2020 (11) TMI 1125 - HC - Income Tax

Exemption u/s 11 denied - income generated by the assessee, who is registered u/s 12A from the business of Chitty/Kuri - HELD THAT - We pertinently have to notice that even in Surat Art Silk Manufacturers' Association the distinction as to a business held under Trust or carried on by it was noticed in the minority judgment without any clarification as to what would be the consequence of the distinction in the later instance. All the decisions cited, wherein business in kuries was mentioned as an object in the Memorandum of Association, were held to be business held under trust. The kuri business here too, has to be hence found to be a business held under trust. Sub-section (4) of Section 11 makes any business held under trust to be property held under trust for the purposes of this section. Hon'ble Supreme Court in Thanthi Trust 2001 (1) TMI 80 - SUPREME COURT held that if the income from the business is utilized for achieving the objectives of the trust or institution, then it is incidental to the attainment of the objectives of the Trust. We have to follow the above dictum of the Hon'ble Supreme Court which is binding on us under Article 141 of the Constitution of India. The observation of the Delhi High Court It would in our opinion be disastrous to extend the sweep of the observations made by the Supreme Court (quoted above) in the case of Thanthi Trust (supra), on the facts of that case, to all cases where the trust carries on business which is not held under trust and whose income is utilised to feed the charitable objects of the trust'; according to us, does not subserve judicial discipline. We are of the opinion that the first Proviso brought in the same effect as spoken of in Dharmaposhanam, on exemption which respect to carrying on a public utility. But 'medical relief' is not qualified with those words; as has been found in Dharmadeepti as affirmed in Surat Art Silk Manufacturers' Association 1979 (11) TMI 1 - SUPREME COURT On the above reasoning we answer the question of law in the negative and in favour of the assessee and against the Revenue.

Summary

Issues Involved:

1. Whether the Tribunal was correct in denying exemption to the income generated by the assessee, registered under Section 12A of the Income Tax Act, 1961, from the business of Chitty/Kuri, which was fully utilized for the purpose of 'medical relief', falling under the definition of 'charitable purpose'.

Issue-wise Detailed Analysis:

1. Denial of Exemption by the Tribunal:

The primary issue in the appeal was whether the income generated by the assessee from the business of Chitty/Kuri, which was fully utilized for 'medical relief', qualifies for exemption under the Income Tax Act. The Tribunal denied this exemption, asserting that the Chitty business was not incidental to the primary object of the assessee-Trust. The Tribunal referred to the first proviso to Section 2(15) and concluded that the Chitty business could not be considered incidental to the main charitable object of the Trust, thereby disentitling the assessee from claiming exemption under Section 11.

2. Interpretation of 'Business Held Under Trust' vs. 'Carried on by a Trust':

The Revenue distinguished between a business 'held under trust' and 'carried on by a trust'. The Revenue argued that the case of Thanthi Trust, which involved a business held under trust, was not applicable here as the Chitty business was carried on by the Trust. The Tribunal and the first appellate authority supported this distinction, relying on precedents like CIT v. Mehta Charitable Pranalay Trust, which differentiated between businesses held under trust and those carried on by trusts.

3. Applicability of Section 2(15) and Section 11(4A):

The Court examined the provisions of Section 2(15) and Section 11(4A) as they applied to the relevant assessment year. The Court noted that the main object of the Trust was the provision of medical relief, which is a charitable purpose under Section 2(15). The Court emphasized that the income from the Chitty business was applied towards achieving this charitable purpose, and separate books of accounts were maintained, fulfilling the requirements of Section 11(4A).

4. Precedent Analysis:

The Court analyzed various precedents, including Dharmodayam Company, Dharmaposhanam Company, and Thanthi Trust, to determine the applicability of exemption. It was noted that the decision in Dharmodayam Company was upheld by a Constitution Bench in Surat Art Silk Manufacturers' Association, which clarified that the words "not involving the carrying on of any activity for profit" qualify only the last head of charitable purpose and not the earlier heads like medical relief. The Court found that the Tribunal erred in dismissing the applicability of these precedents.

5. Distinction from Mehta Charitable Pranalay Trust:

The Court disagreed with the Delhi High Court's decision in Mehta Charitable Pranalay Trust, which had drawn a distinction from Thanthi Trust. The Court found that the Chitty business, unlike the manufacturing business in Mehta Charitable Pranalay Trust, did not require substantial initial investment and was incidental to the attainment of the Trust's objectives.

Conclusion:

The Court concluded that the income from the Chitty business was utilized for achieving the objectives of the Trust, namely medical relief, and was therefore incidental to the attainment of the Trust's objectives. The Court held that the Tribunal erred in denying the exemption and ruled in favor of the assessee. The appeal was allowed, and the question of law was answered in the negative, favoring the assessee and against the Revenue. The parties were left to bear their respective costs.