TaxTMI 
TaxTMI 
TaxTMI 
2020 (7) TMI 245
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....015, the assessee is under appeal with following grounds of appeal: - The following grounds are without prejudice to each other: 1) The Commissioner of Income Tax (Appeals) ["the CTT(A)"] erred in confirming the action of the Assessing Officer ("the AO") in rejecting the appellant's claim for exemption under section 11 and section 12 of the Income Tax Act, 1961 ("the Act") on the ground that its activities were not charitable and on the ground that the first proviso to section 2(15) of the Act was applicable. 2) The CIT(A) overlooked that the appellant was formed as a "Not for Profit Company" under section 25 of the Companies Act, 195h and was prohibited by its object clause from carrying on any activity on commercial basis. 3) The AO and the CIT(A) ought to have held that the entire history / genesis behind the formation of the appellant, the manner of and purpose behind the formation of the appellant, the fact that the appellant had been licensed by the Central Government under section 25 of the Companies Act and the tact of involvement of the Ministry of Finance and Reserve Bank of India in the formation of the appellant clearly showed that the appellant's case d....
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....ent from grounds of appeal, the assessee is primarily aggrieved by denial of exemption u/s 11 & 12 by Ld. Assessing Officer by invoking proviso to Sec. 2(15) as introduced by Finance Act, 2008 w.e.f. 01/04/2009. The provisions of Section 11 provide for exemption to certain income derived from property held under trust wholly for charitable or religious purposes. The expression 'Charitable Purpose' as defined u/s. 2(15) would include relief of the poor, education, medical relief, preservation of environment & monuments, objects / places of historic interest and advancement of any other object of general public utility. The first proviso to Sec 2(15) as introduced by The Finance Act, 2008 w.e.f. 01/04/2009 provide that the last limb i.e. '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 for any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. The proviso has two limbs and....
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....m the benefit of Sec.11 & 12 of the Act. 3.2 Another pleadings are that the assessee continue to have valid registration as Trust u/s 12AA of the Act which was granted postinsertion of proviso to Sec.2(15). The registration is subsisting and the same is never been revoked by the revenue authorities. Therefore, the assessee would be entitled to claim the exemption. 3.3 Our attention has been drawn to various documentary evidences as placed on record, to support all these arguments. A chart has been placed before us to dispel the observations of lower authorities that the assessee was charging fees with a view to earn profit while rendering certain services and therefore, it was not eligible to claim the stated benefit. As per the chart, the fees charged by the assessee has drastically been reduced by 70% from Re.1/- per transaction in AY 2010-11 to Re.0.30 per transaction in AY 2020-21 as tabulated below: - Date of Resolution Period Rate per transaction (INR) Reduction (%) From To From 1st January, 2010 (i.e from commencement of activity 31st March 2010 1 - 23rd March 2010 1SI April 2010 8th August 2010 0.8 20% 30th July 2010 9th August 2010 30th Apri....
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.... case was hit by proviso to Sec.2(15) since it was carrying out systematic commercial activities for the benefit of participating banks which led to huge value additions for these banks. There was no element of charity in assessee's activities. The Ld. CIT-DR also assailed the submissions that the assessee was created by an act of parliament and it was submitted that RBI was not its promoter. It was also submitted that core principle of forming the assessee was to assist public and private sector banks in carrying out their commercial activities involving receipts and payments by charging a fee. At the best, the activities could be for general public good and India being a welfare state, such mechanism only advances the economic activity and supports the payment system leading to economic buoyancy. However, there was no element of charity in the domain of the governance. The Ld. CIT-DR drew attention to the fact that the assessee reflected surplus of Rs. 11.50 Crores against revenue of Rs. 17.58 Crores which was in the shape of commercial fees. The Ld. CIT-DR also submitted that any person desirous of commencing the payment system may apply to RBI for an authorization under the Ac....
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....inancial institution. No objects of the company would be carried out without permission of the competent authorities and no objects were to be carried out on commercial basis. The income of the company was to be applied solely for the promotion of stated objects. No portion of income could be paid as dividend, bonus or otherwise by way of profit to its members. As per clause-XI of the Memorandum, in case of winding up or dissolution of the company, the residual surplus was not to be distributed amongst the members but were to be transferred to specified entity having similar objects. The 9 subscribers are the participating bankers who agree to subscribe one share each in the entity. The authorized share capital of the assessee has been set at Rs. 300 Crores consisting of 3 crores equity shares of Rs. 100/-each. As per Article-191, The company is specifically prohibited from distributing profits, in any manner, including payment of any dividend or remuneration to its members. 6.4 Section 25 of The Companies Act, 1956 is a special provision for registration of companies which are set up for promoting commerce, art, science, charity or any other similar useful object to promote publi....
