2023 (8) TMI 766 - AT - Income Tax

Exemption u/s 11 - Charitable activity u/s 2(15) - basis of the denial of it s claim for exemption by the Revenue is that the activity of letting built-up space and provision of amenities, the principal activity undertaken in pursuance of it s objects, though otherwise qualifying as advancement of an object of general public utility and, thus, a charitable purpose, is no longer so in view of the proviso to sec.2(15) - business of providing built-up space or making available vacant land, on leasehold basis - Interest on fixed deposits with banks credited directly to the corpus fund - Whether society constituted under the Travancore-Cochin Literary, Scientific and Charitable Societies Registration Act, 1955 (on 27.10.2004) and registered u/s. 12AA as a charitable trust, is entitled to exemption u/s. 11? - HELD THAT - The word involves in proviso to sec.2(15) is not preceded by the word necessarily , and neither is there anything in the language of the provision, or the decision in Ahmedabad Urban Development Authority 2022 (10) TMI 948 - SUPREME COURT which is being sought to be scrupulously followed in deciding these appeals, for it being so read. The adopted business model, however, necessarily involves letting the said space to the industry for a consideration, and which is pegged at market rates. Any other basis, as we shall presently see, would be inconsistent with sound business practice and economic rationale. It is by and through the carrying on of this business of providing built-up space or making available vacant land, on leasehold basis, i.e., even if at a charge, that the assessee-society fulfills its object of promotion of IT/ITES industry in the State of Kerala. The same is thus incidental to its object/s. Whether the charges levied by it, including the lease rentals, are with a view to recover it s costs, or at best with a nominal margin, or this is not the case, with it, as alleged, operating on commercial basis, charging lease rentals at market rates? - Coming to the assessee s case, even as it s MoA lists a number of objects, all toward promotion of IT/ITES industry in Kerala, it is essentially engaged in, firstly, setting-up and, then, managing industrial park by the name Infopark Kerala at Kochi, which houses such units on leasehold basis. That, in any case, is the only activity being pursued. Sec.2(15) being a definition provision, where its terms are not satisfied, the assessee s claim of a charitable institution shall be ousted even if its activities are not hit by the provision or are in relation to objects other than GPU.As informed, built up space is leased thereto for 7-8 year term. The other format followed is 99-yearlease of vacant land. There is no restrictive element in the scope of the term business to exclude an activity. The Apex Court in Sultan Brothers (P.) Ltd. 1963 (12) TMI 4 - SUPREME COURT on an argument of rental income being a business, as what was being let was a commercial asset, clarified that a thing can not by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Whenever the matter, arising on account of the differential computation of income under the two heads of income, i.e., of business, and from house property, travelled to the higher courts, it has been unequivocally clarified for being decided in the conspectus of the case, so that decisions both ways, i.e., as business income, as indeed from house property, from the Hon'ble Apex Court obtain. The determinative test, as explained by it, being that the letting is being undertaken in an organized manner to turn the house property, i.e., land and building, into account. The test is satisfied in the instant case . The lease rentals are deployed to finance both creation of more built-up space, as per it s mandate, and which we observe to be at, besides Cochin, Thrissur, Ambalapuzha and Cherthala, as well as through charge of depreciation, sustain that existing. This business is not a property held under trust, but one carried on the basis or by virtue of such property, being, for instance, 80 acres of land transferred from KINFRA; the capital infusion by GoI and GoK, etc. The income generated from it s business by the assessee, or, more precisely, the assets representing the same, again, is property held under trust inasmuch as there is no other activity, at least for the present, by the assessee-society. The same qualifies as an eligible business u/s. 11(4A), and it s income assessable as business income. The head of income under which the income of a charitable institution, where taxable, would stand to be assessed under the Act, cannot even otherwise be determinative of the matter. Vetting the financial summary provided by the assessee, reveals it to have excluded, in arriving at the surplus, the interest earned by it on it s capital/corpus parked with banks in the form of term deposits. The same may be as a matter of policy or, as it appears to us, the same being idle for the time being, i.e., till they are deployed toward further investment an ongoing process, for its activities. We see no reason for its exclusion, being as much a part of it s income as any other, being in fact duly reported to the Revenue per it s returns for the relevant years and, further, as subject to application u/s. 11(1)(a) . It may be stated that interest does not represent operational income, justifying it s exclusion on that basis. We can hardly agree. The reason is simple. The monies have not been provided for safe-keeping, but, representing property held under trust, for being deployed for charitable purposes. Their deployment would in fact generate additional revenue, i.e., in sums higher than that fetched on bank deposits, as apparent from Table A above, and which also puts the cash profit, i.e., prior to depreciation, in perspective. Reference here may be made to the decision of UOI v. Baba Banda Singh Bahadur Education Trust 2023 (5) TMI 283 - SUPREME COURT wherein the Apex Court was moved solely by the profit figures, i.e., before and after depreciation, themselves, in holding the assessee-respondent as not entitled to exemption u/s. 10(23C)(vi) of the Act. The assessee is, in our clear view, not entitled to any exemption u/s. 11 qua its surplus on its application for the relevant years, and its income is liable to assessed as business income. This decides the first issue Depreciation claim - The assessee shall be entitled to claim depreciation up to AY 2014-15 at the rates specified under the Act read with IT Rules. This would be irrespective of whether it has already claimed and been allowed exemption u/s. 11(1) on application of income on the cost of relevant capital assets. This is as s. 11(6) is operative only AY 2015-16 onwards. Decided partly in favour of assessee.

