INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR

ITA Nos. 809/JP/2013 Assessment Years : 2010-11
Assistant. Commissioner of Income Tax (Appellant) vs. M/s. Shri Panchyati Dharamshala (Respondent)
Date of Judgment: 01-01-2016

ORDER

PER SHRI LALIET KUMAR, J.M.

The present appeal filed by the revenue is arising from the order dated 01.08.2013 passed by the learned CIT (A)-I, Jaipur for the A.Y. 2010-11. The revenue has raised the following grounds of appeal :-

(1) Whether on the facts and in the circumstances of the case and law, the ld. CIT (A) was justified in allowing the exemption under section 11 & 12 to the assessee ignoring the facts that assessee trust is involved in commercial activities, hit by first proviso to section 2(15) r.w.s. 13(8) of the I.T. Act.

(2) Whether on the facts and in the circumstances of the case and in law the ld. CIT (A) was justified in directing to allow the capital expenditure as the assessee trust is not entitled to exemption under section 11 & 12.

2. Brief facts of the case are that the assessee is a Trust registered under section 12A(a) of the I.T. Act, 1961. It has filed return of income on 20.09.2010 declaring NIL income for the year under consideration. The case was scrutinized under section 143(3) of the IT Act. The activities of the trust are performed within the Municipal Limits of Jaipur. The assessee is engaged in charitable activity of running a Dharamshala and receipt of rent is in the nature of maintenance charges and is incidental to the main activity of trust. During assessment proceedings, the AO noted that the activities of the assessee trust, its charitable purpose is that of advancement of general public utility. The AO placing reliance on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Paramhans Ashram Trust (2009) 184 Taxman 204 (Raj.) observed that the charitable purpose of the assessee society is that of advancement of general public utility. Thus, the AO vide order sheet entry dated 31.01.2013 required the assessee to explain as to why in view of the amended provisions of section 2(15), appropriate action u/s 13(8) be not taken. In response, the ld. Counsel of the assessee vide his submission dated 08.02.2013 furnished the explanation. The reply of the assessee was considered by the AO but could not find it acceptable. The AO observed that as per the amended provisions of the Income TAX Act, 1961, any trust or society registered u/s 12A of the IT Act having advancement of general public utility as its charitable purpose and has receipts more than Rs. 10 lacs from any activity in the nature of business, commerce, etc. shall not be entitled for exemption from taxation. Therefore, the AO forfeited the exemption u/s 11 & 12 of the IT Act for the A.Y. 2010-11 on the income earned by the assessee of Rs. 68,45,354/- (Rs. 68,28,254/- as collection from travelers and Rs. 17,100/- as advertisement income) and after allowing expenses to the tune of Rs. 41,17,572/- added the balance amount of Rs. 27,27,782/- to the income of the assessee. The AO has also not allowed capital expenditure to the tune of Rs. 72,35,233/- on the ground that he has forfeited the exemption, but allowed the depreciation to the extent of Rs. 7,45,149/-.

3. Being aggrieved by the order of AO, the assessee carried the matter before ld. CIT (A), who allowed the claim of the assessee after discussing the matter at length in para 4 to 6 of his order. The ld. CIT (A) observed that the first and second proviso to section 2(15) come into play only when the activity being carried out by the assessee is in the nature of “trade, commerce or business”. He also placed reliance on the CBDT's Circular no. 11 of 2008 dated 19.12.2008 which explains the rationale of bring this amendment. After going through the circular, the ld. CIT (A) observed that exemption shall not be available to the entities who are engaged in commercial activities in the garb of charity, but in the present case under consideration the matter remains to be decided is whether the assessee is engaged in commercial activities or not. In this regard, the ld. CIT (A) placed reliance on the judgment of Hon’ble Delhi High Court reported in 133 ITR 470 wherein it has been held that for any activity to be defined as “business”, profit motive is an important factor. Profit motive may not be the sole criteria for an activity to be defined as business but nevertheless it is an important criteria, particularly when it is a case of a trust or society and it is with reference to a fiscal statute. In the present case it is seen that the society is registered under the Societies Registration Act, 1860 and is now governed by the Rajasthan Society Registration Act, 1958. Sec. 14A of this Act provides that upon dissolution of the society all the assets shall go to the State Government. Apart from this, it may also be noted that the terms of the society clearly provide that all the moveable and immovable property, in present or in future, shall belong to the society and all the savings of income and expenditure account shall be utilized for the developmental work of the society. Clause 4(c) of the Society’s constitution reads as under :-

The ld. CIT (A) observed that there does not appear to be any profit motive in the case of the assessee as the excess of income over expenditure cannot be distributed amongst its members either in the course of its activity or in the event of its dissolution. Therefore, one of the important ingredients for treating the activity of the appellant as business i.e. , profit motive is missing in this case. Since there is no profit motive involved, the activities carried out by the appellant cannot be described as business. In such a situation, as explained by CBDT vide its Circular (supra), there would be no application of proviso to section 2(15).

4. The ld. CIT (A) also placed reliance on the judgment of Hon’ble Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Mfg. Association, 121 ITR 1 (SC) wherein it is held that what is important in the case of trust or institution is the primary or dominant purpose. If the dominant purpose is charitable, another object which by itself may not be charitable, would not prevent the trust or institution from being a valid charity. The ld. CIT (A) after going through the tariff rate of room rent charged by the assessee opined that the charges are very nominal starting from a mere Rs. 40/- and it indicates that no profit motive is involved. He, considering all the legal and factual position, held that proviso to section 2(15) is not attracted in this case and disallowance of exemption u/s 11 & 12 is unjustified. Thus he directed the AO to assess the society as per provisions of section 11 & 12 and grant the requisite exemption.

