1979 (12) TMI 90 - AT - Income Tax

Appeals granted, reassessment additions vacated, assessee qualifies as charitable trust for tax exemption.

The Tribunal allowed the appeals, vacating the additions made in the reassessments and affirming that the assessee qualifies as a charitable trust ... - Issues Involved:1. Reopening of assessments under Section 147(b) of the Income Tax Act, 1961.2. Determination of whether the assessee qualifies as a charitable trust under Section 11 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Reopening of Assessments under Section 147(b) of the Income Tax Act, 1961The appeals pertain to reassessments under Section 143(3) read with Section 147(a) of the Income Tax Act, 1961, for the assessment years 1972-73, 1973-74, 1974-75, and 1975-76. The original assessments had accepted the assessee's claim that it was a charitable trust entitled to exemption under Section 11 of the Act. However, the assessments were reopened under Section 147(b) based on the Income Tax Officer's (ITO) belief that the income had escaped assessment due to the assessee running a business, which fell under the ambit of Section 2(15) of the Act.The reasons recorded by the ITO for reopening the assessments were based on the Supreme Court's judgment in the case of Indian Chamber of Commerce vs. CIT West Bengal (101 ITR 797), which held that profit motive is a normal incident of business activity, and if a trust carries on a business, it involves the carrying on of an activity for profit. The ITO concluded that the assessee could not be termed as a charitable trust and was not entitled to exemption benefits under Section 11 of the Act.The assessee contended that the reopening was invalid as there was no new information or belief that income had escaped assessment. However, the Tribunal agreed with the Revenue, stating that the reopening of assessments was justified based on the reasons recorded.2. Determination of Whether the Assessee Qualifies as a Charitable Trust Under Section 11 of the Income Tax Act, 1961To determine whether the assessee qualifies as a charitable trust under Section 11, the Tribunal examined the trust deed dated 18th July 1959. The trust deed outlined several objects, including providing facilities for education, aiding educational and cultural institutions, promoting physical and cultural activities, and providing assistance to orphans, widows, and the poor.The Tribunal emphasized the definition of 'charitable purpose' under Section 2(15) of the Act, which includes relief to the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. The primary objects of the trust were to promote education and provide relief to the poor, which fall under the first three heads of charitable purposes.The Tribunal referred to the Supreme Court's judgment in Dharmadeepti vs. CIT, which clarified that the words 'not involving the carrying on of any activity for profit' qualify only the last head of charitable purposes and not the earlier three heads. Therefore, if the primary purpose of the trust is relief of the poor and education, the trust qualifies as a charitable institution even if it carries on an activity for profit.The Tribunal also cited the Supreme Court's majority opinion in a judgment dated 19th November 1979, which disapproved of earlier decisions that suggested any activity yielding profit disqualifies a trust from being charitable. The test is whether the predominant object of the activity is to sub-serve the charitable purpose or to earn profit. If the former, the trust remains charitable even if it incidentally earns profit.Based on these legal principles, the Tribunal concluded that the assessee's primary objects were charitable, and the clauses allowing the trust to run a business were merely ancillary to achieving its charitable purposes. Therefore, the assessee was entitled to exemption under Section 11 of the Act.Conclusion:The Tribunal allowed the appeals, vacating the additions made in the reassessments and affirming that the assessee qualifies as a charitable trust entitled to exemption under Section 11 of the Income Tax Act, 1961.