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Institute for Development and Research in Banking Technology (IDRBT) Hyderabad Versus The Asst. Director of Income Tax (E) -1, Hyderabad

2015 (7) TMI 521 - ITAT HYDERABAD

Exemption of income under the provision of Section 11 denied - Computation of income of assessee society - CIT (A) held that the activities of the assessee fall within the purview of the proviso to section 2(15) - 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? - Held that:- .The mere fact that the appellant society had generated surplus, during the course of carrying on the ancillary .....

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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 .....

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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 Jain Mandal, (1993 (11) TMI 17 - GUJARAT High Court ). Further, we also note that the provisions of section 11(1)(a) of the Act does not prescribe that income of the year should have been applied only in the year in which income has arisen. Therefore, we hold that the pre-operative expense should be allowed as .....

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reciation - Held that:- We direct the Assessing Officer to allow the depreciation as an application of income. See case of A.P. Olympic Association [2014 (2) TMI 988 - ITAT HYDERABAD] - Decided in favour of assessee. - ITA.No.1712/Hyd/2014 - Dated:- 30-6-2015 - Shri Saktijit Dey And Shri Inturi Rama Rao, JJ. For the Petitioner : Mr. Laxminiwas Sharma For the Respondent : Smt. K. Kamakshi ORDER PER INTURI RAMA RAO, A.M. This appeal filed by the assessee directed against the Order of the Ld. CIT(A .....

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Technology in Banking and Financial Sectors (c) To serve as a Centre for promoting Cooperative endeavor and interaction in Research activities between the Technocrats and Users of Information Technology in the Banking and Financial Sectors. (d) To establish and maintain data bank, libraries and information services. (e) To initiate, establish and participate in collaborative activities with other researchers and institutions/organization within and outside the country. (f) To sponsor, conduct/o .....

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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 sals .....

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ied on the decision of Hon ble Supreme Court in the case of Sole Trustee, Lok Shikshana Trust v CIT [1975] 101 ITR 234(SC). The Assessing Officer further held that the Appellant society generated surplus out of its receipts from the consultancy services rendered to various banking institutions and other organizations. Therefore, he held that the appellant society is engaged in rendering services in relation to trade, business and commerce. The Assessing Officer noted that the total receipts rece .....

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ed tax of ₹ 5,01,728/- and depreciation of ₹ 1,00,00,144/-debited to income and expenditure account. 4. Being aggrieved by the order, an appeal was filed before the Ld. Commissioner of Income Tax (Appeals)-IV, Hyderabad, who, vide Order dated 28.08.2014, partly allowed the appeal. However, concurred with the view of the Assessing Officer that the Appellant society was engaged partly in education and partly in activities aimed at advancement of any other object general public utility .....

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ing the fact that activities of the assessee fall within the purview of imparting education and research 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, 1 .....

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n 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 consistently following cash system of accounting as Section 11 allows only application and receipts of fund for the computation of income. (6) The Ld. CIT(A) has erred in disallowing the depreciation of ₹ 1,0 .....

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re us by the Authorized Representative that the objects of the Appellant society are purely educational in nature. Rendering consultancy services on account of which the Appellant society had received some consideration is only for the purposes of attainment of the main objects and in connection with the main objects. Therefore, the proviso to Section 2(15) of the Act cannot be made applicable to the Appellant society since the proviso is applicable only in respect of the activities carried on, .....

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cision rendered in the case of Indian Chamber of Commerce vs. Income-tax Officer - ITAT Kolkata C Bench 167 TTJ and the Hon ble Delhi High Court in the case of Indian Trade Promotion vs. Director General of Income Tax 371 ITR 333 and Gujarat High Court in the case of Director of Income-tax (Exemption) vs. Ahmedabad Management Association [2014] 366 ITR 85. 7. On the other hand, the Ld. Principal CIT/DR argued that the proviso to Section 2(15) is clearly applicable to the Appellant society as the .....

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ociety 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 .....

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ad with specialization in banking technology and information security. But the primary object for which the Appellant society was created is to promote the Information Technology in the Banking Sector and undertake research in those areas. This is clear from the genesis of the organization (reproduced from website): During the first phase of reforms in the Indian Financial Sector, a need was felt to develop an Institute of Higher Learning, which would also provide the operational service support .....

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39; Association [IBA]. This agreement was a major breakthrough in the introduction of computerised applications and development of communication networks in Banks. In the following two years, substantial work was done and the top managements realised the urgent need for training, research and development activities in the area of Banking Technology. Banks and Financial Institutions started setting up Technology-based training centres and colleges. However, a need was felt for an Apex Level Insti .....

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Technology Institute for the purpose of Research and Development as well as Consultancy in the application of technology to the Banking and Financial sector of the country. As recommended by the Committee, the Institute for Development & Research 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 with .....

