2016 (8) TMI 865 - AT - Income Tax

Denial of exemption claimed under section 11 & 12 - as the assessee society does not fall within the scope of charitable purpose defined in section 2(15) of the Act and therefore, benefit of section 11 and 12 of the Act was not allowed to the appellant in the instant year - Held that - The appellant society has engaged in education which has been accepted in the preceding assessment years consistently by the Revenue in assessments framed under section 143(3) of the Act. Mere fact that there was a surplus could not be a basis to conclude that activities of the society were in the nature of trade, commerce or business or any activities rendered in connection with service or business for any other consideration. The activities of the appellant have been accepted to be within the scope of education under section 2(15) of the Act and also under section 10(22) of the Act. In such circumstances, the conclusion of the Assessing Officer to hold that the activities of the assessee are not in the nature of education only on the pretext that income from education is confined to Distance Learning course fee of ₹ 20.65 lacs out of total receipts of ₹ 21.45 crores is incorrect. On the contrary, we notice that the activities of the appellant are in the nature of participatory research. In the order of assessment of the appellant for assessment year 1983-84, it has been observed that the participatory research is a new development of the last decade and was arisen out of the experience of grassroots educational efforts in the Third World Countries. It has been noted that the Participatory Research can be utilized depend upon the needs of the poor and deprived. It has been noted that it has worked on the problems of forest, land, rural development, drinking water, primary health care, women s income generating efforts, occupational and environmental health etc. The appellant has also emphasized that it work with the community organizers, adult educator, health care workers, social workers etc. in training them to use participatory research methodology in their work. The appellant produces own educational materials for use in educational programmes and for wider dissemination. Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust v. UOI 2010 (1) TMI 49 - HIGH COURT OF PUNJAB AND HARYANA AT wherein it was held that merely because profits have resulted from the activities of imparting education, it would not result in change of character of the education that it was solely for educational purpose. The invocation of proviso to section 2(15) of the Act to deny claim of exemption under section 11 and 12 of the Act is not justified. Accordingly, grounds of appeal are allowed in favour of assessee.

Issues Involved:
1. Denial of exemption under sections 11 and 12 of the Income Tax Act.
2. Determination of whether the appellant society's activities are charitable under section 2(15) of the Income Tax Act.
3. Consideration of the appellant society's surplus as indicative of profit motive.
4. Applicability of the Bangalore Club judgment regarding interest earned on surplus funds.
5. Validity of the CIT(A)'s findings on the nature of the appellant's transactions and surplus.

Issue-wise Analysis:

1. Denial of Exemption under Sections 11 and 12:
The appellant society contested the denial of exemption under sections 11 and 12 by the CIT(A). The CIT(A) upheld the Assessing Officer's view that the society's activities were commercial in nature and not charitable under section 2(15). The Tribunal examined the appellant's activities, noting that the society was registered under section 12A and had been granted exemption under section 80G. The Tribunal found that the appellant's activities were educational, focusing on research, training, and capacity building, which had been accepted in previous assessments.

2. Charitable Nature under Section 2(15):
The Tribunal reviewed the appellant's objectives and activities, which included promoting participatory research, training, and education. The Tribunal cited various judicial precedents, including ICAI Accounting Research Foundation vs. DGIT (E) and Society for Essential Health Action Trust, to support the view that research and educational activities fall within the ambit of "education" under section 2(15). The Tribunal concluded that the appellant's activities were educational and not commercial, thus qualifying as charitable.

3. Surplus as Indicative of Profit Motive:
The Assessing Officer had held that the surplus generated by the appellant indicated a profit motive. The Tribunal referred to the Supreme Court's judgment in Queen's Educational Society v. CIT, which clarified that the existence of a surplus does not necessarily imply a profit motive if the primary purpose is education. The Tribunal found that the appellant's surplus was incidental and did not change the charitable nature of its activities.

4. Applicability of Bangalore Club Judgment:
The CIT(A) had relied on the Bangalore Club judgment to tax the interest earned on surplus funds. The Tribunal distinguished the facts of the appellant's case from the Bangalore Club case, noting that the appellant's interest income was earned from investments made in accordance with section 11(5) and was used for charitable purposes. The Tribunal held that the interest income should not be taxed.

5. Validity of CIT(A)'s Findings:
The Tribunal scrutinized the CIT(A)'s findings regarding the nature of the appellant's transactions and surplus. It noted that the CIT(A) had erroneously concluded that the appellant's activities were commercial based on TDS deductions and surplus generation. The Tribunal emphasized that the appellant's activities were educational and aligned with its charitable objectives. It also noted that the appellant's receipts were primarily grants and aids, not commercial fees.

Conclusion:
The Tribunal allowed the appeal, holding that the appellant society's activities were charitable under section 2(15) and that the denial of exemption under sections 11 and 12 was unjustified. The Tribunal directed that the exemption be granted, and the interest income not be taxed. The appeal was decided in favor of the appellant.

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