2026 (3) TMI 636 - HC - Income Tax

Incidental business activity test: charitable exemption upheld where no retained income and quantitative thresholds were not breached.

Characterisation under the charitable-object definition turns on whether commercial activities are incidental to the GPU object and comply with the ... Denial of exemption u/s 11 - claim of depreciation and claim of the corpus donation - activities of the appellant were not in nature of charitable activities at all as the appellant basically rendered professional services by way of giving advise for identifying charitable organizations for donors and the appellant did not bring on record any evidence to show any change in the nature of activities in the previous years wherein such exemption was denied - HELD THAT: - The Court held that AO has worked out the total donation received by the assessee and the percentage of donation retained by it, and thereafter applied the decision of Ahmedabad Urban Development Authority [2022 (10) TMI 948 - SUPREME COURT] wherein, it is held that the charitable organization cannot engage in trade, commerce or business or provide service for consideration unless such activities are identical to their core “general public utility” and within 20% monetary threshold. AO found that for the subsequent years, as the assessee has retained donation less than 20% of the total donation received, the Assessing Officer came to the conclusion that the assessee cannot be treated as engaged in trade, commerce or business as prescribed in the decision of Ahmedabad Unrban Development Authority (supra). There is no retention of income but there is a deficit of about 7%, the question of denying the exemption under Sec.11 of the Act would not arise in view of the decision of the Hon’ble Apex Court in the case of Ahmedabad Urband Development Authority (supra). There is no need to remand the matter back to the Assessing Officer and considering the facts available on record, we answer both the questions in favour of the assessee and against the revenue. Final Conclusion: Both substantial questions framed for Assessment Year 2009-10 were answered in favour of the appellant and against the revenue; the appeal is allowed and no remand to the Assessing Officer is directed. Issues: Whether the assessee is entitled to exemption under Section 11 and Section 12 of the Income-tax Act, 1961 for Assessment Year 2009-10 in view of the characterisation of its activities under Section 2(15) and the Supreme Court's decision in Assistant Commissioner of Income-Tax (Exemptions) v. Ahmedabad Urban Development Authority.Analysis: The legal framework requires examination of whether activities in the nature of trade, commerce or business are incidental to the GPU object and comply with the quantitative limits and conditions set out in Section 2(15) (including the proviso and the monetary thresholds) and Section 11 (including Section 11(4A) and the requirement to maintain separate books for such receipts). The controlling authorities and provisions to be applied include Sections 60 to 63, Section 10(23C) provisos, and the tests established by the Apex Court regarding incidental business activities, the requirement that business activities be intrinsically linked to the GPU object, and the quantitative threshold/earnings retained test. On the facts for the year under consideration the assessee had no retained income but a deficit, and subsequent adjudications for later assessment years applying the Ahmedabad Urban Development Authority test showed retained donation below the prescribed monetary threshold; accordingly there is no material to characterise the assessee as engaging in disqualifying business activity for the year in question.Conclusion: Entitlement to exemption under Section 11 and Section 12 of the Income-tax Act, 1961 is allowed for Assessment Year 2009-10; the questions are answered in favour of the assessee and against the revenue.