2022 (2) TMI 1362 - AT - Income Tax

Denying of exemption u/s 11 - non charitable activity - AO held that the actual activities carried out by the assessee are in the nature of pure commercial activity carried out by any Contractor and work/activity carried out by the assessee during the entire year can only be described as carrying out Civil Construction Work - HELD THAT - As 'incidental' is an offshoot of the 'main activities', inherent bye-product of pre-dominant activities. The activities complementing the main activities are not in the nature of incidental to the business. It is incidental if it is supporting the activities to the main activities. The Tribunal held that the activities carried on by the assessee is itself principal activities and not incidental activities. Hence, it is not possible to hold that the construction activities carried out by the assessee is not protected by the provisions of section 11(4A), there is no merit in the argument of the assessee. As contended by the assessee that the surplus funds generated from the construction business was spent towards charitable activities and therefore, the assessee is entitled for exemption under section 11(4) is not acceptable. Initially, the assessee carried on the business itself which is not at all property held under trust. This activity is a business activity and the provisions of section 11(4A) is applicable. The tribunal held that there is no nexus between the activities carried on and the objects of the assessee that can constitute an activity incidental to the attainment of the objects, namely, to promote cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self reliance among the members of the public etc. Being so, the assessee is not entitled for any exemption under section 11. We have examined the facts of the assessee s case and find that the same is identical to the case decided by the ITAT, Cochin Bench 2018 (11) TMI 117 - ITAT COCHIN The ratio laid down in the aforesaid case therefore is squarely applicable to the facts of the assessee s case. Decided against assessee.

Summary

Issues Involved:
1. Applicability of Section 11 benefits to the assessee.
2. Interpretation of the proviso to Section 2(15) of the Income Tax Act.
3. Nature of activities carried out by the assessee.
4. Examination of the assessee’s profit motive.
5. Relevance of the ITAT Cochin Bench decision in a similar case.

Detailed Analysis:

1. Applicability of Section 11 benefits to the assessee:
The primary issue was whether the assessee, a society constituted to generate and propagate innovative ideas on housing, could claim benefits under Section 11 of the Income Tax Act, 1961. The Assessing Officer (AO) examined whether the assessee's activities fell under the proviso to Section 2(15) of the Act, which would preclude it from claiming such benefits. The AO concluded that the assessee's activities were commercial in nature, thus disqualifying it from Section 11 benefits.

2. Interpretation of the proviso to Section 2(15) of the Income Tax Act:
The proviso to Section 2(15) states that if the activities of a society are in the nature of trade, commerce, or business, they will not be considered charitable. The AO noted that the assessee's activities, such as road repairs, building repairs, and construction of commercial buildings, were akin to those carried out by private contractors and thus fell under the category of trade or business. Consequently, the AO held that the assessee's activities did not qualify as charitable purposes under the Act.

3. Nature of activities carried out by the assessee:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] both found that the activities carried out by the assessee were commercial in nature. The AO pointed out that the assessee's activities included civil construction work and were liable to VAT, further indicating their commercial nature. The CIT(A) agreed, noting that the activities performed were in the nature of commercial contract works, and if accepted as charitable, would imply that every civil work contractor could claim charitable status.

4. Examination of the assessee’s profit motive:
The AO rejected the assessee's argument of operating without a profit motive, citing the accumulation of Rs. 2.45 Crores over five years and a profit of Rs. 1.17 Crores in the current year on a turnover of Rs. 13.67 Crores. This accumulation and profit margin suggested that the assessee was operating on a commercial basis. The CIT(A) upheld this view, emphasizing the lack of evidence to support the assessee's claim of working towards its stated objectives.

5. Relevance of the ITAT Cochin Bench decision in a similar case:
The Tribunal referred to a similar case decided by the ITAT Cochin Bench, where it was held that the activities carried out by the assessee were not incidental to the attainment of the trust's objectives and were predominantly commercial. The Cochin Bench decision emphasized that the mere application of income for charitable purposes does not render the business activities as incidental to the trust's objectives. The Tribunal found the facts of the present case identical to the Cochin Bench case and applied the same rationale, concluding that the assessee's activities were not entitled to exemption under Section 11.

Conclusion:
The Tribunal upheld the order of the CIT(A), agreeing that the assessee's activities were commercial in nature and not incidental to its stated objectives. Consequently, the assessee was not entitled to the benefits of Section 11 of the Income Tax Act. The appeal by the assessee was dismissed.