2016 (7) TMI 1099 - HC - Income Tax

Entitlement to exemption u/s 11 - charitable activities - sale proceeds of the lands by assessee trust - Held that - The assessee has purchased the lands to an extent of 71.89 Acres, in the year 1986-87, for the purpose of setting up a medical college and old age home. According to the assessee, permission could not be obtained from the competent authorities and thus, the lands purchased for the abovesaid purposes, in the year 1986-87, which fell within the ambit of Section 2(15) of the Income-Tax Act, could not be utilised and thus, they were constrained to sell the same. Merely because the lands were sold from 1994 onwards, which fetched a higher value, it cannot be said that it was only for profit motive. Bumber profit, as held by the Assessing Officer, depends upon the value of the land, sold in the year 2009-10. Though the assessee has started selling the bulk land into plots from 1994-95 onwards, it is not the case of the revenue that there was no bona fide on the part of the assessee, as to why, the assessee was constrained to sell the same. Market value of the land purchased in the year 1986-87, cannot be expected to be static. Naturally, when it is sold after many years, it would fetch a higher value. Law also does not prohibit an assessee to sell the lands, less than the market value. Merely because, lands are sold at a higher rate, after a considerable period of time, that alone cannot be the sole criteria to contend that the activity of the assessee was business activity, not incidental to the principal activity of the trust, which is, otherwise charitable in nature. Whether to gain profit by sale and utilise the sale proceeds, for any other purpose or engage in continuous activity of business or trade or commerce, as the case may be, and to divert the gain, for any other purpose or to spend the same for charitable purpose Findings recorded and extracted supra that the amount is utilised for charitable purpose, is indisputed. Activities for a span of considerable period, may reflect business or commercial activity, but the question to be decided, is whether, it is incidental to carry on the main purpose, charitable , which includes, (i) Relief of the poor, (ii) Education, (iii) Medical relief. What emerges from the reading of the provisions and the Circular is that a trust or institution, whose purpose is advancement of any other object of general public utility, and recognised as charitable, under the fourth limb of Section 2(15) of the Income-Tax Act, and predominantly engages in activities in the nature of trade, commerce or business, should not be permitted to escape from taxability, with the mask, charitable . In the case on hand, the glaring omission on the part of the revenue is to consider, as to whether, sale of lands was necessitated Whether it was incidental towards attainment of the objectives of the trust , and more particularly, when the income was wholly utilised only for achieving the objectives of charitable purpose of the trust. Therefore, mere sale of an immovable property of the trust alone, cannot be the sole factor, to arrive at a conclusion that the income earned should be brought under the head, business income . In the case of trust or institution, whose predominant activity is not business, incidental activity of sales, carried out, in furtherance of and to achieve the main objectives of the trust or institution, should not be construed as business activity, solely with an intention to earn profit, and consequently, to bring the income, under the head, business income. Going through the material on record and in the light of the discussion, we are unable to accept the contention of the Revenue that the substantial questions of law, raised by the revenue, deserve to be answered, affirmatively, in favour of the revenue. Both on facts and law, the revenue has failed to substantiate the contentions raised in the instant appeals. - Decided in favour of assessee.

Issues Involved:
1. Whether the profit from the sale of land owned by the assessee can be treated as business income.
2. Whether the profit from the sale of land is eligible for exemption under Section 11 read with Section 2(15) of the Income-Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Treatment of Profit from Sale of Land as Business Income

The primary issue revolves around whether the profit earned from the sale of land by the assessee, a trust running educational institutions, should be classified as business income. The assessing officer argued that the activity of selling land by converting it into plots and earning profits was a systematic and organized business activity. The officer noted that the trust had been engaging in this activity since 2004-05 and concluded that it was a commercial activity with a profit motive, not falling under any charitable activities as per the objects of the trust.

The appellate authority and the Tribunal, however, disagreed with this view. They held that the sale of land was incidental to the main charitable objects of the trust, which included education. The Tribunal observed that the trust sold the land prudently to secure maximum revenue for its charitable activities, particularly education. The proceeds from the sale were utilized for the trust's charitable purposes, and there was no diversion of funds for non-charitable activities. Thus, the Tribunal concluded that the sale of land was an incidental activity and not a business activity.

Issue 2: Eligibility for Exemption under Section 11 read with Section 2(15)

The second issue concerns whether the profit from the sale of land is eligible for exemption under Section 11 read with Section 2(15) of the Income-Tax Act. The assessing officer's contention was that the trust's activity of selling land constituted a business activity, making the profit taxable. However, the appellate authority and the Tribunal held that the trust's activities were charitable in nature, focusing on education, which falls under the definition of "charitable purpose" as per Section 2(15).

The Tribunal referred to Circular No.11/2008, which clarifies that the newly inserted proviso to Section 2(15) will not apply to entities whose purpose is relief of the poor, education, or medical relief, even if they incidentally carry on commercial activities. The Tribunal found that the trust's primary objective was education, and the sale of land was incidental to this objective. The proceeds from the sale were used for charitable purposes, and the trust maintained separate books of accounts for such activities. Therefore, the Tribunal concluded that the profit from the sale of land was eligible for exemption under Section 11.

Conclusion:

The High Court upheld the decisions of the appellate authority and the Tribunal, dismissing the appeals filed by the Revenue. The Court agreed that the profit from the sale of land was incidental to the trust's charitable activities and not a business activity. The proceeds were used for charitable purposes, and the trust maintained separate accounts for such activities. Therefore, the profit from the sale of land was eligible for exemption under Section 11 read with Section 2(15) of the Income-Tax Act.

The substantial questions of law raised by the Revenue were answered against them, and the Tax Case Appeals were dismissed.

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