Case Law Details
Shree Bhartimaiya Memorial Foundation Vs ACIT (ITAT Ahmedabad )
ITAT Ahmedabad held that only profit and gains derived from the incidental business of charitable-trust would qualify as income for computing statutorily allowed accumulation of 15% in terms of section 11(1)(a) of the Income Tax Act.
Facts- The assessee is a registered charitable trust, both under the Income Tax Act and with the Charity Commissioner, providing services to the public at large. During the impugned year it had shown gross receipts of Rs.23,90,62,222/- including receipt of Rs.7,40,55,485/- from its pharmacy business. Finding the pharmacy business to be incidental to the charitable activities of the assessee-trust, the AO held that in terms of the provisions of section 11(1)(a) of the Act it was only profits and gains of the pharmacy business which were to be considered for the purpose of computing the amount to be allowed to set apart, at the rate of 15% of the income. The assessee had computed the same on the gross-receipts of the pharmacy business. Accordingly, the excess accumulation claimed by the assessee to the tune of Rs.33,40,283/- was denied by the AO. The same was upheld by the ld.CIT(A).
Conclusion- The section 11(4A) of the Income Tax Act clearly states profits and gains of businesses incidental to the main objects of the charitable entities and qualifying for exemption being, to be incomes of such trusts eligible for exemption.
We uphold order of the ld.CIT(A) holding that it is the only profits and gains derived from the incidental business of the assessee charitable-trust i.e. its pharmacy business, which would qualify as income for the purpose of computing the statutorily allowed accumulation at the rate of 15% in terms of section 11(1)(a) of the Act.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
Present appeal has been filed by the assesseeagainst order passed by the ld.Commissioner of Income-Tax(A)-9, Ahmedabad [hereinafter referred to as “ld.CIT(A)”] dated 13.3.2020 under section 250(6) of the Income Tax Act, 1961 (“the Act” for short)pertaining to Asst.Year 2016-17.
2.The grounds raised by the assessee read as under:
1. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income-Tax (Appeals) has erred in enhancing addition to Rs.53,19,254/-as against Rs.33,40,284/- u/s 11(1)(a) of the Act made by Assessing Officer on account of excess relief.
2. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income-Tax (Appeals) has erred in calculating deduction u/s 11(1) of the Act based on net income of pharmacy store instead of gross receipts.
3. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income-Tax (Appeals) has erred in confirming addition of Rs.33,40,280/- restricting exemption u/s.11(1)(a) on net income of pharmacy store.
4. It is therefore prayed that the above addition/disallowance made by the AO may be please deleted.”
3. At the outset itself, it was pointed out that the solitary dispute in the present appeal pertained to the quantum of the statutorily allowed accumulation of charitable income, as per section 11(1)(a) of the Act, on the income from the pharmacy business of the assessee trust, whether to be calculated on its gross receiptsor on the net profits & gains of the business .
4. Brief background of the case being that the assessee is a registered charitable trust, both under the Income Tax Act and with the Charity Commissioner, providing services to the public at large. During the impugned year it had shown gross receipts of Rs.23,90,62,222/- including receipt of Rs.7,40,55,485/- from its pharmacy business. Finding the pharmacy business to be incidental to the charitable activities of the assessee-trust, the AO held that in terms of the provisions of section 11(1)(a) of the Act it was only profits and gains of the pharmacy business which were to be considered for the purpose of computing the amount to be allowed to set apart, at the rate of 15% of the income. The assessee had computed the same on the gross- receipts of the pharmacy business. Accordingly the excess accumulation claimed by the assessee to the tune of Rs.33,40,283/- was denied by the AO. The same was upheld by the ld.CIT(A). The finding of the ld.CIT(A) in this regard at para 4.3 to 4.4 of the order is as under:
“4.4 The appellant during the course of appellate proceedings has said that as per section 11(1)(a), it is the gross receipts which is to be added and therefore, the calculation of accumulated income shall be calculated on the entire amount of such gross profits. It has also relied on two judgments in the case of Society of the Servant of the Holy Spirit v/s. DCIT (Exemption), Circle 17(2), Bangalore (ITA No. 975/Bang/2015), but the facts of the said case are different as the question that was raised before the Hon’ble ITAT was also different so it cannot be relied upon. It is stated that the scheme of exemption from taxation in case of an entity engaged in charitable purposes is governed by the provisions of Section 2(15) of the Act. However, the law recognizes that charitable activity cannot be run without donations or some source of income. Therefore, it allows for certain business income i.e. incidental to the nature of the charitable activity so that the earnings from that business is applied for the purpose for which the exemption is granted. Thus, there is no prohibition on a charitable trust carrying on a business. A charitable trust can be settled in relation to any property including a business undertaking. The income from such business shall also qualify for exemption provided the other conditions of sections 11 and 12 are fulfilled. However, the income of such business shall be determined in accordance with the provisions of the Act. i.e Section 28 to 44 as per sec 11 (4) income of any business held in trust for charitable purpose shall be eligible for exemption. This contention has been affirmed by the Supreme Court in the case of Asst. CIT vs. Thanthi Trust (2001) 247 ITR 785 (SC) that has held that all that is required for the business income of a trust or institution to be exempt from tax is that the business should be incidental to the attainment of objective of the trust or institution. A business whose income is utilised by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is a business which is incidental to the attainment of the objectives of the trust or institution.
