Income Tax Appellate Tribunal - Chennai
Deputy Director Of Income Tax ... vs Willingdon Charitable Trust on 30 June, 2006
Equivalent citations: [2007]103ITD493(CHENNAI), (2007)106TTJ(CHENNAI)1121
ORDER
Mahavir Singh, J.M.
1. These cross-appeals of the Revenue and the assessee are directed against separate orders of the CIT(A), Chennai. The relevant assessment years involved in these appeals are 1995-96, 1996-97, 1997-98, 1998-99 and 2000-01.
2. The common issue raised, in these appeals of the Revenue as well as the assessee is regarding denial of exemption under Section 11 of the IT Act, 1961 on the basis that the trust properties held are used for commercial purposes instead of charitable purposes and consequent to that, computation of income from these properties as well as donations is assessed as business income.
3. The briefly stated facts are that the assessee is a registered trust under Section 12A(a) of the Act. It was established as a club by name "The Willingdon" which was started in 1924 with the then Governor of the State of Madras, the Administrative General of the State of Madras and the Secretary and Treasurer of State Bank of India as trustees. The main object of the club was to encourage and maintain the social interconnection between Europeans and Indians for promotion of sports, such as tennis and other indoor games and past-time for the purpose of entertainment and amusements, educational instructive or otherwise and such other purposes. The Willingdon Club acquired the property known as Willingdon premises bearing Door No. 1/4, Marshalls Road, Egmore, Chennai, for a sum of Rs. 2 lakhs. The activities of the club became ineffective over the years, due to significant political and social changes brought about by the Indian independence. Subsequently, in the year 1971, a new organization was created under the name of 'The Willingdon Charitable Trust'. The said organization constituted a society by a resolution passed on 27th Feb., 1971 for the proper utilization of the property and for the fulfilment of the objects of the trust and for promoting other objects consistent with the needs of modern times and the said trust was registered under the Societies Registration Act, 1860. The trustees of the said charitable trust applied to the Madras High Court in C.S. No. 76/1973 for transfer of the property of the erstwhile "The Willingdon" to "The Willingdon Charitable Trust". The Hon'ble Madras High Court by its order dt. 8th March, 1973 empowered the first mentioned three trustees of "The Willingdon" to transfer the properties and the assets of the club to "The Willingdon Charitable Trust" for the purpose of administering the aims and objects as mentioned in the memorandum of association and rules made thereunder of the trust. In view of the order of the Hon'ble Madras High Court, the properties and assets of the "The Willingdon" transferred to "The Willingdon Charitable Trust".
4. In view of the above background, The Willingdon Charitable Trust was created and managed by a board of directors with 15 trustees inclusive of the 3 trustees of the erstwhile "The Willingdon". The aims and objects of "The Willingdon Charitable Trust" are enumerated in Clause 3 of the memorandum of association, dt. 10th Feb., 1971 which reads as under:
3. The objects and aims of the trust shall be as follows:
(1) To establish, run or maintain educational, technical or technological institutions of all kinds in India for the benefit of the public.
(2) To institute and maintain or support hospitals, creches and dispensaries.
(3) To maintain homes for orphans, to support and educate pupils and students and destitute children.
(4) To award scholarships and stipends for education and to institute lectureships and arrange lectures and arrange or support cultural activities of a charitable nature enuring for the benefit of the public and also to establish endowments for such purposes.
(5) To provide relief for the poor and the distressed.
(6) To provide for the carrying out of protection of animals useful to mankind and generally to spend amounts for charitable purposes enuring for the benefit of the public.
(7) To collect and maintain a fund to be contributed by voluntary donations and subscriptions for the objects and purpose of the trust.
(8) To accept any gifts or property movable or immovable on such terms and conditions as may be agreed to between the donor or donors and the trust but so as not to incur any liability on the part of the trust or members of the trust board and provided also that the conditions agreed to are of a charitable nature enuring for the benefit of the public.
(9) To act as trustees and managers of any institution of trust having similar objects in fit and proper cases.
(10) To construct and maintain any buildings of works necessary or convenient for the purpose of the trust.
(11) To incorporate with itself any institution, society or association having objects wholly or in part, similar to those of the trust and are of a charitable nature enuring for the benefit of the public and to co-operate with any person or body of persons in aid of such object, provided such object is of a charitable nature enuring for the benefit of the public.
(12) To do such other lawful acts and things as may be necessary or incidental and conducive to the attainment of the above aims and objects of any of them.
