Commissioner Of Income-Tax, Chennai v. Sri Magunta Raghava Reddy Charitable Trust, New

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 14.07.2016 CORAM: THE HONOURABLE MR.JUSTICE S.MANIKUMARand THE HONOURABLE MR.JUSTICE D.KRISHNA KUMAR T.C.A.Nos.451 and 452 of 2016C.M.P.No.9327 of 2016 Commissioner of Income-Tax,Chennai. ... Appellant in both TCAsversus Sri Magunta Raghava Reddy Charitable Trust,New No.17/1, Old No.9, Bazullah Road, T.Nagar,Chennai 600 017. ... Respondent in both TCAs Prayer: Tax Case Appeals filed under Section 260A of the IncomeTax Act, 1961, against the orders of the Income Tax AppellateTribunal, 'B' Bench, Chennai and made in I.T.A.Nos.2251 and2252/Mds/2014 respectively, dated 29.09.2015, against the Orderof the Commissioner of Income Tax (Appeals) - VII, Chennai dated13.05.2014 and made in I.T.A.Nos.169 & 1304/13-14 respectively,against the Orders of the Assistant Director f Income Tax(Exemptions) - IV, Chennai dated 31.03.2013 and 24.02.2014respectively and made in PAN/GIR No.AABT50146C for theAssessment Years 2010 - 2011 and 2011 - 2012 respectively. For Appellant: Mr.J.Narayanasamy,in both TCAs Senior Standing Counsel for Income-TaxCOMMON ORDER (Order of the Court was made by S.MANIKUMAR, J.) Tax Case Appeals arise out of a common order made inI.T.A.Nos.2251 and 2252/Mds/2014, dated 29.09.2015, for theassessment years 2010-11 and 2011-12 respectively. https://hcservices.ecourts.gov.in/hcservices/ 2.Short facts leading to the appeals are that theassessee, a trust, is running educational institutions, in thename of M/s.M.S.R.Junior Colleges at Ammanabrolu, Chinnaganjam,C.S.Puram, Gudlur, J.Panguluru, Kandukuru, Kanigiri, Kavali,Kurichedu, Lingasamudram, Ravinuthala, Santhanutana Padu andValaparla and MSR degree colleges at Kavali, Kondepi andVinjamuru, registered under Section 12A(a) of the Income-TaxAct, filed return of income for the assessment year 2010-11 on21.09.2010, admitting Nil income. 3.Return for the year 2010-11, was processed underSection 143(1) of the Income-Tax Act, on 20.09.2011. On the sameday, the case was taken up for scrutiny and notice under Section143(2) was issued. In response to the notice, representative ofthe assessee appeared and filed the details called for, fromtime to time. On verification of the return of the income andother details, for the assessment year 2010-11, the assessingofficer noticed that the assessee had disclosed an amount ofRs.1,62,76,519/-, as profit on sale of land. Vide order, dated04.09.2012, the assessee was required to submit computation, asper the provisions of Section 11(1A) of the Act. In response tothe above, the assessee, vide letter, dated 28.01.2013, hasstated as under: “2… in pursuance of its objectives, the assesseepurchased 71.89 Acres of land in survey No.601,607,611and 598 in Nellore Bit-II, Nellore during the years1986-87 for starting medical college and old agehomes) However, enormous delay crept in obtainingnecessary permission for starting these institutions.In the meantime, attempts at encroachment of the landbegan being made by various elements. Therefore, theAssessing Officer decided to abandon the idea ofmedical college and old age home and decided toconfine to running junior and egree colleges, drinkingwater and mortuary vans in the district of Nellore andPrakasam, in A.P. Consequently, when the abovereferred land was proposed to be disposed off, therewere no buyers in view of the huge stretch of land.Therefore the assessee obtained permission from townplanning authorities, converted the land into smallplots and started selling the land in the layout fromthe F.Y 1994-95 and utilized the same for thecharitable activities of the Trust. It is thereforesubmitted that (there were no business motive when theassessee acquired the land and sale of land in theform of plots is only to make the land better saleableand also to realize better price. It may not be out ofcontext to submit that this aspect had been thoroughly scrutinized in the assessment of earlier years and theassessee passed the test convincingly. 3. Section 11A of the income tax Act refers toCapital Asset being property held under trust whollyfor charitable or religious purposes. As explained inthe para 2 above, the land originally purchased forsetting up medical colleges and old age homes ceasedto be a property held under trust wholly forcharitable purposes since the assessee abandoned theplan of setting up medical college and old age homes.Since then the assessee endeavored to dispose of theproperty and utilize the proceeds in the charitableactivities of the assessee and true to the plan hasbeen applying the sale proceeds from sale of plots tothe charitable activities every year. It is therefore submitted that “sale of plots ofland” was not out of the property held under trustwholly for charitable activities nor was it treated ascapital asset by the assessee. Kind attention isinvited to the Balance Sheet wherein the “Land forSale” has been shown separately and not as part ofFixed Assets. For the reasons it is submitted that Section 11Ais not applicable to the facts of the assessee’s case.” 4.After considering the above explanation, for theassessment year 2010-11, the Assessing Officer found that theassessee has bought 71.89 acres of land and at the time ofdisposing of the said land, obtained necessary permission fromthe town planning authority to divide the land into small plotsand sold the same, by entering into sale