ITO (OSD), CHENNAI V. Sri Magunta Raghava Reddy Charitable Trust, CHENNAI

ITA 2251/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96097 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2015
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 05-08-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 08-09-2014
• Court: TRIBUNAL
• Assessee Lawyers: D ANAND
• Keywords: Capital asset; Business income; Charitable institution
• Section: 11A; 12; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . , . ! '# , $ % BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ./ I.T.A.NOS.2251 & 2252/MDS./2014 ( / ASSESSMENT YEARS :2010-11 & 2011-12) INCOME TAX OFFICER (OSD),(EXEMPTIONS-IV), ANNEXE BUILDING III FLOOR NUNGAMBAKKAM, CHENNAI 600 034. VS. SRI MAGUNTA RAGHAVA REDDY CHARITABLE TRUST , NEW NO.17/1,OLD NO.9,BAZULLAH ROAD, T.NAGAR,CHENNAI 600 017. PAN AABTS 0146 C ( &' / APPELLANT ) ( ()&' / RESPONDENT ) / APPELLANT BY : DR.B.NISCHAL,JCIT,D.R / RESPONDENT BY : MR.D.ANAND,ADVOCATE / DATE OF HEARING : 05.08.2005 ! /DATE OF PRONOUNCEMENT : 29.09.2005 * / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THESE TWO APPEALS ARE FILED BY THE REVENUE AGAINS T THE COMMON ORDER OF THE COMMISSIONER OF INCOME TAX (A)- VII, CHENNAI DATED 13.05.2015 IN ITA NO.169 & 1304/13-14 PASSED UNDER ITA NOS. 2251 & 2252/MDS/14 2 SEC.143(3) READ WITH SECTION 250 OF THE ACT FOR THE ASSESSMENT YEAR 2010-11 & 2011-12. 2. THE REVENUE HAS RAISED SIX GROUNDS IN ITS APPEA L, HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD. CIT(A) HAS ERRED IN LAW BY ALLOWING THE CLAIM OF THE ASSESSEE FOR GRANTING THE BENEFIT U/S.11 OF THE ACT THEREBY NOT TAXING THE PROFIT ARISING OUT OF THE SA LE OF LAND SINCE THE PROCEEDS WERE UTILIZED FOR CHARITABLE ACTIVITIES OF THE TRUST AS PER THE PROVISIONS OF SECTIONS 11, 12 & 13 OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A TRUST, REGISTERED U/S 12A(A) OF THE ACT BY THE LD.CIT, TN- III, VIDE REGISTRATION NO. C.NO.1146-111(72)/86 DATED 08.09.1986, FILED IT S RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-11 ON 21.09.201 0 AND FOR THE ASSESSMENT YEAR 2011-12 ON 12.09.2012 ADMITTING NI L INCOME. THE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT W AS COMPLETED U/S.143 (3) OF THE ACT ON 31.03.2013 & 24.02.2014 B Y TREATING THE INCOME DERIVED FROM SALE OF LAND AS BUSINESS INCOME OF ` 1,62,76,519/- & ` 44,23,266/- RESPECTIVELY. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE LD. ASSESSING OFFICER THAT THE ASSESSEE HAD DISCLOSED AN ITA NOS. 2251 & 2252/MDS/14 3 AMOUNT OF ` 1,62,76,519/- AND ` 44,23,266/- AS PROFIT ON SALE OF LAND FOR THE ASSESSMENT YEAR 2010-11 & 2011-12 RESPECTIV ELY. ON QUERY, THE ASSESSEE HAS REPLIED FOR BOTH THE ASSESSMENT YE ARS AS FOLLOWS:- A.Y 2010-11 2 ( IN PURSUANCE OF ITS OBJECTIVES, THE ASSESSEE PURCHASED 71.89 ACRES OF LAND IN SURVEY NO.601,607,611 AND 598 IN NELLORE BI T-II, NELLORE DURING THE YEARS 1986-87 FOR STARTING MEDICAL COLLEGE AND OLD AGE HO MES) HOWEVER, ENORMOUS DELAY CREPT IN OBTAINING NECESSARY PERMISSION FOR S TARTING THESE INSTITUTIONS. IN THE MEANTIME, ATTEMPTS AT ENCROACHMENT OF THE LAND BEGAN BEING MADE BY VARIOUS ELEMENTS. THEREFORE, THE ASSESSING OFFICER DECIDED TO ABANDON THE IDEA OF MEDICAL COLLEGE AND OLD AGE HOME AND DECIDED TO CONFINE TO RUNNING JUNIOR AND EGREE COLLEGES, DRINKING WATER AND MORTUARY VAN S IN THE DISTRICT OF NELLORE AND PRAKASAM, IN A.P. CONSEQUENTLY, WHEN THE ABOVE REFERRED LAND WAS PROPOSED TO BE DISPOSED OFF, THERE WERE NO BUYERS I N VIEW OF THE HUGE STRETCH OF LAND. THEREFORE THE ASSESSEE OBTAINED PERMISSION FR OM TOWN PLANNING AUTHORITIES, CONVERTED THE LAND INTO SMALL PLOTS AN D STARTED SELLING THE LAND IN THE LAYOUT FROM THE F.Y 1994-95 AND UTILIZED THE SAME F OR THE CHARITABLE ACTIVITIES OF THE TRUST. IT IS THEREFORE SUBMITTED THAT (THERE W ERE NO BUSINESS MOTIVE WHEN THE ASSESSEE ACQUIRED THE LAND AND SALE OF LAND IN THE FORM OF PLOTS IS ONLY TO MAKE THE LAND BETTER SALEABLE AND ALSO TO REALIZE BETTER PRICE. IT MAY NOT BE OUT OF CONTEXT TO SUBMIT THAT THIS ASPECT HAD BEEN THOROUG HLY SCRUTINIZED IN THE ASSESSMENT OF EARLIER YEARS AND THE ASSESSEE PASSED THE TEST CONVINCINGLY. 3. SECTION 11A OF THE INCOME TAX ACT REFERS TO CAP ITAL ASSET BEING PROPERTY HELD UNDER TRUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURP OSES. AS EXPLAINED IN THE PARA 2 ABOVE, THE LAND ORIGINALLY PURCHASED FOR SETTING UP MEDICAL COLLEGES AND OLD AGE HOMES CEASED TO BE A PROPERTY HELD UNDER TRUST WHOL LY FOR CHARITABLE PURPOSES SINCE THE ASSESSEE ABANDONED THE PLAN OF SETTING UP MEDICAL COLLEGE AND OLD ITA NOS. 2251 & 2252/MDS/14 4 AGE HOMES. SINCE THEN THE ASSESSEE ENDEAVORED TO DI SPOSE OF THE PROPERTY AND UTILIZE THE PROCEEDS IN THE CHARITABLE ACTIVITIES O F THE ASSESSEE AND TRUE TO THE PLAN HAS BEEN APPLYING THE SALE PROCEEDS FROM SALE OF PLOTS TO THE CHARITABLE ACTIVITIES EVERY YEAR. IT IS THEREFORE SUBMITTED THAT SALE OF PLOTS OF LAND WAS NOT OUT OF THE PROPERTY HELD UNDER TRUST WHOLLY FOR CHARITABLE ACT IVITIES NOR WAS IT TREATED AS CAPITAL ASSET BY THE ASSESSEE. KIND ATTENTION IS IN VITED TO THE BALANCE SHEET WHEREIN THE LAND FOR SALE HAS BEEN SHOWN SEPARATE LY AND NOT AS PART OF FIXED ASSETS. FOR THE REASONS IT IS SUBMITTED THAT SECTION 11A IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. A.Y 2011-12 4. DURING THE RELEVANT YEAR THE ASSESSEE SOLD IWO P LOTS OF LAND FOR A CONSIDERATION OF RS. 44.60 IAKHS. COPIES OF THE SAL E DEEDS 5/01/2010 AND 15/12/2010 ARE ENCLOSED. A