2017 (2) TMI 601 - AT - Income Tax

Exemption under sections 11 & 12 denied - income derived from transactions from non-members - assessee has earned interest income on RBI Bonds - can the activity of keeping funds deposited in the manner mandated by the statute i.e. section 11(5) of the Act can be construed as an activity in the nature of trade, commerce or business so as to fall within the meaning of the proviso to section 2(15) of the Act? - Held that - The answer is quite obvious because once an entity, which is governed by the regime of sections 11 to 13 of the Act is mandated to keep its funds in a prescribed manner, the earnings therefrom cannot be viewed as an activity of in the nature of trade, commerce or business within the meaning of the proviso to section 2(15) of the Act. Notably, in the present case, there is no charge made against the assessee at any stage that such earnings have not been spent towards the objects of the assessee i.e. promotion of sports, games and recreation facilities to the general public at large and physical development and healthy life style. Thus the activity of depositing money in the bank and earning interest would not constitute trade, commerce or business within the meaning of section 2(15) r.w. proviso thereof. Thus, in so far as interest income is concerned, we find no merit in the stand of the lower authorities. For the other three categories of income namely, compensation from the Caterer(restaurant), compensation from Decorator for gymkhana functions and Miscellaneous income are concerned, herein also it cannot be said that the same involve carrying on of any activity in the nature of trade, commerce or business. It is quite clear that the scope and ambit of the exemption envisaged in sections 11 & 12 of the Act relate to the receipt of income derived from the property held under trust for charitable or religious purposes to the extent to which such income is applied to such purposes in India. Before proceeding further, we may reiterate that there is no charge against the assessee at any stage that there is an application of income for any purpose other than the objects of the assessee trust. Much has been made out by the lower authorities to the fact that assessee has charged a fee for allowing use of its sports grounds, and therefore, it is asserted that such an activity is hit by the disability contained in the proviso to section 2 (15) of the Act. In our considered opinion, mere charging of fee ipso-facto would not enable an activity to be governed by the proviso to section 2(15) of the Act without establishing any profit-motive in the charging of fees. Objects of the assessee are undoubtedly the promotion of sports, games and recreation facilities to the public at large and such like receipts on account of compensation from the Decorator against gymkhana function, miscellaneous income and compensation from caterer(restaurant) cannot be construed as activity in the nature of trade, commerce or business for the purposes of the proviso to section 2(15) of the Act. Therefore, having regard to the facts and circumstances of the case, in our view, the CIT(A) erred in departing from his stand in earlier years by wrongly relying on the proviso to section 2(15) of the Act in the instant year because the activities in question cannot be construed to be in the nature of trade, commerce or business so as to fall within the purview of the proviso to section 2(15) of the Act. Thus, on this aspect assessee succeeds. - Decided in favour of assessee

Issues Involved:
1. Exemption under Sections 11 & 12 of the Income Tax Act.
2. Principle of mutuality and whether the assessee trust is a mutual concern.
3. Validity of reopening assessment under Section 147/148 of the Income Tax Act.
4. Taxability of interest income, restaurant compensation, gymkhana function income, and miscellaneous income.
5. Depreciation as an application of income.
6. Set-off and carry forward of deficit and unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Exemption under Sections 11 & 12 of the Income Tax Act:
The primary dispute revolves around the exemption claimed by the assessee under Sections 11 & 12 of the Act on the grounds of carrying on charitable activities. The Assessing Officer denied the claim, asserting that the trust's activities primarily benefited its members, thus not qualifying as charitable within Section 2(15) of the Act. However, the CIT(A) allowed the exemption for assessment years 2005-06 to 2008-09, but denied it for 2009-10. The Tribunal upheld the CIT(A)'s decision for 2005-06 to 2008-09, affirming that the trust's activities were charitable and the trust was entitled to exemption under Section 11.

2. Principle of Mutuality:
The Revenue argued that the trust should be treated as a mutual concern, thereby disqualifying it from claiming exemption under Section 11. The CIT(A) disagreed, stating that the trust's activities were charitable and not mutual in nature. The Tribunal affirmed this view, noting that the Revenue had accepted similar decisions in earlier years without further appeals.

3. Validity of Reopening Assessment under Section 147/148:
For assessment year 2006-07, the assessment was reopened under Section 147/148. The CIT(A) held this reopening as bad in law due to the absence of fresh material. The Tribunal agreed, emphasizing that even when a return is processed under Section 143(1), the conditions prescribed in Section 147 must be fulfilled. The Tribunal found no fresh tangible material to justify the reopening, thus affirming the CIT(A)'s decision.

4. Taxability of Various Incomes:
The Assessing Officer taxed interest income, restaurant compensation, gymkhana function income, and miscellaneous income, arguing these were earned from non-members and thus taxable. The Tribunal disagreed, particularly with the interest income, stating it was earned from investments mandated by Section 11(5) and could not be seen as an activity in the nature of trade, commerce, or business. The Tribunal cited various judgments to support that such incomes did not fall within the scope of the proviso to Section 2(15).

5. Depreciation as an Application of Income:
The CIT(A) allowed depreciation as an application of income, following the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Institute of Banking Personnel Services. The Tribunal upheld this view, noting that the Revenue's objections were covered by the said judgment.

6. Set-off and Carry Forward of Deficit and Unabsorbed Depreciation:
The CIT(A) directed the Assessing Officer to allow the set-off and carry forward of deficit and unabsorbed depreciation. The Tribunal affirmed this direction, reiterating that the assessee was entitled to exemption under Sections 11 & 12, thus necessitating the reworking of these claims in accordance with the law.

Conclusion:
The Tribunal dismissed the Revenue's appeals for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09, while allowing the assessee's appeal for 2009-10. The Tribunal upheld the CIT(A)'s decisions granting exemption under Sections 11 & 12, rejecting the principle of mutuality, and invalidating the reopening of assessments without fresh material. The Tribunal also ruled that various incomes earned by the trust were not taxable as they did not constitute activities in the nature of trade, commerce, or business.

← Previous Next →