5. The assessee-trust owned property, viz., "The Willingdon" which consists of land admeasuring 187 grounds. The assessee initially built a commercial complex and three floors admeasuring about 45100 sq. ft. between 1990 and 1992 for a total sum of Rs. 3.5 crores as loan taken from M/s Indian Bank. Thereafter, the assessee constructed additional floor area of 9105 sq. ft. for which a loan of Rs. 58.29 lakhs was received from M/s Indian Bank. Again in the years 1997 and 1999, the assessee constructed 4th floor with an area of 794.5 sq. ft. after obtaining a loan of Rs. 1.53 crores from M/s Indian Bank. The commercial complex as constructed was leased out to M/s Indian Bank and other entities. The assessee was receiving rental income from this property. Between 1989 and 1091, the assessee constructed two large auditoriums namely, Raja Muthiah Hall and Rani Meyammai Hall at a cost of Rs. 4.88 crores. The assessee received a donation of Rs. 3.05 crores from M/s Indian Cultural Trust and the balance was received from M/s Indian Bank and M/s South India Corporation. The assessee on completion of these two auditoriums started letting out the same for marriages, exhibitions and other social and religious functions. The assessee-trust was also running a ladies hostel in the complex.
6. The assessee has admitted the income from running of these two auditoriums by way of rent and amenities as well as donations for the following assessment years is as under:
Rs.
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Sl. No. Asst. yr. Rent Amenities Donations Total
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1. 1992-93 64,750 1,40,082 - 2,04,832
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2. 1993-94 4,62,500 15,31,581 28,12,500 48,06,581
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3. 1994-95 4,10,250 13,69,728 25,78,000 43,57,978
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4. 1995-96 6,16,000 28,81,741 37,71,002 72,68,743
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5. 1996-97 Rent and Amenties 6600447 50,62,501 1,16,62,948
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6. 1997-98 Rent and Amenties 7065934 51,00,000 1,21,65,934
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Further, the assessee has also admitted the income from running of ladies hostel as under:
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Sl. No. Asst. yr. Income
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1 1996-97 36,391
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2 1997-98 3,24,620
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The assessee claimed excess of expenditure over income for the asst. yr. 1995-96 and admitted the excess of expenditure over income for the asst. yrs. 1996-97, 1997-98, 1998-99, 2000-01. During the asst. yrs. 1996-97, 1997-98 and 2000-01, the assessee filed Form 10 under Rule 17 of the IT Rules r/w Section 11(2) of the Act for accumulation of its income starting from the asst. yr. 1996-97 ending with he previous year 31st March, 2001, i.e. 2000-01 to construct a college for women in Madras. The assessee along with Form 10 filed other details such as investment/deposit of the accumulated income in the modes specified under Section 11(5) of the Act. Accordingly, the assessee claimed exemption under Section 11 of the Act to the income mentioned as above for all these years. In view of these facts, the AO in all these years, examined the issue as to whether, the assessee is doing charitable activities within the meaning of Section 2(15) of the Act, so as to allow or not to allow exemption under Section 11 of the Act. Considering the main activity of the assessee to run the two auditoriums, which are let out for marriages, exhibitions and other social and religious functions and the ladies hostel, the AO found that these activities are commercial in nature. Further, he considered the resolution passed in 1992 by the board of the trustees of the assessee-trust and he has gone through the entire rent chart including the donations and amenities which is as under:
Rs.
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Name of the hall Donation Rent Maintenance A/C Amenities Total Charges charges
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Rani Meyammai Hall
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First day 13,500 9,000 2,500 5,000 30,000
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Subsequent days 10,500 7,000 1,000 5,000 23,000 (per day)
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Raja Muthiah Hall
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First day 12,000 8,000 2,500 5,000 27,500
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Subsequent days 9,000 6,000 1,000 5,000 22,000 (per day)
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For conducting meetings for 4 hrs. duration
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The AO also found that apart from the above, the assessee was providing the following services and collecting charges from its customers which are as under:
(i) Various amenities in the halls,
(ii) Vessels,
(iii) Furnitures,
(iv) Water facilities,
(v) Electricity,
(vi) Air conditioners, auditorium maintenance charges including telephone services,
(vii) Maintenance charges.
The AO further found that the rent per day for the two auditoriums included the donations and other amenities and held that the objects of the trust as enumerated above did not include the construction of auditoriums and letting out the same to the public. Hence, for the following reasons, he held that the trust is not for charitable purposes and the same could not constitute a general public utility within the meaning of Section 2(15) of the Act:
(i) While constructing an auditorium and letting out on "no profit no loss basis may constitute a general public utility, letting out auditoriums at high rate, would not be the same.
(ii) For public, hiring auditoriums either from a private entity or from a charitable trust is one and the same. If running an auditorium constitutes an object of general public utility, then an auditorium run buy a private entity could also be considered as a charitable activity.
(iii) The fact that the income earned by the appellant from the running of the auditorium is ear marked for construction of college for women in Chennai cannot itself make a commercial activity a charitable purpose.
(iv) The activity of running auditoriums is not incidental to the objects of the appellant as it is a commercial activity earning huge profits. As observed by the Madras High Court in the case of CIT v. Sivakasi Hindu Nadars Uravinmurai , the predominant object of a charitable trust should be charitable purpose and not to earn profit, whereas in the case of the appellant, the predominant object is running of the auditoriums.
