Income Tax Appellate Tribunal - Cochin
M/S.Ashis Super Merchato, Cochin vs Assessee on 5 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI N.R.S.GANESAN, JM and CHANDRA POOJARI, AM
I.T.A. Nos. 67&68/Coch/2014
Assessment Years : 2007-08 & 2008-09
M/s. Ashish Super Mercato, Vs. The Deputy Director of Income-tax
Verapoly Archdiocesan Sales (Exemption), Range-2, Ernakulam.
Centre, Marine Drive,
Kochi-682 031.
[PAN: AAATA 3485D]
(Assessee -Appellant) (Revenue-Respondent)
Assessee by .Smt. Divya Ravindran, Adv.
Revenue by Shri K.K.John, Sr. DR
Date of hearing 13/10/2014
Date of pronouncement 05/12/2014
ORDER
Per CHANDRA POOJARI, Accountant Member:
These two appeals filed by the assessee are directed against the different orders passed by the CIT(A)-II, for the assessment years 2007-08 and 2008-09.
2. Since the issue is identical in both the appeals, they were clubbed together, heard together and are being disposed of by this common order for the sake of convenience.
2 I.T.A. Nos.67&68/Coch/2014
3. The only grievance of the assessee in these appeals is with regard to non-granting of exemption under section 11(4A) of the I.T. Act, though the assessee was registered under section 12A of the I.T. Act.
4. The brief facts as narrated in I.T.A. No. 67/coch/2014 are that the assessee is a Public Charitable Trust with registration under section 12A of the I.T. Act, 1961. The institution filed its return of income for the assessment year 2007-08 on 24/10/2007 declaring nil income. While making the assessment, the Assessing officer disallowed the claim u/s. 11 of the Act. The Assessing officer also found that no separate books of accounts were maintained for business activities and also disallowed bad debts written off at Rs.3,099/-, interest and penalty at Rs.1,03,720/- and depreciation claimed at Rs.1,55,540/-. The Assessing officer has also applied maximum marginal rate for the income and issued two notices one u/s. 156 for tax at nil and the other notice demanding the tax of Rs.13,04,483/-.
4.1 While making the addition, the Assessing officer had gone into the details of the main activities of the Trust, its main objects and the nature of the activities under various head. On observing that the major income and expenditure of the assessee Trust was by running a super market on commercial basis and not by charitable and religious activities so that he 3 I.T.A. Nos.67&68/Coch/2014 disallowed exemption u/s. 11(4A) to the assessee. Against this, the assessee carried the matter in appeal before the CIT(A).
5. The CIT(A) observed that although the assessee society is religious and charitable organization, it was undertaking mission activities, organizing Catholic Community development programmes but at the same time, it was also running super market by name Ashish Super Mercato. In this regard, according to the CIT(A), the provisions of section 11 are very clear, according to which, where the income is derived from the property held under Trust "wholly" for charitable or religious purposes, and such income is applied for charitable or religious purposes, then only the various benefits under the section are allowable to the Trust. In this case, the CIT(A) observed that the assessee Trust was not undertaking its activities wholly for charitable or religious purposes, rather the total income from commercial activities by running a super market there are gross receipts to the tune of Rs.77,45,329/- whereas expenses for charity are only to the tune of Rs. 12,00,177/- (Rs.11,96,410 as per the Assessing officer). 5.1 The CIT(A) further observed that in a number of High Court and Supreme Court decisions, it was held that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the 4 I.T.A. Nos.67&68/Coch/2014 primary or dominant purpose would not prevent the trust or institution from being a valid charity. According to the CIT(A), the test which has, therefore, to be applied is whether the object which is said to be non- charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable. The CIT(A) also relied on the decision of the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufactures Association (121 ITR 1) where in it was held that any commercial activity can be taken as incidental or conducive to the attainment of objects of the trust. Although the word "wholly" may not be applied in strict sense but it should not be that commercial activity are main activities and charitable or religious activities become ancillary in the over all activity of the assessee. 5.2 The CIT(A) also observed that since in the present case, the major activity of charitable organization is running of a super market, the same cannot be treated as charitable or religious activity as it is being carried out on commercial principles of business expediency for earning profit and running of this super market can also not be treated as business incidental to the attainment of the objectives of the trust. The CIT(A) also observed that the receipts derived from such running of super market are not exclusively used for charitable purpose rather majority of the expenses are towards establishment and running of the super market. According to the 5 I.T.A. Nos.67&68/Coch/2014 CIT(A), it is also not a case where super market is selling various articles on any subsidized rates to benefit the poor or need and they are selling it at profit as any other general merchant does. Thus the CIT(A) held that running of super market where receipts are to the tune of Rs.77,45,329/- and charitable expenses are of Rs.12,00,177/- cannot be said as ancillary or incidental activity undertaken while doing charity, rather the whole fabric of activities looks like a corporate business being undertaken, where as part of the corporate social responsibility some charity which works out to just 15.5% of total receipts has been done.
