The assessee trust filed its return of income electronically for the Asst.
Year 2017-18 vide acknowledge No.270521161301017 on 30-10-2017
declaring Nil income after claiming exemption u/s 11 of the I.T. Act, 1961.
The case has been selected by CASS. Notice u/s 143(2) was issued through
e-mail on 20.08.2018 to the assessee’s e-mail ID registered with the
department.
2. Subsequently, a detailed questionnaire along with the notice u/s.
142(1) r.w.s 129 dated 27-08-2019 was sent by e-mail, as there was change
in incumbent. In response to the above notice, the assessee furnished the
details called for electronically through E-Proceedings.
3. The trust has been granted registration u/s 12A by the Commissioner
of Income tax, Karnataka-II, Bangalore vide No.Accts/718/10A/Vol-B-I/K-3
dated 28-06-1973.
4.1 The objectives of the society for which the society is
established is:-
a) To construct a Kalyana Mantapam to enable all persons to perform –
marriages and religious and social functions, and to provide amenities
like water, utensils, furniture, electricity etc.
b) To provide facilities and amenities for the education of the poor,
irrespective of their casts or religious or community, in the form of free
scholarships for indigenous as well as foreign education and if
necessary grant loans for such purposes in deserving cases;
c) To provide medical facilities to those who are in need, to construct
maternity wards and the like in and around Bangalore. Such amenities
and facilities can also be provided in other areas at the discretion of
the trustees.
d) To provide accommodation and hostel facilities, both boarding and
lodging, to poor students irrespective of religion or community or
caste.
e) To receive donations or contributions for the benefit of the trust fund
from philanthropic persons and persons charitably disposed for
carrying on the activities for which the trust is created.
f) To start, establish, maintain, and conduct any such activity of public
utility or charity not inconsistent with the above objects.
These were the original objects as per the deed of trust executed on
the 7th day of March, 1962. Subsequently vide supplementary deed of trust
dated 09/06/2016, the following objects were included:-
g) To promote, education, including special education and employment
enhancing vocation skills especially among children, women, elderly, and the
differently abled and livelihood enhancement projects.
h) To promote empowering women, setting up and administer homes and
hostels for women and orphans and old age homes, day care centers and
such other facilities for senior citizens.
i) To provide financial assistance to sportsperson involving in rural
sports, nationally recognized sports, Paralympics and Olympic sports.
j) To donate to other public charitable, religious organizations with
similar objects in accordance with relevant provisions of the Income-tax Act,
1961.
4.2. It can be seen from the above 10 objects that the first object belongs
to the last limb of charity defined u/s. 2(15) being the Advancement of any
other object of general public utility, While the rest of the objects are
charitable and belonging to the main limbs of charity, the solitary first object
or the primary objective determines the character of the institution. Viewed
in this angle, it can be seen that the trust belongs to the last limb of
charity or the residual limb, more particularly when the financials of the
assessee depict a scenario that this primary object has been seriously
pursued in the case of the assessee trust for the year under consideration.
5. As seen from the records, the assessee’s predominant activity relates
to running and maintenance of 2 marriage halls, one at Chennai and the
other at Bangalore. As seen from the financials, this activity of running and
maintenance of a marriage hall is pursued earnestly in the course of actual
carrying out of such advancement of any other object of general public
utility. Since, the object and the performance match, this activity becomes
the principal activity in the line of trade or business and not incidental to the
main objects of the trust. In short, when the object of the trust is to run
Kalyana mantapams, when such object is complied by operating the
marriage halls, the provisions of Sec. 11(3A) do not come in to play, but at
the same time, proviso to sec. 2(15) comes in to operation.
6. Therefore the entire purpose of scrutiny was directed to obtain
explanation from the assessee against the enforcement of the provisions of
Sec. 13(8). Further, the computation of income did not adhere to the
arithmetic prescribed in circular No. 5-P(LXX-6) of 1968, by CBDT dated
19/06/1968. The notices u/s. 142(1) contained the corresponding queries and
the consequential replies obtained were carefully examined.
