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2016 (5) TMI 199 - ITAT HYDERABAD

2016 (5) TMI 199 - ITAT HYDERABAD - TMI - Exemption u/s. 11 - Held that:- In order to deny the benefit of exemption the activity must be advancement of any other object of general public utility and the above two conditions i.e., (a) and (b) exist. As far as the first condition is concerned it is not in trading and it is a decided fact before various appellate authorities that the activities of the organization are charitable and hence the said proviso is not applicable. As far as the second con .....

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dering any services, this part of amendment is also totally not applicable to the case. - Decided in favour of assessee - I.T.A. Nos. 1522 & 1523/HYD/2014, C.O. Nos. 66 & 67/HYD/2014 - Dated:- 29-4-2016 - Shri B. Ramakotaiah, Accountant Member And Shri S. S. Viswanethra Ravi, Judicial Member For the Petitioner : Smt. Vasundhara Sinha & Shri M. Sitaram, DRs For the Respondent : Shri D. V. Anjaneyulu, AR ORDER Per B. Ramakotaiah, A. M. These appeals are by Revenue and cross-objections are by a .....

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of entire income of ₹ 1,47,35,757/-. The return was processed u/s. 143(1). Subsequently, a notice u/s. 148 was issued on the ground that: i. That the corporation is not eligible for exemption u/s. 11; ii. Provision of gratuity of ₹ 3,40,11,894/- was not allowable; iii. Provision for leave salary of ₹ 2,09,20,086/- was not allowable; iv. Loss on sale of fixed assets being capital in nature of ₹ 6,615/- is not allowable; 3. Coming to the facts and details of the case, the A .....

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l 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:] (b) That the assessee is involved in trading activity by buying commodities and selling through public distribution system. Therefore, it does .....

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ritable activity. (e) The assessee company is involved in purchase and sale of essential commodities like rice, wheat, LPG Gas, Sugar, Oil, Kerosene etc. at fixed prices by the Government and in turn gets subsidy and commission from Government, therefore, the company is in trading business with a motive to earn profit. Therefore, does not fall u/s. 2(15) and therefore, the exemption u/s. 11 cannot be granted. 4. Assessee submitted before the Ld. CIT(A) as under: (a) The assessee, A.P. State Civi .....

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o the poor and needy people of the society. The Corporation is dealing in levy items like rice, edible oils, sugar etc. (c) The Assessee Corporation has, been carrying out its object of distribution of essential commodities to the people of Andhra Pradesh particularly to the poorer section of the society at lower prices with the support of subsidy being provided by the Government of Andhra Pradesh. Without the subsidy the Corporation cannot survive. (d) It is carrying on its business with no PRO .....

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ary value. (h) The objects of the assessee are Charitable in nature and as such it had been claiming its Income if any, (though actually belongs to Government) as exempt under sec. 11 of the Income tax Act. (i) Further during the year under consideration, the organization's gross receipts are of ₹ 4249.11 cr and the net profit is ₹ 4.67 cr. The gross receipts includes sales of ₹ 2144.46 cr and the subsidy, of ₹ 2102.65 cr, without which there would have been heavy los .....

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se wherein held: 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 arise from the activity" This view was again upheld by the Gujarat High Court on appeal by the revenue in [2014] 362 ITR 539 (Guj.) Director of Income Tax (Exemption) Vs. Sabarmat .....

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nt of any other object of general public utility by virtue of the proviso, would be excluded from the definition of "charitable trust. The statutory provisions, as explained on the speech of the Finance Minister and Circular No. 11 of 2008, are that the activity of a trust would be excluded from the term "charitable purpose" if it is engaged in any activity in the nature of trade, commerce, or business or renders any service in relation to trade, commerce, or business for a cess, .....

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eration, the activity may leave a surplus. The law does not expect the trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating "surplus" is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charit .....

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11, 12 and 12AA are complied with and there is no violation of S. 13 - After the omission of the clause "not involving carrying any activities of profit" from s. 2 ( 15) by the Finance Act, 1983 w.e.f 1st April, 1983, the element of profit cannot be excluded from the definition" Charitable purpose". Relying on the above case laws the appellant pleaded for exemption u/s. 11 of the I.T. Act, 1961. 5. After considering the detailed submissions of assessee, Ld. CIT(A) has held in .....