4.1. In respect of denial of claim of capital expenditure amounting to Rs. 72,35,233/-, the ld. CIT (A) allowed the claim of the assessee by observing as under :-

“ 6. I have considered the facts of the case. The capital expenditure made by the appellant has been disallowed by the AO on the ground that the appellant was not entitled to exemption u/s 11 & 12. However, as has been held above, the appellant is entitled to exemption under these sections. Therefore, the disallowance of claim of the capital expenditure as application of income also appears to be uncalled for and is, accordingly, deleted.”

5. Now the Revenue is before us.

5.1. The ld. D/R supporting the order of the A.O. prayed that the order of ld. CIT (A) be set aside and that of the AO be confirmed.

5.2. On the other hand, the ld. A/R of the assessee vehemently supported the order of the ld. CIT (A) and requested that the order of ld. CIT (A) may be confirmed. 5.3. We have heard the rival contentions and perused the material available on record. The assessee society being registered is governed by the provisions of Societies Registration Act, 1860 and now the Rajasthan Societies Registration Act, 1958 regulates the affairs of the societies established for charitable purposes. The AO noted that the activities of the assessee trust, its charitable purpose is that of advancement of general public utility. The AO placing reliance on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Paramhans Ashram Trust (2009) 184 Taxman 204 (Raj.) observed that the charitable purpose of the assessee society is that of advancement of general public utility. Thus, the assessee was required to explain as to why in view of the amended provisions of section 2(15), appropriate action u/s 13(8) be not taken. On the explanation furnished by the assessee, the AO was not satisfied. Therefore, he forfeited the exemption allowable to the assessee trust u/s 11 & 12 of the IT Act by applying first proviso to section 2(15) read with section 13(8) of the IT Act, 1961. The AO has also not allowed capital expenditure on the ground that since he has forfeited the exemption. The ld. CIT (A) allowed the claim of the assessee for the reasons given in para 4 to 4.3 of his order as under :-

“ 4. I have considered submissions of the appellant and have also gone through the assessment order. It is seen that the AO has disallowed the exemption on the ground that maintaining of Dharamshala was an activity of advancement of general public utility and was, therefore, hit by the amended provisions of section 2(15) as its receipts exceeded the maximum limit of Rs. 10 lacs as mentioned in the proviso. 4.1 It is, however, noticed that the first and second proviso to section 2(15) come into play only when the activity being carried out by the assessee is in the nature “trade, commerce or business”. This is also obvious from CBDT’s Circular No. 11 of 2008 dated 19.12.2008 which explains the rationale of bringing this amendment. This Circular reads as under :-

“ ……..

The newly inserted proviso to section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under ‘any other object of general public utility’. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants.

Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).

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. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, 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.”

It is, thus, clear from this Circular that exemption shall not be available to the entities who are engaged in commercial activities in the garb of charity. The issue, therefore, is as to whether the appellant is engaged in commercial activities or not.

4.2. As explained by Delhi High Court (133 ITR 470), for any activity to be defined as “business”, profit motive is an important factor. Profit motive may not be the sole criteria for an activity to be defined as business but nevertheless it is an important criteria, particularly when it is a case of a trust or society and it is with reference to a fiscal statute. In the present case it is seen that the society is registered under the Societies Registration Act, 1860 and is now governed by the Rajasthan Society Registration Act, 1958. Sec. 14A of this Act provides that upon dissolution of the society all the assets shall go to the State Government. Apart from this, it may also be noted that the terms of the society clearly provide that all the moveable and immovable property, in resent or in future, shall belong to the society and all the savings of income and expenditure account shall be utilized for the developmental work of the society. Clause 4(c) of the Society’s constitution reads as under :-

Hence, there does not appear to be any profit motive in the case of the assessee as the excess of income over expenditure cannot be distributed amongst its members either in the course of its activity or in the event of its dissolution. Therefore, one of the important ingredients for treating the activity of the appellant as business i.e., profit motive is missing in this case. Since there is no profit motive involve, the activities carried out by the appellant cannot be described as business. In such a situation, as explained by CBDT vide its Circular (supra), there would be no application of proviso to section 2(15).

4.3. Moreover, as held by the Apex Court in the case of Surat Arts Silk (121 ITR 1), what is important in the case of trust or institution is the primary or dominant purpose. If the dominant purpose is charitable, another object which by itself may not be charitable, would not prevent the trust or institution from being a valid charity. It is noted in this case that the charges for the room are very nominal, starting from a mere Rs. 40/-. This also indicates that there is no profit motive involved in this case. Considering all the legal and factual position, it is apparent that the dominant motive in this case is not earning profit but to do charity in the form of public service by providing accommodation to the common man at affordable rates. The activities of the assessee, therefore, cannot be characterized as business activities. Hence, proviso to section 2(15) is not attracted in this case and, therefore, the disallowance of exemption u/s 11 & 12 is unjustified. The AO is, accordingly, directed to assess the society as per the provisions of section 11& 12, and grant the requisite exemption.”

After analyzing the various details furnished and considering the various judgments of Hon’ble Supreme Court and Hon’ble High Courts made available on record and the factual position, we do not find any infirmity in the order of ld. CIT (A). Therefore, while confirming the order of ld. CIT (A), we dismiss the revenue’s appeal.

6. In the result, appeal of revenue is dismissed.

Order pronounced in the open court on 01/01/2016.

(T.R. Meena)               (Laliet Kumar)
Accountant Member     Judicial Member