IT APPEAL NOS. 33 AND 339 (HYD.) OF 2015
[ASSESSMENT YEARS 2009-10 & 2010-11]

B. RAMAKOTAIAH, ACCOUNTANT MEMBER 
AND SAKTIJIT DEY, JUDICIAL MEMBER

B. Rajaram for the Appellant. 
C.S. Subramanyam and V. Sivakumar for the Respondent.

ORDER

Saktijit Dey, Judicial Member - These two appeals by the Department are against separate orders of the learned Commissioner of Income-tax (Appeals), Hyderabad pertaining to the assessment years 2009-10 and 2010-11.

I. T. A. No. 33/Hyd/2015 for the assessment year 2009-10

2. The Department has raised five grounds. Ground Nos. 1 and 5 being general in nature, do not require any specific adjudication.

3. In ground Nos. 2 and 3, the Department has challenged the decision of the learned Commissioner of Income-tax (Appeals) in upholding the assessee's claim of exemption under section 11 of the Act. Briefly the fact relating to the issue in dispute are, the assessee a society registered under the Andhra Pradesh Societies Registration Act, was also granted registration under section 12A of the Act, under the Income-tax Act, 1961 as a charitable institution with effect from November 23, 1995. As it appears, the assessee-society was also filing its returns claiming exemption under section 11 of the Act, which has been allowed by the Department over the years. For the assessment year under consideration, the assessee filed its return of income on September 29, 2009 declaring "nil" income after claiming exemption under section 11 of the Act. During the assessment proceeding, it was noticed from information available on record by the Assessing Officer that the assessee is constructing a Jagannadha temple making huge investment and up to the end of previous year 2008-09, it has invested an amount of Rs. 2,29,50,378. He further noticed that out of the total income of Rs. 1,54,72,028, for the year under consideration the assessee-trust has invested an amount of Rs. 76,67,283 in construction of the temple. The Assessing Officer observed that as per its bye-law, primary object of the assessee-society is to provide facility for cultural meetings, events and activities of people from Odisha. One more activity which was included in the aims and objects after amendment is to promote and propagate Jagannadha dharma/culture and philosophy. He further noticed that the object of the trust has to render support and to provide subsidised free accommodation for temporary period to people hailing from Odisha. However, he found that apart from the investment made in construction of Jagannadha temple, other expenses of the society include pooja expenses, maintenance of hall and cultural programmes, etc., whereas the main source of income of the trust is rental income, income from souvenir and donations. The Assessing Officer observed, the activities/programmes carried out during the financial year revealed that the trust is engaged mainly in construction of temple of lord Jagannadh and letting out of kalyan mandapams. On the basis of the aforesaid facts, the Assessing Officer formed an opinion that the activities of the assessee-society are not in accordance with the aims and objects of the society as the assessee is predominantly engaged in construction of temple, which is not amongst its objects. He, therefore, called upon the assessee to show-cause as to why the claim of exemption under section 11 shall not be denied. In response to the query raised by the Assessing Officer, it was submitted by the assessee as under :

4. Further relying upon a number of judicial precedents, it was submitted before the Assessing Officer that philosophy of Jagannadha dharma is an integral part of odisha culture and heritage. Hence, construction and maintenance of Jagannadha temple is inseparable from odisha culture and heritage. The Assessing Officer, however, was not convinced with the explanation of the assessee. He opined that construction of Jagannadha temple not being in consonance with the aims and objects of the society cannot be considered as charitable activity. Further, he observed that the assessee is also having income from letting out of function hall, sale of souvenir, etc., which are purely commercial activities, therefore, in view of proviso to section 2(15) of the Act, the assessee's activity cannot be considered to be for charitable purpose. Accordingly, he concluded that the assessee is not entitled for exemption under section 11 of the Act. The Assessing Officer, ultimately, passed assessment order by determining the total income of the assessee at Rs. 51,66,893 by making various additions and disallowances. Being aggrieved of the assessment order, so passed, the assessee preferred an appeal before the learned Commissioner of Income-tax (Appeals).

