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Assessee-company, engaged in the jewellery business, had filed its return of income and was selected for scrutiny. Subsequently, an assessment order was passed under Faceless Assessment Scheme requiring the assessee to pay a certain amount, and proceeding for imposition of penalty under section 271AAC(2) was also initiated.
The assessee contended that section 144B, inserted by Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 with effect from 1-4-2021, provided a detailed procedure to be followed by the department for completing assessment under the Faceless Scheme. But, the same was not followed by the department.
The instant writ petition was filed by the assessee seeking to quash the assessment order passed and consequent proceedings initiated without the issuance of a show-cause notice or draft assessment order on the ground that same were in violation of specific provisions contained under section 144B.
The High Court held that sub-section (9) of section 144B required the department to follow the procedure in respect of assessments made on or after 01-04-2021. However, the said sub-section (9) was omitted with effect from 1-4-2021. Thus, the ground raised by the assessee was not maintainable as said sub-section stood omitted from the statute book with retrospective effect. Further, since the assessee had the alternative statutory remedy of filing an appeal before appellate authority under section 246A wherein other issues raised in the petition could be considered and decided, the writ petition filed by the assessee was dismissed.
Does ‘Tax Audit’ under section 44AB apply to Business Income of Charitable & Religious Institutions?
1. Introduction
Section?44AB?of the Income-tax Act, 1961 (herein referred to as 'the Act') provides for mandatory audit of books of account of an assessee who is engaged in business or profession. The audit report under Section 44AB shall be furnished in Form No. 3CA/3CB-3CD. In this article, we have analysed the applicability of 'Tax Audit' under section 44AB to Charitable and Religious institutions registered under section?12AB. These institutions are subject to Sections 11 to 13, which are special provisions governing the taxation of charitable or religious institutions.
On the study of the relevant provisions of the Act applicable to institutions registered under section 12AB, it seems that the requirement of Tax Audit does not exist even if these institutions are engaged in incidental business activities under section 11(4A) or even holding businesses as property of trust under section?11(4)?of the Act.
2. CONTROVERSY SURROUNDING THE ISSUE
This issue remains controversial and debatable due to the contradictory requirements in the Income-tax Rules and the interpretations by recognised bodies such as the Institute of Chartered Accountants of India (ICAI).
The following requirements suggest the relevance and applicability of 'Tax Audit' to charitable institutions.
2.1. Requirement to Submit Audit Report along with Form 10A/10AB
The application for registration of trust is required to be filed in Form 10A or Form 10AB. Form 10A shall be filed for provisional registration of a new trust under Section 12AB. Application in Form 10AB shall be filed for the renewal of registration of a trust already registered under Section 12AB. These forms shall be filed electronically under DSC or EVC.
Rule 17A of the Income-tax Rules 1962 provides the list of documents to be accompanied by the application in Form 10A or 10AB. It requires the submission of audit report under Section 44AB in the following cases:
??where a business undertaking is held by the applicant as per the provisions of sub-section (4) of section 11 and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business undertaking relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and?self-certified copy of the report of audit as per the provisions of section 44AB?for such period;?[Emphasis Supplied]
??where the income of the applicant includes profits and gains of business as per the provisions of sub-section (4A) of section 11 and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and?self-certified copy of the report of audit as per the provisions of section 44AB?for such period;[Emphasis Supplied]
Thus, Form 10A and Form 10AB require the audit report under Section 44AB as an attachment to the form while filing an application for registration under Section 12AB.
2.2. Guidance Note on Audit of Public Charitable Institutions
The ICAI has issued a 'Guidance Note on Audit of Public Charitable Institutions under the Income-tax Act, 1961'
We have reproduced Para 9.8 on Page 16 of this Guidance Note:
It may be noted that mere filing of the audit report under section 12A(1)(b) may not fulfill the requirement of filing tax audit report in appropriate cases. For example, where?an institution is carrying on a business whose objects are incidental to the attainment of the objectives of the institution and separate books are maintained in respect of such business, audit under section 44AB of the Act may become necessary if the sales, turnover or gross receipts from such business exceed Rs.40 lakhs. In that case the institution has to get its accounts audited under section 44AB and furnish the audit report along with return of income before the specified date. [Emphasis Supplied]
So the guidance note issued by ICAI suggests the filing of an audit report under Section 44AB if the charitable institution is carrying on a business incidental to the attainment of the objectives of the institution and separate books are maintained in respect of such business and turnover from such business exceeds the specified limit.
