2019 (9) TMI 1598 - AT - Income Tax

Trust's Charitable Activities Upheld for Tax Exemptions

The Tribunal upheld the CIT(A)'s decisions, confirming the trust's activities as falling under 'education' and 'medical relief' for charitable purposes ... Charitable purpose - imparting education - medical relief - proviso to section 2(15) - fee versus donation - predominant object test - profit motive - investment modes under section 11(5) - forfeiture under section 13(1)(d) - disallowance limited to relevant income - application of income - donations to other trusts - loss on sale of assets - income and expenditure account treatmentCharitable purpose - imparting education - medical relief - proviso to section 2(15) - Whether the appellant-trust's activities in teaching Sudarshan Kriya fall within 'imparting education' and 'medical relief' and are therefore charitable, or whether they fall within the residuary limb subject to the proviso to section 2(15). - HELD THAT: - The Tribunal examined the objects of the trust, the structured methodology of Sudarshan Kriya training, and medical/research material on therapeutic and wellness benefits. It accepted authorities holding that systematically imparted yoga qualifies as 'imparting education' and may also amount to 'medical relief'. The proviso to section 2(15) applies only to trusts falling within the residuary limb where commercial/business activities are carried on; it does not apply to trusts whose predominant objects fall within the specified limbs of relief to the poor, education or medical relief. On the material before it the Tribunal found the predominant objects and activities of the trust were to impart education in yoga and provide medical relief to the public; charging of modest contributions did not convert the activity into commercial trade or business. Consequently the proviso to section 2(15) was held inapplicable.Activities in teaching Sudarshan Kriya are charitable as 'imparting education' and 'medical relief'; proviso to section 2(15) does not apply.Fee versus donation - predominant object test - profit motive - Whether receipt of fees or contributions (including from corporate participants) affects the trust's charitable character or renders its activities commercial. - HELD THAT: - The Tribunal applied the predominant-object test: mere charging of fees or receipt of donations by participants, including cases where payors treated amounts as fees for tax deduction purposes, does not by itself demonstrate a profit motive. Statistical material showed vast numbers of small-value donors and many participants attending without fees. Reliance was placed on precedent that the organisation's objects, not the quantum of surplus, determine predominant object. On these facts there was no aliment of profit motive and the charging of contributions did not extinguish the trust's charitable character.Charging of fees or receipt of donations did not negate charitable character; no commercial trade or profit motive found.Investment modes under section 11(5) - forfeiture under section 13(1)(d) - disallowance limited to relevant income - Effect of investments made otherwise than in the modes specified in section 11(5) and consequence under section 13(1)(d) - whether breach leads to loss of exemption on entire income or only on income attributable to such investment. - HELD THAT: - The Tribunal considered the statutory scheme of sections 11(1)/(2)/(5) and section 13(1)(d), CBDT Circular No.387/1984 and precedents. The circular and judicial authority indicate that contravention of specified investment modes leads to exclusion/forfeiture of the income attributable to the offending investment, not automatic denial of exemption for the trust's entire income. On the facts the Assessing Officer identified interest from specified companies; CIT(A) allowed exemption in respect of interest from Shriram Transport Finance Co. after examining facts. The Tribunal endorsed the approach that only the relevant income is to be forfeited/excluded and the balance income remains eligible for exemption if otherwise in conformity with section 11.Breach of section 11(5) yields forfeiture only qua the income from the non compliant investment; entire income is not automatically denied exemption under section 11.Application of income - donations to other trusts - 80G recognition - Whether donations made by the assessee to other institutions (including corpus donations) qualify as application of income and are allowable, and whether the Assessing Officer's partial disallowance was correct. - HELD THAT: - The Tribunal analysed section 11(2) and the explanation concerning transfers to other registered institutions, and considered authority distinguishing current-year donations from accumulated funds. It noted the CIT(A)'s direction to verify recipient trusts' charitable status and 80G recognition before treating the transfers as application of income. Given that donations from current income (not accumulated under section 11(2)) are permissible provided recipients are charitable, the Tribunal upheld CIT(A)'s direction and confirmation of allowance subject