INCOME TAX APPELLATE
TRIBUNAL - CHANDIGARH
ITO (EXEMPTIONS) VS. CHANDIGARH LAWN TENNIS ASSOCIATION
M.A. NO. 37/CHD/2018, DATE: 23-03-2018
Summarised Judgement ( Scroll for Complete
Judgement)
Strictures
passed against the Dept for confronting, showing resentment and displeasure to the
Tribunal for granting interim stay against recovery of demand. The Dept is showing
open defiance of, disrespect of, or of open resentment to, orders of the Tribunal,
which may prove be very dangerous for the sanctity of the courts of law/Justice
dispensation system of the country. Hence, Costs imposed on dept.
===========================================
Complete Judgement
Income Tax Appellate Tribunal - Chandigarh
M/S Chandigarh Lawn Tennis ... vs Ito (Exemptions), Chandigarh
on 26 July, 2018
BEFORE SHRI SANJAY GARG
, JUDICIAL MEMBER AND
Ms. ANNA PURNA GUPTA , ACCOUNTANT MEMBER
I T A No . 1 3 8 2 / CH D/ 2 0 1 6
Assessment Year : 2013 - 14
Chandigarh Lawn Tennis vs. The ITO (Exemptions),
Association, Ward, Chandigarh
Sector 10, Chandigarh
PAN No. AAATC4943J
(Appellant) (Respondent)
Appellant by : Sh. Y.K.
Sud, CA
Respondent by : Smt.
Chanderkanta, Addl. CIT (on 22.3.2018)
& Sh.Yoginder Mittal, Sr. DR (on 13.7.2018)
Date of Hearing : 22.03.2018 & 13.7.2018
Date of Pronouncement : 26.07.2018
ORDER
Per Sanjay Garg, Judicial Member:
The present
appeal has been preferred by the assessee against the order dated 21.10.2016 of
the Commissioner of Income Tax(A)- 2, Chandigarh [hereinafter referred to as 'CIT(A)'].
2. The
assessee in this appeal has taken the following grounds:-
1. That
the CIT(A) was not justified in upholding the action of the Assessing officer of
denying the exemption of Rs. 1,06,14,830/- u/s 11 of the Income Tax Act, 1961 on
the grounds that the assessee is hit by section 13(8) of the Income Tax Act.
2. That
CIT(A) failed to consider the submissions made ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh by the assessee and has wrongly given a finding
that holding of the Devis Cup Tie was not the object of the assessee.
3. That
the Ld. CIT(A) has shown gross indiscipline by not following the various judgements
of High courts and also of Jurisdictional ITAT while upholding the disallowance
of exemption u/s 11 claimed by the assessee.
3. Brief
facts relating to the issue as culled out from the order of CIT(A) are that the
assessee, M/s Chandigarh Lawn Tennis Association (hereinafter referred to as 'CLTA')
is a society registered under the Societies Registration Act. The assessee is also
registered as a charitable entity vide order dated 27.09.2006 of the CIT(E) u/s
12AA of the Income Tax Act (in short 'the Act'). The main object of the assessee
is for the promotion of game of lawn tennis by controlling the conduct of championships
and other open and restricted competitions within its jurisdiction and holding coaching
classes/schemes for players. During relevant year under consideration, the assessee
hosted an international event 'Cloud India v/s New Zealand Davis Cup Tie' for which
separate income and expenditure account had been maintained. This event was hosted
by providing various services and facilities like infrastructure, boarding and lodging,
logistics, advertisement etc. These facilities were provided by receiving money
for advertisement for souvenir, corporate box income, sale of tickets, sponsorship
etc. and thus a surplus of Rs. 1,08,36,902/- was generated. Assessing Officer observed
that the assessee society was registered u/s 12AA on ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh 27.09.2006 and the objects were charitable but
after the amendment in section 2(15) of the Act, the definition of charitable purpose
had undergone change and that the proviso to the said section laid down that advancement
of any other object of general public utility would not be a charitable purpose
if it involved 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. Assessing Officer
further observed that holding of 'Davis Cup Tie' was not in accordance with the
object of the society as it was an international event which had been exploited
by the assessee for commercial purpose by allowing of private sponsors, selling
tickets through private concerns, allowing of advertisement from various business
entities. The assessee had surplus of Rs. 1,06,14,830/- as per consolidated income
and expenditure statement. The assessing officer therefore held that the assessee
was not eligible for exemption u/s section 2(15) read with section 13(8) of the
Act and therefore the entire surpluses was brought to tax.
4. Being
aggrieved by the said order of the Assessing officer, the assessee preferred appeal
before Ld. CIT(A). However, Ld. CIT(A) dismissed the appeal of the assessee observing
as under:-
"5.3
I have carefully considered the submission of the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh appellant, the assessment order and perused
the decisions relied upon by the appellant. The ratio in these cases is that proviso
to section 2(15) is not hit so long as the rendering of any service are purely incidental
to the main objective of general public utility carrying on by the assessee. In
the case of India Trade Promotion Organisation, the Hon'ble Delhi High Court has
held that the main object of the assessee is to organise trade fairs / exhibitions
in order to promote trade, commerce and business and therefore, the activities taken
by the assessee for sale of tickets and sale of publications are incidental to the
main objective of the assessee. In the instant case, the appellant has organised
Davis Cup Tie between India and New Zealand is an international event and totally
apart from the objective of the assessee the Assessing Officer has given reasoned
findings that the main objectives of the assesses society is to promote, develop
and popularize the game of tennis, to promote and maintain the bonds of friendships
between all the affiliated clubs and institutions within its jurisdiction and encourage
new clubs and institutions, to control the conduct of such championships and other
open an restricted competitions within its jurisdiction as may be sanctioned by
the association and / or approved by the AITA. As per the income and expenditure
account furnished by the assessee the normal surplus of Rs. 15,96,663/- was generated
as per the activities taken by the assessee which has been listed on page 5 of the
assessment order which are incidental to the dominant object of the assessee. However,
by holding India V/s New Zealand Davis Cup Tie, appellant has thrown open the sale
of ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh tickets, advertisements and sponsorships to
private sponsors and business entities with the main motive to earn maximum profits
or commercial gains from this activity. Therefore, the holding of Davis Cup Tie
cannot be said as incidental to the main objective of general public utility carried
on by the assessee.
5.3.1 Appellant
has placed reliance on the decision of the improvement trust of ITAT Chandigarh
Bench in which the order of ITAT, Amritsar Bench in the case of Hoshiarpur Improvement
Trust has been followed. In these cases these trust were constituted under the Punjab
Town Improvement Act with the main objectives of bringing about improvement in towns.
In these cases, assessee sold residential and commercial units and residential and
commercial lands and earned profits and these activities were held by the jurisdictional
tribunal as incidental to the attainment of its main object. The case of the appellant
is entirely different wherein the Davis Cup Tie was organized entirely deviating
from the objectives of the trust and by commercially exploiting the event earn huge
surplus of Rs. 1,92,54,745/- as against the normal surplus generated from the activities
of the trust during the relevant year of Rs. 15,96,663/-. Therefore, appellant has
done the activities of rendering service to trade, commerce or business for a commercial
consideration, these activities are not incidental or subservient to the main objective
of general public utility and is hit by proviso to section 2(15) of the Act. Hence,
the action of the A.O in bringing to tax the surplus of Rs. 1,06,14,830/- u/s 13(8)
is upheld. Ground of appeal No. 1, 2, 3 and 4 are dismissed."
Chandigarh
Lawn Tennis Association, Chandigarh
5. Being
aggrieved by the said order of the Ld. CIT(A), the assessee has come in appeal before
us.
6. Sh.
Y.K. Sud, the Ld. Counsel for the assessee has made oral as well as written submissions
contending therein that as per object '3a' and '3c' of the object clauses of the
MOA of the assessee, holding of a 'Davis Cup Tie' was / is towards the promotion,
development and popularizing the game of tennis amongst the general public. That
these matches of international importance are watched by public at large either
watching it live by buying tickets or by watching the game on live telecast of the
TV channels. The public and people having interest in the game are highly benefited
by watching the professional players of two nations contesting against each other.
That as per the clause 3c of the object clauses, 'to conduct the championship and
other open restricted competitions with the sanction of the Association and approved
by AITA' is the clear objective of the assessee trust. That even the Chandigarh
Administration and Govt. of India also monitor and supervise the Davis Cup Tie.
That it cannot be said that holding of International Davis Cup is not the objective
of the trust. That the Chandigarh Lawn Tennis Association has been established with
the object of promotion of the Lawn Tennis game by teaching the children and making
them players and also for holding of the various tournaments and competition approved
by the IATA and all these objects have been considered as charitable by CIT while
granting the registration ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh to the trust. The Ld. Counsel for the assessee
has further submitted that the AO in his order has although agreed with the assessee
that it is engaged in the promotion of the game lawn tennis and also agreed that
all the objects are charitable in nature but yet he gave a finding that these objects
were / are pursued for commercial gains. That this finding of the AO is contrary
to the finding of the CIT in as much the CIT has allowed the registration u/s 12AA
by holding the objects of the trust as charitable and that the registration is still
continued till date. That at the time of making assessment, all that Assessing Officer
has to verify as to the activities of the assessee are according to the objects
of the trust. That it is well settled law that when the motive of the trust is not
of making profits but for the attainment of the objects, if any commercial activity
is carried on, the exemption u/s 11 cannot be denied. That the assessee Chandigarh
Lawn Tennis Association had hosted the Davis Cup matches earlier also in the year
1989-90 and 1992-93 and the exemption to the income of the trust was allowed during
these year u/s 11 and further that this exemption has consistently been allowed
to the assessee ever since its inception in 1975, therefore applying the rule of
consistency, exemption u/s 11 should be allowed for this year also.
The ld.