5. In the course of hearing of the appeal before the learned Commissioner of Income-tax (Appeals), it was submitted by the assessee that construction of Jagannadha temple being a part of Odisha culture cannot be construed to be an activity different from its aims and objects. The assessee strongly contesting the finding of the Assessing Officer that construction of temple is not charitable activity, relied upon a decision of the hon'ble Andhra Pradesh High Court in the case of CIT v. Social Service Centre [2001] 250 ITR 39/119 Taxman 124 wherein construction of church was held to be a charitable activity. It was submitted by the assessee that religion and charity always come together in this country and once exemption is granted for charitable activity, religious activities are also included. The assessee submitted that all charitable organisations may not carry religious activities, but, all religions profess charity as essential part of their philosophy. As religion and charity are always co-existing, the Assessing Officer cannot deny exemption under section 11 of the Act by holding that application of money was for a religious activity of constructing a temple. As far as allegation of the Assessing Officer that the assessee is earning from commercial activity, it was submitted by the assessee that maintenance and letting out of function hall, sale of souvenir, etc., are ancillary and incidental to the main objects of the assessee, hence, cannot be considered to be commercial activities. He submitted that receipts from such activities is utilised for construction of temple, which is a charitable activity.

6. The learned Commissioner of Income-tax (Appeals) after considering the submissions of the assessee in the context of facts and materials on record found that in the assessee's own case for preceding assessment years, the learned Commissioner of Income-tax (Appeals) has decided the issue in favour of the assessee by holding that the assessee being engaged in temple construction activity is entitled for exemption under section 11, which was also confirmed by the Income-tax Appellate Tribunal, Hyderabad Bench. She observed that there is no doubt that the assessee was engaged in construction of Jagannadha temple for the last three years and for this purpose the assessee has raised monies through donations, by renting out hall, etc. However, it was observed by the learned Commissioner of Income-tax (Appeals) that in view of the principle laid down by the hon'ble Andhra Pradesh High Court in the case of Social Service Centre(supra) and the decision of the Income-tax Appellate Tribunal in the assessee's own case, the activity of the assessee in constructing a temple falls under charitable activity. Accordingly, she held that exemption under section 11 cannot be denied to the assessee. She observed, even after amendment to section 2(15) with effect from April 1, 2009, the primary purpose of renting out a hall being for raising funds for the construction and maintenance of temple, which is a charitable activity, exemption under section 11 cannot be denied. Accordingly, she allowed the assessee's claim of exemption under section 11 of the Act. Being aggrieved, the Department is before us.

7. The learned Departmental representative mainly relying upon the reasoning of the Assessing Officer submitted that after insertion of proviso to section 2(15) of the Act, any activity of commercial nature resulting in income to the assessee would deprive the society or trust from being considered to have been established for charitable purpose, hence, no exemption under section 11 can be allowed.

8. The learned authorised representative, on the other hand, apart from making oral submissions filed a detailed and exhaustive written submission, the sum and substance of which is the assessee being involved in charitable activity, exemption cannot be denied to it merely because some income is generated to the assessee from letting out of function hall or sale of souvenir. It was submitted that such activity of letting out function hall or sale of souvenir being incidental and ancillary to the primary object of society, which is charitable in nature and moreover the income generated from such activity being utilised for the charitable object, the proviso to section 2(15) will not apply. The learned authorised representative submitted, in case of the assessee, the Tribunal in the preceding assessment years having already held construction of Jagannadha temple as a charitable activity and further the income generated from letting out of function hall is not a commercial activity, the issue stand settled in favour of the assessee. He, therefore, submitted that there is no justifiable reason to interfere with the order of the learned Commissioner of Income-tax (Appeals). As far as souvenir sale is concerned, the learned authorised representative submitted, souvenir sale cannot be considered to be of commercial nature as it is an act of voluntary contribution by persons, who buy souvenir.

