2013 (10) TMI 745 - AT - Income Tax

Trust's Commercial Activities Denied Tax Exemption

Assistant Commissioner of Income-tax Versus Amritsar Improvement Trust

Assistant Commissioner of Income-tax Versus Amritsar Improvement Trust - TMI Issues Involved:1. Deletion of addition by treating surplus income as business income.2. Deletion of disallowance of employees' PF debited to income and expenditure account.3. Qualification for exemption under Section 11 of the Income Tax Act.4. Nature of the trust's activities as charitable or commercial.Detailed Analysis:1. Deletion of Addition by Treating Surplus Income as Business Income:The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 5,38,12,792 made by the AO by treating the surplus income as business income. The AO argued that the assessee-trust's activities were confined to developing new housing/commercial projects, benefiting only a handful of people who purchased properties from the trust. The AO relied on the Tribunal, Chandigarh Bench's decision in the case of PUDA vs. CIT, which held that the activities were of a commercial nature and not charitable. The CIT(A) reversed this, holding that the trust's activities were charitable in nature and entitled to exemption under Section 11, relying on the Punjab & Haryana High Court's decision in the case of Improvement Trust, Moga.2. Deletion of Disallowance of Employees' PF Debited to Income and Expenditure Account:The AO disallowed Rs. 20,78,026 debited to the income and expenditure account for employees' PF, arguing that the assessee did not fulfill the conditions for deduction under Section 36(1)(iv) as the PF was kept in the form of FDRs/Savings accounts. The CIT(A) held that the assessee-trust had utilized the entire income towards its main objective and that the PF amount was enforceable under the Provident Fund Act, resulting in no taxable surplus.3. Qualification for Exemption under Section 11 of the Income Tax Act:The AO argued that merely granting registration under Section 12AA does not exempt the assessee from fulfilling the requirements of Sections 11 and 12. The AO is within his power to verify whether the income and expenditure were utilized for achieving the trust's objectives. The CIT(A) held that the trust's activities were charitable and that the trust had applied more than 85% of its gross receipts towards its aims and objectives, thereby qualifying for exemption under Section 11.4. Nature of the Trust's Activities as Charitable or Commercial:The AO argued that the trust's activities were of a commercial nature, similar to private builders, and did not qualify as charitable. The CIT(A) relied on the Punjab & Haryana High Court's decision, which held that the Improvement Trust's activities were of general public utility and charitable in nature.Conclusion:The Tribunal found that the CIT(A) had not adequately addressed the AO's concerns regarding the details of the activities undertaken by the trust. The Tribunal emphasized that registration under Section 12AA does not preclude the AO from examining whether the trust's activities meet the requirements of Sections 11 and 12. The Tribunal upheld the AO's decision, stating that the trust's activities did not qualify for exemption under Section 11 and were of a commercial nature. Both appeals filed by the Revenue were allowed, and the CIT(A)'s orders were cancelled.