2023 (12) TMI 1183 - AT - Income Tax

Trust exemption denied for acting as facilitator collecting fees instead of direct charitable activities

The ITAT Ahmedabad addressed a trust's claim for exemption under sections 11 and 12, which was denied by authorities who found the assessee acted as a ... Exemption u/s 11 and 12 - exemption denied as assessee is not engaged in charitable activities - CIT(A) held that the Assessee is a facilitator for arranging funds for charitable organisations, and that the assessee receives fees from the donors as well as the donees - assessee submitted that the activity of the assessee is that it acts as a bridge between the donor and the donee i.e. the activity of the assessee is that on receipt of donation, the assessee identifies suitable recipients, who are not the direct beneficiaries of such donation but are usually other trusts who are engaged in conducting charitable activities. The role of the assessee is to identify such genuine organizations / trusts which are engaged in carrying out charitable activities in the form of giving relief to the poor etc. HELD THAT:- The assessee had further given the donation to other trusts for the purpose of carrying out charitable work itself would not disentitle the assessee from denial of exemption. Before us, we observe that it is not the case of the Department that the trusts / organisations to whom the assessee had given the donations for carrying out charitable activities had not in fact carried out any charitable activities in the first instance. Secondly, it would be useful to reproduce the relevant extracts of the decision rendered by Hon’ble Supreme Court in the case of the Ahmedabad Urban Development Authority[2022 (10) TMI 948 - SUPREME COURT] as held that while carrying out charitable activities, the assessee trust may also collect nominal cost / consideration with the objective to effectuate the carrying out of the charitable activities. However, this is subject to the condition that such charge is only confined to the extent the same is required for the purpose of carrying out charitable activities and should not take the colour of professional fees / business income. Thus in interest of justice, the matter is being restored to the file of the AO to analyse the impact of the observations made by the Hon’ble Supreme Court in the decision of AUDA [supra] more specifically on the observations made by the Hon’ble Supreme Court with regards to incidental earning of income, in the light of the assessee’s set of facts. AO after considering of the facts of the assessee’s case may then decide whether, looking into the assessee’s facts, the assessee is engaged primarily in rendering of services for consideration (retained earnings) or whether looking into the totality of facts of the assessee’s case, it could be inferred that such retained earnings are only kept by the assessee to the extent of facilitating the above activities. Assessing Officer may also analyse the impact of decisions which have held that the assessee acts as a bridge between the donor and the recipient, even then, looking into the particular facts of assessee’s case, it may be inferred that the assessee is carrying out charitable activities within the meaning of Section 2(15) - Accordingly, looking into the totality of facts of the assessee’s case, the Assessing Officer may also analyse whether the aforesaid decisions have a bearing on the assessee’s set of facts. In the result, the primary matter involved in all the Assessment Years under consideration before us is restored to the file of the Assessing Officer for carrying out the analysis as directed above. Issue raised by the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether an entity that receives donations and forwards them to registered charitable organizations, while retaining a portion to meet administrative expenses, qualifies as carrying out 'charitable purpose' within the meaning of Section 2(15) and is entitled to exemption under Sections 11 and 12, or is hit by the proviso to Section 2(15) and Section 13(8) as carrying on activity in the nature of trade, commerce or business or rendering services for a fee. 2. Whether depreciation can be allowed to the entity and, if so, under what provision, when concurrent claims for depreciation and capital expenditure are made in the context of charitable application of income (relevant to AY 2014-15). 3. Whether corpus donations received by the entity should be brought to tax or are exempt under Section 11(1)(d), in light of the entity's characterization of activities and treatment of receipts. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of activities - charitable purpose vs. trade/business under proviso to Section 2(15) and applicability of Section 13(8) Legal framework: The definition of 'charitable purpose' in Section 2(15) and the proviso inserted w.e.f. 1-4-2009 excluding 'advancement of any other object of general public utility' if it involves trade, commerce, business or receipt of cess/fee/consideration (subject to a monetary threshold); exemption under Sections 11 and 12 depends on the entity carrying out charitable activities; Section 13(8) restricts benefits to private companies or trusts in certain commercial situations. The concept that incidental charges or nominal cost recovery do not convert charitable activity into business (as clarified by the Supreme Court) is part of the governing principles. Precedent treatment: Earlier tribunal and court decisions cited in the judgment include authorities holding that donor-trusts applying income to other charitable trusts may still be entitled to exemption; authorities upholding that providing services or goods at cost/nominal consideration do not normally constitute trade/business; and an earlier tribunal decision in the assessee's own case (AY 2009-10) which found the receipts were chargeable as advisory fees exceeding the proviso threshold and therefore not charitable. The Supreme Court's decision (referred to as AUDA) refined the test for incidental income and held that cost-based