2013 (1) TMI 63 - HC - Income Tax

Approval u/s 10(23)(C) - rejection of application as the activities of the agency were not in the nature of advancement of any objects of general public utility - do not indicate any charitable activity - Held that - The petitioner was registered under the Andhra Pradesh (Telangana Area) Public Societies Registration Act, 1350 Fasli by Food and Agriculture (EP-II) Department dated 01-06- 1977, the State Government approved the proposal of the Director of Agriculture and directed that the petitioner shall carry on the functions of the certification agency under the Seeds Act, 1966 in the Andhra Pradesh State with effect from 01-06-1977. The objects of the petitioner have already been set out. The petitioner thus certifies the Seeds which meet the minimum seeds certification standards as per Indian Minimum Seed Certification Standards, 1988. Seed growers enter into contract with a society/agent, who approaches the petitioner for certification of the seeds and after securing certification, they sell the certified seeds to the farmers at a market price determined by them. The petitioner collects a fee for providing certification as the process of certification involves technical and scientific evaluation of the seeds although the fee collected by it would be enough to enable it to sustain its activities and may not result in much profit. The term advancement of any other object of general public utility used in Section 2 (15) includes all objects to promote the welfare of the public particularly when the object is to promote or protect the interest of a particular trade or industry. The activity of the petitioner which facilitates sale of certified seeds to farmers therefore falls within advancement of any other object of general public utility included in the definition of the term charitable purpose as defined in Section 2 (15) of the Act but in view of the fact that certification of seeds by the petitioner facilitates trade, commerce or business in the certified seeds by the client of the petitioner, the proviso to the said section would come into operation. Thus the petitioner s activity assists the sale of certified seeds and is in relation to any trade, commerce or business and therefore its activity cannot be held to be a charitable purpose . In this view of the matter the 1st respondent rightly rejected the application of the petitioner for approval under Section 10 (23C) (iv) - the petitioner has not rendered its services directly to the farmers but is rendering its services directly to its clients/agents who are engaged in trading of the certified seeds with profit motive and therefore its activities are not for the advancement of any other object of general public utility and hence not for charitable purpose in view of second limb of the first proviso to Section 2 (15) - aginst assessee.

Issues Involved:
1. Whether the petitioner's activities qualify as "charitable purposes" under Section 10 (23C) (iv) of the Income Tax Act, 1961.
2. Whether the rejection of the petitioner's application for approval under Section 10 (23C) (iv) by the Chief Commissioner of Income Tax was justified.
3. The relevance of the petitioner's registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987.
4. Whether the petitioner's services rendered directly to clients/agents instead of farmers affect its eligibility for tax exemption.
5. The applicability of the proviso to Section 2 (15) of the Income Tax Act, 1961.

Detailed Analysis:

1. Whether the petitioner's activities qualify as "charitable purposes" under Section 10 (23C) (iv) of the Income Tax Act, 1961:
The petitioner, Andhra Pradesh State Seed Certification Agency, sought approval under Section 10 (23C) (iv) of the Income Tax Act, 1961, claiming that its activities are for charitable purposes. The court noted that the petitioner's activities include certifying seeds to ensure quality, which indirectly benefits farmers. However, the court emphasized that the definition of "charitable purpose" under Section 2 (15) includes the advancement of any other object of general public utility, provided it does not involve any activity in the nature of trade, commerce, or business, or any activity of rendering any service in relation to any trade, commerce, or business for a fee or consideration.

2. Whether the rejection of the petitioner's application for approval under Section 10 (23C) (iv) by the Chief Commissioner of Income Tax was justified:
The Chief Commissioner of Income Tax rejected the petitioner's application on the grounds that the agency's activities were not in the nature of advancement of any objects of general public utility, did not indicate any charitable activity, and were not registered under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987. The court upheld this decision, stating that the petitioner's activities facilitate trade, commerce, or business in certified seeds by its clients/agents, and thus do not qualify as charitable purposes under the Income Tax Act.

3. The relevance of the petitioner's registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987:
The court found that the petitioner's lack of registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987, was not a decisive factor in denying the exemption. However, it noted that the petitioner's activities did not align with the definition of charitable purposes under Section 2 (15) of the Income Tax Act, as they involved facilitating trade and commerce in certified seeds.

4. Whether the petitioner's services rendered directly to clients/agents instead of farmers affect its eligibility for tax exemption:
The court held that the petitioner's services rendered to clients/agents who trade in certified seeds, rather than directly to farmers, indicated that its activities were not for the advancement of any other object of general public utility. This distinction was crucial in determining that the petitioner's activities did not qualify as charitable purposes under Section 10 (23C) (iv) of the Income Tax Act.

5. The applicability of the proviso to Section 2 (15) of the Income Tax Act, 1961:
The court emphasized the importance of the proviso to Section 2 (15), which excludes activities involving trade, commerce, or business from being considered charitable purposes. The court cited the Finance Minister's speech and the Finance Bill, 2008, which clarified that entities engaging in trade, commerce, or business should not claim to be engaged in charitable activities. The court concluded that the petitioner's certification activities, which facilitate trade in certified seeds, fall within the scope of the proviso and thus do not qualify as charitable purposes.

Conclusion:
The court dismissed the writ petition, affirming that the Chief Commissioner of Income Tax rightly rejected the petitioner's application for approval under Section 10 (23C) (iv) of the Income Tax Act. The petitioner's activities, which facilitate trade in certified seeds, do not qualify as charitable purposes under the Act, particularly in light of the proviso to Section 2 (15).

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