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2015 (9) TMI 845 - ITAT MUMBAI

2015 (9) TMI 845 - ITAT MUMBAI - TMI - Entitlement to exemption u/s 11 and 12 and section 10(23C)(iiiab) - engagement in manufacturing activity - CIT(A)-I held that the A.O. has erred in applying first proviso to section 2(15) to the case of the appellant trust and taxing the exempt income under section 10(23C)(iiiab). - Held that:- Once the activities of the Assessee are educational and medical in nature, the considerations of element of business activity and profit motives embedded therein etc .....

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been made out. Merely because some manufacturing activities in the nature of alleged business activities are involved, this will not change the character of activity. The Assessee has demonstrated as to how these allied manufacturing activity has assisted its key objects in the area of education and medical reliefs. The receipts from manufacturing activities have been admittedly applied towards the objects of the trust.

Therefore, in our considered view, manufacturing activity allied .....

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ally exclusive. The Assessee is entitled to relief in any of the sub clause dehors the relief for other activity available under other sub clause. The stand of the Assessee that the receipts from manufacturing activity has been applied for furtherance of the principle objects also remains uncontroverted. As a logical corollary, the activities in question are not for the purposes of profit as contemplated in S. 10(23C) (iiiab) & (iiiac) of the Act. The case laws relied upon the Revenue are distin .....

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e Assessee Shri Nikhil Pathak ORDER PER PRADIP KUMAR KEDIA, AM The Revenue is in appeal against the order of CIT(A)-I, Nashik dated 02.05.2013 relating to assessment year 2010-11 passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. The Revenue has raised the following grounds of appeal 1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik was justified to held that the A.O. has erred in applying first proviso to section 2(15) to the cas .....

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cts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik was justified to held that the A.O. has erred in not reducing capital expenditure of ₹ 62,47,446/- incurred by the trust on the objects of the trust being application of income. 5. Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik was justified to held that the A.O. has erred in not computing the income of the Charitable Trust registered under the B.P.T. Act and as per provisions of Income .....

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on 80G w.e.f. 01.04.2009 vide approval dated 10.11.2009. It also emerges that the assessee institution is established since 1924 and working towards charitable purposes for more than 80 years. The activities of the trust are run through the medium of five sections and a consolidated income & expenditure account and balance sheet of the assessee (Ayurved Seva Sangh) is prepared based on the audit reports of the various sections. The details of the said sections are as under :- Section Activit .....

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in the field of Ayurveda. Ayurved Sanshodhan Vibhag Conducting research in the field of Ayurveda. 4. The return of income of the assessee trust is outlined as under :- Particulars Amount (Rs.) Gross Receipts 5,02,16,925 Less: Establishment Expenses 88,92,298 Less: Depreciation 13,16,599 Less: Expenditure on the object of the Trust (Revenue) 3,63,22,867 Surplus before Capital Expenditure 36,85,161 Less: Capital Expenditure 62,47,446 Deficit without considering 15% relaxation (25,62,285) 5. The As .....

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oceedings, the Assessing Officer noticed that one of the sections of the trust namely Aushadi Bhavan is carrying on activity of manufacturing of Ayurvedic Medicines, which is commercial in nature. He observed that total sale from this manufacturing activity from Aushadi Bhavan stands at ₹ 3,21,80,532/-. The cost of the production is stated to be ₹ 2,10,86,342/- and gross profit is ₹ 1,25,57,482/- i.e. 39% of the sales. The net profit is stated to be ₹ 27,25,450/- i.e. 8.4 .....

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mitted before the Assessing Officer that the main object of the trust is to promote Ayurveda and create awareness of Ayurveda as enshrined in ancient Shashtras and Granthas. In order to fulfill the main object, the trust is manufacturing Scientific Ayurvedic Medicines besides their other activities. So, it is to be understood that the manufacturing activity is undertaken to fulfill the object of the trust and not with the objective of carrying on any business activity/profit motive. The objects .....

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tricted to the assessee whose object is advancement of any other object of general public utility . The manufacturing activity is only incidental to the main object of the trust and cannot be construed to be one of trade or business. The assessee further contended that without manufacturing and selling/providing Ayurvedic medicines at reasonable rates to the general public at large, the object of the trust cannot be attained. The assessee further contended that besides making available medical h .....

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o the above, it is pertinent to note that even if the income from Aushadi Bhawan is treated as not Income from Charitable purpose then also the Taxable Income of the Trust is Nil as mentioned below. It is worth noting here that the Public Charitable Trust of Ayurved Seva Sangh is a single entity formed more than 85 years ago carrying on Charitable activity and hence registered as Charitable Trust under the Bombay Trust Act, 1950. All the charitable activities carried on by the Trust are genuine. .....

