2025 (6) TMI 986 - HC - Income Tax

Exemption u/s 11 - Charitable activity or business activity - whether CIT(A) Mumbai erred in accepting that assessee is not involved in business activity as per the provisions of Section 2(15)? -CIT(A) also found that admittedly the Assessee Trust is not a party to any transaction between two inter se members and therefore the proviso to Section 2(15) of the IT Act was also not attracted - ITAT confirmed CIT(A) order - HELD THAT - We find that the entire case has been decided purely on facts. The ITAT is the last fact finding authority which has came to the conclusion that the Assessee Trust is not carrying on any commercial activity and therefore is entitled to the exemption under Section 11. This finding of the ITAT is purely based on the facts of the case and which facts were also analyzed by the CIT(A) before he partly allowed the Appeal of the Assessee Trust. In these circumstances and finding that the decision of the ITAT is purely based on facts we are of the opinion that the Order of the ITAT does not give rise to any Substantial Question of Law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the Commissioner of Income Tax (Appeals) erred in holding that the assessee Trust was not engaged in business activity under Section 2(15) of the Income Tax Act, 1961 (IT Act);

(b) Whether the provisions of Section 13(2) of the IT Act were applicable despite the trustees being beneficiaries of the Trust;

(c) Whether the exemption under Section 11 of the IT Act was rightly allowed to the assessee Trust despite the receipt of substantial transfer fees and the trustees being elected members who owned houses.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Whether the assessee Trust was engaged in business activity under Section 2(15) of the IT Act

The legal framework under Section 2(15) defines "business" and excludes certain activities from being treated as business, particularly in the context of charitable trusts. The proviso to Section 2(15) excludes transactions between members of a mutual association from being treated as business.

The Assessing Officer (AO) contended that the Trust was engaged in commercial activity by constructing houses and selling them to members, collecting transfer fees, and thus carrying on business. The AO relied on the facts that the Trust collected Rs. 1.15 crores as transfer fees during the relevant assessment year and had collected Rs. 6.35 crores till date, indicating commercial dealings.

The CIT(A) examined the factual matrix and found no sale of houses by the Trust to members. Instead, the CIT(A) concluded that membership transfers were governed by the Trust Deed and eligibility criteria, and the Trust was not a party to any sale or purchase transaction between members. The CIT(A) held that the proviso to Section 2(15) applied, excluding such inter se transactions from business activity.

The ITAT upheld the CIT(A)'s findings, agreeing that the Trust's activities did not amount to business under Section 2(15). The Court noted that these findings were factually based and supported by the documentary evidence, including the Trust Deed and financial records.

Competing arguments from the Revenue that the collection of transfer fees and the nature of the transactions amounted to business were rejected on the basis that the Trust did not itself engage in sales, and the transfer fees were between members, not a commercial consideration paid to the Trust.

Conclusion: The Court concurred with the ITAT that the Trust was not engaged in business activity under Section 2(15), as the transactions were inter se members and not commercial sales by the Trust.

Issue (b): Applicability of Section 13(2) when trustees were beneficiaries

Section 13(2) of the IT Act prohibits exemption to trusts where any part of income or property is used for the benefit of trustees or their relatives, which would amount to violation of charitable status.

The AO found that since trustees were elected members and owners of houses, the Trust's activities violated Section 13(2). This was premised on the assumption that the trustees benefitted from the Trust's income or property.

The CIT(A) rejected this contention, emphasizing that trustees being members and owners did not ipso facto mean that the Trust's income or property was applied for their individual benefit contrary to the provisions. The Trust's objects and Deed governed membership and benefits, and the trustees did not derive any undue advantage from the Trust's income.

The ITAT agreed with the CIT(A), holding that mere trusteeship combined with membership and ownership did not attract Section 13(2) violation, especially where the Trust's activities were charitable and not commercial.

The Court found that the Revenue's argument failed to establish any misuse of income or property to the trustees' benefit in contravention of Section 13(2).

Conclusion: The Court upheld the finding that Section 13(2) was not applicable, as trustees' status as members and owners did not constitute prohibited benefit from the Trust's income or property.

Issue (c): Allowance of exemption under Section 11 despite receipt of transfer fees and trustees being elected members

Section 11 of the IT Act provides exemption to income of trusts applied for charitable purposes. The AO denied exemption based on the Trust's receipt of Rs. 1.15 crores as transfer fees and the trustees' ownership status.

The CIT(A) and ITAT found that the transfer fees were paid inter se members and not to the Trust as commercial consideration. The Trust's income was applied for charitable purposes consistent with its objects. The trustees' ownership did not amount to personal benefit from the Trust's income.

The Court emphasized that the exemption under Section 11 depends on the nature of the Trust's activities and application of income, not merely on the receipt of transfer fees or trustees' membership. Since the Trust was not engaged in business and did not violate Section 13(2), exemption was rightly allowed.

The Revenue's contention that the transfer fees represented commercial income was rejected as the Trust was not a party to such transactions and did not profit commercially from them.

Conclusion: The Court affirmed the allowance of exemption under Section 11, holding that the Trust's income was applied for charitable purposes and the transfer fees did not constitute commercial income of the Trust.

3. SIGNIFICANT HOLDINGS

The Court held that:

"The ITAT is the last fact finding authority which has come to the conclusion that the Assessee Trust is not carrying on any commercial activity and, therefore, is entitled to the exemption under Section 11 of the IT Act."

"The findings of the ITAT are purely based on the facts of the case, which facts were also analyzed by the CIT(A) before he partly allowed the Appeal of the Assessee Trust."

"We find that the decision of the ITAT does not give rise to any Substantial Question of Law, much less, the Questions of Law as projected by the Revenue."

The Court established the core principle that factual findings by the ITAT on the nature of the Trust's activities, membership transactions, and application of income for charitable purposes are binding unless there is a substantial question of law.

It was determined that inter se transactions between members governed by the Trust Deed do not constitute business under Section 2(15), and trustees being beneficiaries does not automatically attract Section 13(2) violation.

The final determination was to dismiss the Revenue's appeal, affirming the CIT(A) and ITAT's orders allowing exemption under Section 11 and rejecting the application of Sections 2(15) proviso and 13(2) in the facts of the case.