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....perations of National Financial Switch (NFS) from the Institute of Development and Research in Banking Technology (IDRBT) on October, 15,2009. The assessee was incorporated in Dec. 2008 and it was incorporated as a Section 25 company under the Companies Act and aimed to operate for the benefit of all the member banks and their customers. Sufficient reserves were provided to assessee company so that the company could operate on high volume payment services. There were various core promoter banks for the assessee which include SBI, PNB, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC. 6.6 The main objects of the assessee company, as noted by Ld.AO, in para 4.5, are as follows: - 1. To promote the activities of bankers clearinghouse, owning, establishing operating, maintaining and consolidating payment system is for local, regional and national settlement of funds through electronic and paper based clearing systems, and related arrangements for evolving standards and procedures necessary for promoting, sound, efficient and cost-effective clearing and payment system is and to do all such acts and deeds as am necessary to ensu....
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....ee argued that it was for benefit of people at large and eligible to claim the impugned benefit. 6.9 However, the said pleas were rejected in the background of the fact that the activities of NFS was service in relation to business of all banks involved. Banks are commercial entities and the facility so provided would be huge value addition to the services of any bank to their customers in order to increase volume, business and ultimate profits of the banks. The other pleas also could not find favor with Ld. AO. 6.10 The other arguments taken by assessee were summarized in para 4.8 of the order. The assessee, inter-alia, submitted that it was a nonprofit company registered u/s 25 of The Companies Act and its income could not be distributed by way of dividend. It was granted registration u/s 12AA after seeing its no-profit activity. Further, it charges fee merely to meet the cost of operations and income so generated is incidental in nature and not with a view to generate profits. 6.11 However, the said arguments could not convince Ld. AO who opined that the assessee carried out systematic activity in the nature of business and its activities were hit by proviso to Sec.2(15). The....
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....appellant has charged Rs. 1 per transaction from customer bank. There is nothing brought on record by the appellant that the cost to the appellant per transaction Is more than Rs. 1 and hence its submission regarding cost being nominal remains unsubstantiated. ii. It was stated that there was no intention to make profit and hence its activities are charitable. In this regard it is mentioned that during the year under consideration it has received income of Rs. 17.58 crores from the business transactions out of which surplus of Rs. 11.50 crores has been generated which is nothing but profit only. Further as rightly mentioned by the assessing officer, for applicability of proviso to section 2(15), profit motive is not required to be proved. On perusal of the income and expenditure account for the year ended 31 March 2010 it is noted that the total expenditure booked is only Rs. 6.22 crores against which the surplus generated is Rs. 11.50 crores which is about 2 times. Thus, contention of the appellant that there is no profit is factually also not correct. iii. The appellant in its submissions has agreed that its objects fall in the category "'advancement of any other object....
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..... i.e. RBI and hence the activity is not for profit. In this regard it is mentioned that the Company has not been created by any Act of Parliament. There are several banks that are under the control of RBI but they are not exempt from tax. Even otherwise in the case of Entertainment Society of Goa Vs. CIT (2013) 23 ITR 549 (Mum)(Trib) it was held that ' the proviso to section 2(15) will also apply to a regulatory body or a body incorporated by Government as the section does not provide any exception under the proviso. The contention of the appellant Is therefore not acceptable. v. The appellant also stated that under section 13(2)(d), there should be inadequate remuneration or other compensation which is not the case of the appellant. In this regard it is mentioned that the AO has invoked provisions of section 13(1)(c)(ii) which says that sec. 11 shall not apply in the case of a trust if any part of its income is applied directly or indirectly for the benefit of any person referred to in subsection (3). It is not disputed that the banks to whom services have been rendered are falling within the category of persons referred to in Section 13(3). Accordingly, I agree with the AO....
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....may be." Also in the case of Chamber of Commerce Vs. CIT (1936) 4 ITR 397, Hon'ble Allahabad High Court, discussing the test for ""charity", observed that element of 'altruism' must be present i.e. to say "Before an institution can be held to be charitable there must be an element of altruism, that is to say, the beneficiaries must not be able to claim the benefit. Thus as discussed above, the appellant has failed this test also. vi. In view of the facts and legal position as discussed above, I am of the considered opinion that that the AO has rightly denied the exemption u/s. 11. It is evident that Ld. CIT(A) has, inter-alia, observed that for the applicability of proviso to Sec. 2(15), profit motive is not required to be proved. Further, the activity of NFS-ATM switch would be in the nature of rendering services in relation to business of all banks involved and facilities provided by the assessee would lead to huge value addition to the services provided by the bank to its customers. The profit motive behind such business, commerce or trade activity is not required to be separately examined and proved for applicability of proviso to Sec. 2(15). This proviso woul....
