2017 (1) TMI 666 - AT - Income Tax

Denial of exemption under section 11 - Non charitable activity - Held that - Expenditure incurred on blood donation camps, Free books distribution are purely charitable in nature and therefore these are to be considered application of income. Administrative expenses are basically includes printing & stationery, conveyance expenses, office maintenance expenses which are necessary for running office of the trust. It is not the case of the AO that the assessee has made any business of sale or purchase of property. There is no allegation that activities are not charitable in nature. Expenditure incurred on Eye check up, blood donation camps, Free books distribution are purely charitable in nature and therefore are to be considered application of income. Administrative expenses are basically includes printing & stationery, conveyance expenses, office maintenance expenses and salary expenses which are necessary for running office of the trust. This is not the case of the AO that the assessee has made any business of sale or purchase of property. There is no allegation that activities are not charitable in nature. Thus we delete the addition in dispute and accordingly decide the issue in dispute in favour of the assessee and against the Revenue.

Issues Involved:
1. Validity of the CIT(A)'s order.
2. Denial of exemption under Section 11 of the Income Tax Act.
3. Classification of rental income as income from house property.
4. Application of income for charitable purposes.
5. Interest charged under Sections 234A, 234B, 234C, and 234D of the Income Tax Act.

Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The assessee contested the orders passed by the CIT(A) for assessment years 2010-11 and 2011-12, arguing that the orders were flawed both legally and factually. The Tribunal reviewed the CIT(A)'s decisions, which had upheld the Assessing Officer's (AO) additions and denial of exemptions.

2. Denial of Exemption Under Section 11:
The assessee, a registered society under Section 12AA, claimed exemption under Section 11, asserting it was an educational institution holding property/assets for charitable purposes. The AO denied this exemption, treating the income from an agreement with M/s Mothers Pride Personal Ltd. as income from house property. The Tribunal noted that the AO accepted the application of funds for charitable activities and did not dispute the charitable nature of the assessee's activities. Citing the ITAT Chennai Bench decision in Anjuman-E-Himayath-E-Islam and the Madras High Court's ruling in DIT(E) vs. Govindu Naicker Estate, the Tribunal held that the rental income was part of the charitable objects of the trust and should be considered as applied for charitable purposes.

3. Classification of Rental Income as Income from House Property:
The AO classified the rental income from M/s Mothers Pride Personal Ltd. as income from house property, allowing statutory deductions under Section 24. The Tribunal found that the assessee's rental income was in line with its charitable objectives as per its Memorandum of Association. The Tribunal referred to the Chennai Bench decision, which clarified that for trusts, the provisions of Chapter IV (Sections 22-27) for computing income from house property do not apply when determining income under Section 11. Thus, the rental income should be considered as applied for charitable purposes.

4. Application of Income for Charitable Purposes:
The Tribunal examined the application of income, including administrative expenses, interest on term loans, depreciation, and expenses for charitable activities like blood donation camps and free book distribution. It was noted that the assessee had applied more than its receipts for charitable purposes. The Tribunal cited several judicial precedents, including the Madras High Court's ruling in DIT(E) vs. Govindu Naicker Estate, which held that repayment of loans and depreciation are considered applications of income for charitable purposes. The Tribunal concluded that the expenditures were indeed for charitable activities and should be treated as such.

5. Interest Charged Under Sections 234A, 234B, 234C, and 234D:
The assessee contested the interest charges under Sections 234A, 234B, 234C, and 234D. However, the Tribunal's primary focus was on the substantive issues of exemption under Section 11 and the classification of income. The Tribunal's decision to allow the appeals implicitly addressed these interest charges by resolving the primary issues in favor of the assessee.

Conclusion:
The Tribunal allowed both appeals filed by the assessee, holding that the rental income was part of the charitable objects and should be considered as applied for charitable purposes. The Tribunal deleted the additions made by the AO and upheld the assessee's claim for exemption under Section 11. The decisions were based on detailed analyses of the application of income, supported by relevant judicial precedents. The Tribunal's order emphasized that the assessee's activities were charitable in nature and aligned with its stated objectives.

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