2025 (4) TMI 1424 - AT - Income Tax

Eligibility of the assessee trust for registration u/s 12AB - application of the assessee was rejected on the pretext non maintaining separate set of books of account and alleging that the assessee is engaged in commercial activities - HELD THAT - As is evident from the record that the trust runs Dharmshala since 1962 and that activities cannot be compared as commercial activities. Considering all the aspect of the matter the Bench feels that the assessee should represent the case and contested the written submission placed before the CIT(E). Considering the fact that running of dharmshala cannot be termed as charitable activities and thereby the assessee cannot be denied registration merely on that count and since the assessee has prayed before us that they may given one more chance to contest the issue raised before the Ld. CIT(E) and its merit and therefore considering that of aspect of the matter the assessee should be given one more chance to contest the case before the ld. CIT(E) - Appeal of the assessee is allowed for statistical purposes.

The core legal questions considered in this appeal revolve around the eligibility of the assessee trust for registration under Section 12AB of the Income Tax Act, 1961. Specifically, the issues include:

Whether the activities undertaken by the assessee trust qualify as charitable activities or fall within the ambit of "trade, commerce or business" under the proviso to Section 2(15) of the Act;
Whether the assessee trust is required to maintain separate books of account under Section 11(4A) of the Act;
Whether the rejection of the registration application by the Commissioner of Income Tax (Exemption) violated principles of natural justice, particularly in light of the assessee not being given adequate opportunity to present its case.

Issue 1: Characterization of Activities as Charitable or Commercial (Section 2(15) of the Act)

The legal framework centers on the definition of "charitable purpose" under Section 2(15) of the Income Tax Act. This section includes relief of the poor, education, medical relief, preservation of environment, monuments, and advancement of any other object of general public utility. However, the proviso excludes activities involving trade, commerce, or business for a fee or consideration, unless such activities are incidental to the charitable purpose and the aggregate receipts from such activities do not exceed 20% of the total receipts.

Precedents cited include the interpretation by the Hon'ble Delhi High Court, which emphasized that profit motive is a key factor in determining whether an activity constitutes "business." The Supreme Court in a landmark ruling underscored that the dominant purpose of a trust is determinative; if the primary purpose is charitable, incidental non-charitable activities do not disqualify the trust.

The assessee trust operates a Dharamshala established in 1962, providing shelter to pilgrims at a nominal fee of Rs. 500 per room, effectively Rs. 125 per person, inclusive of amenities. The fees charged are argued to be a reimbursement of expenses, not a commercial rent. The trust deed restricts distribution of surplus income and mandates utilization of savings for developmental work, negating profit motive.

Several judicial authorities support this position:

The Income Tax Appellate Tribunal, Jaipur, held that rent charged by a Dharamshala does not constitute business activity under Section 2(15).
The Rajasthan High Court in Raghunath Das v. CIT recognized running a Dharamshala as an object of general public utility and thus charitable.
The Rajasthan High Court in CIT v. Paramnand Ashram Trust held that maintenance of Dharamshalas and related charitable activities qualify as objects of general public utility, entitling exemption under Sections 11 and 2(15).
The Madhya Pradesh High Court in CIT v. Ganesbram Laxminarayan Goel similarly held that rental income from Dharamshala activities applied to maintenance falls within charitable purposes.

The Commissioner of Income Tax (Exemption) rejected the registration application on the basis that the rental receipts were not nominal and thus constituted business receipts exceeding the 20% threshold under the proviso to Section 2(15). The Commissioner also concluded that the activities were not incidental but the sole purpose of the trust.

The Tribunal noted that the CIT(E) erred in applying the proviso since the activities lack profit motive and are inherently charitable. The nominal fee charged is for reimbursement, not profit, and the dominant purpose is charitable. The Tribunal observed that the CIT(E) failed to appreciate the dominant purpose and the nature of the activities, which have been consistently held by courts to be charitable.

Issue 2: Applicability of Section 11(4A) Regarding Maintenance of Separate Books of Account

Section 11(4A) mandates that a charitable trust engaged in business activities incidental to its charitable purpose must maintain separate books of account for such activities. The Commissioner held that the assessee contravened this requirement by not maintaining separate accounts, thereby justifying rejection of registration.

The assessee argued that since the proviso to Section 2(15) does not apply (as the activities are not business in nature), Section 11(4A) is not triggered and thus maintenance of separate books is not mandatory.

The Tribunal agreed with the assessee's submission that the applicability of Section 11(4A) is contingent upon the proviso to Section 2(15) being applicable. Since the activities are not business activities, the requirement to maintain separate books does not arise.

Issue 3: Violation of Principles of Natural Justice

The CIT(E) passed the impugned order ex parte, citing non-filing of replies by the assessee despite multiple opportunities. The assessee contended that it was deprived of a fair hearing and opportunity to present its case, which violates natural justice.

The Tribunal observed that the assessee had requested adjournments and sought an opportunity to contest the issues before the CIT(E). Given the importance of the matter and the long-standing charitable nature of the trust's activities, the Tribunal found merit in the contention that the assessee should be afforded a proper hearing.

The Tribunal emphasized that the decision to remit the matter back to the CIT(E) for fresh adjudication is without prejudice to the merits and is intended to ensure compliance with natural justice principles.

Application of Law to Facts and Treatment of Competing Arguments

The Tribunal carefully examined the facts, including the nominal fees charged, the use of income for maintenance, and the trust deed's provisions restricting profit distribution. It found that the CIT(E) had misapplied the proviso to Section 2(15) by treating the nominal fees as business receipts and ignoring the charitable character.

The Tribunal also considered the extensive judicial precedents supporting the charitable nature of running a Dharamshala and held that the activities do not amount to trade or commerce.

Regarding the procedural aspect, the Tribunal recognized the importance of giving the assessee an opportunity to present its case fully and found that the ex parte order was premature.

Conclusions

The activities of the assessee trust qualify as charitable under Section 2(15) of the Income Tax Act, 1961, as they lack profit motive and are aimed at general public utility.
The proviso to Section 2(15) and the conditions therein do not apply to the assessee, and consequently, Section 11(4A) requiring separate books of account is not applicable.
The rejection of registration without affording the assessee a proper hearing violates natural justice principles.
The matter is restored to the file of the CIT(E) for fresh adjudication after affording the assessee a fair opportunity to present its case and produce relevant documents.

Significant Holdings

"The proviso to Section 2(15) of the Act only operationalizes upon the fulfilment of the condition that the nature of the activity performed by a concerned trust or institution has to be in the 'nature of trade, commerce or business.' If the activity performed is not the nature of 'trade, commerce or business' then the proviso will be inapplicable in the concerned situation."

"In the case of trust or institution focus should be placed upon primary or dominant purpose of the trust. If the dominant purpose is charitable, another object which by itself may not be charitable, would not prevent the trust or institution from being a valid charity."

"The activities performed or rent charged by Dharamshala do not constitute as activities in the 'nature of trade, commerce or business'."

"Our decision to restore the matter back to the file of the ld. CIT(E) shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the ld. CIT(E) independently in accordance with law."

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