IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH SMC, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NOS. 4965 & 4966/MUM/2015 : (A.Ys : 2010-11 & 2011-12) Pathare Prabhu Charities Vs. ITO (Exemptions)-11(1), Pathare Prabhu Dnyati Bhuvan No. 3, Mumbai (Respondent) Jagannath Shankerseth Road, Thakurdwar, Mumbai 400 002. PAN : AAATP0303P (Appellant) Assessee by : Shri Hiro Rai Revenue by : Shri Sumit Kumar Date of Hearing : 14/09/2016 Date of Pronouncement : 05/10/2016 ORDER captioned two appeals by assessee relate to Assessment Years 2010-11 & 2011-12 and involve common issue. In both appeals, singular grievance of assessee is that income-tax authorities have erred in denying exemption u/s 11 & 12 of Income Tax Act, 1961 (in short Act ) with respect to income earned from contract entered with M/s. Karishma Catering Services Pvt. Ltd. Since issue and facts and circumstances in both assessment years are similar, appeal for Assessment Year 2010-11 is taken up as lead case in order to appreciate controversy. 2 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 ITA NO. 4965/MUM/2015 (Assessment Year : 2010-11) 2. This appeal by assessee is directed against order of CIT(A)-1, Mumbai dated 11.08.2015, pertaining to Assessment Year 2010-11, which in turn has arisen from order dated 06.03.2013 passed by Assessing Officer, Mumbai under section 143(3) of Act. 3. In this appeal, assessee has raised following Grounds of appeal :- 1. learned Commissioner of Income Tax (Appeals) erred in upholding denial of exemption u/s 11 and 12 by Assessing Officer, by application of provisions of section 11(4A). 2. learned Commissioner (Appeals) failed to appreciate that transaction with caterer was in substance mere passive letting of property, which could in no way be regarded as business. 3. learned Commissioner (Appeals) erred in going by nomenclature of income, and did not appreciate that mere nomenclature of income did not necessarily determine its true character. 4. learned Commissioner (Appeals) erred in not perusing various clauses of agreement, which clearly demonstrated that nothing was to be done by appellant other than allowing use of space by caterer. 5. learned Commissioner (Appeals) erred in stating that Assessing Officer had clearly brought out that it was not mere letting out of property, but also so many facilities had been allowed to caterer. 6. learned Commissioner (Appeals) erred in distinguishing cases cited before him from facts of case before him. 7. learned Commissioner (Appeals) was wrong in holding that since income of appellant was flowing from business of caterer, who was unrelated to appellant, income of appellant was also in nature of business income. 3 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 8. Your appellant pray that order of learned Assessing Officer be modified by holding that income received by your appellants from caterer was not in nature of business income, and by allowing exemption u/s 11 and 12 to your appellants. 4. Though appellant-trust has raised multiple Grounds of appeal, solitary issue is with regard to benefit of exemption u/s 11 & 12 of Act in relation to transaction entered with M/s. Karishma Catering Services Pvt. Ltd., which according to assessee, in substance represents letting of property giving rental income, whereas Assessing Officer treats it as Business income not covered by provisions of Sec. 11(4A) of Act. 5. Before I proceed to address controversy in detail, brief background is appropriate. appellant is Trust set-up in 1901 and is registered with Charity Commissioner, Mumbai as well as with Director of Income-tax (Exemptions), Mumbai u/s 12A of Act. At time of hearing, learned representative for assessee explained that appellant-trust is carrying out activities of charitable purpose involving measures for alleviating members of Pathare Prabhu community. appellant-trust provides subsidies in field of education, medical and housing by providing scholarships, accommodations at subsidised rates, etc. to deserving members of Pathare Prabhu community. It was also explained that such activities have been carried out since incorporation and that there is no dispute on same. Notably, assessee owns three halls in building known as Pathare Prabhu Charities Sabhagraha Sankul located at Andheri (W), Mumbai. Assessee-trust gave above halls to 4 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 M/s. Karishma Catering Services Pvt. Ltd. for period of 10 years starting from August, 2008 to July, 2018 in terms of agreement dated 25.8.2008, copy of which is placed in