2007 (1) TMI 104 - HC - Income Tax

Assessee, a trust, claiming exemption of Income from properties & lease rentals u/s 10(22) & 11 - eligibility to exemption has to be decided with reference to the objects of the trust - object of the assessee trust is education & activities of letting out properties & receiving lease rentals is an activity carried on only to fulfill the object of the trust. Hence, the income derived by letting out the properties cannot be treated as business income of the assessee - exemption allowed

Summary

Issues:
1. Interpretation of whether letting out of property constitutes a business activity for tax exemption under section 11 of the Income-tax Act, 1961.

Analysis:
The case involved a tax appeal by the Revenue against the order of the Income-tax Appellate Tribunal regarding the assessment year 1995-96. The main issue raised was whether the activity of letting out of property should be considered a business activity, impacting the eligibility for exemption under section 11 of the Act. The assessee, a trust, had claimed exemption of income from properties and lease rentals under sections 10(22) and 11, which was initially disallowed by the Assessing Officer but later allowed by the Commissioner of Income-tax (Appeals). The Appellate Tribunal upheld the decision, leading to the Revenue's appeal.

Before deciding on the exemption of income for the educational trust, the court needed to determine the trust's object and whether letting out properties constituted a business activity. It was established that if a trust exists solely for educational purposes, its income would be exempt under section 10(22). Previous court rulings emphasized that if a trust conducts business activities to raise funds for its main educational objectives, it could still claim exemption under section 10(22).

In this case, the High Court found that the main object of the assessee trust was education, and the activities of letting out properties and receiving lease rentals were carried out solely to fulfill the trust's educational objectives. The court cited precedents where similar activities were considered as fulfilling the trust's objects rather than being standalone business activities. Consequently, the income derived from letting out properties was not deemed as the business income of the trust, making it eligible for exemption under section 11 of the Act.

In conclusion, the High Court upheld the decision of the Appellate Tribunal, ruling in favor of the assessee trust and dismissing the Revenue's appeal. The court emphasized that the income from letting out properties was not to be treated as business income but as an activity aligned with the trust's educational objectives, thus qualifying for exemption under section 11 of the Act.