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stematic 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 knowledge. Likewise, if you .....

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in the process make you wiser though poorer. If you visit a night club, you get acquainted with and add to your knowledge about some of the not much revealed realities and mysteries of life. All this in a way is education in the great school of life. But that is not the sense in which the word "education" is used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by normal s .....

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itution of University of Hyderabad are only incidental for attainment of the main objectives i.e., promotion of technology in banking sector. The Hon ble Apex Court held in the case of CIT vs. Andhra Chamber of Commerce 55 ITR 722 that only the predominant object for which the organization was created is alone to be considered for the purpose for determining whether the nature of activities fall within the scope and ambit of charity . The ratio laid down in this case was followed again in the ca .....

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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 instit .....

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ct which is charitable. It was on an application of this test that in CIT v. Andhra Chamber of Commerce (supra), the Andhra Chamber of Commerce was held to be a valid charity entitled to exemption from tax. The Court held that the dominant or primary object of the Andhra Chamber of Commerce was to promote and protect trade, commerce and industry and to aid, stimulate and promote the development of trade, commerce and industry and to watch over and protect the general commercial interests of Indi .....

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jects 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". The Court also held that the Andhra Chamber of Commerce did not cease to be charitable merely because the members of the Chamber were incidentally benefitedin carrying out its main charitable purpose. The Court relied very strongly on the decisions in Commissio .....

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er there is no such personal benefit, intellectual or professional, to the members of the society or body of persons as to be incapable of being disregarded. 10. The ratio laid down in the above cases is that in the case of entity or organization whose objects are several, some of which are charitable and non-charitable; the test of predominant object for which the organization was set up is alone to be applied. Therefore, in the present case, the research and development in the Information Tech .....

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, 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 c .....

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romote the interests of those who conduct the said trade or industry. The distinction between the protection of the interests of individuals and the protection of interests of an activity which is of general public utility goes to the root of the whole problem : CIT v. Andhra Chamber of Commerce, (1965) 55 ITR 722, 727 (SC); Addl. CIT v. Ahmedabad Millowners Association, (1977) 106 ITR 725, 738 (Guj)]. Applying the ratio laid down in the above cases to the facts of the present case, we have no d .....

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under Section 2(15) of the Act. 11. Having held that the objects of the Appellant society are in the nature of general public utility services , we now have to consider whether the proviso to Section 2(15) of the Act is applicable or not. The proviso to Section 2(15) of the Act was added by Finance Act, 2008. The said proviso reads as under : 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 activi .....

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was explained by the CBDT in its Circular No.11 of 2008, dated 19.12.2008, 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 wa .....

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nt 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 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. 2. The following implications arise from this amendment- 2.1 The newly inserted pro .....

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It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that- (i) the busines .....

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nt of any other object of general public utility i.e., the fourth limb of the definition of charitable purpose contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 3.1 The .....

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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 or .....

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t would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering 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 ad .....

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ject of general public utility. It has been noticed that a number of entities operating on commercial lines are claiming exemption on their income either under section 10(23C) or section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the "advancement of an object of general public utility" as is included in the fourth limb of the current definition of "charitable purpose". Such a claim, when made in re .....

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ivity of rendering of any service in relation to any trade, commerce or business, for a fee or cess or any other consideration, irrespective of 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 t .....

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viously, 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:- "6. Clause 3 of the Finance Bill, 2008 seeks to amend the definition of 'charitable purpose' so as to exclude any activity in the nature of trade, commerce .....

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k of a charity. A number of Honourable Members have written to me expressing their concern on the possible impact of the proposal on Agricultural Produce Market Committees (APMC) or State Agricultural Marketing Boards (SAMB). Since there is no intention to tax such committees or boards, and in order to remove any doubts, I propose to insert a new clause (26AAB) in section 10 of the Income tax Act to provide exemption to any income of an APMC or SAMB constituted under any law for the time being i .....

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itable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as "advancement of any other object of general public utility." (Emphasis supplied) 14. From the above, it is clearly discernible that the intention of Parliament in introducing the proviso to Section 2(15) of the Act is to deny exempti .....

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siness 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 B .....

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an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. For the purpose of the first proviso to section 2(15), trade is sufficient, therefore, this aspect is not required to be examined in detail. The word "business" is the broadest term and is encompasses trade, commerce and other activities. Section 2(13) of the Income-tax Act defines the term "business" as under : &q .....

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uot; has been used. The Legislature has deliberately departed from giving a definite import to the term "business" but made reference to several other general terms like "trade", "commerce", "manufacture" and "adventure or concern in the nature of trade, commerce and manufacture". In Black's Law Dictionary, Sixth Edition, the word "business" has been defined as under : "Employment, occupation, profession or commercial activity .....

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'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 .....

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nvolved 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), Dir .....