4.4.1 Obviously it is only the profits, that is generated from the incidental business that can be applied for charitable activity not the gross receipts/turnover of such business, as no business can be run without certain expenditure. Therefore, the principle that only surplus income of pharmacy, is to be transferred to the main account of the charitable trust for calculation of accumulated income u/s.11(1)(a) of the Act as decided by the AO is correct and her action is upheld.”
5. A perusal of the above reveals that the ld.CIT(A) held the accumulation allowable on the net profits of the business noting that exemption provisions u/s 11 relating to businesses incidental to charity, i.e section 11(4A), referred to incomes of such businesses as being profits and gains of the business. Accordingly he held that accumulation of incomes of such incidental businesses was to be computed on the profits and gains of the business and the gross receipts accordingly would not qualify for the said purpose.
6. Before us, ld.counsel for the assessee has heavily relied on the decision of the Hon’ble Apex Court in the case of Programme for Community Organization, (2001) 248 ITR 1 (SC) and in the case of ACIT Vs. ALN Rao Charitable Trust (1995) 216 ITR 697 (SC) in support of his contention that the accumulation is to be calculated on the gross receipts and not profits and gains of business. He also relied on various decisions of the ITAT which have followed the decision of Hon’ble Apex Court in the case of Programme for Community Organization (supra) as under:
i) Society of the Servant of the Holy Spirit Vs. DCIT (Exp), ITA No.975/Bang/2015
ii) Public Education Society Vs. DCIT, ITA No.664/Bang/2015 dated 25.8.2015 On the other hand, the ld.DR relied on the order of the ld.CIT(A).
7. On the other hand, the ld.DR relied on the order of the ld.CIT(A).
8. We have heardboth the parties, and we do not find any merit in the contentions of the ld.counsel for the assessee. The issue in dispute pertaining to exemption provided to incomes of charitable entities, more particularly with regard to the amount statutorily allowed to be set apart for charitable purpose as per section 11(1)(a) of the Act ,for clarity the relevant provisions of the section are reproduced hereunder:
11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;
As is evident from the above, income from properties held for charitable purposes are exempt from tax to the extent utilized for the said purposes. Also 15% of such income is allowed to be set apart or accumulated for the said purpose and treated as deemed application/utilization for charitable purposes.
8. The issue in dispute before us is vis a vis interpretation of the term income from property held for charitable purposes in the relation to businesses qualifying as such properties. Sub section 4A of section 11 deals with exemptions to such businesses and is relevant for interpreting the said term. The said section 11(4A) is reproduced hereunder:
(4A)Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.
A bare perusal of the same leaves no scope for any doubt about the scope of the term income of businesses qualifying for charitable purposes, as referring to their profits and gains only. The section clearly states profits and gains of businessesincidental to the main objects of the charitable entities and qualifying for exemption being, to be incomes of such trusts eligible for exemption.
9. The order of the ld.CIT(A) holding likewise after considering the above relevant provisions of section 11, we hold, is in accordance with law.
10. The contention of the Ld.Counsel for the assessee that it is the gross receipts of the business on which the quantum of accumulation is to be determined is based on case laws which have been rightly distinguished by the ld.CIT(A). The decision of the Hon’ble Apex Court in the case of Programme for Community Organization (supra) , relied upon by the Ld.Counsel for the assessee was followed by the ITAT, Bangalore Bench in the case of Society of the Servant of the Holy Spirit (supra). The Ld.CIT(A) has rightly distinguished the same pointing out that the said case dealt with a totally different issue and was rendered entirely on different set of facts. In the said case, the issue was not as to what would comprise income of an incidental business carried out by a charitable entity, but on the contrary, the issue before the Bench was whether the gross-receipts of the charitable entity, as such would qualify as income for determining the amount statutorily allowed to be set apart/accumulated in terms of section 11(1)(a) of the Act or the net receipts. In the said case, the ITAT followed the decision of the Hon’ble Apex Court in the case of Programme for Community Organization (supra) and held that it would be gross-receipts viz. donation and income from charitable activities, which would qualify as income for the said purpose. The decision clearly did not address as to what would constitute income of business incidental to charitable activities for the purpose of accumulation/setting apart. Therefore, the said decision does not apply to the case before us.
11. The reliance placed on the decision of the Hon’ble Apex Court in the case of ALN Rao Charitable Trust (supra) also we find is of no assistance to the assessee, wherein the Hon’ble Apex Court had interpreted the provision of law relating to exemption provided to charitable entities in terms of section 11 of the Act, and hadmore particularly dealt with the quantification of the amount allowed to be set apart in terms of section 11(1)(a) of the Act and the amount to be accumulated in terms of section 11(2) of the Act. The Hon’ble Court held that the amounts accumulated/set apart in terms of section 11(2) of the Act would be reduced from the income of the charitable trust over and above the amount allowed to be statutorily accumulated in terms of section 11(1)(a) of the Act. The said decision was rendered in totally different context and is of no assistance to the assessee where the issue is the scope of the term income of an business incidental to charity for determining the statutory allowed deduction at the rate of 15% thereof.
12. In view of the above, we uphold order of the ld.CIT(A) holding that it is the only profits and gains derived from the incidental business of the assessee charitable-trust i.e. its pharmacy business, which would qualify as income for the purpose of computing the statutorily allowed accumulation at the rate of 15% in terms of section 11(1)(a) of the Act.
13. In view of the above, all the grounds of the assessee are dismissed; consequently, the appeal of the assessee stands dismissed.
14. In the result, the appeal of the assessee is dismissed.
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