2024 (6) TMI 566 - AT - Income Tax

Charitable trust retains section 11 exemption despite rental income as commercial nature not proven

The ITAT Jodhpur upheld CIT(A)'s decision granting exemption u/s 11 to a charitable trust. The AO had denied exemption claiming the trust's activities ... Exemption u/s 11 - charitable activity u/s 2(15) - AO observed that the assessee's activities were commercial, with rental receipts exceeding Rs. 25 lakhs, thus not qualifying as charitable - AO concluded that the trust's activities were in the nature of trade, commerce, or business, thus falling under the amended section 2(15) - AO concluded that assessee is not entitled for benefit of exemption of income u/s 11 of the LT. Act and its case is being assessed as AOP, Capital expenditure debited in Income & Expenditure a/c is not an allowable expenses - CIT(A) allowed exemption/deduction. HELD THAT:- Assessee is registered u/s. 12AA of the act and their objects are considered as charitable in nature. There is no material brought on record to support the fact that the assessee is acting with profit motive so far in the activities carried out. The receipt that the assessee received is invested or expended for the object of the society. AO merely noted that major source of revenue if the donation is reduced then the income is on account of rent income and therefore, he considered the activity of the assessee trust as commercial in nature and invoked the proviso to section 2(15) and denied the benefit of section 11 & 12 to the assessee. We have gone the finding recorded by the ld. AO he has merely stated that the assessee is earning the rental income and the same was considered as commercial in nature. But while doing so he failed to bring on record as to why the rental income was treated by him as commercial income. Even the apex court in the case of ACIT vs. Ahmedabad Urban Development authority [2022 (10) TMI 948 - SUPREME COURT] accepted that if the mark up is up to 20 % of the overall receipt it can be granted exemption provided the quantitative limit ( of not exceeding 20% ) under second proviso to section 2(15) for receipt from such profits, is adhered to. There is no finding in the order of the lower authority is that the assessee is earning exceeding 20 % of the overall receipt and the mark up is exceeding the standard set by the apex court. We also take note of the fact that the CBDT in circular NO. 11/2008, dated 19-12- 2008 clarified that 'In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. Assessee, who claim that their object is charitable purpose within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.' Merely the receipt would not fall the character as commercial income of the assessee. Not only that the apex case in the case of AUDA (supra) held that the word is 'total receipts', thus it appears to be farfetched an argument that certain receipts shall be deducted to arrive at for the purpose of prescribed percentage, especially when there is no such mention in the Section itself. The proviso to section 2(15) provides that the advancement of any object of general public utility shall not be a charitable purpose unless such activity is undertaken in course of actual carrying out of such advancement and the aggregate receipt from such activity do not exceed 20% of the total receipt. Thus, when the receipt from an activity undertaken with object of general public utility but such receipt do not exceed 20% of the total receipt, the proviso would not be applicable. In the present case the receipt from rent is in course of actual carrying out of the objects of the general public utility and such receipt is below 20 % (sl.5 of submissions thereunder before the ld. CIT(A)). Alternatively, if it all it is noted that the proviso to section 2(15) is attracted, then in that circumstances, exemption of section 11 cannot be withdrawn in its entirety. As the intent and purpose is tax that business income which arises because of an activity in the nature of trade, commerce and business. Based on these observations we do not find any infirmity in the finding of the ld. CIT(A) in allowing the benefit section 11 & 12 to the assessee - Decided against revenue. Issues Involved:1. Charitable Purpose and Exemption u/s 112. Capital Expenditure Claim3. Corpus Fund TreatmentSummary:Issue 1: Charitable Purpose and Exemption u/s 11The revenue challenged the CIT(A)'s decision to grant the assessee society exemption u/s 11, arguing that the society was primarily engaged in earning rental income, constituting more than 85% of its receipts, which falls under the proviso to section 2(15) as activities in the nature of trade, commerce, or business. The AO observed that the assessee society's activities were commercial, thus not charitable, and denied the exemption. The CIT(A) found that the society's activities, including providing properties for social, cultural, charitable, and religious activities at nominal charges, did not deviate from its charitable objectives. The CIT(A) noted that the rental income was less than 20% of the total receipts, adhering to the proviso to section 2(15). The ITAT upheld the CIT(A)'s decision, emphasizing that the society's activities were charitable and the rental income was within permissible limits.Issue 2: Capital Expenditure ClaimThe AO disallowed the assessee's claim of Rs. 5,61,09,633/- as capital expenditure, arguing that the society was not entitled to exemption u/s 11 and thus assessed it as an AOP. The CIT(A) allowed the claim, noting that since the assessee was eligible for exemption u/s 11, the capital expenditure should be allowed. The ITAT agreed with the CIT(A), confirming that the capital expenditure was rightly allowed as the society was eligible for exemption u/s 11.Issue 3: Corpus Fund TreatmentThe AO treated the corpus donation of Rs. 4,31,35,150/- as general revenue receipts, stating that the assessee failed to produce specific directions from donors, which is mandatory for treating voluntary contributions as corpus donations u/s 11(1)(d). The CIT(A) found that the assessee provided letters and PAN details of donors specifying the corpus nature of donations and directed the AO to treat the amount as corpus donation. The ITAT upheld the CIT(A)'s decision, noting that the donations were received with specific directions and utilized for constructing the bhawan, thus qualifying as corpus donations exempt u/s 11(1)(d).Conclusion:The ITAT dismissed the revenue's appeal, affirming the CIT(A)'s decision to grant the assessee society exemption u/s 11, allow the capital expenditure claim, and treat the corpus donations as exempt under section 11(1)(d).