2025 (1) TMI 1413 - HC - Income Tax

Denial of Exemption u/s 11 - activities of the appellant were more in the nature of business activities carried on with a profit motive - Whether the activities of the appellant qualify as relief of the poor u/s 2(15) ? - HELD THAT - The payment of such amounts to the poor and marginal farmers if proved would have led the authorities below to conclude that the activities of the appellant were carried on with the object of providing relief of the poor. They would have arrived at such a conclusion by looking at the activities of the appellant company in a holistic manner and against the backdrop of its stated objects in its Memorandum of Association. The impugned order of the Appellate Tribunal that upholds the finding of the authorities below is therefore set aside and the appeals allowed to the extent of holding that the activities of the appellant/assessee have to be seen as falling under the head of relief of the poor for the purposes of the definition of charitable purpose u/s 2 (15) and for the purposes of computation of income and grant of exemption u/s 11 of the I.T. Act. That said we do find force in the submission of Department that there was no enquiry by the authority below with reference to the accounts and documents produced by the appellant/assessee on the aspect of whether the appellant had in fact satisfied the requirement of application of income in terms of Section 11 for claiming the exemption. We feel that the assessment of the appellant/company under the I.T. Act for the assessment years 2017-18 and 2018-19 would not be complete unless the above exercise is also completed by the Assessing Officer. While allowing the I.T. Appeals therefore by finding that the appellant would be entitled to the exemption u/s 11 as an entity providing relief of the poor we remand the matter to the Assessing Authority to determine whether or not the appellant actually satisfied the requirement of application of income u/s 11 of the I.T. Act during the assessment years in question for the purposes of obtaining the benefit of exemption. Decided in favour of assessee.

The core legal issues considered in this judgment are:

1. Whether the activities of the appellant qualify as "relief of the poor" under Section 2(15) of the Income Tax Act, thus entitling them to exemption under Section 11 of the I.T. Act.

2. Whether the appellant's activities are incidental to its charitable purpose or primarily business-oriented, thereby affecting its eligibility for tax exemption.

3. Whether the appellant satisfied the requirement of application of income under Section 11 of the I.T. Act for the assessment years 2017-18 and 2018-19.

Issue-wise Detailed Analysis:

1. Qualification as "Relief of the Poor":

Relevant Legal Framework and Precedents: Section 2(15) of the I.T. Act defines "charitable purpose" to include "relief of the poor" and "advancement of any other object of general public utility." The proviso excludes activities involving trade or commerce unless they are incidental to the main charitable purpose. Precedents such as Thiagarajar Charities and Lucknow Development Authority were considered.

Court's Interpretation and Reasoning: The Court interpreted the activities of the appellant as primarily charitable, aimed at providing relief to small and marginal farmers, thus qualifying as "relief of the poor." The Court emphasized that the appellant's business activities were incidental to its charitable objectives.

Key Evidence and Findings: The appellant provided evidence of its activities, including sourcing agricultural produce at premium prices from small and marginal farmers and assisting them in obtaining organic certification.

Application of Law to Facts: The Court applied the definition of "charitable purpose" to the appellant's activities, concluding that the primary objective was charitable, with business activities being incidental.

Treatment of Competing Arguments: The Court rejected the Revenue's argument that the appellant's activities were primarily business-oriented, noting the lack of evidence to suggest a profit motive.

Conclusions: The Court concluded that the appellant's activities fall under "relief of the poor," entitling them to exemption under Section 11.

2. Incidental Nature of Business Activities:

Relevant Legal Framework and Precedents: The definition of "charitable purpose" and its proviso were central to this issue. The Court relied on precedents that distinguish between primary charitable objectives and incidental business activities.

Court's Interpretation and Reasoning: The Court found that the appellant's business activities were incidental to its main charitable purpose, which was to support small and marginal farmers.

Key Evidence and Findings: The Court noted the appellant's support for farmers, including financial assistance and market access, as evidence of its charitable intent.

Application of Law to Facts: The Court applied the legal framework to determine that the appellant's business activities were a means to achieve its charitable objectives.

Treatment of Competing Arguments: The Court dismissed the Revenue's claim that the appellant's primary objective was commercial, highlighting the lack of evidence to support this assertion.

Conclusions: The Court concluded that the appellant's business activities were incidental to its charitable purpose, supporting its eligibility for tax exemption.

3. Application of Income under Section 11:

Relevant Legal Framework and Precedents: Section 11 of the I.T. Act requires the application of income for charitable purposes to qualify for exemption.

Court's Interpretation and Reasoning: The Court acknowledged that the appellant's compliance with Section 11 needed further examination by the Assessing Officer.

Key Evidence and Findings: The Court noted the absence of sufficient inquiry into whether the appellant met the application of income requirements.

Application of Law to Facts: The Court identified the need for a detailed assessment of the appellant's compliance with Section 11.

Treatment of Competing Arguments: The Court recognized the Revenue's concern about the lack of evidence regarding the application of income but emphasized the need for further examination.

Conclusions: The Court remanded the matter to the Assessing Officer to determine whether the appellant satisfied the application of income requirements under Section 11.

Significant Holdings:

The Court held that the appellant's activities qualify as "relief of the poor" under Section 2(15) of the I.T. Act, entitling them to exemption under Section 11. The Court emphasized that the appellant's business activities were incidental to its charitable purpose. The Court remanded the matter to the Assessing Officer to assess compliance with the application of income requirements under Section 11.

The Court stated: "The activities of the appellant/assessee have to be seen as falling under the head of 'relief of the poor' for the purposes of the definition of 'charitable purpose' under Section 2(15) of the I.T. Act and for the purposes of computation of income and grant of exemption under Section 11 of the I.T. Act."

The final determination was to allow the appellant's appeals, recognizing their entitlement to exemption under Section 11, and remanding the case for further assessment of income application compliance.

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