5.3 According to the CIT(A), as per the provisions of sub-section (4A) of section 11 amended with effect from 01-04-1992 all that is required for the business income of the trust or institutions to be exempt from tax is that the business should be incidental to the attainment of the objective of the trust or institution and that separate books of accounts are maintained by such Trust or institution in respect of business as well as charitable activities. In view of the specific provision of sec. 11 that activities of the organization should be wholly for charitable and religious purposes, and if they are in the nature of business, the same have to conform to the conditions laid down in sec 11(4A), the CIT(A) justified the action of the Assessing officer in holding that the assessee is not entitled to exemption u/s. 11 of the I.T. Act. Accordingly, the CIT(A) confirmed the denial of 6 I.T.A. Nos.67&68/Coch/2014 exemption of the income of the assessee u/s. 11(4A) of the Act. Against this, the assessee is in appeal before us.
6. The Ld. AR submitted that the assessee is registered as a charitable institution under the Travancore Cochin Literary Scientific and Charitable Societies Registration Act, 1955. According to the Ld. AR, the main objectives for which the Society was formed as per para 4 of the Memorandum of Association are as under:
(a) To promote the cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self-reliance among the members of the public.
(b) To respond to the needs of time and to organize Catholic Community for receiving social justice, general upliftment and growth.
(c) To foster the spirit of charity to all and to secure educational, social and economic development to the members of the community.
(d)To establish and maintain technical, commercial and medical institutions and to impart useful training to create self-reliance to the members of the community.
(e) To establish and maintain institutions for the relief of the sick and the ailing, for the indigent, the disabled, the old and destitute, the orphans and the uncared for without any consideration of caste, community, colour or creed.
(f) To raise funds by subscriptions, donations, gifts foundations and loans and to receive aids and subsidies in cash or kind.
(g) To establish an exhibition-cum-sales centre for the products of the various social service organizations in the Archdiocese on a charitable basis and to undertake any commercial activity that would not be 7 I.T.A. Nos.67&68/Coch/2014 contrary to the objectives of the society and to use the profits from such commercial activities to further the objectives of the society.
(h) To proved funds from the income of the Society for the charitable works and mission activities of the Archdiocese of Verapoly as well as of similar societies within the Archdiocese of Verapoly.
(i) To acquire movable and immovable properties by purchase, lease, mortgage, etc. and to administer and deal with the same in the manner as may be decided by the Governing Body.
(j) To obtain finances and loans from Banks and other institutions for the establishment or otherwise and for implementing the projects that may be undertaken by the society.
(k) To pledge, hypothecate or mortgage movable or immovable property belonging to the Society.
(l) To equip the establishments, undertakings or institutions with necessary instruments; machineries furnitures and equipments.
(m)To maintain funds to meet the expenses of capital nature and pay into such funds, moneys at such times and in such amounts as the Governing Body may decide from time to time.
