2015 (1) TMI 928 - HC - Income Tax

Charitable purpose proviso to Section 2(15) read down to exclude profit-driven trade; approval under 10(23C)(iv) directed.

The proviso to the definition of charitable purpose in Section 2(15) must be read down to avoid arbitrariness under Article 14: it excepts from charitable ... Charitable activity - Constitutional validity of the First Proviso to Section 2(15) - challenged as arbitrary and unreasonable and has no rational nexus with the object sought to be achieved and is thus violative of Article 14 of the Constitution of India - order passed by the respondent u/s 154 denying exemption earlier granted u/s 10 (23C) (iv) - Held 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 Section 2(15) of the said Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution India. In 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 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its 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 charitable purposes. Thus, while we uphold the Constitutional validity of the proviso to Section 2(15) of the said Act, it has to be read down in the manner indicated by us. As a consequence, the impugned order dated 23.01.2013 is set aside and a mandamus is issued to the respondent to grant approval to the petitioner under Section 10(23C)(iv) of the said Act within six weeks from the date of this judgment. - Decided partly in favour of assessee. Issues: (i) Whether the First Proviso to Section 2(15) of the Income-tax Act, 1961 is constitutionally valid as applied and/or requires a restricted interpretation to avoid arbitrariness under Article 14; (ii) Whether the petitioner (India Trade Promotion Organization) is entitled to approval under Section 10(23C)(iv) of the Income-tax Act, 1961 notwithstanding receipts from letting out space, sale of tickets, publications and leasing of food and beverage outlets.Issue (i): Whether the First Proviso to Section 2(15) insofar as it excludes 'advancement of any other object of general public utility' when it involves activities in the nature of trade, commerce or business or rendering services in relation thereto, is constitutionally sustainable and how it must be construed.Analysis: The proviso must be read in the context of Section 10(23C)(iv) and not in an absolute literal manner that would render Section 10(23C)(iv) redundant. Legislative materials (Budget Speech, Parliamentary debate, CBDT circular) show the object was to exclude entities that are essentially commercial in nature masquerading as charities. A literal reading would group genuine charitable institutions with purely commercial entities, risking violation of Article 14 by treating unequals alike. Authorities and prior decisions of this Court (including ICAI and GS1 decisions) support a contextual reading wherein the presence or absence of profit-making as the dominant object, and the character of the activity as incidental or primary, are material. The Court may read down legislation where a literal construction leads to constitutional infirmity unless the statutory language is unambiguous and admits no other construction.Conclusion: The First Proviso to Section 2(15) is constitutionally valid but must be read down. Its operation is confined to activities the dominant object of which is profit-making (i.e., trade, commerce or business, or services in relation thereto) and does not extend to institutions whose dominant and primary objective is charitable even if they receive consideration for incidental activities.Issue (ii): Whether the petitioner, which organizes trade fairs and derives receipts from letting out space, tickets, publications and food and beverage outlets, falls within the proviso and is excluded from being an institution established for charitable purposes under Section 2(15).Analysis: The factual matrix shows the petitioner was constituted under Section 25 of the Companies Act to promote trade for public benefit, holds a special government lease, reinvests surpluses in furtherance of objectives, and that its receipts (space rent, ticket sales, publications, F&B leases) are incidental to organizing trade fairs and facilitating trade promotion. There is no demonstrable dominant profit-making motive; activities are not conducted on commercial lines with primary aim of private enrichment. Pre-amendment recognition and the nature of statutory control and purpose weigh in favour of charitable character when dominant object is public utility rather than profit.Conclusion: The petitioner is not covered by the First Proviso as read down because its dominant and primary objective is the advancement of an object of general public utility and not profit-making. The impugned order withdrawing exemption is unsustainable and is set aside; the respondent is directed to grant approval under Section 10(23C)(iv).Final Conclusion: The First Proviso to Section 2(15) is upheld as constitutionally valid but must be construed restrictively to exclude only those institutions whose dominant objective is carrying on trade, commerce or business or rendering services thereto for profit; applying this test, the petitioner qualifies as an institution established for charitable purposes and is entitled to approval under Section 10(23C)(iv).Ratio Decidendi: The proviso to Section 2(15) must be interpreted in the context of Section 10(23C)(iv) so that it excludes only entities whose dominant objective is profit-making (trade, commerce or business or services in relation thereto); incidental receipts do not convert an institution with a dominant charitable object into a commercial undertaking.