TCA.896 & 899 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 15.09.2020 CORAM: HON'BLE MR.JUSTICE N.KIRUBAKARAN and HON'BLE MR.JUSTICE P.VELMURUGAN T.C.A.Nos.896 and 899 of 2018 M/s.Sri Ram Samaj, No.47, Arya Gowda Road West Mambalam Chennai 600 033 (PAN AACTS5436N) ..Appellant in both TCAs /Appellant -Vs- Joint Director of Income Tax (Exemptions) Chennai-600034 ..Respondent in both TCAs /Respondent. Prayer: Tax Case Appeal filed under Section 260 of Income Tax Act, 1961, praying to set aside order dated 06.04.2016 passed by Income Tax Appellate Tribunal, Chennai 'D' Bench in ITA.No.665 & 664/Mds/2015 for Assessment Year 2010-11 and 2011-12. For Appellant : Mr.Sathish Parasaran, Senior counsel for Mr.Srinath Sridevan For Respondent : Mr.J.Narayanaswamy. http://www.judis.nic.in 1/19 TCA.896 & 899 of 2018 JUDGMENT P.VELMURUGAN,J. above Tax Case Appeals are filed against order of Income Tax Appellate Tribunal, Chennai 'D' Bench, dated 06.04.2016 passed in ITA.No.665 & 664/Mds/2015 for Assessment Year 2010-11 and 2011-12. 2.1. appellant herein is assessee. assessee is society registered under Societies Registration Act. It got its approval under Section 12AA of Income Tax Act, 1961 [hereinafter in short called as Act ]. 2.2. appellant society filed its return for Assessment Years 2010- 11 and 2011-12 on 21.10.2010 and 21.10.2011 respectively, admitting nil income, after claiming exemption under Section 11(1)(a) of Act. 2.3. appellant's case for both Assessment Years was selected for scrutiny and notices u/s.143(2) of Act had been issued to appellant. In response to notices, appellant's authorized representative appeared from time to time and provided details called for. After scrutinizing details filed, assessments were completed u/s.143(3) of Act on 25.02.2013 and 27.01.2014 for Assessment Years 2010-11 and 2011-12 respectively. In http://www.judis.nic.in 2/19 TCA.896 & 899 of 2018 both orders, Assessing Officer invoked Sections 2(15) and 13(8) of Act to make Sections 11 and 12 inapplicable insofar appellant is concerned and computed taxable income of appellant, treating appellant as Association of Persons at Rs.25,42,950/- for A.Y.2010-11 and at Rs.22,16,619/- for AY 2011-12. 3.1. appellant society operates community hall 'Ayodhya Aswamedha Mandapam', marriage function centre 'Mithalapuri Kalyana Mandapam' and unit to facilitate performance of customary and traditional rites connected with funeral obsequies named 'Gnanavapi'. corresponding income received from these properties, is classified as income from House Property. Assessing Officer pointed out that such categorization of nomenclature of head of receipt of income as income from House Property is incorrect. 3.2. Authorized Representative of appellant society pleaded that same is income derived from house property only, relying on decision of High Court of Madras in case of Chennai Properties and Investments Ltd., reported in 136 Taxman 202 (MAD). 3.3 Assessing Officer pointed out that such reliance is misplaced. There is no such relationship of landlord and tenant subsisting. In case of http://www.judis.nic.in 3/19 TCA.896 & 899 of 2018 profitable entities would obviously be in nature of business income and different classification in respect of operations by non profitable organization appears to be unfair. Therefore, claim that income derived from these units is Income from House Property is not entertained. 4. Further, Assessing Officer rejected claim of deduction u/s.24(a) of Act @ 30% stating that question of allowing statutory deduction will not arise. 5. It is further pointed out by Assessing Officer that objects of Trust fall under main limbs of charitable purpose being education, medical relief and relief to poor. income from Community Hall, Kalyana Mandapam and Gnanavapi are used to offset cost in maintaining schools run by Trust and hence proviso to Section 2(15) cannot find application so as to bring income from running of Kalyana Mandapam to tax. 6. Assessing Officer held that business of running Community Hall, Marriage Hall and Gnanavapi cannot be treated as incidental business eligible for exemption u/s.11(4A). It is pointed out that since society whose charitable purpose is object of General Public Utility has ventured in http://www.judis.nic.in 4/19 TCA.896 & 899 of 2018 nature of trade, commerce or business during year and had also received fee as consideration for services rendered, which is in excess of Rs.10 Lakhs, proviso to section 2(15) gets invoked, inexorably. It is also held that since proviso to section 2(15) is invoked, provisions of section 11 & 12 become inoperative. 7. In assessment order pertaining to A.Y.2011-12, Assessing Officer in paragraph 8.1, cited proviso to Section 2(15) of Act. It is as follows:- 8.1 Proviso to Section 2(15) introduced with effect from 01/04/2019 reads as under:- Charitable purpose includes relief to poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic of historic interest and advancement of any other object of general public utility. 