7.1. The first issue relates to computation of income. The gross receipts as
per P & L account is Rs. 3,71,58,499/-. It includes rent from marriage halls of
Rs. 2,79,21,492/-, Interest of FDs of Rs. 91,63,247/- and Miscellaneous
receipts of Rs. 73,710/-. The revenue expenditure towards charitable
purposes is quantified to be Rs. 2,58,64,782/-. This expenditure includes cost
of maintenance of both the marriage halls and charities and donations made
of Rs. 1,03,42,531/- (Bangalore Unit) and Rs. 48,75,694/- (Chennai Unit)
summing up to Rs. 1,52,18,225/-. The balance expenditure of Rs.
1,06,46,557/- is incurred for operations and maintenance of marriage halls.
In the computation of income, the assessee has treated the sum total of both
the expenditure as application of income.
7.2. While both the items of expenses are to be treated as application of
income, the Circular No. 5-P(LXX-6) of 1968, by CBDT dated 19/06/1968
ordains an exclusive formula in such a situation. For easier comprehension,
the content of the entire circular is captured and provided below:-
1. In Board’s Circular No. 2-P(LXX-5), dated 15-5-1963, it was explained
that a religious or charitable trust, claiming exemption under section
11(1), must spend at least 75 per cent of its total income for religious
or charitable purposes. In other words, it was not permitted to
accumulate more than 25 per cent of its total income. The question
has been reconsidered by the Board and the correct legal position is
explained below.
2. Section 11(1) provides that subject to the provisions of sections 60
to 63, “the following income shall not be included in the total income of
the previous year. . . .” The reference in clause (a) is invariably to
“Income” and not to “total income”. The expression “total income” has
been specifically defined in section 2(45) as “the total amount of
income computed in the manner laid down in this Act”. It would,
accordingly, be incorrect to assign to the word “income”, used
in section 11(1)(a), the same meaning as has been specifically
assigned to the expression “total income” vide section 2(45).
3. In the case of a business undertaking, held under trust, its “income”
will be the income as shown in the accounts of the undertaking.
Under section 11(4), any income of the business undertaking
determined by the ITO, in accordance with the provisions of the Act,
which is in excess of the income as shown in its accounts, is to be
deemed to have been applied to purposes other than charitable or
religious, and hence it will be charged to tax under sub-section (3). As
only the income disclosed in the account will be eligible for
exemption under section 11(1), the permitted accumulation of 25 per
cent will also be calculated with reference to this income.
4. Where the trust derives income from house property interest on
securities, capital gains, or other sources, the word “income” should
be understood in its commercial sense, i.e., book income, after adding
back any appropriations or applications thereof towards the purposes
of the trust or otherwise, and also after adding back any debits made
for capital expenditure incurred for the purposes of the trust or
otherwise. It should be noted, in this connection, that the amounts so
added back will become chargeable to tax under section 11(3) to the
extent that they represent outgoings for purposes other than those of
the trust. The amounts spent or applied for the purposes of the trust
from out of the income, computed in the aforesaid manner, should be
not less than 75 per cent of the latter, if the trust is to get the full
benefit of the exemption under section 11(1).
5. To sum up the business income of the trust, as disclosed by the
accounts plus its other income computed as above, will be the
“income” of the trust for the purposes of section 11(1). Further, the
trust must spend at least 75 per cent of this income and not
accumulate more than 25 per cent thereof. The excess accumulation if
any, will become taxable under section 11(1).
In such a situation , when it is substantiated that the property of the Trust is
"business", it is the quantum of income or surplus of such business and not
the receipts or total income of the business which determines the exemption
@ 15 % u/s 11(1)(a) .
