2010 (10) TMI 1176 - HC - Income Tax

Exemption u/s 011 - income from the business undertaking - charitable or religious purpose - In present case the assessee Trust holds the property in Trust. the commercial activity is being carried on by the assessee by using the building as marriage halls auditoriums etc. The assessee has filed its returns claiming that the income derived therein is being used towards its objectives which are charitable in nature and filed its return claiming that the Income derived from the property held in Trust by the assessee is eligible for exemption u/s 011. However the AO for the assessment has rejected the exemption sought for by the assessee by holding that in as much as the assessee was carrying on a commercial activity which is not incidental to the object of the Trust as required u/s 011 the exemption cannot be granted. It was also held that the assessee has not complied with the provisions contained u/s 011(4)(A) by not maintaining separate books of accounts in respect of its income assessable under the said business. HELD THAT - The factual question of the actual income that is to be exempted has not been gone into by taking into consideration of the separate heads of accounts. A perusal of Section 011(4)(A) of the Act would clearly show that the said provision is an exception to Section 011(1) 011(2) 011(3) and 011(3)(A).Therefore the assessee will have to satisfy the authorities that such an exemption is to be granted by providing substantial materials to show that income derived from the business has been utilised towards the fulfillment of the objectives of the trust. Equally a duty is cast upon the AO concerned to look into the records and give a factual finding determining the actual income available for exemption. However in view of our reasoning that a business income if utilized towards the achievement of the object of the assesse trust the same would be incidental to the achievement of the object. Accordingly the substantial questions of law raised are answered in favour of the revenue.

Issues Involved:
1. Interpretation of Section 11(1) read with Section 11(4) and 11(4)(A) of the Income Tax Act.
2. Determination of whether the business income of the trust is incidental to its charitable objectives.
3. Compliance with the requirement of maintaining separate books of accounts under Section 11(4)(A).
4. Necessity of remanding the case to the Assessing Officer for further determination.

Issue-Wise Detailed Analysis:

1. Interpretation of Section 11(1) read with Section 11(4) and 11(4)(A) of the Income Tax Act:
The court examined whether Section 11(4)(A) restricts the scope of Section 11(4). It concluded that Section 11(4)(A) does not exclude Section 11(4) but complements it. Section 11(4)(A) provides an exemption for business income if it is incidental to the attainment of the trust's objectives and separate books of accounts are maintained. The court emphasized the principle of harmonious construction, stating that provisions should be read together to avoid making any provision redundant. Thus, Section 11(4)(A) does not restrict the power under Section 11(4).

2. Determination of whether the business income of the trust is incidental to its charitable objectives:
The court referred to the Supreme Court's judgment in *ASSISTANT COMMISSIONER OF INCOME-TAX v. THANTHI TRUST [2001 247 ITR 785]*, which held that business income used to achieve the trust's objectives is incidental to those objectives. The court reiterated that the income derived from the business, if utilized for charitable purposes, qualifies for exemption under Section 11(4)(A). The court rejected the revenue's argument that the business activities were purely commercial and not connected to the trust's objectives.

3. Compliance with the requirement of maintaining separate books of accounts under Section 11(4)(A):
The court found that the assessee had maintained three sets of accounts, satisfying the requirement of Section 11(4)(A). The Commissioner of Income Tax (Appeals) and the Tribunal had both held that the assessee complied with the condition of maintaining separate accounts. The court upheld these factual findings, rejecting the revenue's contention that the assessee did not maintain separate books of accounts.

4. Necessity of remanding the case to the Assessing Officer for further determination:
The court agreed with the revenue that the authorities had not thoroughly examined the actual income eligible for exemption. The court emphasized that the Assessing Officer must verify the records and determine the actual income utilized for charitable purposes. The court decided to remand the case to the Assessing Officer to determine the eligibility of the assessee's income for exemption under Section 11, based on a detailed examination of the records.

Conclusion:
The court held that business income used for charitable purposes is incidental to the trust's objectives and qualifies for exemption under Section 11(4)(A). The court also confirmed that the assessee had complied with the requirement of maintaining separate books of accounts. However, the court remanded the case to the Assessing Officer to determine the actual income eligible for exemption, directing the Assessing Officer to complete the exercise within three months. The orders passed by the Tribunal were set aside, and the appeals were allowed to the extent indicated.

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