1989 (4) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income-tax Act, 1961.
2. Nature of activities carried out by the assessee and whether they constitute a business for profit.
3. Applicability of Section 13(1)(bb) of the Income-tax Act, 1961.

Detailed Analysis:

1. Eligibility for Exemption under Section 11:
The primary issue was whether the assessee, a society engaged in various public utility services, was entitled to claim exemption under Section 11 of the Income-tax Act, 1961. The society argued that its surplus income was applied for charitable purposes and thus should be exempt. The Income-tax Officer (ITO) had denied the exemption, asserting that the society's activities were commercial and profit-driven.

2. Nature of Activities:
The assessee's activities included maintaining centers for adult education, sewing for widows, and providing various public utility services. The ITO observed that the tailoring activity generated significant surplus income and was conducted on commercial lines. The ITO relied on a previous decision for the A.Y. 1977-78, which held that the tailoring activity was a business carried on with a profit motive. The assessee contended that the surplus was used for charitable purposes and that the tailoring activity was not organized on commercial lines, as it did not advertise, had no sales executives, and charged moderate rates.

3. Applicability of Section 13(1)(bb):
The ITO and the Commissioner of Income-tax (Appeals) (CIT(A)) held that the assessee was not entitled to exemption under Section 11 read with Section 13(1)(bb) because the primary activity was profit-driven. However, the assessee argued that Section 13(1)(bb) did not apply to its case as it was deleted with effect from 1-4-1984 and was not relevant for the assessment years in question.

Tribunal's Findings:

Eligibility for Exemption:
The Tribunal noted that the assessee was granted exemption for the assessment years 1978-79 and 1979-80, and the proceedings under Section 263 initiated by the Commissioner were dropped. The Tribunal emphasized that the mere fact that an activity results in profit does not necessarily mean it is carried out with a profit motive. The Supreme Court's decision in Surat Art Silk Cloth Mfrs. Association was cited, which laid down that the primary purpose must be charitable, and any profit must feed the charitable purpose.

Nature of Activities:
The Tribunal found that the assessee's tailoring activity was not conducted with a predominant profit motive. The activity did not involve advertising, sales executives, or large administrative costs, which are typical of commercial enterprises. The surplus generated was wholly earmarked for charitable purposes, and the charges were moderate compared to market rates. The Tribunal concluded that the predominant object was to carry out charitable purposes and not to earn profit.

Applicability of Section 13(1)(bb):
The Tribunal held that Section 13(1)(bb) did not apply to the assessee's case as it was concerned with the advancement of any other object of general public utility, which was not barred from carrying on an activity for profit. The Tribunal also noted that Section 13(1)(bb) had been deleted with effect from 1-4-1984, and thus, it was not relevant for the assessment years in question.

Conclusion:
The Tribunal allowed the appeals, holding that the assessee was entitled to exemption under Section 11 for the assessment years 1980-81 and 1981-82. The Tribunal emphasized that the assessee's activities were genuinely charitable, and the surplus income was applied for charitable purposes, thus meeting the criteria for exemption under Section 11.