2004 (11) TMI 81 - HC - Income Tax

Assessee/trust claimed exemption under section 11 stating that since it has applied more than 75 per cent, of its income for charitable and educational purposes, the income is eligible for exemption under section 11 of the Act. The Assessing Officer, finding that the activities of the assessee in running the business of paper caps is hit by section 11 (4A), held that the trust is not entitled to exemption u/s 11 - Tribunal found that the income of the assessee had been employed to achieve its charitable objects and, therefore, even in the light of section 11(4A) of the Act and applying the decision in Asst. CIT v. Thanthi Trust the assessee is entitled to exemption under section 11 - Finding, therefore, no substantial question of law for our consideration, these revenue s appeals are dismissed

Summary

Issues:
1. Eligibility for exemption under section 11 of the Income-tax Act.
2. Applicability of section 11(4A) of the Act.
3. Interpretation of the Supreme Court's judgment in Asst. CIT v. Thanthi Trust [2001] 247 ITR 785.

Eligibility for exemption under section 11 of the Income-tax Act:
The case involved appeals against orders of the Income-tax Appellate Tribunal concerning exemption under section 11 of the Income-tax Act for the assessment years 1994-95 and 1993-94. The assessee trust claimed exemption under section 11, stating that it had applied more than 75% of its income for charitable and educational purposes. The Assessing Officer, however, held that the trust's business activities were not eligible for exemption under section 11(4A) of the Act. The Commissioner of Income-tax (Appeals) allowed the exemption, following a precedent, and directed the Assessing Officer to grant the exemption. The Tribunal, based on a previous decision, dismissed the Revenue's appeals, leading to the current appeal on the substantial questions of law regarding the trust's eligibility for exemption.

Applicability of section 11(4A) of the Act:
Section 11(4A) of the Act states that unless a trust's business is incidental to its charitable and religious purposes, income exemption under sections 11(1), 11(2), 11(3), and 11(3A) shall not apply. The Tribunal found that the trust's income was utilized to achieve its charitable objectives, and even considering section 11(4A) and the Supreme Court's decision in Asst. CIT v. Thanthi Trust [2001] 247 ITR 785, the trust was entitled to exemption under section 11 of the Act. The court emphasized that the business must be carried out in the actual accomplishment of the trust's primary purpose to qualify for exemption.

Interpretation of the Supreme Court's judgment in Asst. CIT v. Thanthi Trust [2001] 247 ITR 785:
The Supreme Court's judgment clarified that for a trust's business income to be tax-exempt, the business must be incidental to achieving the trust's objectives. The court highlighted that the amended section 11(4A) of the Act, as per the 1992 amendment, was more beneficial to trusts or institutions. The judgment emphasized that in case of ambiguity, the provision should be construed in favor of the assessee. The Tribunal's decision, in line with this interpretation, upheld the trust's entitlement to exemption under section 11 of the Act. Consequently, the court dismissed the appeals, finding no substantial question of law for consideration.

In conclusion, the judgment reaffirmed the importance of aligning a trust's business activities with its charitable objectives to qualify for income tax exemption under section 11 of the Income-tax Act.