TMI Blog2011 (5) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... to carry on the proclaimed main objects of the charitable activities. In these circumstances, the business carried on by the assessee trust cannot be considered as business incidental to the attainment of main objects of charity. As the assessee has not satisfied the first condition of section 11(4A) cancelling the registration u/s 12A is warranted - Decided against the assessee - 135(MAD.) OF 2011 - - - Dated:- 11-5-2011 - DR. O.K. NARAYANAN, HARI OM MARATHA, JJ. V. Ramachandran and Dr. Anita Sumanth for the Appellant. Shaji P. Jacob for the Respondent. ORDER Dr. O.K. Narayanan, Vice-President. This appeal is filed by the assessee. The appeal is directed against the order of the Commissioner of Income-tax-I, at Madurai passed under section 12AA(3) of the Income-tax Act, 1961, cancelling the registration earlier granted to the assessee under section 12A. The registration has been cancelled through his proceedings dated 30-12-2010. 2. The assessee is a trust. It was created by the trust deed executed on 6-7-1992. The objects proclaimed in the trust-deed are the following : "(a) To establish and/ or build and/or maintain and/or run and/or improve and/or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee trust has been enjoying exemption under section 11(1)(a) of the Income-tax Act, 1961. 4. The order appealed against, passed by Commissioner of Income-tax under section 12AA(3) is the culmination of enquiries made by the Commissioner in respect of the activities carried on by the assessee trust. The enquiries have been prompted by the materials furnished by the assessee trust along with the return of income filed for assessment year 2008-09. The Commissioner on perusal of report in form 3CD filed along with the return of income and the enclosures, found that the assessee trust is carrying on business activities even though the objects of the trust are stated to be charitable in nature. It has been stated in the audit report that following are the activities carried on by the assessee trust ; (a) Manufacturing and Trading in Intra Ocular Lens (b) Manufacturing and Trading in Ophthalmic and Cardiovascular suture needles (c) Manufacturing and Trading in Ophthalmic Pharmaceutical products (d) Manufacturing and Trading in Antiseptic Pharmaceutical products (e) Manufacturing and Trading in Microsurgical blades (f) Manufacturing and Trading in Bipolar Cautr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the profits for the assessment years 2007-08, 2008-09, 2009-10 respectively. It was only for the assessment year 2010-11 that the percentage of donations has been increased to 61 per cent which amounted to Rs. 12,14,37,500. In respect of that donation also, the Commissioner found that the donations were predominantly made to its associate trust, M/s. Aravind Medical Research Foundation. When the assessee has made a total donation of Rs. 12,14,37,500 in the assessment year 2010-11, an amount of Rs. 12 crores has been made to Aravind Medical Research Foundation alone which accounted for 98 per cent of the donations made by the assessee trust. 7. In the light of the above observations, the Commissioner of Income-tax held that even though the assessee trust has been registered as a charitable trust, it has not been carrying on any charitable activities in accordance with the objects proclaimed in its trust deed. The assessee trust is carrying on the business of manufacturing and selling of medical and ophthalmic items and the entire profit generated from the business is accumulated in the hands of the assessee itself as financial assets and wherever donations have been made, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the beneficiaries of the activities stated to be charitable carried on by the assessee. He further relied on the judgment of the Hon'ble Supreme Court in the case of Yogiraj Charity Trust v. CIT [1976] 103 ITR 777 wherein it was held that where there are various objects of a trust, which are all independent objects and even if one of its objects cannot be described as a charitable, the claim of the entire trust for exemption must fail. The Commissioner held that in the case of the assessee trust, out of the seven objects, object clauses (e) and (f) fail to be a charitable one, for the way they are performed and the rest of the five objects (a) to (d) and (f) which are in the nature of charitable activities would not be of any help to the assessee trust, for the reason that those five objects have not been attended to by the assessee trust through its activities. He, accordingly, confirmed his proposal and cancelled the registration granted to the assessee trust under section 12A on 9-10-1922. The assessee is aggrieved and therefore, the appeal before us. 9. The detailed grounds raised by the assessee trust in this appeal are extracted below : "(a) The Commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax failed to note that the requirement of not involving in any activity for profit has to be understood in the light of the provisions of section 11(4A) which clearly permits a business to be held under trust for charitable purpose and so long as the twin conditions of section 11(4A) are satisfied, the benefit under section 11 cannot be denied. (g) The Commissioner of Income-tax is wrong in his observation that there is no element of charity in the activities carried on by the appellant. The Commissioner ought to have seen that the activity of manufacturing and marketing of Eye care products is an activity incidental to the attainment of the main object for charity pursued by the Trust and the Trust has complied with the twin conditions of section 11(4A) of the Act. The Trust has maintained separate accounts in respect of the aforesaid activity and the income from the said activity has been used to feed the charity. Thus, the activity was carried on as incidental to and for the attainment of the object of medical relief. Consequently, the Trust is entitled to relief under section 11 and the registration of the Trust has to be continued. (h) The Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in Yogiraj Charity Trust. In the appellant's case, all the objects are charitable and the activity of manufacturing and marketing of eye care products was carried on only to feed the charity and satisfies the requirements of section 11(4A)." 