2003 (12) TMI 276 - AT - Income Tax

Tribunal Upholds Charitable Status and Income Exemption for Trust, Rules Agricultural Income in Favor of Revenue.

The ITAT upheld the CIT(A)'s decision affirming the Trust's charitable status and its income exemption under section 11, except regarding agricultural ... Exemption in respect of income of the trust u/s 11 - Charitable Or Religious Trust - Validity of CIT(A)'s order and application of mind - Utilization of funds - admission of fresh evidence - Agricultural income/loss and its exemption status - HELD THAT:- In the present case, we find that the details of income for the assessment year under reference are at the paper book. The assessee derived income from running a nursing home, interest income on FDRs/investments made out of sale proceeds, agricultural income and other miscellaneous receipts by way of rent etc. aggregating to Rs. 1,61,445. There would hardly be any expenses against such receipts. Against receipts of Rs. 1,36,170 from agriculture, the assessee had incurred agricultural farm expenses of Rs. 2,32,894. Therefore, the net result from agriculture was a loss of Rs. 2.49 lakhs as mentioned in the assessment order. The assessee had received interest income on FDRs/ other investments of Rs. 32,13,031 on which the assessee does not seem to have incurred any expenditure. Thus, interest income of Rs. 32,13,031 was net income and donation of Rs. 29 lakhs to SUKES has been given out of such income. The receipts from hospital activities and nursing home were to the tune of Rs. 24,72,443. Against the same, the assessee had incurred expenses including depreciation of Rs. 31,84,765. After adjusting loss of Rs. 2.49 lakhs against such expenses, remaining expenses of Rs. 29 lakhs or so against receipts from CMC etc. of Rs. 24,72,443, the net result from running CMC would be a loss of Rs. 4 lakhs or so. Thus, it could not be said that assessee was running a nursing home (CMC) purely for commercial consideration or with profit motive as the net result from running such activities was a loss. Page 33 of the paper book for the assessment year 1997-98 further shows that even in the past, net result from running of a nursing home was a loss. Thus profit motive does not seem to be the dominant objective of CMC. In any case, even if there is a little surplus and the objective is not to make profit and such income is reinvested and utilized for the objectives of the trust, the same would qualify for exemption. It is only such business income which has not been utilized for the objects of the trust or where the income assessed by the Assessing Officer is found to be higher than shown in the accounts of the assessee that such income would alone be not entitled to exemption as per section 11(4A). This is not the case here. Thus, we do not find any merit in such submission of the ld. D.R. The expression used for maintenance of separate account in the section is not 'shall'. Thus mere non-maintenance of separate books of account shall not prove fatal to the claim of the assessee for exemption under section 11. The Assessing Officer can still determine the income by apportioning receipts and expenses on estimate basis. The judgment of M.P. High Court in the case of CIT v. Nabhinandan Digamber Jain [2001 (5) TMI 8 - MADHYA PRADESH HIGH COURT] also supports the view that such estimation can be done. Besides, as stated earlier, net result from running of such activities is a loss. There is no income in respect of which it could be said that assessee has claimed exemption. The only income in respect of which assessee has claimed exemption is interest on FDRs/investments made out of sale proceeds of property at New Delhi. Therefore, the question of denying such exemption on this account does not arise. Therefore, this submission is also rejected. Whether the donation given to SUKES would be considered for utilization of income for the objects of the trust ? - It is not correct to say that donation given to SUKES was inconsistent with the objects of the assessee-trust because both, inter alia, include establishment and assistance for running of nursery schools. We have also noted that since SUKES was registered and allowed exemption u/s 80G, the assessee was under a bona fide impression that SUKES shall carry out the objects for which donation has been given. Moreover, as per provisions of section 11 of the Income-tax Act, even SUKES was required to utilize the funds for the objects for which it was created. Any misutilization of funds or utilization of funds other than the objects of the society would disentitle the recipient-society to exemption u/s 11 of the Income-tax Act. It has rightly been held by the ld. CIT(A) that once donation is given by the assessee and the money has parted company, the assessee loses control or power to resort to legal course to recover the amount so donated. Therefore, this fact cannot be held against the assessee. As regards funds diverted by SUKES to business ventures of Brar family, there is no evidence on record that the founders and trustees of the assessee-trust were also the founders or the trustees of SUKES. It, therefore, cannot be said that the amounts diverted to Brar family were under the direction of the assessee-trust. Moreover, the persons to whom funds were diverted were not the persons falling in the prohibitive categories