2009 (3) TMI 252 - AT - Income Tax

Application seeking renewal of approval u/s 80G - nature of construction and maintenance of community hall - objects of the trust include relief of the poor, education and medical relief - business activists or not? - Trust belongs to one family, which includes brothers of the managing trustee - voluntary contributions received by a trust created only for charitable or religious purposes is to be deemed as income u/s 11. HELD THAT - The convention centre was constructed for earning income for the trust. Since the trust was finding it difficult to administer and to look after the day-to-day activities, therefore, the same was leased. This shows that the convention centre, i.e., kalyana mantapa was constructed for the purpose of carrying out the business activity. It has not been given on long lease but the lease is only of 36 months though it is renewable for a further period on mutually agreed terms and conditions. Such an activity of giving the convention centre on lease is part of the nature of activity in the form of trade or commerce. The meaning of the words in relation to as appearing in section 14A has been considered by the Calcutta Bench in the case of Deputy CIT v. S.G. Investments and Industries Ltd. 2003 (5) TMI 198 - ITAT CALCUTTA-C . After considering the meaning of the words in relation to , the hon'ble Special Bench held that not only the direct but also the indirect expenditure, which has any relation to the exempt income, is not to be allowed as a deduction. It is therefore clear that any activity, which directly or indirectly facilitates the rendering of any service in relation to any trade, commerce or business, then such an activity will be covered under the proviso to section 2(15). For carrying out the business of hiring kalyana mantapa by the lessee, the building is an essential asset and without the building, such business cannot be carried out. We therefore hold that the construction of kalyana mantapa and giving the same on lease in the case of the trust where all the objects are not in respect of relief of poor, education and medical is covered by the proviso to section 2(15) and the trust cannot be said to be created wholly for charitable purpose. In the case of Sengunthar Thirumana Mandapam 2006 (6) TMI 64 - MADRAS HIGH COURT on which the assessee has placed reliance, in that case, the kalyana mandapam was to be allowed to be used for nominal rent by weavers and agriculturists. In the instant case, the facts are different and therefore, that judgment is not applicable. The decision in the case of Ram Bhawan Dharamshala 2002 (7) TMI 798 - RAJASTHAN HIGH COURT is also not applicable in view of the amended definition of charitable purpose and in that case, the hon'ble Madras High Court was concerned with the issue as to whether the letting out of the property is an activity of business. Now in the amended definition, the words used are that the activity may be in the nature of trade, commerce or business . In the case of Halai Nemon Association 1998 (11) TMI 37 - MADRAS HIGH COURT the hon'ble Madras High Court has held that the building, which was being let out for functions and therefore, the receipts were taxable under the head Business . Therefore, in the instant case, it cannot be said that the said trust existed wholly for the charitable purposes in view of the amended definition of charitable purpose. As contended by ld AR that the ld DIT (Exemptions) should have refrained from considering section 13 in not granting the renewal of approval u/s 80G. As per section 80G(5), the concerned authority can give renewal of approval u/s 80G in case he is satisfied that the trust income is not liable to be included in total income under the provisions of sections 11 and 12. Section 12(1) clearly says that the provisions of sections 12 and 13 shall apply in respect of voluntary contributions received by the trust. Renewal of approval u/s 80G is in respect of voluntary contributions to be received by the trust. Therefore, as per section 12(1), the concerned authority is empowered to look into the applicability of section 13. The concerned authority has to be satisfied that the income of the trust will not be liable to inclusion in the total income under the provisions of sections 11 and 12. The words liable to inclusion means that the authority concerned has to take a decision on the basis of the facts available at the time of application. The authority concerned cannot shut its eyes in case the provisions of section 13 ate applicable on the basis of the facts on record, though the actual assessment of that previous year may be made by AO subsequently, but the authority concerned has to take a decision on the basis of the facts as available on the date of application, which is before the start of the previous year while AO has to decide the issue on the basis of the facts of that particular previous year after the end of the previous year. Hence, it is held that the learned DIT (Exemptions) was legally correct in looking into the provisions of section 13 while considering the application of the trust for renewal of approval u/s 80G. No prudent person would have invested such a huge amount without adequate security that the investment made will yield appropriate income and the investment will remain safe. Shri Ramamurthy, Hindu undivided family is a person covered u/s 13(3). As per section 13(1)(c), it is mentioned that if any part of income or property of the trust is used or applied directly or indirectly for the benefit of any person referred to in section 13(3), then nothing contained in sections 11 and 12 shall operate to exclude from the total income of the previous year of the person in receipt of the income. Thus, investing such a huge amount in the construction of a kalyana mantapa without having adequate arrangement for retaining the land for a sufficient long period, resulted in a benefit to Shri Ramamurthy, Hindu undivided family, who is a person covered u/s 13(3). The word benefit has not been defined in the Act and therefore, its ordinary meaning will have to be applied that it means, advantage and such advantage may be either monetary or non monetary. In view of the fact that the benefit is available to a person specified in section 13(3), therefore, the income of the trust is not exempt u/s 11 and 12 and therefore, the learned DIT (Exemptions) was right in not allowing renewal of approval u/s 80G. Moreover, no basis has been provided for fixing the monthly rent to satisfy that the lease rent adequately compensates the trust, who has constructed the kalyana mantapa on the land leased out to it. The onus was on the appellant trust to have provided the basis that the agreed lease rent was adequate. If the appellant trust was having lease right over the land for a long period then the adequate compensation should have been considered that aspect as to what the assessee was leasing to Shri S. Ramamurthy was kalyana mantapa along with the land. In case only the building was being leased as the land belongs to Shri Ramamurthy, Hindu undivided family, then the appellant trust has not taken adequate steps to protect its investment. Hence, the learned DIT (Exemptions) was justified in not giving renewal of the approval u/s 80G. In the result, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Whether the object of the trust to establish community halls is a commercial activity.
2. Whether any benefits have been provided to interested persons by the trust in violation of section 13 of the Income-tax Act.
3. Whether the trust was correct in fixing the lease rent for the kalyana mantap based on the market value of the building.
4. Whether the trust deed provides for leasing out the trust property to others or to themselves by the trustee.
5. Whether the activities of the trust, such as running hostels, lose their charitable nature due to the insertion of the proviso to section 2(15) with effect from April 1, 2008.

