Trust's Business Income Exempt from Tax: Court Upholds Charitable Status

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Case Name:

Commissioner of Income Tax Vs Janakiammal Ayyanadar Charitable Trust (High Court of Madras)

Tax Case (Appeal) Nos.1566 and 1567 of 2005

Date: 18th September 2012

Key Takeaways:

1. A trust property given with directions to run a business and use income for charitable purposes can be eligible for tax exemption under Section 11 of the Income Tax Act.

2. The primary purpose of a trust being charitable in nature is crucial for determining tax exemption eligibility.

3. The court emphasized the importance of considering Sections 2(15), 11(4A), and 13(1)(bb) of the Income Tax Act when assessing charitable trusts' tax exemptions.

Issue:

Was the Income Tax Appellate Tribunal correct in holding that the Janakiammal Ayyanadar Charitable Trust is eligible for exemption under Section 11 of the Income Tax Act for income arising from its business and rental activities?

Facts:

1. The Janakiammal Ayyanadar Charitable Trust was created on April 30, 1957, primarily for educational and charitable purposes.

2. The founders gifted land and a business called "The National Papercaps Factory" to the trust, stipulating that trustees should run the business and use the income for charitable objects.

3. The trust claimed exemption under Section 11 of the Income Tax Act for income earned from the business during the relevant assessment years (1990-91 and 1991-92).

4. The Assessing Officer initially denied the exemption, citing Section 11(4A) and lack of evidence that the business was carried out in pursuit of the trust's primary objects.

5. The case went through appeals at the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, with both ruling in favor of the trust.

Arguments:

Revenue's Arguments:

1. The trust's income from the business is subject to Section 11(4A) and should not be exempt from tax.

2. The business carried on by the trust is not in the course of actually carrying out its primary charitable objects.

3. The ratio of the Supreme Court's judgment in the Thanthi Trust case (246 ITR 785) should apply to this case.

Trust's Arguments:

1. The primary purpose of the trust is charitable in nature.

2. The business was gifted to the trust with the specific direction to use its income for charitable purposes.

3. The trust is eligible for exemption under Section 11 of the Income Tax Act.

Key Legal Precedents:

1. Thiagarajar Charities Vs Additional CIT [1997] 225 ITR 1010

2. CIT Vs. Samyuktha Gowda Saraswatha Sabha (Mad) [2001] 245 ITR 242

3. Thanthi Trust Vs. Central Board of Direct Taxes [1995] 213 ITR 639

4. Addl. Commissioner of Income-tax v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1

5. Assistant Commissioner of Income Tax Vs. Thanthi Trust [2001] 247 ITR 785

Judgement:

The High Court dismissed the Revenue's appeal and confirmed the order of the Tribunal. Key points of the judgment include:

1. The court acknowledged that the Assessing Officer had found the primary purpose of the Trust to be charitable in nature.

2. The court emphasized the importance of considering Sections 2(15), 11(4A), and 13(1)(bb) of the Income Tax Act in light of the trust's charitable nature.

3. The court applied the law declared by the Apex Court in the Surat Art Silk Cloth Manufacturers Association and Thiagarajar Charities cases.

4. The court distinguished this case from the Thanthi Trust case.

5. The High Court confirmed that the trust is eligible for exemption under Section 11 of the Income Tax Act.

FAQs:

1. Q: What makes a trust eligible for tax exemption under Section 11 of the Income Tax Act?

  A: A trust can be eligible if its primary purpose is charitable in nature and it uses its income, including from business activities, for charitable objects.

2. Q: Can a charitable trust run a business and still claim tax exemption?

  A: Yes, if the business was given to the trust with directions to use its income for charitable purposes and it aligns with the trust's primary charitable objects.

3. Q: What is the significance of Section 11(4A) in this case?

  A: Section 11(4A) deals with the taxation of income from business activities of charitable trusts. The court considered this section along with others to determine the trust's eligibility for exemption.

4. Q: How did the court distinguish this case from the Thanthi Trust case?

  A: While the exact reasoning isn't provided in the summary, the court noted that this case was different from the Thanthi Trust case and applied precedents from other relevant Supreme Court judgments.

5. Q: What impact does this judgment have on other charitable trusts?

  A: This judgment reinforces the principle that trusts with a primary charitable purpose can claim tax exemption on income from gifted businesses if the income is used for charitable objects.