mentioned in section 13. Moreover, the Board's Circular No. 1582 dated 19-10-1984 only directs the field officers to examine this aspect at the time of completing the assessment. But it does not say that exemption in respect of donation given to another institution should invariably be denied. Thus, in the light of the detailed discussion and the legal position discussed above, we are of the considered opinion that CIT(A) was justified in holding that donation given to SUKES by the assessee-trust amounted to utilization of income for the objects of the assessee-trust and, therefore, such income qualified for exemption u/s 11 of the Income-tax Act. Accordingly, we do not find any legal or factual infirmity in the well-reasoned and well-discussed order of ld. CIT(A). The same is upheld and all the grounds of appeal from ground Nos. 1 to 6 are dismissed. Admission of fresh evidence - We find that ld. CIT(A) has not admitted fresh evidence; she has only referred to the subsequent conduct of the assessee for taking a view that assessee was a charitable institution. There is nothing wrong in the approach of the CIT(A). The subsequent conduct of the assessee can be taken into account for deciding the matter if it does not involve admission of fresh evidence. Be that as it may, our findings in the present order are not based on the subsequent conduct of the assessee. Therefore, the submission of the revenue in this respect is rejected. Agricultural income/loss and its exemption status - Once the income is considered as exempt u/s 10, there is no question of including the same for the purpose of allowing exemption u/s 11 of the Income-tax Act. Reliance is also placed on the decision of Madhya Pradesh High Court in the case of Nabhinandan Digamber Jain. Thus, income/loss from agricultural properties held under a trust is to be separately computed and cannot be given set off against income from non-agricultural properties held under the trust eligible for exemption under section 11. The assessee has not disputed the agricultural income computed by the Assessing Officer at loss of Rs.2.49 lakhs. In the light of these facts and circumstances of the case, we are of the considered opinion that ld. CIT(A) was not justified in allowing set off of loss against other income for the purpose of allowing exemption u/s 11 of the Income-tax Act. We, therefore, set aside the order of the CIT(A) and restore that of the Assessing Officer. This ground of revenue's appeal is allowed. In the result, the appeal of the revenue is partly allowed. Issues Involved:1. Validity of CIT(A)'s order and application of mind.2. Charitable status of the Trust and exemption u/s 11(1).3. Admission of additional evidence without opportunity to the Assessing Officer.4. Utilization of funds for charitable purposes.5. Donation to Sardarni Uttam Kaur Educational Society (SUKES) and its alignment with Trust objectives.6. Agricultural income/loss and its exemption status.Summary:Issue 1: Validity of CIT(A)'s OrderThe Revenue contended that the CIT(A)'s order dated 2-3-2001 was 'bad in law and on facts' and lacked proper application of mind.Issue 2: Charitable Status and Exemption u/s 11(1)The Revenue argued that the Trust did not utilize income for achieving its charitable objectives, thus failing to meet the exemption requirements u/s 11(1) of the Income-tax Act. The Tribunal upheld the CIT(A)'s finding that the Trust was charitable, noting its activities and donations aligned with its objectives, including medical relief and education.Issue 3: Admission of Additional EvidenceThe Revenue claimed that the CIT(A) admitted additional evidence without giving the Assessing Officer an opportunity to respond, violating Rule 46A(3) of the Income-tax Rules, 1962. The Tribunal found that the CIT(A) referred to subsequent conduct of the Trust without admitting new evidence, thus rejecting the Revenue's claim.Issue 4: Utilization of Funds for Charitable PurposesThe Revenue argued that the Trust's donation to SUKES was not related to its medical objectives. The Tribunal noted that the Trust's objectives included maintaining and financing nursery schools, which aligned with SUKES's educational purpose. The Tribunal upheld the CIT(A)'s decision that the donation was consistent with the Trust's objectives.Issue 5: Donation to SUKESThe Revenue contended that the donation to SUKES was misutilized and diverted to business ventures of the Brar family. The Tribunal found no evidence that the Trust's funds were used for non-charitable purposes or benefited prohibited persons under section 13. It upheld the CIT(A)'s decision that the donation was for charitable purposes and exempt under section 11.Issue 6: Agricultural Income/LossThe Revenue argued that agricultural income/loss was not incidental to the Trust's objectives and should not be exempt under section 11. The Tribunal agreed, citing that agricultural income is exempt under section 10 and cannot be set off against non-agricultural income for exemption purposes. The Tribunal restored the Assessing Officer's decision on this matter.Conclusion:The Tribunal upheld the CIT(A)'s decision on most grounds, affirming the charitable status of the Trust and the exemption of its income under section 11, except for the treatment of agricultural income/loss, which was ruled in favor of the Revenue. The appeal was partly allowed.