TaxTMI 
TaxTMI 
2016 (5) TMI 812
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.... the facts of the case are that the assessee, a society, is a body working under the Department of Space, Government of India. The main objective of the assessee is to undertake, aid, promote, guide and coordinate research and development in the field of semiconductor technology, micro-electro mechanical system and process technologies relating to semiconductor processing as per the Memorandum of Association and rules and regulations of the society. During the assessment proceedings, the Assessing Officer noted that the assessee had made certain purchases and sales and so he was of the view that the activities of the society were not of charitable nature. According to him, the sales were made at lower rates and so provisions of section 40A(2)(b) of the Income Tax Act, 1961 (in short 'the Act') were also attracted. The reply of the assessee was that it was a public utility concern falling under the Department of Space and products being developed were for specific requirement of various government departments. It was submitted that the assessee was not a profit making concern or rendering any trade or business with profit making as an objective in relation to any trade, comm....
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....rdingly, he held that the Assessing Officer was not right in taxing the surplus of Rs. 3,27,80,000/- by denying the exemption under section 11 of the Act to the assessee. In the passing, he also mentioned that the observations of the Assessing Officer that the assessee did not provide any documentary evidence to the effect that the activities done by the assessee during the year were of charitable nature, is not relevant for the reason that the assessee was granted registration under section 12A of the Act by the Commissioner of Income Tax on the ground that the activities of the assessee were covered within the meaning of "charitable purpose", as defined in section 2(15) of the Act. Further, he observed that the view of the Assessing Officer that the sales were made at lower rates is not relevant because the sales are made only to the Government Department. Moreover, the provisions of section 40A(2)(b) of the Act do not apply to sales. In this way, the learned CIT (Appeals) allowed the appeal of the assessee. 6. Aggrieved by this, the Revenue has come up in appeal before us. The learned D.R. during the course of hearing before us, submitted that the fact the assessee is register....
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.... In fact, the books of account maintained by the assessee may be treated as separate books of account. In respect of the allegation of the Assessing Officer that the sales were made at lower rate to the sister concern, he submitted that the assessee being an autonomous body of Department of Space, Government of India is not a business organization working for profit so as to compare its strategic devices as any other profit making business organization. Its prices are not comparable in the market since the products manufactured by the assessee being for the strategic need of the nation are not available in the commercial or open market. The allegation of the Assessing Officer that the society or departments to whom the assessee had made sales were also making claim of exemption under section 11 of the Act, is also mis-conceived as the products are being supplied to various Government Departments and others are not in fact claiming exemption under section 11 of the Act. 8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that for the year....
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....ered under section 12AA of the Act. Section 12AA provides for the procedure for registration of a trust or institution by the Commissioner of Income Tax. Section 11 of the Act provides for the definition of income from property held for charitable of religious purpose, which are basically the exemption provision, whereby an entity registered under section 12AA of the Act can avail exemption on the 'income from property held for charitable purpose', subject to the provisions of section 11 of the Act. Sub-section (1)(1A), (2), (3) and (4) are provisions with respect to the various conditions to be fulfilled by an assessee to avail exemption of any income derived by him from the property held for charitable purposes. All these sub-sections talks about the exemption of income subject to respective conditions provided therein. Sub-section (4) to section 11 is an exception to all these provisions and reads as under : "(4A) Sub- section (1) or sub- section (2) or sub- section (3) or sub section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of ....
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....of the Act as it stood from its inception, reads as follows : "2(15) "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility ]" 16. The charitable purpose always included the activities related to the relief of the poor, education, medical relief and advancement of any other object of general public utility. The activities related to the preservation of the environment and preservation of monuments or places or objects of artistic or historic interest were added to the charitable purpose by Finance (No.2) Act, 2009 with retrospective effect from 1.4.2009. The term 'yoga' was inserted by the Finance Act, 2015 with effect from 1.4.2016. 17. First proviso to the said section was added by the Finance Act, 2008, which reads as under: "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....
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....ity to check these conditions at the time of granting exemption under section 11 of the Act even if the assessee is laced with the registration under section 12A of the Act. 20. In the present case, the only objection of the Assessing Officer in raising the proviso to section 2(15) of the Act is that the assessee is engaged in sale and purchase. Now the question arising before us is whether selling and purchasing of certain things amount to carrying of business so as to disentitle assessee the exemption under section 11 of the Act. Though a number of judgments were cited by both the sides, we would like to refer to the judgment of Delhi High Court in the case of India Trade Promotion Organisation Vs. DGIT (2015) 371 ITR 333 (Del), whereby the question was the constitutional validity of amendment to section 2(15) of the Act by inserting the said proviso. While adjudicating the issue the Hon'ble Court though held the proviso to section 2(15) of the Act to be not ultra-virus the constitution, however a 'reading down' of the proviso was advised by the Hon'ble Court. It has been very categorically held in the judgment that in pursuance of the provisions of this proviso ....
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....ose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes." 21. Undisputedly, the judgment was rendered in the context of section 10(23C) of the Act. However, the proposition laid down by the Court are equally applicable for exemption under section 11 of the Act. Now the position emerging is that while deciding whether an assessee is engaged in the activity in the nature of trade, commerce or business to come under the ambit of proviso to section 2(15) of the Act in the context of exemption under section 11, we have to see the prime objective of the assessee while carrying out these activities. If the prime objective is profit making than the assessee would be caught under the provisions of this proviso. However, if the activities are not driven primarily to earn profit but primarily to do charity then exemption will be available to the assessee in question. In such a scenario, the profit making activity may be incidental to the attainment of its object of general pub....
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....igible for exemption under section 11 of the Act, meaning thereby that even if the assessee was earning any profit out of business carried on by it, the same was exempt under section 11 of the Act on the basis of the fact that the same was applied for charitable purposes. However, proviso to section 2(15) of the Act changes the scenario in the sense that it in fact carves out from the ambit of charitable purposes, those activities being of business in nature, irrespective of its application, whether for charitable or for charitable purpose. Here the mandate of Delhi High Court in the case of India Trade Promotion Organization (supra) of reading down the proviso comes into play, whereby one has to look to the dominant object of the assessee, whether it is to do charity or to do business. This implicitly allows the carrying of charitable activities and business hand in hand, subject to the conditions provided herein. This also explains the purpose of presence of sub-section (4A) to section 11, even after the insertion of proviso to section 2(15) of the Act. 24. Further, in the present case there is another clause No.60 in its Memorandum of Association, which reads as under : "60. ....