Can exemption of Section 11 can be withdrawn on omission of Section 10(20A)?

Charitable organization is a kind of institution or a business that falls under the category of NPO or non-profit organization and can be based on providing educational, religious or public interest activities. There are different kinds of activities of the charitable organizations. Some of them offer relief to the needy people who are in distress, poverty or are underprivileged.

There are also some who are related to educational, scientific or religious affiliations. Some of the activities of charitable organization also include the creation of public building and monuments and take care of them. All these are done by the donations that a charitable organization gets. Due to their distinct organisation and objective entire income of such charitable or religious trusts are taxed as per the provisions of section 11-13 of the Income Tax Act, 1961, which provides for various tax benefits to them.

What benefit under income tax is provided to trusts?

Trust formed for charitable or religious purposes which are not intended to do commercial activities are allowed various benefits under the Income-Tax Act, inter-alia, exemption under section 11.

What do you mean by religious or charitable purpose?

The term religious purpose is not defined under the Income-Tax Act. Section 2(15) of the Income Tax Act defines “charitable purpose” to include relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.

However, the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess, fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless:

such activity is undertaken in the course of carrying out of such advancement of any other object of general public utility and
the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year

How is income from property held for charitable or religious purposes by is trust, taxed?

According to Section 11 of the Income Tax Act, the following income from property held for charitable or religious purposes shall not be included in the total income of the previous year

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; and
where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property

In simple words,

15% of gross receipts from such trust property – Exempt

85% of gross receipt from such trust property

Income Applied for Charitable Purposes in India – Exempt to the extent to which applied for the following purposes:
1. Purchase of capital asset
2. Repayment of loan for purchase of capital asset
3. Revenue Expenditure
4. Donation to trust registered u/s 12AA or u/s 10(23C)
In case whole or part of income is not received during that year in which it is derived. Income deemed to be applied for charitable purpose in India and exempt shall be:
1. Income is applied for charitable purpose in India in the year of receipt or in the immediate succeeding year.
2. Assessee submits a declaration to the AO on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the year of receipt or succeeding year.
In any other case exempt income shall be:
- Such income is applied in above mentioned charitable purposes in the immediately succeeding year.
- Assessee submits a declaration to the AO on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the immediate succeeding year.

Let us refer to the case of JCIT(OSD), (Exemptions) Vs Patiala Improvement Trust (ITAT Chandigarh), where the issue under consideration was whether exemption of Section 11 can be withdrawn on omission of Section 10(20A)?

Facts of the Case:

The assessee society registered under section 12A of the Act, 1961 and subsequently withdrawn, filed its return of income for the assessment year under consideration declaring nil income after claiming exemption u/s 11 of the Act.
The AO noticed that during the year relevant to the assessment year under consideration the assessee carried on the business of sale and purchase of residential plots and commercial properties and earned huge net profit, which did not fall within the ambit of the advancement of any other object of general public utility under section 2(15) of the Act.
Accordingly, the AO asked the assessee to justify its claim and after hearing the assessee rejected the claim of the assessee.
The AO rejected the claim of the of the assessee and after making addition on account of disallowance of donation amounting and disallowance of service Tax paid, passed Assessment Order u/s 143(3).

Order of Commissioner of Income tax (Appeals) [CIT(A)]

The assessee challenged the assessment order before the CIT(A).
The CIT(A) relying on the decision of the ITAT in the case of Hoshiarpur Improvement Trust Vs. ITO and the decision of the ITAT Chandigarh Bench in assessee’s own case, allowed the appeal of the assessee.
Feeling aggrieved by the said findings of the CIT(A), the Revenue appealed before the Income Tax Appellate Tribunal (ITAT).
The only grievance of the Revenue is that the CIT (A) has wrongly held that the assessee is entitled for exemption u/s 11 of the Act.

Observations of ITAT on the previous ruling of ITAT on assessee’s own case

The Coordinate Bench had decided the identical issue in favour of the assessee in assessee’s own case for the A.Y. 2012-13.
In the said case, the assessee submitted the decision of Punjab and Haryana High Court in the case of Tribune Trust (2016) (P&H).
In this case the High Court decided the issue of applicability of section 2(15) in favour of Improvement Trust.

