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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
This appeal by the assessee is directed order of the CIT(A), Thrissur dated 18/07/2019 and pertains to the assessment year 2012-2013.
2. The assessee has raised the following grounds of appeal:
1) Because, the learned Commissioner of Income-tax (Appeals) erred in law as well as on facts while confirming the levy of Income-tax by the learned Income-tax Officer;
2) Because, the learned Commissioner of Income-tax (Appeals) has erred in overlooking and summarily rejecting the finding made by the Hon'ble Supreme Court in the case of Assistant Commissioner of Income-tax v/s
Thanthi Trust reported in 247 ITR 785 that "a business whose income is utilised by the Trust or the institution for the purpose of achieving the objective of the Trust of the institution is, surely, a business which is incidental to the attainment of the objective of the Trust". This observation was also made in the case of Commissioner of Income-tax v/s Janaki Ammal Ayyandar Trust 277 ITR 274 (Mad.)-
3) Because, the learned Commissioner of Income-tax (Appeals) did not consider the fact that the activity done by the assesse was accepted by the learned Assessing Officer in the earlier year and granted exemptions, since conducting chitty is one of the objective incidental to the main object as per Memorandum of Association.
4) Because, the learned Commissioner of Income-tax (Appeals) was wrong in concluding that in chit business, only the subscribers are benefited and not the assessee. The assesse being the foreman derives income as foreman commission and GST is attracted. In any business, the customers will be benefited by way of supply of goods or by way of receipt of services.
5) Because, the learned Commissioner of Income-tax (Appeals) ignored the fact that section 13(1)(bb) was omitted by the statute with effect from 01- 04-1984.
6) Because, the learned ITO was wrong in concluding that explanation to section 2(15) is applicable for the assesse who is imparting medical aid ignoring the circular issued by CBDT.
7) The assesse craves leave to add/alter any of the grounds of appeal before or at the time of hearing.
The facts of the case are that the assessee is a Trust registered u/s. 12AA of the Income Tax Act. The assessee is running a hospital as a charity and it is also doing kuri business stated to be for the purpose of charity. The assessee filed its return of income for AY 2012-13 on 29/09/2012 declaring nil taxable income after claiming exemption u/s. 11 of the I.T. Act. The Assessing Officer observed that as
per income and expenditure statement filed by the assessee along with the return of income, the assessee had income from kuri business of Rs.12,28,637/-. The Assessing Officer observed that kuri business cannot be considered an act for the accomplishment of object of charitable activities in terms of section 2(15) of the I.T.
Act. According to the Assessing Officer, the main object of kuri business is to earn profit and is not incidental to charitable activities. Therefore, he denied exemption u/s. 11 of the Act relating to the income of Rs.12,28,637/- from kuri business and assessed the same as business income separately.
On appeal, the CIT(A) observed that the conduct of kuri business would not constitute an activity incidental to the attainment of objectives of the Trust.
According to the CIT(A), the whole rationale behind kuri business was mutual benefit of its members or subscribers whose main aim was to earn profit or avail a financial loan. The CIT(A) observed that the assessee’s case was not covered under first three limbs of section 2(15). Further, it was observed that no advancement of general public utility was carried out as substantial profit was earned by the subscribers and only a minor profit, if at all, was used for charitable activities which in no way would mean that the business or trade was carried out for advancement of general public utility. According to the CIT(A), Section 11 (4A) substituted w.e.f. 1-4-1992 makes it amply clear that subsection (1) or sub-section (2) or section (3) or sub-section (3A) shall not apply in relation to any income of a trust or institute being profits and gains of business unless business is incidental to attainment of objectives of the trust. Thus, a blanket prohibition is created by this amendment. 3 4.1 According to the CIT(A), the reliance placed by the assessee on the decision of the Cochin Bench of the ITAT in the case of Dharmodayam Co. (2003) 84 ITD 259 is misplaced because the decision pertains to cases prior to 1-4-1992 when section 11 (4A) was not on statute. In fact, the Tribunal observed as follows:
"The above findings have to be understood in the light of the law as it stood before the amendment brought in by the Finance (No.2) Act, 1991 with effect from 1-4-1992. The amendment has brought in a blanket prohibition. It prohibits the carrying on of business, unless the business is incidental to the attainment of the objects of the trust, for which separate books are to be maintained. The case laws considered in this order and a/so the Rule in Dharmodayam Co.'s case (supra) (assessee's own case) have to be read in the context of the law as it stood then. There was no total prohibition against the business in the old law. It was possible to carry on business, subject to specified exceptions and restrictions. The dividing line was that there should be no activity for profit. But the position has been changed with effect from 1-4-1992. Therefore, caution may have to be exercised in the application of the Rule in Dharmodayam Co.'s case (supra) from assessment year 1992-93 onwards."