7. The AO also examined another aspect as to whether these two auditoriums are a 'property held in trust' or not. He held that the running of a ladies hostel could not either be an object of the trust or incidental to the objects as the said activity was not incorporated as an object of the trust. Therefore, he held that these activities are totally independent from the objects of the trust. For this, he has given the following reasons:
(i) The property was not settled by the founders of the trust as corpus.
(ii) The property was not donated to the trust by any other person.
(iii) The activity of running auditoriums was never one of the objects of the trust.
(iv) The property was constructed by the trust on appellant's own volition and not on the direction of the settler or donor.
Further, after considering the activities of the assessee-trust that running of two auditoriums, he considered that the same is not an object of the trust or incidental to any objects of the trust but an independent activity. Accordingly, he held that it is to be treated as 'business activity for profit' for the following reasons:
(i) The activity of letting out the auditorium is organized on commercial lines as not only the auditorium but also furniture, utensils and all other infrastructure/facilities available in the premises are given on hire.
(ii) The auditoriums are let out on substantially high rents to the persons of high society and to organizations for huge exhibitions and the activity of letting out resulted in profit. Considering the same, the situation is analogous to the case of CIT v. V. Shanmugham . Though in that case, a person was running a lodging house, in the present case, the auditorium premises and other infrastructures are hired making it a concerted business activity, having a taint of commerciality. The appellant has rendered the activity of letting out Kalyana Mandapams and the supporting infrastructure in a systematic well organized manner to efficiently see the users of the auditoriums and there is no difference between services rendered by a modern hotel or a lodge and the services rendered by the appellant excepting there is no supply of food in the case of the appellant. If running a hotel or a lodge can be considered as a business running an auditorium should also be considered as a business.
8. The AO also examined the issue as to whether the assessee satisfies the conditions under Section 11 (4A) of the Act or not. According to him, unless and until the assessee satisfies the condition therein, the income of the trust cannot be considered as exempt under Section 11 of the Act. He considered that the Finance Act, 1983 deleted the expression "not involving the carrying on of any activity for profit" in Section 2(15) of the Act and, therefore, carrying on of business per se cannot be a reason for denial of exemption under Section 11 of the Act in view of conditions laid down under Section 11 (4A) of the Act. The AO further held that the assessee did not satisfy the said conditions for the following reasons:
(i) Firstly, the business if any carried on by a trust should be incidental to the attainments of the objectives of the trust. In the present case, the activity of letting out the auditoriums cannot be considered as incidental to the objects as it is an independent and commercial activity. The word 'incidental' means depending upon or pertaining to something else primary, that is something incidental to the main purpose. In the case of Gayathri Women Welfare Association, the Karnataka High Court found that the said association set up an ancillary unit for assembling HMT watches and since it provided employment to a number of women, the activity of setting up of the ancillary unit was considered as 'incidental' to the objects of the said association. In the case of the appellant, however, the same thing cannot be said as the activity of letting out the auditoriums is not a primary and incidental activity.
(ii) Secondly, a trust should maintain separate books of account in respect of income from the business activity. In the present case, though the appellant is maintaining books of account relating to the activity of letting out the auditoriums, it is crediting income by the way of rent from M/s Indian Bank as well as interest on fixed deposits in the same account, etc. It keeps a separate account only for running the ladies hostel"
The AO was of the view that the above two conditions should be cumulatively satisfied under Section 11(4A) of the Act for exemption. Since the assessee has not satisfied any of the conditions, he denied the exemption under Section 11(4A) of the Act. Aggrieved by the orders of the AO in all these years, the assessee preferred appeals before the CIT(A). The CIT(A) has allowed the claim of the assessee for the asst. yrs. 1996-97, 1997-98, 1998-99 and for the asst. yrs. 1995-96 and 2000-01 were not allowed and the order of the AO was confirmed. Hence, aggrieved, the Revenue is in appeal for the asst. yrs. 1996-97, 1997-98 and 1998-99 and the assessee is in appeal for the asst. yrs. 1995-96 and 2000-01. On the same reasonings, the order of the AO was revised for the asst. yr. 1995-96 under Section 263 of the Act against which the assessee is also in appeal before the Tribunal.
