Case Law Details
ITO Vs. Kalinga Cultural Trust (ITAT Hyderabad)
Assessee is pursuing charitable activity in accordance with its aims and objects while constructing the Jagannadha Temple. In fact, the AO himself in assessment order has admitted that income/fund of assessee is utilized in construction of the temple. Further, the coordinate bench in the said order held, by letting out function hall assessee is not involved in commercial activity so as to dis entitle it from claiming exemption u/s 11. Therefore, considered in the aforesaid perspective, there being no dispute to the fact that dominant object of assessee is charitable in nature, proviso to section 2(15) cannot be applied to deny exemption to assessee u/s 11 of the Act. In our view, AO without examining the issue in proper perspective has abruptly concluded that assessee is not entitled to exemption u/s 11 of the Act only because proviso to section 2(15) was introduced w.e.f. 01/04/09. In our view, proviso to section 2(15) of the Act will not apply automatically to every trust or institution irrespective of the fact, whether the dominant object of the trust or institution is charitable purpose or earning profit. When in the present case assessee is registered as charitable institution and there is no change in the aims and objects of assessee in the impugned AY and the activities of assessee over the years remains the same, the proviso to section 2(15) cannot be applied to assessee to deny exemption u/s 11 of the Act.
Full Text of the ITAT Order is as follows:-
This appeal of the Revenue is directed against the order of CIT(A)- 9, Hyderabad, dated 18th November, 2016 relating to AY 2012-13.
2. Briefly the facts of the case are that the assessee is registered u/s12A of the Act, filed its return of income for the AY 2012-13 on 18/09/2012 declaring total income of Rs. Nil after claiming exemption u/s 11 of the Act to the extent of Rs. 1,16,38,669/-. The case was selected for scrutiny under CASS and accordingly, statutory notices u/s 143(2) and 142(1) were issued, against which, the AR of the assessee submitted the information, as called for.
2.1 The AO observed that the assessee trust was registered u/s 12A of the Act on 23/11/1995 and certain amendments of the aims and objectives were made with effect from 01/04/2008. Further, AO observed that since by this amendment, the original character of the Trust undergone a distinct change, the trust required fresh registration u/s 12AA, but, assessee did not apply for fresh registration u/s 12AA. According to the AO, the assessee does not have registration for the PY 2011-12 relevant to AY 2012-13 and, therefore, it is not entitled for the benefit of section 11.
2.2 The AO noted that the assessee is maintaining a function hall which was let out on rent for various activities including marriage function, cultural functions etc., and received Rs. 47,45,479/- from the function hall. The AO opined that the nature of activity of letting of the function hall on rent is in the nature of trade, commerce or business within the meaning of the proviso to section 2(15) of the Act and as the receipt from this activity exceeds Rs. 10 lakhs the assessee’s activities cannot be termed as charitable activities as per the provisions of section 2(15). Accordingly, he held that the assessee is not entitled for the benefit of section 11 of the Act.
2.3 Further, the AO observed that as the assessee lost the benefit of section 11, the status of the assessee is to be treated as an AOP and the income of the assessee is to be treated as per commercial principles. On verification of the books of account, he found that the assessee had failed to make TDS on total security charges of Rs. 20,29,067/- and he disallowed the same for violation of section 40(a)(ia) of the Act.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A).
4. During the appellate proceedings, the assessee submitted that the issue of denial of exemption u/s 11 is squarely covered by in its favour by the CIT(A)-9 for AY 2011-12 and also the order of ITAT in ITA No. 913/Hyd/2015, dated 04/11/2015. The CIT(A), therefore, considered the submissions of the assessee and directed AO to allow exemption u/s 11 and recompute the income as per the provisions of the Act. By treating the assessee is eligible for exemption u/s 11, the dis allowance u/s 40(a)(ia) is deleted as provisions of section 40(a)(ia) are not applicable to this concern.
5. Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal:
“1. The order of the Ld. CIT(A) is erroneous both on facts and in law.
