TaxTMI 
TaxTMI 
2015 (1) TMI 928
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....2.2012, whereby exemption earlier granted under Section 10 (23C) (iv) of the said Act had been withdrawn. The petitioner also seeks a writ of mandamus or any other appropriate writ, order or direction in the nature of mandamus directing the respondent to grant exemption to the petitioner under Section 10(23C)(iv) of the said Act. 2. On 01.05.2008, by a notification No. DGIT(E)/10(23C)(iv)/2008/143, approval had been granted under Section 10(23C)(iv) of the said Act to the petitioner for the assessment year 2007-08 onwards. During the assessment proceedings for the assessment year 2009-10, a proposal for withdrawal of the exemption was received from the Assessing Officer through the Director of Income-tax (Exemptions), Delhi on 21.12.2011. The proposal was moved for considering the case for withdrawal of exemption on the ground that the main object of the petitioner being advancement of objects of general public utility, the proviso to Section 2(15), which had been introduced with effect from 01.04.2009 was applicable. This led to an order dated 23.02.2012 passed by the respondent withdrawing the exemption, which had earlier been granted under Section 10(23C)(iv) from the assessm....
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....ublic charitable institution. Consequently, the respondent withdrew the exemption earlier granted under Section 10(23C)(iv) from the assessment year 2009"10 and onwards. 4. Being aggrieved by the said order of withdrawal of exemption dated 23.02.2012, the petitioner filed a writ petition being WP(C) No.3142/2012 before this court. That writ petition was dismissed as withdrawn on 23.05.2012 with the liberty that the petitioner may file an application under Section 154 of the said Act before the respondent seeking rectification of mistakes, which, according to the petitioner, had crept into the order dated 23.02.2012 on account of factual inaccuracies. The court, while dismissing the writ petition and granting the said liberty, also clarified that it had not expressed any opinion regarding the maintainability of the application under Section 154 of the said Act and that such an application, if filed, would be examined and considered in accordance with law. Thereafter, the petitioner filed the rectification application under Section 154 of the said Act before the respondent seeking rectification of the alleged mistakes which were apparent on the record, which resulted in the order ....
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....ailable with the petitioner may not be sufficient to meet the cost of the new project. 6. As regards income from hoardings, the petitioner submitted that such income depicted in the income and expenditure statement had a different connotation than what was commonly understood where hoardings are put up on the roadsides for advertisement purposes. It was pointed out that, in the case of the petitioner, the large sized banners / boards are temporarily put up by the participants / organizers at the gates of Pragati Maidan Complex and / or within the Pragati Maidan Complex to attract the attention of the visitors about the events as well as to serve as directional guides for the events organized in Pragati Maidan. 7. As regards sale of publications, it was pointed out that the petitioner publishes a 'fair guide' for each trade fair / exhibition and these guides contain the names, product profiles and stall numbers of the participating companies for guidance of the visitors and the receipts generated therefrom is treated under the head "Sale of Publications". The income received on this account is only a few lakhs of rupees each year. It was contended that the receipt of this amou....
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....s contended that the respondent was, therefore, unjustified to construe the object of having food and beverage outlets as being driven by commercial and business objectives. 10. It was also pointed out that the respondent, in its order dated 23.02.2012, had not taken into account the fact that the petitioner was a Government of India undertaking incorporated under Section 25 of the Companies Act, 1956 in accordance with the decision of the Cabinet. The petitioner functions under the administrative control of the Department of Commerce under the Ministry of Commerce and Industries and all the fairs of the petitioner are held by the Government of India or its nominees. The affairs of the petitioner are managed by the Board of Directors headed by the Chairman and Managing Directors nominated by Government of India on rotation basis from the pool of senior officers from the Civil Services. This ensures that the functions of the petitioner are managed in accordance with the rules and regulations and in consonance with the object for which the petitioner was constituted. The accounts of the petitioner are also subject to various audits - internal audit, statutory audit and audit by th....
