TaxTMI 
TaxTMI 
2011 (3) TMI 1265
X X X X Extracts X X X X
X X X X Extracts X X X X
....from I. T. T. A. No. 251 of 2008. The Agricultural Market Committee, Giddalur ("the AMC", for brevity) was constituted under section 4 of the AMC Act vide G. O. Ms. No. 842, Food and Agriculture, dated June 29, 1971, as amended by G. O. Ms. No. 512, dated August 16, 1978. It was availing of exemption as a "local authority" as defined under section 10(20) read with section 10(29) of the Income-tax Act. By the Finance Act, 2002, with effect from April 1, 2003, section 10(29) was deleted and an Explanation was added to section 10(20) mentioning Panchayats, Municipalities, Municipal Committees and Cantonment Boards alone to be a "local authority", for the purpose of sec-tion 10(20). As a result, from the assessment year 2003-04 onwards, AMCs could not claim exemption as a "local authority". They, therefore, made an application on August 22, 2006 in Form 10A to the Commissioner of Income-tax, Guntur seeking registration under section 12A of the Income-tax Act. Their authorized representative appeared, furnished information, produced evidence and filed written submissions. The Commissioner of Income-tax passed orders being F. No. 1(50)/R-2/CIT-GNT/2006-07, dated December 12, 2006 rejecti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e investing and depositing the money, and an AMC would not be able to comply with such mode of depositing the money which would entail in forfeiture of exemption. Lastly, the senior counsel would contend that, by the Finance Act, 2008 with effect from April 1, 2009, AMCs have been included in section 10(26AAB) enabling them to be exempted from paying tax. This would show that Parliament never intended to treat the activities carried on by the AMC as charitable. 6. The standing counsel for the AMCs submits that all AMCs are seeking registration as institutions for advancement of general public utility. All of them were availing of exemption under section 10(20). But, with effect from April 1, 2003, AMCs were denied exemption. Therefore, there is no prohibition for them from claiming registration under section 12A of the Income-tax Act. According to the counsel, at the time of consideration of application for registration under section 12A, the Commissioner of Income-tax has to look to the objects for establishment of the AMC, and the possible likelihood of non-compliance with section 11(5) is not rele-vant. She would urge that all questions of law raised in the memorandum of....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."Section 2(31) defines "person". "2.(31) 'person' includes- (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses ; Explanation.-For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or estab-lished or incorporated with the object of deriving income, profits or gains ;" 10. Chapter III contains provisions which deal with incomes which do not form part of total income for the purpose of levy of income-tax. As of now, there are fourteen (14) sections. These can be conveniently grouped into four categories. Section 10 enumerates incomes from various sources of various institutions and persons which shall not be included in computing the total income of a previous year of any such person....
X X X X Extracts X X X X
X X X X Extracts X X X X
....part for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent. of the income from such property ; (c) income derived from property held under trust- (i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and (ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India : Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income ; (d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. 11.(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :- (i) investment in savings certificates as defined in clause....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessment year immediately following the financial year in which such application is made." 13. A brief analysis of all the provisions would show that (i) providing relief of the poor ; (ii) establishing institution for education ; (iii) providing medical relief ; and (iv) to advance any other object of general public utility are included within the definition of "charitable purposes". With effect from April 1, 2009, a new definition has been substituted, in that, if the advancement of object of general public utility involves carrying on any activity in the nature of trade, commerce or business or any activity of ren-dering any service in relation to any trade, commerce or business for cess or fee or any other consideration, such activity shall not be a charitable purpose. AMCs which availed of exemption under section 10(20) as a matter of course sought exemption as charitable institutions after the amendment of section 10(20) by the Finance Act, 2002, with effect from April 1, 2003. They were excluded from the purview of being "local autho-rities" and, therefore, sought exemption from the assessment year 2003-04 onwards. Except the addition of the proviso, restricting the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....breach of section 13(1) generally and section 13(1)(d) specifically. Analysis of the provisions of the AMC Act 15. The AMC Act provides for establishment of notified market areas/yards for purchase and sale of agricultural produce and livestock and for better regulation of such markets. Various Provincial States even in pre-Inde-pendence period had such marketing legislation with the sole purpose of protecting the interests of agriculturists, farmers and growers and to wean them away from exploitation by middlemen. The purpose of marketing legislation is to enable purchasers to get a fair price for the commodities by eliminating middlemen and provide a regulating market with facilities for correct weighments, storage, accommodation and equal powers of bargain for reasonable price to the growers and the consumers (M. C. V. S. Aru-nachala Nadar v. State of Madras, AIR 1959 SC 300, Mohammad Hussain Gulam Mohammad v. State of Bombay, AIR 1962 SC 97, Muhammadbhai Khudabux Chhipa v. State of Gujarat, AIR 1962 SC 1517, and Lakhan Lal v. State of Bihar, AIR 1968 SC 1408. 