2014 (1) TMI 1539 - HC - Income Tax

Charitable activity - Applicability of proviso to section 2(15) - activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. - AO observed that, considerable income was generated from the activity of milk production and sale. - Held that - The objects of the Trust clearly establish that the same was for general public utility and for charitable purposes - Profit making was neither the aim nor object of the Trust - Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business - As clarified by the CBDT in its Circular No. 11/2008 dated 19th December 2008 the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of public utility - The facts and circumstances of each case are different - Decided against Revenue.

Issues Involved:
1. Whether the Appellate Tribunal erred in directing the Assessing Officer to provide exemption under section 11 of the Income Tax Act to the assessee.
2. Whether the Appellate Tribunal erred in holding that the proviso to Section 2(15) of the Income Tax Act was not applicable to the facts and circumstances of the case.

Detailed Analysis:

Issue 1: Exemption under Section 11 of the Income Tax Act

The controversy revolves around the activities of the respondent assessee, Sabarmati Ashram Gaushala Trust, which is engaged in breeding milk cattle and related activities. The Assessing Officer denied the exemption under section 11 of the Income Tax Act, 1961, by invoking the newly added proviso to Section 2(15) introduced by the Finance Act of 2010. The Assessing Officer concluded that the Trust generated considerable income from milk production and sale, thus framing an assessment order for A.Y 2009-2010 denying the benefits of Sections 11 and 12.

The assessee appealed to the CIT [A], who rejected the appeal and confirmed the Assessing Officer's order. The Tribunal, however, reversed the decision of the revenue authorities, holding that the Trust is a charitable trust and the proviso to Section 2(15) does not apply. The Tribunal relied on the Finance Minister's speech and CBDT Circular No. 11/2008, noting that the Trust's activities were non-commercial with no profit motive, and any incidental profit would not be hit by the proviso to Section 2(15). The Tribunal clarified that this decision was specific to the peculiar facts of the case and would not apply to a trust engaged in business or trade under the guise of charitable activities.

Issue 2: Applicability of Proviso to Section 2(15)

Section 11 of the Act pertains to income from property held for charitable or religious purposes. The term "Charitable Trust" is defined in Section 2(15) and includes various purposes such as relief to the poor, education, medical relief, and preservation of the environment. The proviso to Section 2(15) excludes entities involved in trade, commerce, or business from being considered as charitable if they charge a fee or any other consideration.

The proviso aims to exclude activities in the nature of trade, commerce, or business masked as charitable purposes. The Finance Minister's speech and the CBDT Circular No. 11 of 2008 clarify that genuine charitable organizations will not be affected, and the determination of whether an entity is carrying on activities in the nature of trade, commerce, or business will depend on the totality of facts.

The Tribunal examined the objects of the Trust, which include breeding cattle, improving the quality of cows and oxen, producing and selling cow milk, holding and cultivating agricultural lands, and conducting scientific research related to cattle and agriculture. The Tribunal noted that these objects were charitable and aimed at general public utility, with profit generation being incidental and secondary to the Trust's main activities. The Tribunal concluded that the proviso to Section 2(15) does not apply as the Trust's activities were not in the nature of trade, commerce, or business.

The High Court agreed with the Tribunal's view, emphasizing that the Trust's main objectives were charitable and aimed at general public utility. Profit-making was not the aim or object of the Trust, and incidental surpluses generated from carrying out its activities did not render the activities as trade, commerce, or business. The Court referenced the CBDT Circular, which clarifies that the proviso targets activities that are truly in the nature of trade, commerce, or business but are disguised as public utility activities.

The High Court also cited the Delhi High Court's decision in the case of the Institute of Chartered Accountants of India, which held that the fundamental function of the Institute was to regulate the activities of its members, and incidental income from coaching classes did not attract the proviso to Section 2(15).

Conclusion:

The High Court concluded that the Tribunal did not commit any error in its judgment, and the Tax Appeal was dismissed. The Trust's activities were charitable in nature, aimed at general public utility, and any incidental profit did not transform these activities into trade, commerce, or business.

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