9. We have heard the rival contentions and gone through the case records. Before us, the learned Counsel for the assessee has filed memorandum of income for the asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 along with the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Janakiammal Ayyandar Trust as well as of the Tribunal. The facts are undisputed. The learned Departmental Representative has not objected to the facts. The assessee's contention before the AO as well as the CIT(A) was that even if the provisions of Section 11(4A) of the Act are considered applicable, profit making is not prohibited provided such activity is not an object in itself but it is incidental to the charitable objectives of a trust. It was also contended that even granting but not conceding that letting out of auditoriums constitutes a business activity, such business is a 'property held in trust' within the meaning of Section 11(4) of the Act and that taxability of income from such 'a business held in trust' can only be decided as per that sub-section, i.e. 11(4) and not according to Section 11(4A) of the Act. In view of this, if there is income over and above the income admitted is computed as per the provisions of the IT Act, then such excess income could be taxed under Section 11(4) of the Act. But the AO interpreted the provisions of Sections 11(4) and 11(4A) of the Act in a different manner. It was the contention of the assessee that any income from a property, being business held in trust, will be eligible for exemption under Section 11 of the Act provided conditions in Section 11(4A) are satisfied but even if the twin conditions of the Section 11(4A) of the Act are satisfied, excess of income computed over and above the income shown in the accounts will have to be taxed as income which is applied for other than charitable purposes. This interpretation of the AO was not acceptable to the assessee on the ground that the property in question was donated by another trust to it and therefore though the auditoriums were constructed by it the property should be considered as property held in the trust. The assessee relied on the decision of the Hon'ble apex Court in Asstt. CIT v. Thanthi Trust Etc., Etc (2001) 165 CTR (SC) 681 : (2001) 247 ITR 785(SC). According to the AO, the trustees are only permitted to construct the buildings to carry on the activities of the trust and not to construct auditoriums. But the contention of the assessee was that running of the auditoriums is a business held in trust but the AO did not accept this stand. After going through the assessment order, we find that the AO has arrived at the following findings:
(i) The activity of the assessee, viz., letting out the two magnificent auditoriums to trade association for carrying on exhibition, etc. and to provide them to individuals for conducting marriages along with necessary infrastructure such as furniture, utensils, etc. at exorbitant rates affordable only by the most affluent in the society, is not a charitable activity. On this count, the assessee should lose its claim for exemption under Section 11 in respect of its business income.
(ii) The above activity constitutes a commercial activity, the income from which is assessable under the head Business or profession. This business is not one held in trust by the assessee.
(iii) If the income from business is to enjoy the benefit of exemption under Section 11 it has got to satisfy the conditions mentioned in Section 11(4A).
(iv) Out of the two conditions mentioned in Section 11(4A) the one, viz., that the business should be incidental to the objectives of the trust is not satisfied in the assessee's case. Also the second condition, viz., that it should maintain separate accounts in respect of its business activity is also not satisfied. Therefore, on this account also, the assessee has to lose its claim for exemption under Section 11 in respect of the income from letting out of the auditoriums.
10. The assessee's contention was that the income earned by the assessee-trust is exempt under Sections 11 and 12 of the Act. Further, it was submitted that it is holding properties detailed above in trust to carry on the charitable activities. It has not carried on any commercial activity and its activities are only intended for general public utility. It was further submitted that the provisions of Sections 10 to 13 are not violated warranting denial of exemption under Section 11 of the Act to it. Before us, now, the learned Counsel for the assessee argued that the assessee is collecting donations from various persons using the auditoriums but it does not receive any corpus donations from these persons. It was also contended that it collects rent for the use of the halls in that auditoriums and collecting rent for the provisions of various amenities. It spent money received from the rent, etc. to the upkeep and maintenance of the auditoriums and spent the donations received towards expenditure for the charitable purposes. The excess of income over expenditure is incidental and is not a profit in the hands of the assessee as the businessmen would understand it in the commercial sense. Further, it was submitted that the assessee has been carrying on the charitable activities and the Department has been treating the assessee as a charitable trust for income-tax purposes for the past several years. The learned Counsel for the assessee submitted that the funds were accumulated for which Form 10 was filed by the assessee and the purpose shown therein was 'construction of women's college at Gandhi Nagar, Adayar, Chennai'. He further stated that even while running a women's hostel, donations are collected apart from the rent and these funds were utilized for charitable purposes exclusively and the assessee fulfilled all the conditions laid down under Section 11 of the Act. During the course of hearing before the CIT(A), the assessee filed the written submissions and contended as under:
(i) As regards the facts mentioned by the AO in respect of formation of trust and the construction of buildings, etc., there is no dispute.
(ii) The observation of the AO that the rent charged for the two auditoriums are very high and are beyond the reach of the common man is not warranted on the facts of the case since the rent charged is based on the area occupied and also taken into account certain other considerations like provisions of amenities such as electricity, car parking, watch and ward and other facilities.
(iii) The observation of the AO that neither the erstwhile "The Wellingdon" or the appellant "The Willingdon Charitable Trust" were authorized to construct and let out auditoriums and to run a ladies hostel is erroneous and is not borne out by any material on record to the contrary. The memorandum of association lists out the objects and aims of the trust which contains the following:
3.10. construct and maintain any buildings or works necessary or convenient for the purpose of the trust.
