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2025 (5) TMI 1096 - HC - Income TaxValidity of notice issued u/s 143(2) beyond the prescribed six-month period - HELD THAT - Notice u/s 143 (2) of the Act was issued well within the time prescribed for issuance of notice on 26-9-2012 it was required to be served as per the provisions contained in Section 143 of the Act on or before 30-9-2012 and 30-9-2012 was Sunday being a holiday as per the Post Office Regulations noticed herein-above therefore notice was came to be served on 1-10-2012 on Monday. In our considered opinion such service of notice u/s 143 (2) of the Act on the assessee on 1-10-2012 is the valid service of notice in view of Section 10 of the General Clauses Act. Thus the assessee was timely served and as such both the appellate authorities are absolutely justified in holding that notice served was within the period of limitation prescribed u/s 143 (2). Denial of exemption u/s 11 - charitable purposes u/s 2(15) - renting of marriage hall - HELD THAT - A careful perusal of Section 2 (15) of the Act would reveal that the expression charitable purpose has been defined by way of an inclusive definition so as to include relief to the poor education yoga medical relief preservation of environment (including watersheds forest 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. The expression advancement of any other object of general public utility has been considered by the Supreme Court in number of judgments. Undisputedly the appellant/assessee is registered as a charitable trust u/s 12A with the Commissioner of Income Tax Raipur. One of the objects of the assessee Trust is to establish maintain Dharamshalas Temples homes orphanages or other establishments for relief of and to give help to poor and destitute people orphans widows cripples and old aged persons and otherwise provide them rehabilitation aid for self earnings among the other objects. All the authorities were impressed with the fact that the Dharamshala was rented out to different persons and therefore had ventured into commercial activities. However it is the case of the assessee that the Dharamshala was rented out to different persons on a cost basis or nominally above cost. It is the case of the assessee that renting of marriage hall was done on a cost-basis or nominally above cost to cover up the expenditure which has not been considered by all the authorities and merely by holding that Rs. 15, 89, 163/- was received by the assessee Trust the authorities have proceeded to hold that Rs. 2, 20, 247/- was liable to tax. In our considered opinion the Dharamshala was let out for charitable purpose mentioned in the trust deed on a cost-basis or nominally above cost to cover up the charges as demonstrated by the assessee and the primary and predominant object of the Trust was charitable. Furthermore it has been shown by the appellant/assessee that the appellant Trust has adopted the mercantile system of accounting for the financial year 2010-11 (assessment year 2011-12) for which depreciation of Rs. 8.55 lakhs is to be accepted which the authorities have not accepted same ought to have been allowed as depreciation being notional expenditure in light of the decision of the Supreme Court in Rajasthani and Gujarati Charitable Foundation Poona s case 2017 (12) TMI 1067 - SUPREME COURT and that of the M.P. High Court in Raipur Pallottine Society s case 1989 (9) TMI 93 - MADHYA PRADESH HIGH COURT As such on both the counts the finding of the learned authorities that proviso to Section 2 (15) of the Act would apply is contrary to the facts and law available on record. All the three authorities are absolutely unjustified in holding that the appellant Trust is carrying out the commercial activities by letting out the Dharamshala for various purposes and committed grave legal error in holding that appellant / assessee Trust is involved in commercial activities. Accordingly the second substantial question is answered in favour of the assessee and against the Revenue.
1. ISSUES PRESENTED and CONSIDERED
The Court considered two core legal questions arising from the tax appeal under Section 260A of the Income Tax Act, 1961: (a) Whether the notice issued under Section 143(2) of the Income Tax Act for the assessment year 2011-12 was invalid due to delay in service beyond the prescribed six-month period, thereby rendering the consequential assessment order null and void. (b) Whether the second proviso to Section 2(15) of the Income Tax Act, as it stood during the relevant assessment year, was applicable to the appellant trust, thereby justifying the addition of Rs. 2,20,250/- to the income on the ground that the trust's activities involved carrying on business or rendering services for consideration exceeding the prescribed threshold, contrary to the definition of "charitable purpose." 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Notice under Section 143(2) of the Income Tax Act Relevant legal framework and precedents: Section 143(2) mandates that a notice for scrutiny assessment must be served within six months from the end of the financial year in which the return is filed. The proviso to clause (ii) of Section 143(2) is mandatory and stipulates no notice shall be served after this period. The General Clauses Act, 1897, Section 10, provides that if the last day for doing an act falls on a holiday or non-working day, the act done on the next working day shall be deemed timely. Several Supreme Court precedents (H.H. Raja Harinder Singh v. S. Karnail Singh AIR 1957 SC 271; Chaganti Satyanarayana v. State of Andhra Pradesh (1986) 3 SCC 141; HUDA v. Dr. Babeswar Kanhar (2005) 1 SCC 191; Mohd. Ayub v. State of U.P. (2009) 17 SCC 70) have endorsed this principle, emphasizing that the law does not compel the performance of an impossibility and that acts done on the next working day after a holiday are valid. Court's interpretation and reasoning: The notice was issued on 26-9-2012 and served on 1-10-2012. The last permissible date for service was 30-9-2012, which was a Sunday and a postal holiday. The Court examined postal regulations confirming that no business is transacted on Sundays and holidays. Applying Section 10 of the General Clauses Act, the