agreements, obtainedsale consideration, registered the documents, etc. Though theassessee has purchased the said land at Rs.49/- per Sq. Yard.,sold the same at Rs.5,500/- per Sq.Yard, by making bumberprofits, during the previous year 2009-10. The above activity ofthe trust carrying on business activity, was with a profitmotive. The above activity of the assessee is an organizedactivity of carrying on business with profit motive. Theassessee has been engaging in this activity from the year 2004-05, with profit motive. Thus, the activity of the assessee isonly a commercial activity, not falling under any of thecharitable activities, as per the objects of the Trust. Further,the said activity does not fall under any of the limbs definedin Section 2(15) of the act, viz., relief to poor, education,medical relief and not even under the category, “any otherobject of general public utility”. So saying, for the assessmentyear 2010-11, the Assessing Officer passed an order on31.03.2013 and brought to tax, a sum of Rs.1,62,76,519/-, underthe head, “income from business”. 5.For the assessment year 2011-12, the assessee filed thereturn of income on 12.09.2011, admitting Nil income. Returnwas processed under Section 143(1) of the Income-Tax Act. Thecase was taken up for scrutiny and notice under Section 143(2)was issued on 03.08.2012. In response to the notice issued,representative of the assessee appeared and furnished thedetails, called for. On verification of the return of the incomeand other details, the assessing officer noticed that a sum of44,23,266/- was earned as profit on sale of land. On the above,the assessee, vide letter, dated 09.01.2014, has stated as under: “4. During the relevant year the assessee sold Iwoplots of land for a consideration of Rs. 44.60 Iakhs.Copies of the sale deeds 5/01/2010 and 15/12/2010 areenclosed. A statement showing computation of Capitalgains is enclosed. As regards the corresponding costof land it is submitted that the assessee hadpurchased 71.89 Acres of land in Nellore during theyears 1986-87 for setting up a medical college and oldage homes. When these objectives could not bematerialized and faced with a threat of encroachments,the assessee obtained permission from the townplanning authorities and commenced selling the land insmall plots since then...” “4. During the relevant year the assessee sold Iwoplots of land for a consideration of Rs. 44.60 Iakhs.Copies of the sale deeds 5/01/2010 and 15/12/2010 areenclosed. A statement showing computation of Capitalgains is enclosed. As regards the corresponding costof land it is submitted that the assessee hadpurchased 71.89 Acres of land in Nellore during theyears 1986-87 for setting up a medical college and oldage homes. When these objectives could not bematerialized and faced with a threat of encroachments,the assessee obtained permission from the townplanning authorities and commenced selling the land insmall plots since then...” 6.Referring to Section 2(13) of the Income-Tax Act, whichdefined the term, “business” and citing the very same reasons,for bringing a sum of Rs.1,62,76,519/-, under the head,“business income”, for the assessment year 2010-11, vide order,dated 24.02.2014, the Assessing Officer brought a sum ofRs.44,23,266/-, under the head, “income from business” for theassessment year 2011-12. 7.Being aggrieved by the orders of assessment, dated31.03.2013 (for the assessment year 2010-11) and 24.02.2014 (forthe assessment year 2011-12) respectively, the assessee filedappeals in I.T.A.No.169 and 1304/2013-14, before theCommissioner of Income-Tax (Appeals)-VII, Chennai. Before theappellate authority, the assessee contended that they hadpurchased 71.89 acres of land, during the year 1986-87, forstarting a medical college and old age homes. There was a delayin obtaining necessary permission for starting the institutions.In the mean time, attempts were made to encroach upon the land.Therefore, for the reasons, stated supra, the assessee decidedto abandon the idea of a starting medical college and old agehomes, and to sell the land. As there were no takers, in view ofthe huge stretch of land, the assessee decided to convert theland into plots and accordingly, obtained permission from the Town Planning authorities. The assessee started selling theplots from the assessment year 1995-96 onwards and utilised thesale proceeds for charitable activities of the trust for allthese years, including the assessment years 2010-11 and 2011-12.After perusing the trust deed, dated 25.06.1986, theCommissioner of Income-Tax (Appeals), the appellate authority,has recorded the objects of the trust, as hereunder: “(a) .......... (b) For the above purpose, to construct,establish and maintain schools, colleges, technicalcolleges, technical institutions, medical collegesand other educational institution............