2.3. Guidance Note on Tax Audit under Section 44AB
The ICAI has issued a revised edition of the 'Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961'. This is effective for the A.Y. 2022-23 and the subsequent years.
We have reproduced Para 6.1 on Page 22 of this Guidance Note:
A question may arise in the case of an assessee whose income is not chargeable to income-tax by reason of a specific exemption contained in the law or otherwise, as to whether he is required to get his accounts audited and to furnish such report under section 44AB. Such cases may cover those assessees who are wholly outside the purview of income-tax law as well as those whose income is otherwise exempt under the Act. It is felt that neither section 44AB nor any other provisions of the Act stipulate exemption from the compulsory tax audit to any person whose income is exempt from tax. This section makes it mandatory for every person carrying on any business or profession to get his accounts audited where conditions laid down in the section are satisfied and to furnish the report of such audit in the prescribed form.?A trust/association/institution carrying on business may enjoy exemptions as the case may be under sections?10(21)?or 10(23A) or 10(23B) or section 10(23BB) or section 10(23C) or section 11. A co-operative society carrying on business may enjoy deduction under section 80P. Such institutions/associations of persons will have to get their accounts audited and to furnish such audit report for purposes of section 44AB if their turnover in business exceeds the prescribed limit?(Presently Rs. 1 crore and Rs 10 crore in certain specified cases). But an agriculturist, who does not have any income under the head "Profits and gains of business or profession" chargeable to tax under the Act, need not get his accounts audited for purposes of section 44AB even though his total sales of agricultural products may exceed the prescribed limit).?[Emphasis Supplied]
The guidance note on Tax Audit suggests that even if the business income of the trust is to be computed under Section 11, it will have to get its accounts audited and furnish such audit report for purposes of section 44AB if its turnover in business exceeds the prescribed limit.
Therefore, we can see that the recently amended rule 17A(2), the ICAI Guidance Note on Audit of Public Charitable Institutions, and Guidance Note on Tax Audit under Section 44AB suggest that the Tax Audit is a requirement applicable to Charitable Institutions which are governed by provisions of Sections 11 to 13. However, this requirement of 'Tax Audit' provided under the Income-tax Rules and the position taken in the Guidance Note publications of ICAI doesn't seem consistent with the law applicable to charitable institutions.
In the coming paragraphs, we have analysed the various provisions of the Act and legal jurisprudence to decipher the applicability of the tax audit to charitable institutions.
3. Analysis of the applicability of tax audit
3.1. Understanding the manner of Computation of Income under Sections 11 to 13
Section 11 of the Act deals with the computation of income from property held for charitable and religious purposes. Section 11(1) provides the incomes that shall not be included in the total income of the previous year of the person in receipt of the income.
It is well-settled law that the `income' as referred to in section 11(1) must be computed following commercial principles and not under the ordinary provisions of the Act. In other words, section 14 and five heads of income do not apply to organisations registered under section 12AB.
This can be inferred from the following circular and legal precedence in this regard:
(a)?Board Circular No. 5-P(LXX-6) Dt. 19th June 1968?The CBDT Circular has clarified that the word 'income' in section 11(1)(a) must be understood in a commercial sense and five heads of income as per section 14 are not applicable.
(b)?Income under section 11 cannot be computed by applying provisions of section?14?In?CIT?v.?Estate of V. L. Ethiraj?[1982] 136 ITR 12/[1980] 16 CTR 238 (Mad.), it was held that income from properties would have to be arrived at in the normal commercial manner without reference to the provisions which were attracted by section 14. In this case, the Court observed that the language of section 11(1)(a) makes it clear that the income derived from the property held under trust wholly for charitable and religious purposes, to the extent to which such income is applied to such purposes in India, is excluded. When once the income from the property, as such, is excluded, there is no question of computing the income from the property by applying the provisions of section 14.
(c)?`Income' must be understood in a commercial sense and not the `total income' as assessed?It is not the `total income' as would be assessed by the ITO that is relevant for the purpose of investing the funds of the trust or assessing the income of the trust. Taking into account the purpose for which the conditions of section 11(1)(a) are imposed, it would be clear that `income' to be considered will be that which is arrived at in the context of what is available in the hands of the assesse subject to an adjustment of any expenses extraneous to the trust –?CIT?v.?P.S.G. & Sons Charities?1996 Tax LR 477 (Mad.), See also –?CIT?v.?Programme for Community Organisation?[1997] 228 ITR 620/141 CTR 502 (Ker.).
