2020 (1) TMI 1149 - HC - Income Tax

Exemption u/s 11 - application of income for any purpose other than the object of the Trust - HELD THAT - In the present case, Tribunal held that object of the assessee is undoubtedly promotion of sports, games and providing recreation facilities to the public at large and to the members in particular and therefore receipts on account of compensation from decorator against gymkhana function, miscellaneous income and compensation from caterer (restaurant) cannot be construed as activities in the nature of trade, commerce or business for the purpose of the proviso to Section 2(15) of the Act. This court in the case of Director of Income Tax (Exemptions) Vs. Shri Vile Parle Kelavani Mandal, 2015 (5) TMI 220 - BOMBAY HIGH COURT has held that educational institutions require funds; activity of letting out of halls for marriages, sale and advertisement rights is not a regular activity undertaken as part of business. Income is generated by giving various halls and properties of the institution on rental basis on holidays when those are not required for educational activities. Therefore, such activities cannot be construed to be business activities, such activity being an incidental activity; and thus income generated therefrom cannot be brought to tax. This court in Shree Nahsik Panchvati Panjrapole 2017 (3) TMI 1262 - BOMBAY HIGH COURT emphasized that the test that should be applied whether it was income earned from business or income earned from incidental activity is the test of dominant object of the trust i.e., what is the dominant object of the activity. If the dominant object of the activity is profit making, the purpose would not be charitable but if the dominant object of the activity is charitable then notwithstanding making of profit, the charitable character of the purpose would not be lost. Depreciation to assessee trust - double deduction - HELD THAT - Issue covered by the decision of the Supreme Court in Commissioner of Income Tax-III, Pune Vs. Rajasthan and Gujrat Charitable Foundation, Poona , 2017 (12) TMI 1067 - SUPREME COURT whereby those questions have been answered in favour of the assessee and against the revenue.

Issues Involved:

1. Deletion of additions by ITAT regarding interest income and other incomes.
2. Applicability of the principle of mutuality.
3. Interpretation of Section 2(15) and Section 11 of the Income Tax Act.
4. Alleged double deduction on account of depreciation.
5. Reliance on previous judgments including those not accepted by the Department.

Issue-wise Detailed Analysis:

1. Deletion of Additions by ITAT:

The Revenue challenged the ITAT's decision to delete the additions made by the Assessing Officer (AO) concerning various incomes of the assessee trust. The AO had added interest income, compensation from caterer, miscellaneous income, and compensation from decorator to the total income of the assessee, asserting that these incomes were not eligible for exemption under Sections 11 and 12 of the Income Tax Act. The ITAT, however, found no merit in the AO's stand and deleted these additions, holding that these incomes were incidental to the charitable activities of the trust and not in the nature of trade, commerce, or business.

2. Applicability of the Principle of Mutuality:

The Revenue argued that the interest income earned from non-members could neither be exempted under Section 11 of the Act nor under the principle of mutuality. The ITAT rejected this argument, noting that the interest income was earned from investments made in compliance with Section 11(5) of the Act and could not be construed as an activity in the nature of commerce or business. The Tribunal relied on its previous decision in the case of Bombay Presidency Golf Club Limited, which was upheld by the High Court, affirming that no question of law arose from such findings.

3. Interpretation of Section 2(15) and Section 11 of the Income Tax Act:

The Tribunal held that the activities of the trust, including earning interest income and receiving compensations, were not in the nature of trade, commerce, or business as per the proviso to Section 2(15) of the Act. The Tribunal emphasized that mere charging of fees does not imply a profit motive, and such activities were necessary for carrying out the charitable purposes of the trust. The Tribunal referenced several judgments, including those of the Delhi High Court and Gujarat High Court, to support its view that incidental income generated in the course of achieving charitable objectives does not alter the charitable nature of the trust.

4. Alleged Double Deduction on Account of Depreciation:

The Revenue cited the case of Escorts Ltd. Vs. UOI to argue that no deduction should be allowed under Section 32 for depreciation on assets acquired through capital expenditure, as it would amount to double deduction. The Tribunal, however, did not find merit in this argument, relying on the Supreme Court's decision in Commissioner of Income Tax-III, Pune Vs. Rajasthan and Gujarat Charitable Foundation, Poona, which had addressed similar issues in favor of the assessee.

5. Reliance on Previous Judgments:

The Revenue contended that the ITAT erred in relying on the judgment of the Bombay High Court in the case of Institute of Banking Personnel Selection, as the Department had not accepted that decision on merit. The Tribunal, however, noted that the Supreme Court had granted leave in related cases, indicating that the legal principles involved were still under consideration. The Tribunal's reliance on these judgments was deemed appropriate, as they provided relevant legal precedents supporting the assessee's position.

Conclusion:

The High Court upheld the ITAT's findings, concluding that the income in question was incidental to the charitable activities of the trust and not in the nature of trade, commerce, or business. The Court reiterated that the dominant object of the trust was charitable, and incidental surpluses did not alter this character. The appeal was dismissed, affirming that no substantial question of law arose from the Tribunal's order.

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