2019 (4) TMI 377 - HC - Income Tax

Charitable activity u/s 2(15)- Addition of interest holding that the income is exempt u/s 11(5) and the proviso to Section 2(15) - object of the assessee club - HELD THAT - The main object of the assessee club as noted above is to provide golf facilities to the members for promotion of the sport. The Tribunal correctly held that there was no element of the assessee s activity being in the nature of trade, commerce or business. Once the applicability of the proviso to Section 2(15) is ruled out, the question of the exemption under Section 11 of the Act would arise. Clause (a) of sub-section (1) of Section 11 provides that subject to the provisions of Sections 60 to 63, the income derived from the property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes shall not be included in the total income of the previous year of the person in receipt of the income. The assessee had invested its surplus funds in specified deposits earning interest which reduced the assessee s loss. In terms of sub-section (1) of Section 11 of the Act, therefore, such income was exempt from tax. The Tribunal, therefore, correctly granted relief to the assessee. No question of law arises.

Summary

Issues:
Interpretation of Section 2(15) of the Income Tax Act - Whether the proviso to Section 2(15) applies to the case?
Applicability of Section 11 of the Income Tax Act - Whether the interest income earned by the assessee is exempt under Section 11?

Analysis:
The appeal before the Bombay High Court involved the interpretation of Section 2(15) and the applicability of Section 11 of the Income Tax Act. The main issue was whether the proviso to Section 2(15) applied to the case, and if the interest income earned by the assessee was exempt under Section 11.

In the case, the respondent assessee, a Trust registered under Section 12A of the Act, filed its return of income for the assessment year 2009-10. The Assessing Officer disallowed the exemption claimed on the interest income of ?2.17 Crores, citing the proviso to Section 2(15) which defines "charitable purpose." The Tribunal, however, allowed the appeal of the assessee, noting that the interest income was earned from surplus funds invested in banks for promoting the sport of golf, the principal object of the assessee.

The Tribunal held that the assessee was not engaged in any activity of trade, commerce, or business, and therefore, the proviso to Section 2(15) did not apply. Additionally, the Tribunal found that the interest income was exempt under Section 11 of the Act as the funds were invested in specified deposits, reducing the assessee's losses. The High Court concurred with the Tribunal's view, stating that the income derived from property held under trust for charitable purposes was exempt under Section 11.

The High Court clarified that the principle of mutuality was not the basis for their decision, distinguishing the case from a previous judgment involving an Association not registered as a trust. As a result, the appeal was dismissed, affirming the Tribunal's decision to grant relief to the assessee and upholding the exemption of the interest income under Section 11 of the Income Tax Act.

In conclusion, the High Court's judgment emphasized the importance of interpreting the provisions of the Income Tax Act, specifically Section 2(15) and Section 11, to determine the taxability of income earned by trusts engaged in charitable activities. The decision provided clarity on the application of exemptions and the exclusion of certain activities from the definition of "charitable purpose" under the Act.