Counsel has further referred to the decision of the 'Amritsar Bench' of the Tribunal
in the case of Hoshiarpur Improvement Trust and 'Moga Improvement Trust' 291 CTR
352 ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh stating that therein the Bench has taken a view
that exemption u/s 11 is available on the profits generated by improvement trusts
on the ground that the motive of the trust is not to carry on any commercial activity
and motive is not to earn any profits and activities carried out may be commercial
in nature are for the attainment of the main objective, hence charitable, and exemption
u/s 11 was allowed. That even the appeal against this order of the Moga Improvement
Trust has been dismissed by P&H High Court in the judgment reported in 291 CTR
352 at page 395.
The ld.
Counsel for the assessee has also relied upon the following case laws:
i. Asst.
CIT Vs Surat City Gymkhana (2008) 300 ITR 214(SC)
ii. Sonepat
Hindu Educational & Charitable Society Vs. CIT & Anr.(2005) 278 ITR
262(P&H)
iii. Hiralal
Bhagwati Vs. CIT (2000) 246 ITR 188 (Guj) iv. Ananda Marga Pracharaka Sangha Vs.
CIT (1996) 218 ITR 254 (Cal) v. ITO Vs Mrs. Dwarika Prasad Trust (1989) 30 ITD 84
(Del)(SB) vi. ITO Vs Trilok Tirath Vidyavati Chuttani Charitable Trust (2004) 90
ITD 569 (Chd) vii DDCA Vs DIT 168 TTJ 425(ITAT Delhi) .
7. Sh.
Y.K. Sud, the Ld. Counsel for the assessee, has also made the alternate submissions
that the assessee Chandigarh Lawn Tennis ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh Association is involved in imparting training
to boys and girls in Tennis and is running a tennis academy having coaches and instructor
therefore the assessee trust can be said to be engaged in imparting education since
teaching tennis to the students amounts to imparting of education and is covered
in the first limb of section 2(15) and not as a residual clause. He in this respect
has relied upon the decision of the Delhi Bench of the Tribunal in the case of 'Pitanjali
Yog Peeth Nyas Vs ADIT'(Exemptions) stating that the Hon'ble Delhi Bench has held
that imparting training in Yoga amounts to educational activity as per the law laid
down by the Hon'ble Supreme Court in the case of Lok Shiksha Trust. He, therefore,
has submitted that imparting training in lawn Tennis also amounts to education and
therefore the assessee falls in the first limb of the definition of charitable purposes
as defined u/s 2(15) and that the proviso is not applicable to the assessee.
8. Apart
from oral submissions made by Smt. Chandarakanta, the Ld. DR, written submissions
have also been filed by Smt. Sangeeta Sharma, the Ld. Income Tax Officer (Exemptions)
on behalf of the Department wherein it has been contended since the activities of
appellant is directly in contrast of the first proviso to Section 2(15) of the Act,
so, the exemption u/s 11 and 12 of the Act has rightly been denied. That Section
2 (15) of the Act clearly defines that as far as the first three limbs are concerned,
it constitute 'charitable purpose' even if they incidentally involve in carrying
on of ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh commercial activities but as far as the fourth
limb i.e. 'advancement of any other object of general public utility' is concerned,
the entities are not eligible for exemption under section 11 or under section 10(23C)
of the Act if they carry on commercial activities. That while interpreting the object
and scope of this Section, the various Tribunals/Courts have decided many important
cases in favour of the revenue. That in the case of 'PUDA Vs. CIT', reported as
(2006) 103 TTJ CHD 988 , the application for registration u/s 12A(a) filed by above
named statutory Development Authority was rejected by the CIT, which order was finally
confirmed by the ITAT of Chandigarh Bench vide a detailed judgment of Tribunal dated
01.06.2006, which decision has been further followed by various Tribunals and also
by the Amritsar Bench while deciding a similar case of another statutory Govt. body
i.e. 'Jalandhar Development Authority vs. CIT reported' as (2010) 35 SOT ASR 15
whereby it again upheld the order of CIT rejecting the application for grant of
registration u/s 12A of the Act vide a detailed judgment of Tribunal dated 12.06.2009.
That since, many such entities were seen engaged in commercial activities also claiming
exemption on the ground that their activities were for the advancement of objects
of general public utility in terms of the fourth limb of the definition of 'charitable
purpose', hence, Section 2 (15) was amended vide Finance Act, 2008 by adding a proviso
which states that the 'advancement of any other object of general ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh 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.
Reliance has also been placed on Circular No. 11/2008 dated 19.12.2008 of the CBDT
in this respect, which we will discuss in the later part of this judgement. It has
been further contended that after insertion of the above provisos to Section 2 (15)
of the Act, the Amritsar Bench of the tribunal while interpreting the entire scope
and objects of Section/circular and legal position, decided a case of another statutory
Govt body i.e. 'Jammu Development Authority vs. CIT' vide order dated 14.06.2012
reported as (2012) 52 SOT ASR 153 following the judgments in the cases of PUDA and
'Jalandhar Development Authority' (supra) and has upheld the order of CIT which
canceled the registration while passing an order u/s 12AA (3) of the Act, wherein,
it has been held that if activities of any Institution/Trust/Society under the fourth
limb i.e. `the advancement of any other object of general public utility' are in
the nature of trade, commerce or business for cess or fee and the receipts therefrom
crosses the prescribed limit (which for the year under consideration was 25 Lakhs
or more) then they are not eligible to continue with registration u/s 12A and the
same is ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh required to be withdrawn. That the limit of
receipt in second proviso to section 2(15) was Rs. 25 lakhs for the year under consideration.
Further that that the judgment in 'Jammu Development Authority' was later upheld
firstly by Hon'ble J&K High Court in ITA No. 164 of 2012 vide its order dated
07.11.2013 and also by Hon'ble Supreme Court in Special Leave to Appeal (C) No.
4990 of 2014 vide its order dated 21.07.2014. That the aforesaid decisions of the
tribunal passed in the cases of PUDA (supra), Jalandhar Development Authority (supra)
and also the 'Jammu Development Authority vs. CIT' (supra) have been consistently
followed by the Tribunals all throughout the Country, reliance in this respect has
been placed on the following decisions of the coordinate benches of the Tribunal:
(a) Andhra
Pradesh State Housing Corp. Ltd. Hyderabad Vs. DIT (E), Hyderabad ITA No. 1845/Hyd/2012
(Hyderabad bench)vide order dated 19.04.2013.
(b) Housing
Board Haryana, Panchkula Vs. CIT, Panchkula, (Chandigarh Bench) in ITA No. 1200/CHD/2004
vide order dated 30.05.2014.
(c) The
Greater Cochin Development Authority, Kochi Vs. Jt. DIT (E), Kochi, (Cochin Bench)
in ITA No. 792 & 793/Coch/2013 vide its judgment dated 08.08.2014.
(d) M/s
Patiala Urban Planning & Development Authority, Patiala (PDA) Vs. The ITO, (Chandigarh)
in ITA No. 674 & 675/CHD/2014 vide judgment dated 06.05.2015.
(e) A.P.
Housing Board, Hyderabad Vs. DIT (E), (Hyderabad ) in ITA No. 110/Hyd/2008 vide
its judgment dated 03.06.2015 ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh
(f) Ahmedabad
Urban Development Authority Vs. and 711/Ahd/2013 and ITA No. 647 and 2335/Ahd/2014
vide its d judgment dated 19.04.2016.
9. Reliance
has also been placed on the decision of the jurisdictional Pb. & Hry. High Court,
in the case of 'The Tribune Trust Vs. CIT', reported as 390 ITR 547 (P&H) (which
we will discuss in detail in the coming paras of this judgement).
10. It
has been further submitted on behalf of the department that the activities of the
appellant are aimed at earning profit as it is carrying on activity in the nature
of trade, commerce or business. The purpose of appellant is making profit and also
there is no spending of the income exclusively for the purpose of charitable activities
and profits of the assessee are not used for charitable purpose. Reference has also
been made to the financial accounts of the appellant, and it has been submitted
that the appellant hosted the "India- New Zealand Davis Cup Tie" in September,
2012 by providing various services/ facilities like infrastructure, boarding and
lodging, logistics, advertisement etc. These facilities were provided by receiving
various types of fees and financial considerations. That the activity of hosting
this event had been carried out in addition to the normal activities being carried
out for advancement of objects of the appellant. Thus, this activity was of commercial
nature with dominant object to earn profit. Out of total ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh income of Rs. 1,92,54,745/-, the assessee had
received income to the tune of Rs. 1,60,14,000/- from sponsorship, which was 83.16%
of the total income. The appellant earned huge profit of Rs. 1,08,36,902/- from
the event after meeting out expenses. It has been further contended that the object
clause of the appellant does not contain any clause that for furtherance of its
objects, it shall charge any sum like sponsorship, advertisement or make collection
through sale of corporate tickets. That the event was exploited commercially as
the major focus of the appellant was to utilize this event for commercial gains.
Reference has also been made to the Income and Expenditure account and percentage
of profit as gathered from the consolidated books of accounts maintained by the
appellant for financial years 2008-09 to 2015-16 to submit that the appellant's
surplus took an upturn from the financial year 2012-13, the year under consideration
and in which Davis Cup tie was organized. That from the financial year 2008-09 to
2011-12, the appellant earned accumulated surplus of Rs. 7,96,473/- and during the
financial year 2013-14 to 2015-16, the appellant earned accumulated surplus of Rs.
94,88,969/-. However, in total contrast, the appellant, during the year under consideration
i.e. financial year 2012-13, earned surplus of Rs. 1,06,14,830/- and earned 88%
profit which clearly established that dominant object of the appellant was to maximize
profit. A table in respect of Corpus fund, Fixed Deposit Receipts, Bank balances
and interest income received for the financial year 2008-09 ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh to 2015-16 has also been furnished to contend
that the appellant has been accumulating Corpus fund year after year. The fixed
deposit receipts of the appellant also increased year after year. That the same
is the case with interest income. That during the year under consideration, the
amount of FDRs surged from Rs. 13.86 lakh to Rs. 86.20 lakh and this shows that
the profit earned by the appellant from hosting India- New Zealand Davis Cup Tie
has been invested in the form of FDR. That it is evident from financial accounts
that the appellant has invested Rs. 55,00,000/- in FDRs in State Bank of Patiala
and earned interest of Rs. 60,883/- during the year under consideration. That considering
the trend of continued investment in FDRs, year after year, without its utilization
towards the objects, the intent of the appellant to earn income to further increase
profit is clearly visible. Reliance in this respect has been placed on the decision
of the Hon'ble Karnataka High Court in the case of Visvesvaraya Technological University
Vs. Assistant Commissioner of Income Tax (reported as 362 ITR 279). A table showing
income from Admission/ Training fee, training expenses, profit and profit percentage
for the financial year 2008-09 to 2015-16 has also been furnished to submit that
the appellant has been earning huge profit from training activity also which is
unjustified and unwarranted considering the charitable objects of the appellant.
