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TMI Blog2025 (3) TMI 759X X X X Extracts X X X X X X X X Extracts X X X X ..... ers Association for facilitating export of diamond. Subsequently, the diamond exporters found that there was need for setting up a diamond bourse in Bombay with customs clearance facilities for facilitating export of diamond and make trade more competitive in the international market. After deliberating on the request made by the Diamond Exporters Association, the Central Government, in 1984, accepted the proposal to set up a diamond bourse in Bombay. The Minerals and Metals Trading Corporation of India Ltd. (MMTC), a Central Government undertaking, agreed to coordinate the administrative steps. As per the suggestion of the Ministry of Commerce, Government of India, the bourse was named as 'Bharat Diamond Bourse'. Thus, a decision was taken by the Government of India in the Ministries of Finance and Commerce to set up 'Bharat Diamond Bourse' with the object of encouraging and increasing the export of polished diamond from India. 4. Mumbai City (erstwhile Bombay), traditionally had been the headquarters of diamond trade and exports. However, the main business center for diamond trade was located in a congested locality. Whereas, the International Airport in Mumbai was situated at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, the assessee was set up as a non-profit company with the principal object of facilitating diamond export so that maximum revenue could be earned by way of foreign exchange and also can make diamond trade more competitive at the international level. Subsequently, on 15.12.1986, an agreement was entered between MMTC and the assessee, under which, it was agreed that from 1st April, 1988 the activities of the Bourse would be carried out by the assessee and no more by MMTC. After taking over the operations from MMTC, to meet the expenditure relating to payment to be made to the Chief Executive, staffs and other expenditure connected with activities of Bourse, including, that of Customs Clearance Centre, storage, transportation and delivery of import and export parcels, it was decided, the assessee shall recover service charges on cost basis from members/non-members. As per the agreement, these reimbursements are to be deposited in a separate Bank account and the assessee will maintain separate books of account and get them audited. In terms with the agreement, the assessee issued a circular on 14.09.2001indicating the cost per parcel to be incurred and to be reimbursed from members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that the activities of the assessee are hit by the proviso to Section 2(15) of the Act, hence, the objects of the assessee do not fall within the ambit of 'charitable purpose'. Based on the order cancelling registration u/s. 12A of the Act, the AO passed assessment orders for A.Ys 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10, rejecting assessee's claim of exemption u/s. 11 of the Act. 11. Against such decision of the AO, as well as, challenging the cancellation of registration u/s. 12A of the Act, assessee ultimately came in appeal before the Tribunal. In a consolidated order passed on 30.03.2017 in ITA No. 884/Mum/2012 and others, the Tribunal set aside the order passed by the DIT(E) cancelling assessee's registration, while restoring the registration granted earlier u/s. 12A of the Act. Further, the Tribunal directed the AO to verify whether the objects of general public utility carried on by the assessee would be hit by the proviso to section 2(15) of the Act brought into statute w.e.f. 01.04.2009. 12. In pursuance to the directions of the Tribunal, the AO took up the assessment proceedings for the relevant assessment years including assessment year under dispute. Whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying 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;" ii. The Memorandum explaining the provisions of the Finance Bill, 2008 lays down the legislative intent for insertion of Proviso to Section 2(15) of the Act. The relevant part of the Memorandum reads as under: "Streamlining the definition of "charitable purpose" Section 2(15) of the Act defines "charitable purpose" to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. It has been noticed that a number of entities operating on commercial lines are claiming exemption on their income either under section 10(230) or section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the "advancement of an object of general public utility" as is included in the fourth limb of the current definition of "charitable purpose". Such a claim, when mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and were charity institutions. The attempt was to remove the masks from the entities, which were purely trade, commerce or business entities, and to expose their true identities. The object was not to hurt genuine charitable organizations and, this was also the assurance given by the Finance Minister while introducing the Finance Bill 2008. 20) The expressions "trade", "commerce" and "business" as occurring in the first proviso to section 2(15) of the Act must be read in the context of the intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organised manner. The purpose and the dominant object for which an institution carries on its activities is material to determine whether the same is business or not. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. The object of introducing the first proviso is to exclude organizations which are carrying on regular business from the scope of "charitable purpose". The purpose of introducing the proviso to Section 2(15) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which justify and show that the activity undertaken is in fact in the nature of business. 22) The purpose for which the Appellant Assessee is established and the scope of activities carried out by the Appellant Assessee is discussed in detail in the foregoing para's. On going through the same and the Memorandum of Association of the Appellant Assessee (Refer page 275 of the Paper Book), it is amply clear that the Appellant Assessee is established for the promotion of exports of Gem & Jewellery from India and to provide for this purpose infrastructure and other facilities in India for Indian and overseas buyers and sellers of Gem and Jewellery and for the fulfilment of its object, it receives by way of reimbursement, the cost of carrying activities mentioned in its object clause. 23) The Appellant has been consistently following the same set of object year on year basis since its inception. 