1st Proviso- Provided that advancement of any other object of general public utility shall not be charitable purpose, if it involves carrying on of any activity in nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for cess or fee or any other consideration, irrespective of nature of use or application, or retention, of income such activity. http://www.judis.nic.in 5/19 TCA.896 & 899 of 2018 2nd Proviso Provided further that first proviso shall not apply if aggregate value of receipts from activities referred to therein is ten lakhs rupees or less in previous year. 8. Assessing Officer, dealt with new proviso in Section 2(15) of Act, holding that certain types of activities (advancement of objects of general public utility) considered otherwise charitable were taken out of definition of charitable activity, if they were found to be engaged in trade and commerce. As per section 11(4A), charitable institution is permitted to carry on business activities which are incidental to its objects as long as they maintain separate account for business activities. activities of assessee organization clearly come within purview of 'Business' related. 'Business' under Income-tax Act is inclusive definition and not exhaustive. In paragraph 8.7, it is held as under:- 8.7. receipts are from community & marriage halls and Gnanavapi have been received throughout year and there is systematic and regular carrying on of activity in nature of trade, commerce or business or activity of rendering any service in relating to any trade, commerce or business for cess or fee or any other consideration. Further, overall receipts during financial year under consideration are in excess of threshold limit of Rs.10.00 lakhs and therefore, first and second provisos http://www.judis.nic.in 6/19 TCA.896 & 899 of 2018 to Section 2(15) are clearly and distinctly applicable in case of assessee's organisation. very fact that 'Receipts' relating to Kalyana Mandapam and Gnanavapi are received, goes to show that amended provisions of Section 2(15) are clearly attracted. 9. Aggrieved by order of Assessing Officer, appellant society filed appeal before Commissioner of Income Tax (Appeals). CIT (Appeals), by common order dated 31.12.2014, cited judgment of Madras High Court in case of Ramalingam Charities Vs. CIT wherein it is held that if objects of trust are composite in nature, it cannot be held to be wholly existing for purpose of education. contention of assessee that surplus from other activities was only going to meet shortfall in income of educational institution was rejected by CIT (Appeals) by holding that perusal of income and expenditure accounts of school for FY 2008-09 to 2010-11 reveals that it results in surplus for three consecutive years. amendment to Section 2(15) of Act with effect from 01.04.2009 makes business income taxable even if it is incidental to objects as long as such objects are of general public utility. CIT (Appeals) held that letting out of halls is business activity and not incidental to objects as required u/s.11(4A) of Act to merit exemption u/s.11 of Act. http://www.judis.nic.in 7/19 TCA.896 & 899 of 2018 10. CIT (Appeals) held that activity of letting out of halls is covered by residuary limb of definition u/s.2(15) of Act and hit by proviso to Section 2(15) of Act and liable to lose exemption u/s.11 and 12 of Act. Thus, CIT (Appeals) confirmed order of Assessing Officer for Assessment Years 2010-11 and 2011-12. 11. Aggrieved by order of CIT(Appeals), appellant/assessee filed appeal before Income Tax Appellate Tribunal. By common order dated 06.04.2016, ITAT, in paragraph 9, cited decision of Supreme Court in case of Additional CIT Vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1, wherein it is held that under trust for charitable purpose, income therefrom would be entitled to exemption u/s.11(1) of Act. ITAT pointed out that finding of CIT (A) is that running of community hall Kalyanamandapam and funeral ceremony hall were not held under trust, but it was business commenced/carried on by Society, subsequent to formation of trust; though business was commenced by Society, it was carried on by Society after its formation, it cannot be said to constitute property held under trust. U/s.11(4), it is only business which is held under trust that would enjoy exemption in respect of http://www.judis.nic.in 8/19 TCA.896 & 899 of 2018 its income u/s.11(1) of I.T.Act and there is distinction between objects of trust and powers given to trustees to effectuate purpose of trust. ITAT thus held that assessee is not entitled for any exemption u/s.11 of I.T.Act. 12. Aggrieved against order of ITAT, appellant/assessee filed present Tax Case Appeals. present Tax Case Appeals are admitted on following substantial questions of law:- (i) Whether Section 2(15) of Income Tax Act, 1961 would be attracted to assessee case where earned income from letting out of Kalyana Mandapam, Gnanavapi utilizes entire revenue derived there from towards charitable objects such as Education and Medical relief to poor? (ii) Would activity of letting out Kalyana Mandapam not be incidental to attainment of objectives of trust thereby entitling assessee to exemption under Section 12AA by virtue of exemption carved out under Section 11(4A)? 