TaxTMI 
TaxTMI 
2015 (7) TMI 521
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....Research activities between the Technocrats and Users of Information Technology in the Banking and Financial Sectors. (d) To establish and maintain data bank, libraries and information services. (e) To initiate, establish and participate in collaborative activities with other researchers and institutions/organization within and outside the country. (f) To sponsor, conduct/organize teaching and training programmes, conferences, seminars, lectures and similar other activities on subjects of relevance to the society." 3. For the assessment year 2011-12, the Appellant society filed the return of income on 29th September, 2011 declaring 'NIL' income after claiming exemption under the provisions of Section 11 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' - in short). After processing the said return of income under the provisions of Section 143(1) of the Act, the case was selected for scrutiny assessment and final assessment was passed under Section 143(3) of the Act vide Order dated 03.02.2014 at a total income of Rs. 18,06,84,275/- after denying the exemption u/s. 11 of the Act. The claim of the Appellant society before the Assessing Officer was that it has ....
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....rounds of appeal: GROUNDS OF APPEAL (1) The CIT(A) erred in facts and law while passing the order. (2) The Learned CIT (A) has erred in holding that the activities of the assessee fall within the purview of the proviso to section 2(15) of Income Tax Act, 1961 ignoring the fact that activities of the assessee fall within the purview of 'imparting education' and 'research' in Banking Technology which is very much within the first three limbs of section 2(15) of the Income Tax Act, 1961. (3) The Ld. CIT (A) has erred in concluding that the assessee is ineligible for the claim of exemption u/s. 11 even though the activities of the society are charitable in nature and are in line with the objectives of the society having got registered u/s. 12AA of the I.T. Act, 1961. (4) The Ld. CIT(A) has erred in computing the income on mercantile basis instead of cash basis which is followed by the assessee consistently since A.Y. 1997-98 and as required for Sec. 12AA institutions. The Ld. CIT (A) erred in not appreciating that the assessee has filed the details of its Receipts and Payments along with income and expenditure account before the Assessing Officer. (5) The Ld. CIT(A) has er....
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....ment Association [2014] 366 ITR 85. 7. On the other hand, the Ld. Principal CIT/DR argued that the proviso to Section 2(15) is clearly applicable to the Appellant society as the Appellant Society is engaged in rendering of services to trade and commerce and therefore, she urged upon that the orders of the lower authorities should be upheld. 8. We heard the rival submissions and perused the material on record. In this case, the question that comes up for adjudication by us is whether the appellant society is engaged in the activities which are in the nature of educational or advancement of any other objects of general public utility. If the activities of the appellant society fall within the ambit of expression "education", then clearly the proviso to Section 2(15) of the Act is not applicable. Therefore, it is necessary to consider the objects of the Appellant society. The objects of the appellant society are extracted supra. From those stated objects, it is abundantly clear that the primary objects of society is to promote study, dissemination of knowledge and conduct research in the area of Information and Technology Service in Banking Business and financial sectors. The Appell....
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....communication network. The committee also suggested setting up of an Information Technology Institute for the purpose of Research and Development as well as Consultancy in the application of technology to the Banking and Financial sector of the country. As recommended by the Committee, the Institute for Development & Research in Banking Technology [IDRBT] was established by the Reserve Bank of India in March 1996 as an Autonomous Centre for Development and Research in Banking Technology." 9. Now the issue that comes up for consideration is whether those objects fall within the definition of the term 'education' appearing in Section 2(15) of the Act. The term 'education' has not been defined by the provisions of the Income Tax Act, 1961. The term 'education' had come up for interpretation before the Hon'ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. Commissioner of Income-Tax, Mysore - 101 ITR 234 held as under at page 241: "............The sense in which the word "education" has been used in section 2(15) in the systematic instruction, schooling or training given to the young is preparation for the work of life. It also connotes the whole course of sc....
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....rt in the case of Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association 121 ITR 1, which held as under vide pages Nos.11 and 12: "..........The law is well settled that if there are several objects of a trust or institution, some of which are charitable and some noncharitable and the trustees or the managers in their discretion are to apply the income or property to any of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempt from tax. In other words, where the main or primary objects are distributive, each and everyone of the objects must be charitable in order that the trust or institution might be upheld as a valid charity-Mohammed Ibrahim Riza v. CIT [1930] LR 57 IA 260 and East India Industries ( Madras)Pvt. Ltd. v. CIT [1967] 65 ITR 611. But if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity- CIT v. Andhra Chamber of Commerce [1965] 5....
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....own in the above cases is that in the case of entity or organization whose objects are several, some of which are charitable and non-charitable; the test of predominant object for which the organization was set up is alone to be applied. Therefore, in the present case, the research and development in the Information Technology in the Banking Sector is the prime object for which the Appellant society was created by the Reserve Bank of India as evident from the genesis of the organization. Offer of M.Tech course, Ph.D. programmes are only incidental for attainment of main objects of the organization. The primary object of promoting the technology in banking and financial sectors does not fall within the ambit of expression 'education' as defined above, since the said activity does not involve systematic instruction, schooling or training given to the young in preparation for the work of the life. The projects undertaken and the research activities by the Appellant society are only aimed at improvement of technology in Indian Banking and Financial sectors. As a result of developments in these areas, society at large shall be benefited and shall promote the welfare of general public. T....
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....such activity: "[Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [twenty-five lakh rupees] or less in the previous year;]" The scope of the proviso was explained by the CBDT in its Circular No.11 of 2008, dated 19.12.2008, as follows : "Departmental circular.-1. Definition of "Charitable purpose" under section 2(15) of he Income-tax Ac, 1961---reg.--- 'Section 2(15) of the Income-tax Act, 1961 ("he Act"), defines "charitable purpose" to include the following:-- (i) relief of the poor (ii) education (iii) medical relief, and (iv) the advancement of any other objection of general public utility. An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of "charitable purpose". Therefore, section 2(15) was amended, vide Finan....
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....h an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under "any other object of general public utility". Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if suc....
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.... 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 use or application of the income from such activity, or the retention of such income, by the concerned entity. This amendment will take effect from the 1st day of April, 2009 and will accordingly apply in relation to the assessment year 2009-10 and subsequent assessment years.' 12. A reference can be made to the following extract from the Speech of the Minister of Finance on 29.02.2008:- "180. '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 income have sought to claim that their purpose would also fall under 'charitable purpose'. Obviously, this way not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Ge....
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.... which are purely commercial or business in nature or the commercial business entities, which wear the mask of a charity. The genuine charitable organizations are not affected in any way. It was further clarified that Chambers of Commerce and similar organizations rendering service to its Members could not be affected by introduction of the proviso. We, therefore, are required upon to find out whether the objects of the Appellant society are commercial or business in nature. Keeping this in mind, it is to be examined what is meant by the expression "commercial or business". The words 'trade', 'commerce' and 'business' were enumerated and elucidated in Institute of Chartered Accountants of India v. Director-General of Income-tax (Exemptions) [2012] 347 ITR 99 (Delhi) as under (page 113): "Trade, as per the Webster's New Twentieth Century Dictionary (2nd edition), means, amongst others, "a means of earning one's living, occupation or work. In Black's Law Dictionary, "trade" means a business which a person has learnt or he carries on for procuring subsistence or profit ; occupation or employment, etc. The meaning of "commerce" as given by the Concise Oxford Dictionary i....
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....ome real, substantive and systematic course of activity or conduct with a set purpose. The second essential characteristic is profit motive or capable of producing profit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure (Bharat Development P. Ltd. v. CIT [1982] 133 ITR 470 (Delhi)). The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And, lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction.' In the said case reliance and reference was made to State of Punjab v. Bajaj Electricals Ltd. [1968] 2 SCR 536, Khoday Distilleries Ltd. v. State of Karnataka [1995] 1 SCC 574, Bharat Development (P) Ltd. v. CIT [1982] 133 ITR 470/[1980] 4 Taxman 58 (Delhi), Barendra Prasad Ray v. ITO[1981] 129 ITR 295/6 Taxman 19 (SC), State of Andhra Pradesh v. H. Abdul Bakhi & Bros. [1964] 15 STC 664 (SC), State of Gujarat v. Raipur Mfg. C....
