2010 (10) TMI 153 - HC - Income Tax

Charitable purpose Exemption Assessee-Trust engaged in renting building owned Business income of utilized towards achievement of object AO to decide as to whether such Business income used for attainment of object Matter remanded. A perusal of the provisions contained in section 11(4A) of the Act would make it clear that it contains two separate elements. The first one being if the Assessing Officer is convinced on enquiry about the genuineness of the trust on a consideration of the relevant materials then he can decide and declare the eligibility of exemption. The second one being the entitlement of the income as eligible for exemption. In order to satisfy himself the Assessing Officer has to necessarily go through the relevant records like the application, accumulation, deployment of income in specified assets, utilization of income, etc. Therefore, it is the duty of the Assessing Officer to find out that the income is wholly and exclusively applied to the object of the trust. In other words, if the Assessing Officer finds that the income as shown in the return is not actually utilized for a charitable purpose as claimed by the assessee then the exemption claimed for the said income goes. It would also mean that in such a case the profit making is the real object and therefore the doctrine of feeding the charity would have no application whatsoever.

Issues Involved:
1. Interpretation of Section 11(1) read with Section 11(4) and Section 11(4A) of the Income-tax Act.
2. Whether the business activities of the trust are incidental to its charitable objectives.
3. Compliance with the requirement of maintaining separate books of account under Section 11(4A).
4. Necessity of remanding the case to the Assessing Officer for determination of actual income eligible for exemption.

Detailed Analysis:

1. Interpretation of Section 11(1) read with Section 11(4) and Section 11(4A) of the Income-tax Act:
The primary issue is whether Section 11(4A) restricts the scope of Section 11(4). Section 11(4A) exempts income from a business undertaking of the trust if the business is incidental to the attainment of the trust's objectives and separate books of account are maintained. The court held that Section 11(4A) does not override Section 11(4) but complements it. The court emphasized that the statutory provisions should be read together harmoniously. The court stated, "Section 11(4A) of the Act does not exclude section 11(4). Exemption under section 11(4A) would be available only when the business is incidental to the attainment of object of the trust."

2. Whether the business activities of the trust are incidental to its charitable objectives:
The court examined whether the income from commercial activities such as letting out marriage halls, auditoriums, and running a ladies hostel is incidental to the trust's charitable objectives. The court referenced the Supreme Court judgment in Asst. CIT v. Thanthi Trust, which held that if the income from business is used for achieving the objectives of the trust, it is incidental to the objectives. The court concluded, "When a business income is used towards the achievement of the object of the trust it would amount to incidental to the achievement of the object of the trust notwithstanding the profit and gain involved therein."

3. Compliance with the requirement of maintaining separate books of account under Section 11(4A):
The court noted that maintaining separate books of account is mandatory for claiming exemption under Section 11(4A). The assessee maintained three sets of accounts: one for income from auditoriums, one for the trust's income, and one for the ladies' hostel. Both the Commissioner of Income-tax (Appeals) and the Tribunal found that the assessee complied with this requirement. The court upheld these findings, stating, "The said findings being findings of fact, we are of the opinion that the contention of the Revenue that no separate books of account are maintained by the assessee in respect of his income assessable under the said business cannot be countenanced."

4. Necessity of remanding the case to the Assessing Officer for determination of actual income eligible for exemption:
The court acknowledged that the authorities had not thoroughly examined the actual income eligible for exemption under Section 11(4A). The court emphasized the need for the Assessing Officer to verify the records and determine the actual income used for charitable purposes. The court stated, "It is the duty of the Assessing Officer to find out that the income is wholly and exclusively applied to the object of the trust." Consequently, the court remanded the case to the Assessing Officer to determine the actual entitlement of exemption, directing the entire exercise to be completed within three months.

Conclusion:
The court set aside the Tribunal's orders and allowed the appeals to the extent indicated. The case was remanded to the Assessing Officer to verify the actual income eligible for exemption and ensure compliance with the statutory requirements. The court emphasized the importance of harmonious interpretation of statutory provisions and adherence to judicial precedents.

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