13. Among various grounds of appeal raised by learned counsel for appellant/assessee, it is stated that ITAT failed to apply well settled http://www.judis.nic.in 9/19 TCA.896 & 899 of 2018 proposition of law as observed by Supreme Court in ACIT Vs. Thanthi Trust reported in 247 ITR 785 that all that is required for business income of Trust or Institution to be exempt is that business should be incidental to attainment of objectives of trust or institution. appellant is educational trust and its objects are predominantly educational in character and falls within first three limbs of section 2(15) of Act. ITAT has failed to recognize that surplus income generated from running mandapams and gnanavapi is pumped back into society and utilized solely for running educational institution, which is primary objective of society. 14. learned Senior counsel for appellant in support of his submissions relied on decision of High Court of Delhi reported in (2015) 371 ITR 333 [India Trade Promotions Organization Vs. Director General of Income-Tax (Exemptions) and Others]. learned Senior counsel relied on Paragraphs 48, 49 and 50 of said decision, which is as under:- 48. With this in mind, it is to be seen as to what is meant by expressions "trade", "commerce" or "business". word "trade" was considered by Supreme Court in its decision in case of Khoday Distilleries Ltd and Others v. State of Karnataka and Others: 1995 (1) SCC 574, whereby Supreme Court held that "the primary meaning of word 'trade' is exchange of goods for goods or goods for money". Furthermore, in State of Andhra Pradesh v. H. Abdul Bakhi and http://www.judis.nic.in 10/19 TCA.896 & 899 of 2018 Bros: 1964 (5) STC 644 (SC), Supreme Court held that -the word "business" was of indefinite import and in taxing statute, it is used in sense of occupation, or profession which occupies time, attention or labour of person, and is clearly associated with object of making profit". This court, in ICAI (I) (supra) held that, while construing term "business" as appearing in proviso to Section 2(15), object and purpose of Section has to be kept in mind. It was observed therein that very broad and extended definition of term "business" was not intended for purpose of interpreting and applying first proviso to Section 2(15) of Act so as to include any transaction for cess, fee or consideration. Court specifically held that:- -An activity would be considered 'business' if it is undertaken with profit motive, but in some cases, this may not be determinative. Normally, profit motive test should be satisfied, but in given case activity may be regarded as business even when profit motive cannot be established / proved. In such cases, there should be evidence and material to show that activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that activity undertaken is in fact in nature of business. 49. In Bureau of Indian Standards (supra), this court, while considering whether activities of Bureau of Indian Standards (supra) in granting licences and trading certificates and charging of fee amounted to carrying on business, trade or commerce, held as under:- 73. ... In these circumstances, -rendering any service in relation to trade, commerce or business? cannot, in opinion of Court, receive such wide construction as to enfold regulatory and sovereign authorities, set up under statutory enactments, and tasked to act as agencies of State in public duties which cannot be discharged by private bodies. Often, apart from controlling or parent statutes, like BIS Act, these statutory bodies (including BIS) are empowered to frame rules or regulations, exercise co-ercive powers, including inspection, raids; they possess search and seizure powers and are invariably subjected to Parliamentary or legislative oversight. primary object for setting up such regulatory bodies would be to ensure general public utility. prescribing of standards, and enforcing those standards, through accreditation and continuing supervision through inspection etc., cannot be considered as trade, business or commercial activity, merely because testing procedures, or accreditation involves charging of such fees. It cannot be said that public utility activity of evolving, prescribing and enforcing standards, -involves? carrying on of trade or commercial activity.? 