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....s with regard to the applicability of proviso to Section 2(15) of the Income-tax Act. Accordingly, the application u/s 154 of the Income-tax Act, 1961 on the issue of proviso to Section 2(15) of the Income-tax Act 1961 is not maintainable, hence rejected." 13. The respondent, in his order dated 23.01.2013 also held on merits as under:" "In view of the fact that providing of space on rent to the traders by the applicant organization facilitates these traders to explore various opportunities of expanding their business, the proviso to the Section 2(15) of the Income Tax Act, 1961 comes into operation. Thus, the applicant's activity assists the traders / exhibitors to explore various opportunities of expanding their business and is "in relation to any trade, commerce or business" and therefore its activity cannot be held to be a 'charitable purpose'." The respondent also took support from the decision of the Kerala High Court in the case of Info Parks Kerala v. Deputy Commissioner of Income-tax: (2010) 329 ITR 404. Reliance was also placed by the respondent on a decision of the High Court of Andhra Pradesh in the case of Andhra Pradesh State Seed Certification Agency v.....
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....al 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(23C) 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 made in respect of an activity carried out on commercial lines, is contrary to the intention of the provision. With a view to limiting the scope of the phrase "advancement of any other object of general public utility", it is proposed to amend section 2(15) so as to provide that "the advancement of any other object of general public utility" shall not be a charitable purpose if it involves the carrying on of - (a) any activity in the nature of trade, commerce or business; or (b) any activity of rendering of any service in relation to any trade, commerce or business, for a fee or cess or any other consideration, irrespective of the nature of....
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....he marketing of agricultural produce. I once again assure the House that genuine charitable organisations will not in any way be affected. The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether an entity is carrying on 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. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organisations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as "advancement of any other object of general public utility." (underlining added) 18. In the context of the above, it was submitted by Mr Syali that the object of the introduction of the proviso to clause (15) of Section 2 of the said Act was to deny the benefit of Income-tax Act exemption to "purely" commercial and business entities which wear the mask of a charity. Genuine charitable organizations were not to be affected in any way. Mr Syali submitted that while th....
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....in a class get an advantage over others, so long as they are not singled out for special treatment. [See: Khandige Sham Bhat v. Agricultural Income-tax Officer: (1963) 3 SCR 809]. 21. Since in the present case we are dealing with a taxation measure it is necessary to point out that in the field of taxation the decisions of this Court have permitted the legislature to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. [See: East India Tobacco Co. v. State of A.P.: (1963) 1 SCR 404, P.M. Ashwathanarayana Shetty v. State of Karnataka: 1989 Supp (1) SCC 696, Federation of Hotel and Restaurant Association of India v. Union of India: (1989) 3 SCC 634, Kerala Hotel & Restaurant Association v. State of Kerala: (1990) 1 SCR 516, and: Gannon Dunkerley and Co. v. State of Rajasthan (1993) 1 SCC 364.) 22. xxxx xxxx xxxx xxxx 23. Just as a difference in the treatment of persons similarly situate leads to discrimination, so also discrimination can arise if persons who are unequals, i.e., differently placed, are treated similarly. In such a case ....
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.... 27. The limitations of the application of the principle that discrimination would result if unequals are treated as equal, in the field of taxation, have been pointed out by this Court in Twyford Tea Co. Ltd. v. The State of Kerala: (1970) 3 SCR 383, wherein tax at a uniform rate was imposed on plantations. Hidayatullah, CJ, speaking for the majority, while upholding the tax, has observed: "...It may also be conceded that the uniform tax falls more heavily on some plantations than on others because the profits are widely discrepant. But does that involve a discrimination? If the answer be in the affirmative hardly any tax direct or indirect would escape the same censure for taxes touch purses of different lengths and the very uniformity of the tax and its equal treatment would become its undoing. The rich and the poor pay the same taxes irrespective of their incomes in many instances such as the sales-tax and the profession tax etc." 28. It was further observed: "The burden is on a person complaining of discrimination. The burden is proving not possible 'inequality' but hostile 'unequal' treatment. This is more so when uniform taxes are levi....