Thus, the Tribunal itself observed that post amendment section 11(4A) creates a blanket prohibition on business unless it is incidental to charitable activity.
4.2 The CIT(A) rejected the contention of the assessee that surplus generated for kuri business was entirely used by the assessee for its charitable purpose on the reason that only a minor surplus was generated in the hands of management and profits of business were earned predominantly in the hands of subscribers and not public at large.
4.3. The Ld. AR placed reliance on the judgment of the Supreme Court in CIT vs.Thanthi Trust (247 ITR 785) wherein it was held has follows:- 4
"As it stands, all that it requires for the business income of a trust or institution to be exempt is that the business should be incidental to the attainment of the objectives of the trust or institution. A business, whose income is utilized by the trust or institution for the purposes of achieving the objectives of the trust or the institution is, surely a business which is incidental to the attainment of the objectives of the trust. In any event, if there be any ambiguity in the language employed, the provision must be construed in a manner that benefits the assessee. The trust, therefore, is entitled to the benefit of Section 11 for the Assessment Year 1992-93 and thereafter."
But the CIT(A) distinguished the above decision of the Tribunal by observing that the proceeds of kuri business in the case of the assessee substantially benefited the members or subscribers and the predominant object was to generate profit in the hands of subscribers. Therefore, the CIT(A) observed that the assessee was not able to prove that its case does not fall in Section 11 (4A). Further, according to the CIT(A), in the case of Thanthi Trust, the Apex Court made an observation as follows:-
"The requirement of section 13(1)(bb) is that the exemption under section 11 will not be available to such a trust that carries on any business unless the business is carried on 'in the course of the actual carrying out of the primary purpose of the trust', that is to say, unless the business is carried on in the course of actually accomplishing a primary purpose of the trust; the business must, therefore, be carried on in the course of the actual accomplishment of relief of the poor, education or medical relief. As an example, a public charitable trust for the relief of the poor, education and medical relief that carries on the business of weaving cloth and stitching clothing by employing indigent women carries on the business in the course of actually accomplishing its primary object of affording relief to the poor and it would qualify for the exemption under section 11."
"Another fitting example would be the business in selling milk and cow-dung manure by the Goshala. Many such instances which are incidental to the primary object of the charities can be illustrated to drivei home the point but certainly the assessee's activity would never fit in any one of them."
4.4 Thus, the CIT(A) brought out the following points:
Business should be carried out in the course of actual carrying out of primary purpose, or accomplishment of primary objective.
Every case has to be analysed based on its own peculiar facts. Kuri
business cannot be said to be carried out in course of accomplishing primary purpose of a religious/charitable trust. It is nowhere comparable to activities or business which the Supreme Court had held to be incidental to primary purpose. The business is not providing any relief to poor or needy people.
4.5 In view of the above, the CIT(A) concluded that running a kuri business is not incidental to objectives of trust and Section 11 (4A) impose a bar on such business and income from Kuri business becomes taxable in the hands of the trust.
Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee-Trust is registered under section 12AA of the I.T. Act and is engaged in providing medical relief to the public. Therefore, the assessee’s case falls under third limb of the section 2(15) of the I.T. Act and the entire activity of the appellant will constitute charitable purpose even if it incidentally involves the carrying of commercial activities. According to the Ld. AR, section 11(4) is squarely applicable to the assessee wherein the Trust is allowed to do incidental business activities for the purpose of the attainment of its objects and the surplus generated from the kuri business was entirely used by the assessee for its charitable purposes and 6 therefore, became eligible for exemption u/s. 11 of the Act. The Ld. AR relied on the judgment of the Supreme Court in the case of CIT vs. Thanthi Trust (247 ITR 785) and of this Tribunal in the case of Dharmodayam Co. cited supra.
5.1 The Ld. AR relied on the CBDT Circular No. 11/2008 dated 19/12/2008 and drew our attention to paras 2.1 to 3.2 which reads as follows:
2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose even if it incidentally involves the carrying on of commercial activities.
