TMI Blog2013 (10) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long-term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under the residuary clause -general public utility Regarding separate books of accounts - Held that:- We fail to understand when the petitioner is maintaining the books of accounts with regard to their receipts/income as well as the expenses incurred for their entire activity then how it can be held that separate books of accounts have not been maintained for business activities. The -business activities are intrinsically woven into and part of the charitable activity undertaken. The -business activity is not feeding charitable activities. In any case, when we hold that the petitioner is not carrying on any business, trade or commerce, question of requirement of separate books of accounts for the business, trade or commerce is redundant. Restriction under First proviso to section 2(15) - Held that:- Question is whether the legislative intent is to exclude from definition of charitable purpose any activity which has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Processing Food Products Export Development Authority, Federation of Indian Chamber of Commerce and Industry (FICCI), Associated Chambers of Commerce and Industry of India (ASSOCHAM), Bureau of Indian Standards (BIS), Confederation of Indian Industry (CII), Spices Board and Indian Merchants Chambers. 4. It is not disputed by the respondents that the object of the petitioner inter-alia includes creating awareness and promoting study of Global Standards regarding Company Prefix Number (GS1 standards), location numbering, EDI, ECR, automatic data collection and related services and technologies; research and development into these Global Standards; and providing education in universities and colleges regarding these standards. We shall refer and elucidate upon GS1 standard subsequently in the judgment. 5. At this stage, it would be suffice to notice and record that the impugned order dated 17th November, 2008 elucidates that the objective and activities of the petitioner fall under the residuary clause of Section 2(15) of the Act. In other words, the respondent accepts that the petitioner were/are carrying on charitable activity under the residuary heading -any other object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore Rs. 1.42 crore Rs. 1.95 crore NET PROFIT Rs. 1.54 crore Rs. 1.29 crore Rs. 1.55 crore N.P. rate 58.33% 47.60% 44.28% b) Petitioner was not maintaining separate books of accounts for the business/commercial activity, i.e. licensing bar coding system, and did not intend to do so in future. Thus there was violation of Section 11(4) and (4A). Thereby, the petitioner had violated proviso to Section 10(23C)(iv) for assessment years 2007-08, 2006-07, 2005-06 and the petitioner does not meet the specified conditions of Section 10(23C)(iv) for assessment years 2008-09 onwards. Nature and Character of Activity of GS1 namely the Assessee 8. We may now notice in some detail and put on record what is the exact nature and character of activities carried on by the petitioner society. GS1 codes have been developed and created by GS1 International, Belgium. GS1 coding system was/is used worldwide. The code promotes universal standard in Electronic Data Inter-exchanged (EDI) and other services. GS1 coding is extensively used globally and is even mandatory for some services/goods or adopted for significant advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period in question is both prior and subsequent to the amendments made applicable vide Finance Act 2008 with effect from 1.4.2009. Before deciding the contentions of the parties we would like to first reproduce Section 2(15) of the Act which defines the term charitable purpose before and after its amendment by Finance Act, 2008. Section 2(15) before amendment by Finance Act, 2008 was as under; - 2(15) -charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. By Finance Act, 2008 with effect from 1.4.2009 the following proviso was added;- Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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 cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity Second proviso inserted to Section 2(15) by Finance Act, 2010 with retrospective effect from 1.4.2009, reads as under:- P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. The following quote from the said judgment is relevant;- "The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management. Period post the amendment vide Finance Act 2008 w.e.f 1.4.2009 13. A bare perusal of the main pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived for carrying on any activity in nature of trade, commerce or business or for any activity of rendering of any service in relation to any trade, commerce or business, even if the consideration or the money received is used in furtherance of the charitable purposes/activities. In view of the first proviso, the decisions that the application of money/profit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the proviso and the bar/prohibition will apply. Scope of Trade, Commerce or Business 15. The key words, namely; trade, commerce and business were enumerate and elucidate in Institute of Chartered Accountants of India Anr. Vs. Director General of Income Tax (Exemptions) Delhi Ors.(Supra) as under:- Trade, as per the Webster's New Twentieth Century Dictionary (2nd edition), means, amongst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sampath Iyengar's Law of Income Tax (9th edition), a business activity has four essential characteristics. Firstly, a business must be a continuous and systematic exercise of activity. Business is defined as an active occupation continuously carried on. Business vocation connotes some real, substantive and systematic course of activity or conduct with a set purpose. The second essential characteristic is profit motive or capable of producing profit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure (Bharat Development P. Ltd. v. CIT [1982] 133 ITR 470 (Delhi)). The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And, lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction. In the said case reliance and reference was made to State of Punjab v. Bajaj Electricals Ltd. (1968) 2 SCR 536, Khoday Distilleries Ltd. V. State of Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is infect in the nature of business. The test as prescribe in Raipur Manufacturing Company (supra) and Sai Publications Fund (supra) can be applied. The six indicia stipulated in Lord Fisher (supra) are also relevant. Each case, therefore, has to be examined on its own facts. 