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"Charitable purpose" includes relief to the poor, education, medical relief and advancement of any other object of general public utility. After the amendment w.e.f. 01.04.2009 the section reads as under: "Charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the c .....

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1 ('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 object 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 .....

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ring 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 proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief Consequently, where the purpose of a trust or institution is re .....

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ns 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 business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business. Similarly, entities whose obj .....

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h 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. There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are .....

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ts. 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 .....

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ll 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 advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in .....

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1 of the Circular makes it amply clear that the activities aimed at providing relief to the poor, education, medical relief etc. etc. will fall u/s.2(15) even if such activity incidentally involves carrying on commercial activity. Further, para 2.2 of the Circular makes absolutely clear that 'Relief of the poor encompasses a wide range of objectives for the welfare of the socially disadvantaged and the needy people like orphans, destitute, handicapped, disadvantaged women and children etc. e .....

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pellant's own case in case Reference No. 59 of 1992 held that the Corporation is a Charitable Institution within the meaning of section 2(15). After elaborate discussion this judgement was delivered on 21.08.1990 much prior to the amendment to section 2(15). Nevertheless, the activities of the corporation remain same for decades right from inception to till date. After having considered all the information on record, the primary objective of the Corporation is to provide food to the poor at .....

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raised the following grounds: 2. The learned CIT(A) erred in ignoring the fact that assessee-company is involved in purchase and sale of essential commodities like rice, wheat, LPG Gas, Sugar, Oil, Kerosene etc. at the prices fixed by the government and in turn gets subsidy and commission from the government and therefore it is trading/ business with a motive to earn profit. 3. The learned CIT(A) has not discussed the issue of quality of rice, wheat, oil etc. being supplied through the PDS syst .....

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he assessee corporation. As these facts have not been brought on record, it is concluded that the subsidy amount has not been utilized for advancement of any other object of general public utility. Hence the assessee is not eligible for claim u/s 2(15). 5. The learned CIT(A) erred in ignoring the fact that assessee's alleged claim of 'general public utility' is nothing but only a colorable device to conceal its real intention of conducting business with a profit motive . 7. Ld. CIT-D .....

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es the price and definition of Section 2(15) cannot be interpreted in the fashion considered by Ld. CIT. The phrases in the definition of charitable nature are separate and destitute and cannot be considered in a broader view. It was further submitted that Government gives subsidy but not reimbursement. Therefore, assessee s activity cannot be considered as relief of poor . It is a trading/business activity and there can be incidental benefit to poor but not main activity. 8. Ld. AR referring to .....

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er years when facts are same. All the arguments now raised by the AO have already been considered earlier and the ITAT in assessee s own case A.P. State Civil Supplies Corpn. Vs. ITO [37 ITD 0001]{TM} has held as under: The Memorandum of the assessee in item III has made a bifurcation between the main objects sub-division (a) and objects incidental or ancillary to the attainment of the main objects sub-division (b). Clause 28 falls in sub-division(b). The Memorandum itself describes the clause a .....

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ould go in its entirety to the Government, i.e., it goes to the public and consequently there would be no chance of any element of private gain, if by private gains it is meant that the gain ensure for individuals other than "State". Even if dividends are to be declared, if its utilisation is for public purposes, the entity does not lose its character of charitable nature. The assessee was set up by assets transferred to it by the Government. It is only in the fitness of the things tha .....

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te against the conclusion that the assessee is a charitable entity. For the aforesaid reason and on any analysis of the activities of the Corporation in the light of the various judicial pronouncements, the activities are charitable in nature within the meaning of section 2(15) . 10. This view was upheld by the Hon'ble AP High Court in the appeal of Revenue in CR No. 59/1992 dt. 04-03-2003 as under: The Tribunal noticed that the assessee is required to deal in food grains, foodstuffs, and ot .....

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ffered huge losses. It is under those circumstances, the Appellate Tribunal found that the assessee-institution itself has come into existence with an object to ensure distribution of food grains and edible oils to the masses through the approved outlets. For the purposes of the Act, the Appellate Tribunal found that the income derived by the Corporation is utilized for charitable purpose. Charitable purpose as defined in sub-section (2) of Section 15 of the Act includes the relief of poor, educ .....

