2012 (11) TMI 429 - HC - Income Tax

High Court grants exemption to PHD Chambers of Commerce under Income Tax Act Section 11

The High Court ruled in favor of the assessee, PHD Chambers of Commerce and Industry, granting exemption under Section 11 of the Income Tax Act. The court ... Charitable purpose u/s 2(15) - Income from property held for charitable or religious purposes - whether the provisions of Section 11(4A) were attracted to the assessee’s case - whether by rendering specific services to members and non-members for a fee, a trade, professional or similar association can be said to be carrying on a business activity? Held that:- A survey of the decided cases shows that trade and professional associations have been held entitled to the exemption under Section 11. An association of businessmen who sold goods on hire purchase Add. CIT vs. South India Hire Purchase Association (1978 (2) TMI 59 - MADRAS HIGH COURT), an association of traders dealing in photographic and connected trades Commissioner of Income-tax v. South Indian Photographic and Allied Trades Assn ( 1983 (7) TMI 3 - MADRAS HIGH COURT) and an association consisting of Kirana Merchants Madras Kirana Merchants Association v. CIT, (1976 (8) TMI 29 - MADRAS HIGH COURT) were held by the Madras High Court to be eligible for the exemption under Section 11 notwithstanding that some of the associations charged their members fees for specific services rendered. It is not proper to characterise the activities of the chamber as activities amounting to a business in the generally understood sense of the word, the most important feature of business being profit motive. It has not been suggested by the income tax authorities that the activities carried out by the assessee chamber were propelled by any profit motive. In such circumstances, it is proper to view the activities as driven by a charitable motive in the sense in which a charitable purpose is defined in Section 2(15). In this view of the matter, the provisions of Section 11(4A) are not attracted to the present case and a remand to the AO for finding out whether the activities were incidental to the objectives of the trust and separate books of accounts were maintained for such business was unnecessary - in favour of the assessee. Issues Involved:1. Exemption under Section 11 of the Income Tax Act.2. Applicability of Section 11(4A) of the Income Tax Act.3. Characterization of activities as business or charitable.4. Requirement to maintain separate books of accounts.5. Deduction of depreciation.6. Application of the principle of mutuality.7. Interpretation of Section 28(iii) of the Income Tax Act.Detailed Analysis:1. Exemption under Section 11 of the Income Tax Act:The assessee, PHD Chambers of Commerce and Industry, claimed exemption under Section 11 of the Income Tax Act for the assessment years 2006-07 and 2007-08. The Assessing Officer (AO) denied this exemption, arguing that the assessee was engaged in business activities by rendering services to both members and non-members. However, the CIT(A) accepted the assessee's appeal, stating that there was no profit motive and no business activity, thus directing the AO to allow the exemption. The Tribunal, however, restored the matter to the AO for further inquiry.2. Applicability of Section 11(4A) of the Income Tax Act:Section 11(4A) stipulates that income from business activities is exempt only if the business is incidental to the trust's objectives and separate books of accounts are maintained. The Tribunal held that the assessee's activities were business activities, thus attracting Section 11(4A). The High Court, however, disagreed, stating that the assessee's activities were incidental to its objectives and not driven by profit motive, thus Section 11(4A) was not applicable.3. Characterization of Activities as Business or Charitable:The Tribunal and AO characterized the assessee's activities as business activities. However, the High Court emphasized that the activities were in furtherance of the assessee's charitable objectives and not driven by profit motive. The Court referenced Supreme Court judgments, highlighting that activities leading to economic prosperity for the community are charitable.4. Requirement to Maintain Separate Books of Accounts:The Tribunal directed the AO to ascertain whether separate books of accounts were maintained for the business activities. The High Court found this unnecessary, as it concluded that the activities were not business activities requiring compliance with Section 11(4A).5. Deduction of Depreciation:The Tribunal restored the issue of depreciation deduction to the AO for reconsideration. The High Court did not specifically address this issue in its judgment, focusing instead on the broader applicability of Section 11.6. Application of the Principle of Mutuality:The High Court discussed the principle of mutuality, noting that surplus arising from services to members should not be taxed. Section 28(iii) was enacted to destroy the principle of mutuality, but the Court held that this does not imply the activities are business activities with a profit motive.7. Interpretation of Section 28(iii) of the Income Tax Act:The High Court analyzed Section 28(iii), which charges income from specific services to members under 'profits and gains of business.' The Court concluded that this does not mean the activities are carried on with a profit motive, thus supporting the assessee's claim for exemption under Section 11.Conclusion:The High Court concluded that the assessee's activities were charitable and incidental to its objectives, not driven by profit motive. Therefore, the provisions of Section 11(4A) were not applicable, and the remand to the AO was unnecessary. The substantial question of law was answered in favor of the assessee, granting the exemption under Section 11.