2. The Id. CIT(A) erred in allowing exemption to the assessee Trust for the A.Y. 2012-13, when the assessee is not eligible for exemption of its income u/s 11 of the IT Act, 1961, in view of the amended provisions of section 2(15) of the Act, particularly, in view of the provisions of the first proviso to section 2(15) of the Act, inserted vide finance act, 2008, with effect from 01-04- 2009 which is attracted in the case of the assessee for the A Y 20 12-13.
3. The Id. CIT(A) ought to have appreciated that the provisions of the first Proviso to section 2(15) of the IT Act, 1961 is attracted to the surplus receipts of Rs. 47,45,479/- derived by the assessee towards rental income from the cultural hall during the previous year 2011-12, relevant to A Y 2012-13 and thus not eligible for exemption of income u/s 11 of the Act.
4. The Id. CIT(A) erred in deleting the dis allowance of Rs. 20,29,067/-, made by the AO, u/s. 40(a)(ia) of the Act, in the assessment, when the assessee is not eligible for exemption u/s.t i of the Act, for the AY 201213.
5. Any other ground that may be urged at the time of hearing of the case.”
6. Considered the rival submissions and perused the material facts on record. We find that similar issue came up for consideration before the Tribunal in assessee’s own cases for earlier years. In AY 2011 – 12, the Tribunal vide ITA No. 913/Hyd/2015, order dated 04/11/2015 has held as under:
“5. Having heard both the parties and having considered the rival contentions in the light of the material on record, we find that the claim of the assessee for exemption under S.11 of the Act has been denied on the ground that the activity of the assessee in running the function hall and deriving rental income is of a commercial nature in terms of proviso to S.2(15) of the Act, and also that constructing and maintaining a temple is not among st the aims and objects of the society and is not a charitable activity. As can be seen from the facts of the case narrated above, impugned order of the learned CIT(A) in Kalinga Cultural Trust, Hyderabad accepting the claim of the assessee for exemption is based on the consistent view taken by the learned CIT(A) in assessee ‘s own case for earlier years. It has been brought to our notice that the issue relating to assessee’s claim for exemption under S.11, is also covered in favour of the assessee, by the decisions of the Tribunal dated 6 .6 .201 4 in ITA Nos .8 94, 895/Hyd/2013 and 1067/Hyd/2012 for assessment years 2006-07 to 2008-09; and dated 3.7.2015 in ITA Nos.33 and 339/Hyd/2015 for assessment years 2009-1 0 and 2010-11 respectively. A copy each of both these orders have been furnished before us by the learned counsel for the assessee along with the written submissions filed by him.
6. In its recent decision dated 3.7.2015 in assessee’s own cases for the assessment years 2009-1 0 and 2010-11, the Tribunal, besides taking note of the earlier order of the Tribunal dated 6.6 .201 4 on this issue for assessment years 2006-07 to 2008-0 9 (supra), after due consideration of the nature of the activities of the assessee in constructing Jagannadha Temple as well as letting out of the function hall held that the assessee is entitled for exemption under S.11 of the Act for the elaborate reasons discussed in paras 8, 8.1 and 8.2 of the order, which are reproduced below-
“8. We have considered the submissions of the parties and perused the material on record as well as the orders of revenue authorities. As could be seen from the assessment order, AO has denied exemption u/s 11 to assessee primarily on two reasons, firstly, because assessee is constructing Jagannadha Temple, which, according to AO, is neither in accordance with the aims and objects nor a charitable activity. The second reason is, after introduction of proviso to section 2(15) of the Act, assessee looses its character of trust having been established for charitable purpose as it has earned income by engaging in commercial activities. As far as allegation of AO that construction of temple by assessee is neither in accordance with aims and objects of assessee nor charitable activity is concerned, it has to be rejected at the threshold in view of the decision of the coordinate bench in assessee’s own case in AYs 2006- 07, 2007-08 and 2008-0 9 in ITA Nos. 894 & 895/Hyd/13 and 1067/Hyd/12, dated 06/06/1 4 wherein the coordinate bench agreed with the ld. CIT(A) that construction of Jagannadha Temple is not only in furtherance of the aims and objects of assessee society but, is also a charitable activity. In view of the aforesaid, we do not find any merit in the submissions of the ld. DR that construction of Jagannadha Temple is not a charitable activity. As far as the second reason for denying exemption u/s 11 is concerned, it is the allegation of AO that as assessee was involved in commercial activity by generating income by letting out function hall, selling souvenir, etc, it is not eligible for exemption in view of the proviso to section 2(15) of the Act, we are of the view that the same requires deeper analysis. However, before deciding the issue, it is necessary to observe that there cannot be any dispute to the fact that assessee’s objects are charitable in nature, as ld. DIT(E) has granted registration to assessee u/s 12A of the Act since the year 1995 and which is continue till date.