It has been, therefore, contended that the income earned by the assessee is not
only in the direct contrast to post amendment of Section 2(15) and ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh its proviso and that the surplus accumulated
over the years has not been ploughed back for the charitable purposes. It has therefore
been submitted that the lower authorities rightly denied the claim of exemption
to the assessee u/s 11 of the Act for the year under consideration.
11. The
assessee, however, in its rejoinder has submitted that the judgments relied upon
by the AO are totally distinguishable which do not support the facts of the assessee.
The judgments are against the granting of registration u/s 12A under the Income
Tax Act whereas in the case of the assessee the registration u/s 12A is granted
and most importantly is the fact that registration is intact till date and not withdrawn
by the CIT. That the AO could have proposed to the CIT for withdrawal of the registration
which the AO has not done. That there is no law laid down by the J&K High Court
which has approved the order of Amritsar Bench on facts and since there was no question
of law involved, the Hon'ble Supreme Court dismissed the SLP. This issue has already
been considered by the jurisdictional P&H High Court in the case of 'Moga Improvement
Trust' 291 CTR 352 wherein in para 84 of the judgment at page 407 the Hon'ble High
Court has dismissed the plea of the revenue of getting support from Jammu Development
Authority case. That so far the reliance of the Department in the case 'Tribune
Trust' (supra) is concerned, the Hon'ble High Court has observed that profit was
the pre-dominant motive, purpose and object of the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh assessee 'The Tribune Trust'. That the Tribune
Trust had over the year accumulated huge profits and there was nothing in the case
to show that the surplus accumulated over the years had been ploughed back for charitable
purposes. That, however, in the case of the present assessee (Chandigarh Lawn Tennis
Association) profit making is not the motive of the assessee and the only object
of the assessee is to promote the game of Lawn Tennis and hold various tournaments
for the promotion of the game. That the Hon'ble P&H High Court in the case of
'Moga Improvement Trust' reported (supra) has held that if the trust is not set
up with a motive of making profits but during carrying on of its activities according
to the objects if any surplus is generated which is again ploughed back for the
activities of the trust exemption u/s 11 is to be allowed. In the present case of
the assessee the entire surplus generated from the 'Davis Cup Tie' has been ploughed
back and spent for the activities of the trust. That the Assessing officer while
framing the assessment has only to see that the assessee trust has carried out the
activities in accordance with its objects and 85% of the total receipts have been
spent towards the objects of the trust to which the assessee has complied with as
per the provisions of the Income Tax Act u/s 11, 12 & 13. It has been further
submitted that the assessee society holds various tournaments in which it incurs
deficit as well as surplus. Hence it will not be correct to say that the tournaments
are organized by the appellant with commercial motive.
ITA No.
1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh
12. We
have considered the rival submissions and have also gone through the records. The
issue involved in this appeal requires the interpretation of section 2(15) of the
Act including the proviso thereto. For that purpose, we need to look at the changes
/ amendments brought out from time to time in the provisions of section 2(15) of
the Income Tax Act as these have bearing upon the interpretation of the section
as it stands during the relevant period and as on today. We will also consider the
judicial decisions passed from time to time interpreting the time to time amended
provisions of section 2(15) of the Act. We have the benefit of decision of the co-ordinate
Amritsar Bench of the Tribunal in the case of 'Hoshiarpur Improvement Trust' case
(supra) and also of the Hon'ble Punjab & Haryana High Court in the case of 'The
Tribune Trust' (supra).
13. In
the Income-tax Act, 1922, the relevant /corresponding provision was section 4(3)
of the Act, which read as under:
Section
4(3) of the 1922 Act:
"4.
Application of Act.--
......
..... ..... ...... ...... ...... ....... (3) This Act shall not apply to the following
classes of income:--
(i) Any
income derived from property held under trust or other legal obligation wholly for
religious or charitable purposes, and in the case of property so held in part only
for such purposes, the income applied or finally set apart for application thereto.
(ii) to
(viii) ............................................." In this sub-section "charitable
purposes" includes relief of the poor, education, medical relief and the advancement
of any other object of general public utility."
14. The
issue relating to the interpretation of the above provisions of the 1922 Act came
into consideration of the Privy Council in the case of 'The Trustees of the Tribune
Press vs. CIT' [(1939) 7 ITR 415: AIR 1939 PC 208]. The Privy Council took into
consideration the will of Sardar Dyal Singh, the founder of the Tribune Trust, and
observed that it seemed unreasonable to doubt that his object was to benefit the
people of upper India by providing them with an English newspaper - the dissemination
of news and the ventilation of opinion upon all matters of public interest. That
the object of the paper could fairly be described as "the object of supplying
the Province with an "organ of educated public opinion" and that it should
prima facie be held to be an object of general public utility. It was, therefore,
held that property of the assessee 'Tribune Press' was held under Trust wholly for
the advancement of general public utility.
15. Thereafter
to overcome the decision of the Privy Council, the section 3(4) of the 1922 Act
was substituted with section 2 (15) of the 1961 Act, whereby the words "not
for profit" were added to the "advancement of object of general public
utility" in the provisions. The provisions of Section 2(15) of the 1961 Act,
as they stood at that time, read as under:
Section 2 (15): "Charitable purpose"
includes relief of the poor, education, medical relief and the advancement of any
other object of general public utility not involving the carrying on of any activity
for profit."
16. Thus
in the 1961 Act, advancement of any other object of general public utility was qualified
with the crucial words "not involving the carrying on of any activity for profit."
which was not there in the relevant provisions of section 4(3) of the 1922 Act.
The interpretation of the above substituted provision by 1961, Act came into consideration
before the three judges Bench of the Supreme Court in the cases of 'Sole Trustee,
Lok Shikshana Trust vs. CIT' (1975) 101 ITR 234 (SC). The assessee Trust in that
case was carrying out the activity of printing and publishing of newspaper and magazines.
The assessee claimed that the object of the assessee- trust was education, while
the stand of the revenue was that the activity of the assessee would fall in the
last mentioned category in section 2(15), viz., the advancement of any other object
of general public utility. The reason for the above divergence in the stands of
assessee and the revenue was because the concluding words of the definition in section
2(15) of the Act "not involving the carrying on of any activity for profit"
did not qualify the first three categories of relief of the poor, education, or
medical relief but qualify only the fourth category of "advancement of any
other object of general ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh public utility" which was qualified with
the words "not involving the carrying on of any activity for profit".
17. His
Lordship Justice H.R. Khanna, writing the majority view (for himself & Justice
A.C. Gupta) observed that the word 'education' has not been used in that wide and
extended sense, according to which every acquisition of further knowledge constitutes
education. That though a number of objects, including the setting up of educational
institutions, were mentioned in the trust deed as the objects of the trust, however,
the trust at that time was carrying out only the last mentioned object of the trust,
namely, supplying the Kannada speaking people with an organ or organs of educated
public opinion viz the publication of newspaper and magazine. His Lordship further
relying on the decision of the Judicial Committee in the case of 'In re Trustees
of the Tribune' [1939]7 ITR 415 (PC) held that the object of the assessee-trust
(Lok Shikshana Trust) was "the advancement of any other object of general public
utility". It was further observed that as a result of the addition of the words
'not involving the carrying on of any activity for profit' at the end of the definition
in section 2(15), even if the purpose of trust was advancement of any other object
of general public utility, it would not be considered to be charitable purpose unless
it was shown that the above purpose did not involve the carrying on of any activity
for profit. That in order to bring a ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh case within the fourth category of charitable
purpose, it would be necessary to show that:
"(1)
the purpose of the trust is advancement of any other object of general public utility,
and (2) the above purpose does not involve the carrying on of any activity for profit."
His Lordship
further observed that that the word used in section 2(15) is profit and not private
profit and it would not be permissible to read in the above definition the word
'private' as qualifying profit even though such word was not there. That there was
also no apparent justification or cogent reason for placing such a construction
on the word 'profit'. The words 'general public utility' contained in the definition
of charitable purpose were very wide. These words, exclude objects of private gain.
That it was also difficult to subscribe to the view that the newly added words 'not
involving the carrying on of any activity for profit' merely qualify and affirm
what was the position as it obtained under the definition given in the Act of 1922.
If the legislature intended that the concept of charitable purpose should be the
same under the Act of 1961, as it was in the Act of 1922, there was no necessity
for it to add the new words in the definition. That the earlier definition did not
involve any ambiguity and the position in law was clear and admitted of no doubt
after the pronouncement of the Judicial Committee in the cases of In re the Tribune
[1939] 7 ITR 415 (PC) and in and 'All India Spinners' Association v. CIT' [1944]
12 ITR ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh 482 (PC). If despite that fact, the legislature
added new words in definition as if the newly added words were either not there
or were intended to be otiose and redundant.
18. However
his Lordship Beg, J. writing a separate order while stressing on the meaning of
word 'involve' observed that the dictionary meaning of the word 'involve' was of
wide import and would cover all profit making, even as a mere by-product, if this
word had stood alone and by itself without further qualifications by the context.
However, the use of the words 'for profit', showed that the involvement of profit
making should be of such a degree or to such an extent as to infer it to be the
real object. If the profits must necessarily feed a charitable purpose, under the
terms of the trust, the mere fact that the activities of the trust yield profit
will not alter the charitable character of the trust. The genuineness of the purpose
was to be tested by the obligation created to spend the money exclusively or essentially
on 'charity'. That if profit making results from the activity and these profits
could be utilised for non- charitable purposes, the trust would not be exempt from
paying income-tax.
