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2025 (5) TMI 683 - AT - Income TaxDenial of benefit of exemption u/s 11 - objects of assessee falls under the category of advancement of any other object of general public utility - assessee is hit by the proviso to section 2(15) of the I.T. Act its objects are no more charitable objects - whether the proviso to section 2(15) of the Act disentitles the assessee from availing exemption u/s. 11 and 12 despite it being registered u/s. 12A? HELD THAT - Intention to earn profit is an essential ingredient for an activity to be considered in the nature of trade commerce or business. If a charitable trust or institution charges a nominal profit above cost in respect of its activities it would not fall within the vice of proviso to section 2(15). As elaborately dealt in the above paragraphs in the present case assessee has not even covered its expenses in respect of activities offered by it there being deficit in its income and expenditure statement. Furthermore ld. Assessing Officer has also not disputed this fact who has held these to be mutual activities. As per case of Ahmedabad Urban Development Authority 2022 (10) TMI 948 - SUPREME COURT and Media Research Users Council 2024 (2) TMI 328 - ITAT MUMBAI we summarise our conclusions on the core issue as stated above. We find that assessee has been held to be a charitable institution carrying on the object of General Public Utility which is primarily engaged in promotion of sports including swimming squash gymnasium other sports activities like yoga aqua aerobics table tennis bridge billiards and snooker. Activities carried out by the assessee has led to nurturing of talent in all these sports fields details of which are elaborately discussed by ld. CIT(A). Assessee has also placed on record details of performance and achievements of various sports persons in the above stated sports at national as well as international levels. Keeping the litigation history and the entire discussion made above in perspective it is held that assessee is a charitable trust and principles of mutuality has been erroneously applied by the ld. Assessing Officer for denying the claim of exemption u/s. 11 of the Act. Almost for four decades assessee has been found to be pursuing these activities for charitable purpose which is available for the benefit of persons of all communities and castes. It is undisputed that promotion of sports falls within the charitable cause of advancement of any other object of General Public Utility. Merely because proviso has been inserted in Section 2(15) it does not render activities which has been consistently found to be charitable to become commercial in nature. We find that in absence of intention to generate profit from the activities undertaken by the assessee in view of continuous deficit the same cannot be regarded as commercial in nature. AO considered the activities on the principles of mutuality. In our considered view as discussed in detail in the above paragraphs once the activities are held to be mutual the same cannot be simultaneously held in the nature of trade commerce or business because a person cannot trade with oneself. Application of principles of mutuality has already been negated by us also the activities of the assessee are held not to be in the nature of trade commerce or business. It is adequately demonstrated by the assessee that fees/charges recovered by it for its activities are to meet its cost which in fact is not sufficient since assessee incurs deficit year on year basis which is met out from the interest earnings. Thus in view of these findings and observations we hold that assessee is not hit by the proviso to Section 2(15) of the Act and thus claim of exemption u/s. 11 is allowed. Accordingly grounds raised by the Revenue are dismissed.
The core legal questions considered in these appeals are:
1. Whether the assessee, a charitable trust registered under section 12A of the Income Tax Act, is entitled to exemption under section 11 despite its objects falling under the category of "advancement of any other object of general public utility" as defined in section 2(15) of the Act. 2. Whether the proviso to section 2(15), which excludes activities involving trade, commerce or business carried on for a fee or other consideration from the definition of charitable purpose, applies to the assessee's activities and disqualifies it from claiming exemption under section 11. 3. Whether the income earned by the assessee from membership fees, sale of food, liquor, and facilities such as playing cards amounts to carrying on a trade or business, thereby attracting the proviso to section 2(15) and disentitling the assessee from exemption. 4. Whether the assessee, being an organization of members and thus a mutual organization with commercial objectives, can claim charitable exemption under section 11. Issue-wise Detailed Analysis: Issue 1 & 2: Applicability of Proviso to Section 2(15) and Entitlement to Exemption under Section 11 Relevant legal framework and precedents: Section 2(15) of the Income Tax Act defines "charitable purpose" to include advancement of any other object of general public utility (GPU). The proviso inserted by the Finance Act, 2008, effective from 1 April 2009, excludes from charitable purposes any advancement of GPU objects that involves activities in the nature of trade, commerce or business, or rendering services related thereto, for a fee or other consideration. The Supreme Court judgment in ACIT vs. Ahmedabad Urban Development Authority (2022) is pivotal, as it interprets the proviso and clarifies that activities charging only cost or nominal markup do not constitute trade or business, and that a charitable institution may generate incidental profits within prescribed quantitative limits without losing exemption. Court's interpretation and reasoning: The Tribunal analyzed the assessee's objects and activities, noting that the assessee was formed as a public charitable trust in 1970 with the main objects of constructing and maintaining swimming pools and other sports facilities for the benefit of all communities, and promoting aquatic and other sports. The assessee is registered under section 12A and has been consistently recognized as a charitable institution for over four decades. The Tribunal observed that the proviso to section 2(15) applies only if the activities are in the nature of trade, commerce or business carried on for a fee or other consideration. It held that the assessee's activities do not amount to trade or business, as the fees charged are substantially below the cost incurred, resulting in a deficit, and are thus incidental to the charitable objects. Key evidence and findings: The assessee provided detailed financial statements showing that the income from sports and other activities was significantly lower than the expenditure incurred, excluding interest income. Charges for facilities such as swimming pools, gymnasium, squash, bridge, and billiards were nominal and aimed at cost recovery rather than profit-making. The assessee also demonstrated extensive public benefit