2017 (5) TMI 679 - AT - Income Tax

Appeal reversed: corpus donations treated as quid pro quo for hall rental, s.11 exemption denied, s.2(15) applies

The Deputy Commissioner of Income-tax (Exemptions) -II, Chennai Versus M/s. Chennai Kammavar Trust

ITAT Chennai (AT) upheld the AO's denial of exemption under s.11, finding that amounts labeled as corpus donations (Rs.11,28,000) were quid pro quo ... Granting exemption u/s.11 - earning income from letting out of Kalayana Mandapam for marriage and other functions - whether regard to the terms of the Trust Deed, it can be said that the activities carried on by the assessee in the form of running of community hall, viz 'Chennai Kamawar Kalyana Mahal” was itself held under the Trust - Held that:- In this case, it is brought on record by the AO that the assessee collected ₹ 11,28,000/- as corpus donation from 93 persons who performed functions at “Chennai Kamawar Kalyana Mahal”. In addition to this, ₹ 4,70,000/- was rent for utilizing the facilities of “Chennai Kamawar Kalyana Mahal” by 53 persons, totaling is ₹ 15,98,000/-. As against this, in guise of corpus donation collected ₹ 11,28,000/- from the persons, who have performed the functions in the “Chennai Kamawar Kalyana Mahal”. That amount of ₹ 11,28,000/- cannot be considered as corpus donation instead it should be a rental income. On enquiry by assessing officer, it was proved that the persons who paid rent of community hall and who paid the corpus donation were same. This is an act of quid pro for hiring the hall and no question of voluntary contribution in this payment. It is also to be noted that the dates exhibited in both cases were same. Being so, the provisions of sec.2(15) of the Act is squarely applicable as total receipts of rent from community hall exceeds ₹ 10 lakhs, and we do not find any infirmity in the order of AO in rejecting the claim of exemption u/s.11 of the Act. Accordingly, the order of Ld.CIT(A) is reversed and the order of AO is restored. - Decided against assessee. Issues:Granting exemption u/s.11 of the Act to a charitable trust despite earning income from business activities; Interpretation of sec.2(15) of the Act in relation to income derived from letting out a community hall for marriage functions; Determining whether the business activities are incidental to the charitable objects of the trust as per Trust Deed.Detailed Analysis:Issue 1: Granting exemption u/s.11 despite business activitiesThe Revenue appealed against the CIT(A) order granting exemption u/s.11 of the Act to a charitable trust earning income from letting out a community hall for marriage functions. The Revenue contended that the trust's activities were hit by the amendment of sec.2(15) of the Act, which includes business activities. The trust claimed that the income from letting out the hall was property income and not business income, hence eligible for exemption u/s.11. The Tribunal analyzed the Trust Deed and relevant provisions to determine if the business activities qualified for exemption.Issue 2: Interpretation of sec.2(15) in relation to community hall incomeThe Tribunal examined whether the income generated from letting out the community hall was incidental to the charitable objects of the trust as per the Trust Deed. The trust argued that the income was applied for charitable purposes, making it eligible for exemption u/s.11(4). However, the Tribunal found that the running of the hall was not inextricably linked to the trust's charitable objectives, leading to a denial of exemption under sec.11 of the Act. The Tribunal referenced relevant case laws to support its decision.Issue 3: Trust's claim of corpus donation and rental incomeThe AO highlighted discrepancies in the trust's claim of corpus donation and rental income collected from functions at the community hall. The AO found that the corpus donation was actually rental income, as the same individuals paid for both. This raised concerns of quid pro quo and exceeded the threshold for exemption u/s.11. The Tribunal upheld the AO's findings, emphasizing the application of sec.2(15) due to the total rental receipts exceeding the limit.In conclusion, the Tribunal allowed the Revenue's appeal, reversing the CIT(A) order and restoring the AO's decision to deny exemption u/s.11 of the Act to the charitable trust. The judgment delved into the Trust Deed, business activities, and income sources to determine the eligibility for tax exemption, emphasizing the interpretation of sec.2(15) and the incidental nature of business activities to the trust's charitable objectives.