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opinion, are not vitiated for any reason whatsoever. The Appellate TribW1al did not commit any error in upholdi.i1g the plea of the assessee that the main and dominant object of the assessee-Civil Supplies Corporation is a charitable one. The Tribunal adverted to the point urged by the Revenue that there is a provision even in the Articles of Association for providing the manner and method in which the profits earned by the Corporation are to be utilized. It was the case of the Revenue that the .....

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rovision in the memorandum of articles of association providing as to how the profits if any earned by the assessee-corporation are to be utilized itself shall have no bearing upon the question as to whether the assessee is a charitable one or not. The reasoning of the Tribunal, in our considered opinion, is neither perverse nor vitiated. At any rate, there is nothing on record to suggest that the Corporation made any profits as such. Even otherwise, the Tribunal noticed that the expression ' .....

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;Tribunal. As has been rightly observed by the Appellate Tribunal, even if any dividends are declared, the utilization of the 'same by the Corporation is undoubtedly for public purpose. Therefore, the Corporation does not lose its character of charitable nature. In such view of the matter, the 1st question referred for our opinion is answered against the Revenue and in favour of the assessee. So far as the next question is concerned, the Appellate Tribunal took the correct view that whether .....

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rom any infirmity. For the aforesaid reasons, it is unnecessary to answer the question referred for our opinion at the instance of the assessee. . 11. The assessee was established with an object to ensure supply of food grains, edible oils, dall etc., to the masses/general public through the approved outlets by State Civil supplies department by grant of substantial subsidies given by the Govt. and is a Corporation governed and controlled by the Govt. of A.P{then}. The main activities of the Cor .....

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e Corporation cannot survive. The sale price is less than the procurement price. This activity no way can be considered as trading activity. Whereas in the case of a trader or an ordinary business man sale price generally will be more than cost and there can not be rate fixed by government. Therefore, calling the activities of the assessee in the nature of an 'ordinary business man does' is totally incorrect and without any evidentiary value. 12. Further during the year under considerati .....

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the nature of relief to the poor and therefore "charitable" and eligible for exemption of income u/s 11 of the Act. 13. As regards the issue of amendment to Section 2(15) of the Act, the provisions of Sec. 2(15) before and after amendment is as under: Before amendment "charitable purpose includes relief to the poor, education, medical relief and advancement of any other object of general public utility After amendment ie. substituted for above by Finance Act, 2008, w.e.f. 01-04-20 .....

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ective of the nature of use or application, or retention, of income from such activity; Prima facie upto and assessment year 2008-2009 "charitable purpose" includes relief of poor, education, medical relief and any other object of public utility. The sec 2(15) amended wef 1-4-2009 that 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, .....

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(a) and (b) exist. As far as the first condition is concerned it is not in trading and it is a decided fact before various appellate authorities that the activities of the organization are charitable and hence the said proviso is not applicable. As far as the second condition is concerned ie. any activity 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 .....

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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 arise from the activity . b) SABARMATI ASHRAM GAOUSHALA TRUST vs ASSISTANT DIRECTOR OF INCOME TAX (EXEMPTION) (Ahd)(Trib.) 95 ITR 409 "Assessee carrying on commercial activity, not with profit earning motive but a .....

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g of the proviso to s. 2(15) along with speech of the Finance Minister and the CBDT Circular No. 11 of 2008 Dt. 19th Dec., 2008 make it clear that only the institutions carrying on commercial activities with intention to earn profits are intended to be covered by the proviso, not the genuine charitable institutions. The activity will be deemed to be in the nature of trade, commerce or business, only if same is carried on with the intention to earn profit , This view was again upheld by the Gujar .....

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ovided under the proviso are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue of the proviso, would be excluded from the definition of "charitable trust. The statutory provisions, as explained on the speech of the Finance Minister and Circular No. 11 of 2008, are that the activity of a trust would be excluded from the term charitable purpose" if it is engaged in any activity in the nature of trade, commerce, or business or r .....

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