24) The Hon'ble ITAT, Hon'ble High Court and Hon'ble Supreme Court in AY 1989-90 and AY 1990-91 have already analyzed the activities carried out by the Appellant Assessee, i.e., whether they are in the nature of charitable activities. 25) The Hon'ble ITAT in its order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of ACIT(E) vs Ahmedabad Urban Development Authority [2022] 449 ITR 1(SC) has specifically dealt with the aspects relating to the advancement of General Public Utility ("GPU") with respect to trade promotion bodies. The Hon'ble Supreme Court has held that in case of advancement of GPU by trade promotion bodies, the activities cannot fall under the ambit of trade, commerce, business. In other words, such trade promotion bodies should be operating on a not-for- profit basis. The Hon'ble Supreme Court has further held that in order to ascertain the advancement of GPU as not for profit basis, it is important to look at the object clauses of the Memorandum of Association and identify if any clause falls within the ambit of trade, commerce or business. The Hon'ble Supreme Court has also held that where any services are provided at cost basis or nominally above cost, in such situations, the rigors of proviso to section 2(15) shall not be triggered, i.e., it will not fall within the mischief of "cess, or fee, or any other consideration" towards "trade, commerce or business". Without prejudice to the above, 30) The Ld. Assessing Officer and Ld. CIT(A) erred in not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regarded as traders, or why contributions returned to them should be regarded as profits." The proposition of law is restated in Bankipur Club (supra) and Bangalore Club (supra) by placing reliance upon the following extract from Simon's Taxes Simon's Taxes, Volume B, 3rd Edition, Pgs. 159, 167: "... it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered..." 14. Per contra, strongly relying upon the observations of the AO and learned First Appellate Authority, learned Departmental Representative submitted, since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as a charitable institution/organization is intact. It is a fact on record that the AO had made an attempt to deny claim of exemption u/s. 11 of the Act to the assessee in AYs 1989- 90 and 1990-91 on the reasoning that the assessee does not have charitable objects as it has generated income from business activity. However, higher appellate authorities, such as, the Tribunal, Hon'ble jurisdictional High Court and Hon'ble Supreme Court, while reversing the decisions of the Departmental authorities, have unequivocally held that not only the assessee's objects are of charitable nature coming within the ambit of any other object of general public utility but it does not carry out any commercial activity, hence, entitled to exemption u/s. 11 of the Act. In this context, it will be relevant to look at the following observations of the Hon'ble Supreme Court :- "In order to decide the first question, the circumstances under which the appellant-assessee came into existence are required to be noticed. The diamond exporters in India had formed a Diamond Exporters Association for facilitating export of diamonds. There was need for setting up a diamond bourse in Bombay with custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational Airport, Bombay. When MMTC was appointed as the custodian, it had incurred expenditure on behalf of the Bharat Diamond Bourse to the extent of about Rs. 81 lakhs for setting up of the bourse. On 31st August, 1984 the Managing Committee of the assessee resolved to treat the expenses incurred by MMTC as a loan which was to be returned with interest @ 6% per annum. MMTC had taken certain premises on lease in the Diamond Plaza which was sub-leased to the assessee on the same terms and conditions except for the deposit. The principal object of establishment of the bourse was to facilitate the diamond trade so that maximum revenue could be earned by way of foreign exchange and also to make the diamond trade more competitive at the international level. 8. On 15th December, 1987 an agreement was arrived at between MMTC and the assessee under which it was agreed that from 1st April, 1988 service charges would be collected by the assessee and not by MMTC, and from that date the bourse would meet its own obligations towards its staff, their expenses etc. and so on. Under the said agreement the operations of the bourse were taken over from the MMTC. 9. The setting up of the Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, carrying on business in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, Silk Cloth and Cotton Cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of this members. The Constitutional Bench of this Court held that, if there are several objects of the institution, some of which are charitable and some non-charitable and the trustees or the managers in their discretion may apply the income of the institution of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempted from tax. Where the main or primary objects are distributive, each and every one of the object must be charitable in order that the trust be held as a valid charity. But, if the primary or dominant purpose of the institution is charitable and another which, by itself, may not be charitable, but is merely ancillary or incidental to the primary or dominant object, it would not prevent the institution from validly being recognised as a charity. The test to be applied is, whether the object which is said to be non-charitable is the main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing center in India for all those engaged as manufacturers, traders, exporters and importers, brokers/commission agents of diamonds." 