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2020 (9) TMI 1095
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....by ignoring the fact that assessee was earning huge profits by providing data connectivity to its subscribers in lieu of consideration as per its objects and nowhere, charity can be seen in the whole process 3. On the facts and circumstances of the case, Ld. CIT (A) has erred in allowing the appeal of the assessee by ignoring the fact that as capital expenditure for earlier years was allowed as application of income in the year in year of purchase of fixed asset/s 4. On the facts and circumstances of the case, Ld CIT(A)has erred in allowing assessee's appeal by ignoring that assessee like charitable or religious institutions are governed by almost the separate or independent provisions of sections 11, 12, 12A, 12AA & 13 and these provisions are independent code in itself in Chapter III of the Income Tax Act, 1961. The income and expenditure is computed on the basis of the entire expenditure including the capital expenditure for purchase of capital asset u/s. 11(1)." 2. At the outset, ld. counsel for the assessee submitted that in the appeal for the Assessment Years 2009-10 and 2010-11 this Tribunal on similar issues and grounds raised by the Revenue has decided....
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....exemption u/s. 11. The relevant observations and the findings are as under: "11. We have carefully considered the rival contentions and perused the orders of the lower authorities. Undoubtedly, the assessee trust has been created by the Govt. of India with an object for development of computer communication in the country and it is a non-profit society. Subsequently, various certificates issued by various authorities also show that the assessee does not exist for the profit. The subscribers to the society were eminent persons such as Prof. YK Alagh and Hon‟ble former President of India, Dr. APJ Abdul Kalam when, his Excellency was scientific advisor to Govt. of India. Further, the governing council also has the Hon‟ble Minister of Communication and Information Technology as its Chairman and several highranking government officials along with the eminent technocrats of the country. 12. The main object of which the trust is formed are as under:- "3.1 The society has been established as a non-profit society only for the objects as under:- 3.1.1 To advance the cause of computer communication in the country in all its aspects and dimension....
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....king, information technology and other related emerging fields in India and abroad. 3.2.3 Work in the areas of advanced computer, networking taking into consideration of both technological forecasts and national needs. 3.2.3 Work in the areas of advanced computer, networking taking into consideration of both technological forecasts and national needs. 3.2.4 Conduct general and customized educational and training activities for users and others through classroom and distance learning modes. 3.2.5 Conduct National and international conferences including teleconferences, seminars, symposia and workshops to inclulcate awareness of the strategic importance of computer communication and information technology in educational and research. 3.2.6 Carry out guide research leading to advanced degrees from leading national and international educational institutions and universities. 3.2.7 Institute stipends scholarships, associate ship and fellowship to students and individuals. 3.2.8 Carryout demonstration filed trials pilot production of its products and services developed in house or in collaboration with other educational and r....
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....ecide subscription, membership tariff and other charges for the services provided by the society. 3.2.22 Receive grants, loans, subscriptions, hire/lease charges, donations or any other financial contribution in cash and securities and of any property either movable or -movable from within the country and/on abroad including international agencies, cacentral and multilateral agencies subject to prevailing laws of the Government of India and to invest and deal with funds and moneys of the Society and to vary, after or transfer such investments from time to time. 3:2.23 To accept remuneration for, consultancy, design, development, technology transfer, providing services or any related activity in the Country as well as abroad. 3.2.24 To establish and maintain provident and' other funds for the benefit of the employees or for the purpose of the Society and open and operate bank accounts. 3.2.25 Any surplus funds not needed or capable of being used for immediate application towards the objects for the society will be invested by the society only in accordance with the provisions contained from time to time in Income Tax Act 1961 applicable to suc....
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....e Central Govt for the purpose of clause (vii) of sub-section (1) of Section 36 of IT Act. (x) Investment in immovable property i.e. in any building or other immovable property/ asset related to the approved activities of the SIRO. xi) Deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964)." 13. The above objects of the assessee must be tested on the actual performance of the trust to understand the nature of activities carried on by it. Assessee has submitted the projects undertaken by it which are as under :- "A. ERNET network is a judicious mix of terrestrial and satellite based wide area network. GBPT India provides services through its 15 Points of Presence (PoPs) located across the country. All PoPs are equipped to provide access to Intranet, Internet and Digital Library through trial leased circuits and radio links to the user institutions. The PoP at STPI Bengaluru provides Intranet and Internet access through Satellite. ERNET network supports IPv4 and IPv6 Internet Protocol. IPv6, routing protocol OSPFv3, end to end Ethernet services, QoS (DiffServ....