However
as per both the majority and minority view, it was concluded that the activity of
the Trust was not charitable purpose but for making profits and the relief was denied.
19. Further
the matter came for discussion in the case of 'Indian Chamber of Commerce vs. CIT'
(1975) 101 ITR 796 (SC) and the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh matter was decided in favour of the revenue.
Commenting on the expression, "not involving the carrying on of any activity
for profit", their Lordships observed:
"Notwithstanding
the possibility of obscurity and of dual meaning when the emphasis is shifted from
'advancement' to 'object' used in s. 2(15), we are clear in our minds that by the
new definition the benefit of exclusion from total income is taken away where in
accomplishing a charitable purpose the institution engages itself in activities
for profit."
20. The
Hon'ble Supreme Court, thus, emphasized that if in the advancement of the objects
of general public utility a trust resorts to carrying on of any activity for profit,
then necessarily s. 2(15) cannot confer exemption. It needs to be mentioned here
that as against the above definition of charitable purpose, which seeks to preclude
carrying on of any activity for profit involved in advancement of any other object
of general public utility, sub- section (4) of section 11 still allowed carrying
on of any business held in trust for charitable or religious purpose. The relevant
part of the said provision read as under:
"11.
Income from property held for charitable or religious purposes.--(1) Subject to
the provisions of sections 60 to 63, the following income shall not be included
in the total income of the previous year of the person in receipt of the income--
(a )income
derived from property held under trust wholly for charitable or religious purposes,
to the extent to which such income is applied to such purposes in India; . . .
Chandigarh
Lawn Tennis Association, Chandigarh (4) For the purposes of this section 'property
held under trust' includes a business undertaking so held. . ."
21. Another
section 13(1)(bb) was introduced by the Taxation Laws Amendment Act, 1975 and remained
on the statute book until omitted with effect from 1-4-1984 providing that in the
case of a charitable trust or institution for the relief of the poor, education
or medical relief, any income from business carried on by the trust will not be
exempt, unless the business is carried on in the course of actual carrying out of
a primary purpose of the trust or institution.
13. Section
11 not to apply in certain cases.--(1) Nothing contained in section 11 or section
12 shall operate so as to exclude from the total income of the previous year of
the person in receipt thereof--
** ** (bb)in
the case of a charitable trust or institution for the relief of the poor, education
or medical relief, which carries on any business, any income derived from such business,
unless the business is carried on in the course of the actual carrying out of a
primary purpose of the trust or institution;"
22. With
the aforesaid amendment, when read in its plain and literal meaning , the institutions
or trusts carrying on the activity as per first three limbs of section 2(15) i.e.
for the relief of the poor, education or medical relief were allowed to carry on
business activity also, but subject to the condition that such business is carried
on in the course of the actual carrying out of a primary purpose of the trust or
institution to claim their activity as for "charitable Purposes". However,
for the institutions carrying on the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh activity as mentioned in the fourth limb i.e.
for advancement of object of General Public Utility, the profit making was barred
in view of the crucial words " not for making profit" added in section
2(15) of the Act of 1961.
23. However,
it is to be noted here that the above decisions in the cases of 'Sole Trustee, Lok
Shikshana Trust vs. CIT' (supra) and Indian Chamber of Commerce vs. CIT (supra)
were overruled by the Majority View of the Larger Bench Judgement of the Supreme
Court in 'Addl. CIT v. Surat Art Silk Cloth Manufacturers Assn' reported in [1978
] 121 ITR 1 [1979] 2 Taxman 501 (SC). Justice P.N. B hagwati writing Majority view
for the bench, in para 17 of the said order held that the activity of the trust
or the institution must be for profit in order to attract the exclusionary clause.
It is not therefore enough that as a matter of fact an activity results in profit
but it must be carried on with the object of earning profit. That profit-making
must be the end to which the activity must be directed or in other words, the predominant
object of the activity must be making a profit. The Hon'ble Supreme Court further
observed:
"Where
an activity is not pervaded by profit motive but is carried on primarily for serving
the charitable purpose, it would not be correct to describe it as an activity for
profit. But where, on the other hand, an activity is carried on with the predominant
object of earning profit, it would be an activity for profit, though it may be carried
on in ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh advancement of the charitable purpose of the
trust or institution. Where an activity is carried on as a matter of advancement
of the charitable purpose or for the purpose of carrying out the charitable purpose,
it would not be incorrect to say as a matter of plain English grammar that the charitable
purpose involves the carrying on of such activity, but the predominant object of
such activity must be to subserve the charitable purpose and not to earn profit.
The charitable purpose should not be submerged by the profit making motive; the
latter should not masquerade under the guise of the former. The purpose of the trust,
as pointed out by one of us (Pathak, J.) in Dharmadeepti v. CIT [(1978) 3 SCC 499
: 1978 SCC (Tax) 193] must be '"essentially charitable in nature" and
it must not be a cover for carrying on an activity which has profit making as its
predominant object." This interpretation of the exclusionary clause in Section
2 clause (15) derives considerable support from the speech made by the Finance Minister
while introducing that provision. The Finance Minister explained the reason for
introducing this exclusionary clause in the following words:
"The
definition of 'charitable purpose' in that clause is at present so widely worded
that it can be taken advantage of even by commercial concerns which, while ostensibly
serving a public purpose, get fully paid for the benefits provided by them namely,
the newspaper industry which while running its concern on commercial lines can claim
that by circulating newspapers it was improving the general knowledge of the public.
In order to prevent the misuse of this definition in such cases, the Select Committee
felt that the words 'not involving the carrying on of any activity for profit' should
be added to the definition."(emphasis
supplied by us).
24. The
Hon'ble Supreme Court thus took departure from the ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh plain English grammar meaning of the words in
the provisions, but interpreted the phrase 'not involving the carrying on of any
activity for profit' suffixed to the 'advancement of any other object of general
public utility' in the provisions of section 2(15) of the 1961 Act in the manner
that if the income from the profit making activity is ploughed back to subserve
the charitable purpose to achieve the end or ultimate motive of charity, the activity
of such an institution will not be excluded from the definition of charitable purposes.
The Hon'ble Supreme Court held that it was obvious that the exclusionary clause
was added with a view to overcoming the decision of the Privy Council in the of
'The Trustees of the Tribune Press [AIR 1939 PC 208 : (1939) 7 ITR 415] where it
was held that the object of supplying the community with an organ of educated public
opinion by publication of a newspaper was an object of general public utility and
hence charitable in character, even though the activity of publication of the newspaper
was carried on commercial lines with the object of earning profit. That the publication
of the newspaper was an activity engaged in by the trust for the purpose of carrying
out its charitable purpose and on the facts it was clearly an activity which had
profit-making as its predominant object, but even so it was held by the Judicial
Committee that since the purpose served was an object of general public utility,
it was a charitable purpose. The Hon'ble Supreme Court observed that it ITA No.
1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh was clear from the speech of the Finance Minister
that it was with a view to setting at naught this decision that the exclusionary
clause was added in the definition of "charitable purpose". The test which
has, therefore, now (as per section 2(15) of 1961 Act) to be applied was whether
the predominant object 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 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. However, the profits, if any, should be ploughed back and applied to
charitable activity to subserve the main purpose. The Hon'ble Supreme Court held,
"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 realisation but
would also reflect unsound principle of management." The Supreme Court held
that the concluding words "not involving the carrying on of any activity for
profit" go with the "object of ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh general public utility" and not with the
"advancement". His Lordship, Justice Bhagvati, as he then was, expressing
the majority view observed : " The Revenue contended that whatever be the object
of general public utility, its "advancement" or achievement cannot involve
the carrying on of any activity for profit; otherwise the purpose of the trust would
not be a charitable purpose and its income from business would not be immune from
tax liability. This contention cannot, however, be accepted as its consequence would
be as follows:
i. The
trust or institution established for promotion of an object of general public utility
would not be able to engage in business for fear that it might lose the tax exemption
altogether and a major source of income for promoting objects of general public
utility would be dried up. It is difficult to believe that the Legislature could
have intended to bring about a result so drastic in its consequence. If the intention
of the Legislature were to prohibit a trust or institution established for promotion
of an object of general public utility from carrying on any activity for profit,
it would have provided in the clearest terms that no such trust or institution shall
carry on any activity for profit, instead of using involved and obscure language
giving rise to linguistic problems and promoting interpretative litigation.
ii. Section
11(4) , which declares that "property held under trust" shall include
a business undertaking enjoying immunity from tax and which gave statutory recognition
to this principle decided by this Court in earlier cases, would be rendered wholly
superfluous and meaningless, after the insertion of clause (bb) in section 13(1)
with effect from 1-4-1977.
(emphasis
supplied by us).
25. However,
there was dissenting view in the words of Justice A.P. Sen pointing out that it
is not permissible for the Court to whittle down the plain language of the section.
He reminded that "It would be contrary to all rules of construction" in
the words of Khanna, J., speaking for himself and Gupta, J. in Loka Shikshana Trust,
"to ignore the impact of the newly added words 'not involving the carrying
on of any activity for profit' and to construe the definition as if the newly added
words were either not there or were intended to be otiose and redundant, i.e., as
qualifying and affirming the position under the Act of 1922." According to
Sen, J. "if an object of general public utility is engaged in an activity for
profit, it ceases to be a charitable purpose and, therefore, the income is not exempt
under section 11(1)(a). He also observed that the concept of 'profits to feed the
charity', therefore, is applicable only to the first three heads of charity and
not the fourth. It would be illogical and, indeed, difficult to apply the same consideration
to institutions which are established for charitable purposes of any other object
of general public utility. Any profit-making activity linked with an object of general
public utility would be taxable. The theory of the dominant or primary object of
the trust cannot, therefore, be projected into the fourth head of charity, viz.,
'advancement of any other object of general public utility' so as to make the carrying
on of a business activity merely ancillary or incidental to the main object."