(d)?Heads of income under section 14 have no relevance and question of allowing statutory deductions will not arise
The word 'income' in section 11(1)(a) must be understood in a commercial sense [Cir. No. 5-P(LXX-6) Dt. 19th June 1968] and five heads of income as per section 14 are not applicable. Since the five heads of income under section 14 do not apply to a trust registered under section 12AB, there is no income to be computed under the head of business and profession.
The `income' contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Since the income from property held under trust has to be arrived at in a normal commercial manner and when the income from property held under trust as such is excluded, there is no scope of computing the income from property by applying the provisions of section 14 of the Act. Therefore, the question of allowing any statutory deductions as contemplated by the different provisions of the Act dealing with different heads of income in computing the income accumulated does not arise when the trust loses the benefit of accumulation –?DIT (Exmp)?v.?Girdharilal Shewnarain Tantia Trust?[1993] 71 Taxman 150/199 ITR 215 (Cal.).
Therefore income in the case of charitable institutions is to be computed in a commercial sense and not under five heads of income, including profit and gains from business.
3.2. Applicability of Section 44AB and business held as trust property under Section 11(4) & Incidental business under section 11(4A)
The requirement of audit under section 44AB is under the head 'Profit & Gain from Business', and therefore this audit is required only when the income is computed under the head 'Profit & Gain from Business' or there is a specific requirement of Tax audit under section 44AB.
In the case of an organisation registered under section 12AB, the income is computed in a commercial sense, and five heads of income are not applicable, and none of the provisions under sections 11, 12 & 13 provides for the computation of income under the head 'Profit & Gain from Business' .
Even the CBDT Circular No.?5-P(LXX-6) Dt. 19th June 1968 has clarified the manner of computation of income even for business undertaking held under trust and it provides as under:
(a)?In Board's Circular No. 2-P(LXX-5), dated 15-5-1963, it was explained that a religious or charitable trust, claiming exemption under section 11(1), must spend at least 75 per cent of its?total income?for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its?total income.?The question has been reconsidered by the Board and the correct legal position is explained below.
(b)?Section 11(1) provides that subject to the provisions of sections?60?to?63,
"the following income shall not be included in the total income of the previous year. . . ."
The reference in clause (a?) is invariably to "Income" and not to "total income". The expression "total income" has been specifically defined in section?2(45)?as "the total amount of income computed in the manner laid down in this Act".?It would, accordingly, be incorrect to assign to the word "income", used in section 11(1)(a), the same meaning as has been specifically assigned to the expression "total income"?vide?section?2(45).
(c)?In the case of a business undertaking, held under trust, its "income" will be the income as shown in the accounts of the undertaking.?Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income.
(d)?Where the trust derives income from house property interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).(e)?To sum up the business income of the trust, as disclosed by the accounts?plus?its other income computed as above, will be the "income" of the trust for the purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1).
3.3. Applicability of provisions of PGBP to Charitable Institutions
To compute income under section 11(4) or under 11(4A), there is no mention of computing income under the head 'Profits & Gains of Business or Profession'. It may be noted that under sections 11 to 13, there are specific references where the sections applicable under the head 'Profits & Gains of Business or Profession' are also made applicable to the computation of income under section 11. In other words, unless specifically provided, the provision of the head 'Profits & Gains of Business or Profession' shall not apply to Charitable Institutions.
The Finance Act, 2018 inserted Explanation 3 to Section 11(1) to apply the following two provisions to charitable and religious institutions:
(i)?Disallowance for payment without TDS deduction under sub-clause (ia) of clause (a) of section 40.
(ii)?Disallowance for cash payment above Rs. 10,000/- under sub-section (3) and (3A) of section 40A.
The text of Explanation 3 to Section 11(1) is reproduced as under:
"Explanation 3 - For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits & Gains of business or profession".
In light of the above, it is very clear that the statute specifically provides that some provisions applicable to business entities are required to be made applicable to charitable entities. In other words, unless specifically provided no provision corresponding to section 14 and five heads of income shall apply to charitable institutions.
