TaxTMI 
TaxTMI 
2016 (5) TMI 199
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....48 was issued on the ground that: i. That the corporation is not eligible for exemption u/s. 11; ii. Provision of gratuity of Rs. 3,40,11,894/- was not allowable; iii. Provision for leave salary of Rs. 2,09,20,086/- was not allowable; iv. Loss on sale of fixed assets being capital in nature of Rs. 6,615/- is not allowable; 3. Coming to the facts and details of the case, the AO denied exemption u/s. 11 for the reasons mentioned below: (a) That Section 2(15) of the IT Act, 1961 denotes that, 'Charitable purposes 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 it involves the carrying on of 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, for a cess or fee or any other consideration, irrespective of the nature of use or application,....
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....normal trade or business. (f) The distributions of all levy commodities are to be done according to the instructions of the Government which is again not in general trade or business. (g) Therefore, calling the activities of the assessee as normal business activities is totally incorrect and without any evidentiary value. (h) The objects of the assessee are Charitable in nature and as such it had been claiming its Income if any, (though actually belongs to Government) as exempt under sec. 11 of the Income tax Act. (i) Further during the year under consideration, the organization's gross receipts are of Rs. 4249.11 cr and the net profit is Rs. 4.67 cr. The gross receipts includes sales of Rs. 2144.46 cr and the subsidy, of Rs. 2102.65 cr, without which there would have been heavy losses: Subsidy on PDS 1959.04 cr Subsidy on Rice 3.74 cr Subsidy on others (NNM) 3.85 cr Subsidy on others (RGDALL,Poil) 136.02 cr Total Subsidy 2102.65 cr (j) Thus the activities of the assessee are unlike an ordinary business man or trader but are in the nature of relief to the poor and therefore "charitable" and eligible for exemption of income u/s 11 of the Act. (....
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....ularly if generating "surplus" is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature. " Further, the above same view was upheld by the Hon'ble tribunal in the case of [2014] 160 TTJ (Hyd) 771 The Institute & Electronics Engineers Inc. Vs Director of Income Tax (Exemption): Charitable Trust - Registration U/s.12AA - Charitable purpose vis-a-vis profit motive - object of the assessee being in the nature of charitable activities, registration U/ s.12AA cannot be denied on the ground that some profit has been earned by assessee, so long as provisions of 55. 11, 12 and 12AA are complied with and there is no violation of S. 13 - After the omission of the clause "not involving carrying any activities of profit" from s. 2 ( 15) by the Finance Act, 1983 w.e.f 1st April, 1983, the element of profit cannot be excluded from the definition" Charitable purpose". Relying on the above case laws the appellant pleaded for exemption u/s. 11 of the I.T. Act, 1961. 5. After considering the detailed submissions of assessee, Ld. CIT(A) has held in favour of assessee stating as under: "5. The appellant....
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.... or business; or (b) any activity of rendering any service in relation to any trade, commerce or business; for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity. 2. The following implications arise from this amendment - 2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities. 2.2. 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on ....
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....3.2. In the final analysis, however, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business. 5.2 As evident from the clarification given in Circular no.11 dated 19.12.2008, it is amply clear that this provision was brought into Act w.e.f. 01.04.2009 to prohibit certain industrie....
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.... and sale of essential commodities like rice, wheat, LPG Gas, Sugar, Oil, Kerosene etc. at the prices fixed by the government and in turn gets subsidy and commission from the government and therefore it is trading/ business with a motive to earn profit. 3. The learned CIT(A) has not discussed the issue of quality of rice, wheat, oil etc. being supplied through the PDS system and the amount of benefit that is passed on to the consumer/beneficiary. It is well known fact that the essential commodities supplied through PDS are of poor quality and are available at the same price in the open market. Therefore, there is no advancement of any object in the interest of general public. 4. The learned CIT(A) has erred in not discussing the issue of utilization of subsidy given by state government in purchasing the essential commodities to be supplied through PDS system by the assessee corporation. As these facts have not been brought on record, it is concluded that the subsidy amount has not been utilized for advancement of any other object of general public utility. Hence the assessee is not eligible for claim u/s 2(15). 5. The learned CIT(A) erred in ignoring the fact that assessee....