He also pointed out that the Direct ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh Tax Laws Committee in its interim report on
charitable trusts (Chapter 2) in 1977 had considered the question whether the expression
'not involving the carrying on of any activity for profit' in the definition of
'charitable purpose' should be deleted and expressed its opinion in favour of deletion.
The Government however did not accept the suggestion. He observed "I fail to
comprehend when the recommendation has not been acted upon by the Government by
suitable legislation, how this court can by a process of judicial construction to
achieve the same result."
26. The
purpose of our above discussion, is that while interpreting the scope of the words"
"not involving the carrying on of any activity for profit." suffixed with
"the advancement of any other object of general public utility" both the
views as to whether literal interpretation of the above clause is to be taken or
the same is to be read down to remove hardship to the trusts whose end motive is
charity as they apply all such profits earned in charitable activity, went on side
by side. Earlier in the case of 'Lok Shiksha Trust' (supra) the majority view prevailed
for the literal interpretation of the provisions of the section 2(15) of the Act,
however later on in the case of 'Surat Art Silk Manufacturers Assn.'(supra) the
provisions were read down and 'purpose test' or 'the end object' or to say 'predominant
object' theory was applied.
27. However,
shortly after the above judgment was delivered by the Five Member Bench Hon'ble
Supreme Court in the case of "Surat Art Silk Manufacturers Assn." (supra)
, Sub-section (4A) was introduced in section 11 by the Finance Act, 1983 with effect
from 1-4-1984 to provide that a trust or institution for charitable or religious
purpose will not get the benefit of exemption under section 11 in respect of any
profits or gains of business carried on by it, unless the business is--(i ) carried
on by a trust wholly for public religious purposes and the business consists of
printing and publication of books or publication of books or the business is of
a kind notified by the Central Government, or (ii) carried on by an institution
wholly for charitable purposes and the work in connection with the business is mainly
carried on by the beneficiaries of the institution. The Legislature, however, omitted
the words 'not involving the carrying on of any activity for profit' from the definition
of 'charitable purpose' in section 2(15), and also omitted section 13(1)(bb ).
11(4A)
: Sub-section (1) or sub-section (2) or sub-section (3) or subsection (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 the trust or, as the case may be, institution, and separate books
of account are maintained by such trust or institution in respect of such business.
CBDT circular
no. 621 dated 19 t h December 1991 [(1992 ] 195 ITR (St) 154 @165] 15.8 In order
to bring exemption of charitable or religious trusts in line with the corresponding
provisions in section 10(23C)(iv) or (v), sub-section (4A) of section 11 has been
amended to permit trust and institutions to carry out business activities if the business activities are incidental
to the attainment of its objective. The charitable or religious trust will no longer
lose complete exemption from income-tax. However, the profits and gains from such
business activity will be subjected to tax.
CBDT circular
no 642 dated 15 t h December 1992 In partial modification to para 15.8 (as extracted
above) of the Circular No. 621, dt. 19th Dec., 1991 issued from F. No. 133/389/91-TPL,
it is clarified that according to the provisions of section 11(4A) of the Income
tax Act, as amended through the Finance (No. 2) Act, 1991, with effect from 1st
April, 1992, profits and gains of business in the case of a trust or institution
will not be liable to tax if the business is incidental to the attainment of the
objectives of the trust or institution, as the case may be. In addition, separate
books of account are to be maintained by the trust or institution in respect of
such business. Income of any other business which is not incidental to the attainment
of the objectives of the trust or institution will not be exempt from tax.
31. The
major change, in our view, brought by amendment to section 11(4A), is that earlier
the phrase "not involving the carrying on of any activity for profit"
was applicable to the fourth limb of definition of "charitable purposes"
as per the provisions of section 2(15) of the 1961 act i.e. in respect of the institutions
carrying out the activity for advancement of general public utility. However dropping
the crucial words "not involving the carrying on of any activity for profit"
from section 2(15) and bringing the crucial words "unless the business is incidental
to the attainment of the objectives of the trust" by way of amendment in section
11(4A) allowed the institutions carrying out the activity for the advancement of
object of General Public Utility to carry out business activity also, if the business
activities are incidental to the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh attainment of their objective. Earlier , the
provisions of section 13(1)(bb) provided that the institutions carrying out the
activity under the first three limbs i.e. relief to the poor, education and medical
relief are permitted to business activity in the course of the actual carrying out
of their primary purpose. However, the omission of section 13(1) (bb) and corresponding
amendments brought in section 11(4A) brought the institutions carrying out the activity
of General Public Utility at par with the Institutions carrying on the activity
as per first three limbs of section 2(15) of the Act allowing the carrying of business
activity incidental to attainment of their object. This was inconsonance with the
interpretation made by the hon'ble Supreme Court in the case of "Surat Art
Silk Cloth Manufacturers Association" (supra).
32. The
phrase 'business is incidental to the attainment of the objectives of the trust'
came up for interpretation before the Supreme Court in the case Asstt. CIT v. Thanthi
Trust [2001] 247 ITR 785 / 115 Taxman 126. The assessee therein was involved in
activity of publishing of a newspaper. The object of the trust was to establish
the said newspaper as an organ of educated public opinion for the Tamil-speaking
reading public to disseminate news and to ventilate opinion upon all matters of
public interest and to establish and run schools, colleges, hostels and orphanages.
The Court held that a business, whose income is utilized by the trust or the institution
for the purposes of achieving the objectives of the trust ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh or the institution, is, surely, a business which
is incidental to the attainment of the objectives of the trust. The findings of
the Hon'ble Supreme court can be divided into three parts:
(i) Discussing
the position for the period from the assessment years 1979-80 to 1983-84, when the
provisions of section 13(1)(bb) remained on the statute, the court held to claim
the exemption under section 11 the business must be carried on in the course of
the actual accomplishment of relief of the poor, education or medical relief. As
an example, a public charitable trust for the relief of the poor, education and
medical relief that carries on the business of weaving cloth and stitching, clothing
by employing indigent women carries on the business in the course of actually accomplishing
its primary object of affording relief to the poor and it would qualify for the
exemption under section 11 of the Act. The court however observed that In the instant
case, (Thanthi Trust) the business that the trust carried on was that of running
a newspaper. That business, though it was held by the trust as a part of its corpus
and, therefore, in trust, did not directly accomplish, wholly or in part, the trust's
objects of relief of the poor and education. Its income only fed such activity.
It could not be held to be carried on in the course of the actual accomplishment
of the trust's objects of education and relief of the poor. It was, therefore, not
possible to accept the argument on behalf of the trust that it was entitled to the
exemption under section 11.
(ii) However,
in respect of the assessment years 1984-85 to 1991-92 when the provisions of section
13(1)(bb)) stood omitted the court observed that Sub-section (4) of section 11 remains
on the statute book and it defines the words 'property held under trust' for the
purposes of section 11 to include a business held under trust. Sub-section (4A)
restricts the Chandigarh
Lawn Tennis Association, Chandigarh benefit under section 11 so that it is not available
for income derived from business unless (a) the business is carried on by a trust
only for public religious purposes and it is of printing and publishing books or
any other notified kind. That the newspaper business that was carried on by the
trust did not fall within sub-section (4A). The trust was not only for public religious
purposes, so it did not fall within clause (a). It was a trust not an institution,
so it did not fall within clause (b). It must, therefore, be held that for the assessment
years in question, the trust was not entitled to the exemption contained in section
11 in respect of the income of its newspaper.
(iii) However,
in respect of the assessment year 1992-93 and thereafter considering the provisions
of amended section 11(4A) of the Act the court held that the substituted sub- section
(4A) (with effect from 1-4-1992) states that the income derived from a business
held under the trust wholly for charitable or religious purposes shall not be included
in the total income of the previous year of the trust or institution if "the
business is incidental to the attainment of the objectives of the trust or, as the
case may be, institution" and separate books of account are maintained in respect
of such business. Clearly, the scope of sub-section (4A) is more beneficial to a
trust or institution than was the scope of sub-section (4A) as originally enacted.
In fact, the substituted sub-section (4A) gives a trust or institution a greater
benefit than was given by section 13(1)(bb). If the object of the Parliament was
to give trusts and institutions no more benefit than that given by section 13(1)(bb),
the language of section 13(1)(bb) would have been employed in the substituted sub-section
(4A). As it stands, all that is required for the business income of a trust or institution
to be exempt is that the business should be incidental to the attainment of the
objectives of the trust or ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh institution. A business whose income is utilized
by the trust or the institution for the purpose of achieving the objectives of the
trust or the institution is, surely, a business which is incidental to the attainment
of the objectives of the trust. In any event, if there be any ambiguity in the language
employed, the provision must be construed in a manner that benefits the assessee.
Since it was not in dispute that the income of its newspaper business had been employed
to achieve its objectives of education and relief to the poor and that it had maintained
separate books of account in respect thereof, it was therefore, held that the trust
was entitled to the benefit of section 11 for the assessment year 1992-93 and thereafter.
The Supreme Court, therefore, has drawn the distinction between the Pharse "in
the course of the actual carrying out of their primary purpose" and the phrase
"the business is incidental to the attainment of the objectives of the trust."
It was therefore, held that if all the surplus in acquiring business assets is invested
or ploughed back to the business, business will be a business incidental to the
attainment of the objects of the trust .
33. The
Supreme Court again considered the applicability of the last limb of the definition
of 'charitable purpose' in the case of 'CIT v. Gujarat Maritime Board' [2007] 295
ITR 561 [2008] 166 Taxman 58 (SC), the Court observed that he expression 'any other
object of general public utility' is of the widest connotation. The expression would
prima facie include all objects which promote the welfare of the general public.
34. The
amendment brought by Finance Act 1983 to Section 2(15) remained in force from 1984
to 2009. The legal position remained that to claim exemption from taxation under
section 11 of the Act, making profits from a business activity must be incidental
to the attainment of objectives of the trust i.e. it must subserve the end result
for the end motive of charity. Further that separate books of accounts should be
maintained in respect of such business activity by the assessee.