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....is to provide network infrastructure support using-TEIN3. 3. My FIRE - Multi-disciplinary Networking of Research Communities in FIRE MyFIRE (www.my-fire.eu) is an European Commission funded project launched in June, 2010 through the EU FP7 programme, under the ICT thematic priority Future Internet Research and Experimentation (FIRE). The project aims to ensure a balance between the requirements for researcher's collaboration and the stakeholder's expectations. MyFIRE project consortium includes, four. European partners (Inno TSD SA France, ETSI France, University of Edinburgh UK and Fraunhofer Germany), and four international partners from BRIC (IPT Brazil, ITMO Russia, ERNET India and BII China) countries. 4. Mobile IPv6 Test bed - Mobility between heterogeneous access networks Mobile IPv6 test bed is a joint project between ERNET India and Indian Institute of Science (IISc) -Bengaluru which is funded by the Department. Under the project, a WLAN access network testbed has been setup at ERNET Bengaluru with Mobile IPv6Home Agent (HA), Mobile Node (MN) anti Correspondent Node (CN) services configured using the UMIP MIPv6 stack. The seamless network layer mobili....
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....onnectivity including distance education in the region. 10. ICT Vocational Centres for Children with Disabilities-Phase II After implementation of the pilot project by setting up of ICT centers in 21 schools in Tamil Nadu and NCR Delhi, ERNET India has implemented the second phase of the project. In this phase, select 100 schools spread throughout the country have been made disable friendly through setting up of ICT centers for students who are physically challenged, and those with hearing or vision impairment. 11. Moll with State Government of Rajasthan for establishing ICT Infrastructure at Schools in rural areas This Memorandum of Understanding (MoU) is made between ERNET India and State Government of Rajasthan for establishing Information & Communication Technologies (ICT) Infrastructure in the Schools located in rural areas of Rajasthan. ICT Centres have been setup under the project in 250 Schools located in rural areas of Ajmer and Jaipur districts. The establishment of connectivity to the ICT centers is in progress. 12. c-Linkage of Krishi Vigyan Kendras under ICAR Under an MoU, ERNET India has established a dedicated VSAT Hub and deployed....
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.... of the Mahatma Phule Krishi Vidyapeedh, Rahuri. * Tele-presence based High Definition Video Conference facility at 8 locations of Ministry . of Earth Sciences (MoES). * Video Conferencing facilities at 49 locations of Income Tax, 7 locations of DGS&D and 11 locations of the National Institute of Immunology (Nil) under the Department of Biotechnology(DBT). C. Conferences & Workshops A PAN (the Asia Pacific Advanced Network) refers to both the organization representing its members, and to the backbone network that connects the research and education networks of its member countries/economies to each other and to other research networks around the world. APAN coordinates developments and interactions among its members, and with peer international organizations, in both network technology and applications, and is a key driver in promoting and faciiitating network-enabled research collaboration; knowledge discovery telehealth; and natural disaster mitigation. ERNET India is a primary member of APAN (the Asia Pacific Advanced Network) representing the education and research network of the country. During 22nd-26th August 2011, ERNET India organized th....
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....ssessee is formed not for the purposes of the profit. 16. As amended w.e.f. 01.04.2009 the provisions of section 2(15) has undergone change by inserting the proviso therein. The impact of the proviso is that the trust and societies who are engaged in carrying on "charitable purposes" falling into the category of "advancement of any other object of general public utility‟ they would not be considered as carrying on charitable purposes if they carry on any activity in the nature of trade, commerce and business for a cess, fee or any other consideration. If the above conditions are fulfilled then use of the income is immaterial. The main reason for the insertion of the above proviso is to deny the exemption to the institutions which are driven primarily by a desire or motive to earn profit and do charity through the "advancement an object of general public utility" then such institutes shall not be regarded as institutions established for charitable purposes. Hon'bleDelhi High Court in (371 ITR 333) in India Trade Promotion Vs. DGIT has held that the correct interpretation of proviso to section 2(15) would be that it carves out an exception from the charitable purpo....
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....ed in obtaining those services, which should be effective, efficient, reliable and sustainable. Hence, such clauses are required. Therefore, it cannot be said that those clauses suggests that assessee is carrying on business. 18. Further, merely because the profits have been earned in one or two years it cannot lead to the fact that assessee is existing for making profit. It is required to be ascertained that whether profit making is not the driving force or dominant objective of the assessee. The assessee has given enough evidences to show that profit earning is not the driving force or objective of the assessee. As the principal emerges from the decision of the Hon'ble Supreme Court in CIT Vs. Surat Art Silk Manufacturing Association 121 ITR 1 activity for the profit connotes that the predominant object of the activity must be the making of profit. It is not enough that as a matter of fact the activities results into profit. Where an activity is not pervaded by the profit motive but is carried on primarily for serving the charitable purposes, it would not be correct to describe it as an activity for profit merely because profit accrues. Even the proposition ....