7.3. It is clear from the memo of computation of taxable income; the
assessee trust has failed to follow the arithmetic emphasized by the Circular,
which has been upheld by various courts. The Circular is indeed assessee
friendly. In a situation, if the provisions of Sec.13 become applicable it would
be unfair to bring the total income to Tax, on denial of Exemption u/s 11. It
would actually lead to a chaotic situation where, even the expenses parted
would be brought to tax. Therefore the Board thought it sensible to treat the
surplus of Income over the expenditure as the value to compute the
exemption u/s 11(1). Following the rationale expressed unambiguously by
the said Circular , the computation of the assessee treating the Business
receipts as "income" and Business Expenditure in earning such income as
"application" is not accepted and hence discarded , only to re-compute the
income as envisaged by the circular relied upon.
7.4. The income of a charitable or religious organization is to be computed
in a commercial sense and also in the sense of what is actually available for
charitable purposes. Therefore, the income for the purpose of section 11
should be the net income after deducting the expenditure incurred towards
earning such income. In the case of CIT vs. Rao Bahadur Calavala Cunnan
Chetty Charities (1988)(135 ITR 485) the Honourable Madras High Court
observed that –
“in the absence of any definition of ‘income’, one has to proceed
on the basis of it as a concept, as understood in general parlance.
Income would ordinarily exclude a receipt by way of capital. Mere
Gross Receipts cannot also be taxed as income. It may be broadly
stated that what is taxed is not also any gross receipts. The
receipts must be revenue in nature and is to be taxed after
excluding the necessary outgoings”.
7.5. Therefore, the computation requires to be modified and the one
provided by the assessee is not acceptable. The computation as provided by
the assessee and the modified version is provided in the same tabulation in
para no. 9 below. However, the taxable income arrived as a result of the
above discussion would be immaterial since the entitlement of charitable
status has become questionable due to invocation of sec. 13(8) as per the
discussion made in the subsequent part of this order.
8.1. On verification of the particulars of charity and donations made, it is
seen that out of the total application of Rs. 1,52,18,225/-, the assessee has
spent Rs. 38,96,405/- towards education, Rs. 18,26,741/- towards medical
relief and Rs. 94,95,079/- towards general. While the medical, education and
general relief has been extended partially to the beneficiaries directly and
the balance in the form of donations. In the tabulation provided containing
details of donations made during the F.Y. 2016-17, a sum of Rs. 24,34,666/-
is categorized as religious donations. Rs.15,00,000/- has been paid to
Devagiri Venkateshwara Swamy Trust and other religious institutions. For
easier comprehension, the tabulation submitted is captured and provided
below:-
Sl. No Name of the Donee Amount (in Rs.)
1. Sanmana Pollochi Sangam 3,10,000
2. Kanyaka Parameshwari Temple 48,000
3. Srirama Janaki Mandir 2,24,000
4. Gurusankara Swamy Narayana Trust 1,00,000
5. Devagiri Venkateshwara Swamy Trust 15,00,000
6. Sri Rama 1,00,000
7. Sri Srinivasa Devasthana Trust 25,000
8. Sriramulu Sannidhi 1,00,000
9. Srisaila Temple 2,666
10 Swami 25,000
TOTAL 24,34,666
8.2. The assessee was questioned about the correctness of claim of
eligibility of application of income towards religious purposes when its
objects are charitable. As seen in the objects enlisted above, the first 9
objects signify that the assessee is charitable and not religious. The last
tenth object provides for donation to other charities with similar objects. In
such a situation when the object of the society is not religious by character
and when the title carries the suffix “charities”, the donations made for
religious purposes defeats the objects of the trust and hence the same is not
allowable.
8.3. The High Court of Jammu and Kashmir in the case of Ghulam Mohidin
Trust v. Commissioner of Income-tax reported in [2001] 114 TAXMAN
543 (J & K) held that :
“Whether in view of absolute discretion given to trustees in
instant case to spend whole of income for any of several objects
of trust which did not enure for benefit of public but for benefit of
particular religious community, even if trust was held to be partly
charitable and partly religious, it would be disentitled to benefit
of exemption under section 11 - Held, yes “
In the present case, the assessee stands at a lower pedestal of being wholly
charitable as per its objects.
8.4. Even if the recipients had charitable objects coupled with that of their
principal religious objects, the donation given will still not be entitled for
exemption. It is clear from the decisions of the Privy Council in Mohammad
Ibrahim Riza Malak v. CIT AIR 1930 PC 226 and the Supreme Court in
the case of East India Industries (Madras) (P.) Ltd. v. CIT [1967] 65
ITR 611 that where the objects are distributive, each one of the objects
must be charitable in order that the trust might be upheld as a valid charity.
The reason is that in such cases, no definite part of the property or its
income is allocated to charitable purposes and it would be open to the
trustees to apply the whole income to any of the non-charitable objects. The
fact that the income is applied only for charitable purpose in such a case
would be immaterial.
8.5. This position was reiterated by the Supreme Court in Yogiraj Charity
Trust v. CIT [1976]103 ITR 777. In that case, the Supreme Court held
that if one of the objects of the trust is not of a religious or charitable nature
and the trust deed confers full discretion on the trustees to spend the trust
funds for an object other than of a religious or charitable nature, the
exemption from tax under section 4(3)( i ) of the Indian Income-tax Act, 1922
(corresponding to section 11(1) of the 1961 Act) would not be available to
the assessee. The Supreme Court also held that where in a trust deed
providing for many charitable objects the trustees were given uncontrolled
discretion to spend the whole of the trust funds for any of the non-charitable
purposes of the trust, the income of the trust would not be exempt from tax
under section 4(3)( i ) of 1922 Act.
8.6. Additional reliance is placed on the following Apex court decisions:
(i) Upper Ganges Sugar Mills Ltd. v.
Commissioner of Income-tax [1997] 93
TAXMAN 645 (SC)
(ii) Commissioner of Income-tax v. Palghat Shadi
Mahal Trust [2002] 120 TAXMAN 889 (SC).
8.7. Sub-section (4) of section 115 of the Delhi Municipal Corporation Act,
1957 explain:-
“Charitable purpose' includes relief of the poor,
education and medical relief but does not include a
purpose which relates exclusively to religious teaching;"
It is clear from the decision of the Delhi Municipal Corporation Act, 1957 that
Religion is not charity.
8.8 The word “such” found in the provisions of Sec. 11 (1)(a) has to be
given utmost relevance. Based on the discussion made above, a sum of Rs.
24,34,666/- is not treated as application of income for “such” charitable
purposes for which the assessee trust has come in to existence.
9. Based on the discussion made above, computation of income fo the
assessee is modified here under. However, as stated earlier, this stage of
conclusion is rather academic in nature, since the deliberations in the
succeeding paragraphs, does result in disentitlement of the balance
application of income, as well.
Particulars Amount(in Rs.) Amount(in Rs.)
As per As per
assessee’s modification
computation
Gross Receipts [A] 3,71,58,449 3,77,58,449
Business Income [B] 2,79,21,492 2,79,21,492
Expenditure to earn income [C] NIL 1,06,46,557
Income for the purposes of application 2,79,21,492 1,72,74,935
from business [D=B-C]
Interest Income [E] 91,63,247 91,63,247
Miscellaneous receipts [F] 73,710 73,710
Income as per Sec. 11(1)(a) [G] 3,71,58,449 2,65,11,892
Permissible Accumulation U/s. 11(1)(a) 55,73,767 39,76,784
[H= 15% of G]
Income to be applied [I = G-H] 3,15,84,681 2,25,35,108
Application of income(Revenue) [J] 2,58,64,782 1,52,18,225
Less: Religious donations [K] NIL 24,34,666
Eligible Application of Income – Revenue 2,58,64,782 1,27,83,559
[L=J-K]
Application of income(Capital) [M] 23,81,464 23,81,464
Accumulation u/s. 11(2) [N] 33,38,436 33,38,436
Total Application of income 3,15,84,681 1,85,03,459
[O = L+M+N]
Taxable income due to shortfall in NIL 40,31,649
application [P = I – O]
Taxable income at this juncture is Rs. 40,31,650/-.
10. Enforcement of proviso to Sec. 2(15) r.w.s. 13(8):
10.1. The assessee possesses composite objects but the foremost in them is
“To construct a Kalyana Mantapam to enable all persons to perform –
marriages and religious and social functions, and to provide amenities like
water, utensils, furniture, electricity etc.’’ The Hon’ble Madras High Court had
the occasion to adjudicate an identical issue but under a different set of
facts. In the case of Ramalingam Charities v. CIT reported in 12
taxmann.com 114 (Mad.) held that if the objects of the Trust are composite
in nature, it cannot be held to be wholly existing for the purpose of
education. In the present case, the object of the Trust includes running a
Kalyana Mandapam which is certainly not an objective belonging to the main
limbs of charitable purpose. It is for the object of general public utility and it
is this activity which also generates surplus for the Trust.
10.2 There is plethora of judicial decisions which under similar
circumstances in the past had held that running business enterprises is also
charitable when the application of income was directed towards charity.
Foremost among others is the Apex court decision in the case of Asst. CIT v.
Thanthi Trust [2001] 247 ITR 785 (SC). But the same cannot come to the
rescue of the assessee, since the character of “application of income” serves
no purpose and the character of “Income” as gained preponderance in the
newly inserted proviso, thereby making these earlier precedents inapplicable
in the altered scenario. The claims to get income exempted lose relevance
when the transactions undertaken by the Trust existing for the purpose of
charity being the object of general public utility are business in nature and
hit by proviso to section 2(15). For easier understanding the relevant portion
of the statute is reproduced below:
“ 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.”
Therefore, the transactions squarely fall under the ambit of the proviso to
section 2(15).
10.3 The Speech of the Finance Minister in the Parliament explaining the
compulsion to insert the proviso to section 2(15) as detailed in Finance Act,
2008 - Explanatory Notes on provisions relating to Direct Taxes Circular No.
1/2009, dated 27th March, 2009 is extracted below:
5. Streamlining the definition of “charitable purpose”
5.1 Sub-section (15) of section 2 of the Act defines “charitable
purpose” to include relief of the poor, education, medical relief, and
the advancement of any other object of general public utility. It has
been noticed that a number of entities operating on commercial lines
are claiming exemption on their income either under sub-section (23C)
of section 10 or section 11 of the Act on the ground that they are
charitable institutions. This is based on the argument that they are
engaged in the “advancement of an object of general public utility” as
is included in the fourth limb (at present sixth limb) of the current
definition of “charitable purpose”. Such a claim, when made in respect
of an activity carried out on commercial lines, is contrary to the
intention of the provision.
5.2 With a view to limiting the scope of the phrase “advancement of
any other object of general public utility”, sub-section (15) of section 2
has been amended to provide 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. Scope of this amendment
has further been explained by the CBDT vide its circular no.11/2008
dated 19th Dec 2008.
5.3 Applicability: This amendment has been made applicable with
effect from 1st April, 2009 and shall accordingly apply for assessment
year 2009-10 and subsequent assessment years.“
10.4 The Supreme Court’s decision in the case of Thanthi Trust [2001] 247
ITR 785 was held in favor of Revenue, for the years when Sec 13(1)(bb) was
in vogue under the statute. It once again assumes significance and becomes
enforceable when the phrase "not involving the carrying on of any activity
for profit" in the earlier definition of section 2(15) and contents of Section
13(1)(bb) have got revitalized under a new proviso to Section 2(15). The
phrase “carrying on of an activity for profit” is substituted with a wider
connotation in the form of “the carrying on of any activity in the nature of
trade, commerce or business “. The Apex court In the State of
Gujarat v. Raipur Mfg. Co. [1967] 19 STC 1 (SC) stated that:
“business is normally with the object of making profit.”
In State of Andhra Pradesh v. H. Abdul Bakhi & Bros. [1964] 15 STC 664, the
Supreme Court elucidated that:
“the expression " business " is an extensively used word of
indefinite import. In the taxing statutes it is used in the sense of
an occupation or profession which occupies time, attention or
labour of a person and normally associated with the object of
making profit.”
