New User   Login      
Tax Management India .com TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (7) TMI 1099 - MADRAS HIGH COURT

2016 (7) TMI 1099 - MADRAS HIGH COURT - TMI - Entitlement to exemption u/s 11 - charitable activities - sale proceeds of the lands by assessee trust - Held that:- The assessee has purchased the lands to an extent of 71.89 Acres, in the year 1986-87, for the purpose of setting up a medical college and old age home. According to the assessee, permission could not be obtained from the competent authorities and thus, the lands purchased for the abovesaid purposes, in the year 1986-87, which fell wit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e that there was no bona fide on the part of the assessee, as to why, the assessee was constrained to sell 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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. - What emerges from the reading of the provisions and the Circular is that a trust or institution, whose purpose is advancement of any other object of general public utility, and recognis .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

lly 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 con .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t appeals. - Decided in favour of assessee. - T.C.A. Nos. 451 and 452 of 2016, C.M.P. No. 9327 of 2016 - Dated:- 14-7-2016 - S. Manikumar And D. Krishna Kumar, JJ. For the Appellant : Mr. J. Narayanasamy ORDER ( Order of the Court was made by S. Manikumar, J. ) Tax Case Appeals arise out of a common order made in I.T.A.Nos.2251 and 2252/Mds/2014, dated 29.09.2015, for the assessment years 2010-11 and 2011-12 respectively. 2. Short facts leading to the appeals are that the assessee, a trust, is r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nstitutions. In the meantime, attempts at encroachment of the land began being made by various elements. Therefore, the Assessing Officer decided to abandon the idea of medical college and old age home and decided to confine to running junior and egree colleges, drinking water and mortuary vans in the district of Nellore and Prakasam, in A.P. Consequently, when the above referred land was proposed to be disposed off, there were no buyers in view of the huge stretch of land. Therefore the assesse .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

oughly scrutinized in the assessment of earlier years and the assessee passed the test convincingly. 3. Section 11A of the income tax Act refers to Capital Asset being property held under trust wholly for charitable or religious purposes. As explained in the para 2 above, the land originally purchased for setting up medical colleges and old age homes ceased to be a property held under trust wholly for charitable purposes since the assessee abandoned the plan of setting up medical college and old .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Land for Sale has been shown separately and not as part of Fixed Assets. For the reasons it is submitted that Section 11A is not applicable to the facts of the assessee s case. 4. After considering the above explanation, for the assessment year 2010-11, the 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, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng 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 assessment year 2010-11, the Assessing O .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

called for. On verification of the return of the income and other details, the assessing officer noticed that a sum of 44,23,266/- was earned as profit on sale of land. On the above, the assessee, vide letter, dated 09.01.2014, has stated as under: 4. During the relevant year the assessee sold Iwo plots of land for a consideration of ₹ 44.60 Iakhs. Copies of the sale deeds 5/01/2010 and 15/12/2010 are enclosed. A statement showing computation of Capital gains is enclosed. As regards the co .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

very same reasons, for bringing a sum of ₹ 1,62,76,519/-, under the head, business income , for the assessment year 2010-11, vide order, dated 24.02.2014, the Assessing Officer brought a sum of ₹ 44,23,266/-, under the head, income from business for the assessment year 2011-12. 7. Being aggrieved by the orders of assessment, dated 31.03.2013 (for the assessment year 2010-11) and 24.02.2014 (for the assessment year 2011-12) respectively, the assessee filed appeals in I.T.A.No.169 and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al 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 2 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r the assessment years 2010-11 and 2011-12, the Commissioner of Income-Tax (Appeals), appellate authority, recorded as hereunder: Perusal of the income and expenditure a/c for AY 2010-11 reveals that a sum of ₹ 1,62,76,519/- was credited to income account as profit on sale of land. Similarly, a sum of ₹ 44,23,266/- was credited to income account as profit on sale of land for AY 2011-12. Perusal of expenditure a/c for both the assessment years also reveals that there is no diversion o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ver a period of time and that the activity constituted business activity, the appellate authority has referred to a Circular No.11 of 2008, dated 19.12.2008. Taking note of the observations of the assessing officer, recognising the character of the trust (charitable), the appellate authority held as follows: If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on cannot be denied to the trust. Therefore, I am of the considered view that the decision of the assessing officer cannot be countenanced. 10. The Commissioner of Income-Tax (Appeals), vide common order, dated 13.05.2014 in I.T.A.Nos.169 and 1304/13-14, held that, ...the assessee is not liable to tax on the profit arising out of sale of land as the proceeds are utilized for charitable activities of the trust. The AO was under the wrong impression that the sale of plot of land is a business acti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ansactions, 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d maximum revenue from the sale of the excess land, and utilized the same for complying with the main objects of the assessee trust viz., Education. Hence as held by the Ld. CIT (A), the transaction of the sale of the land by the assessee in a wise manner by applying commercial prudence is only an activity which is incidental to the main objects of the assessee. Therefore, the view of the Ld. CIT (A) that the proviso of Section-2(15) will not be applicable to the facts of the assessee s case is .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

land owned by the assessee cannot be treated as business income and the same is eligible for exemption under Section 11 r/w. Section 2(15) even though the Tribunal had admitted the assessee's commercial intention to venture into real estate business. (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that profit from the sale of the land owned by the assessee cannot be treated as business income and the same is eligible for exemption under Sectio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 sub .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ness 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 business activity and therefore, the profit derived from the sale has to be taxed. 14. Placing reliance on a decision of a Karnataka High Court in Commissioner of Income-Tax v. R.Ramaiah reported in (1984) 146 ITR 39, Mr.J.Narayanasamy, learned Senior Standing Counsel appearing for the appellant further submitted that purchase of lands .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

