2013 (11) TMI 54 - AT - Income Tax

Trust qualifies for tax exemption under Section 11 for 2009-2010; proviso to Section 2(15) inapplicable.

The Tribunal held that the proviso to Section 2(15) did not apply to the assessee trust as its activities were charitable and not profit-driven. ... Benefit u/s 11 - Object of assessee doubted - Charitable purpose u/s 2(15) - Profit motive - Held that:- assessee trust was registered with Charity Commissioner and the copy of the certificate issued by the Charity Commissioner has been filed in the compilation before us. The Commissioner of Income-tax, Gujarat has registered the assessee-trust under Section 12A. The Joint Commissioner of Sales-Tax (Legal) vide its order dated 2.9.2006 has noted that the activities of the assessee-trust are also not business like, but are allied activities to meet the objectives of the trust, and hence as per the exception in notification (notification section 2(10)), the applicant cannot be considered as trade - for the applicability of proviso to section 2(15), the activities of the trust should be carried out on commercial lines with intention to make profit. Where the trust is carrying out its activities on non-commercial lines with no motive to earn profits, for fulfillment of its aims and objectives, which are charitable in nature and in the process earn some profits, the same would not be hit by proviso to section 2(15) of the Act - aims and objects of the assessee-trust are admittedly charitable in nature, and was granted registration by the Charity Commissioner as well as by the Commissioner of Income-Tax (Exemption) under Section 12A of the Act. The assessee has carried out its activities for the fulfillment of its object of breeding the cattle and to improve the quality of the cows and oxen and had sold semen, fodder, milk etc. and in the process some profit was earned by the assessee-trust, which is incidental in nature. The activities undertaken by the assessee-trust for the fulfillment of its charitable objects on non-commercial lines are not hit by the proviso to section 2(15) of the Act. For the applicability of newly inserted proviso to section 2(15) of the Act, the objects of the trust, the purpose and manner of activities of the Trust, whether to make profit or whether the profit earned was incidental to the activities of the trust, overall facts and circumstances in its entirety, the volume of the profit received by the trust, and whether the activities of the trust were conducted in a way to fulfill its object of the trust, which have essentially to be charitable in nature, and the intention of the trustees, all have to be considered to arrive at a just and fair conclusion. In fact the cases where profit making is the object should be distinguished from the cases, where, although the objects of the trust are wholly charitable, but some profit was made out of the activities undertaken by the Trust for the purpose of achieving the objects of the general public utility. The objective of the proviso to section 2(15) is to deny exemption to such assessee who are engaged in business activities in the garb of charitable purpose. It shall however not effect the cases of charitable institutions, which are carrying on charitable activities genuinely and the facts of the each case has to be seen to decide whether the proviso to section 2(15) is applicable to the facts of the case of the assessee. Mere selling some product at a profit will not ipso facto hit the assessee by applying the proviso to section 2(15) and deny the exemption available under Section 11 of the Act. The intention of the trustees and the manner in which the activities of the charitable trust/institution are undertaken are highly relevant to decide the issue of applicability of proviso to section 2(15) of the Act. If the interest on investment received by the assessee during the year amounting to ₹ 26,15,060/- is taken away from the income side of the assessee, there is a net excess of expenditure over the income during the relevant period, and it cannot be said that the assessee has carried out its activities in the advancement of its charitable objects in a way to earn profit on commercial line. Even if at the end of the accounting year, there is some profit received by the assessee while conducting the charitable objects of the Trust, the same shall be merely incidental in nature and shall not attract the applicability of proviso to section 2(15) of the Act. There is no material/evidence brought on record by the Revenue which may suggest that the assessee was conducting its affairs on commercial lines with motive to earn profit or has deviated from its objects as detailed in the Trust Deed of the assessee - proviso to section 2(15) is not applicable to the facts and circumstances of the case, and the assessee was entitled to exemption provided under Section 11 of the Act for the relevant assessment year - Decided in favour of assessee. Issues Involved:1. Applicability of proviso to Section 2(15) of the Income Tax Act.2. Nature of activities of the assessee trust.3. Denial of benefit under Section 11 of the Income Tax Act.4. Exclusion of capital grants from total income.5. Grant of depreciation on capital expenditure.6. Applicability of Section 11(1)(b) to a trust created before the commencement of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Applicability of proviso to Section 2(15) of the Income Tax Act:The core issue was whether the proviso to Section 2(15) applied to the assessee trust for the assessment year 2009-2010. The proviso states that the advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on any activity in the nature of trade, commerce, or business. The Tribunal found that the proviso would apply only if the activities were conducted with a profit motive. The Tribunal emphasized that the activities of the trust should be evaluated based on the nature, scope, extent, and frequency of the activity, considering overall facts and circumstances.2. Nature of activities of the assessee trust:The assessee trust argued that its activities were for 'relief to the poor' and not commercial in nature. The Tribunal examined the trust deed and found that the trust was established by Mahatma Gandhi and had charitable objectives, including breeding cattle and improving the quality of cows and oxen. The trust was registered with the Charity Commissioner and under Section 12A of the Income Tax Act. The Tribunal concluded that the activities were conducted on non-commercial lines and any profit earned was incidental to the charitable activities.3. Denial of benefit under Section 11 of the Income Tax Act:The Tribunal noted that the AO and CIT(A) had denied the benefit of Section 11, which provides tax exemption for income derived from property held under trust for charitable purposes. The Tribunal held that since the activities of the trust were charitable and not carried out with a profit motive, the trust was entitled to the exemption under Section 11.4. Exclusion of capital grants from total income:The assessee argued that capital grants amounting to Rs. 1,08,60,086 should be excluded from total income since capital expenditure was not allowed due to the denial of benefit under Section 11. The Tribunal did not specifically address this issue separately but implied that the exclusion would be considered in light of the overall decision favoring the assessee.5. Grant of depreciation on capital expenditure:The assessee sought depreciation on capital expenditure of Rs. 1,66,30,885 incurred during the year. The Tribunal's decision to allow the benefit under Section 11 implied that depreciation on capital expenditure would be granted as per the Act.6. Applicability of Section 11(1)(b) to a trust created before the commencement of the Income Tax Act, 1961:The assessee contended that as a trust created before the commencement of the Income Tax Act, 1961, the provisions of Section 11(1)(b) should apply, ensuring that income derived from property held under trust for its purposes would not be included in the total income. The Tribunal's decision to grant exemption under Section 11 supported this contention.Conclusion:The Tribunal concluded that the proviso to Section 2(15) did not apply to the assessee trust as its activities were charitable and not conducted with a profit motive. Therefore, the trust was entitled to the exemption under Section 11 of the Income Tax Act. The appeal of the assessee was allowed, and the decision was delivered in the peculiar facts and circumstances of the case, not to be taken as a precedent for other charitable trusts engaging in business under the guise of charitable activities. The order was pronounced in open court.