In view of the above clause, the appellant can construct and maintain any building or works necessary or convenient for the purpose of the trust. The purpose of the trust is mainly educational, medical relief and relief of poor, protection of animals useful to mankind and as mentioned in Clauses 3(1) to 3(6). The other subjects mentioned in Clauses 3(7) to 3(12) are in the nature of powers which have been incorporated in order to carry out the purpose of the trust. Clauses 3(10) and 3(12) provide that the trust is empowered to do such other lawful acts and things as may be necessary, incidental and conducive to the attainment of the above aims and objects and in Clause 3(10), the construction and maintenance of any building is an incidental power given to the trustees and out of the income earned from the said building in the form of rent, the trust is able to generate funds in order to do charity. In other words, the two auditoriums in question are property owned by the trust, which carries on activities in order to feed the charity for regular course of generating funds, to attain the objects of the trust. Thus, it is clear that the carrying on of activities in question is within the objects and powers of the trust in terms of Clause 3(10) of the memorandum of association.
The AO also observed the properties are not held in trust for the reason that these properties were not in existence with the erstwhile "The Willingdon". The submission of the appellant is that the property originally belonging to the "The Willingdon" was made over and given to it as per Court order and it holds it in trust from it's inception in view of the fact that the building that existed at the time of transferring to the appellant is in a dilapidated condition and the appellant has to demolish the same partly and construct various buildings. The AO further observed that these properties are not used for the objects of the erstwhile "The Willingdon" is not correct, since he ought to have appreciated that the appellant has filed Form No. 10 and has specifically mentioned that the income of the trust is accumulated for the construction of a college at Gandhi Nagar, Adyar, Chennai. As it is clear from Clause 3(1), the main object of the trust is educational and the funds generated out of these two auditoriums are meant for such purpose. In the case of CIT v. Sivakasi Hindu Nadars Uravinmurai , Madras High Court remanded the matter to the Tribunal to find out whether the trust has spent the money for charitable purpose. In the present case, the appellant has opted for accumulating the income from letting out of the auditoriums for specific educational purpose and thus the facts are to be distinguished.
(v) The AO remarked that running of a ladies hostel cannot be considered as a property held in trust. This hostel is basically meant for college students and therefore it is also incidental to the education object of the trust.
(vi) Though the AO observed that the activities of the appellant are not for charitable purposes within the meaning of Section 2(15) of the IT Act, it is submitted that the objects of the trust listed out in the memorandum of association detailed above are charitable objects. Reliance is placed on the decision of the Supreme Court in the case of Thiagarajar Charities v. Addl. CIT and Addl. CIT v. Surat Art Silk Cloth Manufacturers Association .
(vii) The activities of running auditoriums are intermingled with the objects of the trust and the power of the trust. The activities are charitable and the exploitation of the properties are incidental to the appellant's objects. Therefore, the case laws relied on by the AO are not applicable to the facts of the case. In the case of CIT v. V. Shanmugam , the Madras High Court was concerned with the activity of running a lodging house and this judgment is not applicable to the facts of the present case as the appellant has no profit motive at all. The surplus earned in excess of income over expenditure is incidental and it should not be compared with the profit earned by a business entity.
(viii) The AO also held that the conditions laid down in Section 11(4A) are not fulfilled. The appellant submits that it is not carrying any business activity at all and hence invoking the provisions of Section 11(4A) does not arise.
11. On these contentions of the assessee, the CIT(A) asked for the comments of the AO, who vide his report dt. 18th April, 2000 submitted the para wise comments as under:
(i) The main issues are:
(a) Whether the properties viz., Raja Muthiah Hall, Rani Meyammai Hall and ladies hostel are held in trust.
(b) Whether the assessee's activities are authorized in it's objects.
(c) Whether the activities undertaken by the assessee are incidental activities to the objects.
(d) What is the nature of income.
(e) Whether the conditions laid in Sub-section (4) of Section 11 or Sub-section (4A) of Section 11 are attracted, if so what is the result.'
(ii) With regard to the first two issues whether the properties, i.e. two auditoriums and ladies hostel are held in trust and whether such activities are authorized by the objects of the trust, it may be seen that the appellant was vested with a property in a dilapidated condition and the appellant constructed the present buildings which are used for the purposes detailed above. In view of the AO, the above properties are not held in trust for the reason that such properties were not settled/donated to the appellant as a corpus by the founders of the trust or by any of the donors, etc. and that neither the activities undertaken by the appellant are authorized in the objects of the trust nor they are incidental to such objects. It is his view that these activities are commercial activities.
(iii) The view that the property can be considered as held in trust can be taken when a property is either settled by the founders of the trust as corpus or donated by any other person, is in conformity with the settled law. In the case of the appellant, the properties were constructed by appellant's own volition and not on the direction of the settler or a donor. The view of the appellant that it constructed the present building on a property settled by a Court order and as such this property held in trust, cannot be accepted as the present buildings are constructed on the plot without any authorization by the objects of the trust. In his view, the activities are commercial in nature as fully detailed in the assessment order.
