2016 (4) TMI 641 - HC - Income Tax

Registration under section 12A withdrawn - ITAT allowed the claim - whether ITAT was justified in allowing the appeal of the assessee brushing aside the provisions of Section 11 (4A) ? - Held that - It is well settled principle of law that the test to determine as to what would be a charitable purpose within the meaning of section 2 (15) of the Act, is to ascertain what is the dominant object of the activity; whether it is to carry out a charitable purpose or to earn profit. If the predominant object is to carry-out a charitable purpose and not to earn profit the purpose would not lose its charitable character merely because the some profit arises from the activity. The revenue s contention that the tribunal has overlooked the provisions of section 11(4A) is unfounded. We have noted above that the service charges received in respect of 6th and 7th floor were clearly on account of educational purpose. Letting out was incidental and not the principle activity of the assessee-trust. Thus, in our opinion, section 11(4A) which require separate account to be maintained would not be attracted in view of our conclusion that the said amounts as received by the assessee for the assessment year have been received from educational activity which is the dominant activity of the assessee-trust. In our opinion, if this be the case, separate books of accounts cannot be insisted upon as the said activity becomes part and parcel of the educational activities carried out by the assessee-trust. In such a case, the benefit of exemption under section 11 (4A) cannot be denied. An interpretation as urged on behalf of the revenue would render nugatory the very spirit, rationale and the object of the exemption provisions making the same unworkable - Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of Section 11(4A) of the Income Tax Act, 1961.
2. Interpretation and application of Section 2(15) and its proviso regarding "charitable purpose."
3. Validity of withdrawal of registration under Section 12A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Section 11(4A) of the Income Tax Act, 1961:
The revenue contended that the assessee did not maintain separate books of accounts for the income received from letting out the auditorium and the Management Institute, as required under Section 11(4A). The Tribunal, however, found that the service charges received were on account of educational purposes, and letting out was incidental, not the principal activity. Thus, Section 11(4A) was not applicable since the amounts received were part of the educational activities of the trust. The Tribunal's conclusion was supported by the Division Bench decision in the case of Director of Income Tax (Exemption) vs. Vile Parle Kelawani Mandal, which held that separate books of accounts are not necessary if the activity is part and parcel of the educational activities.

2. Interpretation and Application of Section 2(15) and its Proviso Regarding "Charitable Purpose":
The assessee argued that their primary object was the "advancement of education," which falls within the definition of "charitable purpose" under Section 2(15). The revenue's case was that letting out the premises amounted to an activity in the nature of trade, commerce, or business, thus attracting the first proviso to Section 2(15). The Tribunal concluded that the dominant object of the assessee was educational, and incidental letting out of the premises did not change this character. The Tribunal noted that the premises were let out for educational purposes to Lala Lajpatrai Institute, and the income from letting out the auditorium was minimal and incidental. The CBDT Circular No. 11/2008 was also cited, which clarified that the proviso to Section 2(15) does not apply to entities whose primary purpose is education, even if it incidentally involves commercial activities.

3. Validity of Withdrawal of Registration Under Section 12A of the Income Tax Act, 1961:
The DIT (E) had withdrawn the registration of the assessee under Section 12A, citing that the activities of letting out premises were commercial and not charitable. The Tribunal, however, found that the assessee's activities were in line with its primary objective of promoting education. The Tribunal observed that the letting out of the premises was for educational purposes and incidental income from the auditorium did not change the charitable nature of the trust. The Tribunal's decision was based on the dominant object test, which determines the charitable nature based on the primary purpose of the activity, not incidental profits. The Tribunal set aside the DIT (E)'s order, reinstating the registration under Section 12A.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the primary object of the assessee was the advancement of education, and incidental commercial activities did not alter its charitable nature. The appeal was dismissed, and the Tribunal's order was affirmed, with no order as to costs.