Reference by ITAT to an older case

High Court of Punjab & Haryana High Court in case of CIT(E), Chandigarh Vs. M/s Improvement Trust, Moga held that:

The Tribunal also rightly held that an object of general public utility did not necessarily require the activities to be funded or subsidized by the State.
So long as the objects fell within the ambit of the words “object of general public utility”, it was sufficient.
The achievements of those objects did not have to be as a result of State funding or State subsidy.
The Tribunal accordingly rightly held that the authorities were not justified in denying the benefit of section 11 and holding that the assessee was not covered by the words “advancement of any other object of general public utility” in Section 2(15).
The Tribunal, therefore, rightly directed the Assessing Officer to delete disallowance of exemption.
It could not possibly be suggested that the Government of Punjab formed the trusts under the Punjab Town Improvement Act, 1922 because it wanted to carry on the business as colonizers or developers under the mask of the category “objects of general public utility”.
Section 28(2)(iii) of the Punjab Town Improvement Act, 1922 permitted a scheme under this Act to provide inter- alia for the disposal of the land vested in or acquired by the trust including by lease, sale and exchange thereof.
This, however, was not the predominant activity or responsibility of the trust. Nor the assessee was making profits from this activity as its predominant motive.

The duty contained in Section 24 was not similar to that of a private developer or a colonizer as wrongly suggested by the Assessing Officer and confirmed by the CIT(A).
The development scheme under section 24 was prepared for the purpose of development of a locality.
Section 24(2) provided that the trust may if it is of the opinion that it is expedient and for the public advantage to promote and control the development of and to provide for the expansion of a municipality in any locality adjacent thereto within the local area of such trust prepare “an expansion scheme”.
The development scheme, therefore, was for the public purpose of development of any locality and an expansion scheme is also prepared when it is expedient and for the public advantage as opposed to a mere personal advantage as in the case of private developers or the colonizers.
The two could not possibly be compared.
These schemes did not contemplate mere development of the plots and the construction of the premises for sale.
The Trust must under the Act adopt a holistic approach for the betterment and advantage of the entire area within its jurisdiction.
Section 25 which provided for a housing accommodation scheme to be framed was similar.

The trust was required to frame such a scheme if it is of the opinion that it is expedient and for the public advantage to provide housing accommodation for any class of inhabitants within its local area.
The trust was, therefore, to be motivated not by personal but by public benefit. Such activities clearly fell within the last category of cases in the proviso to Section 2(15) as it stood at the relevant time, namely, “advancement of an object of general public utility”.
It could hardly be suggested that the Government of Punjab established the assessee’s trust and conferred upon its public responsibilities and duties of the nature specified in the PTI Act as a camouflage for its commercial, trade and business ventures. The creation and incorporation of the trust under section 3 was for a public purpose.
The appellants, would, therefore, undoubtedly have been entitled to the benefit of Section 10(20A).
The assessee would not have been entitled to the benefit of Section 10(20A) upon its omission by the Finance Act, 2002 with effect from 01.04.2003. Section 10(20A) of the Act did not contain any other requirement. It was wider than Section 2(15).
However, Section 2(15) and the corresponding sections including Sections 11, 12, 12A and 12AA were independent of Section 10(20A) of the Act.

Upon the omission of Section 10(20A), the provisions of the other sections were not affected. They remained intact.
An assessee could have been entitled to the provisions of Section 10(20A) and the other provisions simultaneously. The omission of one, however, did not affect the validity or the existence of the others.
The two provisions were distinct and independent of each other. Thus, the omission of Section 10(20A) did not affect the rights of the parties claiming the benefit of Sections 2(15), 11, 12, 12A and 12AA of the Act.

Conclusion by ITAT in the present case

Following the above judgement, ITAT did not find any infirmity in the order of the CIT(A) and deciding the identical issue in favour of the assessee the departmental appeal was dismissed.

In simple words, benefit of Sections 2(15), 11, 12, 12A and 12AA are available even on the omission of Section 10(20A).

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