2015 (1) TMI 928 - HC - Income Tax

Section 2(15) First Proviso Upheld but Narrowed to Protect Charitable Status Under Section 10(23C)(iv)

The HC upheld the constitutional validity of the First Proviso to Section 2(15) but read it down to avoid arbitrariness under Art 14. The proviso excludes ... 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 Involved:1. Constitutional validity of the First Proviso to Section 2(15) of the Income-tax Act, 1961.2. Withdrawal of exemption under Section 10(23C)(iv) of the Income-tax Act, 1961.3. Application of the proviso to Section 2(15) concerning activities of trade, commerce, or business.4. Interpretation of 'charitable purpose' under Section 2(15) in the context of Section 10(23C)(iv).Detailed Analysis:1. Constitutional Validity of the First Proviso to Section 2(15) of the Income-tax Act, 1961:The petitioner challenged the First Proviso to Section 2(15) of the Income-tax Act, 1961, as amended by the Finance Act, 2008, arguing it was arbitrary, unreasonable, and violative of Article 14 of the Constitution of India. The court examined whether the proviso treated unequals in a like manner, thus leading to discrimination. The court noted that the proviso did not distinguish between purely commercial entities and genuine charitable organizations, thereby potentially violating the principle of equality enshrined in Article 14. The court referred to the Supreme Court decision in Venkateshwara Theatre v. State of Andhra Pradesh, which emphasized that treating unequals equally could lead to discrimination.2. Withdrawal of Exemption under Section 10(23C)(iv) of the Income-tax Act, 1961:The petitioner sought the quashing of the order dated 23.01.2013, which withdrew the exemption granted under Section 10(23C)(iv). The exemption was initially granted on 01.05.2008 but was withdrawn for the assessment year 2009-10 onwards due to the application of the proviso to Section 2(15). The court examined whether the activities of the petitioner fell within the ambit of trade, commerce, or business as per the proviso. The court noted that the petitioner was engaged in promoting Indian trade through activities such as renting space for trade fairs, selling tickets, and leasing food outlets, which were deemed commercial by the respondent.3. Application of the Proviso to Section 2(15) Concerning Activities of Trade, Commerce, or Business:The court analyzed the application of the proviso to Section 2(15) to the petitioner's activities. It was argued that the petitioner's activities, although generating income, were not driven by profit motives but aimed at promoting trade and commerce, thus falling under the charitable purpose of general public utility. The court referred to its earlier decisions in Institute of Chartered Accountants of India v. Director General of Income Tax (Exemptions) and Bureau of Indian Standards v. Director General of Income-tax (Exemptions), which emphasized the dominant object/activity test to determine whether an institution's activities were charitable or commercial.4. Interpretation of 'Charitable Purpose' under Section 2(15) in the Context of Section 10(23C)(iv):The court held that the expression 'charitable purpose' under Section 2(15) must be interpreted in the context of Section 10(23C)(iv). It noted that the dominant activity of the petitioner was not profit-making but promoting trade and commerce for the nation. The court emphasized that merely because an institution generates income does not negate its charitable purpose if the dominant objective is not profit-making. The court also referred to the Supreme Court decision in Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association, which held that business and charity could coexist if the former was subservient to the latter.Conclusion:The court upheld the constitutional validity of the proviso to Section 2(15) but read it down to exclude genuine charitable organizations not driven primarily by profit motives. The impugned order dated 23.01.2013 was set aside, and a mandamus was issued to grant approval to the petitioner under Section 10(23C)(iv) within six weeks. The writ petition was allowed, and the parties were left to bear their own costs.