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....E): WP(C) 3147/2012, decided on 04.07.2013; (4) M/s G.S. 1 India v. Director General of Income-tax (Exemption) and Another: WP(C) 7797/2009, decided on 26.09.2013 (2013) 219 Taxman 205. 23. He submitted that this court, while rendering the above decisions, was conscious of the wide net that the literal meaning of the proviso would cast and, therefore, held that this could not be in consonance with the object sought to be achieved. It was submitted that the petitioner, in any event, apart from the challenge to the Constitutional validity, deserves relief on the anvil of the said four decisions of this court by taking the "dominant object / activity" as the relevant criteria. 24. It was further contended that taxation law was not immune to the principle enshrined in Article 14 of the Constitution which strikes at arbitrariness in any form. A reference was made to the decision of the Supreme Court in E.P. Royappa v. State of Tamil Nadu: 1974 (3) SCC 3, wherein the Supreme Court observed as under:" "85. The last two grounds of challenge may be taken up together for consideration. Though we have formulated the third ground of challenge as a distinct and separate ....
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.... motive inducing from the antechamber of the mind, is not legitimate and relevant but is extraneous and outside the area of permissible considerations, it would amount to mala fide exercise of power and that is hit by Articles 14 and 16. Mala fide exercise of power and arbitrariness are different lethal radiations emanating from the same vice: in fact the latter comprehends the former. Both are inhibited by Articles 14 and 16." 25. It was further contended that classification should be based on an intelligible differentia that distinguishes persons or things that are grouped together from those left out of the group. Moreover, such a classification must have a rational nexus with the object sought to be achieved. If this is not done, then the classification would be violative of Article 14. Mr Syali reiterated, after referring to the Budget Speech of the Finance Minister as well as to the reply of the Finance Minister in the debate in Lok Sabha with regard to the Finance Bill 2008 and the Circular No.11 dated 19.12.2008 that the object behind introduction of the proviso to Section 2(15) was to debar and prevent entities operating "purely" on commercial lines and those masqueradi....
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....ty could co-exist provided the former was subservient to the latter. 27. He finally contended that, in the recent decision of this court in G.S. 1 India (supra), the issue has been dealt with threadbare and this court observed that the profit motive is a determinative and a critical factor to discern whether an activity is a business, trade or commerce. It was further submitted that in the said decision, this court held that the antiquated definition of charity, which entailed only giving and receiving nothing in return, was outdated. The court also observed that the question whether the legislative intent behind the amendment was to exclude from the definition of charitable purpose any activity, which has the aim and object of providing services to trade, commerce or business, is not free from doubt. However, the court observed that there are good reasons to hold that the bar or prohibition was not with reference to the activity of the beneficiary, but the activity of the assessee under the residuary clause. It is intended to exclude an assessee who carries on business, trade or commerce to feed the charitable activity under the last limb. 28. In view of the above submission....
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....ering the validity of a statute the presumption is always in favour of constitutionality and the burden is upon the person who attacks it to show that there has been transgression of constitutional principles. For sustaining the constitutionality of an Act, a court may take into consideration matters of common knowledge, reports, preamble, history of the times, object of the legislation and all other facts which are relevant. It must always be presumed that the Legislature understands and correctly appreciates the need of its own people and that discrimination, if any, is based on adequate grounds and considerations. It is also well-settled that courts will be justified in giving a liberal interpretation in order to avoid constitutional invalidity. A provision conferring very wide and expansive powers on authority can be construed in conformity with legislative intent of exercise of power within constitutional limitations. Where a statute is silent or is inarticulate, the court would attempt to transmutation the inarticulate and adopt a construction which would lean towards constitutionality albeit without departing from the material of which the law is woven. These principles have....