35. However
vide Finance Act, 2008 w.e.f. 1.4.2009, a new proviso (i.e. fist proviso) was added
to this provision, carving out an exception in the cases of 'advancement of any
other object of general utility:
"2
(15) "charitable purpose" includes relief of the poor, education, medical
relief, 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, or retention, of the income from
such activity;' (Emphasis supplied by us).
36. There
are two limbs of the above proviso to section 2(15) of the Act, introduced w.e.f.
1.4.2009, i.e. 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 any activity of rendering
any service in relation to any trade, commerce or business,
(b) irrespective
of the nature of use or application, or retention, of the income from such activity;'
37. The
above amendment was carried in section seeks to overcome the decisions of the hon'ble
Supreme Court in the cases of 'Surat Art Silk' (supra) and 'Thanthi Trust' (supra)
as relevant to the period post substitution of the section 11(4A) of the Act. Firstly,
the position that the carrying of business incidental to the attainment of the objectives
of the trust as was allowable to the intuitions u/s 11(4A) carrying the activity
under the all the limbs of section 2(15) of the Act is no more available to the
institutions carrying on the advancement of object of public utility. The institutions
carrying out the object of public utility have been barred from doing any activity
in the nature of trade, commerce or business for claiming their activity for "charitable
Purposes". Secondly this bar is irrespective of application of income from
such commercial activity. That it will be immaterial whether the income from the
commercial activity is utilized or ploughed back to such activity serving object
of public utility. However, the restriction imposed by the above amendment is /
was applicable only in respect of Chandigarh
Lawn Tennis Association, Chandigarh fourth limb of section 2(15) of the Act i.e.
for the institutions or trusts carrying out the activity of advancement of any other
object of general public utility. Hence, the restriction put by section 11(4A) was
still applicable to the other limbs in the definition of charitable purposes u/s
2(15) of the Act.
38. The
Note on Clauses-Memorandum explaining the clause read as under:--
'RATIONALISATION
AND SIMPLIFICATION MEASURES Streamlining the definition of "charitable purpose"
Section 2(15) of the Act defines "charitable purpose" to include relief
of the poor, education, medical relief, and the advancement of any other object
of general public utility. It has been noticed that a number of entities operating
on commercial lines are claiming exemption on their income either under section
10(23C) or Section 11 of the Act on the ground that they are charitable institutions.
This is based on the argument that they are engaged in the "advancement of
an object of general public utility" as is included in the fourth limb of the
current definition of "charitable purpose". Such a claim, when made in
respect of an activity carried out on commercial lines, is contrary to the intention
of the provision. With a view to limiting the scope of the phrase "advancement
of any other object of general public utility", it is proposed to amend section
2(15) so as to provide 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 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.
This amendment will take effect from the Ist
day of April, 2009 and will accordingly apply in relation to the assessment year
2009-10 and subsequent assessment years.'
39. The
CBDT issued a circular dated 19.12.2008, paragraph-3 whereof reads as under:--
"3.
The newly amended s. 2(15) will apply only to the entities whose purpose is 'advancement
of any other object of general public utility' i.e., the fourth limb of definition
of 'charitable purpose' contained in s. 2(15). Hence, such entities will not be
eligible for exemption under s. 11 or under s. 10(23C) of the Act, if they carry
on commercial activities. Whether such an entity is carrying on an activity in the
nature of trade, commerce or business is a question of fact which will be decided
based on the nature, scope, extent and frequency of activity.
3.1 There
are industry and trade associations who claim exemption from tax under s. 11 or
on the ground that their objects are for charitable purposes as these are covered
under the 'any other object of public utility'. Under the principle of mutuality,
if trading takes place between the persons who are associated together and contribute
to a common fund for the financing of some venture or object, and in this respect
have no dealings or relations with any outside body, then the surplus returned to
such persons is not chargeable to tax. Therefore, where industry or trade associations
claim both to be charitable institutions as well as mutual members, these would
not fall under the purview of s. 2(15) owing to the principle of mutuality. However,
if such organizations have dealings with the non-members, their claim for charitable institution would now be governed
by the additional conditions stipulated in proviso to s. 2(15).
3.2 In
the final analysis, 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 connection to trade, commerce or business, it would not be entitled
to claim that its object is for charitable purposes. In such a case, the object
of 'general public utility' will only be a mask or a device to hide the true purpose
which is trade, commerce, or business or rendering of any service in relation to
trade, commerce or business. Each case would, therefore, have to be decided on its
own facts, and generalizations are not possible. An assessee who claims that their
object is 'charitable purpose' within the meaning of s. 2(15) would be well advised
to eschew any activity which is in the nature of trade, commerce or business or
rendering of any service in relation to any trade, commerce or business."(emphasis
supplied by us).
40. The
above explanation given by the CBDT that the newly amended s. 2(15) will apply only
to the entities whose purpose is 'advancement of any other object of general public
utility' and that such entities will not be eligible for exemption under s. 11 or
under s. 10(23C) of the Act, if they carry on commercial activities irrespective
of application of income from such activity has not gone well with the interpretation
given by the High Courts. The Jurisdictional Punjab & Haryana High Court has
discussed at length ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh the effect of newly inserted proviso to section
2(15) of the 1961 Act w.e.f. 1.4.2009 while referring to several case laws of other
High Courts of the country and held that by the insertion of the proviso, the position
has restored/reverted to legal position as declared by the Hon'ble Supreme court
in 'Surat Art Silk Case' (supra) while interpreting the unamended provisions of
1961 Act. The Hon'ble High Court has observed that the crucial words "not involving
the carrying on of any activity for profit" as were mentioned originally in
the section 2(15) of the 1961 Act, were akin to the wording introduced vide Finance
Act 2008 w.e.f. Ist April 2009 i.e. ""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." The Hon'ble High court has observed that while
the legislature in the 1984 amendment which continued up to the year 2009 altered
the position by deleting the words "not involving the carrying on of any activity
for profit", it reintroduced an exclusionary clause albeit in different and
wider terms in the 2009 amendment. The exclusionary clause related to the object
of general public utility and not the advancement thereof. The Hon'ble High Court
thereafter referring to the words "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" as mentioned in the proviso to section 2(15), as amended
in 2009, observed that such activities are carried for profit only. The Hon'ble
High Court ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh rejected the contention of the revenue that
the meaning of the above words "nature of trade, commerce or business"
was of wider import and that even if the advancement of object of general public
utility involves 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,
it will be out of the definition of the word "charitable purposes". The
Hon'ble high court held that a wider meaning ought not to be given to these words
especially in a taxing statute. The Hon'ble High Court observed that if a trade
or business for a commercial activity did not result in profit, it would not be
necessary to deal with the same in the Income Tax Act. The hon'ble High Court observed
that there was nothing in the Act and particular in section 2 (15) thereof that
indicated that the Legislature contemplated a trade or a business or a commercial
activity other than for profit. The Hon'ble High Court in this respect referred
to the several judgments of the Delhi High Court including in the case of Bureau
of Indian Standards v. DGIT (Exemptions) [2013] 358 ITR 78/212 Taxman 210/[2012]
27 taxmann.com 127, The Institute of Chartered Accountants of India v. DGIT (Exemptions),
[2013] 358 ITR 91/217 Taxman 152/35 taxmann.com 140 wherein it has been held that
while construing the term business for the purpose of Section 2(15) of the Act the
object and purpose of the Section must be kept in mind and a broad and extended
definition of business would not be applicable for the purpose of interpreting and
applying Chandigarh
Lawn Tennis Association, Chandigarh the first proviso to Section 2(15) of the Act.
The object of introducing the first proviso is to exclude organizations which are
carrying on regular business from the scope of "charitable purpose. The expressions
"business", "trade" or "commerce" as used in the first
proviso must, thus, be interpreted restrictively and where the dominant object of
an organisation is charitable, any incidental activity for furtherance of the object
would not fall within the expressions "business", "trade" or
"commerce". Although, it is not essential that an activity be carried
on for profit motive in order to be considered as business, but existence of profit
motive would be a vital indicator in determining whether an organisation is carrying
on business or not. The Hon'ble High Court also referred to the decision of the
Delhi High Court in the case of India Trade Promotion Organization v. DGIT (Exemptions)
[2015] 371 ITR 333/229 Taxman 347/53 taxmann.com 404 wherein it was held as under:-
"An
activity would be considered 'business' if it is undertaken with a profit motive,
but in some cases, this may not be determinative. Normally, the profit motive test
should be satisfied, but in a given case activity may be regarded as a 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 justif y and show that the activity undertaken is
in fact in the nature of business.
58. In
conclusion, we may say that the expression "charitable purpose", as defined
in Section 2(15) cannot be construed literally and in absolute terms. It has to
take ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh colour and be considered in the context of Section
10(23C)(iv) of the said Act. It is also clear that if the literal interpretation
is given to the proviso to Section 2(15) of the said Act, then the proviso would
be at risk of running foul of the principle of equality enshrined in Article 14
of the Constitution of India. In order to save the Constitutional validity of the
proviso, the same would have to be read down and interpreted in the context of Section
10(23C)(iv) because, in our view, the context requires such an interpretation. The
correct interpretation of the proviso to Section 2(15) of the said Act would be
that it carves out an exception from the charitable purpose of advancement of any
other object of general public utility and that exception is limited to activities
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.
In both the activities, in the nature of trade, commerce or business or the activity
of rendering any service in relation to any trade, commerce or business, the dominant
and the prime objective has to be seen. If the dominant and prime objective of the
institution, which claims to have been established for charitable purposes, is profit
making, whether its activities are directly in the nature of trade, commerce or
business or indirectly in the rendering of any service in relation to any trade,
commerce or business, then it would not be entitled to claim its object to be a
'charitable purpose'. 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."(emphasis
supplied by us).