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....r economically carried on unless it is carried on business principles. This is all that the ancillary and incidental objects spell out. Even assuming that any declaration of dividends was permissible under clause 28 of the Memorandum of Association as it stood before amendment, the dividend would go in its entirety to the Government, i.e., it goes to the public and consequently there would be no chance of any element of private gain, if by private gains it is meant that the gain ensure for individuals other than "State". Even if dividends are to be declared, if its utilisation is for public purposes, the entity does not lose its character of charitable nature. The assessee was set up by assets transferred to it by the Government. It is only in the fitness of the things that in the event of the assessee company being wound up, whatever assets are left out of those which are received on transfer initially together with accretion thereto should revert to the Government which had transferred its own assets to the assessee company for setting up. Therefore, on the facts, the distribution of assets in the present case is only a return of the asset to the government with whose assets the ....
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....rovision even in the Articles of Association for providing the manner and method in which the profits earned by the Corporation are to be utilized. It was the case of the Revenue that the very fact that the assessee-Corporation is entitled to make the profits makes its activities as business activity. It was Contended that the Civil Supplies Corporation indulges in pure and simple trading activity in the food grains like any other businessman. The Tribunal lightly pointed out, of course, relying upon the Supreme Court Judgment referred to above that no activity can be efficiently, properly, adequately or economically carried on unless it is carried on business principles. Mere provision in the memorandum of articles of association providing as to how the profits if any earned by the assessee-corporation are to be utilized itself shall have no bearing upon the question as to whether the assessee is a charitable one or not. The reasoning of the Tribunal, in our considered opinion, is neither perverse nor vitiated. At any rate, there is nothing on record to suggest that the Corporation made any profits as such. Even otherwise, the Tribunal noticed that the expression 'not involvin....
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....t of subsidy being provided by the then Government of Andhra Pradesh. Without the subsidy the Corporation cannot survive. The sale price is less than the procurement price. This activity no way can be considered as trading activity. Whereas in the case of a trader or an ordinary business man sale price generally will be more than cost and there can not be rate fixed by government. Therefore, calling the activities of the assessee in the nature of an 'ordinary business man does' is totally incorrect and without any evidentiary value. 12. Further during the year under consideration, as submitted the organizations gross receipts are of Rs. 4249.11 cr and the net profit is Rs. 4.67 cr. The gross receipts includes sales of Rs. 2144.46 cr the following subsidies, of Rs. 2102.65 cr without which there would have been heavy losses: Cr. Subsidy on PDS 1959.04 Subsidy on Rice 3.74 Subsidy on others (NNM) 3.85 Subsidy on others 136.02 Total Subsidy 2102.65 Thus, the activities of the assessee are unlike an ordinary business man or trader but can be considered in the nature of relief to the poor and therefore "charitable" and eligible for exemption of income u/s 11....
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....ch income by the concerned entity, it is essential that one should render any service in relation to any trade, commerce or business for a fee or cess or any other consideration and since assessee is neither a service organization nor rendering any services, this part of amendment is also totally not applicable to the case. 15. Some of the settled case laws in favour of assessee : a) Surat Art Silk Cloth Mfrs. Association 130 ITR 28 (SC) wherein held 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 arise from the activity". b) SABARMATI ASHRAM GAOUSHALA TRUST vs ASSISTANT DIRECTOR OF INCOME TAX (EXEMPTION) (Ahd)(Trib.) 95 ITR 409 "Assessee carrying on commercial activity, not with profit earning motive but as incidental to fulfillment of its charitable objects, was not hit by proviso to Sec 2(15) so as to suffer denial of exemption U/s 11". Held: "The proviso to Sec 2(15) is applicable only in relation to last limb of the definiti....