3.4. Provisions of Chapter IV-D,?i.e., sections?28?to?44D?are not applicable while computing income falling under Chapter III:
The Delhi ITAT in the case of?United Educational Society?v.?Jt. CIT?[2019] 107 taxmann.com 127/74 ITR (T)11/178 ITD 716 (Delhi – Trib.)?held that Provisions of Chapter IV-D,?i.e.,?sections 28 to 44D are applicable while computing income of business or profession and these provisions are not applicable in respect of charitable institution whose income is to be computed under sections 11 and 12 falling under Chapter III.
Income Tax Appellate Tribunal – Mumbai, in the case of?Asstt. CIT?v.?India Magnum Fund?[2002] 81 ITD 295/74 TTJ 620, held that provisions of Section 44AB cannot and do not have any application in relation to incomes which are enumerated under Chapter III and are expressly excluded from total income. To reiterate, Section 44AB is operational only when profits and gains of business or profession are to be computed for the purpose of computation of total income to meet the requirements of the provisions of Section 4. That being so, any income which is designated as "incomes which do not form part of total income" have nothing to do and cannot be subjected to the provisions of Section 44AB.
3.5. Specific provision for Audit under Section 12A
One of the conditions for availing exemptions under section 11 and section 12 is auditing the organisation's accounts under section 12A(1)(b). As per the prevailing provisions, the audit report must be obtained and furnished at least one month before submitting the income tax return.
The monetary limit for compulsory audit under section 12A(1)(b) is currently Rs. 2,50,000. The accounts of the trust should be audited if the total income of the trust or institution as computed under the Income-tax Act, without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount that is not chargeable to income tax in any previous year.
The accounts of the trust for that year should be audited by a Chartered Accountant. The audit report has to be furnished in Form 10B at least one month prior to the due date of submission of return of income.
Thus, there is a specific provision for the audit of charitable trusts under Section 12A. In the audit report in Form 10B, the auditor has to certify that he has examined the balance sheet and the Profit and loss account of the trust or institution, which are in agreement with the books of account maintained by the said trust or institution.
3.6. Reference of time-limits under Section 44AB to audit report under Section 12A(1)(b)
The requirement to furnish an audit report under Section 12A is before the specified date referred to in section 44AB.?Under Section 12A, there is no reference of submitting audit report under section 44AB but only the time limit has been borrowed from Section 44AB.
The text of section 12A(1)(b) is reproduced as under:
(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year,—
(i)?the books of account and other documents have been kept and maintained in such form and manner and at such place, as may be prescribed; and
(ii)?the accounts of the trust or institution for that year have been audited by an accountant defined in the Explanation below sub-section (2) of section?288?before the specified date referred to in section 44AB and the person in receipt of the income furnishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed;
Thus, Section 12A(1)(b) only provides that the dates specified under section 44AB shall also be applicable to audit under section 12A(1)(b). There is nothing to suggest that section 44AB shall also apply to charitable institutions.
3.7. No requirement of Tax Audit when the charitable trust is subject to the benefit of section?11?and No Penalty u/s?271B?even if during the assessment proceedings exemption claimed u/s 11 has not been granted
Income Tax Appellate Tribunal – Delhi,?United Education Society?v.?JT. CIT?[IT Appeal No. 902 (Delhi) of 2016, dated 25-1-2018.] It was held that (Relevant Extract):
Bare perusal of the provisions contained u/s 44AB of the Act goes to prove that the same are applicable to the person carrying on business or profession and is required to get its account mandatorily audited by an accountant. But, in the instant case, when assessee is undisputedly a charitable society and is not carrying out any business and has been claiming exemption u/s 11A of the Act, the penalty u/s 271B of the Act cannot be levied. Furthermore, when there is no computation of profits and gains of the business or profession as part of the total income, the assessee society is not amenable to section 44AB of the Act.
No doubt, exemption claimed by the assessee society trust u/s 11A has not been granted by the AO and completed the assessment u/s?143(3)?at Rs.6,93,54,217/- but it will not burden the assessee to get its account audited with retrospective effect so long as registration u/s 12A of the Act is in operation.
In view of what has been discussed above, we are of the considered view that when the assessee under bona fide belief claimed the exemption u/s 11 of the Act and had not got his accounts audited from the accountant as per provisions contained u/s 44AB, penalty u/s 271B cannot be levied.
3.8. Powers of Assessing Officer under Section 11(4)
Section 11(4) defines "property held under trust" and deals with the determination of income of a business undertaking. The term 'property held under trust' includes a business undertaking. Therefore, income from the business will qualify for an exemption, provided the said business is held under trust for charitable or religious purposes.