to the AO's verification of recipients' status. Corpus donations were similarly left to verification of whether they were voluntary and with specific directions.Donations (including corpus) can constitute application of income if made from current income and recipients are charitable; CIT(A)'s allowance subject to verification of recipient trusts/80G status is sustained.Loss on sale of assets - income and expenditure account treatment - Whether the assessee could claim loss on sale/write off of assets as deduction once the trust was held to be an exempt entity. - HELD THAT: - The Assessing Officer had treated the trust as an AOP and denied separate loss, but CIT(A) accepted the trust's exempt status and allowed the loss to be reflected in the income and expenditure account. The Tribunal found no infirmity in treating the profit or loss on disposal of assets in the accounts of an exempt trust and upheld the allowance of the claimed loss.Loss on sale/write off of assets allowed in income and expenditure account once trust is held to be exempt.Final Conclusion: All appeals filed by the Revenue (for A.Y. 2011-12, 2012-13, 2013-14 and 2014-15) are dismissed: the Tribunal held the trust's Sudarshan Kriya activities to be charitable as 'imparting education' and 'medical relief' (proviso to section 2(15) inapplicable), found charging of contributions did not establish profit motive, confined consequences of any non compliant investments to the income attributable thereto, and sustained the CIT(A)'s allowances of donations, corpus contributions (subject to verification), and loss on sale of assets. Issues Involved:1. Interpretation of Section 2(15) of the Income Tax Act.2. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act.3. Treatment of donations as application of income.4. Treatment of corpus donations.5. Treatment of loss on sale of assets.Issue-wise Detailed Analysis:1. Interpretation of Section 2(15) of the Income Tax Act:The primary issue was whether the activities of the assessee trust, particularly the teaching of Sudarshan Kriya, fell under the definition of 'charitable purpose' as per Section 2(15) of the Act. The Assessing Officer (AO) contended that these activities were aimed at 'advancement of general public utility' and involved trade, commerce, or business, thus not qualifying as charitable. However, the Commissioner of Income Tax (Appeals) (CIT(A)) and the Tribunal found that the activities fell under 'education' and 'medical relief,' thus qualifying as charitable. The Tribunal relied on various judgments, including those from the Delhi High Court and the Supreme Court, which held that activities like teaching yoga and Sudarshan Kriya could be considered as imparting education and providing medical relief.2. Eligibility for Exemption under Sections 11 and 12 of the Income Tax Act:The AO denied the exemption under Sections 11 and 12, claiming that the trust violated Section 13(1)(d)(i) by investing in non-specified modes. However, the CIT(A) and the Tribunal found that the investments were not made from accumulated income under Section 11(2) but from current income, thus not violating Section 13(1)(d)(i). The Tribunal also noted that the trust had withdrawn the non-compliant investments promptly upon realizing the mistake, showing no malafide intention.3. Treatment of Donations as Application of Income:The AO allowed only 50% of the donations made to other charitable trusts, arguing that the donations were not allowable as they did not meet the criteria under Section 80G. The CIT(A) and the Tribunal, however, held that donations made from current income, as opposed to accumulated income, could be considered as application of income. The Tribunal directed the AO to verify the charitable status of the recipient trusts and allow the donations accordingly.4. Treatment of Corpus Donations:The AO had denied the benefit of corpus donations under Section 11(1)(d), arguing that the trust's activities were not charitable. The CIT(A) and the Tribunal, however, found that the trust's activities were indeed charitable and directed the AO to verify whether the donations were received with a specific direction to form part of the corpus. The Tribunal upheld the CIT(A)'s decision, allowing the corpus donations.5. Treatment of Loss on Sale of Assets:The AO denied the claim of loss on the sale of assets, arguing that the trust was not eligible for exemption under Sections 11 and 12. The CIT(A) and the Tribunal, however, held that since the trust was eligible for exemption, it could claim the loss on the sale of assets in its income and expenditure account. The Tribunal found no infirmity in the CIT(A)'s order and upheld the decision.Conclusion:The Tribunal dismissed all the appeals filed by the Revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal confirmed that the assessee trust's activities fell under 'education' and 'medical relief,' qualifying as charitable purposes under Section 2(15). The trust was found eligible for exemptions under Sections 11 and 12, and the donations, corpus donations, and loss on sale of assets were all treated favorably for the assessee.