2020 (9) TMI 626 - AT - Income Tax

Exemption u/s 11 - Charitable u/s 2(15) - activities of the assessee trust, viz. holding conventions, exhibitions etc. were to be construed as being in the nature of trade, commerce or business - main objects of the assessee trust after vetting of which it was registered as a charitable trust by the DIT(Exemption), Mumbai, u/s 12A, vide his order dated 25.11.1999 - HELD THAT - As pointed out by the A.R, and rightly so, the term deposits of ₹ 13.65 crores referred to by the A.O were the term deposits accumulated by the assessee trust over a period of 15 years i.e since the year 1999, and therefore, merely on the ground of having such huge term deposits the assessee s entitlement towards claim of deduction u/s 11 could not have been denied. We are in agreement with the claim of the ld. A.R, that as per clause (iii) of Sec. 11(5) of the Act, deposit of money in any account with a scheduled bank is one of the prescribed form and mode of depositing the money referred to in clause (b) of sub-section (2) to Sec. 11. Accordingly, not being able to persuade ourselves to subscribe to the view taken by the A.O that as the assessee over the years had invested surplus aggregating in term deposits with the banks, it was thus be concluded that it was working with a profit motive, we vacate the said observation. We may herein observe that the narrowing of the definition of charitable purpose as contemplated in Sec. 2(15) insofar the same is related to advancement of any other object of general public utility , was carried out by the legislature by way of an insertion of a proviso , vide the Finance Act, 2009 w.e.f 01.04.2009. Assessments in the case of the assessee trust for A.Ys 2010-11 to A.Y 2013-14 were framed u/s 143(3), and its claim for deduction u/s 11 after being tested in the backdrop of the amended definition of charitable purpose , and also, the proviso that supplemented the said definition, were in both the years found by the revenue to be in order. Revenue while framing the assessment for the aforementioned preceding years had not held the activities of the assessee trust as being in the nature of trade, commerce or business, or those of rendering of any services in relation to any trade, commerce or business. Nothing is either discernible from the records which would reveal that the activities of the assessee trust had witnessed any change during the year in question as in comparison to those for the aforementioned preceding years, nor any contention to the said effect had been advanced by the ld. D.R before us. Accordingly consistent view taken by the revenue in the case of the assessee for the preceding years, we are of a strong conviction that the lower authorities had erred in concluding that as the activities of the assessee trust being in the nature of trade, business or commerce were thus not carried out for a charitable purpose within the meaning of Sec. 2(15) of the Act, it was therefore disentitled for claim of deduction u/s 11. As such, we vacate the order of the CIT(A), and therein direct the A.O to allow the assessee s claim for deduction u/s 11. - Decided in favour of assessee.

Issues Involved:
1. Denial of exemption under Section 11 of the Income Tax Act, 1961.
2. Applicability of the proviso to Section 2(15) of the Income Tax Act, 1961.
3. Principle of mutuality and its application to the assessee's receipts.
4. Taxability of interest income received on term deposits.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue was whether the assessee trust was entitled to the benefit of exemption under Section 11 of the Income Tax Act, 1961. The Assessing Officer (A.O) denied this exemption, reasoning that the assessee was engaged in commercial activities, which disqualified it from being considered as a charitable institution under the amended provisions of Section 2(15) of the Act. The CIT(A) upheld this view, leading to the assessee's appeal.

2. Applicability of the Proviso to Section 2(15):
The A.O and CIT(A) concluded that the activities of the assessee trust fell within the realm of "advancement of any other object of public utility" and were thus commercial in nature. This was based on the observation that the assessee earned substantial income from membership fees, conventions, sponsorships, and promotional activities. The A.O noted that the receipts from these activities exceeded 20% of the total receipts, triggering the proviso to Section 2(15) of the Act, which excludes entities engaged in commercial activities from being considered charitable.

Upon appeal, it was argued that the activities of the trust, such as holding conventions and seminars, were not commercial but were in furtherance of its charitable objectives. The Tribunal examined the post-amended definition of "charitable purpose" under Section 2(15) and concluded that the activities of the assessee trust were not in the nature of trade, commerce, or business. The Tribunal emphasized that the conventions and seminars were held to benefit the real estate sector and were integral to the trust's objectives. Thus, the activities did not fall within the exclusionary proviso of Section 2(15).

3. Principle of Mutuality:
The A.O acknowledged that the assessee was a mutual association but argued that the income earned from its activities did not qualify for exemption under the principle of mutuality. The Tribunal did not delve deeply into this issue, as it had already concluded that the assessee was entitled to exemption under Section 11. However, it noted that the principle of mutuality was not applicable to the interest income earned by the assessee on its deposits with banks.

4. Taxability of Interest Income:
The A.O assessed the interest income earned by the assessee on its term deposits as income from other sources, arguing that it did not satisfy the principle of mutuality. The CIT(A) upheld this view. The Tribunal, however, observed that the term deposits were accumulated over a period of 15 years and were in compliance with the prescribed forms and modes of investment under Section 11(5) of the Act. Thus, the accumulation of surplus funds in term deposits did not indicate a profit motive, and the interest income should not be taxed separately.

Conclusion:
The Tribunal concluded that the activities of the assessee trust were not commercial in nature and were in furtherance of its charitable objectives. Therefore, the assessee was entitled to the benefit of exemption under Section 11 of the Act. The Tribunal vacated the orders of the lower authorities and directed the A.O to allow the assessee's claim for deduction under Section 11. The issue of mutuality was left open, as the primary ground of appeal was decided in favor of the assessee. The appeals for both A.Y. 2016-17 and A.Y. 2014-15 were allowed.

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