15. These being the pre-dominant objectives, we agree with the view taken by the Tribunal as well as the High Court that the assessee was rightly registered under Section 11 by treating it as an institution established for charitable purpose within the meaning of Section 2(15) of the Act." 17. It is an undisputed fact on record that the main objects of the assessee based on which registration was granted u/s. 12A of the Act and, which objects have been accepted to be of charitable nature up to the stage of Hon'ble Supreme Court in assessee's case, have not undergone any change till date. Therefore, it has to be accepted that the assessee is a charitable organization existing for charitable purpose having the object of general public utility in terms of Section 2(15) of the Act. At this stage, it is relevant to observe, Section 2(15) of the Act as was existing in the statute in its original form underwent change through amendment by Finance Act, 2008 with effect from 01.04.2009 with introduction of the following proviso:- "15) "charitable purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the main objects of the assessee, it is not in any manner involved in any activity of trade, commerce or business. There cannot be any doubt regarding this fact. Therefore, it is necessary to see whether the second condition of any activity of rendering any service in relation to any trade, commerce or business is applicable. Since the assessee itself is not carrying on any trade, commerce or business, it cannot be said that it is involved in any activity of rendering service in relation to any trade, commerce or business. The assessee merely provides a platform to importers/exporters of diamonds and precious stones to facilitate import/export activity seamless and less cumbersome to make the trade more competitive in international market. In sum and substance, the role of the assessee is akin to a trade promotion organization. 21. The memorandum explaining the provision of Finance Bill, 2003 spells out the legislative intent for insertion of the proviso to section 2(15) of the Act. The relevant part of the memorandum reads as under: "Streamlining the definition of "charitable purpose" Section 2(15) of the Act defines "charitable purpose" to include relief of the poor, educ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erce but initially activities now carried on by the assessee were carried on by MMTC. It is also a fact on record that assessee has been recognized as a charitable organization with charitable purpose by Highest Court of the country. It cannot be denied that the activities of the assessee have remained as it is since inception. 23. It is further relevant to observe, as per the proviso to Section 2(15) of the Act, the activity of trade, commerce or business or service related to trade or commerce or business must be for a cess or fee or any other consideration. In the facts of the present appeal, admittedly the assessee recovers only the cost incurred for providing certain infrastructure facilities as under: (1) Provision of rent-free accommodation for housing and customs clearance centre as well as the custodian's office. (2) Maintenance of strong room at the Diamond Plaza Custom Clearance Centre ('DPCCC') as well as at the Sahar International Aircargo complex. (3) Provision of security and to and for transportation of export and import parcels between DPCCC and Sahar International Air Cargo complex on every working day. (4) Depositing of Airways Bills with res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ("cess, or fee, or any other consideration"); A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected ("actual carrying out..." inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016); A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be "trade, commerce, or business" or any service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the cost and a nominal mark-up. If such is the case, then the receipts would indicate that the activities are in fact in the nature of "trade, commerce or business" and as a result, would have to comply with the quantified limit (as amended from time to time) in the proviso to Section 2(15) of the IT Act. B.3. In clause (b) of Section 10(46) of the IT Act, "commercial" has the same meaning as "trade, commerce, business" in Section 2(15) of the IT Act. Therefore, sums charged by such notified body, authority, Board, Trust or Commission (by whatever name called) will require similar consideration - i.e., whether it is at cost with a nominal markup or significantly higher, to determine if it falls within the mischief of "commercial activity". However, in the case of such notified bodies, there is no quantified limit in Section 10(46). Therefore, the Central Government would have to decide on a case-by-case basis whether and to what extent, exemption can be awarded to bodies that are notified under Section 10(46). B.4. For the period 01.04.2003 to 01.04.2011, a statutory corporation could claim the benefit of Section 2(15) having regard to the judgment of this Court in the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als on record show that fees or consideration charged by them for the purposes provided are nominal. In the circumstances, it is held that the said two assessee's are driven by charitable purposes. However, the claims of such non- statutory organisations performing public functions, will have to be ascertained on a yearly basis, and the tax authorities must discern from the records, whether the fees charged are nominally above the cost, or have been increased to much higher levels. E.2. It is held that though GS1 India is in fact, involved in advancement of general public utility, its services are for the benefit of trade and business, from which they receive significantly high receipts. In the circumstances, its claim for exemption cannot succeed having regard to amended Section 2(15). However, the Court does not rule out any future claim made and being independently assessed, if GS1 is able to satisfy that what it provides to its customers is charged on cost-basis with at the most, a nominal markup. F. Sports associations So far as the state cricket associations are concerned (Saurashtra, Gujarat, Rajasthan, Baroda, and Rajkot), this Court is of the opinion that the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered to be trade, commerce or business or any services in relation thereto. Hon'ble Supreme Court has further observed that only when the charges are markedly or significantly above the cost incurred, then they would fall within the mischief of cess or fee or any other consideration towards trade, commerce or business. These observations of Hon'ble Supreme Court apply to various category of assessee's including trade promotion bodies and non- statutory bodies. In the facts of the present appeal, admittedly, the receipts of the assessee are on account of reimbursement of cost. Further, the accounts of the assessee placed before us demonstrate that the cost recovery made by the assessee is as per cost without any excessive mark up. In fact, there is no such allegation even by the Assessing Officer. Therefore, assessee's object of any other activity of general public utility would not fall within the vice of proviso to Section 2(15) of the Act. 27. At this stage, we must observe, introduction of proviso to section 2(15) of the Act ipso facto would neither negate assessee's existence for charitable purpose nor disqualify the assessee from enjoying exemption u/s. 11 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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