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....or, education, medical relief, and the advancement of any other object of general public utility." By the Finance Act, 2008, with effect from April 1, 2009, the following proviso was added : "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, or retention, of the income from such activity." A second proviso inserted to section 2(15) by Finance Act, 2010, with ret rospective effect from April 1, 2009, reads as under : "Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lacs or less in the previous year." Rupees ten lakhs mentioned in the second proviso stands enhanced to rupees twenty-five lakhs by the Finance Act, 2011, with effect from April 1, 2012. The main section 2(15) of the Act has also undergone amendments, n....
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....e 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 here the predominant object of the activity is 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. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management." Period post the amendment, vide Finance Act, 2008, with effect from April 1, 2009 14. A bare perusal of the main provision indicates that there are four main factors that need to be taken into consideration before classifying the activity of the assessee as "charitable" under the residuary category, i.e., "advancement of any other object of ....
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....ration or the money received is used in furtherance of the charitable purposes/activities. In view of the first proviso, the decisions that the application of money/profit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the pro viso and the bar/prohibition will apply." Scope of "trade, commerce or business" 16. The key words, namely ; trade, commerce and business were enumerate and elucidate 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 ....
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....or profit.' According to Sampath Iyengar's Law of Income Tax (9th edition), a business activity has four essential characteristics. Firstly, a business must be a continuous and systematic exercise of activity. Business is defined as an active occupation continuously carried on. Business vocation connotes some real, substantive and systematic course of activity or conduct with a set purpose. The second essential charac teristic 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.' 17. In the said case, reliance and reference was made to State of Punjab v. Bajaj Electricals Ltd. [1968] ....
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....tive test should be satisfied but in a given case activity may be regarded as business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is infect in the nature of business. The test as prescribe in Raipur Manufacturing Co. (supra) and Sai Publication Fund (supra) can be applied. The six indicia stipulated in Lord Fisher (supra) are also relevant. Each case, therefore, has to be examined on its own facts." 20. Recently in another decision in WP(C) No. 1755 of 2012 titled Bureau of Indian Standards v. Director-General of Income-tax (Exemptions) [2013] 358 ITR 78 (Delhi) dated September 27, 2012, it was held that Bureau of Indian Standards (BIS) was carrying on charitable activities as described within the ambit of section 2(15) and was entitled to registration/notification under section 10(23C)(iv). We, however, note that there is one distinction between the present petitioner and BIS. BIS ....
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....ature 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 pos sible. 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." (emphasis supplied) 22. It is, evident from Circular No. 11 of 2008 that the new proviso of section 2(15) of the Act is applicable to the assessees who are engaged in commercial activities, i. e., carrying on business, trade or commerce, in the garb of "public utility" to avoid tax liability as it was noticed that the object of "general public utility" was sometimes only a mask or device to hide the true pu....
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....e charged, economic status of the beneficiaries who pay, commercial value of benefits in comparison to the fee, purpose and object behind the fee, etc., are several factors which will decide the seminal question, is it business ? 26. The petitioner charges an initial registration fee of Rs. 20,000 plus annual fee of Rs. 4,000, enhanced to Rs. 5,000 from the financial year 2006-07 onwards from third parties, who become subscribing members and are entitled to use the coding system, GS1. The Revenue acknowledges that the petitioner enjoys monopoly and has exclusive rights to issue global bar coding system GS1 in India. However, the petitioner is not dealing or treating the prized rights as a right, which is to be exploited commercially to earn or generate profits. A coding system of this nature if marketed on commercial lines with profit motive would amount to business but when the underlying and propelling motive is not to earn profits or commercially exploit the rights but "general public good", i.e., to promote and make GS1 coding system available to Indian traders, manufacturers, Government, etc., it will fail the test of business and meets the touchstone of charity. The ....
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....ofit motive" and charity being the primary and sole purpose behind the activities of the petitioner is perspicuously discernible and perceptible. 29. The table relied on by the respondent and mentioned in paragraph 7 above tells a partial story. Only direct expenses incurred have been set off from the fee earned from registration and renewal. The activity of the petitioner involves promotion, propagation and spreading awareness and knowledge about global coding identification system GS1. The entire expenditure of the petitioner has to be taken into consideration and cannot be ignored. There are stipulations in sections 11, 13, etc., of the Act to prevent misuse of or siphoning of funds, bar/prohibit gains to related persons, stipulations of time limits for use of funds, which are effective checks and curtail and deny benefit in cases of abuse. There is no such allegation or contention of the Revenue in the present case. 30. As observed above, the fee charged and the quantum of income earned can be indicative of the fact that the person is carrying on the business or commerce and not charity, but we must keep in mind that charitable activities require operational/r....