Running Petrol Pump Was Incidental to Attainment of Educational Objects of Trust If Surplus Was Used for Charitable Activities: ITAT

Case Details: Smt. Lingammal Ramaraju Shastra Prathistha Trust vs. Asst. Commissioner of Income-tax (Exemptions) - [2024] 168 taxmann.com 476 (Chennai-Trib.)

Judiciary and Counsel Details

• ABY T. Varkey, Judicial Member & Manoj Kumar Aggarwal, Accountant Member
• S. Muralidhar, FCA for the Appellant.
• R. Clement Ramesh Kumar, CIT for the Respondent.

Facts of the Case

The assessee was a public charitable trust registered under section 12A. The assessee trust was running a music school and a library as its main charitable activity, viz., education. It also ran a petrol pump whose receipts were claimed to be utilized for meeting its charitable objectives. For the relevant assessment year, the assessee had filed its return of income declaring nil total income after claiming exemption under section 11.

During the assessment proceedings, the Assessing Officer (AO) completed the assessment wherein, the exemption claimed by the assessee under section 11 was accepted and allowed. Subsequently, the Commissioner (Exemptions) issued a show cause notice under section 263, proposing to revise the assessment order and withdrawing the exemption. It was contended that the petrol outlet business cannot be said to be ‘incidental’ to the education activities of the trust from where it earned more than 80 percent of its income.

Aggrieved by the order, an appeal was filed to the Chennai Tribunal.

ITAT Held

The Tribunal held that the income derived from property held under trust wholly for charitable or religious purposes is exempt from tax under section 11(1) subject to fulfilment of several conditions. Section 11(4) clarifies that ‘property held under trust’ includes a business undertaking. Therefore, profits derived from a business undertaking held under trust also qualify for the exemption, subject to the fulfilment of other conditions.

Section 11(4A) thereafter stipulates two conditions for the claim of exemption of business income under section 11(1); one being that the business is incidental to the attainment of objectives of the trust and the other being that separate books of account are maintained in respect of such business.

The above provisions are applicable to all charitable trusts registered under section 12A seeking exemption under section 11. Relying upon the decision in ACIT (Exemptions) v. Ahmedabad Urban Development Authority [2018] 143 taxmann.com 278 [Para 35], it was found that the Supreme Court has classified the charitable trusts into two categories, viz., ‘per se categories’ of charities (which includes education) and ‘GPU’ trusts and thereafter interpreted the term ‘incidental’ in the context of GPU trusts.

The word ‘incidental’ as appearing in section 11(4A) qua the GPU trusts has to be interpreted in the light of sub-clause (i) of the proviso to section 2(15), i.e., the business should be conducted in the course of actually carrying on the GPU object and the receipts from the business should not exceed 20 per cent of the total receipts of the trust.

Thus, this interpretation of the Supreme Court required a first-degree nexus between the business and the charitable activity in as much as this additional condition imposed was only for GPU trusts on their business activities in terms of the proviso to section 2(15).

The Supreme Court in ACIT v. Thanthi Trust [247 ITR 275] has held that a business whose income is utilised by the trust or the institution for the purpose of achieving the objectives of the trust or the institution is surely a business that is incidental to the attainment of the objectives of the trust.

Therefore, in the case of ‘per se categories’ of charities, a business whose income feeds the charity is to be regarded as a business incidental to the attainment of the objectives of the trust or the institution. In the instant case, the assessee trust falls under the third category, i.e. ‘per se charitable trusts’.

Therefore, applying the ratio laid down in Thanthi Trust’s case, the petrol bunk business carried on by the assessee trust is to be regarded as business incidental to the attainment of the educational objects of the trust as the assessee has demonstrated that the entire surplus from the petrol bunk was utilised for the main charitable activities of the Trust, i.e. education, and separate books of account have been maintained in respect of such business.

Accordingly, it was held that the assessee was fulfilling the conditions set out in section 11(4A).

List of Cases Reviewed

• Malabar Industrial Co. Ltd. v. CIT (243 ITR 83)[Para 24] – followed.
• New Noble Education Society v. CCIT (143 taxmann.com 276)[Para 26] – followed.
• CIT v. NIIT Foundation (467 ITR 63 ) [Para 27] – followed.
• Delhi Music Society v. DGIT (357 ITR 265 ) [Para 28] – followed.
• ACIT (Exemptions) v. Ahmedabad Urban Development Authority [2018] 143 taxmann.com 278 [Para 35] – followed.
• ACIT v. Thanthi Trust (247 ITR 275) [Para 45] – followed.
• DIT(E) v. Wellington Charitable Trust (195 Taxman 232) [Para 45] – followed.
• PCIT v. SPPL Property Management P Limited (2023) 151 taxmann.com 103 [Para 45] – followed.
• Chennai Kammavar Trust [2017] 81 taxmann.com 365 (Chennai – Trib)[Para 43] – distinguished.
• Nirmithi Kendra [2018] 100 taxmann.com 293 (Cochin – Trib.) [Para 43] – distinguished.
• Young Women’s Christian Association of Madras [2014] 41 taxmann.com 142 (Chennai – Trib.)[Para 43] – distinguished.
• Murasoli Trust [2016] 65 taxmann.com 186 (Chennai – Trib.) [Para 43] – distinguished.

List of Cases Referred to

• ACIT v. Thanthi Trust 247 ITR 275 (para 2),
• DIT (Exemptions) v. Willington Charitable Trust [2010] 195 Taxman 232/[2011] 330 ITR 24 (Madras) (para 2),
• Asstt. CIT (Exemptions) v. Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278/144 taxmann.com 78/449 ITR 389/[2023] 290 Taxman 137 (SC) (para 34),
• New Noble Educational Society v. Chief CIT [2022] 143 taxmann.com 276/[2023] 290 Taxman 206/[2022] 448 ITR 594 (SC) (para 3),
• Delhi Music Society v. DIT [2012] 17 taxmann.com 49/204 Taxman 231/[2013] 357 ITR 265 (Delhi) (para 11),
• CIT v. NIIT Foundation [2024] 164 taxmann.com 628/467 ITR 63 (Delhi) (para 11),
• Pr. CIT v. SPPL Property Management (P.) Ltd. [2023] 151 taxmann.com 103/293 Taxman 458 (Calcutta) (para 16),
• Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66/243 ITR 83 (SC) (para 22),
• Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) (para 28)
• Checkmate Services (P.) Ltd. v. CIT [2022] 143 taxmann.com 178/[2023] 290 Taxman 19/[2022] 448 ITR 518 (SC) (para 46).