2023 (2) TMI 1386 - AT - Income Tax

Denial of exemption u/s. 11 - assessee a company formed and registered u/s. 8 of the Companies Act 2013 (corresponding to sec. 25 of the Companies Act 1956) i.e. for carrying out public charitable objects registered as a charitable institution u/s. 12A - turnover extending to almost the entirety of the gross receipt as against the cap of 20% thereof it did not fall to be covered u/s. 2(15) as amended - HELD THAT - Every business by employing people as indeed sourcing goods/services promotes employment both directly and indirectly as also the skill-set required for the same. It cannot however for that reason be regarded as charitable assigned a specific meaning in law. Basic to a claim of providing relief through sourcing i.e. the assessee s case in fine is a legal obligation in its respect apart a better value transfer to a class of farmers on a regular basis both absent/unshown which could also further it as regards it s business being not a pure commercial exercise favourably impacting it qua income application for Objects 1 2 where shown. There is in view of the foregoing nothing to hold that the assessee s trading business is being run for the benefit of the poor the sub-stratum of it s case much less as part of it s mandate. It s claim for exemption u/s. 11 on the profits of the said business constituting the primary source of it s income for the relevant years cannot accordingly be upheld and stands rightly denied by the Revenue. Assessee has filed a compilation of case law which were not referred to during hearing and accordingly not responded to by the other side. The same accordingly do not form part of the Tribunal s record. This explains our non-reference thereto which though stand browsed to find as not in conflict with anything stated herein so as to impact our adjudication which is based on the facts borne out by the record; the first legal principles; and the settled law in the matter. Decided against assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue in this case is whether the assessee, a company registered under section 8 of the Companies Act, 2013, qualifies for exemption under section 11 of the Income Tax Act, 1961. The company claims this exemption on the grounds of being engaged in charitable activities, specifically providing 'relief to the poor' by trading agricultural produce procured from small and marginal farmers. The core legal questions considered include:

• Whether the activities of the assessee qualify as 'relief to the poor' under section 2(15) of the Income Tax Act.
• Whether the trading activities of the assessee can be considered incidental to its charitable objects, thereby qualifying as a property held under trust for charitable purposes.
• Whether the assessee's activities can be classified under 'advancement of an object of general public utility' and if the turnover exceeds the permissible limit for such classification.

ISSUE-WISE DETAILED ANALYSIS

Denial of Exemption under Section 11

Relevant Legal Framework and Precedents

Section 11 of the Income Tax Act provides exemptions for income derived from property held under trust for charitable or religious purposes. Section 2(15) defines 'charitable purpose' to include 'relief to the poor', 'education', 'medical relief', and 'advancement of any other object of general public utility'. The legal framework also includes the requirement that any business activity must be incidental to the attainment of the charitable object and not exceed a specified turnover limit.

Court's Interpretation and Reasoning

The Tribunal examined whether the assessee's activities genuinely provided 'relief to the poor'. It was noted that the company's Memorandum of Association did not explicitly include 'relief to the poor' as one of its main objects. The Tribunal referred to precedents, including the Delhi Stock Exchange Association Ltd. v. CIT and Asst. CIT v. Thanthi Trust, to emphasize the necessity of a legal obligation to apply profits for charitable purposes.

Key Evidence and Findings

The assessee presented a list of farmers from whom agricultural produce was procured, but failed to demonstrate that these farmers qualified as 'poor'. The Tribunal found no evidence of the company applying its profits for charitable purposes or distributing profits among farmers.

Application of Law to Facts

The Tribunal concluded that the assessee's trading activities did not qualify as providing 'relief to the poor' since there was no legal obligation or evidence of profit application for charitable purposes. The business activities were deemed commercial, with no incidental connection to any charitable object.

Treatment of Competing Arguments

The assessee argued that direct purchases from farmers benefitted them by avoiding middlemen. However, the Tribunal found no supporting evidence and noted that purchases at market price do not constitute charity. The Tribunal also dismissed the argument that the business served as a property held under trust, as there was no application of income for charitable purposes.

Conclusions

The Tribunal concluded that the assessee's activities did not qualify for exemption under section 11, as they were not incidental to any charitable object and lacked a legal obligation to apply profits for charitable purposes.

Advancement of an Object of General Public Utility

Relevant Legal Framework and Precedents

The Tribunal considered whether the assessee's activities could be classified under 'advancement of an object of general public utility', a residual category under section 2(15). The legal framework specifies that turnover from such activities should not exceed 20% of gross receipts.

Court's Interpretation and Reasoning

The Tribunal agreed with the first appellate authority that the assessee's activities fell under the 'general public utility' category. However, the turnover exceeded the permissible limit, disqualifying the activities from exemption under section 11.

Key Evidence and Findings

The Tribunal noted that the assessee's turnover for the relevant years was significantly higher than the 20% threshold, indicating a primarily commercial activity.

Application of Law to Facts

The Tribunal applied the amended law, emphasizing that commerciality is central to the assessee's trading activities, which aimed at maximizing profits.

Treatment of Competing Arguments

The assessee did not demonstrate that its trading business was incidental to its stated objects, which could qualify as 'general public utility'. The Tribunal found no evidence of income application for these objects.

Conclusions

The Tribunal concluded that the assessee's activities did not qualify for exemption under section 11, as they exceeded the turnover limit for 'general public utility' and lacked application of income for charitable purposes.

SIGNIFICANT HOLDINGS

The Tribunal held that the assessee's trading activities were not conducted for the benefit of the poor and did not qualify as a property held under trust for charitable purposes. The Tribunal emphasized the necessity of a legal obligation to apply profits for charitable purposes and the requirement for business activities to be incidental to charitable objects.

Core Principles Established

• For exemption under section 11, there must be a legal obligation to apply profits for charitable purposes.
• Business activities must be incidental to the attainment of charitable objects and within specified turnover limits.
• Purchases at market price do not constitute charitable activities unless there is evidence of benefit beyond commercial transactions.

Final Determinations on Each Issue

• The assessee's activities did not qualify as 'relief to the poor' due to the absence of a legal obligation and lack of evidence of profit application for charitable purposes.
• The turnover from the assessee's activities exceeded the permissible limit for 'advancement of an object of general public utility', disqualifying it from exemption under section 11.