TMI Blog2015 (7) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... rom exemption of income under the provision of Section 11 of the Act and the proviso to Section 2(15) of the Act cannot be applied to the appellant society as it is not engaged in any activity which are in the nature of trade, commerce and business. Accordingly, we direct the Assessing Officer to allow the exemption under the provisions of Sec. 11 of the Act. - Decided in favour of assessee. Disallowance of prior period expenses, deferred tax liability and provision for income-tax - Held that:- If the commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the appellant society for charitable purposes in the earlier year against income earned by the appellant society in the subsequent year will have to be regarded as application of income of the appellant society for charitable purpose in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 and will have to be excluded from the income of the appellant society under section 11(1)(a) Reliance in this regard is placed on the decision in the case of CIT v. Shri Plot Swetamber Murti Pujak Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rammes, conferences, seminars, lectures and similar other activities on subjects of relevance to the society. 3. For the assessment year 2011-12, the Appellant society filed the return of income on 29th September, 2011 declaring NIL income after claiming exemption under the provisions of Section 11 of the Income Tax Act, 1961 (hereinafter referred to as the Act in short). After processing the said return of income under the provisions of Section 143(1) of the Act, the case was selected for scrutiny assessment and final assessment was passed under Section 143(3) of the Act vide Order dated 03.02.2014 at a total income of ₹ 18,06,84,275/- after denying the exemption u/s. 11 of the Act. The claim of the Appellant society before the Assessing Officer was that it has been providing Banking Technology Services to the Banks apart from carrying out research in the field of Banking Technology. It was further submitted that the Appellant society was salso conducting a full time M. Tech. course in Banking Technology. Therefore, its activities are purely educational in nature and falls within the ambit of expression charitable purposes as defined under the provisions of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch in Banking Technology which is very much within the first three limbs of section 2(15) of the Income Tax Act, 1961. (3) The Ld. CIT (A) has erred in concluding that the assessee is ineligible for the claim of exemption u/s. 11 even though the activities of the society are charitable in nature and are in line with the objectives of the society having got registered u/s. 12AA of the I.T. Act, 1961. (4) The Ld. CIT(A) has erred in computing the income on mercantile basis instead of cash basis which is followed by the assessee consistently since A.Y. 1997-98 and as required for Sec. 12AA institutions. The Ld. CIT (A) erred in not appreciating that the assessee has filed the details of its Receipts and Payments along with income and expenditure account before the Assessing Officer. (5) The Ld. CIT(A) has erred in disallowing prior period expenses of ₹ 1,26,807/- which was claimed on cash basis, deferred tax liability of ₹ 5,01,728/- and provision for income tax of ₹ 4,63,00,000/- which were not claimed as deduction on the ground that assessee was following mercantile system of accounting. However for the purpose of computation of income assessee was cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard the rival submissions and perused the material on record. In this case, the question that comes up for adjudication by us is whether the appellant society is engaged in the activities which are in the nature of educational or advancement of any other objects of general public utility. If the activities of the appellant society fall within the ambit of expression education , then clearly the proviso to Section 2(15) of the Act is not applicable. Therefore, it is necessary to consider the objects of the Appellant society. The objects of the appellant society are extracted supra. From those stated objects, it is abundantly clear that the primary objects of society is to promote study, dissemination of knowledge and conduct research in the area of Information and Technology Service in Banking Business and financial sectors. The Appellant society was also granted Associate Institute status of the University of Hyderabad for undertaking research for award of Ph.D Degree under External category in the areas of computer sciences information technology. This status enables the appellant society to enroll more Ph.D. students to carry out the research and development in various areas o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch in Banking Technology [IDRBT] was established by the Reserve Bank of India in March 1996 as an Autonomous Centre for Development and Research in Banking Technology. 