Court held that service on the next working day (1-10-2012) is deemed valid and within time. Key evidence and findings: The postal regulations and the date of dispatch and service of notice were undisputed. The last day being a Sunday and the post office being closed was a fact accepted by the Revenue. Application of law to facts and treatment of competing arguments: The appellant argued that the notice was late by one day and thus invalid. The Revenue contended that service on the next working day was valid under Section 10 of the General Clauses Act. The Court favored the Revenue's interpretation, emphasizing the principle of lex non cogit ad impossibilia (law does not compel impossibility) and actus curiae neminem gravabit (the act of court shall prejudice no man). Conclusion: The notice under Section 143(2) was validly served on 1-10-2012, and the assessment proceedings were maintainable. The first substantial question was answered in favor of the Revenue and against the appellant. Issue 2: Applicability of the Second Proviso to Section 2(15) of the Income Tax Act and Taxability of Surplus Relevant legal framework and precedents: Section 2(15) defines "charitable purpose" and includes "advancement of any other object of general public utility." The second proviso excludes activities involving trade, commerce, or business for consideration exceeding prescribed limits from being charitable. The threshold was Rs. 10 lakhs for the relevant year. Amendments to Section 2(15) over years adjusted this limit and introduced conditions for activities connected to charitable objects. Supreme Court precedents considered include Commissioner of Income Tax v. Gujarat Maritime Board (2007) 14 SCC 704, which held that the primary purpose must be the welfare of the general public and ancillary activities not defeating the predominant charitable object do not disqualify exemption. The three-Judge Bench decision in Assistant CIT v. Ahmedabad Urban Development Authority (2023) 7 SCC 249 was pivotal, clarifying that charging fees on a cost basis or nominal markup does not constitute trade or business, but charging significantly above cost does. The Court also highlighted the necessity of examining whether receipts exceed prescribed limits and whether activities are genuinely commercial. Court's interpretation and reasoning: The Assessing Officer and appellate authorities found that the trust's letting of the Dharamshala to the public for various functions generated receipts exceeding Rs. 10 lakhs, thus falling within the second proviso's ambit, denying exemption and taxing the surplus. The appellant contended that the charges were on a cost or nominal markup basis, not profit-driven, and depreciation as a notional expenditure was not considered by authorities. The Court analyzed the facts and the legal principles from the Supreme Court judgments, emphasizing that the primary and predominant object of the trust was charitable. The Court noted the failure of the authorities to consider depreciation of Rs. 8.55 lakhs as a necessary deduction under mercantile accounting principles, citing Commissioner of Income Tax v. Raipur Pallottine Society (1989) and Commissioner of Income Tax-III v. Rajasthani and Gujarati Charitable Foundation (2018) 7 SCC 810, which mandate allowance for depreciation in charitable institutions' income computation. Key evidence and findings: The trust's admission of renting the Dharamshala to 170 persons for various social, religious, and political functions and the receipts generated were undisputed. The appellant's accounting treatment including depreciation was on record but disregarded by authorities. The Court found that the charges were on cost or nominal markup basis, consistent with the Supreme Court's illustrations distinguishing charitable activities from business. Application of law to facts and treatment of competing arguments: The Revenue argued that the receipts exceeded the threshold and thus the trust was engaged in commercial activities. The appellant argued that the activities were charitable, with charges on cost basis and that depreciation should be allowed, reducing taxable surplus. The Court found the Revenue's approach ignoring depreciation and the nature of charges as flawed and contrary to binding precedents. Conclusion: The Court held that the trust's activities were charitable and not commercial. The second proviso to Section 2(15) was not applicable as the receipts were on cost or nominal markup basis, and depreciation had to be allowed. The second substantial question was answered in favor of the appellant and against the Revenue, setting aside the addition of Rs. 2,20,247/- to income. 3. SIGNIFICANT HOLDINGS "Section 10 of the General Clauses Act embodies the principle that where a period prescribed for performance of an act expires on a holiday, the act done on the next working day is deemed timely. The law does not compel the performance of an impossibility." "The charging of any amount towards consideration for an activity advancing general public utility, which is on cost-basis or nominally above cost, cannot be considered to be trade, commerce or business. Only when charges are markedly or significantly above cost do they fall within the mischief of trade, commerce or business." "If depreciation is not allowed as a necessary deduction for computing the income of a charitable institution, there would be no way to preserve the corpus of the trust for deriving income." "The primary and predominant object of a trust must be charitable. Ancillary or incidental activities not defeating this dominant purpose do not disqualify exemption under Section 2(15)." Final determinations: (i) The notice under Section 143(2) served on 1-10-2012 was valid and within limitation, applying Section 10 of the General Clauses Act. (ii) The trust's activities of letting out Dharamshala on cost or nominal markup basis were charitable and not commercial. The second proviso to Section 2(15) was not attracted, and the addition to income was unjustified. (iii) Depreciation as a notional expenditure must be allowed in computing income of charitable institutions under mercantile accounting principles.
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