16. Almost all the States in India have agricultural marketing legislation and the pattern of wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... section 3 of the Act, the State Government is empowered to declare their intention of regulating the purchase and sale of such agricultural produce, livestock or products of livestock in such area as may be specified in such notifications. After considering the objections and suggestions, if any, the State Government is authorised to publish a final notification under sub-section (3) thereof declaring such area to be a notified area. By sub-section (1) of section 4, the State Govern-ment is empowered to constitute a market committee for every noti-fied area which shall be a body corporate having perpetual succession and a common seal. The duty of enforcing the provisions of the Act and the rules and bye-laws is entrusted to a market committee under sub-section (2) thereof. Sub-section (3) of section 4 empowers the market committee to establish such number of markets as the State Government may, from time to time, direct for the purchase and sale of any notified agricultural produce, livestock or products of livestock. Sub-section (3) of section 4 provides such facilities in the market as may be specified by the Government from time to time by a general or special order. Sub-sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the payment of interest on loans that may be raised for pur-pose of the market and the provisions of a sinking fund in respect of such loans ; (vii) the collection and dissemination of information regarding all matters relating to crop statistics and marketing in respect of notified agricultural produce, livestock and products of livestock ; (viii) schemes for the extension or cultural improvement of noti-fied agricultural produce, livestock and products of livestock within the notified area, including the grant, subject to the approval of the Government, of financial aid to the schemes for such extension or improvement within such area, undertaken by other bodies or indi-viduals ; (ix) propaganda for the improvement of agriculture, livestock and products of livestock and thrift ; (x) the expenses of, and incidental to, the conduct of elections ; (xi) the promotion of grading services ; (xii) measures for the preservation of foodgrains ; (xiii) such other purposes as may be specified by the Government by general or special order.' 13. Sub-section (1) of section 16 of the Act provides that there shall be formed for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r produce grown outside the market area, if sold in the market area. . . ." (emphasis supplied) 18. Section 7 of the AMC Act requires every person to obtain a licence from the market committee to set up, establish and use any place in the notified area for the purchase, sale, storage or weighment processing or pressing of any notified agricultural produce. Section 12 empowers the market com-mittee to levy fees on agricultural produce, purchase or sale in the notified market area. These monies form the market committee fund and shall have to be spent in accordance with the provisions of section 14 and the Andhra Pradesh (Agricultural Produce and Livestock) Markets Rules, 1969 (the Rules, for brevity). 19. It may, therefore, be taken as well accepted that AMCs discharge an important duty and function of protecting the interest of a large body of persons, namely, agriculturists, farmers and growers of agricultural produce and livestock. A market committee is a platform to facilitate equal bargaining power for the sale or purchase of agricultural produce with the main object of ensuring fair and reasonable price for the agricultural pro-duce and livestock brought by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o came to the conclusion that the exemption, as envisaged in the provisions of sections 11 to 13, is applicable to cases of trust or institutions built up or created by the individuals/associations/groups having privately owned funds/proper-ties/capital/resources for being used towards advancement of the objects of general public utility in return for tax exemption. The AMC, having been constituted under the AMC Act, cannot be treated as a "person" or a "trust" for charitable purpose. Ultimately, the Commissioner of Income-tax concluded as follows : "(i) The application filed in Form No. 10A, seeking registration under section 12A(a) is late by nearly 39 years and the unusual delay is stated to be attributable to the absence of any requirement to apply for such registration earlier since as absolute exemption was available under the pre-amended provisions. While this contention of the applicant does not explain the delay in filing the application for registration it only reveals the anxiety of the applicant to avoid the charge of income-tax in the wake of and in spite of changes in the statutory position. (ii) The applicantƒ_"agricultural market committee was