2007 (1) TMI 207 - AT - Income Tax

Tribunal Affirms Charitable Status for Shilp Kala Kendra, Grants Section 11 Tax Exemption for 1977-78, 1980-81, 1981-82.

Samaj Kalyan Parishad Modinagar. Versus Income-tax Officer, Central Circle-xxvi, New Delhi.

Samaj Kalyan Parishad Modinagar. Versus Income-tax Officer, Central Circle-xxvi, New Delhi. - TTJ 107, 302, [2007] 105 ITD 29 (DELHI) (SB) Issues Involved:1. Exemption under Section 11 of the Income Tax Act for the assessee's income from insurance business and Shilp Kala Kendra for the assessment year 1977-78.2. Exemption under Section 11 for the assessment years 1980-81 and 1981-82, focusing on whether the predominant object of Mahila Shilp Kala Kendra was charitable or profit-oriented.Detailed Analysis:Issue 1: Exemption under Section 11 for the Assessment Year 1977-78The Tribunal examined whether the income from the Shilp Kala Kendra and insurance business was exempt under Section 11. Section 13(1)(bb), inserted from April 1, 1977, was pertinent as it stipulated that income from business carried on by a charitable trust for relief of the poor, education, or medical relief would not be exempt unless the business was carried out in the course of the actual carrying out of the primary purpose of the trust. The Tribunal concluded that neither the Shilp Kala Kendra nor the insurance agency business was carried out in the course of the primary purpose of the trust. The Tribunal noted that the insurance agency business, discontinued from December 15, 1976, did not satisfy the provisions of Section 13(1)(bb). It also held that the Shilp Kala Kendra was conducted on commercial lines, with profit-making as the dominant object, thus not qualifying for exemption under Section 11.Issue 2: Exemption under Section 11 for the Assessment Years 1980-81 and 1981-82A Special Bench reconsidered the earlier Tribunal's decision for the assessment year 1977-78. It examined the legal position and factual circumstances, concluding that the Shilp Kala Kendra's activities did not involve a profit motive. Key findings included:- The Kendra did not advertise, had no sales managers, and accepted orders only from a limited number of companies, indicating no profit motive.- The surplus generated was applied towards charitable purposes.- The CIT had granted a certificate under Section 80G and dropped proceedings under Section 263, supporting the charitable nature of the trust.The Special Bench held that the assessee was entitled to exemption under Section 11, as the predominant object was charitable.High Court's Remand and Tribunal's ReconsiderationThe High Court remanded the cases back to the Tribunal for reconsideration in light of Supreme Court decisions in Thiagarajar Charities vs. Addl. CIT and Asstt. CIT vs. Thanthi Trust. The Tribunal, upon reconsideration, acknowledged that the assessee pursued an object of general public utility, not education, thus Section 13(1)(bb) was not applicable. The Tribunal emphasized that the charitable object did not involve a profit motive, as the surplus from the Shilp Kala Kendra was consistently applied towards charitable activities.Supreme Court PrecedentsThe Tribunal referred to the Supreme Court's ruling in Surat Art Silk Cloth Manufacturers Association, which established that if the predominant object of an activity is charitable, the mere fact that it yields profit does not alter its charitable character. The Tribunal also considered the Thiagarajar Charities case, which differentiated between the objects of a trust and the powers given to trustees to achieve those objects. The Supreme Court held that if the business profits feed the charitable purposes, it cannot be said that profit-making was the real object.ConclusionThe Tribunal concluded that the assessee's activities did not involve a profit motive and were aimed at achieving charitable purposes. The assessee's claim for exemption under Section 11 was upheld for all the assessment years in question, following the principles laid down by the Supreme Court and the rule of consistency as established by the Delhi High Court in similar cases. The appeals were allowed in favor of the assessee.