9. We have considered the submissions of the parties and perused the material on record as well as the orders of the Revenue authorities. As could be seen from the assessment order, the Assessing Officer has denied exemption under section 11 to the assessee primarily on two reasons, firstly, because the assessee is constructing Jagannadha temple, which, according to the Assessing Officer, is neither in accordance with the aims and objects nor a charitable activity. The second reason is, after introduction of the proviso to section 2(15) of the Act, the assessee looses its character of trust having been established for charitable purpose as it has earned income by engaging in commercial activities. As far as allegation of the Assessing Officer that construction of temple by the assessee is neither in accordance with aims and objects of the assessee nor charitable activity is concerned, it has to be rejected at the threshold in view of the decision of the co-ordinate Bench in the assessee's own case in the assessment years 2006-07, 2007-08 and 2008-09 in I. T. A. Nos. 894 and 895/Hyd/13 and 1067/Hyd/12, dated June 6, 2014 wherein the co-ordinate Bench agreed with the learned Commissioner of Income-tax (Appeals) that construction of Jagannadha temple is not only in furtherance of the aims and objects of assessee-society but, is also a charitable activity. In view of the aforesaid, we do not find any merit in the submissions of the learned Departmental representative that construction of Jagannadha temple is not a charitable activity. As far as the second reason for denying exemption under section11 is concerned, it is the allegation of the Assessing Officer that as the assessee was involved in commercial activity by generating income by letting out the function hall, selling souvenir, etc., it is not eligible for exemption in view of the proviso to section 2(15) of the Act, we are of the view that the same requires deeper analysis. However, before deciding the issue, it is necessary to observe that there cannot be any dispute to the fact that the assessee's objects are charitable in nature, as the learned Director of Income-tax (Exemptions) has granted registration to the assessee under section 12A of the Act since the year 1995 and which is continuing till date.

10. Further, there is nothing on record to suggest that in the intervening period there is any substantial change in the aims and objects of the assessee. Therefore, keeping in view the aforesaid facts, it has to be decided whether the introduction of the first proviso to section 2(15) by the Finance Act, 2008 with effect from April 1, 2009 would automatically disentitle the assessee from being considered as having been established for charitable purpose and thereby depriving it from claiming exemption under section 11 of the Act. A plain reading of section 2(15) of the Act, also makes it clear that the proviso applies only to the last limb of "charitable purpose", i.e., "advancement of any other object of general public utility". The intention of the Legislature in introducing the proviso to section 2(15) as could be gathered from the speech of the hon'ble Finance Minister on the floor of Parliament, explanatory notes, Departmental circulars, is to deny exemption to trusts or institutions who in the garb of charity are purely engaged in commercial or business activities and whose main intention is to earn profit. The proviso is never meant to deprive genuine trusts and institutions whose main object is charity but in the process of achieving the main object they undertake some income generating activity which is ancillary and incidental to the main object. Further, income generated from such activity is also utilised for achieving the main charitable object. The true import and effect of the proviso to section 2(15) of the Act came up for scrutiny before a number of High Courts. The unanimous view of the judiciary in this regard is, that proviso to section 2(15) has to be applied keeping in mind the dominant object/purpose of the trusts or institutions. Therefore, it has to be seen whether the dominant object of the trust is of charitable nature in carrying out the object of general public utility or main intention of the assessee is to earn profit. Further, definition of "charitable purpose" as defined under section 2(15) of the Act cannot be read in vacuum, but, has to be read along with the exemption provisions. That being the case, a literal interpretation to the proviso to section 2(15) cannot be given if the objects of the exemption provisions are to be given full effect. The hon'ble Delhi High Court in case of India Trade Promotion Organization v. Dy. GIT (Exemptions ) [2015] 371 ITR 333/229 Taxman 347/53 taxmann.com 404 while interpreting the effect of proviso to section 2(15) of the Act, after analysing a number of decisions of the hon'ble Supreme Court as well as different High Courts observed that the only thing which is required to be examined is whether the trust or institution has been established for charitable purposes. The fact that it derives income does not in any way detract from the position that it is not an institution established for charitable purposes. The hon'ble High Court observed that merely because the assessee derives rental income, income out of sale of tickets and sale of publications and income out of leasing out food and beverages outlets in the exhibition grounds does not, in any way, affect the nature of trust as a charitable institution, if, it otherwise qualifies for such a character. It was further observed by the hon'ble High Court that if a meaning is given to the expression "charitable purpose" so as to suggest that in case of an institution having an object of advancement of general public utility if derives income it would be falling within the exception carved out in the first proviso to section 2(15) of the Act, then, there would be no institution whatsoever which would qualify for exemption and the exemption provision would be rendered redundant. The hon'ble Delhi High Court referred to its own decision in the case of Institute of Chartered Accountants of India v. Dy. GIT (Exemptions ) [2013] 358 ITR 91/217 Taxman 152/35 taxmann.com 140 wherein while interpreting the expressions "trade, commerce and business", as it finds place in the first proviso to section 2(15), the court held that merely because fees or some other consideration is collected or received by an institution, it would not lose its character of having been established for charitable purpose. The court observed, in this context, the dominant activity of the institution has to be looked into. If the dominant activity of the institution is not business, trade or commerce, then, any such incidental or ancillary activity would also not fall within the categories of trade or commerce or business. The driving force of the trust or institution should not be a desire to earn profit, but, utilise the same for achieving the charitable objects for which it is established. The hon'ble High Court laying down the principle as to how the proviso to section 2(15) should be construed, held as under (page 372 of 371 ITR) :