STATEMENT SHOWING COMPUT ATION OF CAPITAL GAINS IS ENCLOSED. AS REGARDS THE CORRESPONDING COST OF LAND IT IS SUBMITTED THAT THE ASSESSEE HAD PURCHASED 71.89 ACRES OF LAND IN NELLO RE DURING THE YEARS 1986-87 FOR SETTING UP A MEDICAL COLLEGE AND OLD AGE HOMES. WHEN THESE OBJECTIVES COULD NOT BE MATERIALIZED AND FACED WITH A THREAT OF ENCR OACHMENTS, THE ASSESSEE OBTAINED PERMISSION FROM THE TOWN PLANNING AUTHORIT IES AND COMMENCED SELLING THE LAND IN SMALL PLOTS SINCE THEN... THE LD. ASSESSING OFFICER REJECTED THE CONTENTIONS OF THE ASSESSEE FOR THE FOLLOWING REASONS:- ITA NOS. 2251 & 2252/MDS/14 5 (I) MERELY BECAUSE THE PURPOSE FOR WHICH THE PROPE RTY WAS PURCHASED, CEASED TO MATERIALIZE, THE CHARACTERISTI C OF THE PROPERTY CANNOT CHANGE AS NOT HELD FOR CHARITABLE P URPOSE. (II) THE ASSESSEE HAD ITSELF ADMITTED PROFIT ON SA LE OF SUCH LAND AS INCOME DERIVED FROM PROPERTY OF THE TRUST AND CLAIM ED EXEMPTION. THUS, THE CONTENTION OF THE ASSESSEE THA T THE LAND FOR SALE IS NOT THE PROPERTY OF THE TRUST CANNOT BE ACC EPTED. (III) THE ASSESSEE HAD PURCHASED 71.89 ACRES OF LA ND AND AT THE TIME OF SALE OF THE PROPERTY THE ASSESSEE HAD OBTAINED N ECESSARY PERMISSION FROM THE TOWN PLANNING AUTHORITY TO DIVI DE THE LAND INTO SMALLER PLOTS. (IV) THE ASSESSEE HAD BEEN CONSISTENTLY SELLING THE PLOTS OF THE APPROVED LAYOUT DURING THE PERIOD 2004-05 TO 2009-1 0. (V) THE ASSESSEE HAD ITSELF ADMITTED THAT THE SALE OF THE PLOTS DO NOT CONSTITUTE CHARITABLE ACTIVITY BECAUSE THEY WERE SO LD WITH PROFIT MOTIVE. (VI) PURCHASE OF LAND, OBTAINING APPROVAL FOR PROM OTING LAYOUT AND SALE OF THE SAME IS NOT A CHARITABLE ACTIVITY AS PR OVIDED U/S.2(15) ITA NOS. 2251 & 2252/MDS/14 6 OF THE ACT, WHEN THE MAIN OBJECTS OF THE TRUST ARE RELIEF TO THE POOR, EDUCATION, MEDICAL RELIEF ETC., (VII) THE FREQUENCY OF THE TRANSACTION MADE BY THE ASSESSEE BY SELLING PLOTS IN THE LAYOUT IS IN THE NATURE OF BUS INESS AND THEREFORE FALLS WITHIN THE DEFINITION PROVIDED IN S ECTION-2(13) OF THE ACT VIZ., AN ADVENTURE IN THE NATURE OF TRADE A ND COMMERCE. 5. FOR THE AFORE STATED REASONS, THE LD. ASSESSING OFFICER BROUGHT TO TAX THE AMOUNT OF ` 1,62,76,519/- & ` 44,23,266/- UNDER THE HEAD INCOME FROM BUSINESS FOR THE ASSESSMENT YEAR 2010 -11 & 2011-12 RESPECTIVELY. 6. ON APPEAL, THE LD. CIT (A) HELD THAT THE ASS ESSEE IS NOT LIABLE TO TAX ON THE PROFIT ARISING OUT OF SALE OF LAND SINCE THE PROCEEDS WERE UTILIZED FOR THE CHARITABLE ACTIVITIES OF THE TRUST AND ALSO FOR THE FOLLOWING REASONS:- (I) THE ASSESSEES MAIN ACTIVITIES WERE ONLY PROVID ING EDUCATION WHICH IS A CHARITABLE ACTIVITY AS DEFINED IN SECTIO N-2(15) OF THE ACT. ITA NOS. 2251 & 2252/MDS/14 7 (II) THE PROVISIONS OF THE ACT DO NOT PROHIBIT THE ASSESSEE FROM DOING BUSINESS