(c) To establish and maintain old age homesfor the aged, infirm, disabled and destitutepersons;” 8.Going through the details of income and expenditureincurred for the assessment years 2010-11 and 2011-12, theCommissioner of Income-Tax (Appeals), appellate authority,recorded as hereunder: “Perusal of the income and expenditure a/c for AY2010-11 reveals that a sum of Rs.1,62,76,519/- wascredited to income account as profit on sale of land.Similarly, a sum of Rs.44,23,266/- was credited toincome account as profit on sale of land for AY 2011-12. Perusal of expenditure a/c for both the assessmentyears also reveals that there is no diversion of fundsfor non-charitable activity. Similar is the case ofearlier assessment years also. Therefore, I am of theconsidered view that the assessee's activities arecovered by one of the main limbs of the definition ofcharitable purpose as defined under Section 2(15) ofthe Act, viz., education and no other activities arebeing carried on by the assessee.” “Perusal of the income and expenditure a/c for AY2010-11 reveals that a sum of Rs.1,62,76,519/- wascredited to income account as profit on sale of land.Similarly, a sum of Rs.44,23,266/- was credited toincome account as profit on sale of land for AY 2011-12. Perusal of expenditure a/c for both the assessmentyears also reveals that there is no diversion of fundsfor non-charitable activity. Similar is the case ofearlier assessment years also. Therefore, I am of theconsidered view that the assessee's activities arecovered by one of the main limbs of the definition ofcharitable purpose as defined under Section 2(15) ofthe Act, viz., education and no other activities arebeing carried on by the assessee.” 9.On the objections of the assessing officer that theland was laid out and sold as plots and profit was earned in asystematic manner over a period of time and that the activityconstituted business activity, the appellate authority hasreferred to a Circular No.11 of 2008, dated 19.12.2008. Takingnote of the observations of the assessing officer, recognisingthe character of the trust (charitable), the appellate authorityheld as follows: “If the predominant object is to carry out acharitable purpose and not to earn profit, the purposewould not lose its charitable character merely becausesome profit arises from the activity. In this case,the lands in question are no longer required by thetrust and the trust was forced to sell the land by forming plots because there is no taker to purchasethe land en-bloc. Hence, the trust had been sellingthem over a period of years and the profit earned outof it had been utilized towards the objects of thetrust. The AO did not record any finding that theprofitsaredivertedfornon-charitablepurpose/activity. As long as the trust carries outcharitable purpose, the exemption cannot be denied tothe trust. Therefore, I am of the considered view thatthe decision of the assessing officer cannot becountenanced.” 10.The Commissioner of Income-Tax (Appeals), vide commonorder, dated 13.05.2014 in I.T.A.Nos.169 and 1304/13-14, heldthat,“...the assessee is not liable to tax on theprofit arising out of sale of land as the proceeds areutilized for charitable activities of the trust. TheAO was under the wrong impression that the sale ofplot of land is a business activity overlooking theCircular No.11/2008 of the Act.” 11.Not satisfied with the orders of the Commissioner ofIncome-Tax (Appeals), dated 13.05.2014, the Income Tax Officer(OSD) (Exemptions-IV), Chennai, has filed appeals inI.T.A.Nos.2251 and 2252/Mds/2014, before the Income TaxAppellate Tribunal, “B” Bench, Chennai. Before the Tribunal,contentions have been made that the promotion of residentiallayout and sale of lands, by plotting into plots and therebyderiving gain from the real estate transactions, cannot beconstrued as a charitable activity and therefore, any incomederived out of the same, should be taxed in the hands of theassessee trust, under the head “income from business”. Afterhearing both the parties, vide common order, dated 29.09.2015,in I.T.A.Nos.2251 and 2252/Mds./2014, the Tribunal ordered ashereunder: “We have heard both the parties and carefullyperused the materials available on record. It isapparent from the facts of the case that the assesseehad sold its unutilized land for pursuing its mainobjects viz., education. In order to secure maximumrevenue, the assessee has indulged in commercialtransactions. It must be kept in mind that suchtransactions were made only for the purpose ofextending its charitable activities with moreresources. Retaining land which is not required forthe purpose of the assessee’s trust will not help theassessee to comply with its objects in a constructivemanner. Therefore, prudently the assessee trust has “We have heard both the parties and carefullyperused the materials available on record. It isapparent from the facts of the case that the assesseehad sold its unutilized land for pursuing its mainobjects viz., education. In order to secure maximumrevenue, the assessee has indulged in commercialtransactions. It must be kept in mind that suchtransactions were made only for the purpose ofextending its charitable activities with moreresources. Retaining land which is not required forthe purpose of the assessee’s trust will not help theassessee to comply with its objects in a constructivemanner. Therefore, prudently the assessee trust has realized maximum revenue from the sale of the excessland, and utilized the same for complying with themain objects of the assessee trust viz., Education.Hence as held by the Ld. CIT (A), the transaction ofthe sale of the land by the assessee in a wise mannerby applying commercial prudence is only an activitywhich is incidental to the main objects of theassessee. Therefore, the view of the Ld. CIT (A) thatthe proviso of Section-2(15) will not be applicableto the facts of the assessee’s case is appropriateand justified considering the facts and circumstancesof the case. Therefore, we hereby confirm the orderof the Ld. CIT (A). In the result, the appeals of theRevenue are dismissed.” 