TMI Blog2016 (5) TMI 812X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase, it will come to a standstill and will not be able to work and the objects for which registration was granted to it will cease to exist. In order to attain its objects it has to in any case, carry on activities of sale and purchase. In this view, we do not find that the activities of sale and purchase which have been questioned by the Assessing Officer have been carried on by the assessee with the objective to earn profit. Once it is seen that the object of the assessee is not to carrying on the business for profit motive, we can very easily infer that whatever activities in the nature of business the assessee is carrying are all incidental to attainment of its main object. In such a scenario, the provisions of section 11(4A) of the Act comes into play and the assessee has to maintain separate books of account for said business. However, in the present case, the assessee is carrying all its activities out of grants received by the Government, therefore, there cannot be two separate set of books. This fact has not been controverted by the Assessing Officer, nor the learned D.R. while arguing before us, does the same. In view of the above, as per the proposition laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee was not a profit making concern or rendering any trade or business with profit making as an objective in relation to any trade, commerce or business so as to fall under the proviso to section 2(15) of the Act. It was also stated that the assessee is registered under section 12AA of the Act for advancement of object of general public utility and strategic needs of the country i.e. for R D purposes. As regards section 40A(2)(b) of the Act, it was stated that the same is not applicable since the sales were made to the Government Departments, which cannot be treated as sister concern only because they are organizations of Government. The Assessing Officer rejected all the contentions of the assessee and held that it was not eligible for exemption under section 11 of the Act and, therefore, the profit earned during the year from sales and purchases fall within the ambit of proviso to section 2(15) of the Act and were liable to be taxed. 5. Before the learned CIT (Appeals), it was stated that since the registration under section 12A of the Act has been granted by the Commissioner of Income Tax to the assessee, it has been impliedly held by the Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eved by this, the Revenue has come up in appeal before us. The learned D.R. during the course of hearing before us, submitted that the fact the assessee is registered under section 12A of the Act by the Commissioner of Income Tax, does not debar the Assessing Officer to examine the nature and activities of the assessee and the observation of the learned CIT (Appeals) that the Assessing Officer cannot sit over the judgment of the Commissioner of Income Tax is not correct. The Assessing Officer was required not only to examine the claim of exemption in view of the provisions of sections 11 and 12 of the Act, as the Commissioner of Income Tax-II in his order under section 12AA of the Act dated 31.10.2008 itself had laid down that it is certified that this certificate does not entitle the applicant automatically to the exemption of its income under sections 11 and 12 of the Act. It has also been stated in the same certificate that the Assessing Officer shall be free to decide such claim of exemption of income to the assessee under sections 11 and 12 of the Act, after examining it on merits and after satisfying himself that the conditions and requirements laid down in this section are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that for the year under consideration, the assessee is a society, which have been granted registration under section 12AA of the Act. Therefore, it is eligible for exemption under section 11 of the Act. The Assessing Officer has denied the assessee exemption under section 11 of the Act in view of the first proviso to section 2(15) of the Act, which defines the meaning of charitable purpose. Though we should note here that in the order of the Assessing Officer he has mentioned only section 2(15) of the Act and not the proviso thereunder. However, we infer from the reading of the whole order that the Assessing Officer is denying exemption to the assessee in view of the first proviso to section 2(15) of the Act only. 9. Before proceeding further, there arises a preliminary question to be answered in this case. The assessee has been denied exemption under section 11 of the Act despite being registered under section 12A of the Act and the learned CIT (Appeals) has allowed the appeal of the assessee stating that the Assessing Officer ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.] 11. As per this section, the provisions of other sub- sections with respect to exemption under section 11 of the Act are not applicable in relation to any income earned by an assessee which is in the nature of profits and gains of business. Further, it also provides that profits and gains of this business may be allowable as exemption if the business is incidental to the attainment of the objectives of the trust. The same is available to an assessee with the condition that separate books of account are maintained in respect of such business. 12. Section 13 provides for the situation in which the provisions of section 11 are not applicable. Further, for the adjudication of the present appeal, the relevant sub-section is sub-section (8), which reads as under : 13(8) Nothing contained in section 11 or section 12 shall operate so as to exclude any incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; 18. This proviso was inserted to section 2(15) of the Act as a rider to the charitable purpose involving advancement of any other object of general public utility. This amendment came in order to curb the entities which were formed for advancement of any other objects of general public utility and were availing exemption under section 11 of the Act while carrying on commercial activities. It was also clarified by the Circular No.11 of 2008 dated 19.12.2008 issued by the CBDT, whereby it has been categorically stated that if an assessee is engaged in the activities in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it can not be entitled to claim that its objects are for charitable purposes. In such a case, an object of general public utility will be under a mask or device to hide the purpose which is trade, commerce or business or the rendering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitution, however a 'reading down' of the proviso was advised by the Hon'ble Court. It has been very categorically held in the judgment that in pursuance of the provisions of this proviso in deciding whether any activity is in the nature of trade, commerce, or business, it has to be examined whether there is any element of profit making or not. Just by earning income, it cannot be said that the assessee is carrying on any business since it is only when such an assessee has an income that the question of not including it in its total income would arise. Therefore, merely because an institution which otherwise is established for charitable purposes receives income that would not make it any less a charitable institution. The most important finding given by the Court in this case to the extent relevant for the present appeal, are as under : 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit but primarily to do charity then exemption will be available to the assessee in question. In such a scenario, the profit making activity may be incidental to the attainment of its object of general public utility as provided under section 11(4A) of the Act, which was a part of Statute even before the insertion of proviso to section 2(15) of the Act. 22. In the present case, there is no finding by any of the lower authorities that the assessee was involved in any activities which was not in consonance of its objects on the basis of which it was granted registration under section 12AA of the Act. From the perusal of the Memorandum of Association of the assessee placed in Paper Book page 18 onwards. Apart from other objects, we see that the objects involved the following also: (a) to undertake, aid, promote, guide and coordinate research in the field of semiconductor technology, Micro Electro Mechanical Systems (MEMS) and process technologies relating to semiconductor processing. (b) to generate assignments for design, development, production and manufacture of semiconductor based electronic components, sensors, Very Large Scale Integrated (VLSI) circuits and MEMS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (4A) to section 11, even after the insertion of proviso to section 2(15) of the Act. 24. Further, in the present case there is another clause No.60 in its Memorandum of Association, which reads as under : 60. If, on the winding up or dissolution of the Society, there shall remain, after the satisfaction of all its debts and liabilities, any property whatsoever the same shall not be paid to, or distributed among, the members of the Society or any of them but shall be dealt with in such manner as the Government may determine. 25. From the reading of the above, it is also seen that even at the time of winding up or dissolution the assets of the assessee will not go to the benefit of any specific person but will be dealt with in such a manner as the Government may determine. In view of the above, it is quite clear that definitely the object of the society contains sale and purchase as one of its objects, still the ultimate object is not to give benefit to some specific person. Nowhere in his order, the Assessing Officer has been able to bring on record any material or evidence that the assessee is carrying on any activity which is driven by object of profit ma ..... 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