Paper Book at pages 1 to 17. In terms of said agreement, assessee is to receive monthly compensation of Rs.3,00,000/- and agreement provides for increase in monthly compensation after every three years by 10%. For year under consideration, assessee received sum of Rs.39,00,000/- from M/s. Karishma Catering Services Pvt. Ltd. and such amount has been credited in Income & Expenditure Account as Royalty . It would also be pertinent to note here itself that prior to agreement dated 25.8.2008, similar agreement had been entered with M/s. Karishma Catering Services Pvt. Ltd. which was effective for 10 year period from March, 1997 to July, 2008. In course of assessment proceedings for Assessment Year 2010-11, Assessing Officer show- caused assessee as to why income credited in Income & Expenditure Account by way of Royalty be eligible for exemption u/s 11 & 12 of Act on ground that same was Business income not covered by scope of Sec. 11(4A) of Act. 6. Before Assessing Officer, plea of assessee was that contract with M/s. Karishma Catering Services Pvt. Ltd. was, in substance, in nature of rental contract for use of hall and assessee was receiving fixed monthly income plus applicable service tax irrespective of number of days for which M/s. Karishma Catering Services Pvt. Ltd. was booking hall. According to assessee, only obligation of assessee was to make space available to M/s. Karishma Catering Services Pvt. Ltd. and insure building and it was 5 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 M/s. Karishma Catering Services Pvt. Ltd. which was independently booking hall, charging for hall and catering services from customers. It was also contended by assessee that it had obtained Certificate u/s 197(1) of Act for lower deduction of tax at source u/s 194I of Act which indicates that amount paid by M/s. Karishma Catering Services Pvt. Ltd. to assessee was in nature of rent . Assessing Officer has not accepted explanation of assessee. According to Assessing Officer, amount received from M/s. Karishma Catering Services Pvt. Ltd. could not be construed as rent , but it was receipt in nature of Business income . According to Assessing Officer, terms of agreement did not mention that money is being paid for space utilized or rent. Assessing Officer also observed that if it was rental income, why assessee would have shown it in Income & Expenditure Account as Royalty . Further, Assessing Officer held that such business activity was neither incidental to attainment of objectives of Trust and nor assessee was maintaining separate books of accounts and, therefore, exemption could not be allowed on such income in terms of Sec. 11(4A) of Act also. Accordingly, Assessing Officer assessed total income at Rs.39,00,000/-, being Royalty income received, as against Rs. NIL returned by assessee. said action of Assessing Officer has further been affirmed by CIT(A) and accordingly, assessee is in further appeal before Tribunal. 7. Before me, learned representative for assessee has vehemently argued that activity of deriving income by letting out property to M/s. Karishma Catering Services Pvt. Ltd. cannot be 6 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 construed as activity of business and therefore provisions of Sec.11(4A) of Act are not attracted at all. sum and substance of plea is that though nomenclature used is Royalty , but in essence it is in nature of rent because it is earned for giving right to use premises owned by assessee-trust. In support, my attention was drawn to various clauses of agreement to point out that assessee has no role to play in activities being carried out by other concern for providing services to customers. assessee was only required to provide use of space, as owner of property, and thus receipt has to be understood as income by way of rent. On this aspect, it has also been pointed out that even in earlier years, similar contract/agreement existed with M/s. Karishma Catering Services Pvt. Ltd. and income received has been held to be eligible for exemption u/s 11 & 12 of Act and for that matter, reference has been made to assessment order dated 19.12.2008 passed u/s 143(3) of Act for Assessment Year 2006-07, copy of which has been placed in Paper Book at pages 18 to 20. In course of hearing, learned representative also relied upon following decisions for proposition that even in cases where charitable institutions have let out property as marriage hall, etc., same has been held to be eligible for exemption u/s 11 & 12 of Act and not liable to be treated as Business income :- i) CIT v. Samyuktha