2018 (4) TMI 1267 - AT - Income Tax

Denying exemption u/s 11 - assessee is a charitable trust engaged in the activity of promotion of swimming - Held that - The Hon ble Bombay High Court in the case of DIT vs Goregaon Sports Club ( 2012 (4) TMI 214 - BOMBAY HIGH COURT) held that providing sports facilities to general public without restriction to any caste, creed, religion or profession is eligible for exemption u/s 11 of Income-tax Act, 1961. We are of the considered view that the assessee is eligible for exemption u/s 11 of the Income-tax Act, 1961. Therefore, we direct the AO to allow exemption u/s 11 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act.
2. Applicability of the proviso to Section 2(15) concerning charitable purposes.
3. Classification of activities as trade, commerce, or business.
4. Treatment of income from guests and learn-to-swim fees.
5. Allowance of expenses against income.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue was whether the assessee, a public charitable trust, was eligible for exemption under Section 11 of the Income-tax Act. The Assessing Officer (AO) denied this exemption on the grounds that the trust's activities were in the nature of trade, commerce, or business, thus falling under the proviso to Section 2(15). The AO's decision was influenced by the withdrawal of the trust's registration under Section 12A by the DIT (Exemption).

2. Applicability of Proviso to Section 2(15):
The AO contended that the trust's activities, particularly the collection of fees from guests and learn-to-swim programs, were commercial in nature and exceeded the limits prescribed under the proviso to Section 2(15). The AO argued that these activities did not qualify as charitable purposes.

3. Classification of Activities:
The AO classified the income from guests and learn-to-swim fees as business income, asserting that these activities were conducted with a profit motive. However, the assessee argued that these activities were incidental to their main charitable objective of promoting sports and were not conducted with a profit motive. The assessee emphasized that any fees collected were nominal and aimed at covering costs.

4. Treatment of Income from Guests and Learn-to-Swim Fees:
The AO treated the income from guests and learn-to-swim fees as non-mutual income, taxable under the head "Income from other sources." The AO's stance was based on the principle that these activities were not open to the general public but limited to members and their guests, thus falling under the proviso to Section 2(15).

5. Allowance of Expenses Against Income:
The assessee contended that if the income from these activities was considered taxable, then the entire expenses incurred for earning such income should be allowed as deductions. The AO did not fully allow these expenses, resulting in an over-assessment of the trust's income.

Judgment:
The Tribunal held that the assessee trust was indeed eligible for exemption under Section 11. The key points in the judgment were:

- The trust's activities were aligned with its main objective of promoting sports, particularly swimming, and were not conducted with a profit motive.
- The fees collected from guests and learn-to-swim programs were nominal and aimed at covering costs, not generating profit.
- The trust incurred deficits from its core activities, indicating that it was not operating on commercial lines.
- The Tribunal referred to previous decisions, including those in the cases of Chembur Gymkhana and Dahisar Sports Foundation, which supported the view that activities promoting sports and charging nominal fees do not constitute trade, commerce, or business.
- The Tribunal also noted that the trust's registration under Section 12A had been restored, reinforcing its charitable status.

Conclusion:
The Tribunal directed the AO to allow the exemption under Section 11 for the assessee trust. The appeals filed by the assessee were allowed, and the AO was instructed to grant the exemption, recognizing the trust's activities as charitable and not commercial. The judgment emphasized that the promotion of sports and related activities, even if involving some fee collection, do not automatically fall under the proviso to Section 2(15) if conducted without a profit motive.