12.Being aggrieved by the common order of the Commissionerof Income-Tax (Appeals), instant Tax Case (Appeal), has beenfiled, on the following substantial questions of law,“(1) Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatprofit from the sale of the land owned by the assesseecannot be treated as business income and the same iseligible for exemption under Section 11 r/w. Section 2(15) even though the Tribunal had admitted theassessee's commercial intention to venture into realestate business.(2) Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatprofit from the sale of the land owned by the assesseecannot be treated as business income and the same iseligible for exemption under Section 11 on the groundsthat activity of sale of land is incidental to theeducational objects of the trust and the said profitwas applied for the objects of the trust.” 13.Praying for an answer, in favour of the Revenue, on theabove substantial questions of law, Mr.J.Narayanasamy, learnedSenior Standing Counsel for the Income-Tax Department submittedthat the Tribunal has erred in holding that the profit from thesale of land owned by the assessee cannot be treated as businessincome and that the same is eligible for exemption, on thegrounds that activity of sale of land is incidental to theobjects of the trust and the said profit was applied for theobjects of the trust. He further submitted that the assessee hadoriginally treated the land as fixed asset and lateron,converted the land, as stock in trade, in classifying the landin the balance sheet as “land for sale” in the year 2001-03itself, which reveals the assessee's intention was to dobusiness of real estate. He also submitted that the assessee had booked the profit on the sale of the land from 2004-05 onwards,continuously by venturing into business activity and convertedthe land into plots, by applying to the town planning authorityand thereafter, sold the lands by way of separate sale deeds, infrequent intervals, over a period of years. He further submittedthat once the assessee had ventured into a business activity,profits from the sale of plots cannot be treated exempted, byholding that the said business activity was incidental to theobjects of the trust. He also submitted that the object ofeducation, has nothing to do with the profit motive of realestate business activity and therefore, the profit derived fromthe sale has to be taxed. booked the profit on the sale of the land from 2004-05 onwards,continuously by venturing into business activity and convertedthe land into plots, by applying to the town planning authorityand thereafter, sold the lands by way of separate sale deeds, infrequent intervals, over a period of years. He further submittedthat once the assessee had ventured into a business activity,profits from the sale of plots cannot be treated exempted, byholding that the said business activity was incidental to theobjects of the trust. He also submitted that the object ofeducation, has nothing to do with the profit motive of realestate business activity and therefore, the profit derived fromthe sale has to be taxed. 14.Placing reliance on a decision of a Karnataka HighCourt in Commissioner of Income-Tax v. R.Ramaiah reported in(1984) 146 ITR 39, Mr.J.Narayanasamy, learned Senior StandingCounsel appearing for the appellant further submitted thatpurchase of lands and sale of the same, by converting intoplots, is in the nature of business. He further submitted thatthe continuous activity of the assessee, in dividing the land,into plots and selling the same and thereby, earning profits,squarely falls under the definition of business. According tohim, Circular No.11 of 2008, dated 19.12.2008, is not applicableto the case of the assessee. He further submitted that theCommissioner of Income-Tax (Appeals), Chennai, and the Income-Tax Appellate Tribunal, “B” Bench, Chennai, have failed toconsider the abovesaid aspects, in proper perspective andtherefore, prayed that the substantial questions of law raised,require to be answered in the affirmative, in favour of theRevenue. 15.Heard the learned counsel appearing for the parties andperused the materials available on record. 16. Before amendment by Finance Act, 2008, Section 2(15)of the Income-Tax Act, was as under:“2(15) “Charitable purpose” includes relief of thepoor, education, medical relief, and the advancement ofany other object of general public utility.” By Finance Act, 2008, with effect from 1.4.2009, the followingproviso has been added:- “Provided that the advancement of any other objectof general public utility shall not be a charitablepurpose, if it involves the carrying on of any activityin the nature of trade, commerce or business, or anyactivity of rendering any service in relation to anytrade, commerce or business, for a cess or fee or anyother consideration, irrespective of the nature of useof general public utility shall not be a charitablepurpose, if it involves the carrying on of any activityin the nature of trade, commerce or business, or anyactivity of rendering any service in relation to anytrade, commerce or business, for a cess or fee or anyother consideration, irrespective of the nature of use https://hcservices.ecourts.gov.in/hcservices/ or application, or retention, of the income from suchactivity? Second proviso inserted to Section 2(15) byFinance Act, Section 2(15) by Finance Act, 2010 withretrospective effect from 1.4.2009, reads as under:- Provided