(iv) As regards the issue whether the activities undertaken by the appellant are incidental to the objects of the trust, the AO contended that letting out of auditoriums is not one of the objects of the trust and hence such commercial activity is not in any way incidental to the objects of the trust.
(v) The appellant submits that it's activities are so intermingled with the objects and power of the trust and it is also pleaded that the activities are charitable and the exploitation of the properties are incidental to it's objects. In view of the AO, the activities of running the auditoriums and ladies hostel are not incidental to the objects. The word "incidental" would mean "depending upon or appertaining to something else as primary, something necessary, appertaining to, or depending upon another which is termed the principal; something incidental to the main purpose." In the case of the appellant however these activities are totally independent, commercially undertaken and unconnected with any of it's objects. Therefore the contention of the appellant is not correct.
(vi) As regards the nature of income, the AO has held that since the activities are commercial in nature and not incidental to the objects of the trust. As it is a business activity, income therefrom is business income. The AO cited in this regard the high rents charged by the appellant for letting out the auditoriums as well as for amenities and facilities and the systematic maintenance of auditoriums on commercial line with the help of technical personnel such as civil engineers, electrical engineers, etc. He further stressed the fact that there is no landlord and tenant relationship and, therefore, the income cannot be charged under the head "House property" and it is to be necessarily assessed as business income like income from a lodge or a hotel. The AO further stressed the fact that running the auditoriums is a commercial business activity.
(vii) As regards the last issue whether the appellant satisfied conditions under Section 11(4) or 11(4A) of the IT Act, it is stated that since the activities undertaken by the appellant are business activities and since the appellant has not maintained separate books of account in respect of such activities, it has to be held that the appellant has not satisfied the provisions of Section 11(4A) of the IT Act.
12. First of all, going through the aims and objects of the trust, it is seen that the assessee can construct any buildings for the purpose of the trust. The expression, 'for the purpose of the trust' means that the trust is empowered to construct any buildings, inter alia, to achieve the objects of the trust as enumerated in Sub-clause. (1) to (12) above. The expression, 'for the purpose of the trust' would include construction of buildings ultimately in order to attain other objects of the trust and this expression would only amount to empowerment of the assessee for constructing building for its own use directly to achieve the objects of the trust. After going through the records including that of the AO, it is observed that the AO was of the view that if the vacant land in the property has been used for construction of an educational institution, which would be run by the trust, then it would be in order, whereas the construction of auditoriums and running of the same is not in order. It is not denied by the Revenue that excess of income over expenditure from the activity of letting out the auditoriums is being used by the assessee towards the main object. There is no finding by the authorities below that the assessee is not carrying on charitable activities. The only dispute is regarding running of auditoriums and a ladies hostel and collecting rent and donations. This income was utilized by the assessee for the charitable activities and the assessee has fulfilled all the conditions as enumerated in Section 11(5) of the Act. Further, Clause 3(12) shows that the founders of the trust did visualize future needs of the trust by way of unspecified 'lawful acts' and 'things' as may be 'necessary or incidental or conducive to the attainment of the aims and objects of the trust. Since the assessee developed the property received from the erstwhile "The Willingdon" towards the achievement of the objects for which it was set up, the auditoriums held by the assessee are 'property held in trust' for the purposes of Section 11 of the Act.
13. Now, the issue arises whether running of two auditoriums, i.e. hiring them out and related amenities as well as running of ladies hostel would constitute the activity incidental to attainment of the objects of the trust. It is seen from the records that the main objects of the trust are charitable and the exploitation of the properties in question are incidental to attainment of the said objects. It is seen from the above facts that the properties are held in trust and their use and exploitation towards the fulfilment of the objects of the trust particularly having regard to the aims and objects, the activity should be considered as incidental to the attainment of the objects. We do not agree with the reasoning given by the AO that the properties are not held in trust and running the auditoriums is neither an activity as per the objects or incidental to the objects in holding that running of the auditoriums is independent and commercial/business activity for the reason that the hire charges received are high and the activity of letting out of the auditoriums and the related amenities are being carried out in a systematic and business manner. We also do not agree with the finding of the AO that apart from collecting rent from the auditoriums and the related amenities, the assessee also collected donations which should become part of the business income. It is seen from the resolution passed in 1992 for charges of the auditoriums as well as the ladies hostel, that the rate of hire of auditoriums and the related amenities have been fixed by taking into account the locality and the extent of space let out, the amenities/facilities provided and so on. It is a fact that hire charges have been fixed on a prudent basis so as to recoup the cost of the asset and if in that process, there is excess of income over expenditure, the same goes to augment the income for the application of incidental object, i.e. charitable purposes. For this, we have to go through the case law cited by the learned Counsel for the assessee wherein the Hon'ble apex Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association , wherein it was beautifully explained the meaning of activity for profit and charitable purpose which reads as under:
It being clear then that the charitable purpose is the advancement of the object, and that the advancement must not involve carrying on of an activity for profit, I proceed to the next step. The words "activity for profit" should, I think, be taken as descriptive of the nature of the activity. It is an activity of a kind intended to yield profit. It is a profit making activity. That it may not actually yield profit during any period does not deny its true nature. Conversely, if profit has resulted from an activity, that does not, without anything more, classify it as an "activity for profit".
Therefore, for a purpose to fall under the fourth head of "charitable purpose", it must constitute the advancement of an object of general public utility in which the activity of advancement must not involve a profit making activity. The word "involving" in the restrictive clause is not without significance. Activity is involved in the advancement of an object when it is enwrapped or enveloped in the activity of advancement. In another case, it may be interwoven into the activity of advancement, so that the resulting activity has a dual nature or is twin faceted. Since we are concerned with the definition of "charitable purpose", and the definition defines in its entirety a "purpose" only, it will be more appropriate to speak of the purpose of profit making being enwrapped or enveloped in the purpose of the advancement of an object of general public utility or, in other kind of case, the purpose of profit making being interwoven into the purpose of the advancement of that object giving rise to a purpose possessing a dual nature or twin facets. Now Section 2(15) clearly says that to constitute a "charitable purpose", the purpose of profit making must be excluded. In my opinion, the requirement is satisfied where there is either a total absence of the purpose of profit making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit making purpose holds a dominating role or even constitutes an equal component with the purpose of advancement of the object of general public utility, then clearly the definition in Section 2(15) is not satisfied. When applying Section 11, it is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the institution, and enter into an ascertainment of the true purpose of the trust or institution. The true purpose must be genuinely and essentially charitable.
Now, the definition of a purpose is a thing apart from the mode or method employed for carrying out the purpose. Yet the nature of the purpose controls in some degree that mode which is open for carrying it out. If the purpose is charitable in reality, the mode adopted must be one which is directed to carrying out the charitable purpose. It would include, in my opinion, a business engaged in for carrying out the charitable purpose of the trust or institution. The carrying on of such a business does not detract from the purpose which permeates it, the end result of the business activity being the effectuation of the charitable purpose. A business activity carried on, not with a view to carry out the charitable purpose of the trust but which is related to a non-charitable purpose or constitutes an end in itself falls outside the scope of the trust, and indeed may betray the fact that the real purpose of the trust is not essentially charitable. If it is a business entered into for working out the purpose of the trust or institution, that is to say, in the course of, and with a view to, the realization of the charitable purpose, the income therefrom will be entitled to exemption under Section 11. In this connection, it is appropriate to note that Section 11(4) specifically defines "property held under trust" as including a business undertaking. Moreover, when it was found that judicial decisions had held the restrictive clause in Section 2(15) to control the fourth head only, and not also the first three heads in the definition, Parliament attempted to secure its original intent by enacting Clause (bb) in Section 13(1). The two provisions represent the mode of finding finance for working out the purpose of the trust or institution, by deriving income from the corpus of the trust property and also from an activity carried on in the course of the actual carrying out of the purpose of the trust or institution.
At this stage, it will be appropriate to point out that the question whether a trust is created or an institution is established for a charitable purpose falls to be determined by reference to the real purpose of the trust or the institution and not by the circumstance that the income derived can be measured by standards usually applicable to a commercial activity. The quantum of income is no test in itself. It may be the result of an activity permissible under a truly charitable purpose for, as has been observed, a profitable activity in working out the charitable purpose is not excluded. I am unable to agree, with respect, with all that has fallen from H.R. Khanna and C.A. Gupta, JJ. In Sole Trustee, Loka Shikshana Trust v. CIT that the terms of the trust must impose restrictions on making profits, otherwise the purpose of the trust must be regarded as involving the carrying on of a profit making activity. On the contrary, I find myself in agreement with Beg, J. to the extent that he says, in the same case, that it is the genuineness of the purpose, that it is truly charitable, which determines the issue. It seems necessary to me that a distinction must constantly be maintained between what is merely a definition of "charitable purpose" and the powers conferred for working out or fulfilling that purpose. While the purpose and the powers must correlate, they cannot be identified with each other. Reference may, of course, be made to the nature and width of the powers as evidence of the charitable or non-charitable nature of the purpose. For the same reason, I am compelled, with respect, to hold that the observations of Krishna Iyer, J., speaking for the Court, in Indian Chamber of Commerce v. CIT do not accord with what I believe to be a true construction of Section 2(15). If that decision can be justified, it can be only on the basis that in the opinion of the Court the true purpose of the trust or institution was essentially charitable. I am unable to accept the proposition that if the purpose is truly charitable, the attainment of the purpose must rigorously exclude any activity for profit. I am also unable to endorse the position that by permitting the trust or institution to carry on an activity which brings in profit, although that activity is carried on in the course of the working out of the purpose of the trust or institution, "businessmen have a highroad to tax avoidance". It was apparently not brought to the notice of the learned Judges that a carefully enacted scheme has been incorporated in the Act which closely controls the utilization of the trust income, and that the tax exemption is conditional on the observance of the statutory conditions stipulated in that scheme.
