2016 (5) TMI 545 - AT - Income Tax

Entitlement to exemption u/s. 11 - AO held that the business of running community hall, marriage hall and funeral ceremonies hall cannot be treated as incidental business eligible for exemption u/s 11(4A) - Held that - Merely carrying on business for and on behalf of the trust and applying the profits of the same for the object of the trust does not entitle for exemption u/s. 11(4) of the Act unless the business is incidental to the attainment of the objects of the trust. We fail to see any connection between the activities relating to running of community hall, kalyanamandapam and funeral ceremony hall were carried on and the attainment of the objects of the trust. The mere fact that whole or some part of the income from running of community hall, kalyanamandapam and funeral ceremony hall are used for charitable purposes would not render the business itself being considered as incidental to the attainment of the objects. We are in agreement with the Department that the application of income generated by the business is not relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives.Thus the assessee is not entitled for any exemption u/s. 11 of the I.T. Act. - Decided against assessee Entitlement to depreciation - Held that - The assessee is not entitled for depreciation on the opening balance of written down value of the assets in the asst. year under consideration, which were purchased in earlier years and the cost of those assets have already considered as application of income in earlier asst. year while granting exemption u/s.11 of the Act. As decided in case of M/s. Kongunadu Arts & Science College Council 2015 (11) TMI 1119 - ITAT CHENNAI if the assessee claims exemption u/s 11 under Chapter III of the Act, it cannot claim depreciation u/s 32 of the Act. - Decided against assessee

Issues Involved:
1. Classification of income from house property as business income.
2. Application of provisions of Section 11(4A) of the Income Tax Act.
3. Application of provisions of Section 13(8) of the Income Tax Act.
4. Disallowance of exemption under Sections 11 and 12 of the Income Tax Act.
5. Charitable nature and functions of the assessee.

Detailed Analysis:

1. Classification of Income from House Property as Business Income:
The assessee, a society registered under the Societies Registration Act, operates community halls and claimed the income from these properties as income from house property. The Assessing Officer (AO) rejected this classification, treating the income as business income. The AO relied on the decision of the Calcutta High Court in the case of DIT(E) vs. Giridharilal Shewnarain Tantia Trust and observed that the running and maintenance of these units would be in the nature of business income. The AO also invoked the proviso to Section 2(15) of the Income Tax Act, holding that letting out of marriage halls is a business activity.

2. Application of Provisions of Section 11(4A) of the Income Tax Act:
The AO held that the business of running community halls cannot be treated as incidental business eligible for exemption under Section 11(4A) of the Act. The AO observed that the activities of the society are covered by the provisos to Section 2(15) of the Act, making Sections 11 and 12 inoperative. The AO relied on the decision of the Supreme Court in the case of ACIT vs. Thanthi Trust and other precedents to support this view.

3. Application of Provisions of Section 13(8) of the Income Tax Act:
The AO applied Section 13(8) of the Act, which prohibits the applicability of Sections 11 and 12 in respect of any income of the society, not just the business activity. This led to the entire surplus derived by the society being brought to taxation. The AO also brought to tax the corpus donation by observing that Section 11(1)(d) is not in force, making the corpus donation taxable.

4. Disallowance of Exemption under Sections 11 and 12 of the Income Tax Act:
The AO disallowed the exemption under Sections 11 and 12, stating that the society's activities are business in nature and hit by the proviso to Section 2(15) of the Act. The AO observed that the character of income has gained preponderance in the newly inserted proviso, making earlier precedents inapplicable. The AO also noted that the amount spent towards charitable and religious purposes was not incurred to earn the income brought to tax and hence not allowable as expenditure.

5. Charitable Nature and Functions of the Assessee:
The assessee argued that the society has multiple objects, none of which have a profit motive or involve any activity in the nature of trade, commerce, or business. The AR contended that the main activity of the society is running a school, and the receipts from letting out community halls are used towards educational activities, medical relief, and relief to the poor. The AR relied on various judicial precedents to support the claim that the activities carried out by the society are charitable in nature and should be eligible for exemption under Sections 11 and 12.

Tribunal's Findings:
The Tribunal held that the running of community halls, kalyanamandapam, and funeral ceremony hall were not held under trust but were business activities carried on by the society. The Tribunal observed that there is a distinction between property or business held under trust and business carried on by or on behalf of the trust. The Tribunal concluded that the activities carried on by the assessee were not incidental to the attainment of the objects of the trust and hence not eligible for exemption under Section 11.

The Tribunal also held that the assessee is not entitled to depreciation on the opening balance of written down value of the assets, as the cost of those assets had already been considered as application of income in earlier assessment years while granting exemption under Section 11.

Conclusion:
The appeals of the assessee were dismissed, and the order of the lower authorities was upheld. The Tribunal concluded that the activities of running community halls, kalyanamandapam, and funeral ceremony hall were business activities and not incidental to the attainment of the objects of the trust, thus not eligible for exemption under Sections 11 and 12 of the Income Tax Act.

← Previous Next →