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....PCI would be a Section 25 company owned and operated by banks and that no bank or bank group can have shareholding of more than 10% and shares would be held by as many banks as possible and it was also decided that RBI would have representation on the Board. Para-32 of the Report take note of RBI's reply that RBI has not been operating the clearing system to generate income. Income generation was only incidental. RBI started the cheques processing center as a part of its initiative to build a sound cheque clearing system. A need was felt to consolidate all clearing centers under an umbrella organization to bring efficiency and standardization of procedures and practices. Further, the profits to be generated by the new company were not to be paid to the shareholders as dividend but would be used only for further development of payment system. At the time of passage of the PSS Bill, 2006 the then Hon'ble Finance Minister, inter-alia, reiterated that NPCI was a non-profit corporation and a Section 25 company and that its income would not be distributed as dividends but would be ploughed back for creation of infrastructure. He further stated that NPCI will be a public sector corpora....
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....s the leading ATM network in the country. To take an example, if a customer of Punjab National Bank (PNB) uses an ATM of State Bank of India (SBI) to withdraw Rs. 10,000, then, SBI will claim Rs. 10,000 from PNB through the payment mechanism provided by NPCI. NPCI will recover Rs. 10,001 from PNB (including its charge of Re.1) by debiting this amount to PNB and will credit Rs. 10,000 to SBI. Certain other charges and government levies are also recovered on actual basis on these transactions, which are pass-through costs. In this transaction, Re.1 is the income of the Appellant, which has gradually been reduced over the years. In case a customer of SBI uses the ATM of SBI, then, NPCI does not come into the picture. Immediate Payment Service (IMPS) This facility is stated to be a 24X7, real time, cost effective, independent retail payment service introduced by NPCI empowering customers to transfer money instantly within banks and RBI authorized Prepaid Issuers (PPls) across India. The underlying concept behind IMPS is to provide customers "any time, any place" real-time remittance access to meet their various payment needs. Using IMPS, a customer can transfer funds on real-time ba....
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....ntity at national level and RBI could provide settlement services for all the clearing systems, besides being regulator and supervisor of the payments systems. The Broad framework of the proposed new national entity was elaborated therein. The formation of national level entity would ensure uniformity of structure, operations and procedures. This entity would deploy professionally skilled competent personnel to manage and run clearing operations and pave the way for conducting all clearing functions at national level leading to better information dissemination and better customer education on various services and systems. The document also envisages drafting comprehensive legislation on payment system by way of a payment system bill. The main objective would be to establish safe, secure, sound and efficient payment system in India, matching international standards and best practices. This proposed entity would provide a robust and technologically intensive centralized system offering Electronic Clearing Services (ECS), Electronic Funds Transfer (EFT) and National Electronic Fund Transfer (NEFT) services covering the entire country and to take initiatives on ATM-switching, multi-app....
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....ce Minister, inter-alia, reiterated that NPCI was a non-profit corporation and a Section 25 company and that its income would not be distributed as dividends but would be ploughed back for creation of infrastructure. He further stated that NPCI will be a public sector corporation owned by Public Sector Banks, who will own not less than 51% in NPCI. 8.6 Accordingly, NPCI was incorporated as Section 25 Company and it was specifically provided in its Memorandum of Association that none of its objects shall be carried out on a commercial basis. The income and the property of NPCI shall be applied solely for the promotion of its objects and that no part thereof shall be paid or transferred by way of dividend, bonus or otherwise by way of profit. 8.7 The Board for Regulation and Supervision of Payment and Settlement Systems, at its meeting held on 24/09/2009, granted inprinciple authorization to NPCI for operating various retail payment systems in India. The RBI on 15/10/2009, in exercise of powers conferred under the PSS Act, 2007, granted authorization to assessee to take over the operations of National Financial Switch (NFS) from IDRBT. The assessee took over NFS operations from 14....
