2015 (9) TMI 845 - AT - Income Tax

Entitlement to exemption u/s 11 and 12 and section 10(23C)(iiiab) - engagement in manufacturing activity - CIT(A)-I held that the A.O. has erred in applying first proviso to section 2(15) to the case of the appellant trust and taxing the exempt income under section 10(23C)(iiiab). - Held that - Once the activities of the Assessee are educational and medical in nature, the considerations of element of business activity and profit motives embedded therein etc. are rendered wholly irrelevant under S. 2(15) of the Act. The Assessee trust has been granted registration u/s 12A of the Act by the revenue on the basis of the object clauses. The activities carried out by the Assessee are not found by the Revenue to be ultra vires the objects. It is true that merely because the CIT has granted registration u/s 12A will not by itself preclude the AO from examining compliance u/s 11 of the Act. However, in the present case, no cogent case of non compliance has been made out. Merely because some manufacturing activities in the nature of alleged business activities are involved, this will not change the character of activity. The Assessee has demonstrated as to how these allied manufacturing activity has assisted its key objects in the area of education and medical reliefs. The receipts from manufacturing activities have been admittedly applied towards the objects of the trust. Therefore, in our considered view, manufacturing activity allied to education and medial reliefs etc. resulting in profits is no handicap for holding the activities to be charitable in nature under section 2(15) of the Act irrespective of fact that it may involve carrying on of commercial activities provided income from such activities are utilized towards charitable purposes. This view is also fortified by the CBDT Circular no. 11/2008 dated 19/12/2008. The very definition of charitable purpose under S. 2(15) is inclusive in nature and not mutually exclusive. The Assessee is entitled to relief in any of the sub clause dehors the relief for other activity available under other sub clause. The stand of the Assessee that the receipts from manufacturing activity has been applied for furtherance of the principle objects also remains uncontroverted. As a logical corollary, the activities in question are not for the purposes of profit as contemplated in S. 10(23C) (iiiab) & (iiiac) of the Act. The case laws relied upon the Revenue are distinguishable on facts since the profits from manufacturing activity has been applied in the proceedings for larger object of charitable nature of education and medical relief. In the absence any other plea to vacate the order of CIT(A) granting relief on this issue, We find no reason to interfere with the order of the learned CIT(A). - Decided against revenue.

Summary

Issues Involved:
1. Applicability of the first proviso to section 2(15) of the Income-tax Act, 1961.
2. Taxation of exempt income under section 10(23C)(iiiab).
3. Setting off brought forward deficit while computing the income of the trust.
4. Reduction of capital expenditure incurred by the trust as application of income.
5. Computation of income of the Charitable Trust under the provisions of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of the first proviso to section 2(15) of the Income-tax Act, 1961
The Assessing Officer (AO) denied the exemption to the assessee trust on the grounds that the activity carried on by one of its sections, "Aushadi Bhavan," was in the nature of business, thus falling under the proviso to section 2(15) of the Act. The AO argued that the manufacturing and selling of Ayurvedic medicines by "Aushadi Bhavan" was a commercial activity, not aligned with charitable purposes such as medical relief or education. The CIT(A) disagreed, stating that manufacturing Ayurvedic medicines was incidental to the trust's main objects of medical relief and education, and thus, the proviso to section 2(15) was not applicable. The Tribunal upheld the CIT(A)'s decision, emphasizing that the activities were educational and medical in nature and thus did not fall under the proviso to section 2(15).

Issue 2: Taxation of exempt income under section 10(23C)(iiiab)
The AO included the surplus income of Rs. 27,79,180/- from Ayurved Mahavidyalaya in the taxable income. The CIT(A) noted that Ayurved Mahavidyalaya was substantially financed by the Government, qualifying it for exemption under section 10(23C)(iiiab). The Tribunal agreed with the CIT(A), confirming that the surplus was eligible for exemption under section 10(23C)(iiiab).

Issue 3: Setting off brought forward deficit while computing the income of the trust
The AO did not allow the set-off of the brought forward deficit of Rs. 51,25,546/-. The CIT(A) allowed this set-off, treating it as an application of income. The Tribunal upheld the CIT(A)'s decision, allowing the brought forward deficit to be set off against the current year's income.

Issue 4: Reduction of capital expenditure incurred by the trust as application of income
The AO disallowed the capital expenditure of Rs. 62,47,446/- incurred by the trust. The CIT(A) allowed this expenditure as application of income, referencing the decision of the Jurisdictional High Court in the case of CIT vs. Institute of Banking Personnel Selection. The Tribunal agreed with the CIT(A), allowing the capital expenditure as application of income.

Issue 5: Computation of income of the Charitable Trust under the provisions of the Income Tax Act, 1961
The AO computed the income of the trust without considering its charitable status under section 12A and provisions of the Income Tax Act. The CIT(A) corrected this, stating that the trust, being a public charitable trust registered under the Bombay Public Trust Act, 1950, and section 12A of the IT Act, should have its income computed under sections 11, 12, and 13 of the Act. The Tribunal upheld the CIT(A)'s approach, confirming that the trust's income should be computed as per the provisions applicable to charitable trusts.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that the activities of the trust were charitable in nature, the income was eligible for exemption under sections 11, 12, and 10(23C)(iiiab), and the brought forward deficit and capital expenditure were allowable as applications of income. The Tribunal found no merit in the Revenue's contentions and confirmed the CIT(A)'s findings on all issues.