TMI Blog2010 (10) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions contained u/s 011(4)(A) by not maintaining separate books of accounts in respect of its income assessable under the said business. HELD THAT:- The factual question of the actual income that is to be exempted has not been gone into by taking into consideration of the separate heads of accounts. A perusal of Section 011(4)(A) of the Act would clearly show that the said provision is an exception to Section 011(1), 011(2), 011(3) and 011(3)(A).Therefore, the assessee will have to satisfy the authorities that such an exemption is to be granted by providing substantial materials to show that income derived from the business has been utilised towards the fulfillment of the objectives of the trust. Equally a duty is cast upon the AO concerned to look into the records and give a factual finding, determining the actual income available for exemption. However in view of our reasoning that a business income if utilized towards the achievement of the object of the assesse trust the same would be incidental to the achievement of the object. Accordingly, the substantial questions of law raised are answered in favour of the revenue. - The Honourable Mr. Justice F.M. Ibrahim Kali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispensaries etc. The Honourable High Court of Madras in C.S.No.76 of 1973 by its order dated 08.03.1973 has confirmed the consideration of the assessee Trust on the acquisition of the property mentioned above as the one vested with it as a Trust property. The assessee Trust is also registered under Section 12A(a) of the Income Tax Act, 1961 (hereinafter referred as the Act . 3.2.The property purchased being an old building was demolished and two halls have been constructed by the assessee which have been let out as marriage halls and auditoriums. A part of the building is also used for running a hostel for women and another part of it has been used by letting it out to a bank on a rental basis. 3.3.The assessee filed its return claiming that the Income derived from the property held in Trust by the assessee is eligible for exemption under Section 11 of the Act. However, the assessing officer for the assessment years, 1995-96, 1996-97, 1997-98, 1998-99, 2000-01, 2002-03 and 2005-06, respectively has rejected the exemption sought for by the assessee by holding that in as much as the assessee was carrying on a commercial activity which is not incidental to the object of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the assessee has been maintaining three sets of accounts such as, one set of books for the income from auditoriums as well as for interest receipts, one set of books for the income of the trust, wherein it accounts donations and interest receipt. The assessee accounted it's donation receipts from the occupants of the auditoriums in these books only. The assessee finally consolidated both the above accounts and prepared it's income and expenditure account as well as its Balance Sheet and one set of books for the income from the ladies hostel account and hence there is compliance of the condition stipulated under Section 11(4)(A) of the Act by maintaining separate accounts. The Commissioner of Income Tax (Appeals) has also held that in as much as the income derived by the assessee through its commercial activities is being used towards its object which is a charitable purpose, its activity of indulging in such a business is not a business activity independent of the objects of the Trust and the same has to be considered as incidental activity to the charitable activities. Therefore by holding so the Commissioner of Income Tax (Appeals) allowed the appeals filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip to the objectives of the trust the mandate of Section 11(4)(A) of the Act has not been complied with. The learned counsel submitted that the facts involved in the judgment of the Honourable Apex Court in ASSISTANT COMMISSIONER OF INCOME-TAX v. THANTHI TRUST [2001 247 ITR 785] are totally different and therefore the ratio laid down therein by the Honourable Apex Court does not have any application to the present case on hand. The learned counsel strenuously submitted that in the said case one of the objective of the Trust is to run the newspaper which is not the case on hand. Moreover the assessee has demolished the old building and constructed the halls for business purposes and therefore it cannot be construed that the properties are held in trust by the assessee. 8.2.Shri.Patty B.Jeganathan, learned counsel appearing for the revenue further submitted that a combined reading of Section 11(4) and Section 11(4)(A) of the Act would make it clear that even for a property held in trust, the Assessing Officer shall have the power to determine the income in accordance with the provision of the Act and if such income so determined is in excess of the income as shown in the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of building has been let out to M/s.Indian Bank within the auditorium premises, the same has to be necessarily to be included in the books of the said auditoriums. Both the Commissioner of Income Tax (Appeals) and the Tribunal have held on facts that the assessee has been maintaining three separate accounts and they are in compliance of Section 11(4)(A) of the Act. The assessee has complied with Section 11(1) and 11(2) of the Act by utilising the income for the purpose of charity. The assessee has also filed Form-10 towards the accumulation of the income for the purpose of construction of educational institutions. 9.3.Section 2(15) of the Act has been suitably amended by removing the expression not involving the carrying of any activity for profit with effect from 01.04.1984 while defining charitable purpose . Further Section 11(4)(A) of the Act has been amended with effect from 01.04.1992 which is more beneficial to the Trust than what was available prior to the said amendment. 9.4.The issue involved in the appeal that the activity carrying on by the Trust being business in nature is incidental to the objects of the Trust or not has been decided by the Honourable Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not in dispute that the commercial activity is being carried on by the assessee by using the building as marriage halls, auditoriums etc. The assessee has filed its returns claiming that the income derived therein is being used towards its objectives which are charitable in nature. 10.2.In order to appreciate the rival contentions of the learned counsel appearing for both sides, it is useful to extract Section 11(4)(A) of the Income Tax Act, 1961. 11(4)(A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business. 