2016 (10) TMI 46 - HC - Income Tax

Charitable trust - commercial activities - Held that - The term charitable purpose includes advancement of any other object of general public utility. Proviso to section 2(15) however provides that such purpose will not be charitable purpose if it involves carrying on any activity of nature of trade or business or any activity rendering any service in relation to the said commercial business, for a cess or fees or any other consideration irrespective of the nature of use or application, or retention of the income from such activity. This sub-section however carries a further proviso which provides that the proviso will not apply to aggregate value of receipts from the activities referred to thereunder is 25 per cent or less in the previous year. In other words, so long as the aggregate value is less than 25 per cent, the exclusion clause contained in the first proviso would not activate. Surely, at the time of application for registration, when the applicant institute has not even commenced its activities, it would not be possible to apply this proviso and the question of their applicability would arise at a later stage while actually granting exemption. As the Tribunal held that the institute was engaged in the object of general public utility, we do not see any error in such view. - Decided against revenue

Summary

Issues:
1. Whether the Appellate Tribunal was justified in allowing registration to the assessee disregarding the fact that the assessee trust is engaged purely in commercial activities, hit by proviso to section 2(15) of the Act?

Analysis:
The respondent assessee, a society, applied for registration under section 12AA of the Income Tax Act, 1961. The Commissioner of Income Tax rejected the application, stating that the objects of the society were not charitable but purely commercial. The Tribunal, in its judgment, allowed the appeal, emphasizing that the objects were for public utility and advancement, deferring the proviso application to section 11 of the Act. The appellant contended that the Tribunal erred in overruling the Commissioner's decision. However, the High Court observed that the institute aimed to enhance training quality for better employability and financial self-sufficiency without profit motive, thus serving general public utility.

The Court referred to Section 2(15) of the Act, which defines "charitable purpose" to include public utility advancement. The proviso states that if such activity involves trade, business, or service provision for consideration, it may not be considered charitable unless receipts do not exceed 25% of total receipts. The Court noted that at the registration application stage, before activities commenced, applying this proviso was premature. The Court upheld the Tribunal's decision, emphasizing the institute's public utility objectives and financial sustainability without profit motives. Consequently, the tax appeal was dismissed.

In conclusion, the High Court upheld the Tribunal's decision to grant registration to the society, emphasizing the public utility nature of the institute's objectives and its financial sustainability model. The Court clarified the application of Section 2(15) proviso, stating that at the registration stage, the proviso's assessment was premature, and its applicability would be considered during exemption granting.