2025 (4) TMI 1349 - AT - Income Tax

Exemption u/s 11 - scope of provisions of section 2(15) - as per revenue since the income of the trust was applied for religious purposes the surplus so earned by the assessee would not be eligible for exemption u/s 11 - whether activities of the assessee are not religious whereas the assessee has applied the money for religious purpose? - activity of sale of devotional articles was utilized for carrying out the objects or not? - assessee stated that the main charitable activities of the trust were feeding the poor providing education and medical relief - CIT(A) allowed exemption HELD THAT - The assessee is a public charitable trust and it is registered trust u/s 12AA of the act. It is also holding valid approval u/s 80G(5). The perusal of Income and Expenditure (Page No.30 of the paper-book) would show that majority of its income constitute general donations and interest income. Apparently there is no change in the activities of the trust since its inception and the assessee-trust continue to engage in similar kind of activities. The Hon ble Supreme Court in the case of ACIT vs. Ahmedabad Urban Development Authority 2022 (10) TMI 948 - SUPREME COURT held that such activities if carried out for nominal cost would not be ipso fact become business. In the present case the observation of Ld. AO that the assessee sold the books at a high mark-up is fallacious one since AO has not considered the administrative expenditure incurred on carrying out sale of books and articles. The major income of the assessee as observed earlier constitutes general donations and interest income. Therefore the adjudication of CIT(A) could not be faulted with. Revenue Appeal dismissed.

Summary

The core legal questions considered in this appeal include:

1. Whether the assessee, a registered public charitable trust, is eligible for exemption under section 11 of the Income Tax Act despite earning surplus income from the sale of devotional articles.

2. Whether the provisions of section 2(15) of the Act, particularly the first proviso, which excludes income from activities in the nature of trade, commerce, or business from charitable purposes, are attracted to the assessee's income from sale of devotional articles.

3. Whether the activities of the assessee qualify as 'religious' or 'general public utility' and how that classification affects exemption eligibility.

4. The impact of the Supreme Court's ruling in the Ahmedabad Urban Development Authority case on the interpretation of section 2(15) and its application to the facts of this case.

5. Whether the profit margin on sale of devotional articles (32%) and the threshold limit under the 2% proviso to section 2(15) disqualify the assessee from claiming exemption under section 11.

6. The correctness of the learned Commissioner of Income Tax (Appeals) in allowing exemption under section 11 and rejecting the Assessing Officer's denial of exemption.

Issue-wise Detailed Analysis

Issue 1: Eligibility for exemption under section 11 despite surplus income from sale of devotional articles

The relevant legal framework involves section 11 of the Income Tax Act, which provides exemption to income applied for charitable or religious purposes. Section 12AA registration and approval under section 80G(5)(vi) are prerequisites for such exemption. The Assessing Officer (AO) denied exemption on the ground that the surplus income, including corpus donations and profits from sale of devotional articles, was taxable since it was applied for religious purposes only and not charitable purposes.

The Court examined the activities of the trust, which included feeding the poor, education, and medical relief, categorically charitable in nature. The sale of devotional articles was undertaken to generate income to fund these charitable activities. The Tribunal's earlier decisions for AYs 2011-12 and 2012-13, which had similar facts, held that the assessee was eligible for exemption under section 11 and 12.

The Court applied the principle of consistency and continuity in the nature of activities and found no material change in the trust's operations. The exemption was rightly allowed by the CIT(A) following the Tribunal's precedent. The AO's denial was therefore not justified.

Issue 2: Applicability of section 2(15) proviso on income from trade, commerce or business

Section 2(15) defines charitable purpose but excludes income from activities in the nature of trade, commerce or business, even if the income is applied for charitable purposes. The first proviso to section 2(15) states that income from such activities is taxable irrespective of its application.

The AO argued that sale of devotional articles constituted business activity with a 32% profit margin, exceeding the 2% threshold limit, thereby attracting the proviso. The revenue relied on the Supreme Court's judgment in Ahmedabad Urban Development Authority, which clarified that activities involving substantial commercial considerations and profits beyond nominal cost are not charitable.

However, the Court noted that the AO's conclusion was based on gross profit without accounting for administrative and other expenses related to the sale. The net surplus was not shown to be excessive or commercial in nature. The Supreme Court's ruling was considered carefully, particularly the illustration that activities charging nominal fees to cover costs plus a nominal markup do not constitute business. The Court found that the sale of devotional articles was incidental and intended to support charitable activities, not a commercial venture.

Thus, the proviso to section 2(15) was not attracted in this case.

Issue 3: Classification of activities as 'religious' or 'general public utility'

The AO treated the activities as religious, and since the income was applied for religious purposes, exemption under section 11 was denied. The CIT(A) held that the activities were charitable and also involved advancement of general public utility.

The Court examined the nature of the trust's activities-feeding the poor, education, medical relief-and found them to be charitable and advancing general public utility rather than purely religious. The sale of devotional articles was ancillary and aimed at supporting these charitable objectives.

The Court emphasized that the classification affects exemption eligibility, and in this case, the activities fell within charitable purposes eligible for exemption.

Issue 4: Impact of Supreme Court judgment in Ahmedabad Urban Development Authority

The Supreme Court's decision clarified the interpretation of section 2(15) and the threshold of commerciality. It held that activities charging only nominal fees to cover costs plus nominal markup are not business, but charging substantial amounts over cost would constitute business and attract tax.

The Court applied this principle to the facts and found that the AO did not demonstrate that the assessee charged substantial amounts beyond cost. The administrative expenses were not considered, and the profit margin alone was insufficient to establish commerciality.

Therefore, the CIT(A)'s reliance on this precedent to allow exemption was justified.

Issue 5: Whether profit margin and threshold limit under proviso to section 2(15) disqualify exemption

The AO relied on the 32% profit margin and the total receipts from sale of devotional articles exceeding the 2% threshold to deny exemption. The Court observed that the 2% proviso applies to income from business or trade, which must be established after considering net surplus, not just gross receipts or profit margin.

Since the AO failed to account for expenses and administrative costs, the profit margin was not a reliable indicator of business activity. The Court held that the threshold was not crossed in a manner that would attract the proviso.

Issue 6: Correctness of CIT(A) order allowing exemption

The CIT(A) followed the Tribunal's earlier decisions in the assessee's own case and allowed exemption under section 11. The Court found no error in this approach given the consistency of facts and legal principles. The CIT(A) correctly appreciated the nature of activities, the application of income, and the legal framework including the Supreme Court's guidance.

The revenue's appeal was dismissed accordingly.

Significant Holdings

"It may be useful to conclude this section on interpretation with some illustrations. The example of Gandhi Peace Foundation disseminating Mahatma Gandhi's philosophy ... for nominal cost, ipso facto is not business. ... Yet, when the entity concerned charges substantial amounts- over and above the cost it incurs ... such activities are in the nature of trade, commerce, business or service in relation to them. In such case, the receipts ... should not exceed the limit indicated by proviso (ii) to section 2(15)."

This principle was applied to hold that the sale of devotional articles by the trust, being incidental and not for profit beyond nominal markup, does not constitute business income under section 2(15).

The Court established the core principle that the mere existence of surplus or profit from incidental sales does not disqualify a charitable trust from exemption under section 11, provided the surplus is applied for charitable purposes and the activity is not commercial in nature.

The final determination was that the assessee-trust is eligible for exemption under section 11 of the Income Tax Act for AY 2013-14, the provisions of section 2(15) proviso are not attracted, and the CIT(A) order allowing exemption is upheld. The appeal by the revenue was dismissed.