10.3.Shri.Patty B.Jeganathan, learned counsel appearing for the revenue submitted that considering the scope of Section 11(4) vis-a-vis Section 11(4)(A) of the Act, it has to be held that until and unless the business as such is connected either directly or indirectly to anyone of the objectives of the assessee Trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (4A). As it stands, all that it requires for the business income of a trust or institution to be exempt is that the business should be incidental to the attainment of objectives of the trust or institution. A business whose income is utilised by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is, surely, a business which is incidental to the attainment of the objectives of the trust. In any event, if there be any ambiguity in the language employed, the provision must be construed in a manner that benefits the assessee. The trust, therefore, it entitled to be benefit of section 11 for the assessment year 1992-93 and thereafter. It is, we should add, not in dispute that the income of its newspaper business has been employed to achieve its objectives of education and relief to the poor and that it has maintained separate books of account in respect thereof. (Emphasis added) 10.5.The Honourable Apex Court in the above said judgment was pleased to hold that what is sufficient is that the income derived from the business from a property held in trust by the assessee is utilised towards the attainment of the objective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the High Courts in India, it is the mandate of the Constitution as provided in Article 141 that the law declared by the Supreme Court shall be binding on all courts within the territory of India. It was pointed out by this Court in Anil Kumar Neotia v. Union of India6 that the High Court cannot question the correctness of the decision of the Supreme Court even though the point sought before the High Court was not considered by the Supreme Court. 10.8.On a consideration of the ratio laid down in the above pronouncements, we are of the view that when a business income is used towards the achievement of the object of the trust it would amount to incidental to the achievement of the object of the trust not withstanding the profit and gain involved therein. 11.Whether Section 11(4)(A) of the Income Tax Act restricts the power under Section 11(4):- 11.1.Section 11(4)(A) of the Tax is an exception to Section 11(1), 11(2), 11(3) and 11(3)(A) of the Act in so far as the business income which is not utilized towards the object of the trust is concerned. It is couched in a negative language. It provides for an exemption from the purview of the Act from the inclusion of the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill be useful to apply the rule of contextual interpretation to the provisions of Rule 9. It would not be permissible to import any meaning or make additions to the plain and simple language of Rule 9(2) in relation to other authority . The rule of contextual interpretation requires that the court should examine every word of the statute in its context, while keeping in mind the Preamble of the statute, other provisions thereof, pari materia statutes, if any, and the mischief intended to be remedied. Context often provides a key to the meaning of the word and the sense it carries. 62.It is also a well established and cardinal principle of construction that when the rules and regulations have been framed dealing with different aspects of the service of the employees, the courts would attempt to make a harmonious construction and try to save the provision, not strike it down rendering the provision ineffective. The court would normally adopt an interpretation which is in line with the purpose of such regulations. The rule of contextual interpretation can be purposely applied to the language of Rule 9(2), particularly to examine the merit in the contentions raised by the responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that in the absence of any specific bar under section 11(4)(A) of the Act prohibiting the application of section 11(4) it cannot be construed that the same is independent of section 11(4) of the Act. 11.10.Hence, we hold that section 11(4)(A) and section 11(4) of the Act are complementary to each other and section 11(4)(A) does not restrict the power under section 11(4) of the Act. We answer the substantial question of law No.1 in favour of the revenue. 12.Compliance of maintenance of books of accounts:- 12.1.In so far as the compliance of the maintenance of separate books of accounts as required under Section 11(4)(A) of the Act is concerned, a reading of the above said provisions would make it clear that it is mandatory and a condition precedent for the assessee to maintain the same while seeking exemption. However it is not in dispute in the present case on hand that the assessee has maintained three sets of accounts, namely: (i)One set of books for the income from auditoriums including the interest receipt, (ii)One set of books for the income of the Trust wherein the assessee accounts donations receipt, dividend, lease rent, amenities account, and interest rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the said provision is an exception to Section 11(1), 11(2), 11(3) and 11(3)(A) of the Act. Therefore, the assessee will have to satisfy the authorities that such an exemption is to be granted by providing substantial materials to show that income derived from the business has been utilised towards the fulfillment of the objectives of the trust. Equally a duty is cast upon the Assessing Officer concerned to look into the records and give a factual finding, determining the actual income available for exemption. 13.3.Section 11(4) of the Act specifically speaks about the power of the Assessing Officer to deal with a property held in trust. The condition stipulated under Section 11(4)(A) of the Act that the assessee should maintain separate books of accounts for the business income has been introduced with a specific purpose and object behind it. The reason for introducing such a condition is to make sure that the assessee shall not claim and get exemption for the business income which is not used for charitable purposes. Therefore, such a condition is mandatory. In other words, a failure to comply with the condition would make the assessee concerned from claiming exemption. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NAL INSTITUTE v. CENTRAL BOARD OF DIRECT TAXES AND OTHERS [(2008) 301 ITR 86], the Honourable Apex Court observed as follows: 28.In Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC), it has been held by this court that the test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established. (emphasis added) 13.7.In a recent pronouncement, the Honourable Apex Court was placed to hold that when a person claims exception from the operation of a st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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