50. In ICAI(II) (supra), while considering whether activities of ICAI fell within proviso to Section 2(15) as introduced with effect from 01.04.2009, this court, after considering Supreme Court decision in case of Commissioner of Sales Tax v. Sai Publication Fund: (2002) 258 ITR 70(SC) held:- http://www.judis.nic.in 11/19 TCA.896 & 899 of 2018 "Thus, if dominant activity of assessee was not business, then any incidental or ancillary activity would also not fall within definition of business." 51. This court also observed in ICAI(II) (supra) that:- 51. This court also observed in ICAI(II) (supra) that:- 64. ... It is not necessary that person should give something for free or at concessional rate to qualify as being established for charitable purpose. If object and purpose of institution is charitable, fact that institution collects certain charges, does not alter character of institution. ...This court in ICAI (II) (supra) held:- 67. expressions -trade?, -commerce? and -business? as occurring in first proviso to section 2(15) of Act must be read in context of intent and purport of section 2(15) of Act and cannot be interpreted to mean any activity which is carried on in organised manner. purpose and dominant object for which institution carries on its activities is material to determine whether same is business or not. purport of first proviso to section 2(15) of Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for consideration or fee. object of introducing first proviso is to exclude organizations which are carrying on regular business from scope of -charitable purpose?. purpose of introducing proviso to Section 2(15) of Act can be understood from Budget Speech of Finance Minister while introducing Finance Bill 2008. relevant extract to Speech is as under:- .......Charitable purpose? includes relief of poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under -charitable purpose?. Obviously, this was not intention of Parliament and, hence, I propose to amend law to exclude aforesaid cases. Genuine charitable organizations will not in any way be affected.' expressions -business?, -trade? or -commerce? as used in first proviso must, thus, be interpreted restrictively and where dominant object of organisation is charitable any incidental activity for furtherance of object would not fall within expressions - business?, -trade? or -commerce. 15. learned Standing counsel for Respondent-Department supported order passed by Income Tax Appellate Tribunal. http://www.judis.nic.in 12/19 TCA.896 & 899 of 2018 16. Heard both sides. 17. appellant is Trust and said fact is not in dispute. But CIT (Appeals) as well as ITAT found that activity of letting out of halls is covered by residuary limb of definition u/s.2(15) of Act and hit by proviso to Section 2(15) of Act and exempted u/s.11 and 12 of Act. 18. first substantial question of law raised by appellant is that as to whether Section 2(15) of Act would be attracted to assessee case where earned income from letting out of Kalyana Mandapam, Gnanavapi is utilized and entire revenue derived therefrom is used to offset cost in maintaining schools run by Trust, thus, towards charitable objects such as Education and Medical relief to poor. contention of assessee before CIT (Appeals) is that surplus income from Community Hall, Kalyana Mandapam and Gnanavapi was utilized only to meet shortfall in income of educational institution and that contention was rejected by CIT (Appeals). 19. On perusal of entire records, it is apparent that even though appellant trust is running Kalyana Mandapam, Gnanavapi and Community http://www.judis.nic.in 13/19 TCA.896 & 899 of 2018 Hall, income derived therefrom cannot be construed as business income as very object of Trust is for charitable purpose and it should be incidental for Trust. 20. fact remains that there is no records to show that all income derived from Kalyana Mandapam, Gnanavapi and community hall are not used for objects of trust but whereas fact remains that they spent all income from Kalyana Mandapam, Gnanavapi and Community Hall only for educational purpose and medical relief to poor, which are objects of trust. Under these circumstances, appellant is entitled for exemption and income derived from Kalyana Mandapam, Gnanavapi and Community Hall cannot be treated as business of trust. trust has not conducted any business. Whatever income earned from Kalyana Mandapam, Gnanavapi and Community Hall, is utilised for educational purpose and society is running Educational Institution, which is primary object of trust; on other hand, running Kalyana Mandapam, Gnanavapi and Community Hall is not primary object. question is whether entire income derived from Kalyana Mandapam, is