10. Shri V. Ramachandran, the learned Senior Counsel along with Dr. Anita Sumanth, appeared for the assessee trust and argued the case at length. 11. The learned counsel contended that the Commissioner of Income-tax has arrived at his conclusion in total disregard of basic features of the assessee trust. The assessee trust is manufacturing and selling ophthalmic lenses and other medical and surgical accessories not for the purpose of making profits but for the purposes of actively engaging in the health sector on a charitable basis especially to help the activities carried out to prevent blindness among the public. The assessee is closely associated with Aravind Medical Research Foundation and the trustees of both trusts are common and the assessee trustee is augmenting the efforts of Aravind Medical Research Foundation to provide low cost eye care support to the public, especially weaker sections of the society. 12. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He explained that there is no rule that the business carried on by a charitable institution should not be efficiently managed like a business carried on by a business house. If a business activity is carried on efficiently, there will be profit arising and that should not be a fetter against the contention of the assessee that it is a charitable trust. 14. The learned counsel further explained that the law has provided that a charitable trust may carry on a business incidental to the attainment of object of the trust and this proposition has been considered by Hon'ble Supreme Court in the case of Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126, wherein the court has held that all that it requires for the business income of a trust or an institution to be exempt is that the business should be incidental to the attainment of the objects of the trust or institution; that the business income is utilized by the trust or institution for the purpose of achieving the objectives of the trust or institution is, surely a business which is incidental to the attainment of the objectives of the trust; that in any event, if there be any ambiguity, the provision must be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with law and applied for charitable purposes by way of legitimate donations, uphold the undisputed legal status of the assessee as a charitable institution and therefore, the Commissioner of Income-tax has grossly erred in cancelling the registration granted to the assessee under section 12A of the Income-tax Act, 1961. 17. Meanwhile the price details of the products manufactured and traded by the assessee trust have been produced before us. The same have been produced to support its argument that the assessee trust is manufacturing and distributing essential medical aids comparatively at a lesser price for the public. The assessee has highlighted its argument on the price differentiation as one of the reflections of its charitable activities. 18. Some of the details furnished by the assessee trust are reproduced below for a ready comparison : COMPARISON OF AUROLAB'S PHARMACEUTICAL PRODUCT PRICE WITH COMPETITOR PRICE (IN RS.) Pharma Products Surgical Products Sl. No Drug Volume Company Price 1. HPMC 2% w/v 2 ml Aurolab 125 Sun Pharma 150 Appasamy 135 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aurolab 20 10 ml Allergan 44.15 Sun Pharma 57 DILATING DROPS 17. Tropicamide 1% w/v 5 ml Aurolab 40 Sun Pharma 49 18. Cyclopentolate 1% w/v 5ml Aurolab 30 Sun Pharma 33 Microvision 32 19. Cyclopentolate 1% + Phenyl 2.5% w/v 5 ml Aurolab 30 Sun Pharma 35 Comparison of Aurolab's Laser price with competitor orice (in Rs.) Product Name Aurolase 532 (Aurolab) Oculight GLx (Iris) Visulas 532s (Zeiss) GYC 1000 (NIDEK) Laser with Slitlamp 1,000,000 1,300,000 1,200,000 1,100,000 19. Let us make a quick comparison of the price of various products as detailed by the assessee. Under the head Pharma Products, HPMC - 2 per cent w/v is sold by the assessee at Rs. 125 for 2 ml. M/s. Shah Shah, a private manufacturer also sells the said product at the same rate. In the case of same product for 3 ml. the rate of the assessee is Rs. 60 and again the rate of another private firm, M/s. Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Senior Counsel contended that the order of the Commissioner of Income-tax is unjustified, unwarranted and arbitrary. His order violates the principles of natural justice in so far as the Commissioner has proceeded on an erroneous presumption that the object of the assessee trust falls within the fourth limb of section 2(15). The Commissioner has not adverted to the materials submitted before him to establish that apart from the various donations given to Aravind Medical Research Foundation, the assessee has also spent considerable amount for creating infrastructure for the manufacture of eye care products which are used for the advancement of medical relief. Those expenditure incurred by the assessee trust constitute application of funds for charitable purposes. He, therefore, concluded that the order of the Commissioner of Income-tax may be set aside and the registration of the assessee trust under section 12A be restored. 