2025 (2) TMI 152 - AT - Income Tax

Charitable trust hospital entitled to Section 11 exemption for chemist shop, canteen, rental receipts as incidental activities

ITAT Mumbai held that a charitable trust running a hospital was entitled to exemption under section 11 for receipts from various activities including ... Exemption u/s 11 - charitable purpose u/s 2(15) - receipts from running of the chemist shop - various receipts incidental to the objects of the Assessee/trust or not? - HELD THAT:- Admittedly the Assessee is running an Hospital and also having in-house patient's facilities, therefore, the medicines are essentials for the treatment of in-house patients especially. The assessee is also giving treatment to out- patients, and therefore out-patients and even outsiders as well, are at their relatives have an option to purchase the medicines from the assessee's Pharmacy store, as there cannot be any restriction. The Assessee may be on commercial basis but in fact, directly-indirectly providing medical relief by selling medicines to the in-house patients and outpatients and outsiders as well and therefore protected by CBDT Circular (supra) as well. It is also not the case of the revenue that the assessee established Pharmacy store exclusively for outpatients/outsiders and has utilized surplus from the operation of the chemist shop, for other objects than the prescribed objects. Hence on the aforesaid analysis, we hold that receipts from renting of Pharmacy shop is incidental and ancillary to the dominant object and purpose to provide medical facility, and thus the assessee complies with first condition of section 11(4A) of the Act. In respect of the Interest earned by the assessee on FD, PCO receipts, Miscellaneous income, receipt from sale of scrap, canteen, lunch & farm receipts, received from sale of machines, received from nursing course fee we note that even if test of income directly arising from property of Trust is applied, interest directly accrues on funds of the Trust. Interest income will fall under section 11(1)(a )in respect of the receipt from letting out of assessee’s premises, belonging to the educational institutions of the assessee, it is a well-settled principle of law that the test to determine as to what would be a charitable purpose within the meaning of section 2(15), is to ascertained by its dominant object of the activity; whether it is to carry out a charitable purpose or to earn profit. If the pre-dominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because the some profit arises from the activity. The manner in which these receipts are earned it is also observed that they are not earned with any profit motive. We thus hold that, section 11(4A) which require separate account to be maintained would not be attracted in view of conclusion that the said amount are received by the assessee for the years under consideration have been received in the process of achieving the main object, providing educational/medical relief. In this context, we refer to the observations of Vile Parle Kelawani Mandal [2015 (5) TMI 220 - BOMBAY HIGH COURT] as held educational institutions require funds. The income is generated from giving various halls and properties of the institution on rentals only on Saturdays and Sundays and on public holidays when they are not required for educational activities, then, this cannot be said to be a business which is not incidental to attain the objects of the trust. This being merely an incidental activity and the income derived from it is used for the educational institute and not for any particular person, separate books of account are also maintained, then, this income cannot be brought to tax. Thus addition made by the Ld.AO in respect of the receipts from various activities undertaken by the assessee deserves to be deleted. Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the income received by the assessee from various activities should be treated as business income under Section 2(15) of the Income Tax Act.Whether the assessee's activities qualify as charitable purposes under Section 2(15) of the Income Tax Act, despite the income generated from them.Whether the assessee is required to maintain separate books of account for activities deemed incidental to its charitable purposes under Section 11(4A) of the Income Tax Act.Whether the proviso to Section 2(15) of the Income Tax Act applies to the assessee's activities, thus affecting its eligibility for exemption under Section 11.ISSUE-WISE DETAILED ANALYSIS1. Treatment of Income as Business Income under Section 2(15)Legal Framework and Precedents: The relevant legal framework includes Section 2(15) of the Income Tax Act, which defines 'charitable purpose,' and Section 11, which provides exemptions for income derived from property held under trust for charitable purposes. The proviso to Section 2(15) excludes activities in the nature of trade, commerce, or business from being considered charitable.Court's Interpretation and Reasoning: The Tribunal considered whether the income from activities such as royalties, agency commissions, and rent should be classified as business income. It analyzed whether these activities were incidental to the assessee's main charitable objectives.Key Evidence and Findings: The Tribunal found that the activities generating income were ancillary to the main objectives of providing education and medical relief. The income was not derived from any organized, systematic business activity.Application of Law to Facts: The Tribunal applied the principles established in case law, including the decisions of the Supreme Court and High Courts, which emphasize that the dominant object of an activity should determine its classification as charitable or business.Treatment of Competing Arguments: The Tribunal considered arguments from both the assessee and the revenue. The revenue argued that the activities were commercial in nature, while the assessee contended that they were incidental to its charitable purpose.Conclusions: The Tribunal concluded that the income from these activities should not be treated as business income under Section 2(15) as they were incidental to the assessee's charitable objectives.2. Requirement of Maintaining Separate Books of Account under Section 11(4A)Legal Framework and Precedents: Section 11(4A) requires separate books of account for business activities incidental to the main objectives of a trust.Court's Interpretation and Reasoning: The Tribunal examined whether the assessee's activities necessitated maintaining separate books of account.Key Evidence and Findings: The Tribunal found that the activities were not conducted with a profit motive and were integral to the main objectives, thus not necessitating separate books.Application of Law to Facts: The Tribunal applied the principle that incidental activities closely linked to the main charitable purpose do not require separate accounting.Treatment of Competing Arguments: The revenue argued for the necessity of separate books, while the assessee maintained that the activities were not business-oriented.Conclusions: The Tribunal held that separate books of account were not required for the incidental activities.SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities.'Core Principles Established: The judgment reinforced the principle that incidental income-generating activities do not negate the charitable nature of a trust if they support its primary objectives.Final Determinations on Each Issue: The Tribunal determined that the assessee's income from the questioned activities should not be classified as business income and that the assessee was not required to maintain separate books of account for these activities. The appeals filed by the assessee for all the years under consideration were allowed, affirming the charitable status of the activities and the applicability of Section 11 exemptions.