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2016 (5) TMI 812 - ITAT CHANDIGARH

2016 (5) TMI 812 - ITAT CHANDIGARH - TMI - Exemption under section 11 denied - assessee is registered under section 12AA - nature of object - Held 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 m .....

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before us. If the assessee does not do the activity of sale and 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. .....

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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 down by the Delhi High Court in the case of India Trade Promotion Organization (2015 (1) TMI 928 - DELHI HIGH COURT ), the case of the assessee is not hit by the proviso to section 2(15) of the Act. Therefore, for the a .....

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Tax (Appeals), Chandigarh dated 14.11.2013 and 22.8.2014, relating to assessment years 2010-11 and 2011-12 respectively, passed under section 250(6) of the Income Tax Act, 1961 (in short 'the Act'). 2. Since the facts and circumstances are identical in both the appeals, the same were heard together and are being disposed off by this consolidated order for the sake of convenience. 3. We will take up the appeal of the Revenue in I TA No.151/Chd/2014 and the decision given in this appeal wi .....

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and rules and regulations of the society. During the assessment proceedings, the Assessing Officer noted that the assessee had made certain purchases and sales and so he was of the view that the activities of the society were not of charitable nature. According to him, the sales were made at lower rates and so provisions of section 40A(2)(b) of the Income Tax Act, 1961 (in short 'the Act') were also attracted. The reply of the assessee was that it was a public utility concern falling und .....

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nd 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 sa .....

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er cannot sit in judgment on the order of the Commissioner of Income Tax. The learned CIT (Appeals) agreeing with the submissions of the assessee allowed the grounds of the assessee with regard to the findings of the Assessing Officer that the assessee is not a charitable society though falling under the ambit of section 2(15) of the Act. Further, it was submitted that the amount utilized for addition to the capital assets of ₹ 3,72,20,000/- was not considered by the Assessing Officer. It .....

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come over expenditure is less than 15% even if the addition to capital assets is not taken into account and so the case of the assessee is not hit by the provisions of section 11 of the Act. Accordingly, he held that the Assessing Officer was not right in taxing the surplus of ₹ 3,27,80,000/- by denying the exemption under section 11 of the Act to the assessee. In the passing, he also mentioned that the observations of the Assessing Officer that the assessee did not provide any documentary .....

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s is not relevant because the sales are made only to the Government Department. Moreover, the provisions of section 40A(2)(b) of the Act do not apply to sales. In this way, the learned CIT (Appeals) allowed the appeal of the assessee. 6. Aggrieved 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 Assessi .....

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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 fulfilled by the assessee. The assessee undoubtedly, is ha .....

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section 2(15) of the Act, the Assessing Officer had not appreciated the meaning of the word 'trade, commerce or business', which as per meaning of the said connotation as supported by various legal pronouncements is held to be any activity of such nature carried on with the object of earning profit, which element is missing in the present case. A heavy reliance was placed on the judgment of Hon'ble Supreme Court in the case of Khoday Distilleries Ltd. Vs. State of Karnataka (1995) 1 .....

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e to the sister concern, he submitted that the assessee being an autonomous body of Department of Space, Government of India is not a business organization working for profit so as to compare its strategic devices as any other profit making business organization. Its prices are not comparable in the market since the products manufactured by the assessee being for the strategic need of the nation are not available in the commercial or open market. The allegation of the Assessing Officer that the .....

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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 a .....

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ting that the Assessing Officer need not examine the evidences to the effect that the activities done by the assessee during the year were all charitable in nature, is not relevant for the reason that the assessee was granted registration under section 12A of the Act by the Commissioner of Income Tax on the ground that the activities of the assessee were covered within the meaning of charitable purposes as provided in section 2(15) of the Act. However, we do not find ourselves in agreement with .....

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Commissioner of Income Tax himself has laid down a condition that the certificate of the registration under section 12A does not entitle the assessee automatically to the exemption of its income under section 11 of the Act. 10. Now coming to the main issue whether the assessee is eligible for exemption under section 11 of the Act from the relevant assessment year in view of the fact that it is registered under section 12AA of the Act. Section 12AA provides for the procedure for registration of a .....

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ditions to be fulfilled by an assessee to avail exemption of any income derived by him from the property held for charitable purposes. All these sub-sections talks about the exemption of income subject to respective conditions provided therein. Sub-section (4) to section 11 is an exception to all these provisions and reads as under : "(4A) Sub- section (1) or sub- section (2) or sub- section (3) or sub section (3A) shall not apply in relation to any income of a trust or an institution, bein .....

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ss. 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-sect .....

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visions as provided in the proviso to section 2(15) of the Act. The important term is 'in the said previous year'. This itself is evident to show the intention of Legislature is to provide for said verification on year to year basis by the Assessing Officer, while granting exemption under section 11 of the Act. 14. From the reading of all these provisions, we can very safely infer that an assessee can claim exemption under section 11 of the Act on income derived by it from the property h .....

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ction 2(15) of the Act as it stood from its inception, reads as follows : "2(15) "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility ]" 16. The charitable purpose always included the activities related to the relief of the poor, education, medical relief and advancement of any other object of general public utility. The activities related to the preservation of the environment and prese .....

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e 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;" 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 i .....

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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 of any service in relation to trade, commerce or business. 19. From the above analysis, it can be easily infer that the proviso is applicable to these entities which carry on the activities in the nature of trade, commerce or business for a cess, fee or any such cons .....

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involved in carrying on business are debarred from claiming exemption under section 11 of the Act. Further, section 13(8) of the Act also provides to exclude any income which is not in consonance with the first proviso to section 2(15) of the Act. Therefore, it is quite understandable that the intention of the Legislature is to examine on a yearly basis whether the entity claiming exemption under section 11 is involved in carrying on any business, trade or commerce. As per the second part of th .....

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sing before us is whether selling and purchasing of certain things amount to carrying of business so as to disentitle assessee the exemption under section 11 of the Act. Though a number of judgments were cited by both the sides, we would like to refer to the judgment of Delhi High Court in the case of India Trade Promotion Organisation Vs. DGIT (2015) 371 ITR 333 (Del), whereby the question was the constitutional validity of amendment to section 2(15) of the Act by inserting the said proviso. Wh .....

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rning 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 : "5 .....

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order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from 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 .....

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ts activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled 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 ch .....

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ime objective of the assessee while carrying out these activities. If the prime objective is profit making than the assessee would be caught under the provisions of this proviso. However, if the activities are not driven primarily to earn 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 A .....

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s 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. (c) to establish, maintain.. and manage laboratories, workshops, stores a .....

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on to the aforesaid products in India or abroad." 23. At point (d), we observe that to produce, purchase or sell is one of the main objects of the society. These were the objects on the basis of which it was given the registration under section 12AA of the Act. Therefore, it can not be said that by engaging in activities of sale and purchase the assessee is deviating from its objects. No doubt has been cast at any stage in respect of the fact that the assessee is formed primarily to do rese .....

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exempt under section 11 of the Act on the basis of the fact that the same was applied for charitable purposes. However, proviso to section 2(15) of the Act changes the scenario in the sense that it in fact carves out from the ambit of charitable purposes, those activities being of business in nature, irrespective of its application, whether for charitable or for charitable purpose. Here the mandate of Delhi High Court in the case of India Trade Promotion Organization (supra) of reading down the .....

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ation, 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 .....

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f profit making. The assessee manufactures articles as required by the Government and sell those to the Government concern only. Another fact coming out from the order of the Assessing Officer that the assessee is making sales to the concern which was less than market rate, this fact also strengthens the case of the assessee that it is not driven by profit motive. No allegation of violation of any provision of section 13 of the Act is coming out from the order of the Assessing Officer nor it was .....

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