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....She further submitted that by virtue of the proviso itself, it was irrelevant as to the nature or use or application or retention of the income derived from such activity. She submitted that there was a quid pro quo and, therefore, what the petitioner was doing was nothing but rendering a service. She referred to Dalmia Cement (Bharat) Limited v. Commissioner of Income-tax: 357 ITR 419 in the context of meanings of the words "cess" and "tax". She also referred to Dewan Chand Builders and Contractors v. Union of India & Others: 2012 (1) SCC 101 in the context of differentiating between a 'tax' and a 'fee'. She further submitted that a fee would necessarily involve a service element. 33. Ms Aggarwal then referred to the decision of a Division Bench of this court in G.S. 1 (supra) in some detail and attempted to interpret the same as a decision in favour of the revenue. She referred to Institute of Chartered Accountants (I) (supra) to emphasise that in finding out as to whether an activity is in the nature of trade, commerce or business, profit motive is not the sole consideration. She also emphasized that reference to the earlier decisions prior to the introduction of the proviso ....
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....fit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the proviso and the bar/prohibition will apply. 13. Reliance place by the Petitioners on Additional CIT v. Surat Art Silk Cloth Manufacturers Association: (1980) 121 ITR 1 (SC) may not be fully appropriate after introduction of the first proviso as the statutory requirements were then different. Utilization of the funds or income earned whether for charitable purpose or otherwise is not relevant now in view of the first proviso and cannot be a determining factor for deciding whether the Petitioner institute is covered by Section 2(15) of the Act. In the said decision, it was held that the primary or dominant purpose of the trust or institution has to be examined to determine whether the said trust/institution was involved in carrying out any act....
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.... Commissioner of Sales Tax: [1955] 2SCR 483, 493; 6 STC 627, 635 said: 'It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other.' Lord Macmillan in Madras & Southern Maharatta Railway Co. v. Bezwada Municipality (1944) LR 71 IA 113 laid down the sphere of a proviso as follows: 'The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case, the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what clearly falls within its express terms.' The territory of a proviso therefore is to carve out an exception to the main enactment and exclude something which otherwise would have been within the section. It has to operate in the same field and if the language of the main en....
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....amber of Commerce and Industry v. Commissioner of Income-tax, West Bengal I: 111 ITR 514 (Cal.). In that case, a Division Bench of the Calcutta High Court observed as under:" "If we apply the tests laid down by Mr. Justice Krishna Iyer to the instant case, we find that the trustees have acquired land, they have constructed a house on the land and portions of the house have been let out by them. They derive rents regularly and 75 per cent. of the rents after meeting various expenses are handed over to the chamber for its objects of general public utility. On these facts, in view of Mr. Justice Krishna lyer's tests, it cannot be said that the advancement of the object of general public utility does not involve activity for profit." 38. On the basis of the above observations, Ms Aggarwal submitted that even though the said decision was prior to the introduction of the proviso to Section 2(15) of the said Act, the Calcutta High Court had held that because the said trust derived rents regularly and 75% of the rents, after meeting various expenses, were handed over to the said chamber for its objects of general public utility, the same could not be regarded as an activity....
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....ion 10 reads as under:" "10. Incomes not included in total income. - In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included" xxxx xxxx xxxx xxxx xxxx (23C) any income received by any person on behalf of - xxxx xxxx xxxx xxxx xxxx (iv) any other fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States; or xxxx xxxx xxxx xxxx xxxx "2. Definitions.-In this Act, unless the context otherwise requires,- xxxx xxxx xxxx xxxx xxxx (15) "charitable purpose" includes relief of the poor, education, medical relief, Preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility; Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if i....
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....of monuments or places or objects of artistic or historic interest". Insofar as the present case is concerned, we are concerned only with the advancement of any other object of general public utility, which has been regarded as a residuary object. Rule 2C specifies the "prescribed authority" as the Chief Commissioner or the Director General to whom an application is to be furnished under Section 10(23C)(iv) or (v) by a fund, trust or institution. The form of application has been specified as Form No.56. Once such an application is made, the prescribed authority [in this case, the Director General of Income-tax (Exemptions)] has to determine the eligibility for granting approval to an institution for the purposes of exemption stipulated in Section 10(23C)(iv). We have noted that prior to the introduction of the proviso to Section 2(15) of the said Act, the DGIT(E) had, in fact, granted such an exemption on 01.05.2008. But, subsequently, from assessment year 2009"10 onwards, by virtue of the order dated 23.02.2012, the exemption earlier granted was withdrawn. The said withdrawal of exemption was confirmed by the impugned order dated 23.01.2013 passed under Section 154 of the said Act....