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....tional cost which would necessitate the charging of fees by the assessee. However, the said fact would not materially alter the primary objective for which the assessee entity was created. It is also evident that the fee charged by the assessee per transaction has drastically been reduced by as much as 70% over several years which would only bolster assessee's claim that it was not running as commercial organization and its primary motive was not to make profits. 8.11 The observation of Ld. AO that the assessee paid Service Tax of Rs. 17 Crores, in our opinion, would not be determinative of assessee's primary objective. The liability to pay service tax arose to the assessee under separate enactment in view of the fact that the assessee's activities fell within the meaning of Service as defined in Service Tax Regulations. However, the payment thereof would not bring about material change in assessee's primary objective. The assessee would naturally be bound to follow the law of land as applicable to it. 8.12 The Ld. CIT-DR has sought to equate the activities of the assessee with that of e-commerce payment system paytm. However, no substance could be found in the same since the ass....
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.... from the terms of registration certificate itself. It has clearly been mentioned in clause-4 of the registration certificate that registration u/s 12AA does not automatically exempt the income of the Trust. The question of taxability of the income of the Trust has to be examined and decided by Ld. AO based on the activities, compliance with various statutory and other requirements etc. Further, the fact that whether the assessee has actually carried out its activities as per its objects or not, could only be determined on the basis of its financial statements which would be available only at the time of framing of assessment. At the time of registration, the only thing that was required to be seen by the registering authority was that whether the objects of the trust would fall within the expression charitable purposes as defined in Sec. 2(15) or not. Whether the assessee has actually carried out its objects could only be ascertained at the time of framing of assessment by Ld. AO. Therefore, the said plea also could not be accepted. In the case law of Hon'ble Gujarat High Court in Hiralal Bhagwati V/s CIT (2000 246 ITR 188), as relied upon by the assessee, it was held that Ld. AO....
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....arn profits, but to do charity through the advancement of an object of general public utility, it would be an institution established for charitable purposes. It was also observed that merely because a fee or some other consideration is collected or received by the assessee, it would not lose its character of having been established for a charitable purpose. The dominant activity of the assessee was to be examined. If it was not business, trade or commerce then any such incidental or ancillary activity would also not fall within the categories of business, trade or commerce. Although the revenue's Special Leave Petition [SLP] against the same has been admitted by Hon'ble Supreme Court (84 Taxmann.com 283), however, there is no stay on the operation of this judgement and the same is very well applicable to the facts of present case. The Hon'ble Court, in the course of stated judgement, has elaborately considered its own decisions rendered in: - (i) Institute of Chartered Accountants of India V/s DGIT (347 ITR 99) (ii) Bureau of Indian Standards V/s DGIT (2013 212 Taxman 210) (iii) Institute of Chartered Accountants of India V/s DGIT [358 ITR 91 04/07/2013] (iv) M/s GSI Indi....
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....velopment Authority V/s ACIT [396 ITR 323 02/05/2017] has observed that the expression trade, commerce and business must be read in the context of the intent and purpose of Section 2(15) of the act and the same was not meant to exclude entities which are essentially for charitable purposes but conducting some activities for a consideration or a fees. The test which has to be applied is whether the predominant objective of the activity involved in carrying out the object of general public utility was to sub-serve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity was to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. 8.19 Similarly, Hon'ble Allahabad High Court in CIT V/s Lucknow Development Authority 265 CTR 433 16/09/2013 has held that where a trust is carrying on its activities for the fulfilment of its aims and objectives which are of charitable in nature with no mo....
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....e bench could fix a future date of pronouncement of the order which shall not ordinarily be a day beyond a further period of 30 days. Thus, a period of 60 days has been provided under the extant rule for pronouncement of the order. This period could be extended by the bench on the ground of exceptional and extraordinary circumstances. However, the extended period shall not ordinarily exceed a period of 30 days. 10.2 Although the order was well drafted before the expiry of 90 days, however, unfortunately, on 24/03/2020, a nationwide lockdown was imposed by the Government of India in view of adverse circumstances created by pandemic covid-19 in the country. The lockdown was extended from time to time which crippled the functioning of most of the government departments including Income Tax Appellate Tribunal (ITAT). The situation led to unprecedented disruption of judicial work all over the country and the order could not be pronounced despite lapse of considerable period of time. The situation created by pandemic covid-19 could be termed as unprecedented and beyond the control of any human being. The situation, thus created by this pandemic, could never be termed as ordinary circum....
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....ines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a period of three months from the date case is closed for judgment". In the ruled so framed, as a result of these directions, the expression "ordinarily" has been inserted in the requirement to pronounce the order within a period of 90 days. The question then arises whether the passing of this order, beyond ninety days, was necessitated by any "extraordinary" circumstances. 9. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon'ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemi....
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....idemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an "ordinary" period. 10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. ....