2016 (4) TMI 708 - AT - Income Tax

Entitlement to exemption u/s 11(4A) - Held that - A perusal of the chart shows that against a gross revenue of ₹ 5,36,87,019/-, the assessee has expended a sum of ₹ 4,942,490/- and the net surplus comes to ₹ 42,62,079/- which is only 7.93% of the gross receipts. It is also seen that the assessee has incurred deficits in its Guest House at Delhi, Day Care Centre at Dehradun and Senior Citizens Accommodation at Dehradun which had to be funded from the surplus at other projects. Hence, it can be logically inferred that the surplus earned is only incidental to the charitable activities. Also, there is no finding by the AO about any diversion of funds for the individual benefit of any member of the association or for the benefit of his relative. Also there is no finding by the AO regarding any kind of violation of any other conditions by the assessee, as laid down in section 13 of the Act. Therefore, in view of the factual matrix of the case as well as the judicial precedents as aforesaid, we are of the considered opinion that the assessee is engaged in providing relief to the poor, education as well as medical relief. We have no hesitation in holding that the activities of the assessee association fall within the ambit of the first three limbs viz. relief to the poor, education or medical relief and it will not be hit by the newly inserted proviso to section 2(15). Moreover, CBDT Circular no. 11/2008 dated 19th Dec, 2008 states that the commercial activity of any charitable trust will not be subject to tax if along with commercial activities it is engaged in providing relief of the poor, education, medical relief. Proviso to Section 2(15) will apply ONLY to entities whose purposes is advancement of any other object of general public utility. We have already held that the activities of the assessee association fall within the ambit of the first three limbs viz. relief to the poor, education or medical relief and it will not be hit by the newly inserted proviso to section 2(15). Accordingly, the benefit of this circular should also accrue to the assessee and, therefore, the benefit of exemption claimed by the assessee u/s 11 cannot be rightfully denied - Decided in favour of assessee

Issues Involved:
1. Classification of activities under Section 2(15) of the Income Tax Act.
2. Applicability of the proviso to Section 2(15) regarding commercial activities.
3. Maintenance of separate books of accounts under Section 11(4A).
4. Eligibility for exemption under Section 11 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Activities under Section 2(15):
The primary issue was whether the activities of the assessee, a registered charitable organization, fall under the definition of "charitable purpose" as per Section 2(15) of the Income Tax Act, 1961. The Assessing Officer (AO) argued that the assessee's activities, particularly running guest houses, did not qualify as charitable and should be classified under the general object of "public utility." However, the assessee contended that its activities were charitable, focusing on education, health, leadership, and skills training for women's empowerment. The First Appellate Authority (CIT(A)) concluded that the assessee's activities fell under the first three limbs of Section 2(15) (relief to the poor, education, or medical relief) and were not affected by the proviso to Section 2(15).

2. Applicability of the Proviso to Section 2(15):
The AO argued that the assessee's activities were in the nature of trade, commerce, or business, and thus, did not qualify for exemption under the amended Section 2(15). The AO noted that the assessee earned significant revenue from guest houses and did not maintain separate books of accounts for these activities, violating Section 11(4A). The CIT(A) rejected this view, stating that the assessee's activities were charitable and incidental to its main objectives. The Tribunal upheld this view, noting that the assessee's activities were primarily charitable, with any surplus being incidental.

3. Maintenance of Separate Books of Accounts under Section 11(4A):
The AO found that the assessee did not maintain separate books of accounts for its business activities, which is a requirement under Section 11(4A). The assessee countered this by stating that it maintained separate books for its various charitable projects, which were consolidated at the year-end. The Tribunal found no evidence of fund diversion for individual benefits and noted that the assessee's activities were primarily charitable, thus satisfying the conditions of Section 11(4A).

4. Eligibility for Exemption under Section 11:
The AO denied the exemption under Section 11, treating the surplus from guest houses as business profits. The assessee argued that its activities were charitable and that any surplus was incidental. The Tribunal agreed, noting that the assessee's activities fell within the first three limbs of Section 2(15) and were not hit by the proviso. The Tribunal also referred to CBDT Circular No. 11/2008, which states that commercial activities of charitable trusts are not subject to tax if they are engaged in providing relief to the poor, education, or medical relief.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the assessee's activities were charitable and eligible for exemption under Section 11. The appeal by the Department was dismissed.

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