2015 (12) TMI 1745 - AT - Income Tax

Exemption to the trust u/s 11 denied - proof of charitable activities - Held that - Since as stated above the facts in the present case are identcial to that in the case of Hoshiarpur Improvement Trust (2015 (9) TMI 902 - ITAT AMRITSAR), respectfully following the same we hold that the assessee trust is carrying out charitable activity of advancement of public utility and the business activity carried out by it are incidental to the attainment of its main object and thus the proviso to section 2(15) is not attracted in the assessee case. We therefore hold that the assessee is entitled to claim exemption u/s 11. - Decided in favour of assessee. Framing of assessment in the status of artificial juridical person - A.O. changed the status of the assessee from AOP to Artificial Judicial Person - Held that - In view of the fact that we have held the assessee trust to be indulging in activities which constitute advancement of general public utility and hence charitable activities as defined u/s 2(15) of the Act, the status of the assessee shall be AOP as specified in section 164(2) of the Act. Section 164(2) states that where income is derived from property held under trust wholly for charitable or religious purposes, tax shall be charged on the taxable income if any in the status of AOP. In case of discretionary trust which are not covered u/s 164(2), the income is to be assessed in the status of individual. Thus we hold that the assessee trust be assessed in the status of AOP and not Artificial Judicial Person .

Issues Involved:
1. Denial of exemption to the trust under Section 11 of the Income Tax Act.
2. Examination of the objects of the trust post-registration under Section 12AA.
3. Characterization of the trust's activities as charitable or business.
4. Treatment of surplus income of Rs. 3,36,90,540.
5. Status of the assessee as an Artificial Juridical Person (AJP) or Association of Persons (AOP).
6. Alternative plea for setting off expenses against business income if exemption is denied.

Detailed Analysis:

1. Denial of Exemption to the Trust under Section 11:
The assessee argued that after being granted registration under Section 12AA, the trust should be assessed as a Registered Charitable Trust and not as an Artificial Juridical Person. The Assessing Officer (AO) denied the exemption under Section 11, citing that the trust was engaged in activities akin to business, such as the sale and purchase of residential and commercial plots through auctions, generating significant profits. The AO concluded that the trust's primary objective was profit-making, not charitable activities, thus disqualifying it from exemption under Section 11.

2. Examination of the Objects of the Trust Post-Registration under Section 12AA:
The assessee contended that once registration under Section 12AA was granted, the AO could only examine the application of income in accordance with the trust's objects and not question the charitable nature of the objects themselves. However, both the CIT(A) and AO scrutinized the objects, concluding they were not charitable in nature, contrary to the judgment of the Punjab & Haryana High Court in the case of Improvement Trust Moga, which recognized similar objects as charitable.

3. Characterization of the Trust's Activities as Charitable or Business:
The AO and CIT(A) held that the trust's activities, such as selling plots through auctions and charging high fees, were in the nature of trade, commerce, or business, thus falling under the amended provisions of Section 2(15). The assessee argued that these activities were incidental to its primary objective of town improvement, a public utility. The ITAT referred to the case of Hoshiarpur Improvement Trust, where it was held that activities incidental to the main objective of public utility do not attract the proviso to Section 2(15).

4. Treatment of Surplus Income of Rs. 3,36,90,540:
The AO treated the surplus of Rs. 3,36,90,540 as taxable income, arguing that the trust was primarily engaged in profit-making activities. The ITAT, however, concluded that the trust's profit-making activities were incidental to its main objective of public utility and thus, the surplus could not be taxed as income, allowing the trust's claim for exemption under Section 11.

5. Status of the Assessee as an Artificial Juridical Person (AJP) or Association of Persons (AOP):
The AO changed the status of the assessee from AOP to AJP, following previous ITAT decisions. The ITAT, however, held that since the trust was engaged in charitable activities as defined under Section 2(15), its status should be AOP as specified in Section 164(2). This view was supported by the Gujarat High Court's ruling in CIT Vs. Deepak Family Trust No. 1, which stated that charitable trusts should be assessed as AOPs.

6. Alternative Plea for Setting Off Expenses Against Business Income:
The assessee raised an alternative plea that if exemption under Section 11 was denied, all expenses should be set off against the business income. Since the ITAT allowed the exemption under Section 11, this issue did not require adjudication.

Conclusion:
The ITAT allowed the appeal partly, holding that the trust's activities were charitable and incidental to the main objective of public utility. Consequently, the trust was entitled to claim exemption under Section 11, and the surplus income could not be taxed. The trust was to be assessed as an AOP, not an AJP. The alternative plea regarding the setting off of expenses was not adjudicated due to the allowance of exemption.

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