(n) To establish and maintain reserve funds as may be decided by the Governing Body depending upon the requirements of the Society.
(o) To invest and deal with the funds of the Society not immediately required, in societies or other institutions.
(p) To do and carry out all such other lawful acts, deeds and things which are essential, incidental or conducive to the attainment of the objects of the society.
6.1 The Ld. AR submitted that the Assessing officer has erroneously held that the Trust has not carried out any activity of charitable nature for the public at large and he came to a finding that none of the objectives set out in the Trust Deed, except running the Super Market for commercial 8 I.T.A. Nos.67&68/Coch/2014 purposes have been carried out by the assessee. The Ld. AR submitted that the Assessing officer relied on sec. 11(4A) of the Act and held that the business should be incidental to the attainment of the object of the Trust for being eligible for exemption u/s. 11 of the Act. According to the Ld. AR, the Assessing officer also held that the activity carried out by the Trust is not incidental to the attainment of any charitable activity as set out in the objects of the Trust and accordingly, it was held that the assessee is not eligible for exemption u/s. 11 of the Act and the CIT(A) also confirmed the above order.
6.2 The Ld. AR submitted that the assessee rejected the proposal to complete the assessment by treating the status of the Society as AOP wherein it was stated that major expenses of the Society are establishment and administrative in nature and that the amount spent for charity is only for a particular community and hence the meaning of public charity is not covered by its activities. For this, the Ld. AR relied on the following case law:
1. Sole Trustee, Loka Shikshana Trust vs. CIT (1975)(101 ITR 234) (SC).
2. Additional CIT vs. Surat Art Silk Cloth Manufactures Association (1980) (121 ITR 1 (SC).9 I.T.A. Nos.67&68/Coch/2014
3. CIT vs. Dharmodayam Co. (1977) 109 ITR 527) (SC).
6.3 Having rejected the claim for exemption for 2007-08, the Ld. AR submitted that the Assessing officer followed the same method of assessment for the assessment year 2008-09 also.
6.4 The Ld. AR submitted that the entire income of the Society, including the income from Super Market was earmarked for charitable activities and that the income was actually allowed as exemption u/s. 11 in the past. According to the Ld. AR, it was incorrect to say that the objectives of the Trust are not fulfilled and the registration granted u/s. 12A would extend to the assessment years 2007-08 and 2008-09. Being so, there is no violation of sec. 11 of the Act.
7. The Ld. AR also filed 2nd paper book (pgs. 4 to 112) containing donation and charity vouchers for the assessment year 2007-08 and 2008- 09 respectively. In the 2nd paper book (pg. 113), the Ld. AR also filed a petition seeking admission of the additional documents.
8. On the other hand, the Ld. DR strongly objected to the admission of the additional documents and also submitted that these documents shall not be admitted at this stage. Further, he submitted that the assessee was 10 I.T.A. Nos.67&68/Coch/2014 carrying on the business of super market on commercial basis and there is no question of any charitable activities being involved in it. Being so, the assessee cannot be granted exemption u/s. 11(4A) of the I.T. Act. 8.1 The Ld. DR also relied on the following case law:
1) ACIT vs. Thanthi Trust (2001) (247 ITR 785) (SC).
2) Ideal Publications Trust vs. CIT (2008) (305 ITR 143) (Ker.)
9. We have heard both the parties and perused the record. The issue before us is whether, on the facts and circumstances of the case and having regard to the terms of the Trust Deed, it can be said that the super market business carried on by the assessee was itself held under the Trust. For this purpose it is proper to go through the objects for which assessee-Trust is formed. As per the Memorandum of association of the assessee, the objects are as follows:
Clause No. 4 of Trust Deed:
(a) To promote the cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self-reliance among the members of the public.
(b) To respond to the needs of time and to organize Catholic Community for receiving social justice, general upliftment and growth.11 I.T.A. Nos.67&68/Coch/2014
(c) To foster the spirit of charity to all and to secure educational, social and economic development to the members of the community.
