TMI Blog2021 (7) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... t any trade, commerce or business and only deals with its members to attain its objects. Therefore, it cannot be considered as an entity carrying out business under the guise of charity, as referred at para 3.2 of aforesaid CBDT Circular. We note that the activities of mutual organizations are to be restricted to contributions from and participation of only their members. In the case of assessee also, it can be seen from the facts discussed by assessing officer as well as assessee that the assessee organization is based on the principle of mutuality. It is clear from the facts that assessee has been allotting the plots and collecting contributions from its members only and there is complete identity between the persons who contribute the amounts to the assessee trust and beneficiaries of assessee`s activities. It is also established from the facts that assessee deals/transacts only with its members strictly for the fulfillment of its objects. The bye laws of assessee`s organization restrict the allotment of plots and receiving contributions from anyone other than members. It is also established that all the contributors as well as beneficiaries of the assessee are its members o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case, the Id.CIT(A) was justified in deleting the addition of ₹ 30,81,12,572/- when the assessee was carrying out business and the reason for holding the assessee to be a Mutual Organisation does not exist and hence it did not fulfill the conditions of section 11 12 of the I.T. Act. [3] Whether on the facts and circumstances of the case, the Id.CIT(A) was justified in deleting the addition of ₹ 1,31,94,745/- made on account of net income from other sources which becomes taxable due to section 2(15) of the I.T. Act. [4] On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing officer. [5] It is, therefore, prayed that the order of the CIT (A) may be set aside and that of Assessing officer may be restored to the above extent. 4. The relevant material facts, as culled out from the material on record, are as follows. Assessee Trust, is a non-profit making company registered u/s 25 of the Companies Act, 1956. It has obtained registration as a trust u/s 12AA of the Act, on 01.04.2006. With regard to claiming for income from property held for charitable purposes, specifically under the hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the government to develop and provide infrastructure facility by way of an SEZ for furthering the growth of the gems and jewellery industry. It was also submitted that the assessee trust provides employment opportunities through this project and organizes various programs to encourage education and development and has also participated under Vibrant-2009' exhibition and 'Swarnim Gujarat' conducted by Gujarat government. It was further highlighted that the assessee has acquired a land on lease from Gujarat Industrial Development Corporation (GIDC), a government of Gujarat undertaking for the specific purpose of development of Gems and Jewellery Park with the conditions that land can be allotted to members only and no profit can be made out of the activities of bourse. It was also mentioned that the plots would be allotted to members related to gems and jewellery business only which cannot be sublet/transferred without the approval of bourse. The assessee explained the legal provisions of section 2(15) of the Act also relying on the various decisions or Hon'ble Supreme Court and other High Courts and also the Circular No. 11/2008, dated 19.12.2008 issued by CBDT. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ybody etc. were also noticed by assessing officer. 7. Therefore, in the light of the above facts, the assessing officer noted that assessee trust does not fulfill the mandate of first and second proviso of section 2(15) of the Act. Moreover, the total receipts of the assessee trust are exceeding ₹ 10,00,000/- therefore a gross violation is apparent. The activities of the assessee trust cannot be called as activities for General Public Utility and thereby not falling within the definition of charitable purpose. Further, the violation of the provisions of section 2(15) and 11(5) is doubtlessly proved in the case of assessee trust. As it is proved that the claim of the assessee trust that it is applying its funds to the activities which are not falling within the meaning of Charitable Purposes therefore the provisions of section 11 are also violated at large and according to the provisions of section 11(3) the income (Receipt are to be treated as business income) which is applied to the purposes other than charitable or religious purposes or ceases to be accumulated or set apart for application thereto, or ceases to remain invested or deposited in any of the forms or mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR pointed out that activities of the assessee trust cannot be called as activities for General Public Utility and thereby not falling within the definition of charitable purpose, because, it can be seen that the assessee has taken land from Gujarat Govt for a hundred year lease for establishing the Gem and Jewellery Park at Surat which comprises SEZ area and the DTA area and the infrastructure project in the said piece of land has been undertaken in accordance with