Gowda Saraswatha Sabha, 245 ITR 242 (Mad) ii) CIT v. Gordhandas Bhagwandas Charitable Trust, 136 Taxman 161 (Mad) iii) DIT v. Sahu Jain Trust, 243 CIT 131 (Cal) 7 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 iv) CIT v. Sri Rao Baghadur ADK Dharmaraja Educational Charity Trust, 300 ITR 365 (Mad) v) DDIT v. Habib Ismail Hospital & Medical Trust, 19 ITR(Trib) 223 (Mum) 8. On this aspect, ld. DR appearing for Revenue has primarily reiterated stand of Assessing Officer which I have already noted in earlier paras and is not being repeated for sake of brevity. ld. DR also referred to order of CIT(A) to point out that in present case, many facilities have been allowed by assessee to M/s. Karishma Catering Services Pvt. Ltd. and therefore it was not case of simple letting out of property so as to assess income as rental income liable for exemption u/s 11 & 12 of Act. In effect, ld. DR supported stand of lower authorities that income derived from M/s. Karishma Catering Services Pvt. Ltd. was liable to be assessed as Business income . 9. I have carefully considered rival submissions. In present case, factual matrix lies in narrow compass. appellant is charitable trust incorporated in 1901 duly registered with Charity Commissioner, Mumbai and is also enjoying registration u/s 12A of Act with Director of Income-tax (Exemptions), Mumbai. For Assessment Year under consideration, assessee filed its return of income claiming exemption u/s 11 & 12 of Act, as in past years. Assessing Officer has not disputed claim of assessee for exemption u/s 11 & 12 of Act in principle, but he has denied exemption in relation to one stream of income, which has been 8 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 described as Royalty income of Rs.39,00,000/- received from M/s. Karishma Catering Services Pvt. Ltd. According to Assessing Officer, said stream of income is not eligible for claim of exemption u/s 11 & 12 of Act because same is in nature of business income not incidental to attainment of objectives of Trust and, therefore, benefit of Sec. 11 & 12 of Act have been denied. 10. In order to appreciate stand of Assessing Officer, it is appropriate to refer to agreement dated 25.8.2008 between assessee and M/s. Karishma Catering Services Pvt. Ltd. which brings out terms and conditions in terms of which assessee has earned income of Rs.39,00,000/- during year under consideration. Certain clauses of said agreement, which are relevant, are being reproduced hereinafter :- 1. Charities hereby grant to Caterer and Caterer herein accepts from Charities, exclusive right to cater to all functions to be held in any of 3 halls comprised in said Complex for period of 10 years w.e.f August 2008 upto July 2018, subject to terms, conditions, covenants and stipulations herein contained. 2. In this Agreement words Exclusive Catering Contract shall mean : (i) right, for duration of this Agreement to use, in common with Charities all premises at said Complex of Charities. (ii) exclusive right to cater food and hard and soft beverages in Complex at functions held at said 9 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 Complex, subject to rights of Trust reserved hereunder. (iii) Providing, decorating and other required services at function to be held at Complex. 3. In consideration of Charities having granted to Caterer Exclusive Catering Contract as aforesaid, Caterer shall pay to Charities, as and by way of Royalty @ Rs.3,00,000/- (Rupees three lacs only) per month plus service tax and any other levy or tax payable in respect of such Royalty for first period of three years from commencement of this Agreement, and thereafter there shall be increase of 10% after every three years. Thus Caterer shall pay to Charities following amounts, during respective periods shown below plus service tax and other levy or tax as applicable from time to time Period Royalty per month 1. 1 August 2008 to 31st July 2011 st Rs.3,00,000/- 2. 1st August 2011 to 31st July 2014 Rs.3,30,000/- 3. 1st August 2014 to 31st July 2017 Rs.3,63,000/- 4. 1st August 2017 to 31st July 2018 Rs.3,99,300/- aforesaid Royalty shall be paid by Caterer every month in advance, on or before 10th day of each Calendar month. In event of default in payment of Royalty on or before aforesaid stipulated date for continuous period of 2 months, Caterer shall be liable to pay interest @ 12% p.a. on defaulted amount from due date of payment, till payment to and realization thereof by Charities. 