2014 (7) TMI 87 - AT - Income Tax

Deep Mela not commercial activity, fund utilization issue remanded for verification

The tribunal determined that organizing 'Deep Mela' was not a commercial activity but incidental to the trust's objectives. The issue of accumulation and ... Exemption u/s 11 - Charitable activity - profit from an exhibition viz., 'Deep Mela' - commercial activity or not – Requirement to maintain separate books of accounts – Held that:- The activity of organising 'Deep Mela' is not a commercial activity - What is prohibited under the Act is carrying on business and not generating income in furtherance of its objects - The assessee was to generate income to finance its educational/charitable activities – Relying upon Assistant Commissioner Of Income-Tax Versus Thanthi Trust [2001 (1) TMI 80 - SUPREME Court] - a business whose income is utilised by the trust or the institution for the purpose of achieving the objectives of the trust or the institution surely is a business which is incidental to the attainment of the objectives of the trust - The objectives of the society would include financing charitable activities - the activity of organising 'Deep Mela' is incidental to the attainment of its objectives. - Decided in favor of assessee. Non utilization of amount - accumulation - Held that:- The AO has pointed out that the assessee failed to utilise the amount within the period allowed u/s. 11(2) of the Act and assessee filed details of its utilization – the issue of accumulation and utilisation of the amount accumulated is to be remitted back to the AO for verification of the details – Decided partly in favour of Assessee. Issues Involved:1. Validity of assessment under section 143(3) without a valid return of income in response to notice under section 148.2. Classification of 'Deep Mela' activity as a business activity.3. Utilization of income from 'Deep Mela' for charitable purposes.4. Maintenance of separate books of account for 'Deep Mela' activity.5. Utilization of accumulated funds within the specified period under section 11(3)(c).Issue-wise Detailed Analysis:1. Validity of Assessment under Section 143(3):The assessee argued that the assessment under section 143(3) was invalid due to the absence of a valid return of income in response to notice under section 148. The CIT(A) dismissed this ground after detailed discussion, stating that the assessment was protected by the provisions of Section 292BB, which validates the assessment despite procedural lapses if not objected to immediately.2. Classification of 'Deep Mela' as a Business Activity:The assessee contended that the 'Deep Mela' was organized to generate funds for its educational and charitable activities, and thus should not be considered a business activity. The CIT(A) observed that the 'Deep Mela' involved commercial activities like selling handicrafts and inviting advertisements, thus classifying it as a business activity. The CIT(A) relied on the amended section 11(4A) which exempts business income if it is incidental to the attainment of the trust's objectives and utilized for such purposes.3. Utilization of Income from 'Deep Mela':The CIT(A) noted that the income from 'Deep Mela' was not fully utilized for the trust's objectives during the relevant years, violating the conditions laid down in the case of Thanthi Trust. The surplus income figures for the years in question were highlighted, showing partial utilization.4. Maintenance of Separate Books of Account:The CIT(A) held that the assessee failed to maintain separate books of account for the 'Deep Mela' activity as required under section 11(4A). The assessee argued that it maintained basic books and could identify income and expenditure related to the exhibition, but this was not accepted by the CIT(A).5. Utilization of Accumulated Funds:The AO assessed additional income for failure to utilize accumulated funds within the specified period under section 11(3)(c). The assessee argued that the surplus from current year's income could be used for purposes for which earlier years' funds were accumulated. The CIT(A) agreed with the AO, noting that the assessee failed to file the required application for accumulating the current year's surplus within the time allowed under section 139(1).Conclusion:The tribunal held that organizing 'Deep Mela' was not a commercial activity but incidental to the trust's objectives. The issue of accumulation and utilization of funds was remanded to the AO for verification. The appeals were partly allowed for statistical purposes, and the stay applications were dismissed as infructuous.