INCIDENTALLY WHILE COMPLYING WITH TH E CHARITABLE ACTIVITIES, THE PURPOSE FOR WHICH THE TRUST IS FORM ED. (III) THE NEWLY INSERTED PROVISO TO SECTION-2(15) O F THE ACT WILL NOT BE APPLICABLE TO THE CASE OF THE ASSESSEE, SINCE TH E MAIN ACTIVITIES OF THE ASSESSEE IS EDUCATION. (IV) THE LD. ASSESSING OFFICER HAS HERSELF RECOGNIZ ED THE CHARITABLE NATURE OF THE TRUST AND ITS GENUINENESS. (V) THE PREDOMINANT OBJECT AND PURPOSE OF THE TRUST WERE CHARITABLE IN NATURE AND NOT FOR EARNING PROFIT; HO WEVER SUCH CHARACTERISTIC OF THE TRUST WILL NOT ALTER MERELY B ECAUSE SOME PROFIT IS DERIVED BY THE TRUST WHILE PURSUING ITS CHARITAB LE ACTIVITIES. (VI) IN THE CASE OF THE ASSESSEE TRUST THE LAND WH ICH WAS SOLD WERE NO LONGER REQUIRED BY THE TRUST AND THEREFORE IT WA S DISPOSED OFF OVER A PERIOD OF TIME IN SUCH A MANNER SO AS TO OBT AIN OPTIMUM REVENUE WHICH WERE TO BE UTILIZED FOR THE PURPOSE O F THE TRUST. (VII) THERE WERE NO FINDINGS BY THE LD. ASSESSING O FFICER THAT THE PROFITS WERE DIVERTED FOR NON-CHARITABLE ACTIVITIES . ITA NOS. 2251 & 2252/MDS/14 8 7. WITH THE ABOVE OBSERVATIONS, THE LD. CIT (A) H ELD THAT AS LONG AS THE TRUST CARRIES OUT CHARITABLE ACTIVITIES THE EXEMPTION CANNOT BE DENIED TO THE TRUST. 8. BEFORE US, THE LD. A.R. REITERATED HIS SUBMISSI ONS MADE BEFORE THE REVENUE ON EITHER OCCASION AS FOLLOWS:- A) THE ASSESSEE TRUST IS CONSTITUTED IN THE YEAR ON J UNE 25TH 1986 AND IS REGISTERED UNDER SECTION 12A(A) OF THE INCOM E TAX ACT. B) THE PRINCIPLE OBJECT OF THE ASSESSEE TRUST IS TO P ROVIDE MEDICAL RELIEF FOR THE NEEDY, RUNNING OF EDUCATIONAL INSTIT UTION, SUPPLY OF DRINKING WATER AND OTHER CHARITABLE ACTIVITIES. THE APPELLANT HAS BEEN RUNNING EDUCATIONAL INSTITUTION IN THE BACKWAR D AREAS OF PRAKASAM AND NELLORE DISTRICT OF ANDHRA PRADESH IN THE FORM OF JUNIOR COLLEGE IN 14 PLACES AND DEGREE COLLEGES IN 3 PLACES IN THE NAME AND STYLE OF M/S.MSR JUNIOR COLLEGES. C) IN PURSUANCE OF ITS OBJECTS THE ASSESSEE HAD PURCH ASED 71.89 ACRES OF LAND IN THE TOWN OF NELLORE DURING THE A.Y .1986-87 FOR ESTABLISH MEDICAL COLLEGE AND OLD AGE HOMES. HOWEVE R ASSESSEE HAD TO ABANDON THE AFORESAID SINCE THERE W AS ENORMOUS DELAY IN OBTAINING PERMISSION. THE ASSESSE E THEREFORE CONFINED ITSELF TO ACTIVITY OF RUNNING COLLEGES, PR OVIDING DRINKING WATER TO RURAL AREAS AND MORTUARY VANS. ITA NOS. 2251 & 2252/MDS/14 9 D) IN THE MEANWHILE ASSESSEE HAD TO FACE ISSUES PERTA INING TO ENCROACHMENT OF LANDS. AFTER HOLDING THE LAND FOR A SUBSTANTIAL PERIOD OF 15 YEARS THE ASSESSEE THEREFORE DECIDED T O PART WITH THE LAND AND UTILIZE THE PROCEEDS OF THE SAME TO RU N THE EXISTING EDUCATION INSTITUTION AND FOR PURPOSES FOR WHICH TH E TRUST WAS ESTABLISHED. E) IN VIEW OF THE ENORMOUS SIZE OF LAND THE ASSESSEE WAS UNABLE