"58. In conclusion, we may say that the expression 'charitable purpose', as defined in section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to section 2(15) of the said Act then the proviso would be at risk of running fowl of the principle of equality enshrined in article 14 of the Constitution of India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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 or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and the prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes."

11. If we apply the aforesaid principles to the facts of the present case, it is to be seen that as held by the co-ordinate Bench in the assessee's own case in the preceding assessment years, the assessee is pursuing charitable activity in accordance with its aims and objects while constructing the Jagannadha temple. In fact, the Assessing Officer himself in the assessment order has admitted that income/fund of the assessee is utilised in construction of the temple. Further, the co-ordinate Bench in the said order held, by letting out function hall the assessee is not involved in commercial activity so as to disentitle it from claiming exemption under section 11. Therefore, considered in the aforesaid perspective, there being no dispute to the fact that dominant object of the assessee is charitable in nature, proviso to section 2(15) cannot be applied to deny exemption to the assessee under section 11 of the Act. In our view, the Assessing Officer without examining the issue in proper perspective has abruptly concluded that the assessee is not entitled to exemption under section 11 of the Act only because proviso to section 2(15) was introduced with effect from April 1, 2009. In our view, the proviso to section 2(15) of the Act will not apply automatically to every trust or institution irrespective of the fact, whether the dominant object of the trust or institution is charitable purpose or earning profit. When in the present case the assessee is registered as charitable institution and there is no change in the aims and objects of the assessee in the impugned assessment year and the activities of the assessee over the years remains the same, the proviso to section 2(15) cannot be applied to the assessee to deny exemption under section 11 of the Act. In view of the aforesaid, we do not find any merit in the submissions of the learned Departmental representative so as to disturb the finding of the learned Commissioner of Income-tax (Appeals) on this issue. Accordingly, we uphold the order of the learned Commissioner of Income-tax (Appeals) by dismissing the grounds raised.

12. In ground No. 3, the Department has challenged the decision of the learned Commissioner of Income-tax (Appeals) in deleting the disallowance made by the Assessing Officer under section 40(a)(ia) of the Act. Since income of the assessee has to be computed under section 11 of the Act, no disallowance can be made under section 40(a)(ia) by applying commercial principles. Thus, this ground of the Department is also dismissed.

13. In the result, the appeal of the Department is dismissed.

I. T. A. No. 339/Hyd/2015 for the assessment year 2010-11

14. The facts and the grounds raised in this appeal are materially identical to that of I. T. A. No. 33/Hyd/15, following the conclusions drawn in the respective grounds, the same are dismissed.

15. In the result, this appeal of the Department is dismissed.

16. To sum up, both appeals of the Department are dismissed.