(d)To establish and maintain technical, commercial and medical institutions and to impart useful training to create self-reliance to the members of the community.
(e) To establish and maintain institutions for the relief of the sick and the ailing, for the indigent, the disabled, the old and destitute, the orphans and the uncared for without any consideration of caste, community, colour or creed.
(f) To raise funds by subscriptions, donations, gifts foundations and loans and to receive aids and subsidies in cash or kind.
(g) To establish an exhibition-cum-sales centre for the products of the various social service organizations in the Archdiocese on a charitable basis and to undertake any commercial activity that would not be contrary to the objectives of the society and to use the profits from such commercial activities to further the objectives of the society.
(h) To proved funds from the income of the Society for the charitable works and mission activities of the Archdiocese of Verapoly as well as of similar societies within the Archdiocese of Verapoly.
(i) To acquire movable and immovable properties by purchase, lease, mortgage, etc. and to administer and deal with the same in the manner as may be decided by the Governing Body.
(j) To obtain finances and loans from Banks and other institutions for the establishment or otherwise and for implementing the projects that may be undertaken by the society.
(k) To pledge, hypothecate or mortgage movable or immovable property belonging to the Society.
(l) To equip the establishments, undertakings or institutions with necessary instruments; machineries furnitures and equipments.
(m)To maintain funds to meet the expenses of capital nature and pay into such funds, moneys at such times and in such amounts as the Governing Body may decide from time to time.12 I.T.A. Nos.67&68/Coch/2014
(n) To establish and maintain reserve funds as may be decided by the Governing Body depending upon the requirements of the Society.
(o) To invest and deal with the funds of the Society not immediately required, in societies or other institutions.
(p) To do and carry out all such other lawful acts, deeds and things which are essential, incidental or conducive to the attainment of the objects of the society.
10. It is to be noted that section 11(1) of the Act grants exemption to the income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India. There is no exhaustive definition of the words "property held under trust" in the Act; however, sub-section (4) says that for the purposes of section 11, the words "Property held under trust" "includes a business undertaking so held". Sub-section (4A) as it stands amended by the Finance (No. 2) Act, 1991, with effect from April 1, 1992, is in the following terms:
"(4A) 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."
11. Thus, if a property is held under trust, and such property is a business, the case would fall u/s. 11(4) and not u/s. 11(4A) of the Act. 13 I.T.A. Nos.67&68/Coch/2014 Section 11(4A) of the Act would apply only to a case where the business is not held under trust. Thus, there is difference between property or business held under trust and business carried on by or on behalf of the trust.
12. This distinction was recognized by the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 wherein it was observed that if a business undertaking is held under trust for a charitable purpose, the income therefrom would be entitled to the exemption u/s. 11(1) of the Act. In the present case, the finding of the CIT(A) is that the super market business was not held under trust, but it was business commenced/carried on by the Society, subsequent to the formation of trust. Though the business was commenced by the Society and it was carried on by the Society after its formation, it cannot be said to constitute property held under trust. U/s. 11(4), it is only the business which is held under the trust that would enjoy exemption in respect of its income u/s. 11(1) of the I.T. Act and there is a distinction between the objects of a trust and the powers given to the trustees to effectuate the purpose of the trust. Though the objects of the trust were charitable, they were mere powers conferred upon the trustees to carry on the business and the profits from such business would benefit the charitable objects. The exemption u/s. 11 cannot be granted on the reason that the business itself 14 I.T.A. Nos.67&68/Coch/2014 was not in existence at the time of formation of the trust and the property held under trust at the time of formation of the trust was not spelt out in the Memorandum of Association of the assessee. The business of supermarket was not at all in existence at the time of formation of the trust so as to say that the business is property held under trust. Thus, the supermarket business was not even in the contemplation of the Memorandum of Association on the basis of which the Society is formed and, therefore, could not have been settled upon trust. The business carried on behalf of a trust rather indicates a business which is not held in trust, than a business of the trust run by the assessee. In this case, the supermarket business was carried on by the assessee for and on behalf of the trust and it was not business held under trust. Section 11(1) of the Act confers exemption from tax only where the property is itself held under trust or other legal obligation; it does not apply to cases where a trust or legal obligation is not created on any property but only the income derived for a charitable or religious purpose. Surplus funds of a trust, which was claimed to be exempt on the footing that it was property held under trust within the meaning of sec. 11(1) of the Act, was not property held under trust since the property from which the surplus was generated was itself not held under trust. In other words, merely carrying on business for and on behalf of the trust and applying the profits of the same for the object of the 15 I.T.A. Nos.67&68/Coch/2014 trust does not entitle for exemption u/s. 11(4) of the Act unless the business is incidental to the attainment of the objects of the trust.