The means, methods, austerity, selflessness, service motto etc., involved
while performing the charity, loses significance when a surplus is earned
through such business activity.
10.5 So in its substance, essence and form the new insertion is nothing but
a superior substitute of the earlier definition to charitable purpose under
section 13(1)(bb). The narration of the income in the “Income and
Expenditure Accounts”, the contents and the objects of the Society, the
characteristics of the property, the nature of Receipts (Hall rents amenities),
and the characteristics of the services rendered by themselves affirm that
the nature of income or activity is “Business” in nature. Further the Madras
High Court in the case of Halai Nemon Association (2000) 111 Taxman 326
(Mad) has held that running and maintenance of a Marriage Hall and
providing connected amenities is a business activity. Since the Society
whose charitable purpose is an object of General Public Utility has ventured
in the nature of trade, commerce or business during the year and had also
received a fee as consideration for the services rendered , which comprises
more than 20 % of the gross receipts, the proviso to section 2(15) gets
invoked, inexorably.
10.6 There is a difference between property or business held under trust
and business carried on by or on behalf of the trust. This distinction was
recognized by the Supreme Court in the case of Addl. CIT vs. Surat Art Silk
Cloth Manufacturers Association (1980) 121 ITR 1 wherein it was observed
that if a business undertaking is held under trust for a charitable purpose,
the income there from would be entitled to the exemption u/s. 11(1) of the
Act. In the present case, the running of Kalyana Mandapams was not held
under trust, but it was business commenced/carried on by the Trust,
subsequent to the formation of trust.
10.7 Though the business was commenced by the Trust and it was carried
on by the Trust after its formation, it cannot be said to constitute property
held under trust. U/s. 11(4), it is only the business which is held under the
trust that would enjoy exemption in respect of its income u/s. 11(1) of the
I.T. Act and there is a distinction between the objects of a trust and the
powers given to the trustees to effectuate the purpose of the trust. Though
the objects of the trust were charitable, they were mere powers conferred
upon the trustees to carry on the business and the profits from such business
would benefit the charitable objects.
10.8 The running of kalyanamandapams were not at all in existence at the
time of formation of the trust so as to say that the business is property held
under trust. The business carried on behalf of a trust rather indicates a
business which is not held in trust, than a business of the trust run by the
assessee. In this case, the activities of running kalyanamandapams were
carried on by the assessee for and on behalf of the trust and it were not
business held under trust. Section 11(1) of the Act confers exemption from
tax only where the property is itself held under trust or other legal obligation;
it does not apply to cases where a trust or legal obligation is not created on
any property but only the income derived for a charitable or religious
purpose.
10.9 Surplus funds of a trust, which was claimed to be exempt on the
footing that it was property held under trust within the meaning of sec. 11(1)
of the Act, was not property held under trust since the property from which
the surplus was generated was itself not held under trust. In other words,
merely carrying on business for and on behalf of the trust and applying the
profits of the same for the object of the trust does not entitle for exemption
u/s. 11(4) of the Act .
10.10 Since the proviso to section 2(15) is invoked, the provisions of section
11 & 12 become inoperative. The entire earnings are the income of the
society. While the revenue expenditure corresponding to such income
earning activity is alone allowed expenses of capital nature and expenditure
not connected to the income earning activity are not eligible to be allowed as
expenditure, since section 11 has become redundant in this case for the year
under consideration.
10.11 The distinguishing characteristic between “property being
business held under trust” and that of “business for and on behalf of
the trust” was clearly illustrated by the Hon’ble Supreme Court in the case
of Thanthi Trust 247 ITR 785 ( SC). For easier comprehension, the content of
Para 9 of the said order which deliberates on this crucial aspect is captured
and provided below:
“9. Dr. Pal, the learned counsel for the trust, drew a distinction
between a business that was held under trust and a business
that was carried on by a trust. He submitted that there was a
difference between income derived from a business that was a
property or part of the corpus of a public charitable trust and
income derived from a business which was carried on by such a
trust but which was not held under trust in other words, there was
a legal obligation to use the income for the public charitable
purpose of the trust in the first case and not in the latter. This
Court had noted the distinction in Addl. CIT v.Surat Art Silk Cloth
Mfrs. Association [1980] 121 ITR 1, CIT v. P. Krishna Warriar [1964]
53 ITR 176, CIT v. Dharmodayam Co. [1977] 109 ITR 527 . The
provisions of section 13(1)(bb) applied only to a public charitable
trust which carried on a business that it did not hold in trust. They
did not apply to a public charitable trust, such as the trust, which
held the business in trust.”
