1982 (6) TMI 68 - AT - Income Tax

Summary

Issues involved:

1. Applicability of Section 11 exemption to the assessee-trust.
2. Interpretation and applicability of Section 13(1)(bb) of the Income-tax Act, 1961.
3. Computation of income and determination of tax rate under Section 164(1) of the Act.

Detailed Analysis:

1. Applicability of Section 11 exemption to the assessee-trust:

The assessee-trust, formed by a deed executed on 1-7-1964, aimed to carry out various charitable purposes, including education, medical relief, and relief to the poor. The ITO noted that while some objects fell under these categories, others were of general public utility. The ITO, referencing the pre-Surat Art Silk Cloth Manufacturers' Association decision, concluded that business activities disqualified the trust from exemption under Section 11. Specifically, the trust's engagement in fabrication works, sale of yarn and cloth, and receipt of fabrication charges were seen as business activities not carried out in the course of the primary charitable purposes. Consequently, the ITO denied the exemption under Section 11 and applied the maximum marginal tax rate under Section 164(1).

2. Interpretation and applicability of Section 13(1)(bb) of the Income-tax Act, 1961:

The AAC upheld the ITO's decision, emphasizing that Section 13(1)(bb) precluded exemption for business income unless the business was conducted in the course of carrying out the primary purpose of the trust. The assessee argued that Section 13(1)(bb) only excluded business income from exemption but did not disqualify the trust as a whole from Section 11 benefits. The assessee contended that rental and interest income should have been considered separately and that the application of income would have significantly reduced the taxable amount. The Tribunal acknowledged that Section 13(1)(bb) was intended to align the first three charitable purposes with the fourth leg of general public utility, restricting business activities unless directly related to the primary charitable purpose. The Tribunal noted that the ITO and AAC failed to correctly apply these provisions, as Section 13(1)(bb) only excluded business income from exemption, not other incomes like rent and interest, which should still be considered under Section 11 if applied for charitable purposes.

3. Computation of income and determination of tax rate under Section 164(1) of the Act:

The Tribunal pointed out that the ITO and AAC did not correctly compute the income by separating business income from other sources. The ITO was directed to recompute the income, considering the provisions of Sections 11 and 13, and to reassess the applicability of Section 164(1) after hearing the assessee. The Tribunal emphasized that the business of fabrication and sale of cloth was not conducted in the course of carrying out the primary charitable purposes of the trust, as required by Section 13(1)(bb). Therefore, the income from this business could not be exempt under Section 11. The Tribunal highlighted that the business contemplated under Section 13(1)(bb) should be directly related to the charitable activities, such as selling articles made by students or running a dispensary with charges for treatment. The Tribunal concluded that the income from the fabrication business did not meet these criteria and directed the ITO to recompute the income accordingly.

Conclusion:

The Tribunal set aside the orders of the lower authorities and directed the ITO to recompute the income, separating business income from other sources, and to reassess the tax rate under Section 164(1) after hearing the assessee. The appeal was allowed for statistical purposes, subject to the Tribunal's findings.