c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966 did not bring into existence any institution to render charity. The constitution of the market committee was aimed at regulating the purchase and sale of agricultural produce, livestock and products of livestock and to provide certain facilities, as may be specified by the Government, in lieu of fees statutorily levied. Any consideration charged in lieu of any facilities or services provided is a negation of the concept of charity. In the said Act neither any chari-table objects to be pursued by the market committee are specified nor the section of pubic to receive benefit is identifiably defined. (vii) The benefit of exemption is sanctioned by the statute and any claim for exemption is to be within the scope of the provisions of law and not in supersession of the provisions of law. Any persistence with the claim for exemption despite the legislative intent to the contrary, not only seeks to nullify the effect of statutory changes but it may also be interpreted as defiance to the legislative intent. Exemption from tax is only a concession under the statute, it is not a privilege to be enjoyed foreve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hwales [1909] 5 TC 408, 414). There seems to be no solid distinction to be taken under the phrase 'general public utility' between a school founded by a testator but charging fees to its pupils and a paper founded by a testator and sold to its readers. The purpose of providing the poor or the community in general with some useful thing without price or at a low price may doubtless be in itself a purpose of general public utility. But if another object be inde-pendently in itself of general public utility the circumstance that the testator's (sic) bounty was only in respect of the initial capital assets, or had only to meet a working loss temporarily and not permanently will not, necessarily at least, alter the character of the object." 24. In CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC), the Supreme Court considered the question as to whether the income of the Andhra Chamber of Commerce is exempt under section 4(3)(i) of the Indian Income-tax Act, 1922. While observing that the Legislature had used language of great amplitude in defining "charitable purpose" and referring to the Trustees of the 'Tribune' [1939] 7 ITR 415 (PC) the court held that the Chamber of C....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... advancement of an object of general public utility or, in the other kind of case, the purpose of profit making being interwoven into the purpose of the advancement of that object giving rise to a purpose possessing a dual nature or twin facets. Now, section 2(15) clearly says that to constitute a 'charitable purpose' the purpose of profit making must be excluded. In my opinion, the requirement is satisfied where there is either a total absence of the purpose of profit making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit making purpose holds a dominating role or even constitutes an equal com-ponent with the purpose of advancement of the object of general public utility, then clearly the definition in section 2(15) is not satis-fied. When applying section 11, it is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the institution, and enter into an ascertainment of the true purpose of the trust or institution. The true purpos....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Maharashtra Act-the preamble, the powers and duties of the market committees, the power to levy and collect fees and regulate the markets, the court relied on Surat Art Silk [1980] 121 ITR 1 (SC) and held as under (pages 428 and 429) "Applying the tests laid down by the apex court in the aforesaid cases to the facts of the present case, there can be no doubt that the object of the market committees (assessees) established under the 1963 Act is to regulate the entire marketing of agricultural and some other produce from the stage of procuring till it reaches the ultimate consumer, which is squarely covered within the meaning of the expression 'advancement of any object of general public utility' con-tained in section 2(15) of the Act . . . It is pertinent to note that prior to April 1, 1984, the words used in section 2(15) of the Act were 'advancement of any other object of general public utility not involving the carrying on of any activity for profit'. By the Finance Act, 1983 with effect from April 1, 1984, the Legislature has omitted the words 'not involving the carrying on of any activity for profit' from section 2(15) of the Act. Thus, after April 1, 19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lso obliged to provide conveniences for persons visiting a market area, like provid-ing for shelter, shade and parking facilities. A market committee is also obliged to look after the safety, health and convenience of per-sons visiting the market area. A market committee is also obliged to construct and repair link roads, approach roads, culverts, and bridges, etc. One of the many specified activities of a market committee is to extend loans to financially weak communities as well as in the repay-ment of such loans and the interest thereon. The market committee under reference, in the discharge of its obligations, besides carrying out all the aforesaid activities, is stated to have spent a huge sum of money for the construction, development and repair of link roads, culverts, bridges, etc." 29. In Gujarat Maritime Board [2007] 295 ITR 561 (SC), the question before the Supreme Court was whether the Maritime Board is entitled to