9. Now the issue that comes up for consideration is whether those objects fall within the definition of the term education appearing in Section 2(15) of the Act. The term education has not been defined by the provisions of the Income Tax Act, 1961. The term education had come up for interpretation before the Hon ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. Commissioner of Income-Tax, Mysore 101 ITR 234 held as under at page 241: The sense in which the word education has been used in section 2(15) in the systematic instruction, schooling or training given to the young is preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word education has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trustees or the managers in their discretion are to apply the income or property to any of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempt from tax. In other words, where the main or primary objects are distributive, each and everyone of the objects must be charitable in order that the trust or institution might be upheld as a valid charity-Mohammed Ibrahim Riza v. CIT [1930] LR 57 IA 260 and East India Industries ( Madras)Pvt. Ltd. v. CIT [1967] 65 ITR 611. But if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity- CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 . The test which has, therefore, to be applied is whether the object which is said to be non-charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable. It was on an application of this test that in CIT v. Andhra Chamber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnology in the Banking Sector is the prime object for which the Appellant society was created by the Reserve Bank of India as evident from the genesis of the organization. Offer of M.Tech course, Ph.D. programmes are only incidental for attainment of main objects of the organization. The primary object of promoting the technology in banking and financial sectors does not fall within the ambit of expression education as defined above, since the said activity does not involve systematic instruction, schooling or training given to the young in preparation for the work of the life. The projects undertaken and the research activities by the Appellant society are only aimed at improvement of technology in Indian Banking and Financial sectors. As a result of developments in these areas, society at large shall be benefited and shall promote the welfare of general public. The improvement in technology related to Banking Sector leads to economic prosperity which enures for the benefit of entire community. Therefore, these objects can be said to be for advancement of any other objects of general public utility, which is a fourth limb in the definition of charitable purpose in Section 2(15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.2008, as follows : Departmental circular.-1. Definition of Charitable purpose under section 2(15) of he Income-tax Ac, 1961---reg.--- Section 2(15) of the Income-tax Act, 1961 ( he Act ), defines charitable purpose to include the following:-- (i) relief of the poor (ii) education (iii) medical relief, and (iv) the advancement of any other objection of general public utility. An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of charitable purpose . Therefore, section 2(15) was amended, vide Finance Act, 2008, by adding a proviso which states that the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying on of- (a) any activity in the nature of trade, commerce or business; or (b) any activity of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility . Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15). 3.2 In the final analysis, however, whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of use or application of the income from such activity, or the retention of such income, by the concerned entity. This amendment will take effect from the 1st day of April, 2009 and will accordingly apply in relation to the assessment year 2009-10 and subsequent assessment years.' 12. A reference can be made to the following extract from the Speech of the Minister of Finance on 29.02.2008:- 180. 'Charitable purpose' includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade commerce or business and earning income have sought to claim that their purpose would also fall under 'charitable purpose'. Obviously, this way not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected. 13. Further reference can be made to the reply of the Hon ble Finance Minister to the Debate in the Lok Sabha on the Finance Bill, 2008:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r clarified that Chambers of Commerce and similar organizations rendering service to its Members could not be affected by introduction of the proviso. We, therefore, are required upon to find out whether the objects of the Appellant society are commercial or business in nature. Keeping this in mind, it is to be examined what is meant by the expression commercial or business . The words trade , commerce and business were enumerated and elucidated in Institute of Chartered Accountants of India v. Director-General of Income-tax (Exemptions) [2012] 347 ITR 99 (Delhi) as under (page 113): Trade, as per the Webster's New Twentieth Century Dictionary (2nd edition), means, amongst others, a means of earning one's living, occupation or work. In Black's Law Dictionary, trade means a business which a person has learnt or he carries on for procuring subsistence or profit ; occupation or employment, etc. The meaning of commerce as given by the Concise Oxford Dictionary is exchange of merchandise, specially on large scale . In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 Karnataka [1995] 1 SCC 574, Bharat Development (P) Ltd. v. CIT [1982] 133 ITR 470/[1980] 4 Taxman 58 (Delhi), Barendra Prasad Ray v. ITO[1981] 129 ITR 295/6 Taxman 19 (SC), State of Andhra Pradesh v. H. Abdul