Exemption under s 11 — A charitable trust, if acquires tenancy right in respect of some

Exemption under s 11 — A charitable trust, if acquires tenancy right in respect of some immovable property owned by a different person, and thereafter sublets the said tenancy right and in the process earns some income, such income should not be treated to be an income from business as to attract the provisions contained in s 11(4A) — as held by KolHC in DIT v Sahu Jain Trust; ITA No. 38 of 2001, 13 April 2011

Decided on: 31 March 2011 — In favour of: The Assessee.

The assessee was a charitable trust and society and was enjoying exemption in the earlier assessment years. While making assessment for the relevant assessment year, the AO was of the view that as the assessee was earning rent from the properties which were not owned by it. The said exercise done by the assessee for earning income is not incidental to the attainment of the object of the trust, and accordingly the said rental income received by the assessee was assessed as income from business by applying the provisions of s 11(4A). In an appeal, the CIT(A) held that the income earned by letting out the property was for the charitable object, and hence the exemption under s 11 of the Act was allowed. The Tribunal held that to enable the trust to carry out its charitable object in an effective manner if rental income was received by way of subletting, for that reason, the exemption could not have been denied by the AO. It was further pointed out that in the past also, the assessee received the benefit of exemption in respect of the selfsame rental income, and therefore there was no just reason for disallowing the relief claimed. Being aggrieved, the revenue has filed the present appeal.

The issue is whether a charitable trust, if acquires tenancy right in respect of some immovable property owned by a different person, and thereafter sublets the said tenancy right and in the process earns some income, such income should be treated to be an income from business so as to attract the provisions contained in s 11(4A) as it stood at the relevant point of time.

The first and foremost condition for applicability of s 11(4A) is that the income of the trust must arise from business.

The true test to determine whether the subletting of the tenanted accommodation available to the assessee amounts to carrying on any business, ie is it carrying on any adventure or concern in the nature of trade, commerce or manufacture is whether it is a simple letting out of the building or something more than letting out by bringing the case within the meaning of “carrying on any adventure or concern in the nature of trade or commerce”.

In the instant case, the assessee was holding a tenancy right in the property belonging to some other person and by subletting the same, the assessee earned some income. To enable the trust to carry out its charitable object in an active manner if rental income was received by way of subletting, for that reason, the exemption could not have been denied by the AO.

There is no material which is available on record to justify the simple subletting done by the assessee in order to continue its charitable activity to be branded as a “business activity” and the CIT(A) and the Tribunal below rightly did not bring the case within the purview of s 11(4A) of the Act.

Further, the assessee having received the benefit of exemption in respect of the selfsame rental income in earlier year, there was no just reason for disallowing the relief claimed for the relevant assessment year when no fresh materials were brought in this year for coming to a different conclusion.