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pose behind the activity and when an activity is trade, commerce or business was elucidated in Institute of Chartered Accountants of India (supra) in the following words: 'Section 2(15) defines the term charitable purpose. Therefore, while construing the term business for the said Section, the object and purpose of the Section has to be kept in mind. We do not think that a very broad and extended definition of the term business is intended for the purpose of interpreting and applying the fir .....

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ecognized business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact 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. 15. Applying the test enumerated above to the present .....

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en the main objects of the appellant society 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, .....

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ing 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 purely ancillary or subsidiary and not the primary object." In connection to the above case it is laid out the said case dealt with the assessment of the assessee in the A.Ys 1948-49 to wherein relevant to the said AYs 1948-49 to 1952-53, by the last para .....

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poses which does not enure for the benefit of the public. " The adding of the words "not involving the carrying on of any activity for profit: was introduced by the Income tax Act, 1961. Hon'ble Apex court in the earliest decision in the case of Surat Art Silk Cloth Manufacturers Association (Supra) held the theory of dominant or primary object of the trust to be the determining factor so as to take the carrying on of the business activity merely ancillary or incidental to the main .....

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y it was only incidental or ancillary to the dominant object for the welfare and common good of the country's trade, commerce and industry, and its income was, therefore, exempt from tax under s.11 of the IT Act, 1961" Again reiterating the dominant purpose theory, the Hon'ble SC in the case of CST v. Sai Publication Fund 258 ITR 70 laid out as follows: "... If the main activity is not business, then any transaction incidental or ancillary would not normally amount to "bus .....

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ich 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 .....

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amounted to advancement of an object of general public utility in the definition of charitable purpose in section 2(15) of the Act. Charging of amounts from the Government bodies for undertaking these research projects would not make the activity commercial . The projects were undertaken at the instance of the Government of India or the State Governments for improving the accounting and budgetary systems in these local bodies. The expertise of the Foundation in carrying out research in this fie .....

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ehalf of these local bodies were not a regular activity of the Foundation. The primary activity remained research in accounting related fields. Even these projects which were taken up on behalf of those local bodies fit in the description of research projects which could be termed ancillary activity only. (c) The amended definition of charitable purpose would not alter this position. Merely on understanding those three research projects at the instance of the Government/local bodies the essentia .....

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of "involved in the carrying on of any activity of rendering any service in relation to any trade, commerce or business". The expressions "any activity," "rendering any service" and "in relation to any trade, commerce or business" imply that the intention of the legislature was to make the latter 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, ex .....

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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: & .....

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he nature of use or application, or retention, of the income from such activity." In these circumstances, "rendering any service in relation to trade, commerce or business" cannot, in the opinion of the Court, receive such a wide construction as to enfold regulatory and sovereign authorities, set up under statutory enactments, and tasked to act as agencies of the State in public duties which cannot be discharged by private bodies. Often, apart from the controlling or parent statut .....

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etc, cannot be considered as trade, business or commercial activity, merely because the testing procedures or accreditation involves charging of such fees. It cannot be said that the public utility activity of evolving, prescribing and enforcing standards, "involves" the carrying on of trade or commercial activity. Similarly, the Hon ble Delhi High Court in the case of GSI India vs.Director General of Income-tax (Exemption) & anr. [2014] 360 ITR 138 held vide para 36 of the judgme .....

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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 consider .....

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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 the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, comme .....

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to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. The rational that can be culled out from the above decisions is that once the primary objects of an institution are established to be in the nature of charity, then the proviso .....

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ss". If we give due importance to the above mentioned words, the only conclusion will be that the proviso will effect only such cases where the activities of a charitable institution can be considered to be in the nature of trade, commerce or business. In fact, the same controversy, which has been there in the past, whether a charitable institution is carrying on the activities only of charitable nature or is carrying on activities which are in the nature of business, is emerging from this .....

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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 ther .....

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magined keeping in view the circumstances under which the appellant society is operated. The objects of the appellant society are totally charitable in nature and do not carry on any activity in the nature of trade, commerce or business. Therefore, the proviso to Section 2(15) of the Act cannot be applied to the Appellant society as clarified by the Circular No.11 of 2008 issued by the CBDT. It is worthwhile to mention here that the Hon ble Finance Minister had also clarified, during the course .....

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n order to ascertain the true meaning of the words and the language employed in the Statute. The Hon ble Supreme Court in the cases of K.P.Varghese v. ITO 131 ITR 597, Kerala Sate Industrial Development Corporation vs. CIT 259 ITR 51 and Deshbandhu Gupta & Co. v. Delhi Stock Exchange Association Ltd. AIR 1979 SC 1049 had held that the Hon ble Finance Minister s speech can be relied upon to throw light on the object and purpose of particular provision introduced by the Finance Bill. This is i .....

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dominant object continues to be charitable and not to earn the profit. Please refer to the judgments rendered by the Hon ble Apex Court 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 M .....

