Business income of an educational charitable trust utilised entirely for charitable purposes qualifies for exemption under Section 11(4A): ITAT

Citation: Smt. Lingammal Ramaraju Shastra Prathistha Trust v. Asst. Commissioner of Income-tax (Exemptions)

ITAT: Chennai

ITA No: 1250 (CHNY) of 2024

Assessment Year: 2018-19

Date of Order- November 18, 2024

Brief Facts:

• The assessee was a public charitable trust registered under Section 12A of the Income-tax Act, 1961 (IT Act). Its primary charitable activity involved running a music school and library, which were classified under "education".

• The trust also operated a petrol bunk as an ancillary activity, with the surplus revenue used to fund its educational objectives.

• The Assessing Officer (AO) allowed the exemption under section 11 after verifying compliance with the conditions, including the maintenance of separate accounts for the petrol bunk business.

• However, the Commissioner of Income Tax (Exemptions) (“CIT-E”) challenged the allowance of the exemption, asserting that the petrol pump activity contributed over 80% of the trust's receipts and was unrelated to its primary charitable purpose. Moreover, the CIT-E contended that the activity violated the conditions of Section 2(15) and was not incidental to the trust's objectives under Section 11(4A).

• The CIT-E further relied on judgements in ACIT v. Ahmedabad Urban Development Authority (AUDA) and New Noble Education Society v. CCIT to claim that the exemption should be denied.

Observations of the Tribunal:

The Tribunal observed as follows-

• The assessee trust, primarily engaged in providing formal scholastic education through its music school and library, qualified as an educational trust under Section 2(15) of the IT Act rather than a General Public Utility (GPU) Trust

  
  

• The tribunal clarified that restrictions under the proviso to Section 2(15), such as the 20% receipt limit, do not apply to educational trusts.

  
  

• The Tribunal observed that the business activity was considered incidental to the trust’s charitable objectives, as the entire surplus from the business was applied exclusively to its educational purposes, with separate books of accounts maintained as required under Section 11(4A).

  
  

• The Tribunal emphasized the distinction between "per se charitable trusts" (e.g., educational, medical) and "general public utility (GPU)" trusts

  
  

• It distinguished this case from AUDA and New Noble, which dealt with GPU trusts and institutions seeking exemptions.

  
  

• The Tribunal referred to the Supreme Court's judgment in Thanthi Trust, holding that for per se charitable trusts, a business activity whose income is fully utilized for charitable purposes qualifies as "incidental" to the trust’s objectives.
  

Hence, the Tribunal confirmed the AO’s decision to allow the exemption under Section 11 and set aside the CIT-E’s revisionary order under Section 263. It ordered that the business activity was incidental to the trust’s educational purpose, and the AO’s order was neither incorrect nor detrimental to the Revenue’s interests.