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....less to say that the activities of the appellant society are not in the nature of commercial, or business. When the main objects of the appellant society are not business, the incidental activity, which is pursued for attainment of the main objects, cannot be called "business", merely because the appellant society renders services against payment as fees or cess, even if resulting in profit. The Hon'ble Apex Court in the case of CIT vs. Andhra Chamber of Commerce - (1965) 55 ITR 722 - laid down the principle that if the primary purpose of institution was advancement of objects of general public utility, it would remain charitable, even if some incidental or ancillary activity or the purpose for achieving the main purpose, was profitable in nature. It was held as follows : "That if the primary purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose, e.g. promotion of or opposition to legislation concerning that purpose was contemplated." It was only for the purpose of securing its primary aims that it was mentioned in the memorandum of association that the Chamber migh....
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....n the incidental or ancillary activity is established. In such cases, the onus of proof of an independent intention to carry on "business ": connected with or incidental or ancillary sales will rest on the Department. Thus, if the main activity of a person is not trade, commerce etc., ordinarily incidental or ancillary activity may not come within the meaning of "business". In the recent decision which deals specifically with the newly amended section 2(15) of the Act, in the case of Institute of Chartered Accountants of India v. Director General of Income-tax (Exemptions) [2012] 347 ITR 99/202 Taxman 1/13 taxmann.com 175 Delhi HC, laying down the very same principle held as under: "that the fundamental or dominant function of the Institute was to exercise overall control and regulate the activities of the members/enrolled chartered accountants. A very narrow view had been taken that the Institute was holding coaching classes and that this amounted to business. " In another case, the Hon'ble Delhi High Court in the case of ICAI Accounting Research Foundation & anr. Vs. Director General of Income-tax (Exemptions) & Ors. - (2010) 321 ITR 73, after referring to the judgment of....
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.... relation to any trade, commerce or business" imply that the intention of the legislature was to make the latter part of the exception broad and inclusive. It seems that the exception (the first proviso) is intended to catch with its ambit any and all commercial activity, except what falls within the second proviso (which bars application of the exception in cases where the aggregate value of the receipts from the activities mentioned therein is less than ten lakh rupees in the relevant previous year). The Bureau, it would appear at the first blush, renders service in relation to trade, commerce or business by granting certification/quality marks in return of license fee. Apparently, Parliament intended to clarify that not all activities of State agencies (some of which might be set up to carry on trading and commercial activities) can be considered charitable. This can be gathered from the Notes on clauses attached to the Finance Bill, 2008: "Government feels that claim of status of 'charitable organisation' by the organisations carrying out activities on commercial lines is contrary to legislative intention. Finance Bill, 2008 seeks to amend section 2(15) w.e.f. ....
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....so does not seek to disqualify charitable organization covered by the last limb, when a token fee is collected from the beneficiaries in the course of activity which is not a business but clearly charity for which they are established and they undertake." Again, the Hon'ble Delhi High Court in the case of India Trade Promotion Organization vs. Director General of Income-tax (Exemptions) & Ors. [2015] 371 ITR 333, held vide para 58 as follows:- "58. In conclusion, we may say 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 of 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 provi....
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....ature of business, is emerging from this proviso also. In other words, the proviso will not give rise to any new controversy which had not been in the past. The further words used in the proviso, that for a cess or fee or any other consideration, have to be read along with the nature of activities, i.e., trade, commerce or business. When an institution is carrying on activities in the nature of trade, , commerce or business obviously it will be charging fee, etc. It may be charging fee even when rendering/providing services as part of charitable activity in order to supplement its income for carrying on charitable activities. In that case the proviso will not have any implication as the activities would not be in the nature of trade, commerce or business. Accordingly, the proviso inserted in the definition of 'charitable purpose' will not substantially have any impact on the meaning of charitable purpose. 16. The circumstances under which the services rendered by the appellant society to the Banks make clear that there is no profit motive in such activities because these activities were entrusted to the appellant society by the Reserve Bank of India as a part of its superv....