the status of charitable institution under section 11 of the Act. Maritime Board was constituted under the Gujarat Maritime Board Act for the purpose of development of minor ports in Gujarat. Under the statute, the Board also renders stevedoring, tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of any other object of general public utility'. Under section 11(1), income from property held for charitable pur-poses is not includible and does not form part of the total income. Section 11(1) has three clauses (a), (b) and (c). In all the three clauses the words used are 'income derived from property held under trust wholly for charitable purposes'. Under section 11(4), the expression 'property held under trust' includes a business undertaking so held. In other words, income from business undertaking held for charitable purposes can fall under section 11 subject to such income fulfilling the requisite conditions of that section . . . At the outset, we may point out that section 10(20) and section 11 of the 1961 Act operate in totally different spheres. Even if the Board has ceased to be a 'local authority', it is not precluded from claiming exemption under section 11(1) of the 1961 Act. Therefore, we have to read section 11(1) in the light of the definition of the words 'charitable purposes' as defined under section 2(15) of the 1961 Act. We have perused a number of decisions of this court which have interpreted the words in section 2(15), n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns 12 and 12A/12AA of the Income-tax Act. Various market committees established under the M. P. Act successfully assailed the Commissioner's orders before the Tribunal against which the Revenue went in appeal before the High Court raising the plea that the market committees estab-lished under the M. P. Act were not institutions established for a charitable purpose. Whether the income of market committees is derived from the property and is held under trust wholly for charitable purpose ? To answer this question, the Division Bench of M. P. High Court in CIT v. Krishi Upaj Mandi Samiti (No. 1) [2009] 308 ITR 380 (MP) referred to the various pro-visions of the M. P. Act, and the earlier case law including the Gujarat Maritime Board [2007] 295 ITR 561 (SC) and held that the market com-mittees fulfil all the requirements of section 11 of the Income-tax Act to get exemption and are, therefore, entitled to registration under sections 12 and 12A/12AA of the Income-tax Act. The plea that deletion of section 10(29) and amendment of section 10(20) with effect from April 1, 2003 disentitles the market committees from being treated as "charitable institutions" under section 2(15) of the Income....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Act. Even if an AMC does not fall in any of the categories under section 2(31)(i) to (vi), namely, an individual, a HUF, a company, a firm, an association of persons or body of individuals and local authority, it certainly falls within the scope of artificial juridical person. By the Finance Act, 2002, with effect from April 1, 2003, an Explanation was inserted to section 2(31) which makes it clear that, inter alia, an artificial juridical person shall be deemed to be a person whether or not it is estab-lished or incorporated with the object of deriving income, profits or gains. As we have already noticed, as per section 4 of the AMC Act, AMC constituted by the Government for every notified area shall be a body corporate having perpetual succession and a common seal with power to acquire, hold and dispose of the property and may by its corporate name sue and be sued. It is settled law that a body corporate is a person. We may refer to the decision of the Supreme Court in Assistant Commissioner, Assessment II, Bangalore v. Velliappa Textiles Ltd. [2003] 263 ITR 550 (SC); [2004] AIR 2004 SC 86. 34. In Velliappa Textiles Ltd. [2003] 263 ITR 550 (SC), the managing direc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es may be such that the knowledge of the agent must be imputed to the body corporate. Counsel for the respondents says that, although a body corporate may be capable of having an intention, it is not capable of having a criminal intention. In this particular case the intention was the intention to deceive. If, as in this case, the responsible agent of a body corporate puts forward a document knowing it to be false and intending that it should deceive, I apprehend, according to the authorities that Viscount Caldecote L. C. J. has cited, his knowledge and intention must be imputed to the body corporate.'"(ii) The effect of the Finance Act, 2002 and interface between section 10(20) and 11(1) of the Income-tax Act 35. Before the amendments, introduced by the Finance Act, 2002, with effect from April 1, 2003, sections 10(20) and (29) read as under : "10.(20) the income of a local authority which is chargeable under the head 'Income from house property', 'Capital gains', or 'Income from other sources' or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he intention was to increase the tax base for roping in all local authorities except those mentioned hereinabove, AMCs cannot again come under the purview of sections 11 to 13 claiming themselves to be institutions for charitable purpose. The submission, in our considered view, cannot be countenanced. 