the Industrial Infrastructure Upgradation Scheme( IIUS), 2003 as approved by Ministry of Commerce Industry. As per the approval letter of the ministry, the assessee has to acquire a Special Purpose Vehicle(SPV), SAR infracon Pvt Ltd to avail the grant sanctioned by the Central Govt, towards the infrastructure development. Subsequently, as admitted by the assessee, the grant along with the investment made by the assessee towards the infrastructure development could not be availed in time and the said amount of investment was deposited in the Bank as F.D in January and March 2005, by SAR Infracon Pvt. Ltd. and subsequently the said amount of investment along with interest received from Bank was returned to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been established for the purpose of promotion of exports of diamonds, gems, pearl and jewellery exclusively for its members. The assessee trust has fulfilled all the required conditions to be treated it as charitable institution. Shri Tushar Himarni, explained the requirements of section 2 (15) of the Act and pleads that section 2(15) of the Act gives the definition of 'Charitable purpose' which includes relief of the poor, education, medical relief,, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects or artistic or historic interest,] and the advancement of any other object of general public utility. By making amendment vide Finance Act, 2008, a proviso was inserted imposing certain restrictions on the last limb of the definition i.e. any other object of general public utility'. The said proviso reads follows: 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 activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 11 of the Act on the ground that their objects are for charitable purpose as these are covered under ' any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund, for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. 13. Shri Tushar Himarni, (Senior advocate) further pleads that assessee s trust activities are in the nature of general public utility, objectives of the trust are not profit making. The assessee trust is a section 25 company incorporated under the Companies Act, 1956. The assessee trust does not distribute dividend. The assessee trust does not provide higher remuneration to its employees. The assessee trust does not distribute profits among its members. The assessee trust got registration under section 12AA of the Act and working as a non-profit organization and it helps to improve the Gems and Jewellery Trade. The assessee trust has been granted section 12AA registration, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is, withdrawal of exemption claimed under section 11 and 12 of income from other sources to the tune of ₹ 1,31,94,745/- is concerned, Shri Tushar Himarni, Sr. Advocate, invited our attention to page No. 16 of assessee`s paper book wherein Income and Expenditure Account of the assessee is placed. Total income of the assessee trust is ₹ 2,22,87,522/- and total expenditure is at ₹ 90,92,777/. Thus, resulted surplus is at ₹ 1,31,94,744/- (₹ 2,22,87,522- ₹ 90,92,777). Once the gross interest income is added and again gross excess income over expenses ( ₹ 2,22,87,522 ₹ 90,92,772), ₹ 1,31,94,745 is added, then it resulted in double addition/disallowance to that extent. Thus, ₹ 1,31,94,745/- is double addition which is not sustainable in law. Therefore, the effective addition made by the assessing officer in assessee`s case is to the tune of ₹ 30,81,12,572/-, which is, treated as business income, by the assessing officer. 16. Now, coming to the key issue arises for our apt adjudication in the instant lis, which is, whether the assessee trust, is charitable institution or not. We note that assessee trust is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the First Proviso to Section 2(15), which is inserted by Finance Act, 2008, the assessee is carrying out activities in the nature of trade, commerce or business and consequently it cannot be regarded as charitable organization and therefore the exemption under sections 11 and 12 should not be allowed to the assessee. We note that the main object of the assessee trust is to develop the world class gems and jewellery park to provide common facilities required to promote exports of diamonds from India and for this purpose to establish utilities at a central place. For this purpose, contributions from the members being well known gems and jewellery exporters have been received and facilities have been provided exclusively to them. As per ld Counsel, these activities are based on principle of mutuality in view of CBDT Circular No. 11/2008 dated 19.12.2008 and the entity is not involved in carrying on any activity in the nature of trade, commerce or business, therefore, it is not covered by the proviso to section 2(15) of the Act. 17. In this connection, the ld Counsel states that the aforesaid proviso provides for exclusion from the main object of the definition of the term Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 any 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 under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company incorporated under section 25 of the Companies Act, 1956 (b) The assessee obtained registration u/s 12AA of the Income Tax Act, with regard to claiming income from property held for charitable or religious