2.2 Relief of the poor encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that :
(i) the business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business.
Similarly, entities whose object is education or medical relief would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.
3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is advancement of any other object of general public utility i.e., the fourth limb of the definition of charitable purpose contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 7
3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(35).
3.2 In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.
The Ld. DR submitted that the activities of the kuri business cannot be termed as incidental activities of the assessee-Trust so as to grant exemption under section 11 of the Act.
We have heard the rival submissions and perused the record. Similar issue was considered by the Supreme Court in CIT vs. Dharmodayam Company (1977) 109 ITR 527. In this case, the question which arose was whether the income from business of conducting kuries carried on by the assessee was exempt from tax. The Revenue's contention was that since the institution, though established for promoting an object of general public utility, sought to achieve its purpose out of the income of the business of conducting kuries and hence, in view of the concluding words in section 2(15) the assessee's income was not exempt. The Supreme Court, departing from the view taken in Indian Chamber of Commerce (1975) 101 ITR 796 and notwithstanding the specific observation of Krishna lyer, J. in that case to the effect that the Dharmodayam's case was incorrectly decided by the High Court, affirmed the Kerala High Court's decision in CIT vs. Dharmodayam Company (1974) 94 ITR 113. The Supreme Court clearly held that if a business is held under a trust or legal obligation to apply its income for promotion of an object of general public utility or it is carried on for the purpose of earning profit to be utilised exclusively for carrying out such charitable purpose, the last words in section 2(15) would have no application and the trust would be entitled to exemption. What these last concluding words require is not that the trust or institution, whose purpose is advancement of an object of general public utility, should not carry on any activity for profit at all but that the purpose of the trust or institution should not involve the carrying on of any activity for profit. So long as the purpose does not involve the carrying on of any activity for profit, the requirement of the definition would be met and it is immaterial how the monies for achieving or implementing such purposes are found, whether by carrying on an activity for profit or not. This departure in the case of Dharmodayam Company (1977) 109 ITR 527 9 was justified by the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Manufacturers Association (1980) 121 ITR 1 on the ground that when Krishna lyer, J. made the observations regarding the Kerala High Court's decision in CIT vs. Dharmodayam (1974) 94 ITR 113, the facts in the latter decision were not raised before him. The decision in Dharmodayam (1974) 94 ITR 113 (Ker) was followed by the Madras High Court in the case of CIT vs. Ashoka Charities (1987) 163 ITR 579.
In the case of Dharmaposhanam Co. vs. CIT (1978) 114 ITR 463 wherein one of the objects of the assessee-company, registered under section 25 of the Companies Act, 1956 was to do the needful for the promotion of charity, education, industries, etc., and public good, the Supreme Court observed that the operation of an industry ordinarily envisages a profit making activity and so far as the advancement of public good is concerned, it was open to the assessee-company to pursue a profit-making activity in the course of carrying out that purpose. The Supreme Court, affirming the judgment of the Kerala High Court in the case of Dharmaposhanam Co. vs. CIT (1975) 100 ITR 351 (FB) distinguishing the judgment of the Supreme Court in the case of CIT vs. Dharmodayam Co. (1977) 109 ITR 527 and following the judgment of the Supreme Court in the case of Mohd. Ibrahim Riaz vs. CIT AIR 1930 PC 226 and East India Industries (Madras) P. Ltd. vs. CIT (1967) 65 ITR 611, held that since both the said activities involved profit-making the objects of promotion of industries and "public good" were not charitable purposes and the assessee was not 7.1 Prior to substitution, clause (15) as amended by the Finance Act, 1983 w.e.f.
1-4-1984 reads as follows:
“charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility.”
7.2 Section 2(15) was amended by Finance Act, 2008 w.e.f. 1-4-2009 which reads as follows:
“charitable purpose includes relief of the poor, education, medical relief, (preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest And the advancement of any other object of general public utility.
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity 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, irrespective of the nature of use or application, or retention, of the income from such activity.
Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five lakhs rupees or less in the previous year.