In the case of Thanthi Trust (supra) the business of running a
newspaper publishing house was “property held under Trust” since it formed
the corpus of the Trust and was not the creation of the Trust. But in the case
under consideration, the business of constructing and running the Marriage
Halls was the creation out of funds that belonged to the Trust. As stated
earlier, the provisions of section 13(1)(bb) has got a new reincarnation in the
form of proviso to section 2(15) with a wider definition. Therefore, when the
business of Operation and maintenance of Marriage halls is not “property
being business held under trust” but “property being business for and on
behalf of the trust”, the provisons of section 11(4) are inapplicable and
proviso to section 2(15) gets squarely invoked.
10.12 The taxation of income is not confined to the income derived from the
units which operate like a business entity. Section 13(8) prohibits
applicability of section 11 & 12 in respect of any income of the society and is
not restricted to the business activity of the Society. Therefore, the surplus
derived by the Society is entirely brought to taxation. The amount spent
towards charitable and religious purposes were not incurred to earn the
income brought to tax and hence not allowable as expenditure. In the
absence of exemption u/s 11 & 12, the same is not treated as application as
well.
10.13 The Delhi High Court in the case of Pt. Kanahya Lal Punj Charitable
Trust vs DIT(E) reported in 297 ITR 66 has held that :
“once the exemption under Section 11 and 12 is denied, the
Assessee would not get any protection from Section 11 and 12
and the voluntary contribution would be treated as income, as per
definition of income give in Section 2(24) of the Act, according to
which income includes the voluntary contribution receipts by a
trust credited wholly or partly for charitable or religious purposes
or by an institution established wholly or partly for such purposes
meaning thereby once the exemption under Section 11 and 12 of
the Act is withdrawn all the receipts of the trust either by
voluntary contribution or income derived from its property would
be an income of the trust in a normal course and is chargeable to
tax.”
10.14 The assessee is treated as an AOP for the purpose of taxation.
Accordingly, in the absence of eligibility u/s 11 & 12, the provision of section
14 comes into play. Therefore, in respect of properties, which fetch business
income, depreciation for the year is allowed.
10.15 Based on the discussion made above, the taxable income is re-
computed as under:-
Particulars Amount(in Rs.)
As per
modification
Gross Receipts [A] 3,77,58,449
Business Income [B] 2,79,21,492
Expenditure to earn income [C] 1,06,46,557
Income for the purposes of application 1,72,74,935
from business [D=B-C]
Interest Income [E] 91,63,247
Miscellaneous receipts [F] 73,710
Income as per Sec. 11(1)(a) [G] 2,65,11,892
Permissible Accumulation U/s. 11(1)(a) 0
[H= 15% of G]
Exemption u/s 11(1)(a) on Application 0
Exemption u/s 11(1)(d) 0
Less: Depreciation in respect of Addition to 2,25,129
Fixed Assets made during the year
Taxable income due to enforcement of 2,62,86,763
13(8)
11. Since the assessed income is higher that the returned income,
initiation of the penal proceedings under section 270A is warranted and the
same is undertaken separately by issue of notice u/s 274(1).
12. The amount spent towards charitable purposes, are not incurred to
earn the income brought to tax and hence not allowable as expenditure. In
the absence of exemption u/s 11 & 12, the same is not treated as application
as well.
Taxable Income : Rs 2,62,86,763/-
Computation of tax payable is appended.
.Assessed u/s 143(3) of the I.T.Act, 1961.
Issue demand notice accordingly.