38. It is not the case of AMCs that they were not institutions of charity prior to the amendment of section 10(20) by the Finance Act, 2002. As we have analysed earlier, all those statutory, non-statutory entities, concerns and institutions, specified in section 10-subject to the prescribed condi-tionalities and legal requirements-are automatically exempted from pay-ment of tax and those who were not included therein were only required to obtain registration under section 12A so as to claim the benefit under section 11(1) of the Income-tax Act. The fact of being covered under any of the clauses of section 10 does not mean that a person is disqualified to seek registration under section 12A. It is nobody's case before us. When the statute confers the benefit, there was no necessity for AMCs to seek registration under section 12A. By reason of the amendments by the Finance Act, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lf is sufficient indication to belie the submission made by the senior counsel. 40. In Gujarat Maritime Board [2007] 295 ITR 561 (SC), the Supreme Court held that "section 10(20) and section 11 of the Income-tax Act operate in totally different spheres, that even if the Board has ceased to be "local authority', it is not precluded from claiming exemption under section 11(1)". We accordingly hold that an AMC is entitled to seek exemption under section 10(20) read with section 10(29) till March 31, 2003. By reason of the amendment to section 10(20) and deletion of section 10(29) with effect from April 1, 2003, they, for the purpose of the Income-tax Act, ceased to be "local authorities". This itself would not disqualify them from claiming exemption under sections 11(1) and 12 of the Income-tax Act pro-vided they are considered as institutions established for advancement of objects of general public utility, because the Parliamentary benefit under section 10(20) is altogether different from the benefit granted by the tax machinery subject to statutory conditionalities contained in sections 11 to 13 of the Income-tax Act. (iii) Whether AMC is entitled to status of chari....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The market funds are spent in accordance with the budget prepared by the market committee and are spent according to the financial rules (Chapter X of the Rules). Rule 27 of the Rules provides powers and duties of market committee. These mainly relate to the estab-lishment, maintenance and managing market yards, providing facilities for marketing of notified agricultural produce, supervise, the conduct of market functionaries, regulate the opening, closing and suspending transactions, provide for settlement of disputes between the seller and buyer. The duties also include the collection, maintenance and dissemina-tion of information in respect of sale price and movement of notified agricultural produce, production, processing and storage of notified commodities, prevention of adulteration. For doing all these, the market committee also has ancillary duties like employing officers and staff for the efficient implementation of the provisions of the AMC Act and the Rules. All these are intended to provide user friendly facilities for farmers and agriculturists as well as traders at one place. The question is whether these functions discharged by an AMC are for the advancement of the o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his test, applied in Trustees of the 'Tribune' [1939] 7 ITR 415 (PC), seems to have influenced judicial thinking in subsequent decisions as well. The object of general public utility would include all objects which promote the welfare of the general public even if it includes taking up steps affecting trade, commerce or manufacture if the primary purpose is for advancement of objects of general public utility (Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)), even if in an insignificant manner the person makes some profit in carrying out the objects (Surat Art Silk [1980] 121 ITR 1 (SC)). In other words, any activity for the benefit of the public or a section of the public, as distinguished from the benefit to an individual or a group of indi-viduals, would be charitable purpose as the object is for advancement of general public utility. The expression includes all objects to promote the welfare of the public, and when an object is to promote or protect the interest of particular trade or industry that object becomes an object of public utility and would be charitable purpose (Gujarat Maritime Board [2007] 295 ITR 561 (SC)). 46. Applying the law, as laid down by the Privy....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... This submission is wholly misconceived. It is well settled that at the time of considering the application made for registration as a trust or a charitable institution under section 12A read with section 12AA, the Commissioner of Income-tax is required to look to the objects of the trust and nothing more. We may refer to the decision of the Karnataka High Court. 48. In Sanjeevamma Hanumanthe Gowda Charitable Trust v. Director of Income-tax (Exemptions) [2006] 285 ITR 327 (Karn), an application for registration under section 12A was rejected by the Director on the ground that it is carrying on its activity by letting out marriage hall on hire. The appeal against the said order was also rejected. Before the Karnataka Bench, the contention was that the mode of generating income from the trust property was immaterial for according exemption or registration of the trust. Dealing with this aspect, the High Court held (page 329) : "On receipt of such application for registration the Commissioner is under an obligation to follow the procedure prescribed under sec-tion 12AA before he grants or refuses registration. What he is expected to do on receipt of such an applicatio....