5. Caterer shall be at liberty, during subsistence of Agreement, to take bookings for celebration of marriages, engagement, receptions, birthday parties, conferences and other get- togethers in complex, between 6.00 A.M to 12.00 mid-night on such terms and conditions as it may deem fit. Caterer shall 10 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 ensure that no loud music is played, nor any controversial or objectionable or political programmes are conducted at Complex. 6. It is expressly agreed and understood by and between parties hereto that Royalty mentioned in Clause 3 above shall be payable to Charities, irrespective of whether or not Caterer gets sufficient business through bookings for use of said Complex. 13. Caterer shall employ its own servants, employees and staff and Caterer shall be solely responsible and liable for payment and/or disbursement of wages, salaries, emoluments and other dues and to grant such other benefits as may be payable to servants, employees and staff engaged and employed by Caterer, which may be payable by contract or by virtue of statutory requirements. Caterer shall at all times keep Charities, its Trustees and office bearers indemnified against any claim, demand or liability which may be made against Charities and/or which Charities may incur or become liable to pay by reason of non observance or non performance of requirements of this Clause, to be on part of Caterer to be observed and performed. 14. Caterer shall bear cost of obtaining/renewing Licence/s required for purpose of conducting activities in pursuance of this Agreement and also of its subsequent renewal or alterations in terms of aforesaid licence. 32. Caterer shall accept full responsibility for every function held in any part of Complex. 36. Caterer shall give its own quotation for all catering done on Complex to its various customers. 46. Caterer shall be fully responsible for any matters/claims arising out of its catering services and shall maintain sufficient comprehensive insurance cover to meet all claims by third parties 11 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 including for accidents and food poisoning and shall indemnify Charities against any such claims. aforesaid clauses of agreement clearly bring out that so far as assessee-trust is concerned, it has been paid by M/s. Karishma Catering Services Pvt. Ltd. for providing right to use premises owned by assessee. It is also notable that booking of hall, catering of food and other services to customers is entirely prerogative of M/s. Karishma Catering Services Pvt. Ltd. and assessee-trust is no way responsible for same. It is also noteworthy that assessee is to receive fixed monthly sum irrespective of whether or not M/s. Karishma Catering Services Pvt. Ltd. gets sufficient business through bookings for use of hall/premises in question. Considering mechanics of agreement dated 25.8.2008, in my view, it would be inappropriate to hold that assessee is engaged in carrying out any business activity jointly with M/s. Karishma Catering Services Pvt. Ltd. Factually, there is no material to suggest that any facilities have been allowed by assessee to M/s. Karishma Catering Services Pvt. Ltd. other than allowing use of property, which in simple terms tantamount to rental arrangement. No doubt, M/s. Karishma Catering Services Pvt. Ltd. is engaged in carrying out business activities, but so far as assessee is concerned, it is receiving fixed sum as compensation for allowing use of property owned by it. Therefore, qua assessee such receipts are in nature of rental income only. inference of Assessing Officer to contrary in instant year is devoid of any factual support and is clear departure from stand of Revenue in past years. Notably, Preamble of agreement 12 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 itself contains averment that prior to this, similar agreement existed between assessee and M/s. Karishma Catering Services Pvt. Ltd. from March, 1997 to July, 2008. At time of hearing, learned representative for assessee had asserted that income received in earlier years in terms of similar contract have not been understood to be Business income and that even in assessment finalised u/s 143(3) of Act for Assessment Year 2006-07, such income has been accepted to be eligible for exemption u/s 11 & 12 of Act. In my considered opinion, considering past history, which has not been controverted by Revenue, wherein assessee got benefit of exemption in respect of impugned income, there is no justification for disallowing benefit of Sec. 11 & 12 of Act in instant year. Thus, on this count itself I find no reason to hold that income earned from M/s. Karishma Catering Services Pvt. Ltd. is Business income not incidental to attainment of objectives of Trust. 