Where a claim is made that the income of such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions relating to assessment. Where any income so determined is in excess of the income shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
It may be noted that the Assessing Officer has the power to determine business income under section 11(4) as per the provisions of the Act, which would imply that all provisions of the Act shall apply. However, this power is available to the AO during the assessment proceedings, and there is no provision to suggest that the assessee is required to compute income in a manner other than applicable to charitable institutions under section 11.
The text of Section 11(4) is reproduced herein below:
(4) For the purposes of this section "property held under trust" includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof,?the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
The Assessing Officer has been given the power to determine the income of such business in accordance with the provision of this act, but this subsection nowhere provides that the income shall be computed under the head Profits & Gains from Business. MoreovertheCBDT Circular No.?5-P(LXX-6) Dt. 19th June 1968 has clarified as under:
"In the case of a business undertaking, held under trust, its "income" will be the income as shown in the accounts of the undertaking"
The Assessment of Charitable Trusts and Institutions Tax Payers Information Series-37 Published by Income Tax Department, para 5.5(vi) is reproduced as under:
Section 11(4) states that a business undertaking can be held as property under trust. Therefore, a legitimate claim can be made that the income of such business may not be included in the total income of the person receiving such income. In such a case, the assessing officer is required to assess the income of such business under the normal provisions of the Act. If there is a difference between income so determined and the income shown in the accounts, such difference shall not be regarded as having been applied to religious or charitable purpose, but shall be deemed to have been applied to purposes other than charitable/ religious purposes. The point to be noted is that the income of the business has to be calculated under the normal assessment related provisions of the Act and not as per Chapter III which otherwise applies to income of charitable trusts and institutions.
In the light of the above, the moot point here is that the AO may have the power to compute and assess the income as a business entity or even initiate an audit under section?142(2A), but the organisation is not required to either compute income as per business provisions or get the accounts audited under section 44AB.
3.9. Intent and purpose of Section 11(4)
In the case of?CIT?v. Birla Education Trust[1985] 21 Taxman 134/153 ITR 579/44 CTR 263, the Calcutta High Court explained the intent and purpose of section 11(4) of the Act. In this case, it was explained that special powers were given to the AO only to ensure that the trustees or any other vested group are not misusing the exemptions available to trusts by under stating the profits of business held under trust. The High Court also quoted the explanatory statements provided by the Ministry of Finance when the Finance Bill was placed before the Parliament in 1961. The relevant extract is as under:
"It is now settled that the speech of the mover of the Bill is relevant. In Varghese?v.?ITO, P.N. Bhagwati J., held (at p. 608):
"Now, it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. This is in accord with the recent trend in juristic thought not only in Western countries but also in India, that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible."
Smt. Tarakeswari Sinha participating in the debate on September 1, 1961, stated in relation to Sub-section (4) of Section 11:
"Suppose a factory has got a capacity for an annual income of Rs. 15 lakhs but for avoiding a particular portion of the tax, sometimes the trustees or the donors have manipulated the accounts. They say that the income of the factory is only Rs. 10 lakhs and not Rs. 15 lakhs, thus avoiding tax payment on Rs. 5 lakhs which goes to their own pocket. For plugging this hole, actually powers were taken by the income-tax authorities to scrutinise the accounts to find out that the income shown in the books is the correct and has not been more. That was the only safeguard that has been provided by the sub-clause."
Thus, Sub-section (4) was intended to uncover tax evasion by manipulation of the account books. It was not intended to apply to application or expenditure of income by the business undertaking. As already seen, the non-application of income for purposes of the trust was dealt with by Sub-section (3) of Section 11.
It appears to us that Sub-section (4) was intended for a different contingency. It was meant to cover a different situation. It was not intended to apply to application of income.
Under Sub-section (4), the ITO can determine the income and compare it with the income appearing in the accounts. The income spoken of in Sub-section (4) appears to us to be the gross income and not the net income of the business undertaking. The net income is computed after granting the admissible deductions. The deductions admissible from income of a business undertaking are not always the same as application of income wholly for charitable or religious purposes. They may or may not be admissible deduction from business income under the provisions relating to assessment of income. Yet they are entitled to exclusion under Sub-section (1) of Section 11 because they represent application of income wholly for charitable or religious purposes.