13. We now proceed to consider the question whether the carrying on of the supermarket business was incidental to the attainment of the objects of the trust. We fail to see any connection between the carrying on the supermarket business and the attainment of the objects of the trust, which are basically to promote cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self-reliance among the members of the public and other objects enumerated in the preceding paragraph. The mere fact that whole or some part of the income from supermarket business is earmarked for charitable purposes would not render the business itself being considered as incidental to the attainment of the objects. We are in agreement with the Department that the application of income generated by the business is not relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives.
14. It was contended by the Ld. AR that the surplus funds generated from the supermarket business was spent towards charitable activities and therefore, the assessee is entitled for exemption u/s. 11(4) of the I.T. Act. 16 I.T.A. Nos.67&68/Coch/2014 We are unable to accept this contention. Initially, the assessee carried on the business itself which is not at all property held under trust. This activity is a business activity and the provisions of section 11(4A) of the Act is applicable.
15. It was contended that if the profits of the business carried on by the trust are utilized by the trust for the purposes of achieving the objectives of the trust, then the business should be considered to be incidental to the attainment of the objects of the trust as observed by the Supreme Court in the case of ACIT vs. Thanthi Trust (2001) 247 ITR 785 which is as under:
"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 utilized by the trust or the institution for the purposes of achieving 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".
16. Prima facie the above observation would appear to support the assessee's case in the sense that even if the supermarket business is held not to constitute a business held under trust, but only as a business carried on by or on behalf of the trust, so long as the profits generated by it are applied for the charitable objects of the trust, the condition imposed u/s. 11(4A) of the Act should be held to be satisfied, entitling the trust to the tax exemption.
17 I.T.A. Nos.67&68/Coch/2014
17. In our opinion, these observations have to be understood in the light of the facts before the Supreme Court in the case of Thanthi Trust (supra) wherein the trust carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of education which falls u/s. 2(15) of the Act. The newspaper business was incidental to the attainment of the object of the trust, namely that of imparting education and the profits of the newspaper business ere utilized by the trust for achieving the object of imparting education. In this case, there is no such nexus between the supermarket business and the objects of the assessee that can constitute the carrying on of the supermarket business, an activity incidental to the attainment of the objects, namely, to promote cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self-reliance among the members of the public etc. We are therefore, of the opinion that the observations of the Supreme Court must be understood and appreciated in the background of the fact in that case and should not be extended indiscriminately to all cases. Being so, we are inclined to hold that the assessee is not entitled for exemption u/s. 11 of the I.T. Act.
18 I.T.A. Nos.67&68/Coch/2014
18. In the result, both the appeals filed by the assessee are dismissed.
Pronounced in the open court on 05-12-2014
JM under separate order sd/-
(N.R.S.GANESAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi
Dated: 5th December,2014
GJ
Copy to:
1. M/s. Ashish Super Mercato, Verapoly Archdiocesan Sales Centre, Marine Drive, Kochi-682 031.
2. The Deputy Director of Income-tax (Exemption), Range-2, Ernakulam.
3. The Commissioner of Income-tax(Appeals)-II, Kochi.
4. The Commissioner of Income-tax,Kochi.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin