2016 (1) TMI 1024 - AT - Income Tax

Eligibility for exemption under S.11 - CIT(A) allowed the claim - Held that - As decided in assessee s own case for earlier years there being no dispute to the fact that dominant object of assessee is charitable in nature, proviso to section 2(15) cannot be applied to deny exemption to assessee u/s 11 of the Act. In our view, AO without examining the issue in proper perspective has abruptly concluded that assessee is not entitled to exemption u/s 11 of the Act only because proviso to section 2(15) was introduced w.e.f. 01/04/09. In our view, proviso to section 2(15) of the Act will not apply automatically to every trust or institution irrespective of the fact, whether the dominant object of the trust or institution is charitable purpose or earning profit. When in the present case assessee is registered as charitable institution and there is no change in the aims and objects of assessee in the impugned AY and the activities of assessee over the years remains the same, the proviso to section 2(15) cannot be applied to assessee to deny exemption u/s 11 of the Act. In view of the aforesaid, we do not find any merit in the submissions of the ld. DR so as to disturb the finding of the ld. CIT(A) on this issue - Decided in favour of assessee Disallowance u/s 40A(3) - Held that - Once the claim of the assessee for exemption under S.11 has been accepted, the disallowance made by the Assessing Officer under S.40A(3) has no legs to stand, and the ground of the assessee before the learned CIT(A) becomes infructuous. - Decided in favour of assessee

Summary

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income Tax Act.
2. Applicability of proviso to Section 2(15) of the Income Tax Act.
3. Disallowance under Section 40A(3) consequent to the denial of exemption under Section 11.

Detailed Analysis:

1. Eligibility for Exemption under Section 11 of the Income Tax Act:

The core issue revolves around whether the assessee, a society registered under Section 12A of the Income Tax Act, is eligible for exemption under Section 11. The Assessing Officer (AO) denied this exemption on the grounds that the assessee's activity of constructing a Jagannatha Temple does not constitute a charitable activity within the meaning of Section 2(15). Additionally, the AO argued that the primary income source, rental income from a function hall, was commercial in nature, thus disqualifying the society from claiming the exemption.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the exemption, referencing consistent decisions in the assessee's favor for previous assessment years (2008-09 to 2010-11). The Tribunal upheld the CIT(A)'s decision, noting that the construction of the temple and the rental income from the function hall were in line with the society's charitable objectives. The Tribunal cited previous orders and judicial precedents to affirm that these activities did not negate the charitable nature of the society.

2. Applicability of Proviso to Section 2(15) of the Income Tax Act:

The AO's second contention was that the proviso to Section 2(15) disqualified the assessee from being considered a charitable institution due to its engagement in commercial activities, such as renting out a function hall. The Tribunal, however, clarified that the proviso applies only to the last limb of 'charitable purpose,' i.e., advancement of any other object of general public utility. The Tribunal emphasized that the dominant objective of the trust should be considered, and if the primary purpose is charitable, incidental commercial activities do not disqualify the trust from exemption.

The Tribunal referenced the Delhi High Court's decision in the case of Indian Trade Promotion Organisation, which held that incidental income generation does not alter the charitable nature of an institution if the primary objective remains charitable. The Tribunal concluded that the assessee's activities, including the construction of the temple and the rental income, were ancillary to its main charitable objectives, and thus, the proviso to Section 2(15) did not apply.

3. Disallowance under Section 40A(3) Consequent to Denial of Exemption under Section 11:

The AO also disallowed an amount of Rs. 39,000 under Section 40A(3) following the denial of exemption under Section 11. The CIT(A) treated this issue as infructuous after allowing the exemption under Section 11. The Tribunal agreed, stating that once the exemption under Section 11 is accepted, the disallowance under Section 40A(3) becomes irrelevant. Therefore, the Tribunal found no merit in the Revenue's appeal on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that granted the assessee exemption under Section 11. The Tribunal confirmed that the assessee's activities were charitable in nature and that the proviso to Section 2(15) did not apply. Consequently, the disallowance under Section 40A(3) was also deemed irrelevant. The judgment reinforces the principle that incidental commercial activities do not disqualify a trust from being considered charitable if its primary objective remains charitable.