further that the first proviso shall notapply if the aggregate value of the receipts from theactivities referred to therein is ten lacs or less inthe previous year Rupees Ten lacs mentioned in thesecond proviso stands enhanced to Rupees twenty fivelacs by Finance Act, 2011 with effect from 1.4.2012.Section 2(15) of the Act has also undergone amendments and thesame is extracted hereunder: “2. In this Act, unless the context otherwiserequires,-- (15) "charitable purpose" includes relief of thepoor, education, medical relief, preservation ofenvironment including watersheds, forests and wildlifeand preservation of monuments or places or objects ofartistic or historic interest, and the advancement ofany other object of general public utility: Provided further that the first proviso shall notapply if the aggregate value of the receipts from theactivities referred to therein is ten lacs or less inthe previous year Rupees Ten lacs mentioned in thesecond proviso stands enhanced to Rupees twenty fivelacs by Finance Act, 2011 with effect from 1.4.2012.Section 2(15) of the Act has also undergone amendments and thesame is extracted hereunder: “2. In this Act, unless the context otherwiserequires,-- (15) "charitable purpose" includes relief of thepoor, education, medical relief, preservation ofenvironment including watersheds, forests and wildlifeand preservation of monuments or places or objects ofartistic or historic interest, and the advancement ofany other object of general public utility: Provided that the advancement of any other objectof general public utility shall not be a charitablepurpose, if it involves the carrying on of any activityin the nature of trade, commerce or business, or anyactivity of rendering any service in relation to anytrade, commerce or business, for a cess or fee or anyother consideration, irrespective of the nature of useor application, or retention, of the income from suchactivity:Provided further that the first proviso shall notapply if the aggregate value of the receipts from theactivities referred to therein is twenty-five lakhrupees or less in the previous year; Period prior tothe amendment vide Finance Act, 2008 w.e.f 1.4.2009.” With further amendments, now Section 2(15) of the Income-TaxAct, is as follows: “(15) "charitable purpose"includes relief of thepoor, education, yoga, medical relief, preservation ofenvironment (including watersheds, forests andwildlife) and preservation of monuments or places orobjects of artistic or historic interest, and theadvancement of any other object of general publicutility: Provided that the advancement of any other objectof general public utility shall not be a charitablepurpose, if it involves the carrying on of any activityin the nature of trade, commerce or business, or any activity of rendering any service in relation to anytrade, commerce or business, for a cess or fee or anyother consideration, irrespective of the nature of useor application, or retention, of the income from suchactivity, unless— (i) such activity is undertaken in the course ofactual carrying out of such advancement of any otherobject of general public utility; and (ii) the aggregate receipts from such activity oractivities during the previous year, do not exceedtwenty per cent of the total receipts, of the trust orinstitution undertaking such activity or activities, ofthat previous year;” 17.Circular No.11/2008, dated 19.12.2008, issued by theCentral Board of Direct Taxes, considered by the Commissioner ofIncome-Tax (Appeals) as well as by the Income-Tax AppellateTribunal, is extracted hereunder: “Section 2(15) of the Income Tax Act, 1961 ('Act')defines "charitable purpose" to include the following:- (i) Relief of the poor (ii) Education (iii) Medical relief, and (iv) the advancement of any other object ofgeneral public utility. An entity with a charitable object of the abovenature was eligible for exemption from tax underSection 11 or alternatively under Section 10(23C) ofthe Act. However, it was seen that a number ofentities who were engaged in commercial activitieswere also claiming exemption on the ground that suchactivities were for the advancement of objects ofgeneral public utility in terms of the fourth limb ofthe definition of 'charitable purpose'. Therefore,Section 2(15) was amended vide Finance Act, 2008 byadding a proviso which states that the 'advancement ofany other object of general public utility' shall notbe a charitable purpose if it involves the carrying onof - (iii) Medical relief, and (iv) the advancement of any other object ofgeneral public utility. An entity with a charitable object of the abovenature was eligible for exemption from tax underSection 11 or alternatively under Section 10(23C) ofthe Act. However, it was seen that a number ofentities who were engaged in commercial activitieswere also claiming exemption on the ground that suchactivities were for the advancement of objects ofgeneral public utility in terms of the fourth limb ofthe definition of 'charitable purpose'. Therefore,Section 2(15) was amended vide Finance Act, 2008 byadding a proviso which states that the 'advancement ofany other object of general public utility' shall notbe a charitable purpose if it involves the carrying onof - (a) any activity in the nature of trade, commerceor business; or(b) any activity of rendering any service inrelation to any trade, commerce or business; for acess or fee or any other consideration, irrespectiveof the nature of use or application, or retention ofthe income from such activity.2. The following implications arise from thisamendment - 2.1 The newly inserted proviso to Section 2(15) will not apply in respect of the first three limbs ofSection 2(15), i.e., relief of the poor, education ormedical relief. Consequently, where the purpose of atrust or institution is relief of the poor, educationor medical relief, it will constitute 'charitablepurpose' even if it incidentally involves the carryingon of commercial activities. 