2016 (1) TMI 316 - AT - Income Tax

Entitlement to exemption u/s 11 & 12 - activity of running a Dharamshala and receipt of rent - whether assessee trust is involved in commercial activities, hit by first proviso to section 2(15) r.w.s. 13(8)? - Held that - There does not appear to be any profit motive in the case of the assessee as the excess of income over expenditure cannot be distributed amongst its members either in the course of its activity or in the event of its dissolution. Therefore, one of the important ingredients for treating the activity of the appellant as business i.e., profit motive is missing in this case. Since there is no profit motive involve, the activities carried out by the appellant cannot be described as business. In such a situation, as explained by CBDT vide its Circular no. 11 of 2008 dated 19.12.2008 there would be no application of proviso to section 2(15). Moreover, as held by the Apex Court in the case of Surat Arts Silk (1979 (11) TMI 1 - SUPREME Court ), what is important in the case of trust or institution is the primary or dominant purpose. If the dominant purpose is charitable, another object which by itself may not be charitable, would not prevent the trust or institution from being a valid charity. It is noted in this case that the charges for the room are very nominal, starting from a mere ₹ 40/-. This also indicates that there is no profit motive involved in this case. Considering all the legal and factual position, it is apparent that the dominant motive in this case is not earning profit but to do charity in the form of public service by providing accommodation to the common man at affordable rates. The activities of the assessee, therefore, cannot be characterized as business activities. Hence, proviso to section 2(15) is not attracted in this case and, therefore, the disallowance of exemption u/s 11 & 12 is unjustified. The AO is, accordingly, directed to assess the society as per the provisions of section 11 & 12, and grant the requisite exemption - Decided in favour of assessee

Issues Involved:
1. Justification of exemption under sections 11 & 12 of the Income Tax Act for a trust involved in commercial activities.
2. Allowance of capital expenditure for a trust not entitled to exemption under sections 11 & 12.

Detailed Analysis:

Issue 1: Exemption Under Sections 11 & 12
The primary issue revolves around whether the assessee trust, involved in running a Dharamshala, qualifies for exemption under sections 11 & 12 of the Income Tax Act, despite engaging in activities that may be considered commercial. The Assessing Officer (AO) argued that the trust's activities fall under "advancement of general public utility" and exceed the Rs. 10 lakh threshold, thus disqualifying it from exemption under the amended provisions of section 2(15) read with section 13(8).

The AO relied on the Hon'ble Jurisdictional High Court's decision in CIT vs. Paramhans Ashram Trust (2009) and concluded that the trust's activities were commercial. Consequently, the AO forfeited the exemption and added the balance income to the assessee's taxable income.

However, the Commissioner of Income Tax (Appeals) [CIT (A)] disagreed, emphasizing that the first and second provisos to section 2(15) apply only when the activities are in the nature of "trade, commerce, or business." The CIT (A) cited CBDT Circular No. 11 of 2008, which clarifies that exemption is not available to entities engaged in commercial activities under the guise of charity. The CIT (A) further referenced the Delhi High Court's judgment, stating that profit motive is a crucial factor in defining "business," especially for trusts or societies.

The CIT (A) noted that the trust is registered under the Societies Registration Act and that its constitution mandates that all assets go to the State Government upon dissolution. This lack of profit motive, coupled with nominal room charges, led the CIT (A) to conclude that the trust's activities are not commercial. Thus, the CIT (A) directed the AO to grant the requisite exemption under sections 11 & 12.

Issue 2: Allowance of Capital Expenditure
The second issue concerns the disallowance of capital expenditure amounting to Rs. 72,35,233/-. The AO disallowed this expenditure on the grounds that the trust was not entitled to exemption under sections 11 & 12. However, the CIT (A) allowed the claim, reasoning that since the trust is entitled to exemption, the capital expenditure should be considered as an application of income.

The CIT (A) stated, "The capital expenditure made by the appellant has been disallowed by the AO on the ground that the appellant was not entitled to exemption u/s 11 & 12. However, as has been held above, the appellant is entitled to exemption under these sections. Therefore, the disallowance of claim of the capital expenditure as application of income also appears to be uncalled for and is, accordingly, deleted."

Tribunal's Conclusion
The Tribunal upheld the CIT (A)'s order, confirming that the trust's activities do not constitute business due to the absence of a profit motive. The Tribunal dismissed the revenue's appeal, stating, "After analyzing the various details furnished and considering the various judgments of Hon'ble Supreme Court and Hon'ble High Courts made available on record and the factual position, we do not find any infirmity in the order of ld. CIT (A). Therefore, while confirming the order of ld. CIT (A), we dismiss the revenue's appeal."

Result
The appeal of the revenue was dismissed, and the trust was granted exemption under sections 11 & 12, along with the allowance of capital expenditure. The order was pronounced in the open court on 01/01/2016.

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