ITAT Chennai on Charitable Trust Surplus and Exemption u/s 11: Detailed Analysis of Gaura Nitai Seva Trust vs ITO

Background and Procedural History

The dispute in Gaura Nitai Seva Trust Vs ITO came before the ITAT Chennai as an appeal filed by the assessee challenging the order passed by the National Faceless Appeal Centre, Delhi (NFAC) dated 20.06.2024 for Assessment Year 2017-18.

The assessee is a public charitable trust registered under Section 12AA of the Income Tax Act 1961. For the relevant year, it filed its return of income on 28.10.2017, declaring Nil income after claiming exemption under Section 11.

The assessment was completed by the Income Tax Officer, Exemptions Ward, Madurai under Section 143(3) on 18.12.2019, determining the total income at **Rs. 74,41,528/-. The Assessing Officer (AO) denied the assessee the benefit of Section 11by invoking the proviso toSection 2(15)` on the premise that the assessee was engaged in activities in the nature of trade, commerce or business.

The AO’s main allegation was that the assessee, through its activities of purchase and sale of milk and generation of surplus, was effectively carrying on business-like operations. Based on this, the AO concluded that the assessee’s activities fell under “advancement of any other object of general public utility” and were hit by the proviso to Section 2(15).

The assessee carried the matter in appeal before the CIT(A), but the relief granted was only partial. While the CIT(A) acknowledged that the activities had a charitable character, he nonetheless upheld the applicability of the proviso to Section 2(15) and sustained the denial of exemption under Section 11.

Dissatisfied with this finding, the assessee approached the ITAT Chennai.

Grounds of Appeal Before the ITAT

The assessee raised multiple grounds before the Tribunal, broadly challenging:

  • The legality and validity of the appellate order.
  • The denial of exemption under Section 11 and Section 12.
  • The treatment of the assessee’s activities as falling under “advancement of any other object of general public utility” and the consequent application of the proviso to Section 2(15).

Key aspects of the grounds included:

  1. The order was alleged to be contrary to facts, law, and principles of natural justice.
  2. The CIT(A) was said to have erred in holding that the assessee’s charitable activities fell under the limb of “advancement of any other object of general public utility” and then invoking the proviso to Section 2(15) to deny exemption.
  3. The assessee contended that its dominant activities were clearly within the primary categories of charity, namely:
    • “relief to the poor”
    • “preservation of environment”
    • “education”, particularly in the area of early childhood services.
  4. It was also argued that the trust’s main object was to pursue charitable purposes; it was neither established nor operated with a profit motive or for carrying on trade, commerce or business.
  5. The assessee emphasized that income was exclusively applied towards its stated charitable objects and there was no diversion or appropriation of funds for the benefit of trustees.

Factual Matrix and Nature of Activities

The assessee is a public charitable trust registered u/s Section 12AA. For AY 2017-18, it declared Nil income after claiming exemption under Section 11.

During scrutiny assessment, the AO observed that:

  • The assessee was engaged in activities involving purchase and sale of milk.
  • These activities resulted in generation of surplus income.

On this basis, the AO formed the view that the trust was involved in an activity in the nature of trade, commerce or business and therefore fell within the mischief of the proviso to Section 2(15). As a result:

  • The AO denied exemption under Section 11.
  • The total income was computed at Rs. 74,41,528/- vide order u/s Section 143(3) dated 18.12.2019.

Assessee’s Contentions Before CIT(A)

In first appeal, the assessee argued that: