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TMI Blog2009 (8) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... and understanding in the various fields relating to the profession of Accountancy, like accounting, auditing, fiscal laws and policy, corporate and economic laws and policies, economics, financial management, financial services, capital and money markets, management information and capital systems, management consultancy services and allied disciplines. It is formed as a company and was registered on 14.1.1999 with the Registrar of Companies, Delhi vide Registration/Incorporation Certificate bearing No. 55-97935/1998-99 issued under Section 25 of the Companies Act, 1956. It is, thus a deemed company and is having the status of an Academy. 2. The objectives of the Petitioner Foundation are set out in clause (III-A) of its Memorandum of Association and the relevant clause there of reads as under :- "To conceive, establish, promote, sponsor, take over, own, run, administer, operate, maintain, equip and control an academy for the purpose of imparting, dissemination, spreading and promoting knowledge, learning, education and understanding in the fields of accounting, auditing, fiscal laws and policy, corporate and economic laws and policies, economics, financial management, financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act. It is also recognized as a Scientific and Industrial Organization by the Government of India, Ministry of Science and Technology, Department of Science and Industrial Research, New Delhi under the Scheme of Re-organisation of Scientific and Industrial Research Organizations, 1988 vide Certificate dated 5.10.2006. This recognition was originally granted from 18.11.2003 to 31.3.2006 and was further extended vide Certificate dated 5.10.2006. 5. The Petitioner Foundation made an application dated 15.12.2006 to the Respondent No.1 herein in Form No. 56 for claiming exemption from income tax under Section 10(23C)(iv) of the Act taking the plea that it is covered by the expression "charitable purposes", as defined in Section 2(15) of the Act. Certain information was asked by the Respondent No.1, which was supplied by the Petitioner Foundation from time to time. After considering this application, the Respondent No.1 ultimately rejected the request vide its order dated 28.12.2007 stating that the Petitioner Foundation did not qualify for approval under the aforesaid provision. The present writ petition has been filed by the Petitioner Foundation assailing this order. 6. If one is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and on successful completion of research study, a Doctoral Degree is granted by the University to those Research Fellows. During the past few years, the other projects and the nature of research conducted by the Petitioner Foundation included the following :- (a) Corporate Financial Communications; Trends and Practices of Business Groups in India. This research project seeks to ascertain observable trends in corporate financial reporting practices of companies in India (including MNC's operating in India) to establish how efficiently, clearly and transparently the performance is reflected in the audited financials, is communicated to shareholders and other stakeholders through medium of annual reports, Chairman speeches and Directors Report. (b) Issues in Accounting - Valuation of Intangibles: The Research Project is undertaken with an aim to address the accounting issues in knowledge based industry with particular reference to bio-technology industry which is an emerging knowledge driven industry in India and promises a very high rate of growth. The industry based on high research and knowledge content gives rise to various types of intangible assets like patents, intellectu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd. (ICRA) on the above subject is considered by the Expert Group of the Petitioner Foundation. The study proposes to suggest the model code of governance for such organizations and would be brought out as a research publication under the Petitioner Foundation. (h) Electronic Commerce and Direct Taxation: In this project the study on Electronic Commerce and Direct Taxation commissioned is undertaken. (i) Financial and Accounting Reforms, CapacityBuilding and Related Strategies: The Petitioner Foundation joined the ICAI as co-partner for submission of proposals for carrying our research in the area of financial statements and accounting reforms to the Small projects Facility programme (European Union Projects). Out of the above proposals submitted, the proposal titled "Financial and Accounting Reforms, Capacity Building and Related Strategies" was accepted. As per the scope of the project, a detailed study on nine shortlisted urban local bodies on development of institutional framework along with strategies directed towards building capacity for undertaking the suggested reforms has been carried out. As a precursor to this project, the Petitioner Foundation has financed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble activity'. Particulars of the various such jobs undertaken by the Petitioner Foundation and the amounts received for those consultancy services are also stated in the impugned orders. Those details indicate that they broadly fall in two categories, which are as under :- (a) The Petitioner Foundation is providing research and consultancy services to various Government bodies; the payments are made by these Government bodies and have been accounted for by the Petitioner Foundation under the head "Research Contributions". The payments so received are then used for making the payment to Researchers/Consultants hired by the petitioner to carry out the research work. The particulars shown indicate that three Government projects were undertaken by the Petitioner Foundation, namely, that of Municipal Corporation of Delhi (MCD), Kolkata Municipal Corporation (KMC) project and Strengthening Rural Decentralization (SRD) project. The representative of the Petitioner Foundation had urged before the Respondent No.1 that these were not the business/commercial activities but simply research activities and, in fact, expertise was provided to the aforesaid bodies who wanted to streamline their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foundation was carrying on some other charitable activities, separate books of accounts were required to be maintained in respect of business of providing contractual services to various Government bodies as per proviso Section 10(23C)(iv) of the Act, which was not being done by the Petitioner Foundation. 13. The submission of learned counsel for the petitioner in this behalf was that the main activities of the Petitioner Foundation carried out all along were educational and, thus, charitable in nature. The aforesaid activities are incidental to the attainment of its objective. Explanation of the petitioner is that at the instance of the aforesaid local bodies, namely, MCD, KMC and SRD, the Petitioner Foundation took up three projects with sole aim and endeavour to improve and reform preparation and presentation of accounts and accounting process, financial analysis and management practices in these urban local bodies. It is explained that the MCD project was taken up by the Petitioner Foundation in March 2002 and was successfully completed on 31.5.2006. This project arose out of the decision of the Government of India to implement accrual based accounting reform in the third yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise with organizational changes, and standardized formats of financial statements and established audit trails. The Kolkata Municipal Corporation was also provided by the Petitioner Foundation with a clear road map for strengthening its internal audit department. 15. In Strengthening Rural Decentralization (SRD) project, the team of the Petitioner Foundation carried out field visits to various Gram Panchayats (GPs) and Gram Unnayan Samitis (GUSs) spread across the 6 SRD Districts and other non-SRD Districts of West Bengal. In these field visits, the team of Petitioner Foundation carried out study of and assisted in framing proper accounting, auditing and procurements system and procedure in the case of GPs and GUSs, as a deliverable accounting manual, internal audit manual, as well as the procurement manual. 16. The aforesaid description of the three projects given by the Petitioner Foundation finds support from the annual reports as well as other documents produced and annexed by the Petitioner Foundation with this writ petition. 17. It clearly follows that even these three projects were the research projects which were given to the Petitioner Foundation having regard to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Although the source of the income is a business, the object of the trust is not to run that business, but to utilise the income of that business for a charitable purpose. The income has been divided into two portions, i.e., khandani income and the qaumi income. That portion of the income which is not earmarked for charity is subject to tax, but the remaining portion has to be used for charitable purposes. 18. In our view. the entire point is now covered by the Supreme Court's judgment in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association, (1980) 121 ITR 1. The court pointed out in that case that when the object of a trust was the carrying on of an object of general public utility, it is that object of general public utility which must not involve the carrying on of an activity for profit. It was pointed out that it was immaterial how the money for achieving or implementing such purpose was found. Whether that money was obtained by the running of an activity for profit or not, did not make the charity not charitable. Thus, in the present case, no doubt, the trust earns the money from the Hamdard Dawakhana. If that money is used for charitable purpose and not for the carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting and budgetary systems in these local bodies. The expertise of the Petitioner Foundation in carrying out research in this field was sought to be utilized. Therefore, it cannot constitute „business/commercial activity‟. Merely because some remuneration was taken by the Petitioner Foundation for undertaking these projects would not alter the character of these projects, which remained research and consultancy work. It is so categorically held in Hamdard Dawakhana (supra). The important test is the application of the amounts received from those projects. It is nowhere disputed that the receipts are utilized by the Petitioner Foundation for advancement of its objectives. The Memorandum of Association specifically stipulates that these are not to be distributed to the Members as dividends or profits. It is clear that most of the amount received qua these projects was spent on the project and surplus, if any, is used for advancement of the objectives for which the Petitioner Foundation is established. 21. The amended definition of charitable purpose would not alter this position. No doubt, proviso to this definition clarifies that advancement of any other object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip. The essential character of this fellowship is that a student is given the fellowship/scholarship for undertaking research projects. We fail to understand as to how this essential character of the fellowship would alter merely because of distant possibility of a fellow leaving in the middle of the programme or finishing his research early. 23. One significant aspect which is totally ignored by the respondent No.1 is that the Petitioner Foundation is a deemed company under Section 25 of the Companies Act. This section reads as under :- "25. Power to dispense with "Limited" in name of charitable or other company. - (1) Where it is proved to the satisfaction of the Central Government that an association - (a) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and (b) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may by licence, direct that the association may be registered as a company with limited liability, without the addition to its name of the word "Limited" or the words "Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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