2016 (11) TMI 1028 - AT - Income Tax

Exemption u/s 11 & 12 denied - whether transaction with the caterer was in substance a mere passive letting of property, which could in no way be regarded as a business? - Held that - So far as assessee-trust is concerned, it has been paid by M/s. Karishma Catering Services Pvt. Ltd. for providing right to use the premises owned by the assessee. Considering the mechanics of agreement between both it would be inappropriate to hold that assessee is engaged in carrying out any business activity jointly with M/s. Karishma Catering Services Pvt. Ltd. Factually, there is no material to suggest that any facilities have been allowed by the assessee to M/s. Karishma Catering Services Pvt. Ltd. other than allowing use of the property, which in simple terms tantamount to rental arrangement. No doubt, M/s. Karishma Catering Services Pvt. Ltd. is engaged in carrying out the business activities, but so far as assessee is concerned, it is receiving a fixed sum as compensation for allowing the use of property owned by it. Therefore, qua the assessee such receipts are in the nature of rental income only. The impugned income earned by the assessee from providing right to use of a property owned by it cannot be construed to be an income from business activity and rather, it is an activity undertaken to enable it to carry out its charitable activities in an effective manner. Therefore, the action of Assessing Officer is liable to be negated.- Decided in favour of assessee

Summary

Issues Involved: Denial of exemption under Sections 11 and 12 of the Income Tax Act, 1961, concerning income earned from a contract with M/s. Karishma Catering Services Pvt. Ltd.

Detailed Analysis:

1. Denial of Exemption Under Sections 11 and 12:
The primary issue was whether the income earned by the appellant-trust from M/s. Karishma Catering Services Pvt. Ltd. should be treated as rental income eligible for exemption under Sections 11 and 12 or as business income not covered by Section 11(4A). The appellant-trust argued that the income was from a passive letting of property, while the Assessing Officer (AO) treated it as business income.

2. Nature of the Transaction:
The appellant-trust, established in 1901 and registered with the Charity Commissioner and Director of Income-tax (Exemptions), entered into an agreement with M/s. Karishma Catering Services Pvt. Ltd. to let out three halls for a fixed monthly compensation, irrespective of the actual use. The AO contended that the income was business income since the agreement did not explicitly state it was for rent and the income was recorded as 'Royalty.'

3. Past Treatment and Judicial Precedents:
The appellant-trust highlighted that similar agreements in previous years were treated as rental income eligible for exemption. Judicial precedents were cited, including cases where income from letting out properties was held to be eligible for exemption under Sections 11 and 12, such as CIT v. Samyuktha Gowda Saraswatha Sabha and CIT v. Sahu Jain Trust.

4. Analysis of the Agreement:
The Tribunal examined the agreement, noting that the appellant-trust provided the right to use the premises, while M/s. Karishma Catering Services Pvt. Ltd. handled bookings, catering, and other services independently. The income was fixed and not contingent on the business success of the caterer, indicating a rental arrangement rather than a business activity.

5. Conclusion:
The Tribunal concluded that the income received was in the nature of rent and not business income. It reversed the AO's decision, allowing the exemption under Sections 11 and 12. The Tribunal emphasized that the nomenclature of 'Royalty' used in the income records did not change the substance of the transaction.

6. Alternative Plea:
The appellant-trust also argued that even if the income was considered business income, it should still be eligible for exemption under Section 11(4A). However, since the primary plea was accepted, this alternative argument was not adjudicated.

Outcome:
The appeals for both Assessment Years 2010-11 and 2011-12 were allowed, with the Tribunal directing the AO to grant the exemption under Sections 11 and 12 for the income received from M/s. Karishma Catering Services Pvt. Ltd. The order was pronounced on 5th October 2016.