Detailed Analysis:

1. Running of Community Hall as a Commercial Activity:
The learned DIT (Exemptions) concluded that the construction and maintenance of a community hall constitute a business activity, thus rendering it a commercial act. This conclusion was supported by the Madras High Court decision in CIT v. Halai Nemon Association, which held that maintaining a community hall for social and public functions is a commercial activity. The trust's activities fall under "other general public utility" as per section 2(15) of the Income-tax Act. Due to the insertion of the proviso to section 2(15), the trust loses its character of charitable nature.

2. Benefits to Interested Persons:
The trust entered into a lease agreement with Shri S. Ramamurthy in his Hindu undivided family capacity at a monthly rent of Rs. 54,000. The trust constructed a community hall on this site for Rs. 1,42,30,000 and leased it back to Shri S. Ramamurthy at Rs. 1,00,066 per month. The learned DIT (Exemptions) found that this arrangement provided undue benefits to specified persons as per section 13(2)(b), as the lease rent did not reflect the business capacity of the building. Additionally, the trust's management was within one family, raising concerns about conflict of interest and lack of transparency.

3. Fixing Lease Rent Based on Market Value:
The trust's methodology of fixing lease rent based solely on the market value of the building was deemed incorrect. The learned DIT (Exemptions) argued that the building's business capacity should have been considered, not just its market value. This approach resulted in undue benefits to specified persons under section 13(2)(b).

4. Leasing Out Trust Property:
The trust deed did not confer powers to the trustee to lease out the trust property to others or themselves. Therefore, leasing the kalyana mantap to Shri S. Ramamurthy was not in conformity with the trust deed.

5. Charitable Nature of Activities:
The trust's activities, including running hostels for students, women, and senior citizens, were scrutinized under the amended definition of "charitable purpose" in section 2(15). The accounts showed receipts from the inmates for lodging facilities, categorizing this activity under "other general public utility." With the insertion of the proviso to section 2(15), such activities were deemed commercial. The trust failed to substantiate how these activities remained charitable, leading to the denial of renewal of approval under section 80G.

Conclusion:
The appellate tribunal upheld the learned DIT (Exemptions)'s decision to deny the renewal of approval under section 80G. The tribunal agreed that the trust's activities, management practices, and financial arrangements provided undue benefits to specified persons and were commercial in nature. The trust failed to demonstrate that its activities were wholly charitable under the amended definition in section 2(15). The appeal was dismissed, and the decision was pronounced in the open court on March 25, 2009.