41. The
crucial point for the entire discussion in the above case of 'India Trade Promotion
Organization v. DGIT (Exemptions)' was relating to the interpretation of section
2(15) r.w.s. 10(23C) (iv) of the Income Tax Act. The Hon'ble High Court has observed
that the expression "charitable purposes" in context of section10 (23C)
(iv) has a reference to income. It is only when an institute has an ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh income that it will claim exemption from its
inclusion in the total income. The Hon'ble Delhi High Court therefore held that
merely because an institution which otherwise was established for a charitable purpose,
receives income would not make it any less a charitable institution. That it is
not the income but the objects of the institution that have to be looked into. The
Hon'ble Delhi High Court observed that it was undisputed that the institute (India
Trade Promotion Organization) had been established for charitable purpose. The Hon'ble
High Court took the notice that prior to the amendment introduced w.e.f Ist April,
2009 the institute had been recognized as an institution established for charitable
purposes and that this had been done having regard to the objects of the institution
and its importance throughout India. The Hon'ble High Court further observed that
if a meaning is given to the expression 'charitable purpose' so as to suggest that
in case an institution, having an objective of advancement of general public utility,
derives an income, it would be falling within the exception carved out in the first
proviso to Section 2(15) of the said Act, then there would be no institution whatsoever
which would qualify for the exemption under Section 10(23C)(iv) of the said Act
and the said provision would be rendered redundant.
42. The
Hon'ble Punjab & Haryana High court in the case of 'The Tribune Trust' (supra)
following the decision of the Hon'ble Supreme Court in 'Surat Art Silk' (supra)
and in the light of the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh several decisions of the Hon'ble Delhi Court
has held that the predominant object of the trust or institution is the deciding
factor , if the profit is the pre-dominant motive, purpose and object of the assessee
Trust then its activities cannot be considered for charitable purposes as per the
definition of charitable purposes in the light of newly inserted proviso w.e.f.
1.4.2009. But where 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.
43. From
the above discussion and in the light of decisions rendered by the Delhi High Court
in the cases as discussed above and of the Jurisdictional Pb. & Hry. High court
in the case of 'The Tribune Trust' (supra) the position that has emerged is that
as if the new proviso to section 2(15) has never been brought in and has been rendered
redundant or otiose. The theory of predominant object or activity and incidental
income therefrom can well be applied as per the provisions of section 11(4A) of
the Act and as interpreted by the Supreme Court in the case of 'Thanthi Trust' (supra)
and several High Court decisions thereafter. Even with all due respect, in our humble
opinion, the restriction put by newly inserted proviso was applicable only to the
activity of 'any other object of general public utility' but not to the other limbs
of the definition as provided u/s 2(15) of the Act. Hence, to say that the newly
inserted proviso would make for all purposes the section 2(23)(iv) or section 11
(4) ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh of the Act redundant or otiose, in our humble
view, may not be correct. Even the crucial words in the second limb of the proviso
'irrespective of the nature of use or application, or retention, of the income from
such activity' are also required to be considered and the same, in our view, cannot
be ignored. By the insertion of these words, intention of the government is to overcome
the 'ultimate or end object or to say predominant object theory' as was laid down
by the Hon'ble Supreme Court in the cases of 'Surat Art Silk' (supra) and 'Thanthi
Trust' (supra). To be more precise, the effect of the above introduced words is
that it will be immaterial if the funds or the profits from business activity are
ploughed back to subserve the main or the predominant object of the trust. Again,
even at the cost of repetition, it is to be mentioned here that this restriction
is applicable only to the activity of advancement of any other object of general
public utility but not to the other limbs of the activity as included in the definition
provided u/s 2(15) of the Act. We may further add here that the prohibition put
by the above proviso is not applicable in respect of non-business income of the
institution or the trusts carrying on the advancement of other objects of general
public utility but only in respect of income earned from the activity in the nature
of trade, commerce or business. In other words, this exclusionary provision will
not exclude the institutions having income other than the business income.
44. It
is pertinent to mention here that Parliament also realized that the absolute restriction
on any receipt of commercial nature imposed by the proviso inserted w.e.f. 1.4.2009
to section 2(15) may create hardship to the organizations which receive sundry or
incidental considerations from such activities. Therefore by the Finance Act 2010,
there was yet another proviso (i.e. second proviso) inserted with retrospective
effect from 1.4.2009; now the section read as under:
"2
(15) "charitable purpose" includes relief of the poor, education, medical
relief, 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, or retention, of the income from
such activity;
Provided
further that the first proviso shall not apply if the aggregate value of the receipts
from the activities referred to therein is 10 lakh rupees or less in the previous
year.' (emphasis supplied by us)
45. The
CBDT issued explanatory notes to the provisions of the Finance Act, 2010 vide circular
no. 01/2011 dated, the 6th april, 2011, the relevant part in respect of the aforesaid
amendment read as under:
"4.
Change in the Definition of "charitable purpose" 4.1 For the purposes
of the Income-tax Act, "charitable purpose" has been defined in section
2(15) which, among others, includes "the advancement of any other object of
general public utility".
4.2 However, "the advancement of any other
object of general public utility" is not 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.
4.3 The
absolute restriction on any receipt of commercial nature may create hardship to
the organizations which receive sundry considerations from such activities. Therefore,
section 2(15) has been amended to provide that "the advancement of any other
object of general public utility" shall continue to be a "charitable purpose"
if the total receipts from 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
do not exceed Rs.10 lakhs in the previous year.
4.4 Applicability
- This amendment has been made effective retrospectively from 1st April, 2009 and
will, accordingly, apply in relation to the assessment year 2009-10 and subsequent
years."
46. The
above prescribed limit of receipts up to Rs.10 lakhs from the ancillary activity
in the nature of trade business or commerce by the institutions carrying out the
object of General Public Utility was increased to Rs. 25 lakhs vide finance Act
2011 w.e.f.1.4.2012.
47. By
the Finance Act 2015, the first and second provisos also stand substituted, with
effect from 1 s t April 2016, with a new proviso to Section 2(15). The section now
is read as under:
"2
(15) "charitable purpose" includes relief of the poor, education, medical
relief, 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 ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh 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, unless--
(i) such
activity is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility; and
(ii) the
aggregate receipts from such activity or activities during the previous year, do
not exceed twenty per cent. of the total receipts, of the trust or institution undertaking
such activity or activities, of that previous year
48. The
Memorandum explaining the clause read as under:--
"Rationalization
of definition of charitable purpose in the Income-tax Act The primary condition
for grant of exemption to a trust or institution under section 11 of the Act is
that the income derived from property held under trust should be applied for charitable
purposes in India. 'Charitable purpose' is defined in section 2(15) of the Act.
The section, inter alia, provides that 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. However, this restriction shall
not apply if the aggregate value of the receipts from the activities referred above
is twenty five lakh rupees or less in the previous year.
The institutions
which, as part of genuine charitable activities, undertake activities like publishing
books or holding program on yoga or other programs as part of actual carrying out
of the objects which are of charitable ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh nature are being put to hardship due to first
and second proviso to section 2(15).
The activity
of Yoga has been one of the focus areas in the present times and international recognition
has also been granted to it by the United Nations. Therefore, it is proposed to
include 'yoga' as a specific category in the definition of charitable purpose on
the lines of education. In so far as the advancement of any other object of general
public utility is concerned, there is a need is to ensure appropriate balance being
drawn between the object of preventing business activity in the garb of charity
and at the same time protecting the activities undertaken by the genuine organization
as part of actual carrying out of the primary purpose of the trust or institution.
It is,
therefore, proposed to amend the definition of charitable purpose to provide 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,
unless,-
(i) such
activity is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility; and
(ii) the
aggregate receipts from such activity or activities, during the previous year, do
not exceed twenty percent. of the total receipts, of the trust or institution undertaking
such activity or activities, for the previous year .
These amendments
will take effect from 1st April, 2016 and will, accordingly, apply in relation to
the assessment year 2016-17 and subsequent assessment years."(emphasis
supplied by us).
49. Thus,
the respective memorandums explaining the clauses in 2015 explain that the purpose
of insertion of second proviso to section 2(15) and subsequent amendments there
to was to remove ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh the hardship faced by the institutions genuinely
carrying on the advancement of any other object of general public utility due to
first proviso to section 2(15) and to bring appropriate balance between the object
of preventing business activity and at the same time protecting the genuine charitable
activities. The amendments brought out to second proviso w.e.f. 1.4.2016 seeks remove
hardship of restriction of receipts of Rs.25 lakh to the institutes who carry on
the genuine charitable activities for the advancement of their object of general
public utility on a large scale and receives incidental or sundry receipts as per
their large volume of activity which may cross the prescribed limit of Rs. 25 Lakhs.
Hence to rationalize the definition of 'Charitable purposes' the limit of receipt
of Rs. 25 Lakhs has been substituted with 20% of the total receipts.
50. At
this stage, it is important to note that vide finance Act 2012, with retrospective
effect from 1.4.2009 has inserted subsection (8) to section 13 of the Act, which
read as under:
"
[(8) Nothing contained in section 11 or section 12 shall operate so as to exclude
any income from the total income of the previous year of the person in receipt thereof
if the provisions of the first proviso to clause (15) of section 2 become applicable
in the case of such person in the said previous year."
51. The
parliamentary notes on clauses explaining the above amendment to section 13 read
as under:
Clause 6 of the Bill seeks to amend section
13 of the Income-tax Act relating to section 11 not to apply in certain cases.
It is proposed
to insert a new sub-section (8) in the aforesaid section 13 so as to provide that
nothing contained in section 11 or section 12 shall operate so as to exclude any
income from the total income of the previous year of the person in receipt thereof
if the provisions of the first proviso to clause (15) of section 2 become applicable
in the case of such person in the said previous year.
This amendment
will take effect retrospectively from 1st April, 2009 and will, accordingly, apply
in relation to the assessment year 2009-2010 and subsequent assessment years.
52. A corresponding
amendment has also been brought in section 10(23C) of the Act inserted by the Finance
Act, 2012, w.r.e.f. 1-4- 2009 adding the following proviso added:
"10.
In computing the total income of a previous year of any person, any income falling
within any of the following clauses shall not be included-- (23C) any income received
by any person on behalf of-- ...................