purpose, specifically under the head 'General public utility' (c) Its object is to establish a bourse for promotion of exports of diamond, gems, pearl and jewellery from India and provide for this purpose infrastructure and other facilities in India for Indian and overseas buyers and sellers of diamonds, gems, pearls and jewellery. Within its objects the assessee has taken the activity of developing gem and Jewelry Park. (d) In assessee's case, the facts are well covered by Finance Minister's Speech read together with para 3.1 of the Circular. It is well settled law that the speech of the Finance Minister is very much relevant to interpret the provision of law. Reliance in this case is placed on the decision of Hon'ble Supreme Court delivered in the case of K.P. Varghese v. Income-tax Officer [1981] 131 ITR 597 (SC) wherein Apex Court inter alia observed as under:- .the speech made by the mover of the Bill explaining the reason for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting from the income of the trust the expenditure incurred for the purposes of the trust and the acquisition of the fixed asset, it was found that consistent earning of profits had been only with a view to applying the same for charitable objects. Thus, relying on the observations made by the Supreme Court in Surat Art Silk Cloth Mfrs. Association's case (supra) that a charitable trust would not lose its character of charitable purpose if the predominant object of the activity is to carry out the charitable purpose and not to earn profits and if some profit arises from the activity, it would be difficult to hold that all pervading motive of the activities carried on by the assessee-trust was the making of the profit. We note that facts of the aforesaid case of Bharat Diamond Bourse(supra), were similar to that of the assessee and insertion of First Proviso to Section 2(15) does not alter the legal position already settled by Hon'ble Apex Court, because the said Proviso only applicable to the case where the activities of trade, commerce or business are carried out under the guise of 'charity' as envisaged in para 3.1 of Circular of CBDT (No.11/2008). The content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the income from such activity 3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' i.e., the fourth limb of the definition of 1charitable 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 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of Chandigarh in the case of Himachal Pradesh Environment Vs. CIT (I.T.A.T. Chandigarh), ITA No. 74/ Chd/ 2009 wherein it is inter alia held that the proviso to section 2(15) can apply only to entities whose purpose is advancement of any other object of general public utility . It is also observed that profit motive is the essence of trade, commerce or business, and where the services are rendered without a profit motive, such services will not have anything in common with trade, business or commerce. Accordingly, to fall within the second limb of the Proviso to section 2(15), 'rendering of service to trade, commerce or business' must be such that it has a profit motive. 23.On similar and identical facts the reliance can be placed on the decision of Hon'ble Gujarat High Court, in the case of DIT vs. Sabarmati Gaushala Aashram Trust [2014] 362 ITR 539, wherein at para no. 9 of the judgment Hon'ble High Court observed that many activities of genuine charitable purposes which are not in the nature of trade, commerce or business may still generate marketable products. After setting off of the cost, for production of such marketable products from the sale c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he IT Act, what is taxed is, the income, profits or gains earned or arising , accruing to a person . Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. 25. We note that in the present case of the assessee, registration u/s 12AA is granted. The assessee trust is carrying out the activities of general utility of development of infrastructure for world class gem and jewellery in Surat. Now, on insertion of First Proviso to section 2(15), the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side the tax net. The net effect of applicability of exemption provision in section 11 is also just the same. It was also laid down in CIT vs. Andhra Chamber of Commerce (1981) 130 ITR 184 (SC), Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association 121 ITR 1 (SC) and in CIT vs. Bar Council of Maharashtra (1981) 130 ITR 28 (SC), that if the primary object of an entity like Chamber of Commerce, professional association, a bar council, etc is the promotion of any trade, industry, profession, etc. the fact that the business community or the profession as the case may be would be benefit therefrom, would not take away the object from the realm of object of general public utility and, therefore, they would be held established for a charitable purpose. In view of the above factual and legal position, it is quite clear that the object of the assessee is of general public utility and does not hit by first proviso to section 2(15) of the Act. That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid additions. His order on these addition are, therefore, upheld and the grounds of appeal of the Revenue are dismissed. 27. Similar issues towards w ..... 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