2018 (3) TMI 1896 - AT - Income Tax

Exemption u/s 11 denied - letting out of a Shanmukhananda Hall - SH by a charitable institute - no charitable object - HELD THAT - The main objection of the departmental authorities was that the SH was rented out most of the time and that it was a commercial activity. In our opinion, act of letting out of hall cannot be and should not be considered in isolation. Eligibility or otherwise of benefit u/s. 11 of the Act cannot depend solely on one factor.What has to be seen is as to whether the trust is incurring the expenditure for the objects and purposes for which it was established. We find that the issue of letting out of a hall by a charitable institute was deliberated upon by the Hon ble Madras High Court in the case of Madras Stock Exchange Ltd 1976 (4) TMI 47 - MADRAS HIGH COURT and Women s India Trust 2015 (4) TMI 976 - BOMBAY HIGH COURT . The departmental authorities have,in the past,admitted that activities carried out by it were of charitable nature. No new fact has been brought on record to prove that during the year some different incidents had taken place as compared to the earlier year to change the nature of the activities. The letting out of SH,during the period when it was not required by the trust,was not considered a commercial activity in the earlier years.It is true that principles of res judicata are not applicable to the income tax proceedings. But,at the same time it is also true that principles of consistency have to be followed while deciding the tax matters We hold that the assessee is running music school and providing medical services and it is utilising SH for augmenting its funds. In these circumstances in our opinion, it cannot be held that the it is carrying out business activities and the charitable activities are by product, as alleged by the departmental authorities. What has to seen in such cases is a holistic view of the things and not a narrower view - Decided in favour of assessee.

Issues Involved:
1. Denial of deduction for expenses incurred under various heads.
2. Applicability of provisions of Section 11 of the Income Tax Act.
3. Disallowance of depreciation claim.
4. Applicability of proviso to Section 2(15) of the Income Tax Act.
5. Rectification application under Section 154 of the Income Tax Act.

Detailed Analysis:

1. Denial of Deduction for Expenses Incurred Under Various Heads:
The primary issue in the appeal was the denial of deduction for expenses incurred by the assessee towards various heads such as Board of Trustee Account, Medical Care Account, Music School Account, and Sabha Account. The Assessing Officer (AO) observed that the assessee's activities were primarily commercial, as the majority of the receipts were from renting out an auditorium, Shanmukhananda Hall (SH), for various programs. The AO concluded that the assessee was not eligible for exemption under Section 11 of the Income Tax Act as the activities were predominantly commercial.

2. Applicability of Provisions of Section 11 of the Income Tax Act:
The AO held that the assessee's main activity was renting out the hall, and the charitable activities were incidental to the commercial activities. The First Appellate Authority (FAA) upheld this view, stating that the assessee's main activity was letting out the hall for commercial purposes, and the proviso to Section 2(15) was applicable. The FAA also noted that the assessee had earned significant rental income, which constituted 88% of the total receipts, and thus, the main activity was not spreading knowledge but letting out property.

3. Disallowance of Depreciation Claim:
The AO disallowed the assessee's claim for depreciation, reasoning that claiming full amount of assets in the revenue account and again claiming depreciation amounted to double deduction. The FAA upheld this disallowance, stating that since exemption under Section 11 was denied, no deduction for depreciation was available.

4. Applicability of Proviso to Section 2(15) of the Income Tax Act:
The FAA and the AO emphasized that the proviso to Section 2(15) was applicable, which excludes entities engaged in trade, commerce, or business from claiming charitable status. The assessee argued that its activities, such as running a music school and providing medical services, were charitable, and the rental income was used to subsidize these activities. The Tribunal referred to various case laws, including the Hon’ble Bombay High Court's decision, which supported the assessee's claim that incidental activities for furtherance of the charitable purpose do not constitute business activities.

5. Rectification Application Under Section 154 of the Income Tax Act:
The assessee filed a rectification application, which was rejected by the FAA. However, since the main appeal was allowed, the rectification appeal was rendered infructuous.

Judgment:
The Tribunal found that the assessee's predominant objects were charitable, including imparting education in music, dance, drama, culture, and providing medical relief. It held that during the continuation of registration under Section 12A, the departmental authorities could not challenge the charitable nature of the trust's objects. The Tribunal emphasized that the act of letting out the hall should not be considered in isolation and that the overall expenditure for charitable purposes should be considered.

The Tribunal allowed the first ground of appeal, holding that the assessee was engaged in charitable activities and was entitled to the benefits of Section 11. Consequently, the claims for depreciation were also allowed, following the Tribunal's decision for the earlier assessment year. The rectification application appeal was treated as infructuous.

Conclusion:
The appeals were decided in favor of the assessee, granting the benefits of Section 11 and allowing the claim for depreciation. The rectification application was rendered moot due to the favorable decision on the main appeal.

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