1983 (8) TMI 80 - AT - Income Tax

Summary

Issues Involved:
1. Exemption under Section 11(1) of the Income-tax Act, 1961.
2. Applicability of Section 11(2)(a) and Rule 17 of the Income-tax Rules, 1962.
3. Treatment of tax payments as expenditure incidental to the carrying out of the purposes of the assessee.

Issue-wise Detailed Analysis:

1. Exemption under Section 11(1) of the Income-tax Act, 1961:
The assessee, a charitable organization registered under section 25 of the Companies Act, 1956, claimed exemption under section 11(1) for the assessment years 1975-76 and 1976-77. The assessee argued that its income from operating a weighbridge was not derived from any activity for profit but was incidental to its charitable purposes. The Income Tax Officer (ITO) rejected this claim, stating that the income from the weighbridge represented an activity for profit. The Commissioner (Appeals) upheld the ITO's decision, noting that the assessee's memorandum of association did not specifically authorize the operation of a weighbridge and that the assessee had not provided information about other charitable activities.

Upon appeal, the Tribunal examined whether the assessee's activities involved a profit motive. It was noted that the dominant purpose of the assessee was charitable, and the weighbridge was a means to facilitate trade and commerce, which aligned with the assessee's charitable objectives. The Tribunal referenced the Supreme Court's decision in Surat Art Silk Cloth Mfrs. Association, which established that an activity resulting in profit does not necessarily imply a profit motive if it primarily serves a charitable purpose. The Tribunal concluded that the assessee's income from the weighbridge was incidental to its charitable activities and allowed the exemption under section 11(1).

2. Applicability of Section 11(2)(a) and Rule 17 of the Income-tax Rules, 1962:
The assessee also claimed the benefit under section 11(2)(a) for the accumulation of income set apart for charitable purposes. The ITO rejected this claim due to the late submission of the notice of option under Rule 17. The Tribunal considered the decisions of the Madras High Court in M.C.T. Trust and M. Ct. Muthiah Chettiar Family Trust, which held Rule 17 to be ultra vires of section 11, implying that the time limit prescribed under Rule 17 was directory and not mandatory. The Tribunal, in the absence of any contrary decision from the Allahabad High Court, directed the Commissioner (Appeals) to re-examine the assessee's claim under section 11(2)(a) on merits.

3. Treatment of tax payments as expenditure incidental to the carrying out of the purposes of the assessee:
The assessee argued that tax payments made in the assessment years should be treated as expenditure incidental to carrying out its charitable purposes. The Tribunal referenced the Andhra Pradesh High Court's decision in H.E.H. the Nizam's Supplemental Religious Endowment Trust, which supported the view that tax payments are to be considered as expenditure incidental to the charitable purposes of the trust. Consequently, such payments should be excluded from the assessee's income for exemption purposes.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, granting exemption under section 11(1) and directing the Commissioner (Appeals) to reconsider the claim under section 11(2)(a). Additionally, it affirmed that tax payments should be treated as expenditure incidental to the assessee's charitable purposes.