7.3 It means that the assessee-Trust will not be entitled to claim exemption u/s. 11 of the I.T. Act if it was found to have carried on business from which income was derived. Admittedly, the assessee in the present case is engaged in the activity of providing medical relief to the public. During the assessment year under consideration, the assessee earned income from kuri business to the tune of Rs.12,28,637/-. This activity of kuri business cannot be considered as incidental to earning profits of the assessee. None of the primary objects of the assessee-Trust 11 have nexus with the business activity of the assessee. Therefore, the assessee- Trust cannot claim exemption u/s. 11 of the I.T. Act as the activity of kuri business is not done in the course of carrying on the primary objects of the assessee-Trust.
The activity carried on by the assessee-Trust in the form of kuri business is hit by the proviso to section 2(15) of the Act as mentioned in earlier para. We are in full agreement with the findings of the lower authorities that as the proviso to section 2(15) of the I.T. Act puts an embargo on carrying on business by the charitable Trust only if the business is incidental to the main and pre-dominant objects of the the assessee-Trust.
7.4 The Ld. AR placed reliance on the decision of the Cochin Bench of the ITAT in the case of Dharmodayam Co. (2003) 84 ITD 259 which is misplaced because the decision pertains to cases prior to 1-4-1992 when section 11(4A) of the I.T. Act was not on statute. Section 2(15) was amended with effect from 1.4.2009 by Finance Act, 2008.
7.5 Further, a similar issue came up before this Tribunal in the case of Sree Narayana Dharma Paripalana Yuvajana Samithy vs. The Income Tax Officer (Exemption) in & 436/Coch/2019 for the assessment years 2014-15 and 2015-16 wherein it was held as follows:
7.1 In the present case, the main object of the assessee is to offer relief to the poor. However, the assessee is running kuri business. Hence, it is a profit making activity and not incidental to the attainment of the objects of the Trust. 12
By applying income from kuri business for charitable purposes, the assessee cannot say that its prime object is to give relief to the poor. In such circumstances, in our opinion, the CIT(E) is justified in setting aside the assessment order as erroneous and prejudicial to the interests of the Revenue with a direction to the Assessing Officer to redo the same after giving sufficient opportunity of being heard to the assessee.
7.6 Strong reliance has been placed on behalf of the assessee on CIT vs. Dharmodayam Co. (1977) 109 ITR 527 (SC) and it has been seriously urged that this decision concludes the point raised by the assessee herein. We find that it is not possible to accept this. In that case, the income derived by the assessee from kuries was held by the Supreme Court to be exempt u/s. 11(1)(a) of the Act, but the decision proceeded almost entirely on the assumption that the Kerala High Court had found in Dharmodayam Co. vs. Commissioner of Income-tax (1962) 45 ITR 478 (Ker.), in a case between the same parties, that the kuries business was itself held under trust for charitable purpose and from that the court inferred that the business activity was not undertaken by the assessee in order to advance any object of general public utility. No such finding has been rendered by the lower authorities in the present case. It is noticed that the court cautioned in its judgment in Commissioner of Income-tax vs. Dharmodayam Co. (1977) 109 ITR 527 (SC) that the decision was strictly limited to the facts of that case.
7.7 Further, the decision in the case of Dharmodayam Co. vs. Commissioner of Income-tax was distinguished by the Supreme Court in the case of Dharmaposhanam Co. vs. CIT (1978) 114 ITR 463 wherein one of the objects of the assessee-company, registered under section 25 of the Companies Act, 1956 was 13 to do the needful for the promotion of charity, education, industries, etc., and public good by observing that the operation of an industry ordinarily envisages a profit making activity and so far as the advancement of public good is concerned, it was open to the assessee-company to pursue a profit-making activity in the course of carrying out that purpose.
In the result, appeal of the assessee is dismissed. Order pronounced in the open court on 8th January, 2020 sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 8th January, 2020 GJ Copy to:
1. 1. M/s. Bharathakshemam, St. Thomas College Road, East Fort, Thrissur-680 005.
2. The Income Tax Officer, Ward-1(1), Thrissur. 3. The Commissioner of Income-tax(Appeals), Thrissur. 3. The Pr. Commissioner of Income-tax, Thrissur. 4. D.R., I.T.A.T., Cochin Bench, Cochin. 5. Guard File. By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin
Date 1. Draft Order dictated on 07/01/2020 Sr.PS 2. Draft Order placed before author 08/01/2020 AM 3. Approved draft comes back Sr. PS 4. Fair order placed before the author. AM 5. Fair order placed before the Second JM Member for signature 6. Pronouncement on 7. File sent to the Bench Clerk 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.