2011 (6) TMI 333 - AT - Income Tax

Renewal of Exemption under section 80G - denial of exemption as the receipts of the assessee-society are in the nature of trade/commerce/business which were evidenced from the accounts statement submitted before him - Held that - It is seen that none of the conditions mentioned in the circular No. 11/08, dated 19-12-2008 issued by CBDT hit the case of the assessee for recognition under section 80G(5) r.w.s 2(15) of the Act - Obviously, these are inclusive and not exhaustive - Consequently, when the objects of the society are not found to be not charitable in nature and the Society continues to be registered under section 12AA of the Act and the reasonings given by the DIT(E) to deny renewal of approval under section 80G being not sufficient and plausible - Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of renewal of exemption under section 80G of the Income-tax Act, 1961.
2. Classification of the assessee-society's activities as trade/commerce/business.
3. Interpretation of 'charitable purpose' under section 2(15) of the Income-tax Act.
4. Application of Circular No. 11/08 dated 19-12-2008 issued by the Central Board of Direct Taxes.

Issue-wise Detailed Analysis:

1. Denial of Renewal of Exemption under Section 80G:
The main issue in this case is the denial of renewal of exemption under section 80G of the Income-tax Act, 1961, by the Director of Income-tax (Exemptions) [DIT(E)], Chennai. The assessee-society filed an application in Form No. 10G on 29-7-2009 for renewal of exemption. The DDIT(E)-IV, in his report dated 21-1-2010, did not recommend renewal because he found that the receipts of the assessee-society were in the nature of trade/commerce/business. The assessee argued that the activities involving providing accommodation for nominal charges were only a means to an end and not the end itself. The society was earning income from providing accommodation to the public visiting Chennai at nominal charges to carry out the objects of the Trust, which is not prohibited. The Tribunal found that the society continued to be registered under section 12AA of the Act, and its registration had not been withdrawn under section 12AA(3).

2. Classification of Activities as Trade/Commerce/Business:
The DIT(E) denied the benefit of section 80G(5) mainly relying on lodge receipts, treating them as not charitable in nature. The society's receipts during the year were from rent from hall and shop and from the sale of books, among other activities. The authorities treated these activities as purely commercial. However, the Tribunal observed that providing accommodation in the lodge to lower middle-class people at very low rates, sufficient only to cover maintenance and other incidental expenses, amounted to a charitable activity. The surplus funds were utilized for running the school maintained by the society, and there was no evidence that any receipt over and above the expenditure from the lodge was being used for any other purpose. The Tribunal concluded that running a lodge could not, ipso facto, be treated as a business activity, and there was no element of trade or business involved in the maintenance of the lodge.

3. Interpretation of 'Charitable Purpose' under Section 2(15):
The Tribunal noted that the definition of 'charitable purpose' under section 2(15) is inclusive and not exhaustive. The charitable purpose has to be construed in common parlance by applying common sense. The society did not sell any flowers; the word 'flowers' used in the statement of accounts related to the Golden Jubilee Souvenir, called "Malar" in Tamil. The Tribunal referred to Circular No. 11/08 dated 19-12-2008, which lists 'charitable purposes' and clarifies that entities whose object is education or medical relief would continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity. The Tribunal found that none of the conditions mentioned in the circular hit the case of the assessee for recognition under section 80G(5) read with section 2(15) of the Act.

4. Application of Circular No. 11/08:
The Tribunal referred to Circular No. 11/08 dated 19-12-2008, which provides that 'charitable purposes' include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. The circular clarifies that entities with these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject to conditions such as maintaining separate books of account. The Tribunal found that the society's activities did not fall under the proviso to section 2(15), which excludes entities carrying on commercial activities from being considered as having a 'charitable purpose.' The Tribunal concluded that the objects of the society were charitable in nature, and the society continued to be registered under section 12AA of the Act. Therefore, the Tribunal directed the DIT(E) to grant approval under section 80G to the assessee-society.

Conclusion:
The Tribunal allowed the appeal, finding that the society's activities were charitable in nature and directed the DIT(E) to grant approval under section 80G of the Income-tax Act, 1961.