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the application of funds is towards educational and medical purposes. The surplus from Aushadi Bhavan is transferred to Head Office section and therefrom it is applied for Ayurved Rugnalaya (Medical) and Ayurved Mahavidyalaya (Education) and P.G. Course (Education). In the light of the above facts, it is the case of the assessee that the objects of the assessee trust are towards relief to the poor, education and medical relief. 8. The Assessing Officer did not find merit in the contentions of th .....

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ther under the Education or Medical Relief . He drew parallel with the pharmaceutical companies which are not covered under section 2(15) of the Act as charitable entities. He further stated that manufacturing activity of the trust is not accepted for the purpose of medical relief or education. It was treated as purpose of general public utility and therefore proviso to section 2(15) of the Act is invoked. He further stated that on the reading of section 2(15) of the Act and its proviso that a c .....

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an section is ₹ 27,25,450/- which implies that manufacturing activity of the trust is a substantive activity and not just incidental to the object of the trust. The Assessing Officer next observed that the charitable purpose of sections, namely, Ayurved Mahavidyalaya, Arogya Shala Rugnalay and other manufacturing unit of Aushadi Bhavan is well accepted and therefore the assessee was granted 12A certificate and assessed as a charitable purpose. Prior to amendment in section 2(15) of the Act .....

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re the CIT(A), the assessee reiterated that the assessee trust is registered under section 12A w.e.f. 31.07.1975 and recognized under section 80G w.e.f. 01.04.2009 and is established since 1924 for charitable purposes. The activities of the trust are run through various sections as submitted before the Assessing Officer and therefore entitled to exemption under section 11 and 12 of the Act. The assessee also submitted that 99% of the application of funds are towards the object of the trust, name .....

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e following conditions (1) the business should be incidental to the attainment of the objectives of the entity. (2) separate books of account should be maintained in respect of such business. 12. On facts, separate books of account are maintained for Aushadi Bhavan section and business is incidental to the attainment of the objectives of the trust and therefore considering the charitable objects and in the light of CBDT Circular (supra) proviso to section 2(15) is not applicable to the case of t .....

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ment of objects of the trust i.e. medical, education. The Assessing Officer has incorrectly treated the activity as the object of the trust and not the object itself. 14. As an alternative plea, the assessee contended that even if it is assumed for the purpose of debate that the activity of Aushadi Bhavan section is not charitable purpose, then also the income of the charitable trust is to be calculated as per the provisions of the Act. The Trust is registered under the Bombay Public Trust Act a .....

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n alternative plea that income assessed by the Assessing Officer at ₹ 36,85,161/- includes surplus of ₹ 27,79,180/- in respect of Ayurved Mahavidyalya, which is substantially financed by the Government and hence exemption under section 10(23C)(iiiab) of the Act is available to the assessee. Before the CIT(A), the assessee also further contended that when manufacturing Ayurvedic Medicines and supplying the same to the general public, the educational object of Ayurved Mahavidyalya and .....

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view of the above charitable object, the trust has been registered under the Bombay Public Trust Act, 1950 and also under section 12A of the IT Act. The CIT(A) agreed to the contention of the assessee that the manufacturing of medicines is incidental activity of the trust to attain the main objects of the medical relief and medical education, as in the absence of Ayurvedic Medicines, the objects of the trust cannot be attained. The CIT(A) further observed that the separate books of account has b .....

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th the pharmaceutical companies. In the light of the facts broadly noted above, he concluded that the trust is engaged in the activity of relief to poor, education and medical relief and cannot be said to have engaged in the activity of advancement of any other object of general public utility. He, accordingly, held that the Assessing Officer is not justified in denying the benefits granted by section 11 and 12 of the Act to the assessee trust. 17. As regards, the claim of exemption of ₹ 2 .....

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for exemption under section 10(23C)(iiiab) of the Act. 18. The CIT(A) also allowed brought forward deficit of ₹ 51,25,546/- and allowed the same to be carried forward and is to be regarded as application of income. 19. As regards, the claim of the assessee in respect of capital expenditure of ₹ 62,47,446/- incurred by the trust on the objects of the trust and therefore application of income. The CIT(A) held that the capital expenditure is allowable inspite of depreciation claimed by .....

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1. He observed that the assessee trust being a public charitable trust and is registered under Bombay Public Trust Act, 1950 and also under section 12A of the IT Act, the objects of the trust are charitable objects. The trust is, therefore, governed by the provisions of section 11, 12 & 13 of the Act and also applicable provisions of section 10 of the IT Act and held in favour of the assessee. 21. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us. 22. The Ld. Departmen .....

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s that the activity of manufacturing of medicines and selling thereof is neither be termed educational nor medical relief. The Ld. Departmental Representative for the Revenue adverted attention to section 10(23C)(iiiab) and (iiiac) of the IT Act and vehemently argued that the income-tax reliefs are given to the educational institution under section (iiiab) of the Act and reliefs are given to hospital and other institutions engaged in imparting medical reliefs under section (iiiac) of the Act. He .....

