TMI Blog2016 (7) TMI 1099X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. Market value of the land purchased in the year 1986-87, cannot be expected to be static. Naturally, when it is sold after many years, it would fetch a higher value. Law also does not prohibit an assessee to sell the lands, less than the market value. Merely because, lands are sold at a higher rate, after a considerable period of time, that alone cannot be the sole criteria to contend that the activity of the assessee was business activity, not incidental to the principal activity of the trust, which is, otherwise charitable in nature. Whether to gain profit by sale and utilise the sale proceeds, for any other purpose or engage in continuous activity of business or trade or commerce, as the case may be, and to divert the gain, for any other purpose or to spend the same for charitable purpose Findings recorded and extracted supra that the amount is utilised for charitable purpose, is indisputed. Activities for a span of considerable period, may reflect business or commercial activity, but the question to be decided, is whether, it is incidental to carry on the main purpose, charitable , which includes, (i) Relief of the poor, (ii) Education, (iii) Medical relief. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ravinuthala, Santhanutana Padu and Valaparla and MSR degree colleges at Kavali, Kondepi and Vinjamuru, registered under Section 12A(a) of the Income-Tax Act, filed return of income for the assessment year 2010-11 on 21.09.2010, admitting Nil income. 3. Return for the year 2010-11, was processed under Section 143(1) of the Income-Tax Act, on 20.09.2011. On the same day, the case was taken up for scrutiny and notice under Section 143(2) was issued. In response to the notice, representative of the assessee appeared and filed the details called for, from time to time. On verification of the return of the income and other details, for the assessment year 2010-11, the assessing officer noticed that the assessee had disclosed an amount of ₹ 1,62,76,519/-, as profit on sale of land. Vide order, dated 04.09.2012, the assessee was required to submit computation, as per the provisions of Section 11(1A) of the Act. In response to the above, the assessee, vide letter, dated 28.01.2013, has stated as under: 2 in pursuance of its objectives, the assessee purchased 71.89 Acres of land in survey No.601,607,611 and 598 in Nellore Bit-II, Nellore during the years 1986-87 for starting m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer found that the assessee has bought 71.89 acres of land and at the time of disposing of the said land, obtained necessary permission from the town planning authority to divide the land into small plots and sold the same, by entering into sale agreements, obtained sale consideration, registered the documents, etc. Though the assessee has purchased the said land at ₹ 49/- per Sq. Yard., sold the same at ₹ 5,500/- per Sq.Yard, by making bumber profits, during the previous year 2009-10. The above activity of the trust carrying on business activity, was with a profit motive. The above activity of the assessee is an organized activity of carrying on business with profit motive. The assessee has been engaging in this activity from the year 2004-05, with profit motive. Thus, the activity of the assessee is only a commercial activity, not falling under any of the charitable activities, as per the objects of the Trust. Further, the said activity does not fall under any of the limbs defined in Section 2(15) of the act, viz., relief to poor, education, medical relief and not even under the category, any other object of general public utility . So saying, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an time, attempts were made to encroach upon the land. Therefore, for the reasons, stated supra, the assessee decided to abandon the idea of a starting medical college and old age homes, and to sell the land. As there were no takers, in view of the huge stretch of land, the assessee decided to convert the land into plots and accordingly, obtained permission from the Town Planning authorities. The assessee started selling the plots from the assessment year 1995-96 onwards and utilised the sale proceeds for charitable activities of the trust for all these years, including the assessment years 2010-11 and 2011-12. After perusing the trust deed, dated 25.06.1986, the Commissioner of Income-Tax (Appeals), the appellate authority, has recorded the objects of the trust, as hereunder: (a) .......... (b) For the above purpose, to construct, establish and maintain schools, colleges, technical colleges, technical institutions, medical colleges and other educational institution............ (c) To establish and maintain old age homes for the aged, infirm, disabled and destitute persons; 8. Going through the details of income and expenditure incurred for the assessment years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the trust. The AO was under the wrong impression that the sale of plot of land is a business activity overlooking the Circular No.11/2008 of the Act. 11. Not satisfied with the orders of the Commissioner of Income-Tax (Appeals), dated 13.05.2014, the Income Tax Officer (OSD) (Exemptions-IV), Chennai, has filed appeals in I.T.A.Nos.2251 and 2252/Mds/2014, before the Income Tax Appellate Tribunal, B Bench, Chennai. Before the Tribunal, contentions have been made that the promotion of residential layout and sale of lands, by plotting into plots and thereby deriving gain from the real estate transactions, cannot be construed as a charitable activity and therefore, any income derived out of the same, should be taxed in the hands of the assessee trust, under the head income from business . After hearing both the parties, vide common order, dated 29.09.2015, in I.T.A.Nos.2251 and 2252/Mds./2014, the Tribunal ordered as hereunder: We have heard both the parties and carefully perused the materials available on record. It is apparent from the facts of the case that the assessee had sold its unutilized land for pursuing its main objects viz., education. In order to secure maxim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as business income and that the same is eligible for exemption, on the grounds that activity of sale of land is incidental to the objects of the trust and the said profit was applied for the objects of the trust. He further submitted that the assessee had originally treated the land as fixed asset and lateron, converted the land, as stock in trade, in classifying the land in the balance sheet as land for sale in the year 2001-03 itself, which reveals the assessee's intention was to do business of real estate. He also submitted that the assessee had booked the profit on the sale of the land from 2004-05 onwards, continuously by venturing into business activity and converted the land into plots, by applying to the town planning authority and thereafter, sold the lands by way of separate sale deeds, in frequent intervals, over a period of years. He further submitted that once the assessee had ventured into a business activity, profits from the sale of plots cannot be treated exempted, by holding that the said business activity was incidental to the objects of the trust. He also submitted that the object of education, has nothing to do with the profit motive of real estate busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect from 1.4.2012. Section 2(15) of the Act has also undergone amendments and the same is extracted hereunder: 2. In this Act, unless the context otherwise requires,-- (15) charitable purpose includes relief of the poor, education, medical relief, preservation of environment including watersheds, forests 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: 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: Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the previous year; Period prior to the amendment vide Finance Act, 2008 w.e.f 1.4.2009. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the carrying on of - (a) any activity in the nature of trade, commerce or business; or (b) 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. 2. The following implications arise from this amendment - 2.1 The newly inserted proviso to Section 2(15) will not apply in respect of the first three limbs of Section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities. 2.2. 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d now be governed by the additional conditions stipulated in the proviso to Section 2(15). 3.2. In the final analysis, however, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business. 18. The word business is a broader term and it encompasses trade, commerce and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management. 22. Though the above reported case deals with a case of claiming exemption under Section 11(1) of the Income-Tax Act, of a trust, formed with an object of general utility, the dictum laid by the Hon'ble Apex Court that, Where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. , cannot be lost sight of. 23. In Institute of Chartered Accountants of India Anr. Vs. Director General of Income Tax (Exemptions) Delhi Ors., reported in [2012] 347 ITR 99 (Del.), the words, trade, commerce and business have been explained as hereunder: Trade, as per the Webster's New Twentieth Century Dictionary (2nd edition), means, amongst others, a means of earning one's living, occupation or work. In Black's Law Dictionary, trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case [1961] 42 ITR 179. 13. The assessees did not sell any land in the condition in which they bought it. They made convenient building sites and sold the same. They did not even dispose of all the sites in one year. They went on selling the sites year after year realising more and more profits. The fact that all the assessees started converting their lands into building sites almost simultaneously in 1967 itself is an indication of their intention to trade in the lands as a venture. They made it commercially more attractive by converting and dividing into plots. The inevitable inference is that they had no intention to hold the lands as an investment. They dealt with the lands as their stock-in-trade. We are, therefore, unable to uphold the view taken by the Tribunal. 25. In R.Ramaiah's case (cited supra), the intention of the assessee was clear that he wanted to make profits, by selling the land. Activity of the assessee therein was purely commercial. Whereas, in the case on hand, the objects of the assessee-trust are charitable and they are as follows: (i) The principle object of the Assessee trust is to provide Medical relief for the needy, running of educa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble period of time, that alone cannot be the sole criteria to contend that the activity of the assessee was business activity, not incidental to the principal activity of the trust, which is, otherwise charitable in nature. 30. As stated supra, it was a large extent of land, measuring 71.89 Acres. As there were no takers to purchase the large extent of land en-bloc, there was a necessity to plot out the lands, to smaller extent and thus, the assessee has sold the same. When there is no prohibition in the Income-Tax Act, 1961, restraining unutilized lands to be sold in smaller extent, such activity of the assessee, cannot be construed as predominant business activity of the assessee, engaged continuously, with the sole object of making profits and that therefore, the sale proceeds should be brought under the head, business income . Case of the assessee that, sale of land, even before the assessment years 2010-11 and 2011-12 respectively, has been thoroughly scrutinized in the earlier years, and that the assessee had passed the test, convincingly, has not been refuted by the revenue. The assessee is not bound to retain the lands, unutilised forever, when the object for purchasing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso to Section 10(23C) which are that (i) the business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business. Similarly, entities whose object is 'education' or 'medical relief' would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above. 33. There is a clear exclusion of the words, (i) Relief of the poor, (ii) Education, and (iii) Medical relief, in Circular No.11 of 2008 and it makes it abundantly clear that the newly inserted proviso to Section 2(15) will apply only to the entities, whose purpose is 'advancement of any other object of general public utility' i.e. the fourth limb of the definition of 'charitable purpose' contained in Section 2(15). Hence, such entities alone will not be eligible for exemption under Section 11 or under Section 10(23C) of the Act, if they carry on commercial activities. Circular No.11 of 2008 also states that whether such an entity is carrying on an activity in the nature of trade, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dominantly engages in activities in the nature of trade, commerce or business, should not be permitted to escape from taxability, with the mask, charitable . In the case on hand, the glaring omission on the part of the revenue is to consider, as to whether, sale of lands was necessitated Whether it was incidental towards attainment of the objectives of the trust , and more particularly, when the income was wholly utilised only for achieving the objectives of charitable purpose of the trust. Therefore, mere sale of an immovable property of the trust alone, cannot be the sole factor, to arrive at a conclusion that the income earned should be brought under the head, business income . In the case of trust or institution, whose predominant activity is not business, incidental activity of sales, carried out, in furtherance of and to achieve the main objectives of the trust or institution, should not be construed as business activity, solely with an intention to earn profit, and consequently, to bring the income, under the head, business income. 38. Going through the material on record and in the light of the discussion, we are unable to accept the contention of the Revenue that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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