Summary

Issues Involved:
1. Entitlement to exemption under Section 11 of the Income-tax Act, 1961 in view of the amended Section 2(15).
2. Deduction of depreciation in computing income liable for application for charitable purposes.

Summary:

Issue 1: Entitlement to Exemption under Section 11 in View of Amended Section 2(15)
The principal issue in the appeals is whether the assessee, a society registered as a charitable trust under Section 12AA of the Income-tax Act, 1961, is entitled to exemption under Section 11 in light of the amended Section 2(15). The amendment, effective from April 1, 2009, states that the advancement of any other object of general public utility shall not be considered a charitable purpose if it involves any activity in the nature of trade, commerce, or business, and the gross receipts exceed the specified threshold.

The assessee claimed exemption under Section 11(1) for its surplus on account of application on capital assets, relying on its antecedents and its role in promoting IT infrastructure in Kerala. The Revenue denied the claim, arguing that the principal activity of letting built-up space and providing amenities is in the nature of trade, commerce, or business, thus falling under the proviso to Section 2(15).

The Tribunal endorsed the Revenue's understanding, referencing the Supreme Court's decision in Ahmedabad Urban Development Authority, which clarified that a charity engaged in the advancement of an object of general public utility cannot engage in any activity in the nature of trade, commerce, or business for any consideration. The Tribunal found that the assessee's activities, including leasing built-up space and providing amenities, are commercial in nature and thus not eligible for exemption under Section 11.

Issue 2: Deduction of Depreciation
The second issue is whether depreciation should be deducted in computing income liable for application for charitable purposes, given that the cost of the capital assets had already been allowed in full by way of application of income. The Tribunal noted that while Section 11(6) disallows such a claim from AY 2015-16 onwards, the Supreme Court in CIT v. Rajasthan and Gujarathi Charitable Foundation held that no disallowance would obtain for years prior to AY 2015-16. Therefore, the assessee is entitled to claim depreciation up to AY 2014-15.

Conclusion:
The Tribunal concluded that the assessee is not entitled to exemption under Section 11 for the relevant years due to its commercial activities and the provisions of the amended Section 2(15). However, it is entitled to claim depreciation up to AY 2014-15. The appeals were thus partly allowed.