust the statutory remedy: it did not apply for administrative review before the Director General of Inland Revenue nor appeal to the Revenue Tribunal. Hence, the writ petition is not maintainable. Tax exemption is conditional. DEPROSC carried out income‑generating business activities (microfinance) which fall within the taxable ambit, regardless of its non‑profit status.

Legal Provisions Involved

1. Association Registration Act, 2034 – section 5(2)  
2. Income Tax Act, 2031 – section 42(1)(f)  
3. Income Tax Act, 2058 – sections 2(s)(1)(a), 10(g)  
4. Financial Intermediary Organization Act, 2055 – sections 5(2), 24, 31  
5. Interim Constitution of Nepal, 2063 – Articles 32 and 107(2)

Procedural History

• 2069/03/24: Tax Office issued amended assessment order for FY 2057/58–2067/68.  
• DEPROSC bypassed the administrative review and Revenue Tribunal appeal process and filed a writ petition directly in the Supreme Court.  
• 2070/09/03: Supreme Court Joint Bench delivered the final judgment.

Legal Questions Raised

1. Whether the Supreme Court had writ jurisdiction to quash the Tax Office’s decision, given that DEPROSC did not exhaust the ordinary statutory remedies.  

2. Whether DEPROSC falls within the definition of a non‑profit organization under both the former and current Income Tax Acts, and is thereby entitled to tax exemption.  

3. Whether a non‑profit organization can lawfully engage in financial transactions (microfinance) and, if so, whether the income from such transactions is taxable.  

4. Whether the Tax Office’s amended assessment decision was lawful and whether it should be quashed.
 

 Decision of the Court

 1. On Writ Jurisdiction  

If an administrative decision is contrary to law and raises a substantial question of law that requires interpretation, the writ jurisdiction of the Supreme Court cannot be denied merely because the petitioner did not pursue alternative remedies. The Court held that such legal questions can be resolved through a constitutional writ petition.

 2. On Status of DEPROSC as an NPO  

DEPROSC was established with a non‑profit motive and falls squarely within the definition of an “organization entitled to enjoy exemption” under section 42(1)(f) of the Income Tax Act, 2031 and section 2(s)(1)(a) of the Income Tax Act, 2058. Therefore, it is generally entitled to tax exemption.

 3. On Financial Transactions and Taxability  

An NPO registered under the Association Registration Act may lawfully conduct financial transactions if it obtains permission under the Financial Intermediary Organization Act, 2055 (section 5(2)). However, merely being an NPO does not automatically exempt all its income from tax. Income from donations, grants, and contributions may be exempt. Income from purely commercial or profit‑oriented financial transactions is taxable.Tax exemption has limits; the state cannot tax income beyond those limits, nor can an entity claim exemption for commercial profits. Since DEPROSC’s microfinance activities generated profit, such income cannot be wholly tax‑free. The exemption does not extend to profits derived from business‑like financial intermediation.

 4. On Lawfulness of the Tax Office’s Decision  

The Tax Office itself issued the tax‑exemption certificate to DEPROSC. It failed to analyze and segregate which parts of DEPROSC’s income were exempt and which were taxable. It lumped together 12 years’ income and levied tax even on amounts that were clearly exempt (e.g., grants, donations). Because the assessment was made without proper examination and in violation of legal procedure, the Court issued an order of certiorari quashing the Tax Office’s decision and the amended assessment order.
 

Principles Established (Ratio Decidendi)

1. Where a decision is made contrary to law and involves a legal question that the decision‑maker ought to have decided correctly, the Supreme Court’s writ jurisdiction is not barred simply because statutory remedies were not exhausted. Such legal questions can be resolved through constitutional remedy.

2. An entity established with a non‑profit motive and registered under the Association Registration Act qualifies as an NPO under both the Income Tax Act, 2031 and 2058, and is generally entitled to tax exemption.

3. An NPO may engage in financial intermediation after obtaining permission under the Financial Intermediary Organization Act, 2055. However, permission to conduct such activities does not automatically confer tax exemption on income derived from them.

4. Income from purely service‑oriented activities of an NPO may be exempt, but income from profit‑oriented commercial or financial transactions is taxable.  The mere possession of a tax‑exemption certificate does not shield commercial profits from taxation.

5.The tax authority must clearly distinguish between exempt and non‑exempt income. It cannot issue an exemption certificate and later impose tax indiscriminately without undertaking that segregation. An assessment that fails to do so and that taxes exempt income is unlawful and liable to be quashed.

6. Tax exemption is not absolute; it operates within defined legal boundaries. Neither the state may tax beyond those limits, nor may the taxpayer claim exemption for income that falls outside the exempted categories.

7. The fact that the Tax Office did not object to DEPROSC’s tax‑exempt status for many years does not estop it from assessing tax on subsequently discovered taxable income, but any such assessment must be reasoned, segregated, and confined to the taxable portion only. A bulk assessment for over a decade without proper analysis is unsustainable.

Decision

The Supreme Court quashed the amended assessment order of the Tax Office by issuing a writ of certiorari. The matter was remitted to the Tax Office with the direction to reassess DEPROSC’s income by properly segregating exempt income from taxable commercial profits, in accordance with law and the principles laid down in this judgment.