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....erce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a 'cess' or 'fee' or any other consideration, income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retention of such income is irrelevant for the purposes of construing the activities as charitable or not. 45. To be clear, if an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. We have seen that by virtue of Section 25 of the Companies Act, the petitioner is enjoined to plough back its income in furtherance of its object and the declaration of dividends is prohibited. If a literal interpretation is to be given to the proviso, then it may be concluded that this fact would have no bearing on determ....
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.... for charitable purposes? The fact that it derives income does not, in any way, detract from the position that it is an institution established for charitable purposes. Therefore, in our view, merely because the petitioner derives rental income, income out of sale of tickets and sale of publications or income out of leasing out food and beverages outlets in the exhibition grounds, does not, in any way, affect the nature of the petitioner as a charitable institution if it otherwise qualifies for such a character. 47. We have already noted that prior to the amendment being introduced with effect from 01.04.2009, the petitioner had been recognized as an institution established for charitable purpose and this had been done having regard to the objects of the institution and its importance throughout India. It is only because of this that the petitioner had been granted the exemption by the respondent for the period prior to assessment year 2009"10. Therefore, insofar as the receiving of income is concerned, that cannot be taken as an instance to deny the petitioner its status as an institution established for charitable purposes. Because, if that were to be so, then there would be n....
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.... very broad and extended definition of the term "business" was not intended for the purpose of interpreting and applying the first proviso to Section 2(15) of the Act so as to include any transaction for a cess, fee or consideration. The Court specifically held that:" "An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case activity may be regarded as a business even when profit motive cannot be established / proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business." 49. In Bureau of Indian Standards (supra), this court, while considering whether the activities of the Bureau of Indian Standards (supra) in granting licences and trading certificates and charging of fee amounted to carrying on business, trade or commerce, held as under:" "73. ... I....
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....ity 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 Act can be understood from the Budget Speech of the Finance Minister while introducing the Finance Bill 2008. The relevant extract to the Speech is as under:" '....... "Charitable purpose" includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under "charitable pur....
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....e on salaries and depreciation exceeds the surplus as generated from holding coaching classes. In addition, the petitioner institute provides study material and other academic support such as facilities of a library without any material additional costs. The Supreme Court in the case of State of Andhra Pradesh v. H. Abdul Bakhi and Bros. (supra) held as under: "The expression "business" though extensively used a word of indefinite import, in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure." (Underlining added) 72. There is nothing on record to indicate the assertion of the petitioner that its activities are not fuelled by profit motive is incorrect. Absence of profit motive, though not conclusive, does indicate that the petitioner is not carrying on any business." 53. From the said decision, it is apparent that merely because a fee or some other consid....
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.... assesses, who are engaged in commercial activities, i.e., carrying on business, trade or commerce, in the garb of 'public utilities' to avoid tax liability as it was noticed that the object 'general public utility' was sometimes used as a mask or device to hide the true purpose, which was 'trade, commerce or business'." From this, it is evident that the introduction of the proviso to Section 2(15) by virtue of the Finance Act, 2008 was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It was not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts 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. 56. In G.S. 1 (supra) it was contended by the r....
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....fee to use the coding system and to avail the advantages and benefits therein is neither reflective of the business aptitude nor indicative of the profit oriented intent". The court further observed:- "Thus the contention of the revenue that the petitioner charges fee and, therefore, is carrying on business, has to be rejected. The intention behind the entire activity is philanthropic and not to recoup or reimburse in monetary terms what is given to the beneficiaries. Element of give and take is missing, but decisive element of bequeathing is present. In the absence of "profit motive" and charity being the primary and sole purpose behind the activities of the petitioner is perspicuously discernible and perceptible. The court also held:- "27. As observed above, fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self"sustaining in long-term and should not depend upon governme....