2020 (3) TMI 673 - AT - Income Tax

Exemption u/s 11 - CIT-A held that proceeds of kuri business in the case of the assessee substantially benefited the members or subscribers and the predominant object was to generate profit in the hands of subscribers - CIT(A) concluded that running a kuri business is not incidental to objectives of trust and Section 11 (4A) impose a bar on such business and income from Kuri business becomes taxable in the hands of the trust - HELD THAT - Assessee-Trust will not be entitled to claim exemption u/s. 11 if it was found to have carried on business from which income was derived. Admittedly, the assessee in the present case is engaged in the activity of providing medical relief to the public. During the assessment year under consideration, the assessee earned income from kuri business to the tune of ₹ 12,28,637/-. This activity of kuri business cannot be considered as incidental to earning profits of the assessee. None of the primary objects of the assessee-Trust have nexus with the business activity of the assessee. Therefore, the assessee- Trust cannot claim exemption u/s. 11 of the I.T. Act as the activity of kuri business is not done in the course of carrying on the primary objects of the assessee-Trust. The activity carried on by the assessee-Trust in the form of kuri business is hit by the proviso to section 2(15) of the Act as mentioned in earlier para. We are in full agreement with the findings of the lower authorities that as the proviso to section 2(15) puts an embargo on carrying on business by the charitable Trust only if the business is incidental to the main and pre-dominant objects of the the assessee-Trust. AR placed reliance on the decision of the Cochin Bench of the ITAT in the case of Dharmodayam Co. 2002 (2) TMI 313 - ITAT COCHIN which is misplaced because the decision pertains to cases prior to 1-4-1992 when section 11(4A) of the I.T. Act was not on statute. Section 2(15) was amended with effect from 1.4.2009 by Finance Act, 2008. - Decided against assessee.

Issues Involved:
1. Legality of Income-tax levy by the Income-tax Officer.
2. Applicability of Supreme Court precedents regarding business income utilization by a Trust.
3. Consistency in the Assessing Officer's treatment of the assessee's activities in previous years.
4. Determination of whether the chit business benefits the assessee or only the subscribers.
5. Impact of the omission of section 13(1)(bb) on the assessee's case.
6. Applicability of section 2(15) explanation for a Trust imparting medical aid.

Detailed Analysis:

1. Legality of Income-tax Levy by the Income-tax Officer:
The assessee, a Trust registered under section 12AA of the Income Tax Act and engaged in running a hospital and conducting kuri business, filed its return for AY 2012-13 declaring nil taxable income after claiming exemption under section 11. The Assessing Officer denied the exemption for the income from kuri business (?12,28,637), asserting it was not incidental to charitable activities. The CIT(A) upheld this decision, noting that the primary aim of the kuri business was profit generation, not charitable purposes.

2. Applicability of Supreme Court Precedents:
The assessee cited the Supreme Court's judgment in CIT vs. Thanthi Trust (247 ITR 785), arguing that a business whose income is used to achieve the Trust's objectives is incidental to its charitable purpose. However, the CIT(A) distinguished this case, stating that the proceeds of the kuri business primarily benefited the subscribers, not the general public, thus failing the criteria set by section 11(4A).

3. Consistency in Assessing Officer's Treatment:
The assessee argued that the Assessing Officer had previously accepted the activity and granted exemptions. However, the CIT(A) noted that post-amendment (effective from 1-4-1992), section 11(4A) imposes a blanket prohibition on business activities unless incidental to the Trust's objectives. Therefore, previous acceptance does not bind the current assessment.

4. Determination of Benefits from Chit Business:
The CIT(A) concluded that the chit business primarily benefited the subscribers, not the Trust. The assessee, acting as a foreman, earned commissions, but this did not align with providing relief to the poor or other charitable activities. The profits were predominantly in the hands of subscribers, making the business non-incidental to the Trust's objectives.

5. Impact of Section 13(1)(bb) Omission:
The assessee contended that the omission of section 13(1)(bb) should favor their case. However, the CIT(A) emphasized that section 11(4A) and the amendments to section 2(15) post-1992 create a clear prohibition against non-incidental business activities, regardless of the omission of section 13(1)(bb).

6. Applicability of Section 2(15) Explanation:
The assessee argued that their activities fell under the third limb of section 2(15), which includes medical relief, and thus should be exempt even if involving commercial activities. The CIT(A) and the Tribunal disagreed, noting that the kuri business did not align with the primary charitable objectives of the Trust. The activity was deemed a profit-making endeavor, not incidental to providing medical relief or other charitable purposes.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the income from the kuri business was not exempt under section 11 of the I.T. Act. The business was not incidental to the Trust's charitable objectives, and the amendments to section 2(15) and section 11(4A) post-1992 impose a clear prohibition on such activities. The appeal by the assessee was dismissed.

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