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dicines one of the sections of the assessee trust is also educational in nature along with medical relief to the poor is a dampsquib. The plea of the Ld. Departmental Representative for the Revenue is that the assessee cannot seek relief both under educational relief as well as medical relief as provided in main provisions of section 2(15) of the Act. As a sequel to the above, the Ld. Departmental Representative for the Revenue contended that the case of the assessee falls under the residual rel .....

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mitted that the assessee is not entitled to relief under the provisions of the Act as claimed since the activities of the assessee are commercial in nature and not charitable one. 23. The Ld. Departmental Representative for the Revenue relied on the decision of the Hon ble Supreme Court in the case of Indian Chamber of Commerce vs. CIT reported in 101 ITR 796 (SC) for the proposition that advancement of charitable objects must not involve profit making activities. It is not enough if the object .....

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y be for benefit of others rather than oneself. 24. The Ld. Authorized Representative for the assessee, on the other hand, relied upon the order of the CIT(A) and submitted that the Assessing Officer has misread and misconstrued the facts of the case. He submitted that the assessee is pursuing charitable objects for long and is duly registered under section 12A of the Act and is also recognized under section 80G of the Act. The Memorandum of Association of the assessee clearly reflects the objec .....

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. Further section 2(15) of the IT Act which defines charitable purpose also covers the activities of the assessee. As per the definition, charitable purpose includes relief of the poor, education, medical relief and advancement of any other object of general public utility, etc. The assessee trust is established for the purpose of education and medical relief and therefore the assessee is fully eligible for exemption under section 11 and 12 of the Act as claimed. In the alternate, the assessee i .....

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25,450/- by one of its sections of the assessee, namely, Aushadi Bhavan tantamounts to commercial/business activity in the given facts or the activity is charitable in nature. In order to examine the controversy involved, it would be pertinent to refer to section 2(15) of the Act which defines the meaning of expression charitable purpose . Section 2(15) of the Act is applicable at the relevant time reads as under 2(15) charitable purpose includes relief of the poor, education, medical relief, [p .....

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erce 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:] [Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [ten lakh rupees] or less in the previous year;] 26. On close reading of the aforesaid statutory definition of expression charitable purpose it can be seen that the impugned expression has been defi .....

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cation of income of such activity. Therefore, proviso to section 2(15) gives differential treatment to the objects namely reliefs of the poor, education and medical relief, etc. vis-à-vis advancement of any other object of general public utility. It is the case of the assessee trust that its activities are in the field of education and medical relief and therefore proviso to section 2(15) of the Act does not come into play at all, whereas it is the case of the Revenue that the nature of t .....

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ch institutes & liabraries and by editing, printing, publishing & selling, the books, magazines, journals, newspaper on Ayurvedic and allied subjects. 4.2) To establish and conduct, Ayurvedic and allied research laboratories, Pharmacies, Botanical gardens, Museum, Study circles etc. for improvement of Ayurvedic science. 4.3) To start, establish & conduct departments, Institutes for i) Promotion of Ayurvedic literature. ii) Ayurvedic Drug Manufacturing Industries. iii) Training of stu .....

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eva Sangh Nashik and to promote co-ordination, affiliation, amalgamation of other societies or associations with Ayurved Seva Sangh Nashik having similar object. 4.7) To promote the study of other sciences condusive to the promotion of Ayurvedic science. 4.8.a) For achieving the above mentioned objects, to acquire movable & immovable properties by purchase, lease, exchange, gift, acquisition through govt. etc. 4.8.b) For achieving the above mentioned objects to dispose off or sell or mortgag .....

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o promote medical help and provide hospitals and heath related services. 29. In the circumstances, We fail to understand as to how such activities can be termed advancement of any other objects of general utility to be covered by the embargo provided in the first proviso. Once the activities of the Assessee are educational and medical in nature, the considerations of element of business activity and profit motives embedded therein etc. are rendered wholly irrelevant under S. 2(15) of the Act. Th .....

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tivities in the nature of alleged business activities are involved, this will not change the character of activity. The Assessee has demonstrated as to how these allied manufacturing activity has assisted its key objects in the area of education and medical reliefs. The receipts from manufacturing activities have been admittedly applied towards the objects of the trust. The relevant first proviso to S. 2(15) which holds any other objects of general public utility as non charitable if it involves .....

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ap for holding the activities to be charitable in nature under section 2(15) of the Act irrespective of fact that it may involve carrying on of commercial activities provided income from such activities are utilized towards charitable purposes. This view is also fortified by the CBDT Circular no. 11/2008 dated 19/12/2008. 30. The relief was claimed u/s 11 & 12 of the Act in the course of assessment. The Assessee raised grounds before the CIT(A) on a different tangent for granting relief u/s .....

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