2.2. 'Relief of the poor' encompasses a wide rangeof objects for the welfare of the economically andsocially disadvantaged or needy. It will, therefore,include within its ambit purposes such as relief todestitute, orphans or the handicapped, disadvantagedwomen or children, small and marginal farmers,indigent artisans or senior citizens in need of aid.Entities who have these objects will continue to beeligible for exemption even if they incidentally carryon a commercial activity, subject, however, to theconditions stipulated under Section 11(4A) or theseventh proviso to Section 10(23C)which are that (i) the business should be incidental to theattainment of the objectives of the entity, and (ii) separate books of account should bemaintained in respect of such business. Similarly,entities whose object is 'education' or 'medicalrelief' would also continue to be eligible forexemption as charitable institutions even if theyincidentally carry on a commercial activity subject tothe conditions mentioned above. 3. The newly inserted proviso to Section 2(15)will apply only to entities whose purpose is'advancement of any other object of general publicutility' i.e. the fourth limb of the definition of'charitable purpose' contained in Section 2(15).Hence, such entities will not be eligible forexemption under Section 11 or under Section 10(23C) ofthe Act if they carry on commercial activities.Whether such an entity is carrying on an activity inthe nature of trade, commerce or business is aquestion of fact which will be decided based on thenature, scope, extent and frequency of the activity.3.1. There are industry and trade associations whoclaim exemption from tax u/s 11 on the ground thattheir objects are for charitable purpose as these arecovered under 'any other object of general publicutility'. Under the principle of mutuality, if tradingtakes place between persons who are associatedtogether and contribute to a common fund for thefinancing of some venture or object and in thisrespect have no dealings or relations with any outside body, then any surplus returned to the persons formingsuch association is not chargeable to tax. In suchcases, there must be complete identity between thecontributors and the participants. Therefore, whereindustry or trade associations claim both to becharitableinstitutionsaswellasmutualorganizations and their activities are restricted tocontributions from and participation of only theirmembers, these would not fall under the purview of theproviso to Section 2(15) owing to the principle ofmutuality. However, if such organizations havedealings with non-members, their claim to becharitable organizations would now be governed by theadditional conditions stipulated in the proviso toSection 2(15). 3.2. In the final analysis, however, whether theassessee has for its object 'the advancement of anyother object of general public utility' is a questionof fact. If such assessee is engaged in any activityin the nature of trade, commerce or business orrenders any service in relation to trade, commerce orbusiness, it would not be entitled to claim that itsobject is charitable purpose. In such a case, theobject of 'general public utility' will be only a maskor a device to hide the true purpose which is trade,commerce or business or the rendering of any servicein relation to trade, commerce or business. Each casewould, therefore, be decided on its own facts and nogeneralization is possible. Assessees, who claim thattheir object is 'charitable purpose' within themeaning of Section 2(15), would be well advised toeschew any activity which is in the nature of trade,commerce or business or the rendering of any servicein relation to any trade, commerce or business." 18.The word "business" is a broader term and itencompasses trade, commerce and other activities. Section 2(13)of the Income-tax Act defines the term "business" as under : "2(13) 'business' includes any trade, commerce ormanufacture or any adventure or concern in the natureof trade, commerce or manufacture." 19.The word "business" in Section 2(13) defines businessto include any trade, commerce or manufacture or any adventureor concern in the nature of trade, commerce or manufacture.Thus, the legislative intent is to make the definition, wider tocover the above activities and that the word "inclusive" hasbeen used. https://hcservices.ecourts.gov.in/hcservices/ 20.In Black's Law Dictionary, Sixth Edition, the word"business" has been defined as under: "Employment, occupation, profession or commercialactivity engaged in for gain or livelihood.” 