2015 (3) TMI 315 - AT - Income Tax

Non-granting of exemption under section 11(4A) - assessee was registered under section 12A of the I.T. Act. - Held that - During the year under consideration the surplus income generated by the assessee trust in the super market is to the extent of ₹ 77,45,329 out of which a sum of ₹ 11,96,410 was claimed to be applied for charitable purpose. From the details available on record, it appears, a sum of ₹ 11,50,000 was donated to other institutions. No details is available with regard to application of income to the extent of ₹ 46,410. The fact remains is that the assessee trust has not applied the funds to the object of the trust. In fact, it donated the funds to the other institutions. It is not known whether the other institutions to which donations are made has similar objects like that of assessee. However, section 11(3)(d) introduced by Finance Act, 2002 with effect from 01-04- 2003 clearly says that any income which is credited or paid to a trust or institution is not eligible for exemption and the same has to be treated as income of the assessee. Since the assessee has not applied the surplus funds from the business of super market for charitable purpose as per the object of the trust, the assessee is not eligible for exemption. - Decided against assessee.

Summary

Issues Involved:
1. Non-granting of exemption under section 11(4A) of the I.T. Act.
2. Maintenance of separate books of accounts for business activities.
3. Application of maximum marginal rate for the income.
4. Disallowance of bad debts, interest, penalty, and depreciation.
5. Whether the supermarket business is incidental to the attainment of the trust's objectives.

Detailed Analysis:

Non-granting of exemption under section 11(4A) of the I.T. Act:
The primary grievance of the assessee was the non-granting of exemption under section 11(4A) despite being registered under section 12A of the I.T. Act. The Assessing Officer disallowed the claim under section 11, observing that the major income and expenditure of the Trust were from running a supermarket on a commercial basis, not from charitable or religious activities. The CIT(A) upheld this view, noting that the Trust's activities were not wholly for charitable or religious purposes, as the income from the supermarket vastly exceeded the expenses on charity.

Maintenance of separate books of accounts for business activities:
The Assessing Officer found that no separate books of accounts were maintained for the business activities of the supermarket, which is a requirement under section 11(4A). The CIT(A) agreed, stating that for the business income of the trust to be exempt, the business should be incidental to the attainment of the trust's objectives and separate books of accounts must be maintained.

Application of maximum marginal rate for the income:
The Assessing Officer applied the maximum marginal rate for the income and issued two notices, one under section 156 for tax at nil and another demanding tax of Rs. 13,04,483/-. This was based on the finding that the Trust's major activity was commercial, not charitable.

Disallowance of bad debts, interest, penalty, and depreciation:
The Assessing Officer disallowed bad debts written off at Rs. 3,099/-, interest and penalty at Rs. 1,03,720/-, and depreciation claimed at Rs. 1,55,540/-. These disallowances were part of the broader finding that the Trust's activities were primarily commercial.

Whether the supermarket business is incidental to the attainment of the trust's objectives:
The CIT(A) and the Tribunal both found that the supermarket business was not incidental to the attainment of the trust's charitable objectives. The Tribunal noted that the business of running a supermarket was carried out on commercial principles for earning profit and could not be treated as incidental to the trust's objectives. The Tribunal also observed that the income from the supermarket was not exclusively used for charitable purposes, and the majority of the expenses were towards the establishment and running of the supermarket.

Separate Judgment by the Judge:
One judge disagreed with the majority view, arguing that the supermarket could be considered a property/business held under trust and that the income from the supermarket was utilized for charitable purposes. This judge cited the Supreme Court's decision in the case of ACIT vs. Thanthi Trust, which held that a business whose income is used for achieving the trust's objectives could be considered incidental to the attainment of those objectives. However, this view was not adopted by the majority.

Conclusion:
The Tribunal dismissed the appeals filed by the assessee, upholding the CIT(A)'s decision that the Trust was not entitled to exemption under section 11(4A) of the I.T. Act. The Tribunal found that the supermarket business was not incidental to the attainment of the trust's objectives and that the income from the business was not used exclusively for charitable purposes. The requirement of maintaining separate books of accounts for business activities was also not met.