2006 (10) TMI 381 - AT - Income Tax

Exemption of income u/s 11 - incomes other than income under the head Profits and gains from business and profession - Object of general public utility - charitable purposes u/s 2(15) - HELD THAT - It is not the Revenue s case that the activities of the assessee cease to be in the nature of general public utility . The assessee was declined exemption only on the ground that it cannot be said that the assessee was not involved in the carrying on of any activity for profit . Post April 1, 1984, however, that aspect of the matter ceased to be relevant so far as the scope of charitable purposes u/s 2(15) is concerned. The pre-1961 position thus stands restored. In those years, and following the Tribunal s decision for the assessment year 1943-44, the assessee was held to be pursuing an object of public utility. The Revenue admits and accepts this position, as reflected from the stand taken by the Revenue authorities all along. The post-amendment section 2(15) being pari materia with section 4(3)(i) of the 1922 Act and the material facts being identical, the assessee thus continues to be eligible for exemption u/s 11. As for the disability u/s 11(4A), the same being confined to exemption of business income, the assessee will nevertheless be entitled to exemption in respect of other incomes, such as income from house property , capital gains and income from other sources . We, accordingly, answer the questions Nos. 1 and 4 as follows (1) Whether the object of the assessee-trust is an object of general public utility u/s 2(15) of the Income-tax Act, 1961? - Yes. In the light of the amendments in section with effect from April 1, 1984, the assessee trust is eligible for being treated as pursuing an object of general public utility u/s 2(15) of the Act. (4) If the answer to the first question is in the affirmative, does the earning of substantial profit by the assessee affect its status as a trust existing for an object of general public utility and consequently the claim for exemption under section 11, and if so, to what extent, in the light of the judgment of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association 1979 (11) TMI 1 - SUPREME COURT ? - While earning of substantial profit does not affect its status as a trust existing for an object of general utility , so far as business income is concerned, earning of substantial profits attracts the disqualification u/s 11(4A) of the Act, from exemption u/s 11. As for the exemption of income of the assessee-trust under the heads of income other than profits and gains from business or profession is concerned, the earning of substantial profit does not affect the said exemption. The matter shall now go before the Division Bench for disposal of appeals in accordance with the law, and in the light of our above observations.

Summary

Issues:
1. Whether the object of the assessee-trust is an object of general public utility under section 2(15) of the Income-tax Act, 1961?
2. Does the earning of substantial profit by the assessee affect its status as a trust existing for an object of general public utility and consequently the claim for exemption under section 11?

Issue 1:
The Special Bench was constituted to consider the questions related to the object of the assessee-trust and the applicability of certain provisions. The Special Bench initially adjudicated questions (2) and (3) against the assessee, making questions (1) and (4) academic. However, a rectification petition was filed, leading to a recall of the order to address questions (1) and (4) on their merits. The matter was then reviewed by a different set of Members to address the two questions.

Issue 2:
The judgment discusses the historical background of the assessee-trust's activities and its treatment under the Income-tax Act since 1943. It highlights the changes in the law, particularly the amendments in section 2(15) and the introduction of section 11(4A) from April 1, 1984. The discussion revolves around the impact of these changes on the eligibility of the assessee for exemption under section 11, considering the earning of substantial profits. Arguments from both sides were presented, with the counsel for the assessee emphasizing the distinction between business income and other sources of income for exemption purposes.

The judgment concludes that the assessee-trust qualifies as pursuing an object of general public utility under section 2(15) of the Act, post the 1984 amendments. It clarifies that while substantial profits may affect the exemption under section 11 for business income due to section 11(4A), other sources of income remain eligible for exemption under section 11. The judgment directs the matter to the Division Bench for further proceedings in line with the observations made.

This detailed analysis of the judgment provides a comprehensive overview of the legal issues addressed, the arguments presented, and the ultimate conclusions reached by the Tribunal.