17. Recently in another decision in WP(C) No. 1755/2012 titled Bureau of Indian Standards vs. Director General of Income Tax (Exemptions) dated 27th September, 2012, it was held that Bureau of Indian Standards (BIS) was carrying on charitable activities as described within the ambit of Section 2(15) and was entitled to registration/notification under Section 10(23C)(iv). We, however, note that there is one distinction between the present petitioner and BIS. BIS is a statutory authority created by Legislation and, therefore, their case and claim stands on a better footing but this does not imply that only statutory bodies ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business. (Emphasis Supplied) 19. It is, evident from the Circular No. 11 of 2008 that the new proviso of Section 2(15) of the Act is applicable to the assessees who are engaged in commercial activities, i.e. carrying on business, trade or commerce, in the garb of -public utility to avoid tax liability as it was noticed that object of -general public utility was sometimes only a mask or device to hide the true purpose which was -trade, commerce or business. Discussion; Activities of the Petitioner and difference between business and charity 20. In the present case, -the business is not held in trust and neither is -the business feeding the charity. The very -act or activity of charity as claimed by the petitioner is regarded by the revenue as nothing but b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties, who become subscribing members and are entitled to use the coding system, GS1. Revenue acknowledges that the petitioner enjoys monopoly and has exclusive rights to issue global bar coding system GS1 in India. However the petitioner is not dealing or treating the prized rights as a right, which is to be exploited commercially to earn or generate profits. A coding system of this nature if marketed on commercial lines with profit motive would amount to business but when the underlying and propelling motive is not to earn profits or commercially exploit the rights but -general public good i.e. to promote and make GS1 coding system available to Indian traders, manufacturers, government etc, it will fail the test of business and meets the touchstone of charity. The petitioner is not directly or indirectly subjecting their activity to market mechanism/ dynamics (i.e. demand and supply), rather it is motivated and prompted to serve the beneficiaries. This is not a case of commercial exploitation of intellectual property rights to earn profits but rather a case where a token fee has been fixed and payable by the user of the global identification system. 24. The petitioner does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entification system GS1. The entire expenditure of the petitioner has to be taken into consideration and cannot be ignored. There are stipulations in Sections 11, 13 etc. of the Act to prevent misuse of or siphoning of funds, bar/prohibit gains to related persons, stipulations of time limits for use of funds, which are effective checks and curtail and deny benefit in cases of abuse. There is no such allegation or contention of the Revenue in the present case. 27. As observed above, fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long-term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under the residuary clause -general public utility . The impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each case and assess for a period of five years and find out whether the society or body depends on voluntary contributions. Of course, at the end of each five-year period the assessing authority could review the position. 29. Under the provisions of the Act, a charitable institution/ organization is to utilize specific percentage of their funds/income within the assessment year in question and carry forward is allowed subject to strict stipulations. There is no allegation or statement in the impugned order dated 17th November, 2008 that the petitioner has violated the said condition or requirements of the statute. No doubt that the petitioner has to make payment of part of fees collected to GS1 Global services, Belgium but this is natural as GS1 system is global and worldwide system. Petitioner has pointed out that during past years they have been receiving amounts from Government of India for furtherance of their objectives. A fact which is not denied and disputed. The petitioner is not only concerned with enrollment of members who are entitled to GS1 identification system but involved in promoting and spreading awareness about GS1 identification system and making it available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring arguments. First proviso to Section 2(15) of the Act equally bars rendering of any service in relation to any trade, commerce or business when it generates receipts for an amount exceeding the figure mentioned in second proviso. The stipulation broadens and widens the negative stipulation [see The Institute of Chartered Accountants of India case (supra)].The petitioner is providing services to persons engaged in trade, commerce or business who are the beneficiaries. Question is whether the legislative intent is to exclude from definition of charitable purpose any activity which has the aim and object of providing services to trade, commerce or business. The matter is not free from doubt but there are good reasons to hold that the bar or probation is not with reference to activity of the beneficiary but the activity of the assessee under the residuary clause. The intent is to exclude an assessee who carries on business, trade or commerce to feed the charitable activities under the last limb. Application of income earned from business is no longer relevant and cannot help an assessee. Circular No.11 of 2008 is to the said effect and does not promote contrary interpretation. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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