2014 (9) TMI 267 - AT - Income Tax

Cancellation of registration of Trust u/s 12AA(3) Charitable purpose or not u/s 2(15) Held that - The assessee trust is carrying on these activities since its inception and was allowed exemption/registration u/s. 12AA of the Act and is also a notified trust u/s. 10(23C)(iv) of the Act - The CBDT Circular No. 11/2008 dt. 19.12.2008 has explained the implications arising from the amendment brought to the provisions of Sec 2(15) of the Act - The CBDT clarifies that the newly inserted proviso to Sec. 2(15) will not apply in respect of the first three limbs of Sec. 2(15) i.e. relief of the poor, education or medical relief - even the CBDT does not lay down any guidelines for determining whether the entity is carrying on any commercial activity - the fundamental or dominant function of the Trust is to provide asylum for old, maimed, sick, dry, weak, disabled and stray animals and birds, more particularly cows and other such milk cattle and to bring about improvement in breeding cattle for the beneficial promotion, upkeep, maintenance and propagation of cows. Thus the dominant object is to run Panjrapole and the activities related to it. The Trust is engaged in multi series activities of diverse nature but the primary and the dominant activity is Panjrapole - The predominant object of Panjrapole activity has been held to be a charitable purpose in Commissioner Of Income-Tax, Gujarat Versus Swastik Textile Trading Company Pvt. Limited 1977 (7) TMI 30 - GUJARAT High Court the trust would not loose its character of charitable purpose merely because some profits arises from the activity of the sale of milk - Such activity cannot be carried on in such a manner that it does not result in any profit - It be indeed be difficult for persons in-charge of a trust or institution to carry on the activity such that the expenditure balances the income and there is no resulting profit - there was no material which may suggest that the assessee-trust was conducting its affairs solely on commercial lines with a motive to earn profit - There is also no material brought on record which could suggest that the assessee trust has deviated from its objects which it has been pursuing since last 130 years, the proviso to Sec. 2(15) of the Act is not applicable on the facts of the case and the assessee deserves continuance of registration u/s. 12AA of the Act the DIT(E) is directed for the continuance of the registration Decided in favour of Assessee.

Summary

Issues Involved:
1. Cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961.
2. Applicability of the proviso to Section 2(15) of the Income Tax Act, 1961.
3. Denial of exemption under Section 11 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Cancellation of registration under Section 12AA(3):

The assessee challenged the order of the DIT (Exemption), Mumbai, which canceled the registration of the trust under Section 12AA(3) on the grounds that the trust ceased to be for charitable purposes as it was carrying on commercial activities. The DIT (Exemption) issued a show-cause notice proposing to withdraw the registration due to the trust's income from the sale of milk and interest/dividend, which exceeded the threshold limit as per the proviso to Section 2(15). The assessee argued that the activities were not commercial but incidental to the primary charitable purpose of running gaushalas and providing asylum for animals. The Tribunal found that the trust's activities were genuine and aligned with its objects, which had not changed since its inception. The Tribunal concluded that the DIT (Exemption) exceeded its powers under Section 12AA(3) and directed the continuance of the trust's registration.

2. Applicability of the proviso to Section 2(15):

The DIT (Exemption) held that the trust's activities, particularly the sale of milk, were in the nature of trade, commerce, or business, thus falling under the proviso to Section 2(15). The assessee contended that the sale of milk was incidental to the primary charitable activity and not aimed at profit-making. The Tribunal referred to various judicial precedents, including the Delhi High Court's decision in ICAI and the Tribunal's decision in Sabarmati Ashram Gaushala Trust, which supported the view that incidental commercial activities do not disqualify a trust from being considered charitable. The Tribunal concluded that the trust's activities did not amount to carrying on business and were not hit by the proviso to Section 2(15).

3. Denial of exemption under Section 11:

The AO and CIT(A) denied the benefit of Section 11 to the trust, treating its income from the sale of milk and interest/dividend as business income. The Tribunal, after detailed discussion and analysis in ITA No. 1198/M/12, held that the trust's activities were not in contravention of the proviso to Section 2(15) and did not amount to carrying on business. Consequently, the trust was entitled to exemption under Section 11. The Tribunal also noted that the trust was an approved trust under Section 10(23C)(iv), further supporting its charitable status.

Conclusion:

The Tribunal allowed both appeals filed by the assessee, directing the continuance of the trust's registration under Section 12AA and granting the benefit of exemption under Section 11, as the trust's activities were found to be charitable and not in the nature of trade, commerce, or business. The order of the DIT (Exemption) was set aside, and the applicability of the proviso to Section 2(15) was rejected in the context of the trust's activities.