TaxTMI 
TaxTMI 
2016 (5) TMI 199
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....ed u/s. 143(1). Subsequently, a notice u/s. 148 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 ....
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.... or an ordinary business man all these issues does not exist. (e) The purchase quantity and rates are fixed by the Govt. which is not a case of 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 th....
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....se of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself not be the sole consideration for judging whether any activity is trade, commerce or business particularly 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" Charit....
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....fourth limb of the definition of 'charitable purpose'. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states 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 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 welf....
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....ll 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 such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15). 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 thei....
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....itself in a commercial manner so that it can sustain itself, that does not mean the corporation is doing business activity. The primary purpose and objective of the very existence of the Corporation is to supply essential commodities to the needy, poor, therefore, fall within the ambit of section 2(15)". 6. Aggrieved Revenue has raised the following grounds: "2. The learned CIT(A) erred in ignoring the fact that assessee-company is involved in purchase 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 err....
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....der: "The Memorandum of the assessee in item III has made a bifurcation between the main objects sub-division (a) and objects incidental or ancillary to the attainment of the main objects sub-division (b). Clause 28 falls in sub-division(b). The Memorandum itself describes the clause as an object incidental or ancillary to the attainment of the main objects. Merely because a profit resulted, the object does not cease to be charitable. No activity can be efficiently, properly, adequately or 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 as....
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....v. APSRTC and also another decision rendered by t.h.is Court in GIRIJAN COOPERATIVE CORPORATION LIMITED v. COMMISSIONER OF INCOMETAX. The findings so recorded by the Appellate Tribunal, in our considered opinion, are not vitiated for any reason whatsoever. The Appellate TribW1al did not commit any error in upholdi.i1g the plea of the assessee that the main and dominant object of the assessee-Civil Supplies Corporation is a charitable one. The Tribunal adverted to the point urged by the Revenue that there is a provision 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 princi....
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....l subsidies given by the Govt. and is a Corporation governed and controlled by the Govt. of A.P{then}. The main activities of the Corporation are purchase/procurement, storage and distribution essential commodities to the poor and needy people of the society in general. The Corporation is dealing in levy items like rice, edible oils, sugar etc. The Assessee Corporation has been carrying out its object of distribution of essential commodities to the people particularly to the poorer section of the society at lower prices with the support 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. 424....
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....any other object of general public utility and the above two conditions ie., (a) and (b) exist. As far as the first condition is concerned it is not in trading and it is a decided fact before various appellate authorities that the activities of the organization are charitable and hence the said proviso is not applicable. As far as the second condition is concerned ie. 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, 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 ....