2012 (12) TMI 211 - HC - Income Tax

Exemption u/s 11 of the Act - whether business activities carried on by the assessee were incidental to the main aims and objects of the Trust which are of Charitable nature or not - In the present case business in Katha was carried on by the trustees or the Board of Directors and not by the beneficiaries of the trust - held that - If a property is held under trust, and such property is a business, the case would fall under Section 11(4) and not under Section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. - we are unable to accept the contention urged on behalf of the revenue before us that the provisions of Section 11(4A) are sweeping and would also take in a case of business held under trust. The mere fact that whole or some part of the income from Katha business is ear-marked for application to the charitable objects would not render the business itself being considered as incidental to the attainment of the objects. We are in agreement with the view taken by the CIT (Appeals) in his order for the assessment year 1992-93 that the application of the income generated by the business is not the relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives. It was contended on behalf of the assessee that the mere letting out of the factory on lease w. e. f. 01.01.1992 does not amount to carrying on of any business. We are unable to accept this contention. Decision in the case of Thanthi Trust 2001 (1) TMI 80 - SUPREME COURT distinguished - the observations of the Supreme Court must be understood and appreciated in the background of the facts in that case and should not be extended indiscriminately to all cases. It was contended on behalf of the assessee that in case we hold that the assessee-trust is not eligible for exemption because the Katha business was itself not held under trust, it would produce an anomalous or discriminatory result inasmuch as all that is required is for the settler of the trust to declare that the Katha business itself would be held in trust. It is not for us to comment on the contention; we cannot question the legislative wisdom and if there is really an anomalous or discriminatory resultant position, it is for the legislature to take care of it. It is not for us to enter such a complex arena in which no perfect alternatives exist All the appeals decided against the assessee and in favour of the Revenue.

Summary

Issues Involved:
1. Entitlement to exemption under Section 11 of the Income Tax Act.
2. Whether the business activities carried on by the assessee were incidental to the main aims and objects of the Trust, which are of a charitable nature.

Detailed Analysis:

1. Entitlement to Exemption under Section 11 of the Income Tax Act:
The primary issue revolves around whether the assessee, a charitable trust, is entitled to exemption under Section 11 of the Income Tax Act. The trust was created by a deed in 1971 with the primary objective of advancing education, providing for mental, moral and spiritual development, and other charitable purposes. The trust commenced a business of manufacturing Katha, funded through borrowings and contributions from sister concerns.

The CIT (Appeals) and the Tribunal had divergent views on whether the business income was exempt under Section 11. The CIT (Appeals) held that the business was not held under trust but was carried on by the trustees, thereby making Section 11(4A) applicable, which requires the business to be incidental to the attainment of the trust's objects and maintenance of separate books of accounts. The Tribunal, however, held that the business was incidental to the attainment of the charitable objects of the trust, relying on the Supreme Court's judgment in Thanthi Trust.

The High Court, however, emphasized that for the purposes of Section 11, the business must be held under trust to qualify for exemption. It distinguished between a business held under trust and a business carried on by or on behalf of the trust. It concluded that the Katha business was not held under trust as it was started with borrowed funds and not with the original trust fund, which was a nominal amount of Rs. 2,200/-. Therefore, the business did not qualify for exemption under Section 11.

2. Incidental Nature of Business Activities:
The second issue is whether the business activities were incidental to the main charitable objectives of the trust. The CIT (Appeals) held that running a Katha factory was not incidental to the trust's objectives of advancing education, patriotism, and Indian culture. The Tribunal, however, found that the business was incidental to the attainment of the trust's objects, relying on the Supreme Court's judgment in Thanthi Trust.

The High Court clarified that the mere application of business income to charitable purposes does not make the business activity incidental to the attainment of the trust's objects. It emphasized that the activity must be inextricably linked to the trust's objectives. The High Court found no such connection between the Katha business and the trust's objectives, thereby rejecting the Tribunal's view. It also noted that leasing out the factory constituted a business activity, further affirming that the business was not incidental to the trust's objectives.

Conclusion:
The High Court concluded that the Katha business was neither held under trust nor incidental to the attainment of the trust's charitable objectives. Therefore, the trust was not entitled to exemption under Section 11 of the Income Tax Act. The appeals of the Revenue were allowed, and the substantial questions of law were answered in favor of the Revenue.