Mere Sale of Immovable Property of the Trust alone, cannot be the sole factor to treat the said income under the head “Business Income”: Madras HC [Read Judgment]

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The division bench of the Madras High Court, has recently observed that mere sale of an immovable property of the trust alone, cannot be the sole factor for determining the tax liability of a trust under the provisions of the Income Tax Act, 1961.The Court further opined that the said income cannot be treated as “business income” for the mere reason stated above.

The assessee, a trust, is running educational institutions filed return declaring their income as “NIL.”On verification of the documents, the assessing officer found that the assessee had received from the sale of land. The assessee maintained that the land was purchased with an objective to start Medical college and old age homes, which was later abandoned. Consequently, when the above referred land was proposed to be disposed off, there were no buyers in view of the huge stretch of land. Therefore the assessee obtained permission from town planning authorities, converted the land into small plots and started selling the land in the layout from the F.Y 1994-95 and utilized the same for the charitable activities of the Trust. It is therefore submitted that (there were no business motives 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. The Assessing officer treated the activity of the assessee as only a commercial activity, not falling under any of the charitable activities, as per the objects of the Trust. Consequently, he imposed tax on the said income finding that it the business income of the assessee. The officer, further pointed out that the land was laid out and sold as plots and profit was earned in a systematic manner over a period of time and that the activity constituted business activity.

The division bench comprising of Justices Manikumar and Krishnakumar, noticed that in Additional CIT v. Surat Art Silk Cloth Manufactures Association reported in (1980) 121 ITR 1(SC),the Supreme Court observed that “Where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.”, cannot be lost sight of”.

The Court while allowing the submissions of the assessee, found that Market value of the land purchased in the year 1986-87, cannot be expected to be static. Naturally, when it is sold after many years, it would fetch a higher value. Law also does not prohibit an assessee to sell the lands, less than the market value. Merely because, lands are sold at a higher rate,after a considerable period of time, that alone cannot be the sole criteria to contend that the activity of the assessee was business activity, not incidental to the principal activity of the trust, which is, otherwise charitable in nature.”

It was further observed that When there is no prohibition in the Income-Tax Act, 1961, restraining unutilized lands to be sold in smaller extent, such activity of the assessee, cannot be construed as predominant business activity of the assessee, engaged continuously, with the sole object of making profits and that therefore, the sale proceeds should be brought under the head, “business income”.

“Going by the subsequent conduct of the assessee in utilising the profits earned, only for charitable purposes, it is evident that the intention of the assessee, is not to engage continuously, in business or trade or commerce, as the case may be. When the business activity is incidental to attain the objectives of the trust or institution, as the case may be, and if separate books of accounts are maintained, in respect of such business, then the assessee is entitled to exemption under Section 11 r/w. Section 2(15) of the Act.”, the Court observed.

While concluding, the Court added that, “mere sale of an immovable property of the trust alone, cannot be the sole factor, to arrive at a conclusion that the income earned should be brought under the head, ‘business income’. In the case of trust or institution, whose predominant activity is not business, incidental activity of sales, carried out, in furtherance of and to achieve the main objectives of the trust or institution, should not be construed as business activity, solely with an intention to earn profit, and consequently, to bring the income, under the head, business income”.

Read the full text of the Judgment below.