utilized for primary object of Society. In this regard, it is necessary to look into object of Trust. objects of Trust as given are as under:- http://www.judis.nic.in 14/19 TCA.896 & 899 of 2018 (a) To promote and encourage Bharathiya Culture, Art and Philosophy and to conduct periodical meetings and functions. (b) To establish and maintain well equipped library to promote Bharathiya culture, Art and Philosophy. (c) To organize conferences, lectures, meetings, classes, receptions competitions, discourses to promote Bharathiya culture, Art and Philosophy. (d) To establish, maintain and subsidise dispensaries to give or aid in giving free medical treatment to peer and deserving. (e) To feed and to give clothes, free of cost to poor and needs, without any distinction of caste or creed. (f) To establish schools, colleges, universities, research institutions and public libraries as centers of learning and education. (g) To institute and award fellowships, scholarships, school or college fees, gift of school or college books to poor and deserving students. (h) To provide for establishment of buildings with facilities for performance of customary and traditional rites connected with funeral obsequies to poor and needs irrespective of caste, creed or religion. .... (l) To provide facilities for conduct of marriages and such other auspicious functions according to Bharathiya cultural and traditional requirements at reasonable rates for poor and needy without any profit motive. http://www.judis.nic.in 15/19 TCA.896 & 899 of 2018 ..... (t) To perform Sri Rama Navami Mahotsavam every year with traditional solemnity and fervour for purpose of promoting Ramaneeyam and other ancient cultural values as contained in ancient Indian Puranas. 21. contention of appellant/assessee is that in view of above objects of trust to be fulfilled, which is for charitable purpose, income therefrom would be entitled to exemption u/s.11(1) of Act. 22. Whether income derived from letting out of Kalyana Mandapam, Community Hall and Gnanavapi owned by appellant/assessee is income from House property or business income and whether same is liable to be taxed or exempted is other question. contention of assessee is that since utilization of surplus income from running of Kalyana Mandapam, Community Hall and Gnanavapi are for objects of trust, it is exempted from tax. 23. It is to be noted herein that both CIT (Appeals) and ITAT have not discussed about facts in respect of surplus income having been utilized for objects of trust viz., Running educational institution, providing medical relief to poor etc., Absolutely there is no discussion of http://www.judis.nic.in 16/19 TCA.896 & 899 of 2018 facts relating to utilization of earned income from letting out of Kalyana Mandapam and Gnanavapi towards charitable objects such as Education and Medical relief to poor as given in objects of trust. Further, Assessing Officer has not looked into fact as to whether entire income from Community Hall, Kalyana Mandapam and Gnanavapi are utilised for fulfilling objects of trust that is being education Medical relief and relief to poor. In such circumstances, order dated 06.04.2016 passed by Income Tax Appellate Tribunal, Chennai D Bench in ITA.Nos.665 and 664/Mds/2015 for Assessment year 2010-11 and 2011-12 is set aside. matter is remitted back to Assessing Officer for de novo consideration as to whether entire revenue derived from letting out of Kalyana Mandapam, Gnanavapi and Community Hall are utilized for charitable objects of Trust and also to consider as to whether income received from properties of Trust namely, Community Hall, Kalyana Mandapam and Gnanavapi to be classified as income from House Property or business income since income therefrom is utilized for charitable purpose of trust. Assessing Officer shall consider above said questions and decide matter on merits. 24. With above observation, Tax Case Appeals stand allowed and order passed by Income Tax Appellate Tribunal, Chennai 'D' Bench, in http://www.judis.nic.in 17/19 TCA.896 & 899 of 2018 ITA.Nos.665 & 664/Mds/2015 for Assessment Year 2010-11 and 2011-12, dated 06.04.2016, is set aside and matter is remitted back to Assessing Officer for de novo consideration. substantial questions of law are left open to be decided by Assessing Officer by considering issue afresh. No costs. INDEX:Yes/No [N.K.K.,J] [P.V.,J] Internet:Yes/No 15.09.2020 nvsri To 1.The Joint Director of Income Tax (Exemptions) Chennai-600 034 2.The Commissioner of Income Tax (Appeal)-17 , Chennai-34. 3.The Income Tax Appellate Tribunal D Bench, Chennai. http://www.judis.nic.in 18/19 TCA.896 & 899 of 2018 N.KIRUBAKARAN, J. and P.VELMURUGAN, J. nvsri T.C.A.Nos.896 and 899 of 2018 15.09.2020 http://www.judis.nic.in 19/19 Sri Ram Samaj v. Joint Director of Income-tax (Exemptions), Chennai