THE issue before the Bench is - Whether the Katha business carried on by the assessee can be said to be incidental to the attainment of the objects of the trust for purpose of exemption u/s 11 when the object of the trust is to advance education, patriotism, Indian culture, running of hospitals and dispensaries. And the verdict goes in favour of the Revenue.
Facts of the case
The assessee a Charitable Trust. The trust deed set out the objects of the trust which included the establishing and maintaining of schools, colleges and study circles, etc. Clause 19 of the trust deed provided that the trust may "carry on any business for and on behalf or in the name of the trust for the sole object of applying the income and profits thereof for the purposes of objects of the trust”. The trustees were partner of firms which were themselves engaged in the business of the manufacture and sale of Katha. After the formation of the trust, a business was commenced in the name of the trust
The assessee a Charitable Trust. The trust deed set out the objects of the trust which included the establishing and maintaining of schools, colleges and study circles, etc. Clause 19 of the trust deed provided that the trust may "carry on any business for and on behalf or in the name of the trust for the sole object of applying the income and profits thereof for the purposes of objects of the trust”. The trustees were partner of firms which were themselves engaged in the business of the manufacture and sale of Katha. After the formation of the trust, a business was commenced in the name of the trust
for the manufacture of Katha. The funds for this business admittedly came from sister concerns of the firms in which the founder – trustees were partners and borrowings from banks and other agencies. A production unit was set up. This unit started production on 08.02.1973. Sometime in the year 1978, this unit was leased to M/s. Shankar Trading Co. (P) Ltd., a sister concern in which close relations of the trustees held substantial interest. The unit continued to be run by the aforesaid company. The trust was in receipt of monthly lease rental since then. The trust makes purchases and sale of Katha and cutch in its head office mainly through the two concerns in which the founder trustees had substantial interest. The assessee claimed exemption u/s 11. The AO held that the business was carried on not by the assessee – trust, but by the Board of Directors of the company who are managing the business and therefore the provisions of Section 11(4) were not applicable and the provisions of Section 11(4A) were applicable. The CIT (A) held that where the trustees decide to carry on the business in the name of the trust by borrowing funds or diverting money from sister concerns, it cannot be a case of property being held under trust but would be only a case of business being carried on for and on behalf of the trust. The CIT (A) further held that the fact that the income generated by the business was applied to the charitable purposes of the trust was not relevant and what was relevant was whether the business activity was itself incidental to the attainment of the objects of the trust, within the meaning of Section 11(4A).The CIT (A) also held that leasing out of the factory is only one mode of exploiting a commercial asset for gain and such gain falls to be considered as profits and gains of business. The Tribunal directed the AO to allow the exemption u/s 11 and thus allowed the appeal of the assessee. In respect of all the other A.Y namely 1993-94, 1994-95, 2001-02 and 2005-06 to 2007-08, the Tribunal has followed the earlier order passed by it for the A.Y 1992-93 in ITA No.3633/Del/1996. There is no independent reasoning in any of them since the facts for all the years were the same as they existed in the previous year relevant to the A.Y 1992-93.
On Appeal before the HC the Assessee Counsel contended that, the mere letting out of the factory on lease w. e. f. 01.01.1992 does not amount to carrying on of any business. It was also contended that if the profits of the business carried on by the trust are utilised 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.
Having heard the parties, the Tribunal held that,
++ 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). Section 11(4A), would apply only to a case where the business is not held under trust;
++ this is a matter of considerable importance and we would have thought that it was incumbent upon the Tribunal to have examined this fundamental aspect, for two reasons: firstly, 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); secondly, there is a distinction between the objects of a trust and the powers given to the trustees to effectuate the purposes of the trust;
++ a mere direction that the income from the business shall be applied to the charitable objects of a trust, without there being a settlement of the business itself upon trust, does not result in any trust or legal obligation;
++ the mere fact that whole or some part of the income from Katha business is ear-marked for application to the charitable objects would not render the business itself being considered as incidental to the attainment of the objects. The application of the income generated by the business is not the 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;
++ there is no such nexus between the Katha business and the objects of the assessee – trust that can constitute the carrying on of the Katha business an activity incidental to the attainment of the objects, namely advancing of education, patriotism, Indian culture, running of hospitals and dispensaries, etc
On Appeal before the HC the Assessee Counsel contended that, the mere letting out of the factory on lease w. e. f. 01.01.1992 does not amount to carrying on of any business. It was also contended that if the profits of the business carried on by the trust are utilised 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.
Having heard the parties, the Tribunal held that,
++ 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). Section 11(4A), would apply only to a case where the business is not held under trust;
++ this is a matter of considerable importance and we would have thought that it was incumbent upon the Tribunal to have examined this fundamental aspect, for two reasons: firstly, 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); secondly, there is a distinction between the objects of a trust and the powers given to the trustees to effectuate the purposes of the trust;
++ a mere direction that the income from the business shall be applied to the charitable objects of a trust, without there being a settlement of the business itself upon trust, does not result in any trust or legal obligation;
++ the mere fact that whole or some part of the income from Katha business is ear-marked for application to the charitable objects would not render the business itself being considered as incidental to the attainment of the objects. The application of the income generated by the business is not the 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;
++ there is no such nexus between the Katha business and the objects of the assessee – trust that can constitute the carrying on of the Katha business an activity incidental to the attainment of the objects, namely advancing of education, patriotism, Indian culture, running of hospitals and dispensaries, etc
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