2020 (9) TMI 823 - HC - Income Tax

Exemption u/s 11(1)(a) - activity of letting out of halls is covered by the residuary limb of definition u/s.2(15) of the Act and hit by the proviso to Section 2(15) and exempted u/s.11 and 12 of the Act - Whether the entire income derived from Kalyana Mandapam, is utilized for the primary object of the Society? - HELD THAT - In view of the objects of the trust to be fulfilled, which is for a charitable purpose, the income there from would be entitled to exemption u/s.11(1) of the Act. Whether the income derived from letting out of Kalyana Mandapam, Community Hall and Gnanavapi owned by the appellant/assessee is the income from the House property or business income and whether the same is liable to be taxed or exempted is the other question. The contention of the assessee is that since utilization of the surplus income from the running of Kalyana Mandapam, Community Hall and Gnanavapi are for the objects of the trust, it is exempted from tax. Both the CIT (Appeals) and the ITAT have not discussed about the facts in respect of the surplus income having been utilized for the objects of the trust viz., Running educational institution, providing medical relief to the poor etc., Absolutely there is no discussion of the facts relating to the utilization of earned income from letting out of Kalyana Mandapam and Gnanavapi towards charitable objects such as Education and Medical relief to the poor as given in the objects of the trust. Further, the Assessing Officer has not looked into the fact as to whether the entire income from Community Hall, Kalyana Mandapam and Gnanavapi are utilised for fulfilling the objects of the trust that is being education Medical relief and relief to the poor. The matter is remitted back to the Assessing Officer for de novo consideration as to whether the entire revenue derived from letting out of Kalyana Mandapam, Gnanavapi and Community Hall are utilized for charitable objects of the Trust and also to consider as to whether the income received from the properties of the Trust namely, Community Hall, Kalyana Mandapam and Gnanavapi to be classified as income from House Property or business income since the income there from is utilized for charitable purpose of the trust. The Assessing Officer shall consider the above said questions and decide the matter on merits.

Issues Involved:
1. Applicability of Section 2(15) of the Income Tax Act, 1961.
2. Classification of income from letting out Kalyana Mandapam, Gnanavapi, and Community Hall as "income from House Property" or "business income".
3. Eligibility for exemption under Section 11(1) and Section 12AA of the Income Tax Act, 1961.
4. Utilization of income for charitable purposes and its impact on tax exemption.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(15) of the Income Tax Act, 1961:
The core issue is whether Section 2(15) is applicable to the assessee's case where income from letting out Kalyana Mandapam and Gnanavapi is utilized for charitable purposes such as education and medical relief. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the activities of running halls are covered by the residuary limb of the definition under Section 2(15) and thus, hit by the proviso to Section 2(15). This proviso excludes activities involving trade, commerce, or business from being considered as charitable if the receipts exceed ?10 lakhs. The ITAT upheld this view, denying the exemption under Section 11.

2. Classification of Income:
The AO classified the income from the community hall, Kalyana Mandapam, and Gnanavapi as business income rather than income from house property, rejecting the assessee's reliance on the High Court of Madras decision in Chennai Properties and Investments Ltd. The AO argued that there was no landlord-tenant relationship, and the activities were in the nature of business income. Consequently, the claim for deduction under Section 24(a) was also denied.

3. Eligibility for Exemption under Section 11(1) and Section 12AA:
The assessee argued that the surplus income from letting out the halls was used to meet the shortfall in maintaining the educational institutions run by the trust, thus qualifying for exemption under Section 11(1). The CIT(A) and ITAT rejected this argument, stating that the business of running the halls was not incidental to the trust's objectives as required under Section 11(4A). The ITAT cited the Supreme Court decision in Additional CIT Vs. Surat Art Silk Cloth Manufacturers Association, emphasizing that only income from property held under trust is entitled to exemption.

4. Utilization of Income for Charitable Purposes:
The appellant contended that the income from the halls was entirely used for the trust's charitable objectives, such as education and medical relief. However, both the CIT(A) and the ITAT did not adequately discuss or verify this claim. The High Court noted that there was no evidence to show that the income was not used for the trust's charitable purposes. The court emphasized the need to examine whether the entire income from the halls was utilized for the trust's objectives.

Judgment:
The High Court set aside the ITAT's order and remitted the matter back to the AO for de novo consideration. The AO is directed to verify whether the income from letting out the halls is utilized for the trust's charitable objectives and to reclassify the income appropriately as either "income from House Property" or "business income." The court left the substantial questions of law open for the AO to decide afresh, emphasizing the need for a thorough examination of the facts and utilization of income.

The appeals were allowed, and the case was remitted back to the AO for fresh consideration, with no costs awarded.

← Previous Next →