through coaching, competitions, and training of athletes including those with disabilities, which further supported its charitable character. Application of law to facts: Applying the Supreme Court's test from Ahmedabad Urban Development Authority, the Tribunal found that the assessee's activities fall within the ambit of charitable purposes as advancement of GPU, and the proviso to section 2(15) does not apply since the activities are not carried on as trade or business for profit. The Tribunal rejected the Assessing Officer's view that the activities were commercial or mutual, noting that mutuality principles cannot be used to simultaneously hold the activities as trade or business. Treatment of competing arguments: The Revenue argued that the assessee's income from membership fees, sale of food, liquor, and playing cards constituted trade or business, triggering the proviso to section 2(15) and disentitling exemption. The Tribunal rejected this, relying on the assessee's financials showing losses on these activities and the Supreme Court's interpretation that nominal or cost-based charges do not amount to business. The Tribunal also noted the long-standing recognition of the assessee's charitable status by various authorities and courts, including the High Court and earlier Tribunal decisions. Conclusions: The proviso to section 2(15) does not apply to the assessee's activities, and it remains entitled to exemption under section 11. The activities are charitable in nature, and the income from ancillary activities is incidental and not commercial. Issue 3: Whether Income from Ancillary Activities Amounts to Trade or Business Relevant legal framework and precedents: The proviso to section 2(15) excludes from charitable purposes any activity in the nature of trade, commerce or business carried on for a fee or other consideration. The Supreme Court in Ahmedabad Urban Development Authority clarified that charging fees on cost or nominal markup basis does not amount to carrying on business. The test is whether the activity is profit-oriented or commercial in nature. Court's interpretation and reasoning: The Tribunal examined the nature of income from membership fees, sale of food, liquor, and playing cards. It found that these activities are incidental to the primary charitable objects of promoting sports and public utility. The fees charged are substantially below the cost incurred, resulting in a deficit. The Tribunal held that such incidental income does not amount to trade or business and does not attract the proviso to section 2(15). Key evidence and findings: Detailed financial data showed gross receipts from various activities were far less than the expenditure incurred. The assessee's audited accounts reflected continuous deficits excluding interest income. The Assessing Officer did not dispute the mutual nature of activities but erroneously applied principles of mutuality to deny exemption. Application of law to facts: The Tribunal applied the Supreme Court's guidance that only activities with significant profit-making or commercial intent are excluded from charitable purposes. Since the assessee's activities incurred losses and were not profit-driven, they did not constitute trade or business. Treatment of competing arguments: The Revenue's contention that income from ancillary activities constituted trade or business was rejected due to lack of profit motive and the financial evidence of losses. The Tribunal also rejected the application of mutuality principles to characterize the activities as commercial. Conclusions: Income from ancillary activities does not amount to trade or business and does not disqualify the assessee from exemption under section 11. Issue 4: Whether the Assessee Being a Mutual Organization with Commercial Objectives Can Claim Exemption Relevant legal framework and precedents: Mutual organizations are generally excluded from charitable status if their activities are primarily for the benefit of members and commercial in nature. However, the Supreme Court in Ahmedabad Urban Development Authority clarified that the predominant object test is no longer good law, and the focus is on whether activities are in the nature of trade or business and whether income exceeds prescribed limits. Court's interpretation and reasoning: The Tribunal noted that the assessee's activities are not confined to members but extend to the general public, including schools, colleges, and mentally challenged children. The facilities and training provided are for public benefit and have produced nationally and internationally recognized sports persons. The Tribunal held that the assessee is not a mere mutual organization with commercial objectives but a charitable institution promoting sports and public utility. Key evidence and findings: The assessee's infrastructure and coaching facilities are accessible to a wide public, not limited to members. The financial records show deficits, indicating no profit motive. The longstanding recognition of the assessee's charitable status by courts and tax authorities supports this conclusion. Application of law to facts: The Tribunal applied the Supreme Court's rejection of the predominant object test and focused on the nature of activities and income. Since the activities are charitable and not commercial, and the benefits extend beyond members, the assessee qualifies for exemption. Treatment of competing arguments: The Revenue's argument that the assessee is a mutual organization with commercial objectives was rejected based on the evidence of public benefit and lack of profit motive. Conclusions: The assessee is not disqualified from exemption under section 11 on the ground of being a mutual organization with commercial objectives. Significant Holdings: "The proviso to Section 2(15) of the Act applies only if the activities involve carrying on trade, commerce or business or rendering services related thereto for a fee or other consideration. The assessee's activities, being carried out on a cost recovery basis with continuous deficits, do not amount to trade or business." "Charging fees on cost or nominal markup basis for advancement of objects of general public utility does not attract the proviso to section 2(15) and does not disentitle the institution from exemption under section 11." "The principles of mutuality, once applied to hold activities as mutual, cannot simultaneously be used to characterize them as trade or business, since one cannot trade with oneself." "Longstanding recognition of the assessee as a charitable institution, coupled with evidence of public benefit and lack of profit motive, confirms entitlement to exemption under section 11." "The predominant object test is no longer good law; the focus is on whether activities are in the nature of trade or business and whether income from such activities exceeds prescribed quantitative limits." The Tribunal dismissed the appeals filed by the Revenue for both Assessment Years 2014-15 and 2015-16, affirming the assessee's entitlement to exemption under section 11 of the Income Tax Act.
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