Here, the ITO has to scrutinise the accounts and see if there is suppression of income or manipulation of accounts with a view to conceal income. He could see whether there are items which are deemed to be income under some provision of the I.T. Act and which have not been accounted for in the books of the undertaking, or there may be some receipts which are really in the nature of income and which have not been reflected in the accounts. This interpretation of Sub-section (4) of Section 11 is in consonance with the legislative intent as disclosed by the Finance Minister who spoke in Parliament while this provision was under consideration."
In light of the above, it is clear that there is no provision under section 11(4) to suggest that tax audit under section 44AB is applicable or that the AO is required to apply the provisions applicable to business assessees under section 44AB.
3.10. Income from incidental Business under section 11(4A)
The Text of Section 11(4A) is reproduced herein below:
(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.
Business income shall be eligible for exemption under Section 11 if it is incidental to the attainment of objectives of the trust and separate books of account are maintained by the trust in respect of such business. We need to understand the meaning of business incidental to the attainment of main objects.
In the case of?Asstt. CIT?v.?Thanthi Trust?[2001] 115 Taxman 126/247 ITR 785/165 CTR 681, the Supreme Court held that a business whose total income is utilised for the purposes of achieving the objects of the trust should be considered as incidental to the attainment of the objects.
In the case of?CIT?v.?Janakiammal Ayyandar Trust?[2005] 277 ITR 274 (Mad.), the Supreme Court ruling was reaffirmed where the seemingly unrelated business of manufacturing paper cap was held to be incidental as the entire income was applied for charitable purposes. The Madras High Court referred to the Apex Court in?Thanthi Trust?(supra) holding section 11(4A) of the Act, as amended in 1992.
The High Court of Delhi in the case of?Pr. CIT?v.?Servants of People Society?[2021] 133 taxmann.com 244/[2022] 284 Taxman 461?held that where main object of assessee-society was running a printing press and publishing a newspaper and profit so generated was being ploughed back for charitable activities and Commissioner itself had granted registration to assessee under section 12A, recognition under section 10(23C)(vi) and exemption under section 80G, mischief of proviso to section 2(15) was not attracted and findings of Commissioner (Appeals) and Tribunal that assessee/society did not carry on any business, trade or commerce with intent of earning/distributing profit and was thus entitled to exemption under section 11(1) was agreeable.
3.11. Incidental business does not fall under the Scope of Business
Incidental business activity to achieve charitable objectives does not fall under the coverage of Business.
The Supreme Court, in several cases, has held that any business activity integrally required for the dominant charitable activity is also a charitable activity. The Supreme Court of India, in the case of?Yogiraj Charity Trust?v.?CIT?[1976] 103 ITR 777, held that an incidental business activity would also be treated as a charitable activity if it is necessary and incidental to the primary activity
In Institute of?Chartered Accountants of India?v.?Dy. GIT(E)?[WP(C) No. 3147 of 2012, dated 4-7-2013] while considering whether the activities of ICAI fell within the proviso to section 2(15) as introduced with effect from 1-4-2009, this court, after considering the Supreme Court decision in the case of?CST?v.?Sai Publication Fund?[2002] 122 Taxman 437/258 ITR 70/177 CTR 1?held:
"Thus, if the dominant activity of the assessee was not business, then any incidental or ancillary activity would also not fall within the definition of business."
Hence the incidental business activity to feed charity cannot be classified as a business, and therefore, the income for such incidental business-like activity is to be computed in a commercial sense as per the normal scheme of taxation as applicable to a charitable trust and the provisions to compute income under the head profit and gains from business and profession shall not apply.
4. Conclusion
Based on the legal jurisprudence and provisions of the Income-tax Act as discussed above, it can be concluded that there is nothing in the statute that suggests that the income of the charitable institution shall be computed under the head `Profit & Gain from Business' nor it suggests that Tax Audit under section 44AB shall apply to charitable trusts. Sections 11 to 13 are independent of the five heads of income. As long as the registration under section 12AB is intact, the income cannot be computed under the five heads of income.
'Tax Audit' is a specific requirement for the assessee having income under the head 'Business and Profession'. Therefore, there is no obligation on the charitable institutions to get the accounts audited under Section 44AB. However, such organisations are subject to the specific requirement of audit under section 12A(1)(b)?read with?Rule 17B, and a report of such audit is to be furnished in Form 10B.
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