21.Though the department has not questioned the status ofthe assessee, it is worthwhile to consider that in AdditionalCIT v. Surat Art Silk Cloth Manufactures Association reported in(1980) 121 ITR 1(SC), the Hon'ble Supreme held that the primaryor dominant purpose of the trust or institution has to beexamined to determine whether the said institution/trust wasinvolved in carrying on any activity for profit. If theprimary/dominant purpose or object of the trust or institutionwas to carry out object of general public utility and not anyactivity for profit, then the same would satisfy therequirements of Section 2(15) of the Act. Money earned frombusiness held under trust or otherwise, to feed the charitywould not disentitle or negate the claim of engagement incharitable purpose, defined under Section 2(15) of the Act. TheHon'ble Apex Court further held that, "The test which has, therefore, now to be appliedis whether the predominant object of the activityinvolved in carrying out the object of general publicutility is to subserve the charitable purpose or toearn profit. Where profit-making is the predominantobject of the activity, the purpose, though an objectof general public utility would cease to be acharitable purpose. But where the predominant objectof the activity is to carry out the charitable purposeand not to earn profit, it would not lose itscharacter of a charitable purpose merely because someprofit arises from the activity. The exclusionaryclause does not require that the activity must becarried on in such a manner that it does not result inany profit. It would indeed be difficult for personsin charge of a trust or institution to so carry on theactivity that the expenditure balances the income andthere is no resulting profit. That would not only bedifficult of practical realization but would alsoreflect unsound principle of management.” 22.Though the above reported case deals with a case ofclaiming exemption under Section 11(1) of the Income-Tax Act, ofa trust, formed with an object of general utility, the dictumlaid by the Hon'ble Apex Court that, “Where the predominantobject of the activity is to carry out the charitable purposeand not to earn profit, it would not lose its characterof a charitable purpose merely because some profit arises fromthe activity.”, cannot be lost sight of. 23.In Institute of Chartered Accountants of India & Anr.Vs. Director General of Income Tax (Exemptions) Delhi & Ors.,reported in [2012] 347 ITR 99 (Del.), the words, “trade,commerce and business” have been explained as hereunder:“Trade, as per the Webster's New Twentieth CenturyDictionary (2nd edition), means, amongst others, "ameans of earning one's living, occupation or work. InBlack's Law Dictionary, "trade" means a business whicha person has learnt or he carries on for procuringsubsistence or profit ; occupation or employment, etc.The meaning of "commerce" as given by the ConciseOxford Dictionary is "exchange of merchandise,specially on large scale". In ordinary parlance,trade, and commerce carry with them the idea ofpurchase and sale with a view to make profit. If aperson buys goods with a view to sell them for profit,it is an ordinary case of trade. If the transactionsare on a large scale it is called commerce. Nobody candefine the volume, which would convert a trade intocommerce. For the purpose of the first proviso toSection 2(15), trade is sufficient, therefore, thisaspect is not required to be examined in detail.” 24.In Commissioner of Income-Tax v. R.Ramaiah reported in(1984) 146 ITR 39, relied on by the learned counsel for theDepartment, the assessees therein, purchased agricultural landsat the outskirts of the city. The assessees therein cultivatedthe lands for some years. But later on, the assessee formed alayout and started selling the site, as building sites. Questiontherein was, whether the assessees therein, did any business inpurchasing and disposing of the lands by forming house sites.After considering the definition of "Business", under Section 2(13) of the Income-Tax Act, to include any trade, commerce ormanufacture or any adventure in the nature of trade, commerce ormanufacture and decisions in G.Venkataswami Naidu & Co., v. CITreported in [1959] 35 ITR 594, Raja J. Rameshwar Rao v. CITreported in [1961] 42 ITR 179 and Janki Ram Bhadur Ram v. CITreported in [1965] 57 ITR 21, the Andra Pradesh High Court heldas follows: “12. Bearing in mind these principles we may nowturn to the facts before us. The assessees in eachcase purchased the agricultural land lying at theoutskirts of Bangalore City. They no doubt used thelands for agricultural purpose for some years. Butlater, almost simultaneously, they converted the landsafter paying conversion fees. They did not use theconverted lands for their own purposes. They formed layouts for building sites. They divided the landsinto small plots, making it more attractive andmarketable. They, in other words, developed the landsand sold them as house sites. These activities clearlyfall within the ratio of the decision of the SupremeCourt in Rameshwar Rao's case [1961] 42 ITR 179. 13. The assessees did not sell any land in thecondition in which they bought it. They madeconvenient building sites and sold the same. They didnot even dispose of all the sites in one year. Theywent on selling the sites year after year realisingmore and more profits. The fact that all the assesseesstarted converting their lands into building sitesalmost simultaneously in 1967 itself is an indicationof their intention to trade in the lands as a venture.They made it commercially more attractive byconverting and dividing into plots. The inevitableinference is that they had no intention to hold thelands as an investment. They dealt with the lands astheir stock-in-trade. We are, therefore, unable touphold the view taken by the Tribunal.” 