14. Further in the case of Asstt. CIT v. Thanthi Trust (supra), the Hon'ble apex Court has held regarding applicability of Sub-sections (4) and (4A) of Section 11 of the Act as under:
Sub-section (4) of Section 11 remains on the statute book, and it defines property held under trust for the purposes of that section to include a business so held. It then states how such income is to be determined. In other words, if such income is not to be included in the income of the trust, its quantum is to be determined in the manner set out in Sub-section (4).
Sub-s. (1)(a) of Section 11 says that income derived from property held under trust only for charitable or religious purposes, to the extent it is used in the manner indicated therein, shall not be included in the total income of the previous year of the trust. Sub-section (4) defines the words "property held under trust" for the purposes of Section 11 to include a business held under trust. Sub-section (4A) restricts the benefit under Section 11 so that it is not available for income derived from business unless (a) the business is carried on by a trust only for public religious purposes and it is of printing and publishing books or any other notified kind, or (b) it is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution, provided, in both cases, that separate books of account are maintained by the trust or the institution in respect of such business. Trusts and institutions are separately dealt with in the Act (s. 11 itself and Sections 12, 12A and 13, for example). The expressions refer to entities differently constituted. It is thus clear that the newspaper business that is carried on by the trust does not fall within Sub-section (4A). The trust is not only for public religious purposes so it does not fall within Clause (a). It is a trust not an institution, so it does not fall within Clause (b). It must, therefore, be held that for the assessment years in question the trust was not entitled to the exemption contained in Section 11 in respect of the income of its newspaper.
We now address the third controversy, which relates to Sub-section (4A) of Section 11 as substituted w.e.f. 1st April, 1992. The learned Solicitor General submitted that while the substituted Sub-section (4A) gave trusts and institutions a wider latitude than the earlier Sub-section (4A), it had still to be construed to mean that a trust or institution would not get the benefit of Section 11 unless the business it carried on was carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Dr. Pal, on the other hand, submitted that the substituted Sub-section (4A) was couched in wide language and a trust was entitled to the benefit of Section 11 if it utilized the income of its business for the purposes of achieving its objects.
The substituted Sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the trust or institution, if "the business is incidental to the attainment of the objective of the trust or, as the case may be, institution" and separate books of account are maintained in respect of such business. Clearly, the scope of Sub-section (4A) is more beneficial to a trust or institution than was the scope of Sub-section (4A) as originally enacted. In fact, it seems to us that the substituted Sub-section (4A) gives a trust or institution a greater benefit than was given by Section 13(1)(bb). If the object of Parliament was to give trusts and institutions no more benefit than that given by Section 13(1)(bb), the language of Section 13(1)(bb) would have been employed in the substituted Sub-section (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 utilized 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, is entitled to the benefit of Section 11 for the asst. yr. 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.
15. In the present case, the only issue under consideration is the applicability of Section 11(4) and (4A) of the Act and the relevant section reads as under:
11. Income from property held for charitable or religious purposes-
(1) to (3)...
(4) For the purposes of this section "property held under trust" includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the AO shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
(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.
The Hon'ble apex Court in Asstt. CIT v. Thanthi Trust (supra) has dealt with the issue regarding the applicability and scope of Sub-section (4A) of Section 11 as amended w.e.f. 1st April, 1992 and the Hon'ble apex Court has held that provision is more beneficial to the trust or institution than was the scope of the section before the amendment w.e.f. 1st April, 1992. After the amendment of this section, 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. The income from the business which is utilized by the trust or 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 or institution. This view has clearly been expressed by the Hon'ble apex Court as narrated above. In the present case in hand, the only issue is as to whether the income from these two auditoriums and ladies hostel including the rent, amenities and donations is for the purpose of achieving the objects of the trust or incidental to the objects of the trust. We are of the considered view that these incomes are for the attainment of the objects of the trust and these incomes are arising out of the properties held in trust. These properties are held as trust property and in no way this can be termed as profits and gains of the business which are not for the attainment of objects of the trust. In view of these facts and circumstances of the case, we feel that w.e.f. 1st April, 1992, even after amendment in Section 11(4A) of the Act, the assessee is entitled to exemption from excess income over expenditure from these two auditoriums and ladies hostel on account of rent, donations and amenities.
16. In the result, the appeals of the assessee are allowed the appeals of the Revenue are dismissed.