8.1. Further, there is nothing on record to suggest that in the intervening period there is any substantial change in the aims and objects of assessee. Therefore, keeping in view the aforesaid facts, it has to be decided whether the introduction of first proviso to section 2(15) by the Finance Act, 2008 w.e.f. 01/04/0 9 would automatically dis entitle the assessee from being considered as having been established for charitable purpose and thereby depriving it from claiming exemption u/s 11 of the Act. A plain reading of section 2(15) of the Act, also makes it clear that the proviso applies only to the last limb of ‘charitable purpose’ i.e. advancement of any other object of general public utility’. The intention of the legislature in introducing the proviso to section 2(15) as could be gathered from the speech of the Hon’ble Finance Minister on the floor of Parliament, explanatory notes, departmental circulars, is to deny exemption to trusts or institutions who in the garb of charity are purely engaged in commercial or business activities and whose main intention is to earn profit. The proviso is never meant to deprive genuine trusts and institutions whose main object is charity but in process of achieving the main object they undertake some income generating activity which is ancillary and incidental to the main object. Further, income generated from such activity is also utilized for achieving the main charitable object. The true import and effect of proviso to section 2(15) of the Act came up for scrutiny before a number of High Courts. The unanimous view of judiciary in this regard is, proviso to section 2(15) has to be applied keeping in mind the dominant object/purpose of the trusts or institutions. Therefore, it has to be seen whether the dominant object of the trust is of charitable nature in carrying out the object of general public utility or main intention of the assessee is to earn profit. Further, definition of ‘charitable purpose’ as defined u/s 2(15) of the Act cannot be read in vacuum, but, has to be read along with the exemption provisions. That being the case, a literal interpretation to the proviso to section 2(15) cannot be given if the objects of the exemption provisions are to be given full effect. The Hon’ble Delhi High Court in case of Indian Trade Promotion Organization Vs. director General of Income-tax (E), 371 ITR 333 while interpreting the effect of proviso to section 2(15) of the Act, after analyzing a number of decisions of the Hon ‘ble Supreme Court as well as different high courts observed that the only thing which is required to be examined is whether the trust or institution has been established for charitable purposes. The fact that it derives income does not in any way detract from the position that it is not an institution established for charitable purposes. The Hon’ble High Court observed that merely because assessee derives rental income, income out of sale of tickets and sale of publications and income out of leasing out food and beverages outlets in the exhibition grounds does not, in any way, affect the nature of trust as a charitable institution, if, it otherwise qualifies for such a character. It was further observed by the Hon’ble High Court that if a meaning is given to the expression ‘charitable purpose’ so as to suggest that in case of an institution having an object of advancement of general public utility if derives income it would be falling within the exception carved out in the first proviso to section 2(15) of the Act, then, there would be no institution whatsoever which would qualify for exemption and the exemption provision would be rendered redundant. The Hon ‘ble Delhi high Court referred to its own decision in case of Institute of Chartered Accountants of India and another Vs. Director General of Income-tax (E), 358 ITR 91 wherein while interpreting expressions ‘trade, commerce and business as find place in the first proviso to section 2(15), the court held that merely because fees or some other consideration is collected or received by an institution, it would not lose its character of having been established for charitable purpose. The Court observed, in this context, the dominant activity of the institution has to be looked into. If the dominant activity of the institution is not business, trade or commerce, then, any such incidental or ancillary activity would also not fall within the categories of trade or commerce or business. The driving force of the trust or institution should not be a desire to earn profit, but, utilize the same for achieving the charitable objects for which it is established. The Hon ‘be High Court laying down the principle as to how the proviso to section 2(15) should be construed, held as under:
“58. In conclusion, we may say that the expression II charitable purpose”, as defined in section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to section 2(15) of the said Act then the proviso would be at risk of running fowl of the principle of equality enshrined in article 14 of the Constitution of India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and the prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a “charitable purpose”. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes.”