Bakhi Bros. [1964] 15 STC 664 (SC), State of Gujarat v. Raipur Mfg. Co. [1967] 19 STC 1(SC), Director of Supplies Disposal v. Member, Board of Revenue [1967] 20 STC 398(SC) and Mrs.Sarojini Rajah v. CIT[1969] 71 ITR 504 (Mad) to expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty are not business, the incidental activity, which is pursued for attainment of the main objects, cannot be called business , merely because the appellant society renders services against payment as fees or cess, even if resulting in profit. The Hon ble Apex Court in the case of CIT vs. Andhra Chamber of Commerce (1965) 55 ITR 722 laid down the principle that if the primary purpose of institution was advancement of objects of general public utility, it would remain charitable, even if some incidental or ancillary activity or the purpose for achieving the main purpose, was profitable in nature. It was held as follows : That if the primary purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose, e.g. promotion of or opposition to legislation concerning that purpose was contemplated. It was only for the purpose of securing its primary aims that it was mentioned in the memorandum of association that the Chamber might take steps to urge or oppose legislative or other measures affecting trade, commerce or manufactures. Such an object ought to be regarded as pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness : connected with or incidental or ancillary sales will rest on the Department. Thus, if the main activity of a person is not trade, commerce etc., ordinarily incidental or ancillary activity may not come within the meaning of business . In the recent decision which deals specifically with the newly amended section 2(15) of the Act, in the case of Institute of Chartered Accountants of India v. Director General of Income-tax (Exemptions) [2012] 347 ITR 99/202 Taxman 1/13 taxmann.com 175 Delhi HC, laying down the very same principle held as under: that the fundamental or dominant function of the Institute was to exercise overall control and regulate the activities of the members/enrolled chartered accountants. A very narrow view had been taken that the Institute was holding coaching classes and that this amounted to business. In another case, the Hon ble Delhi High Court in the case of ICAI Accounting Research Foundation anr. Vs. Director General of Income-tax (Exemptions) Ors. - (2010) 321 ITR 73, after referring to the judgment of Hon ble Supreme Court in the case of CIT (Addl.) vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter part of the exception broad and inclusive. It seems that the exception (the first proviso) is intended to catch with its ambit any and all commercial activity, except what falls within the second proviso (which bars application of the exception in cases where the aggregate value of the receipts from the activities mentioned therein is less than ten lakh rupees in the relevant previous year). The Bureau, it would appear at the first blush, renders service in relation to trade, commerce or business by granting certification/quality marks in return of license fee. Apparently, Parliament intended to clarify that not all activities of State agencies (some of which might be set up to carry on trading and commercial activities) can be considered charitable. This can be gathered from the Notes on clauses attached to the Finance Bill, 2008: Government feels that claim of status of 'charitable organisation' by the organisations carrying out activities on commercial lines is contrary to legislative intention. Finance Bill, 2008 seeks to amend section 2(15) w.e.f. April 1, 2009, by substituting existing definition with following definition: 'charitable purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken fee is collected from the beneficiaries in the course of activity which is not a business but clearly charity for which they are established and they undertake. Again, the Hon ble Delhi High Court in the case of India Trade Promotion Organization vs. Director General of Income-tax (Exemptions) Ors. [2015] 371 ITR 333, held vide para 58 as follows:- 58. In conclusion, we may say that the expression charitable purpose , as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution of India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o will not give rise to any new controversy which had not been in the past. The further words used in the proviso, that for a cess or fee or any other consideration, have to be read along with the nature of activities, i.e., trade, commerce or business. When an institution is carrying on activities in the nature of trade, , commerce or business obviously it will be charging fee, etc. It may be charging fee even when rendering/providing services as part of charitable activity in order to supplement its income for carrying on charitable activities. In that case the proviso will not have any implication as the activities would not be in the nature of trade, commerce or business. Accordingly, the proviso inserted in the definition of 'charitable purpose' will not substantially have any impact on the meaning of charitable purpose. 