2018 (11) TMI 117 - AT - Income Tax

Construction income not charitable, denied tax exemption under Sections 2(15) & 11: Tribunal ruling

The Tribunal dismissed the appeals, ruling that the assessees' activities did not qualify as charitable under Section 2(15) and were not incidental to the ... Exemption u/s. 11 - denial of exemption as activities of the assessee did not fall under under any of the objectives such as relief for the poor, education, medical relief, the preservation of environment (including water sheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest but comes under the objectives of advancement of any other object of general public utility - though the assessee are issued a certificate u/s. 12A of the Act by the CIT - Held that:- Even if is held not to constitute a business held under trust, but only as a business carried on by or on behalf of the trust, so long as the profits generated by it are applied for the charitable objects of the trust, the condition imposed u/s. 11(4A) of the Act should be held to be satisfied, entitling the trust to the tax exemption. These observations have to be understood in the light of the facts before the Supreme Court in the case of Thanthi Trust [2001 (1) TMI 80 - SUPREME COURT] wherein the trust carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of education which falls u/s. 2(15) of the Act. The newspaper business was incidental to the attainment of the object of the trust, namely that of imparting education and the profits of the newspaper business are utilized by the trust for achieving the object of imparting education. In this case, there is no such nexus between the activities carried on and the objects of the assessee that can constitute an activity incidental to the attainment of the objects, namely, to promote cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self-reliance among the members of the public etc. Being so, we are inclined to hold that the assessee is not entitled for any exemption u/s. 11 of the I.T. Act. - Decided against assessee. Issues Involved:1. Granting of exemption under Section 11 of the Income Tax Act.2. Application of the first proviso to Section 2(15) of the Income Tax Act.Detailed Analysis:1. Granting of Exemption under Section 11 of the Income Tax Act:The appeals concern the denial of exemption under Section 11 of the Income Tax Act. The assessees were granted registration under Section 12A, but the Assessing Officer denied exemption under Section 11, reasoning that the activities did not fall under the objectives such as relief for the poor, education, or medical relief, but under 'advancement of any other object of general public utility.' The turnover exceeded the prescribed limit, leading to the conclusion that the activities were not charitable.2. Application of the First Proviso to Section 2(15) of the Income Tax Act:The Assessing Officer's decision was upheld by the CIT(A). The assessees argued that they were charitable societies promoted by the Government of Kerala, not engaged in trade, commerce, or business for profit. They undertook public utility works funded by MPs, MLAs, and local bodies, with no profit motive, and received only consultancy charges for administrative expenses. They cited various government orders and judicial precedents to support their claim that their activities were charitable and not commercial.Tribunal's Findings:1. Objectives and Activities:The Tribunal examined the objectives of the assessee, which included generating innovative housing ideas, prefabricating housing materials, and serving as a nodal agency for housing programs. The activities during the assessment year included construction projects funded by MPs, MLAs, and local bodies, and the sale of materials to the public.2. Nature of Activities:The Tribunal noted that the assessee's activities involved construction projects and sale of materials, which were organized and systematic. The Assessing Officer treated these activities as taxable under Section 2(15), arguing that they were in the nature of trade, commerce, or business.3. Interpretation of Section 2(15):The Tribunal emphasized that the advancement of any other object of general public utility is not charitable if it involves trade, commerce, or business, and if the receipts exceed Rs. 25 Lakhs. The assessee's activities were deemed to fall under this category, making them ineligible for exemption under Section 11.4. Section 11(4A) Analysis:The Tribunal considered whether the business activities were incidental to the objectives of the trust. It concluded that the construction activities were not incidental but predominant, and thus not protected by Section 11(4A). The business activities were not inextricably linked to the charitable objectives.5. Application of Income:The Tribunal rejected the argument that using surplus funds for charitable purposes entitled the assessee to exemption. It distinguished the case from the Supreme Court's decision in ACIT vs. Thanthi Trust, where the business was directly linked to the charitable objective of imparting education.Conclusion:The Tribunal dismissed the appeals, holding that the assessee's activities were not charitable under Section 2(15) and were not incidental to the trust's objectives under Section 11(4A). The income generated from the construction activities was taxable, and the assessees were not entitled to exemption under Section 11.