2002 (8) TMI 23 - HC - Income Tax

Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee-club was not a charitable institution within the meaning of section 2(15) of the Income-tax Act 1961? - Whether on the facts and in the circumstances of the case the income of the assessee was entitled to exemption either under section 11 of the Income-tax Act 1961 read with section 2(15) of the Income-tax Act or under the principle of mutuality? fist question is answered in negative and in favour of assessee in respect of second question income of the assessee was entitled to exemption under section 11 of the tax Act 1961 read with section 2(15) of the Income-tax Act.

Summary

Issues Involved:
1. Whether the assessee-club was a charitable institution within the meaning of section 2(15) of the Income-tax Act, 1961.
2. Whether the income of the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961 read with section 2(15) of the Income-tax Act, or under the principle of mutuality.

Issue-Wise Detailed Analysis:

1. Charitable Institution under Section 2(15) of the Income-tax Act, 1961

Facts:
The assessee is a society registered under the Societies Registration Act, 1860, and is a public trust. The objects of the society include promoting gymnastic games and sportsmanship. Initially, the Income-tax Officer granted exemption under section 11, but the Commissioner of Income-tax later revoked this, deeming the trust not a charitable institution. The Tribunal upheld this decision, leading to the present reference to the High Court.

Arguments:
- Department's View: Sub-clauses F, G, and H of clause 3 of the trust's constitution, which involve acquiring immovable property, planning a colony, and raising funds, indicate that the trust's objects are not purely charitable.
- Assessee's View: Sub-clauses F, G, and H are incidental powers of the trustees and not the dominant objects of the trust. The dominant objects are to promote sports and sportsmanship, as indicated by sub-clauses A to E.

Historical Context:
In 1906, Pune was a cultural and sports center, and the trust was established to promote physical education and sports among the youth. Due to the isolated location of the Gymkhana, a colony was planned to encourage sports enthusiasts to reside nearby, which was a practical solution at the time.

Court's Reasoning:
The court emphasized the historical context and distinguished between the objects of the trust and the powers of the trustees. The dominant object was to promote sports, and sub-clauses F, G, and H were merely incidental powers necessary for achieving this object. The court referenced the Supreme Court judgment in Thiagarajar Charities v. Add. CIT, which supports the view that incidental powers do not negate the charitable nature of the trust.

Conclusion:
The court held that the assessee-club was a charitable institution within the meaning of section 2(15) of the Income-tax Act, 1961, as the dominant object was to promote sports and not to earn profit.

2. Exemption under Section 11 of the Income-tax Act, 1961

Facts:
The Tribunal had denied the exemption under section 11, which provides tax exemptions for income from property held for charitable purposes. The first appellate authority had initially allowed the exemption, but the Tribunal reversed this decision.

Arguments:
- Assessee's View: The trust's income was applied exclusively for the promotion of sports, fulfilling the requirements of section 2(15) and section 11. The historical facts and the deletion of sub-clause G in 1993 further support this claim.
- Department's View: The existence of sub-clause G suggested a possibility of profit-making activities, which disqualified the trust from exemption under section 11.

Court's Reasoning:
The court reiterated that sub-clauses F, G, and H were incidental and did not constitute the dominant object of the trust. Given the historical context and the fact that no new colonies were established after 1923, the court found the Tribunal's apprehension about profit-making to be unfounded. The trust's income was indeed applied for charitable purposes, specifically for promoting sports.

Conclusion:
The court held that the income of the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961, read with section 2(15) of the Income-tax Act.

Orders:
1. Question 1: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-club was not a charitable institution within the meaning of section 2(15) of the Income-tax Act, 1961?
- Answer: In the negative, i.e., in favor of the assessee and against the Department.

2. Question 2: Whether, on the facts and in the circumstances of the case, the income of the assessee was entitled to exemption either under section 11 of the Income-tax Act, 1961 read with section 2(15) of the Income-tax Act, or under the principle of mutuality?
- Answer: On the facts and in the circumstances of the case, income of the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961, read with section 2(15) of the Income-tax Act.

Both references were disposed of with no order as to costs.