24. Shri Shaji P. Jacob, the learned Commissioner appearing for the revenue, on the other hand, contended that the Commissioner of Income-tax-I, Madurai is justified in cancelling the registration granted to the assessee for good and sufficient reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l products as if it is a business carried on with no let down in the profit rate or the profit margin. The profit earned by the assessee is very attractive ranging from 37 per cent to 49 per cent. The turnover of the assessee trust increasing year after year. The assessee is incurring all kinds of expenditure as incurred in the case of a private businessman. Therefore, he contended that in the activity of manufacturing and trading in Intra Ocular Lens and other related products, there is no element of charity as to claim the benefit of exemption under section 11. 27. The learned Commissioner further explained that the profit generated out of the business carried on by the assessee trust has been consistently capitalized by the assessee trust in the form of various financial assets. The only application of fund made by the assessee trust was donations made in various assessment years. Even the donations paid for the assessment years 2007-08, 2008-09 and 2009-10 were only a nominal part of the profits generated by the assessee trust for those assessment years. The donations were respectively Rs. 66,50,000, Rs. 30,66,000 and Rs. 30,00,000. But for the assessment year 2010-11, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility. It was noticed in the past a number of entities carrying on commercial activities claimed exemption either under section 10(23C) or section 11 by claiming themselves as charitable institutions. They always took shelter under the expression "advancement of an object of general public utility". The amendment sought to limit the scope of the phrase "advancement of any other object of general public utility". Accordingly, section 2(15) has been amended to provide that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves to carry on of any activity in the nature of trade, commerce or business, any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application or retention, of the income from such activity. 31. The learned Commissioner further explained that in the above legal scenario the activity carried on by the assessee involves nothing but carrying on of an activity in the nature of trade, commerce and business for which the assessee is charging price. In such circumstances, even if a portion of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for the assessee. 34. The learned Commissioner, thus, concluded that in the light of the activities carried on by the assessee trust, the Commissioner of Income-tax I, Madurai has rightly cancelled its registration. He prayed that the appeal filed by the assessee may be dismissed. 35. In spite of the wide ranging arguments advanced by both sides, we find that the basic facts relating to the activities carried on by the assessee trust are by and large out of dispute. The assessee trust was created as per trust deed dated 6-7-1992. The registration under section 12A was granted on 9-10-1992. Thereafter till the assessment year 2010-11, the assessee trust has been holding the registration valid and enjoying the benefits of section 11 of the Income-tax Act. The assessee is manufacturing Intra Ocular Lens and other surgical accessories. These items are sold locally as well as exported outside India. The profit generated in the business carried on by the assessee is ranging from 37 per cent to 49 per cent. The assessee accumulated a major portion of its profits earned in the course of business, of course, following the procedures prescribed by law. The only application made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charitable trusts and has accumulated the available funds in accordance with law, it does not mean that the assessee is carrying on a charitable activity for the reason that it is carrying on a business. The fall out of the legal position is that the contention of the assessee that it has not applied its income for non-charitable purposes would not be relevant in considering this case, because the law has provided that the application of income is not the criteria to decide the nature of an institution whether charitable or not, if the said institution is carrying on business in the nature of manufacture, trade, commerce etc. 38. Therefore, it is our considered opinion that the action of the Commissioner of Income-tax is justified in the light of the definition of the expression "charitable purpose" provided in section 2(15) of the Income-tax Act, 1961. This is because the singular activity of carrying on of business continued by the assessee trust through out its life cannot be treated as a charitable activity. 39. The application of funds and profits of the business carried on by a trust shall be relevant for the purpose of section 11, only after it is primarily held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Income-tax Act is strictly defined. The assessee has been carrying on the sole function of manufacture and sale of Intra Ocular Lens and other products. The assessee is earning high amount of profits from year to year. There is nothing on record to show anything about concessional price collected for distribution of such products among needy public. Even though the assessee has accumulated its profits as per income-tax law, that accumulation has become a tool of capitalization of its funds. Section 11(4A) provides for satisfying of two conditions to claim the benefits of section 11, in the case of an institution earning income from profits and gains of business. The first condition is that the business is incidental to the attainment of the objectives of the trust. The second condition is that separate books of account are to be maintained in respect of such business. As far as this case is concerned, the second condition is satisfied. But the question is whether the assessee has satisfied the first condition that whether its business has been carried on as a business incidental to the attainment of its objectives or not. 40. Carrying on of a business to be inci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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