DIT (E) vs. M/s Lala Lajpatrai Memorial Trust (Bombay High Court)

DATE: April 13, 2016 (Date of pronouncement)
DATE: April 19, 2016 (Date of publication)
AY: -
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S. 2(15)/ 11: If the predominant purpose is charitable, the earning of profit from an incidental activity like letting of property does not affect the charitable status. As the letting is a part of the educational activities, there is no obligation to maintain separate books u/s 11(4A). As per CBDT Circular No. 11 of 2008, the first proviso to s. 2(15) applies to the 'advancement of any other object of general public utility'

The DIT (E) passed an order withdrawing/cancelling registration of the assessee under section 12A of the Act on the ground that the activities of letting out the building as carried out by the assessee were in the nature of trade, commerce, commercial business etc. It was alleged that the assessee has received service charge of Rs.12 lacs for renting out the premises for running the institution of Management. Further, the assessee had earned an income of Rs.15,02,182 for letting out of the auditorium. The assessee’s objects were of “advancement of education” and thus receiving rent would fall in the category of “any other object of general public utility” attracting the first proviso to section 2 (15) of the Act as applicable from the year 2009-10. Accordingly, it was held that the assessee though a charitable trust, the activities of the assessee ceased to be charitable thereby resulting in the assessee loosing its charitable character no longer being entitled to the benefits of section 11. The Director of Income Tax (Exemption) accordingly held that section 12AA (3) was attracted and cancelled the registration of the assessee granted under section 12A of the Act. The Tribunal reversed the order of the DIT(E). On appeal by the department to the High Court HELD dismissing the appeal:

(i) It is well settled principle of law that the test to determine as to what would be a charitable purpose within the meaning of section 2 (15) of the Act, is to ascertain what is the dominant object of the activity; whether it is to carry out a charitable purpose or to earn profit. If the predominant object is to carryout a charitable purpose and not to earn profit the purpose would not lose its charitable character merely because the some profit arises from the activity. (See CIT Andhra Pradesh vs APSRTC Hyderabad (1986) 2 Supreme Court Cases 391).

(ii) The revenue’s contention that the tribunal has overlooked the provisions of section 11(4A) is unfounded. We have noted above that the service charges received in respect of 6th and 7th floor were clearly on account of educational purpose. Letting out was incidental and not the principle activity of the assessee trust. Thus, in our opinion, section 11(4A) which require separate account to be maintained would not be attracted in view of our conclusion that the said amounts as received by the assessee for the assessment year have been received from educational activity which is the dominant activity of the assessee trust. In our opinion, if this be the case, separate books of accounts cannot be insisted upon as the said activity becomes part and parcel of the educational activities carried out by the assessee trust. In such a case, the benefit of exemption under section 11 (4A) cannot be denied. An interpretation as urged on behalf of the revenue would render nugatory the very spirit, rationale and the object of the exemption provisions making the same unworkable. In this context, we may usefully refer to the observations of the division bench of this Court in the case of Director of Income Tax (Exemption) vs Vile Parle Kelawani Mandal to which one of us (S.C.Dharmadhikari, J) is a member) in which a similar contention as urged on behalf of the revenue was repelled

(iii) The assessee has also appropriately relied on the Circular No.11 of 2008 of the CBDT and which was issued in view of the amendment to section 2 (15) of the Act and insertion of the first proviso in question. The circular further clarifies the position as held by us above. The CBDT in para 2 has clarified the following implications arising from the amendment:

“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.

3. The newly inserted proviso to section 2 (15) will apply only to 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 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, extent and frequency of the activity.”

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