TO GET BUYERS AND WAS THEREFORE CONSTRAINED TO FORM LA YOUT IN THE YEAR 1995-96 AND UTILIZE THE SAME FOR CHARITABLE AC TIVITIES OF THE TRUST. F) THE MOOT POINT IN THE CASE IS THAT IT WAS A SOLITA RY INSTANCE OF PURCHASE OF LAND AND THAT THE LAND WAS PURCHASED ON LY FOR THE PURPOSE OF RUNNING MEDICAL COLLEGE AND THE SAME REM AINS UNDISPUTED. G) WITH RESPECT TO THE ACTIVITY OF RUNNING COLLEGES T HE ASSESSING OFFICER HAS CATEGORICALLY HELD THAT THE ASSESSEE IS ENGAGED IN CHARITABLE ACTIVITY AS DEFINED IN SECTION 2(15) OF THE ACT AND HAS CONFINED ITS ADDITION ONLY TO ISSUE RELATING TO THE SALE OF THE IMMOVABLE ASSET. 9. LD. D.R VEHEMENTLY ARGUED IN SUPPORT OF THE ORD ER OF THE LD. ASSESSING OFFICER AND FURTHER SUBMITTED THAT THE PR OMOTION OF RESIDENTIAL LAYOUT AND SALE OF THE SAME BY PLOTTING PLOTS THEREBY DERIVING GAIN FROM REAL ESTATE TRANSACTIONS CANNOT BE CONSTRUED AS A ITA NOS. 2251 & 2252/MDS/14 10 CHARITABLE ACTIVITY AND THEREFORE ANY INCOME ARRIVI NG OUT OF THE SAME SHOULD BE TAXED IN THE HANDS OF THE ASSESSEE TRUST UNDER THE HEAD INCOME FROM BUSINESS. 10. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY P ERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS APPARENT FROM THE FACTS OF THE CASE THAT THE ASSESSEE HAD SOLD ITS UNUTILIZED LAND FOR PURSUING ITS MAIN OBJECTS VIZ., EDUCATION. IN ORDER TO SECURE MA XIMUM REVENUE, THE ASSESSEE HAS INDULGED IN COMMERCIAL TRANSACTION S. IT MUST BE KEPT IN MIND THAT SUCH TRANSACTIONS WERE MADE ONLY FOR THE PURPOSE OF EXTENDING ITS CHARITABLE ACTIVITIES WITH MORE RESOU RCES. RETAINING LAND WHICH IS NOT REQUIRED FOR THE PURPOSE OF THE ASSESS EES TRUST WILL NOT HELP THE ASSESSEE TO COMPLY WITH ITS OBJECTS IN A C ONSTRUCTIVE MANNER. THEREFORE, PRUDENTLY THE ASSESSEE TRUST HAS REALIZE D MAXIMUM REVENUE FROM THE SALE OF THE EXCESS LAND, AND UTILI ZED THE SAME FOR COMPLYING WITH THE MAIN OBJECTS OF THE ASSESSEE TRU ST VIZ., EDUCATION. HENCE AS HELD BY THE LD. CIT (A), THE TRANSACTION O F THE SALE OF THE LAND BY THE ASSESSEE IN A WISE MANNER BY APPLYING C OMMERCIAL PRUDENCE IS ONLY AN ACTIVITY WHICH IS INCIDENTAL TO THE MAIN OBJECTS OF ITA NOS. 2251 & 2252/MDS/14 11 THE ASSESSEE. THEREFORE, THE VIEW OF THE LD. CIT ( A) THAT THE PROVISO OF SECTION-2(15) WILL NOT BE APPLICABLE TO THE FACT S OF THE ASSESSEES CASE IS APPROPRIATE AND JUSTIFIED CONSIDERING THE F ACTS AND CIRCUMSTANCES OF THE CASE. THEREFORE, WE HEREBY CO NFIRM THE ORDER OF THE LD. CIT (A). 10. IN THE RESULT, THE APPEALS OF THE REVENUE ARE D ISMISSED. ORDER PRONOUNCED ON 29 TH SEPTEMBER, 2015 AT CHENNAI. SD/- SD/- ( . ! '# ) (V. DURGA RAO) ( . ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 29 TH SEPTEMBER, 2015. K S SUNDARAM. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE