2021 (7) TMI 555 - AT - Income Tax

Exemptions u/s 11 and 12 - Charitable activity u/s 2(15) - whether the assessee trust (A section 25 company, as per old Companies Act, 1956), is charitable institution or not? - HELD THAT - We note that assessee trust is a company incorporated u/s 25 of the Companies Act, 1956, as non-profit making organization. The assessee is promoted by Surat Diamond Association, its other members and the Government of Gujarat for development of world class gem and Jewellery Park. The main object of the assessee is to develop the world class gem and jewellery park. The city of Surat had been traditionally the head-quarter of diamond, traded export for Gujarat. We note that in the present case of the assessee, registration u/s 12AA is granted. The assessee trust is carrying out the activities of general utility of development of infrastructure for world class gem and jewellery in Surat. Now, on insertion of First Proviso to section 2(15), the benefit of section 11 cannot be deprived as the assessee is not carrying out any trade, commerce or business and only deals with its members to attain its objects. Therefore, it cannot be considered as an entity carrying out business under the guise of charity, as referred at para 3.2 of aforesaid CBDT Circular. We note that the activities of mutual organizations are to be restricted to contributions from and participation of only their members. In the case of assessee also, it can be seen from the facts discussed by assessing officer as well as assessee that the assessee organization is based on the principle of mutuality. It is clear from the facts that assessee has been allotting the plots and collecting contributions from its members only and there is complete identity between the persons who contribute the amounts to the assessee trust and beneficiaries of assessee s activities. It is also established from the facts that assessee deals/transacts only with its members strictly for the fulfillment of its objects. The bye laws of assessee s organization restrict the allotment of plots and receiving contributions from anyone other than members. It is also established that all the contributors as well as beneficiaries of the assessee are its members only and there is complete identity between the contributors and participants. As shown from the records that the assessee trust is not providing any services to the persons other than its registered members. The assessee trust does not distribute its profits among members and it does not pay higher remuneration to its employees. It is abundantly clear that the income of the mutual concern falls outside the ambit of charging section 4 of the Income Tax Act and, therefore, outside the tax net. The net effect of applicability of exemption provision in section 11 is also just the same. The object of the assessee is of general public utility and does not hit by first proviso to section 2(15) of the Act. That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid additions. His order on these addition are, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

Issues Involved:

1. Entitlement to exemption under sections 11 and 12 of the Income Tax Act.
2. Justification for deletion of additions made by the Assessing Officer.
3. Applicability of the principle of mutuality.
4. Determination of activities as charitable under section 2(15) of the Income Tax Act.
5. Validity of treating certain incomes as business income.

Detailed Analysis:

1. Entitlement to Exemption under Sections 11 and 12 of the Income Tax Act:

The key issue was whether the assessee trust was entitled to exemptions under sections 11 and 12 of the Income Tax Act. The Assessing Officer (AO) denied these exemptions, arguing that the trust's activities did not fall under "charitable purposes" as defined in section 2(15) of the Act due to their commercial nature. The AO observed that the trust's activities, such as keeping deposits with Sar Infracon Pvt. Ltd. and collecting surplus amounts from members, indicated a profit motive, thereby violating the conditions for charitable status.

2. Justification for Deletion of Additions:

The Commissioner of Income Tax (Appeals) [CIT(A)] had deleted the additions made by the AO. The Revenue contested this decision, but the Tribunal upheld the CIT(A)'s order. The Tribunal noted that the AO's additions were based on a misunderstanding of the trust's activities and objectives. The Tribunal emphasized that the trust's primary objective was to develop infrastructure for the gem and jewelry industry, which aligns with charitable purposes under the principle of mutuality.

3. Applicability of the Principle of Mutuality:

The Tribunal examined whether the principle of mutuality applied to the trust's activities. The principle of mutuality implies that an organization formed by members for mutual benefit, where there is complete identity between contributors and participants, is not engaged in trade or business. The Tribunal found that the trust operated on this principle, as its activities were restricted to its members, and any surplus generated was incidental to its primary objective of promoting the gem and jewelry industry.

4. Determination of Activities as Charitable under Section 2(15):

The Tribunal analyzed whether the trust's activities could be considered charitable under section 2(15) of the Act. The Tribunal referred to the Finance Minister's speech and CBDT Circular No. 11/2008, which clarified that genuine charitable organizations, including trade associations, would not be affected by the amendment to section 2(15). The Tribunal concluded that the trust's activities, such as developing a gem and jewelry park and promoting exports, were for the advancement of general public utility and did not involve trade, commerce, or business with a profit motive.

5. Validity of Treating Certain Incomes as Business Income:

The AO treated certain incomes, including interest from deposits and security deposits from members, as business income. The Tribunal disagreed, stating that these incomes were incidental to the trust's primary charitable activities. The Tribunal highlighted that the trust was a non-profit organization registered under section 25 of the Companies Act, 1956, and had obtained registration under section 12AA of the Income Tax Act, reinforcing its charitable status.

Conclusion:

The Tribunal upheld the CIT(A)'s order, confirming that the trust was entitled to exemptions under sections 11 and 12 of the Income Tax Act. The Tribunal found that the trust's activities were charitable in nature, based on the principle of mutuality, and did not involve trade, commerce, or business with a profit motive. Consequently, the Tribunal dismissed the Revenue's appeals, affirming the trust's eligibility for the claimed exemptions and the deletion of the additions made by the AO.

← Previous Next →