or nominal charges incidental to charitable objects do not convert the activity into trade/business unless charges are markedly above cost. Interpretation and reasoning: The Tribunal noted conflicting findings in earlier tribunal decision (AY 2009-10) and subsequent Supreme Court guidance on incidental income. The Assessing Officer characterised the entity as a facilitator rendering advisory/monitoring services and treated retained donations as fees/consideration, invoking the proviso to Section 2(15). The CIT(A) affirmed that view relying on the AY 2009-10 tribunal order. The Tribunal observed that the AY 2009-10 order did not consider the Supreme Court's later elucidation regarding nominal/incidental charges. The Tribunal therefore directed remand to the Assessing Officer to re-examine facts in light of the Supreme Court's principle: charges necessary for effectuating charitable objects and limited to cost/nominal margin do not convert activity into trade/business; but charges markedly above cost or where receipts are the main activity could be treated as business and fall within the proviso. The Tribunal instructed the Assessing Officer to assess whether the retained portion was incidental and cost-related (per AUDA) or constituted primary, fee-based activity (per prior tribunal view). The Tribunal also directed consideration of precedents holding that acting as a bridge between donor and donee does not per se negate charitable character. Ratio vs. Obiter: Ratio - The Tribunal's operative direction is that where earlier findings predate controlling Supreme Court guidance on incidental receipts, fact-specific reassessment is required to determine whether retained receipts are nominal/incidental (permitted) or fees/professional consideration (excluded). Obiter - observations summarising various earlier authorities and their outcomes on analogous facts serve as guidance but the Tribunal did not overrule prior decisions; instead it treated them as precedents to be applied factually. Conclusion: Issue remitted to the Assessing Officer for de novo factual and legal examination applying the Supreme Court's test on incidental receipts and existing decisions on donor-donee relationships. Statutory relief on Issue 1 allowed for statistical purposes by remand (i.e., appeals restored to AO for reconsideration consistent with directions). Issue 2: Allowability of depreciation where capital expenditure is claimed as application of income to charitable purposes Legal framework: Depreciation is an allowable claim under income-tax provisions subject to its being an allowable deduction; where expenditure is claimed as application of income to charitable purposes, concurrent claims for capital expenditure application and depreciation require examination of whether capital assets are held and used for charitable objects and how tax treatment of such assets interacts with application of income rules. Precedent treatment: The judgment does not extensively canvass specific precedents on the concurrency point but indicates that the question was argued and is fact-specific; the Tribunal did not decide the issue on merits but remanded it to Assessing Officer. Interpretation and reasoning: Because Issue 1 was remitted and will affect the viability of exemption claims and characterization of receipts/expenditure, the Tribunal held it appropriate in the interest of justice to remit Issue 2 to the Assessing Officer along with the primary issue so that concurrent claims for depreciation versus application of income can be examined consistently with the AO's factual finding on charitable character and application/accumulation rules. Ratio vs. Obiter: Ratio - The appropriate procedural course is remand for concurrent factual and legal adjudication by the Assessing Officer; Obiter - no substantive rule on allowability of depreciation was laid down. Conclusion: Issue remitted to the Assessing Officer for de novo consideration; Department's appeal on Issue 2 allowed for statistical purposes (i.e., restored to AO). Issue 3: Taxability of corpus donations Legal framework: Corpus donations are addressed under Section 11(1)(d) and related provisions; whether corpus receipts are taxable depends on whether they qualify as application/accumulation of income or are retained/treated differently per the organization's objects and use. Precedent treatment: Authorities cited in the judgment indicate that donor-trusts applying income to donee charitable trusts are not necessarily disentitled to exemption; corpus treatment depends on facts and whether donee trusts actually carry out charitable activities. The Tribunal did not decide corpus taxability but linked its resolution to the primary characterization of the entity's activities. Interpretation and reasoning: Because characterization under Issue 1 will determine whether the entity's receipts (including corpus donations) are eligible for exemption, the Tribunal remanded Issue 3 to the Assessing Officer for reconsideration in the light of the AO's fresh findings pursuant to Issue 1. The Tribunal accepted the assessee's submission that, if charitable character is established, corpus donations may be exempt under Section 11(1)(d), but declined to adjudicate substantively pending remand. Ratio vs. Obiter: Ratio - Corpus taxability must be reconsidered by the Assessing Officer after determining whether receipts are incidental/nominative or fee-based; Obiter - expression that corpus may be exempt if Issue 1 resolves favourably. Conclusion: Issue remitted to the Assessing Officer for de novo consideration; appeals on Issue 3 allowed for statistical purposes (restored to AO for relevant assessment years). Procedural disposition The Tribunal restored the matters to the Assessing Officer for fresh factual and legal analysis in light of the Supreme Court's test on incidental receipts and relevant precedents, allowing the appeals for statistical purposes and directing reconsideration of Issues 1-3 together to ensure consistent treatment of charitable character, depreciation claims, and corpus receipt taxability.