11. In case of Samyuktha Gowda Saraswatha Sabha (supra) Hon'ble Madras High Court was considering case of assessee whose objectives were education and other objects of general utility and it was deriving income by letting out marriage hall. income from letting out of marriage hall was construed as Business income by Assessing Officer, which was not upheld by Hon'ble High Court. As per Hon'ble High Court, letting out of property was activity for fulfilling objectives of Trust and could not be considered as activity of business so as to deny exemption u/s 11 & 12 of Act. In case of Sahu Jain Trust (supra), Hon'ble 13 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 Calcutta High Court was considering income derived from sub- letting of tenanted properties. Assessing Officer held that such income was not incidental to attainment of objectives of Trust and hence applying provisions of Sec. 11(4A) of Act, exemption u/s 11 of Act was denied. Hon'ble High Court held that where trust was deriving rental income by way of sub-letting to enable it to carry out its charitable objectives in effective manner, exemption could not be denied by Assessing Officer by invoking Sec. 11(4A) of Act. Hon'ble High Court, in particular, noted that in past assessee had got benefit of exemption in respect of such rental incomes. In my considered opinion, aforesaid judicial pronouncements clearly bring out that impugned income earned by assessee from providing right to use of property owned by it cannot be construed to be income from business activity and rather, it is activity undertaken to enable it to carry out its charitable activities in effective manner. Therefore, action of Assessing Officer is liable to be negated. 12. Before parting, I may also touch upon arguments of Assessing Officer that impugned income has been shown by assessee itself as Royalty in Income & Expenditure Account. It is quite well understood that mere nomenclature of receipt is not determinative of its nature. What is required to be seen is terms and conditions in terms of which particular receipt has been earned, and for that matter, in instant case, terms of agreement clearly establish that receipt is essentially for allowing right to use of property owned by assessee and is thus liable to be treated as receipt in 14 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 nature of rent. In course of hearing, learned representative submitted that nomenclature of Royalty has been used by assessee perhaps with intention to avoid any complications associated with tenancy arrangement, though in essence income has been earned for letting out of property. In any case, in my considered opinion, nomenclature is not final determinant of nature of receipt and, therefore, stand of Assessing Officer on this aspect is untenable. 13. In end, I conclude by holding that Assessing Officer erred in not construing income received from M/s. Karishma Catering Services Pvt. Ltd. as income incidental to attainment of objectives of Trust. stand of Assessing Officer is hereby reversed and he is directed to allow exemption u/s 11 & 12 of Act on such income, in view of aforesaid discussion. 14. At time of hearing, learned representative has also made alternative plea to effect that even if impugned activity is to be understood as business activity, yet it is eligible for exemption u/s 11 & 12 of Act because it falls within exceptions prescribed u/s 11(4A) of Act. Since assessee has already succeeded on its preliminary plea, aforesaid alternative plea of assessee is not being adjudicated as it is only academic in nature. 15. In result, appeal of assessee is allowed, as above. 15 Pathare Prabhu Charities ITA Nos. 4965 & 4966/Mum/2015 16. Insofar as appeal of assessee for Assessment Year 2011-12 is concerned, it was common point between parties that facts and circumstances in ITA No. 4966/Mum/2015, for Assessment Year 2011-12 are pari materia to those considered by us in ITA No. 4965/Mum/2015, for Assessment Year 2010-11, thus, my decision therein shall apply mutatis mutandis in this appeal also. 17. Resultantly, both appeals of assessee are allowed. Order pronounced in open court on 5th October, 2016. Sd/- (G.S. PANNU) ACCOUNTANT MEMBER Mumbai, Date : 5th October, 2016 SSL Copy to : 1) Appellant 2) Respondent 3) CIT(A) concerned 4) CIT concerned 5) D.R, SMC Bench, Mumbai 6) Guard file By Order Dy./Asstt. Registrar I.T.A.T, Mumbai Pathare Prabhu Charities v. ITO (Exemptions)-11(1), Mumbai