8.2 If we apply the aforesaid principles to the facts of the present case, it is to be seen that as held by the coordinate bench in assessee’s own case in the preceding AYs, assessee is pursuing charitable activity in accordance with its aims and objects while constructing the Jagannadha Temple. In fact, the AO himself in assessment order has admitted that income/fund of assessee is utilized in construction of the temple. Further, the coordinate bench in the said order held, by letting out function hall assessee is not involved in commercial activity so as to dis entitle it from claiming exemption u/s 11. Therefore, considered in the aforesaid perspective, there being no dispute to the fact that dominant object of assessee is charitable in nature, proviso to section 2(15) cannot be applied to deny exemption to assessee u/s 11 of the Act. In our view, AO without examining the issue in proper perspective has abruptly concluded that assessee is not entitled to exemption u/s 11 of the Act only because proviso to section 2(15) was introduced w.e.f. 01/04/09. In our view, proviso to section 2(15) of the Act will not apply automatically to every trust or institution irrespective of the fact, whether the dominant object of the trust or institution is charitable purpose or earning profit. When in the present case assessee is registered as charitable institution and there is no change in the aims and objects of assessee in the impugned AY and the activities of assessee over the years remains the same, the proviso to section 2(15) cannot be applied to assessee to deny exemption u/s 11 of the Act. In view of the aforesaid, we do not find any merit in the submissions of the ld. DR so as to disturb the finding of the ld. CIT(A) on this issue. Accordingly, we uphold the order of ld. CIT(A) by dismissing the grounds raised. “
7. Facts and circumstances of the case in the year under appeal, viz. assessment year 2011-12, being similar to those considered by the coordinate benches of the Tribunal in assessee ‘s own case for earlier years noted above and in the absence of anything to the contrary brought on record by the Learned Departmental Representative, we find no justification to interfere with the impugned order of the CIT(A) on this issue, which is accordingly confirmed.
8. As for the grievance of the Revenue on the issue of dis allowance made by the Assessing Officer invoking the provisions of S.40A(3), as correctly observed by the learned CIT(A), once the claim of the assessee for exemption under S.11 has been accepted, the dis allowance made by the Assessing Officer under S.40A(3) has no legs to stand, and the ground of the assessee before the learned CIT(A) becomes infructuous. We accordingly find no merit in the ground of the Revenue on this issue as well.”
The issues raised by the AO in his order are materially identical to that of AY 2011-12, respectfully following the decision of Tribunal, we uphold the order of the CIT(A) as the decision of the CIT(A) is in consonance with the decision of the Tribunal and accordingly, dismiss the ground Nos. 2 & 3 raised by the revenue.
7. As regards ground No. 3 deletion of dis allowance of Rs. 20,29,067/- made by the AO u/s 40(a)(ia), we confirm the finding of the CIT(A) that as exemption u/s 11 is allowed the dis allowance would consequently get deleted and accordingly, this ground of appeal is also dismissed.
8. In the result, appeal of the revenue is dismissed.
Pronounced in the open Court on 10th November, 2017.
