2016 (10) TMI 550 - AT - Income Tax

Charitable institution - applicability of the provision of section 13 (8) - benefit of section 11 - Held that - in the given facts and detailed reading of the various judicial decisions through the years interpreting the definition of charitable purpose as laid out in section 2(15) of the Act and also the definition of business in relation to the said section amply revels that the theory of dominant purpose has always all through the years been upheld to be the determining factor laying down whether the Institution is Charitable in nature or not. Where the main object of the Institution was charitable in nature then the activities carried out towards the achievement of the said being incidental or ancillary to the main object even if resulting in profit and even if carried out with non members were all held to be charitable in nature. Hon ble Apex Court in the earliest case of Andhra Chamber of Commerce ( 1980 (5) TMI 3 - SUPREME Court ) had clearly laid out the principle that if the primary purpose of an Institution was advancement of objects of general public utility it would remain charitable even if an incidental or ancillary activity or purpose for achieving the main purpose was profitable in nature. In our view the basic principle underlying the definition of charitable purpose remained unaltered even on amendment in the section 2(15) of the Act w.e.f. 01/04/2009 though the restrictive first proviso was inserted therein. Accordingly in the given facts of the case as discussed above in detail the assessee association s primary purpose was advancement of objects of general public utility and it would remain charitable even if an incidental or ancillary activity or purpose for achieving the main purpose was profitable in nature. Hence assessee is not hit by newly inserted proviso to section 2(15) of the Act. This issue of assessee s appeal is allowed.

Issues Involved:
1. Applicability of Section 13(8) of the Income Tax Act, 1961.
2. Application of the principle of res judicata in income tax proceedings.
3. Interpretation of the first proviso to Section 2(15) of the Income Tax Act, 1961.
4. Interpretation and analysis of the word "shall" in the first proviso of Section 2(15).

Detailed Analysis:

1. Applicability of Section 13(8) of the Income Tax Act, 1961:
The Revenue argued that the CIT(A) erred in granting relief without considering the applicability of Section 13(8). The assessee, an association of industrialists formed for the development of trade and commerce, was registered as a charitable institution under Section 12A. The AO determined that the assessee's receipts from activities like environment management, meetings, conferences, and certificates of origin were in the nature of trade, commerce, or business, thus falling under the amended Section 2(15) which excludes such activities from being considered charitable. Consequently, the AO denied the exemption under Section 11. However, the CIT(A) and ITAT observed that these activities were incidental to the main charitable purpose of promoting trade and commerce, and thus, the assessee was not engaged in business or trade independently.

2. Application of the Principle of Res Judicata in Income Tax Proceedings:
The Revenue contended that the CIT(A) wrongly applied the principle of res judicata, which generally does not apply to income tax proceedings. However, the ITAT upheld the CIT(A)'s decision, referencing the assessee's own case in previous assessment years where similar issues were resolved in favor of the assessee. The ITAT emphasized the principle of consistency, noting that the fundamental aspect permeating through different assessment years should not be changed without material justification.

3. Interpretation of the First Proviso to Section 2(15) of the Income Tax Act, 1961:
The Revenue argued that the CIT(A) failed to appreciate the need to interpret the first proviso to Section 2(15) together with the restrictive second proviso. The ITAT, however, reiterated that the activities generating the impugned receipts were connected and incidental to the main charitable purpose. The ITAT referred to the detailed order for AY 2009-10, which had examined various judicial decisions and concluded that the assessee's activities were for the betterment of trade and industry, thus falling under the charitable purpose despite generating surplus.

4. Interpretation and Analysis of the Word "Shall" in the First Proviso of Section 2(15):
The Revenue claimed that the CIT(A) did not analyze the significance of the word "shall" in the first proviso of Section 2(15). The ITAT, however, maintained that the dominant purpose of the assessee was charitable, and any incidental profit-making activities did not change this primary objective. The ITAT cited several judicial precedents, including the Andhra Chamber of Commerce and Surat Art Silk Cloth Manufacturers Association cases, which supported the view that incidental activities generating surplus do not negate the charitable nature of the institution.

Conclusion:
The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeals and confirming that the assessee's activities were incidental to its main charitable purpose. The principle of consistency was emphasized, and the interpretation of Section 2(15) was aligned with judicial precedents, affirming that incidental profit-making activities do not affect the charitable status of an institution. The appeals of the Revenue were dismissed, and the orders of the CIT(A) were upheld.

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