2019 (7) TMI 874 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) or not? - AO held that the assessee was not a regular educational institute and therefore, not entitled for exemption u/s 11 - HELD THAT - So far as the object of the assessee are concerned, our attention has been drawn to the fact that the trust was established for charitable purpose of education and for encouraging and promoting theoretical and practical education in gemology and scientific study of precious stones of all types and the assessee was established to impart education. Another plea raised is that the assessee was engaged in carrying out Research Development Activities during the year and as a part of the same, carried out testing activities with a view to address the problem of imitation being faced by the Gem industry and therefore, the said activities would merely be an incidental activity carried out in furtherance to achieve pre-dominant objective of Research Development. We are of the considered opinion that the issue would require reappreciation by Ld. AO in view of the fact that the main objects of the assessee trust as well as the connection of testing activities vis- -vis main objects, has not been brought on record by lower authorities. Onus would be on assessee to establish that the testing activities were merely incidental to the attainment of the prime objective of the trust i.e. education and separate books were maintained by the assessee in respect of such business. On the other hand, if the objects of the assessee are found to be covered by last limb i.e. advancement of any other object of general public utility, the 1st proviso of Section 2(15) would squarely apply to the case of the assessee since the assessee is providing service in relation to any trade, business or commerce. In that case, the case has to be adjudicated in the light of the binding judicial pronouncements from the point of view of profit motive as cited by us in the opening paragraphs. Needless to add that, in the event of activity of testing fees found to be having no connection with assessee s primary objectives, the same would be a separate line of business activity for the assessee and no deduction would be available to the assessee u/s 11 on account of this activity. With these directions observations, the matter would stand reverted back to the file of Ld. AO for re-adjudication - Assessee' appeal stands allowed for statistical purposes.

Issues Involved:

1. Applicability of first proviso to Section 2(15) of the Income Tax Act, 1961.
2. Denial of exemption under Section 11 of the Income Tax Act, 1961.
3. Nature of activities carried out by the assessee, whether they fall under 'education' or 'advancement of any other object of general public utility'.
4. Applicability of Section 11(4A) regarding incidental business activities.
5. Treatment of donations received for capital purposes.
6. Rate of tax applicable to the assessee.

Issue-wise Detailed Analysis:

1. Applicability of first proviso to Section 2(15):
The first proviso to Section 2(15) states that 'advancement of any other object of general public utility' shall not be considered a charitable purpose if it involves any activity in the nature of trade, commerce, or business, or rendering any service in relation to trade, commerce, or business, for a fee or consideration. The Tribunal noted that the assessee received testing fees amounting to ?187.01 Lacs, which was significantly higher than the fees from educational activities (?37.18 Lacs). The dominant activity was thus considered to be in the nature of trade, commerce, or business.

2. Denial of exemption under Section 11:
The exemption under Section 11 was denied on the grounds that the assessee was not maintaining separate books for its testing activities and that these activities were independent of its educational activities. The Tribunal emphasized that the registration under Section 12A does not automatically entitle an entity to exemption under Section 11 unless the prescribed conditions are fulfilled.

3. Nature of activities - 'Education' vs. 'Advancement of any other object of general public utility':
The Tribunal observed that the assessee was conducting courses and training, which could be considered educational activities. However, the testing activities were predominant and generated significant income. The Tribunal directed the Assessing Officer (AO) to re-examine whether the testing activities were incidental to the educational activities or constituted a separate business activity.

4. Applicability of Section 11(4A):
Section 11(4A) stipulates that profits from business activities are exempt only if the business is incidental to the attainment of the trust's objectives and separate books are maintained. The Tribunal noted that if the testing activities were found to be incidental to educational activities, the assessee must maintain separate books. If the activities were unrelated, the income from testing would be considered business income and not eligible for exemption under Section 11.

5. Treatment of donations for capital purposes:
The assessee argued that donations received for the acquisition of equipment should be treated as capital receipts and not taxable as business income. The Tribunal directed the AO to adjudicate this issue based on the outcome of the re-examination of the primary objectives and activities of the assessee.

6. Rate of tax applicable:
The assessee contended that it should be taxed at the slab rates applicable to an Association of Persons (AOP). The Tribunal instructed the AO to address this issue in light of the final determination of the nature of the assessee's activities and the applicability of Section 11.

Conclusion:
The Tribunal remitted the matter back to the AO for re-adjudication, directing the AO to re-examine the nature of the assessee's activities, the connection between testing activities and educational objectives, and the applicability of relevant provisions. The AO was also instructed to consider the treatment of donations and the applicable tax rate based on the final findings. The appeal was allowed for statistical purposes, providing the assessee an opportunity to substantiate its claims.

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