2021 (10) TMI 1055 - AT - Income Tax

ITAT Upholds Charitable Purpose Status for Fine Arts Organization

The ITAT dismissed the Revenue's appeals, upholding that the assessee's activities aligned with the definition of 'charitable purpose' under section 2(15) ... Charitable purpose as defined in the proviso to section 2(15) of the Income Tax Act - dominant purpose / profit motive test - incidental commercial activity doctrine - principle of consistency in appellate orders - 15% statutory exemption under section 11 and application of income - principles of natural justice / right to be heard - remand for fresh hearing on deemed income under section 11(3)Charitable purpose as defined in the proviso to section 2(15) of the Income Tax Act - dominant purpose / profit motive test - incidental commercial activity doctrine - principle of consistency in appellate orders - 15% statutory exemption under section 11 and application of income - Whether the activities of the Assessee Society for the assessment years under appeal are charitable and hence eligible for exemption under sections 11/12 having regard to the proviso to section 2(15). - HELD THAT: - On the facts found and recorded by the CIT(A) and having regard to the assessee's long history and the factual material showing that receipts from renting galleries and sale of paintings were incidental and materially lower than the society's overall expenditure, the Tribunal found no infirmity in the CIT(A)'s conclusion that the society is not primarily driven by a profit motive. The Tribunal applied the dominant purpose or profit motive test and the principle that incidental or ancillary commercial receipts do not convert an institution into a non charitable entity where the prime object remains charitable. The Tribunal placed weight on consistent earlier appellate decisions in the assessee's case and the coordinate and High Court precedents which limit the proviso to section 2(15) to institutions primarily engaged in trade, commerce or business. Consequently, the CIT(A)'s allowance of exemption under section 11 (including direction to allow the 15% statutory exemption and application of income) was upheld and the Revenue's appeals were dismissed. [Paras 6, 7, 10]Revenue's appeals dismissed; the Assessee Society held to be eligible for exemption under sections 11/12 for the years under appeal with consequential reliefs upheld.Principles of natural justice / right to be heard - remand for fresh hearing on deemed income under section 11(3) - Whether the CIT(A)'s direction to include unspent amounts as deemed income under section 11(3) could be sustained without affording the assessee a specific opportunity to be heard on that conclusion. - HELD THAT: - The Tribunal found that the CIT(A) had reached an adverse conclusion on the taxability of the unspent amount without confronting the assessee with that specific conclusion and without giving a reasonable and effective opportunity of being heard. Even if the statutory consequences were apparent, principles of natural justice require that an administrative authority afford notice and an opportunity before taking an adverse view affecting the assessee. For this procedural shortcoming the Tribunal did not decide the correctness of the tax conclusion on merits but set aside that portion of the CIT(A)'s order and directed restoration to the file of the CIT(A) with directions to give the assessee a specific opportunity to make submissions and thereafter pass a speaking order in accordance with law. [Paras 11]Impugned appellate treatment of the unspent amount set aside and remitted to the CIT(A) for fresh consideration after giving the assessee a reasonable opportunity of hearing.Final Conclusion: The Revenue appeals for AYs 2013-14 and 2014-15 are dismissed on the finding that the society's activities are charitable; the assessee's appeals are allowed for statistical purposes in so far as the CIT(A)'s treatment of the unspent amount is set aside and remitted for fresh, speaking consideration after affording the assessee a specific opportunity to be heard. Issues Involved:1. Whether the activities carried out by the assessee fall under the definition of 'charitable purpose' as defined under section 2(15) of the Income Tax Act, 1961.2. Whether the activities carried out by the assessee are in the nature of trade, business, or commerce.3. Whether the CIT(A) erred in including a sum as income to be taxed under section 11(3) without giving the assessee an opportunity to show cause.4. Whether the unspent amount considered as deemed income under section 11(3) is subject to any exemption or benefit.5. Whether the assessee should be allowed to set off the unspent amount deemed as income against the excess of application over income for the assessment year 2013-14.Detailed Analysis:Issue 1: Charitable Purpose under Section 2(15)The Revenue contended that the activities of the assessee did not fall under 'charitable purpose' as defined in section 2(15) of the Income Tax Act, 1961. The CIT(A) and ITAT, however, found that the assessee's activities were primarily for the promotion and development of Fine Arts and Crafts in India, which aligns with the definition of charitable purposes. The assessee society, established in 1938, was engaged in activities such as organizing exhibitions, art camps, and providing financial assistance to needy artists. The ITAT upheld the CIT(A)'s finding that these activities were not driven by profit motives and were aimed at fulfilling the society's charitable objectives.Issue 2: Nature of Activities - Trade, Business, or CommerceThe Assessing Officer (AO) had concluded that the assessee was engaged in business activities by renting out galleries and selling paintings. However, the CIT(A) and ITAT found that the galleries were rented out at nominal charges to help artists showcase their work, and the society incurred higher costs than the receipts from these activities. The sale of paintings was also not a regular activity but involved paintings left by artists during art camps. The ITAT referenced past decisions and the Delhi High Court's judgment in India Trade Promotion Organization vs. DGIT (E), which held that incidental activities carried out by a charitable organization do not constitute trade, business, or commerce if the primary objective is not profit-making.Issue 3: Inclusion of Income under Section 11(3) without Opportunity to Show CauseThe assessee argued that the CIT(A) included a sum as income to be taxed under section 11(3) without giving an opportunity to show cause. The ITAT agreed that the assessee should have been given a specific opportunity to make submissions before the conclusion was drawn. The procedural shortcoming was acknowledged, and the matter was remanded back to the CIT(A) to provide the assessee with a reasonable opportunity of being heard.Issue 4: Exemption or Benefit for Unspent Amount under Section 11(3)The CIT(A) had concluded that the unspent amount considered as deemed income under section 11(3) was to be taxed without any exemption or benefit. The assessee argued that this conclusion was reached without proper hearing. The ITAT did not comment on the correctness of the conclusion but emphasized the need for procedural fairness and remanded the issue back to the CIT(A) for a fresh decision after hearing the assessee.Issue 5: Set Off of Unspent Amount against Excess ApplicationThe assessee contended that the unspent amount deemed as income under section 11(3) should be allowed to be set off against the excess of application over income for the assessment year 2013-14. The ITAT found that this issue was also not properly addressed due to the lack of opportunity given to the assessee. The matter was remanded back to the CIT(A) to consider this aspect after hearing the assessee.Conclusion:The ITAT dismissed the Revenue's appeals, finding no merit in their arguments. The assessee's appeals were allowed for statistical purposes, with directions to the CIT(A) to provide a reasonable opportunity for the assessee to be heard and to pass a speaking order in accordance with the law. The ITAT emphasized the importance of procedural fairness and the need to consider the dominant objective of the assessee's activities in determining their charitable nature.