2024 (1) TMI 1473 - HC - Income Tax

Exemption u/s 11 - scope of proviso to section 2(15) r.w.s 13(8) - asseseee is engaged in carrying out the activity of organizing the Garba event during the Navratri in a highly professional manner. The assessee is also earning income from the various food stalls which were arranged for refreshment - HELD THAT - This Court for same assessee for the Assessment Year 2014-15 raising identical questions of law came to be disposed of by the Coordinate Bench of this Court vide order 2020 (3) TMI 233 - GUJARAT HIGH COURT as held purpose and the dominant object for which an institution carries on its activities is material to determine whether the same is business or not. The object of introducing the first proviso is to exclude the organizations which are carrying on regular business from the scope of charitable purpose . An activity would be considered business if it is undertaken with a profit motive but in some cases this may not be determinative. Normally the profit motive test should be satisfied but in a given case the activity may be regarded as a business even when the profit motive cannot be established/ proved. In such cases there should be evidence and material to show that the 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 the activity undertaken is in fact in the nature of business. This Court has already dismissed the Appeal of the Revenue holding inter-alia that organizing the event like Garba cannot be termed as a business and more particularly the learned counsel for the appellant could not point out any distinguishing facts and circumstances and/or any other law which could prompt us to take a different view than that of taken by the Coordinate Bench of this Court Supra - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions arising under the Income-Tax Act, 1961, particularly concerning the applicability of exemption provisions to the assessee Trust engaged in organizing a cultural event:

(i) Whether the Tribunal was justified in confirming the CIT(A)'s order holding that the assessee's activities were not covered by the proviso to Section 2(15) read with Section 13(8) of the Act, thereby entitling it to exemption under Sections 11 and 12, despite the Supreme Court's guidelines on high mark-ups in analogous cases.

(ii) Whether the Tribunal erred in allowing the corpus fund of Rs.1,58,31,976/- without considering that the assessee fell under the proviso to Section 2(15) read with Section 13(8), thus disqualifying it from claiming exemptions under Sections 11 and 12.

(iii) Whether the Tribunal rightly permitted accumulation of Rs.1,08,79,980/- under Section 11(2) without addressing the applicability of the proviso to Section 2(15) read with Section 13(8) and consequent ineligibility for exemption.

(iv) Whether the Tribunal was correct in allowing accumulation of Rs.9,47,051/- under Section 11(1)(a) without considering the proviso to Section 2(15) read with Section 13(8) and the resulting disqualification from exemption under Sections 11 and 12.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Applicability of proviso to Section 2(15) r.w.s 13(8) and entitlement to exemption under Sections 11 and 12

The relevant legal framework involves the interpretation of Section 2(15) of the Income-Tax Act, which defines "charitable purpose," and its proviso introduced to exclude certain activities that are essentially business in nature from charitable purposes. Section 13(8) further restricts exemption if the trust carries out activities with a profit motive or under business principles.

Precedents cited by the Revenue included Supreme Court rulings in ACIT vs Ahmedabad Urban Development Authority, which emphasized scrutiny of high mark-ups and business-like activities to deny exemption.

The Tribunal and CIT(A) had held that the assessee's activities-organizing the Garba event and running food stalls-did not amount to business under the proviso to Section 2(15). The Court noted that the dominant object of the assessee was charitable, supported by its extensive engagement in health and human services, vocational training, women empowerment, and support to NGOs. The income from Garba event and food stalls was incidental and utilized solely for charitable purposes.

The Court relied heavily on a prior coordinate Bench decision for the preceding assessment year, which had examined identical facts and held that organizing the Garba event could not be characterized as business. The Court underscored that the profit motive test is central but not solely determinative; the activity must be examined for continuity, sound business principles, and profit orientation. Here, no such profit motive was established, and the income was reinvested in charitable activities.

The Court rejected the Revenue's reliance on the Supreme Court's guidelines in the AUDA cases, finding them distinguishable due to factual differences and the absence of a profit motive or business continuity in the assessee's case.

Consequently, the Court upheld the Tribunal's and CIT(A)'s interpretation that the proviso to Section 2(15) was not attracted and the assessee was entitled to exemption under Sections 11 and 12.

Issues (ii), (iii), and (iv): Allowance of corpus fund and accumulation under Sections 11(1)(a) and 11(2)

The legal provisions under Sections 11 and 12 allow trusts to claim exemption on income applied for charitable purposes and accumulation of income subject to prescribed conditions.

The Assessing Officer had disallowed exemption on corpus fund and certain accumulations, treating the assessee as engaged in business under the proviso to Section 2(15). However, the Tribunal allowed these claims, consistent with its finding that the assessee's activities were charitable and not business.

The Court, referencing the coordinate Bench's prior ruling and the concurrent findings by the CIT(A) and Tribunal, agreed that the corpus fund and accumulations were rightly allowed. It emphasized that since the assessee was not covered by the proviso to Section 2(15), the exemptions under Sections 11 and 12, including accumulation and corpus fund claims, were valid.

The Court found no merit in the Revenue's contention that the corpus fund and accumulations should be disallowed on the ground of business activities, as the factual matrix and legal principles did not support such a conclusion.

Treatment of competing arguments

The Revenue's main argument rested on the applicability of the proviso to Section 2(15) and the Supreme Court's decisions in AUDA cases, which involved high mark-ups and clear business activities. The Court distinguished these cases on facts, noting the absence of profit motive and the charitable utilization of income by the assessee.

The assessee's argument, supported by the Tribunal and CIT(A), was that the Garba event was a cultural and charitable activity, not a business, and that income was applied solely for charitable purposes, supported by extensive activities in health, education, and social welfare. The Court found this reasoning persuasive and supported by evidence and prior authoritative decisions.

3. SIGNIFICANT HOLDINGS

The Court reiterated the principle that the dominant object of an institution's activities is pivotal in determining whether it is engaged in business or charitable purposes under Section 2(15). It held:

"The purpose and the dominant object for which an institution carries on its activities is material to determine whether the same is business or not. The object of introducing the first proviso is to exclude the organizations which are carrying on regular business from the scope of 'charitable purpose'."

It further held that profit motive is a key test but not conclusive, and activities must be examined for continuity and business principles to qualify as business.

Applying these principles, the Court concluded that the assessee's activities did not attract the proviso to Section 2(15), entitling it to exemption under Sections 11 and 12, including claims on corpus fund and accumulation of income.

The Court affirmed the Tribunal's order and dismissed the Revenue's appeal as devoid of any substantial question of law, relying on the coordinate Bench's prior ruling with identical facts.