B Bench, Chennai, have failed to consider the abovesaid aspects, in proper perspective and therefore, prayed that the substantial questions of law raised, require to be answered in the affirmative, in favour of the Revenue. 15. Heard the learned counsel appearing for the parties and perused the materials available on record. 16. Before amendment by Finance Act, 2008, Section 2(15) of the Income-Tax Act, was as under: 2(15) Charitable purpose includes relief of the poor, education, medical relie .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

espective of the nature of use or application, or retention, of the income from such activity Second proviso inserted to Section 2(15) by Finance Act, Section 2(15) by Finance Act, 2010 with retrospective effect from 1.4.2009, reads as under:- Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lacs or less in the previous year Rupees Ten lacs mentioned in the second proviso stands enhanced to Rupees twenty .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

neral 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 s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ral Board of Direct Taxes, considered by the Commissioner of Income-Tax (Appeals) as well as by the Income-Tax Appellate Tribunal, is extracted hereunder: Section 2(15) of the Income Tax Act, 1961 ('Act') defines "charitable purpose" to include the following:- (i) Relief of the poor (ii) Education (iii) Medical relief, and (iv) the advancement of any other object of general public utility. An entity with a charitable object of the above nature was eligible for exemption from ta .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ct of general public utility' shall not be a charitable purpose if it involves 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 Secti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r 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 objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under Section 11(4A) or the seventh proviso to Section 10(23C) which are that (i) the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 will not be eligible for exemption under Section 11 or under Section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

utside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to Section 2(15) owing to t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 ' .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or manufacture or any adventure or concern in the nature of trade, commerce or manufacture." 19. The word "business" in Section 2(13) defines business to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Thus, the legislative intent is to make the definition, wider to cover the above activities and that the word "inclusive" has been used. 20. In Black's Law Dictionary, Sixth Edition, the word " .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tion/trust was involved in carrying on any activity for profit. If the primary/dominant purpose or object of the trust or institution was to carry out object of general public utility and not any activity for profit, then the same would satisfy the requirements of Section 2(15) of the Act. Money earned from business held under trust or otherwise, to feed the charity would not disentitle or negate the claim of engagement in charitable purpose, defined under Section 2(15) of the Act. The Hon'b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would 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 rea .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

vity. , 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" means a busi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

arge scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. For the purpose of the first proviso to Section 2(15), trade is sufficient, therefore, this aspect is not required to be examined in detail. 24. In Commissioner of Income-Tax v. R.Ramaiah reported in (1984) 146 ITR 39, relied on by the learned counsel for the Department, the assessees therein, purchased agricultural lands at the outskirts of the city. The assessees therein cultivated the la .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

p; Co., v. CIT reported in [1959] 35 ITR 594, Raja J. Rameshwar Rao v. CIT reported in [1961] 42 ITR 179 and Janki Ram Bhadur Ram v. CIT reported in [1965] 57 ITR 21, the Andra Pradesh High Court held as follows: 12. Bearing in mind these principles we may now turn to the facts before us. The assessees in each case purchased the agricultural land lying at the outskirts of Bangalore City. They no doubt used the lands for agricultural purpose for some years. But later, almost simultaneously, they .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ch 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 in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nciple object of the Assessee trust is to provide Medical relief for the needy, running of educational institution, supply of drinking water and other charitable activities. The assessee has been running educational institution in the backward areas of Prakasam and Nellore District of Andhra Pradesh in the form of Junior college in 14 places and degree colleges in 3 places in the name and style of M/s.MSR Junior Colleges. (ii) In pursuance of its objects, the assessee had purchased 71.89 acres o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

orm a layout and sell the plots. In the instant case, the assessee is running educational institutions, engaged in charitable purpose and granted permission underSection 12A(a) of the Income-Tax Act. 27. The assessee has purchased the lands to an extent of 71.89 Acres, in the year 1986-87, for the purpose of setting up a medical college and old age home. According to the assessee, permission could not be obtained from the competent authorities and thus, the lands purchased for the abovesaid purp .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

wards, it is not the case of the revenue that there was no bona fide on the part of the assessee, as to why, the assessee was constrained to sell the same. 29. 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, tha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t, 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 asses .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

intention of the assessee, is not to engage continuously, in business or trade or commerce, as the case may be. When the business activity is incidental to attain the objectives of the trust or institution, as the case may be, and if separate books of accounts are maintained, in respect of such business, then the assessee is entitled to exemption under Section 11 r/w. Section 2(15) of the Act. When the value of the land is enhanced by passage of time, and sold subsequently, it cannot be simply .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

2008, 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tions stipulated under Section 11(4A) or the seventh 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 34. Contention of Mr.J.Narayanasamy, learned Senior Standing Counsel for the Income-Tax Department that Circular No.11 of 2008, is not .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y carries on a commercial activity, it would fall within the ambit of the Circular No.11 of 2008. Reading of the Circular also makes it clear that the Central Board of District Taxes has clearly manifested that industries and trade associations, engaged in activities, with an object, advancement of any other object of general public utility, should not misuse the exemption facilities, under Section 12A of the Income-Tax Act and claim entitlement for exemption under Section 11 or Section 10(23C) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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. 37. What emerges from the reading of the provisions and the Circular is that a trust or institution, whose purpose is advancement of any other object of g .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version