2016 (8) TMI 1445 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) - CIT(Appeals) held that the activities undertaken by the assessee trust are for the fulfillment of the charitable objects on non-commercial lines and are not hit by the provisions of section 2(15) - HELD THAT - Assessee is procuring raw material from African countries and distributing the same to its members as well as other concerns which has similar nature of business as those of the members of the assessee society. Further from the objects of the assessee society, it is evident that such trading activity indulged by the assessee society is not mentioned in the objects of the assessee society - the activity of the assessee society viz., procuring raw materials from abroad and distributing the same will amount to pure commercial transaction because it is purely a trading activity generating substantial profits. There is no element of charity in this kind of activity indulged by the assessee society. It is not a case where the assessee had imported raw materials and distributed the same amongst its members and other commercial entities having same kind of business on cost to cost basis. The activity carried out by the assessee at the most benefit the members of the assessee society and certain commercial entities having same kind of business as that of the members of the assessee society and the public who purchases the produce of these entities. Hence this venture of the assessee society cannot be inferred beyond the scope of Advancement of any other object of general public utility . Therefore, relying in the decision cited by the learned assessing officer we are of the considered view that the proviso to section 2(15) of the Act would be applicable in the case of the assessee and accordingly, the surplus earned by the assessee deserves to be brought under the ambit of tax. - Decided in favour of revenue

Issues Involved:
1. Delay in filing the appeal.
2. Entitlement of the assessee society for exemption under section 11 of the Income Tax Act.
3. Applicability of proviso to section 2(15) of the Income Tax Act to the assessee society's activities.

Detailed Analysis:

1. Delay in Filing the Appeal:
The Revenue's appeal for the assessment year 2009-10 was delayed by 14 days. The delay was attributed to the inadvertent mixing up of records with other files. The Tribunal condoned the delay, considering the explanation provided by the learned DIT (Exemptions), and proceeded with the adjudication.

2. Entitlement for Exemption under Section 11:
The assessee, a trade association registered as a society, filed its returns for the assessment years 2009-10, 2010-11, and 2011-12. The society was granted registration under section 12A(a) of the Act. The activities of the society included representing the trade before government authorities, educating the trade community, and engaging in charitable activities like providing uniforms to students and medical aid to the poor.

During assessment, it was observed that the society purchased wattle from Africa and distributed it to its members and other concerns in the same industry with a margin of profit. The society explained that this activity was carried out without any profit motive and aimed to support small traders. However, the Assessing Officer noted that the society earned a surplus from this activity and withdrew the benefits of sections 11 and 12, bringing the surplus to tax.

On appeal, the Commissioner of Income Tax (Appeals) held that the society's activities were for the fulfillment of charitable objects on non-commercial lines and were not hit by the provisions of section 2(15). The CIT(A) emphasized that the activities were not pervaded by profit motive and were primarily for serving dominant charitable purposes. The surplus earned was incidental and ploughed back into the organization for charitable activities.

3. Applicability of Proviso to Section 2(15):
The CIT(A) observed that the provisos to section 2(15) apply only when the business undertaken is an "unrelated business" of the charitable organization. The income from the society's activities was substantially related to its charitable purpose and contributed importantly to accomplishing that purpose. The CIT(A) cited various judgments, including the case of Sabarmati Ashram Gaushala Trust v. Assistant Director of Income-tax (Exemption), which supported the view that profit earned incidentally from activities carried out on non-commercial lines for charitable purposes is not hit by the proviso to section 2(15).

The Tribunal, however, disagreed with the CIT(A). It noted that the society's trading activity of procuring raw materials from Africa and distributing them to its members and other commercial entities amounted to a pure commercial transaction generating substantial profits. This activity was not mentioned in the society's objects and did not involve any element of charity. The Tribunal concluded that the proviso to section 2(15) was applicable, as the activity was a commercial venture benefiting the members and certain commercial entities, rather than the general public utility.

Conclusion:
The Tribunal ruled in favor of the Revenue, holding that the surplus earned by the assessee society from its trading activities was liable to be taxed under the proviso to section 2(15) of the Act. The appeals of the Revenue were allowed, and the order of the CIT(A) was overturned.

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