16. The circumstances under which the services rendered by the appellant society to the Banks make clear that there is no profit motive in such activities because these activities were entrusted to the appellant society by the Reserve Bank of India as a part of its supervisory role over the Banks in India. In our considered opinion, viewed from any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cases of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 and CIT v. A.P. State Road Transport Corporation [1986] 159 ITR 1. The Hon ble Supreme Court in the case of CIT v. A.P. State Road Transport Corporation held as under: .It is now firmly established by the decisions of this court in Surat Art Silk Cloth Manufacturers Association s case [1980] 121 ITR 1 (SC) and Bar Council of Maharashtra s case [1981] 130 ITR 28 (SC), that the test is What is the predominant object of the activity-whether it is to carry out a charitable purpose or to earn profit? If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity. The ratio in the above case was again followed by the Hon ble Supreme Court in the case of Thiagarajar Charities v. Addl. Commissiner of Income-tax another 225 ITR 1010 and A.P. High Court in the case of Girijan Co-operative Corporation Ltd. v. Commissioner of Income-tax 178 ITR 359. 18. Recently, the Hon ble Supreme Court in the case of Queen s Educational Society v. CIT [2015] 372 ITR 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1,26,807/- and deferred tax liability of ₹ 5,01,728/- and provision for income-tax of ₹ 4,63,00,000/-. It appears the A.O. has disallowed these expenses on the ground that appellant society was not entitled to exemption under the provisions of Sec. 11 of the Act. In the preceding para, we already held that the appellant society is entitled for exemption under the provisions of Section 11 of the Act. Once it is held that the appellant society is eligible for exemption u/s. 11 of the Act, as a logical corollary, the income of the appellant society has to be computed on commercial principles as held by the Hon ble Supreme Court in the case of CIT v. Programme for Community Organization (2001) 248 ITR 1. If the commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the appellant society for charitable purposes in the earlier year against income earned by the appellant society in the subsequent year will have to be regarded as application of income of the appellant society for charitable purpose in the subsequent year in which such adjustment has been made having regard to the benevolent pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receipts in income-expenditure account and claimed various expenses in its computation of income, while declaring excess of income over expenditure. It is also not in dispute that the income of the assessee-trust has to be computed with reference to the provisions of sections 11 and 13. Therefore, the principles governing the computation of income under the head Business may not apply to the computation of income under the above provisions, since the income of a charitable institution has to be computed under ordinary principles of commercial accounting, and depreciation has to be allowed on depreciable assets held by a charitable institution to arrive at the income of 75 per cent. (now 85 per cent.) which is required to be applied for charitable purpose. In the decision of the hon'ble Supreme Court in the case of Escorts Ltd./J.K. Synthetics Ltd. (supra), the hon'ble Supreme Court was to consider the issue wherein the depreciation was also claimed on an asset which was claimed as a deduction while using for research, as capital expenditure on scientific research . On those facts, the hon'ble Supreme Court held that depreciation was inadmissible since the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Delhi High Court in the case of Vishwa Jagriti Mission (supra) and took a over view of the existing decisions on the issue while holding as under : 11. The Revenue is in appeal against the aforesaid order of the Tribunal. We are not inclined to admit the appeal and frame any substantial question of law since none arises from the order of the Tribunal. There is no dispute that the assessee has been granted registration under section 12AA vide order dated September 11, 2009, and, therefore, it was entitled to exemption of its income under section 11. The only question is whether the income of the assessee should be computed on commercial principles and in doing so whether depreciation on fixed assets utilised for the charitable purposes should be allowed. On this issue, there seems to be a consensus of judicial thinking as is seen from the authorities relied upon by the Commissioner of Income-tax (Appeals) as well as the Tribunal. In CIT v. The Society of the Sisters of St. Anme, an identical question arose before the Karnataka High Court. There the society was running a school in Bangalore and was allowed exemption under section 11. The question arose as to how the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting the income of a charitable institution/trust, depreciation of assets owned by the trust/institution is a necessary deduction on commercial principles. The Gujarat High Court, after referring to the judgments of the Karnataka, Maharashtra and Madhya Pradesh High Courts cited above, also came to the same conclusion and held that the amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes. 13. The judgment of the Supreme Court in Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) has been rightly held to be inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on the business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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