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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 699 had reversed the decision of the Uttarkhand High Court, which held that when there is heavy profit the educational institution is intended for profit and therefo .....

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DIT (Exemptions) [2013] 351 ITR 184, which are contrary to the judgment of Uttarakhand High Court in the case of CIT v. Queen s Educational Society 319 ITR 160, held as follows:- ……….We reiterate that the correct tests which have been culled out in the three Supreme Court judgments stated above, namely, Surat Art Silk Cloth, Aditanar and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not .....

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e or otherwise. Therefore, in the instant case also, the mere fact that there was a surplus from the ancillary activities carried on by the appellant society does not mean that its objects ceases to be charitable. 20. Therefore, viewed from any angle, we hold that the Appellant society is entitled from 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 a .....

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ovisions 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 prin .....

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uded 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 Jain Mandal, (1995) 211 ITR 293, 300 (Guj). Further, we also note that the provisions of section 11(1)(a) of the Act does not prescribe that income of the year should have been applied only in the year in which income has arisen. Therefore, we hold that the pre-operative expense of ₹ 1,26,807/- should be allowed as dedu .....

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(1986) 162 ITR 162 (Guj); CIT v. Ganga Charity Trust Fund, (1993) 115 CTR (Guj) 325, 326; CIT v. Apostolos Raptakos Trust, (1998) 143 Taxation 387, 388 (Bom), CIT v. Nizam s Supplemental Religious Endowment Trust (1981) 127 ITR 378 (AP). However, we note from the assessment order that the appellant society had debited the above provision for taxation to income and expenditure account. The Assessing Officer had adopted the excess of income over expenditure for taxation and further addition of pro .....

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yderabad in the case of A.P. Olympic Association, held vide para 8 to 16 as follows: 8. …. We have considered the rival submissions and examined the issue. There is no dispute with regard to the fact that the assessee is registered under section 12AA of the Income-tax Act. There is also no dispute that the assessee has shown all the receipts in income-expenditure account and claimed various expenses in its computation of income, while declaring excess of income over expenditure. It is als .....

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tion 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 .....

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of revenue and generation of black money, if depreciation was allowed. Thus, the hon'ble Kerala High Court gave decision in favour of the Revenue and directed the assessee to re-draw the accounts. 10. The decision of the co-ordinate Bench, which the learned Commissioner of Income-tax (Appeals) relied on, i.e., in the case of Sri Venkata Sai Educational Society (supra) however, did not decide the issue but restored the matter to the file of the Assessing Officer to examine ; whether assets ha .....

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al Society (supra) and CIT v. Market Committee [2011] 330 ITR 16/[2012] 20 taxmann.com 559 (Punj. & Har.), in arriving at that decision. Thus, there was a difference of opinion on the above issue at that point of time. 11. The hon'ble Punjab and Haryana High Court in the case of Manav Mangal Society (supra) has considered and allowed the claim of depreciation (page 423) : "The amount spent on construction of school building at Panchkula is a capital expenditure but for the purpose o .....

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upra) 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 .....

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t. There the society was running a school in Bangalore and was allowed exemption under section 11. The question arose as to how the income available for application to charitable and religious purposes should be computed. Jagannatha Setty, J. speaking for the Division Bench of the court held that income derived from property held under trust cannot be the 'total income' as defined in section 2(45) of the Act and that the word 'income' is a wider term than the expression 'prof .....

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as reproduced in the judgment in which the Board has taken the view that the income of the trust should be understood in its commercial sense. The circular is as under : '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 purpose of the trust or otherwise, and also after .....

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get the full benefit of the exemption under section 11(1).' 12. A similar view was earlier expressed by the Andhra Pradesh High Court in CIT v. Trustee of H.E. H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP) and by the Madras High Court in CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad). The Madhya Pradesh High Court in CIT v. Raipur Pallottine Society [1989] 180 ITR 579 (MP) has held, following the judgment of the Karnataka Hig .....

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e 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 determ .....

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proposition that depreciation is a necessary charge in computing the net income. Secondly, the Supreme Court was concerned with the case where the assessee had claimed deduction of the cost of the asset under section 35(1) of the Act, which allowed deduction for capital expenditure incurred on scientific research. The question was whether after claiming deduction in respect of the cost of the asset under section 35(1), can the assessee again claim deduction on account of depreciation in respect .....

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here does not appear to be any contrary view plausible on the question raised before us and at any rate no judgment taking a contrary view has been brought to our notice. In the circumstances, we decline to admit the present appeal and dismiss the same with no order as to costs". 14. Similar view was also taken by the co-ordinate Bench of the Income-tax Appellate Tribunal, Bangalore in the case of Asstt. CIT v. Shri Adichunchanagiri Shikshana Trust [2013] 141 ITD 575/31 taxmann.com 157 wher .....

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