2016 (9) TMI 855 - AT - Income Tax

Exemption claimed u/s. 11(1)(a) denied - activities of milching animals - Held that - It is an admitted fact that the assessee is not in any way involved in a trade, commerce or business. Nor does it carry out any activity in relation thereto since providing medical, maternity, nursery, fertility and vaccination facilities to bovine milch animals belonging to milk producers in lieu of collecting cess @ 12 paisa per liter of the milk produced. Both the ld. lower authorities are fair enough in not disputing genuineness of all these research and development activities. Its objects forming part of the lower appellate order pages 7 to 9 along with the receipts in question do not indicate any trading, commercial or business activity element. The assessee is already a registered body within the meaning of a charitable trust u/s. 12A of the act. We are only dealing with impugned exemption proceedings. The Assessing Officer takes note of the fact that the appropriate authority has denied assessee s status of a research association u/s. 35(1)(2) of the act. We fail to concur with this line of reasoning as section 35 rejection order denying deduction of expenditure on scientific research stands on a totally different footing as against the impugned exemption proceedings. We make it clear that we are dealing with section 2(15) r.w.s. 11 of the Act wherein the only issue is that of the assessee being engaged in charitable activities in furtherance to its charitable objects followed by application of income in furtherance thereto. We accordingly are of the opinion that both the lower authorities have wrongly rejected assessee s exemption claim by invoking section 2(15) proviso of the act, since it neither carries out any activity in the nature of trade, commerce business nor any activities or renders any service in relation to the same whilst collecting the impugned cess @ 12 paisa per liter from milk producers in lieu of making them avail the above stated facilities. The assessee s activities hereinabove in making available the facilities in question to milching animals are to ensure that they are free from diseases, their breed improvement and overall well being. We apply all the above stated constitutional provisions and case law to conclude that medical relief in section 2(15) of the act very much includes the above referred relief made available by the assessee to the milch animals in lieu of a nominal cess @ 12 paise per litre. We reiterate that we are dealing with a charitable purpose definition clause in a tax statute to be given a broader interpretation in order to give its full effect. We hold that assessee s activities deserve to be treated under the former specific category of medical relief not covered by sec. 2(15) proviso inserted w.e.f. 01-04-2009 in question. It is accordingly held to be not an entity advancing any other object or general public utility without prejudice to our findings hereinabove - Decided in favour of assessee

Issues Involved:
1. Denial of exemption under Section 11(1)(a) of the Income Tax Act.
2. Classification of the trust's activities under Section 2(15) of the Income Tax Act.
3. Taxation of gross income at 30% without proper deductions.
4. Non-allowance of set-off of earlier years' carried forward losses under Section 72.
5. Consideration of the trust's activities as medical relief under Section 2(15).

Detailed Analysis:

1. Denial of Exemption under Section 11(1)(a):
The primary issue is whether the trust's activities qualify for exemption under Section 11(1)(a) of the Income Tax Act. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] denied this exemption, arguing that the trust's activities involved trade, commerce, or business, thus falling under the proviso to Section 2(15) introduced by the Finance Act, 2010. The trust contended that its activities, including research and veterinary services, did not have a profit motive and were purely charitable.

2. Classification under Section 2(15):
The CIT(A) upheld the AO's view that the trust's activities were not charitable under the revised definition of Section 2(15). The AO noted that the trust received a cess from milk producers and contributions from cooperative societies, which were considered as activities related to trade or business. The CIT(A) further argued that the trust's activities, such as research on animal health and receiving fees for services, indicated a commercial nature.

3. Taxation of Gross Income at 30%:
The AO taxed the trust's gross income of ?3,36,06,368 at 30%, treating it as an Association of Persons (AOP) without granting proper deductions. The trust argued that this treatment was incorrect and that it was entitled to deductions under the Income Tax Act.

4. Non-Allowance of Set-Off of Earlier Years' Carried Forward Losses:
The trust claimed that it should be allowed to set off earlier years' carried forward losses amounting to ?4,02,28,751 under Section 72 of the Income Tax Act. The CIT(A) did not grant this set-off, which the trust contested.

5. Consideration as Medical Relief:
The trust argued that its activities should be considered as medical relief to animals, which would exempt it from the proviso to Section 2(15). The CIT(A) rejected this argument, stating that the trust's objects were multifaceted and primarily aimed at general public utility rather than medical relief.

Judgment:

On Denial of Exemption under Section 11(1)(a):
The tribunal concluded that the trust's activities did not involve trade, commerce, or business. It noted that the trust provided essential services like medical, maternity, nursery, fertility, and vaccination facilities to milch animals, which were charitable in nature. The tribunal disagreed with the AO's and CIT(A)'s interpretation, stating that the denial of exemption under Section 11(1)(a) was incorrect.

On Classification under Section 2(15):
The tribunal held that the trust's activities fell under the category of 'medical relief' rather than 'advancement of any other object of general public utility.' It emphasized that the trust's services to milch animals were aimed at their well-being and disease prevention, aligning with the broader interpretation of 'medical relief' under Section 2(15).

On Taxation of Gross Income:
The tribunal did not specifically address the issue of taxing gross income at 30% in detail, as it primarily focused on the classification and exemption issues. However, by allowing the exemption under Section 11(1)(a), the tribunal implicitly rejected the AO's approach to taxing the trust as an AOP without deductions.

On Set-Off of Earlier Years' Losses:
The tribunal did not provide a detailed analysis of the set-off issue, as its primary focus was on the classification and exemption of the trust's activities. However, the favorable ruling on exemption likely implies that the trust would be entitled to set off earlier years' losses as per the applicable provisions.

On Consideration as Medical Relief:
The tribunal concluded that the trust's activities should indeed be considered as 'medical relief' under Section 2(15). It referenced constitutional provisions and a Supreme Court judgment to support the broader interpretation of 'medical relief' to include services to animals. The tribunal reversed the findings of the lower authorities, allowing the trust's activities to be classified under 'medical relief,' thus exempting it from the proviso to Section 2(15).

Conclusion:
The tribunal allowed the trust's appeal, granting exemption under Section 11(1)(a) and classifying its activities as 'medical relief' under Section 2(15). This decision reversed the lower authorities' findings and provided the trust with the sought-after tax relief.

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