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....the profit. Please refer to the judgments rendered by the Hon'ble Apex Court in the cases of Addl. CIT vs. Surat Art Silk Cloth Manufacturers' Association [1980] 121 ITR 1 and CIT v. A.P. State Road Transport Corporation [1986] 159 ITR 1. The Hon'ble Supreme Court in the case of CIT v. A.P. State Road Transport Corporation held as under: ".......It is now firmly established by the decisions of this court in Surat Art Silk Cloth Manufacturers Association's case [1980] 121 ITR 1 (SC) and Bar Council of Maharashtra's case [1981] 130 ITR 28 (SC), that the test is "What is the predominant object of the activity-whether it is to carry out a charitable purpose or to earn profit?" If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity." The ratio in the above case was again followed by the Hon'ble Supreme Court in the case of Thiagarajar Charities v. Addl. Commissiner of Income-tax & another 225 ITR 1010 and A.P. High Court in the case of Girijan Co-operative Corporation Ltd. v. Commissioner of Income-tax 178 ITR 359. 18. Recently, the Hon'ble Su....
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....next ground of appeal relates to the disallowance of prior period expenses of Rs. 1,26,807/- and deferred tax liability of Rs. 5,01,728/- and provision for income-tax of Rs. 4,63,00,000/-. It appears the A.O. has disallowed these expenses on the ground that appellant society was not entitled to exemption under the provisions of Sec. 11 of the Act. In the preceding para, we already held that the appellant society is entitled for exemption under the provisions of Section 11 of the Act. Once it is held that the appellant society is eligible for exemption u/s. 11 of the Act, as a logical corollary, the income of the appellant society has to be computed on commercial principles as held by the Hon'ble Supreme Court in the case of CIT v. Programme for Community Organization (2001) 248 ITR 1. If the commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the appellant society for charitable purposes in the earlier year against income earned by the appellant society in the subsequent year will have to be regarded as application of income of the appellant society for charitable purpose in the subsequent year in which suc....
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....e is also no dispute that the assessee has shown all the receipts in income-expenditure account and claimed various expenses in its computation of income, while declaring excess of income over expenditure. It is also not in dispute that the income of the assessee-trust has to be computed with reference to the provisions of sections 11 and 13. Therefore, the principles governing the computation of income under the head "Business" may not apply to the computation of income under the above provisions, since the income of a charitable institution has to be computed under ordinary principles of commercial accounting, and depreciation has to be allowed on depreciable assets held by a charitable institution to arrive at the income of 75 per cent. (now 85 per cent.) which is required to be applied for charitable purpose. In the decision of the hon'ble Supreme Court in the case of Escorts Ltd./J.K. Synthetics Ltd. (supra), the hon'ble Supreme Court was to consider the issue wherein the depreciation was also claimed on an asset which was claimed as a deduction while using for research, as "capital expenditure on scientific research". On those facts, the hon'ble Supreme Court held....
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....y been discussed by the hon'ble Delhi High Court in the case of Vishwa Jagriti Mission (supra) and took a over view of the existing decisions on the issue while holding as under : "11. The Revenue is in appeal against the aforesaid order of the Tribunal. We are not inclined to admit the appeal and frame any substantial question of law since none arises from the order of the Tribunal. There is no dispute that the assessee has been granted registration under section 12AA vide order dated September 11, 2009, and, therefore, it was entitled to exemption of its income under section 11. The only question is whether the income of the assessee should be computed on commercial principles and in doing so whether depreciation on fixed assets utilised for the charitable purposes should be allowed. On this issue, there seems to be a consensus of judicial thinking as is seen from the authorities relied upon by the Commissioner of Income-tax (Appeals) as well as the Tribunal. In CIT v. The Society of the Sisters of St. Anme, an identical question arose before the Karnataka High Court. There the society was running a school in Bangalore and was allowed exemption under section 11. The questio....
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....ove, that in computing the income of a charitable institution/trust, depreciation of assets owned by the trust/institution is a necessary deduction on commercial principles. The Gujarat High Court, after referring to the judgments of the Karnataka, Maharashtra and Madhya Pradesh High Courts cited above, also came to the same conclusion and held that the amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes. 13. The judgment of the Supreme Court in Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) has been rightly held to be inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on the business and the statutory computation provisions of Chapter IV-D of the Act were appl....