1. The Revenue is on appeal as against the order of the Tribunal relating to the assessment years 1990-91 and 1991-92.

2. It is seen from the narration of facts herein that the assessee Trust herein was created on 30.04.1957 mainly for educational and charitable purposes. The founders gifted the land and the business run in the name of "The National Papercaps Factory" with a stipulation that the said business shall be run by the trustees and the income therefrom shall be utilised for charitable objects.

3. During the relevant previous year, the trustees were stated to have carried on the business and claimed exemption under Section 11 of the Income Tax Act, in respect of the income earned therefrom. The claim for exemption under Section 11 made by the assessee was negatived by the Assessing Officer on the ground that the same was hit by Section 11(4A), that there was no evidence to hold that the business of manufacture and sale of paper caps carried on by the assessee Trust was in the course of actual carrying on of the primary objects. In so holding, the Assessing Officer relied on the decision reported in [1996] 219 ITR 303 (Commissioner of Income Tax Vs. Virudhunagar Hindu Nadars Abiviruthi Panchakadai Mahamai). Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals). Following the decision of the Apex Court reported in [1997] 225 ITR 1010 (Thiagarajar Charities Vs Additional CIT) and the order in the assessee's own case in respect of the assessment year 1994-95, the the assessee's appeal was allowed. Aggrieved by this, the Revenue went on appeal before the Income Tax Appellate Tribunal. Following the decision reported in [2001] 245 ITR 242 (CIT Vs. Samyuktha Gowda Saraswatha Sabha (Mad)) and [1995] 213 ITR 639 (Thanthi Trust Vs. Central Board of Direct Taxes), the Tribunal rejected the Revenue's appeal. Aggrieved by the same, the Revenue has preferred this appeal raising the following substantial questions of law:

" 1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the assessee trust is eligible for the exemption of the income arising out of the business carried on by National Paper Caps and rental income, under Section 11?

2. Whether in the facts and circumstances of the case, the income received by the assessee charitable trust is hit by the provision of Section 11(4A) and

3. Whether the ratio of the Supreme Court's judgment in the case of Thanthi Trust (246 ITR 785) is not squarely applicable to the facts and circumstances of the case? "

4. Even though the Tribunal had not given any finding as regards the primary purpose, yet, a reading of the order of the Income Tax Officer shows that the Officer had considered the clauses in the trust deed to arrive at the finding that the primary object of the Trust are charitable in nature and that the property given was impressed with the character of trust property. Having held so, the Officer, nevertheless, pointed out that there was no evidence to hold that the business of manufacture and sale of papercaps, carried on by the trust in the name of The National Papercaps Factory, was in the course of the actual carrying on of the primary objects; hence, the Trust was not entitled to claim exemption under Section 11 of the Income Tax Act. The Officer rejected the assessee's reliance on the decision reported in [1997] 225 ITR 1010 (Thiagarajar Charities Vs Additional CIT). With the finding of fact arrived at by the Officer that the primary purpose of the Trust was charitable in nature, in the face of Section 2(15) and Section 11(4A) read with Section 13(1)(bb) of the Income Tax Act, we have no hesitation in confirming the order of the Tribunal.

5. We have already considered the issues raised herein in a similar order in Tax Case (Appeal) Nos.259 to 261 of 2004, 987 to 991 of 2005, 1547 to 1549 of 2005 and 675 of 2008 (Commissioner of Income Tax, Madurai Vs. M/s.P.Iya Nadar Charitable Trust Sivakasi) by order dated 18.09.2012 and rejected the Revenue's Tax Cases by applying the law declared by the Apex Court in the decision reported in [1980] 121 ITR 1 (Addl. Commissioner of Income-tax v. Surat Art Silk Cloth Manufacturers Association) and [1997] 225 ITR 1010 (Thiagarajar Charities Vs Additional CIT) and we have distinguished the said case from the decision reported in [2001] 247 ITR 785 (Assistant Commissioner of Income Tax Vs. Thanthi Trust).

6. Even though the Tribunal had not considered the issue as a final fact finding authority, with no disputes raised by the Revenue on the facts and on the facts admitted by the Assessing Officer, we have no hesitation in rejecting the Tax Cases preferred by the Revenue and confirming the order of the Tribunal.

In the result, these Tax Cases (Appeals) stand dismissed. No costs.