25.In R.Ramaiah's case (cited supra), the intention of theassessee was clear that he wanted to make profits, by sellingthe land. Activity of the assessee therein was purelycommercial. Whereas, in the case on hand, the objects of theassessee-trust are charitable and they are as follows: “(i) The principle object of the Assessee trust isto provide Medical relief for the needy, running ofeducational institution, supply of drinking water andother charitable activities. The assessee has beenrunning educational institution in the backward areasof Prakasam and Nellore District of Andhra Pradesh inthe form of Junior college in 14 places and degreecolleges in 3 places in the name and style of M/s.MSRJunior Colleges. (ii) In pursuance of its objects, the assessee hadpurchased 71.89 acres of land in the town of Nelloreduring the A.Y.1986-87 for establish medical collegeand old age homes. However assessee had to abandon theaforesaid since there was enormous delay in obtainingpermission. The assessee therefore confined itself toactivity of running colleges, providing drinking waterto rural areas and mortuary vans.” 26.In R.Ramaiah's case (cited supra), relied on by theRevenue, the intention of the assessee therein, who purchasedthe land for agricultural purpose, was to form a layout and sellthe plots. In the instant case, the assessee is running educational institutions, engaged in charitable purpose andgranted permission underSection 12A(a) of the Income-Tax Act. 27.The assessee has purchased the lands to an extent of71.89 Acres, in the year 1986-87, for the purpose of setting upa medical college and old age home. According to the assessee,permission could not be obtained from the competent authoritiesand thus, the lands purchased for the abovesaid purposes, in theyear 1986-87, which fell within the ambit of Section 2(15) ofthe Income-Tax Act, could not be utilised and thus, they wereconstrained to sell the same. 28.Merely because the lands were sold from 1994 onwards,which fetched a higher value, it cannot be said that it was onlyfor profit motive. Bumber profit, as held by the AssessingOfficer, depends upon the value of the land, sold in the year2009-10. Though the assessee has started selling the bulk landinto plots from 1994-95 onwards, it is not the case of therevenue that there was no bona fide on the part of the assessee,as to why, the assessee was constrained to sell the same. 28.Merely because the lands were sold from 1994 onwards,which fetched a higher value, it cannot be said that it was onlyfor profit motive. Bumber profit, as held by the AssessingOfficer, depends upon the value of the land, sold in the year2009-10. Though the assessee has started selling the bulk landinto plots from 1994-95 onwards, it is not the case of therevenue that there was no bona fide on the part of the assessee,as to why, the assessee was constrained to sell the same. 29.Market value of the land purchased in the year 1986-87,cannot be expected to be static. Naturally, when it is soldafter many years, it would fetch a higher value. Law also doesnot prohibit an assessee to sell the lands, less than the marketvalue. Merely because, lands are sold at a higher rate, after aconsiderable period of time, that alone cannot be the solecriteria to contend that the activity of the assessee wasbusiness activity, not incidental to the principal activity ofthe trust, which is, otherwise charitable in nature. 30.As stated supra, it was a large extent of land,measuring 71.89 Acres. As there were no takers to purchase thelarge extent of land en-bloc, there was a necessity to plot outthe lands, to smaller extent and thus, the assessee has sold thesame. When there is no prohibition in the Income-Tax Act, 1961,restraining unutilized lands to be sold in smaller extent, suchactivity of the assessee, cannot be construed as predominantbusiness activity of the assessee, engaged continuously, withthe sole object of making profits and that therefore, the saleproceeds should be brought under the head, “business income”.Case of the assessee that, sale of land, even before theassessment years 2010-11 and 2011-12 respectively, has beenthoroughly scrutinized in the earlier years, and that theassessee had passed the test, convincingly, has not been refutedby the revenue. The assessee is not bound to retain the lands,unutilised forever, when the object for purchasing such lands,could not be achieved. 31.Added further, material on record further disclosesthat the sale proceeds of the lands were utilised only forcharitable purposes and not diverted. Even going by thesubsequent conduct of the assessee in utilising the profitsearned, only for charitable purposes, it is evident that theintention of the assessee, is not to engage continuously, inbusiness or trade or commerce, as the case may be. When thebusiness activity is incidental to attain the objectives of thetrust or institution, as the case may be, and if separate booksof accounts are maintained, in respect of such business,then theassessee is entitled to exemption under Section 11 r/w. Section2(15) of the Act. When the value of the land is enhanced bypassage of time, and sold subsequently, it cannot be simply heldthat such sale was only for profit motive,dehors the predominantobjectives of the trust or institution, as the case may be. 32.On the contention of Mr.J.Narayanasamy, learnedStanding Counsel for the appellant that Circular No.11 of 2008,dated 09.12.2008, is not applicable to the case of