.
(iv) any
other fund or institution established for charitable purposes which may be approved
by the prescribed authority , having regard to the objects of the fund or institution
and its importance throughout India or throughout any State or States; or
(v) any
trust (including any other legal obligation) or institution wholly for public religious
purposes or wholly for public religious and charitable purposes, which may be approved
by the prescribed authority , having regard to the manner in which the affairs of
the trust or institution are administered and supervised for ensuring that the income
accruing thereto is properly applied for the objects thereof; ................
Provided
also that the income of a trust or institution referred to in sub- clause (iv) or
sub-clause (v) shall be included in its total income of the previous year if the
provisions of the first proviso to clause (15) of section 2 become applicable to
such trust or institution in the said previous year, whether or not any approval
granted or notification issued in respect of such trust or institution has been
withdrawn or rescinded;"
53 . A corresponding amendment has also been
brought to section 143(3) of the Act inserted by the Finance Act, 2012, w.r.e.f.
1-4- 2009 which deals with the assessment, adding third proviso thereto:
"Assessment
:
143. (1)...............
(3) On
the day specified in the notice,--
.................
Provided
also that notwithstanding anything contained in the first and the second proviso,
no effect shall be given by the Assessing Officer to the provisions of clause (23C)
of section 10 in the case of a trust or institution for a previous year, if the
provisions of the first proviso to clause (15) of section 2 become applicable in
the case of such person in such previous year, whether or not the approval granted
to such trust or institution or notification issued in respect of such trust or
institution has been withdrawn or rescinded."
54. Therefore,
with the introduction of second proviso to section 2(15) there is a paradigm shift
from the earlier position. Though, some of the decisions of the Delhi High Court
as referred to above and that of the Pb. & Hry. High Court in the case of The
Tribune Trust (supra) have been delivered subsequent to the introduction of the
second proviso to section 2(15) of the Act, however in none of the above referred
to decisions there is any discussion about the effect of the introduction of second
proviso to section 2(15) of the act and subsequent amendments thereto, amendments
brought in section 10(23C), section 13 and section 143 of the Act. Though the courts
of law have interpreted the first proviso to section 2(15) taking not consideration
the hardships faced by the institutions genuinely involved in carrying out the charitable
activities and thereby did not go by the literal meaning of the words of the provisions
and interpreted the provision to mitigate the hardship to ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh such institutes and to bring rational to the
definition of charitable purposes and thereby holding that the crucial words "
in the nature of trade, commerce or business" find mentioned in the second
proviso have the same meaning as was ascribed to the words " not for making
profits' as were there in the originally introduced provisions of section 2(15)
in the 1961 Act. However, in our view, that was perhaps never the intention of the
parliament to restore the position to that was operative or as interpreted by the
courts of law from the year 1961 to the year1983. That is why immediately in the
next financial year vide Finance Act 2010 with retrospective effect from 1.4.2009,
the date with effect from which the first proviso to section 2(15) was introduced,
the second proviso was brought in with the sole purpose of diluting the rigours
of the first proviso and to mitigate the hardship created to the institutes genuinely
carrying out the object of general public utility. Since with the introduction of
second proviso, the rigour of the first proviso was diluted to ensure appropriate
balance being drawn between the object of preventing business activity in the garb
of charity and at the same time protecting the activities undertaken by the genuine
organization, hence the interpretation given by the courts taking into consideration
the hardship caused by the first proviso , in our view, can not be applied as such
at this stage, but the same is required to be looked into in the light of the second
proviso and the amendments brought in other related sections also, as discussed
ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh above. In our view, it will not be proper to
just ignore the second proviso brought in by the parliament on the statute by following
the interpretation given by the courts of the first proviso which was to mitigate
the hardship created by the first proviso to the institutions genuinely carrying
on the activity of general public utility. Since the interpretation adopted by the
courts was not the literal interpretation of the proviso, but there was departure
from the literal meaning because of the hardships which may be faced by the trusts
carrying genuine charitable activities in giving literal and plain meaning to first
proviso, hence under the circumstances, when the Parliament itself has introduced
the second proviso to remove the rigour of the first proviso and to mitigate the
hardships created by the first proviso, hence the interpretation of the section
2(15) in the changed scenario is to be given by taking into consideration the section
in its entirety and also in the light of consequential amendments carried out in
sections 10(23C), 13, and 143 of the Act and thereby making the newly inserted second
proviso and amendments thereto and other amended section meaningful and workable
so as to achieve and serve the intended purposes for which they have been introduced
by the legislature in the statute.
55. It
is to be noted that the section 2(15) as it stood post insertion of the first proviso
w.e.f.1.4.2009, the charitable purposes included relief to the poor, education,
medical relief, preservation of environment and preservation of monuments or places
or objects ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh of artistic or historic interest and advancement
of any other object of general public utility. The first proviso does not control
or restrict the definition of 'charitable purposes' in respect of trust carrying
out the activity such as relief to poor, education, medical relief, preservation
of monuments etc. as specifically mentioned. However section 11(4A) do put restriction
on business activity of such institutions and provides that the same should be incidental
to their main objects. Subsection 4A of section 11 neither makes inoperative or
redundant the provisions of section 2(15) nor of subsection 4 of section 11. On
the other hand the provisos to section 2(15) only put restrictions on the benefits
available to the trusts carrying on the advancement of any other object of general
public utility which also involves the incidental activity in the nature of trade,
commerce or business. Newly inserted proviso to section 10(23C) also controls or
restricts the benefit available to the institutions claiming benefit thereunder,
however none of the provisions, in our view, in any manner, makes the other section
inoperative, otiose or redundant. On the other hand, in our view, adopting the interpretation
as given by the courts to the first proviso to section 2(15) bereft of second proviso
and ignoring section 13(8) of the Act and other related amendments brought into
section 10(23C) and section 143(3) of the Act with retrospective effect from 1.4.2009,
would make these provisions redundant, otiose and inoperative.
56. It
is pertinent to point here that the hon'ble supreme court in the case of "Thanthi
Trust" (supra) while interpreting the relevant provisions as they stood for
the period from AY 1984-85 to AY 1991-92, denied the benefits of exemption to the
assessee trust applying and adopting the literal interpretation of the more stringent
provisions of section 11(4A) of the act as were there in the statute for the aforesaid
period. Though, the provisions of Sub-section (4) of section 11 remained on the
statute book which defines the words 'property held under trust' for the purposes
of section 11 to include 'a business held under trust', yet, the supreme court observed
that Sub-section (4A) restricts the benefit under section 11 so that it is not available
for income derived from business unless the business is carried on by a trust only
for public religious purposes and it is of printing and publishing books or any
other notified kind. The court held that the newspaper business that was carried
on by the trust did not fall within sub-section (4A). This finding of the Hon'ble
Supreme Court is in departure from the earlier interpretation made by it in the
case of "Surat Art silk Cloth Manufactures Association"(supra) wherein
it was held that the literal and plain meaning of the provisions of section 2(15)
in context of the words "not for making profit" would render the provisions
of section 11 (4) wholly superfluous and meaningless, despite the fact that these
words barring the activity of the making ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh of profit were applicable only in respect of
institutions carrying on the activity in respect of advancement of other objects
of public utility, whereas, the provisions of section 11(4) still holding good for
the institutions carrying in the activity in respect of first three limbs i.e. relief
to poor, education and medical relief. However in the subsequent decison in the
case of Thanthi Trust (supra) , the supreme court applied the plain literal meaning
to the more stringent provisions of subsection 4A of section 11 as these stood during
the period from AY 1984-85 to AY1991-92 and held that subsection 4A restricts the
benefits under section 11, despite noticing the existence of the provisions of subsection
4 of section 11 on the statute. The latter decision of the Supreme Court in the
case of Thanthi Trust (supra), in our view, cannot be ignored or overlooked, while
interpreting the newly amended provisions of section 2(15) of the Act, especially
the second proviso, which also strives to control the benefit available to the institutions
involved in the activity of advancement of any other object of general public utility
and not of the institutions carrying out the activity in respect of other limbs,
to which the provisions of amended subsection 4A to section 11 continue to apply.
57. Another
crucial phrase brought in the first proviso are "irrespective of the nature
of use or application, or retention, of income from such activity". The addition
of the above crucial words obviously is to overcome the decision of the Hon'ble
ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh Supreme court in the case of Surat Art Silk
(supra) as well in the case of 'Asstt. CIT v. Thanthi Trust' (supra) wherein it
was held that if all the surplus or profit from the business activity is invested
or ploughed back into the assets of the assessee or applied to the main activity,
the business will be a business incidental to the attainment of the objects of the
trust. However, this proposition has been made inapplicable or to say bygone by
the Legislature for the institutions carrying on object of general public utility
by way inserting the crucial words " irrespective of the nature of use or application,
or retention, of the income from such activity" in the first proviso to section
2(15) of the Act.
58. The
Government realized need to curb the practice of business houses to claim exemption
on the ground that they were carrying out of objects of general public utility and
thereby making the benefit of exemption in respect of business carried out by them
in the mask of charity and that is why they introduced first proviso to section
2(15) thereby excluding the institutions carrying on the object of the general public
utility if their activities involves carrying on the activity of business trade
or commerce or the services in relation to business trade or commerce for a cess
or fee and even it was also clarified that application or the retention of such
income from such activity will be immaterial. The High Courts of Delhi and Pb. &
Hry. in the cases as referred to above , however, held that the above provision
was a harsh ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh provision and the consequences of the same could
be like as it were that the introduction of words "not for making profits"
in section which operated from 1961 to 1983. Even the Courts of law also following
the proposition laid down by the Hon'ble Supreme Court in the case of 'Surat Art
Silk' (supra) held that the literal and plain meaning cannot be given to the said
first proviso to section 2(15) of the Act and therefore, propounded the 'pre-dominant
object theory' or 'the ultimate fulfilment of object theory' on the same lines as
was given in the case of 'Surat Art Silk' (supra) by the Hon'ble Supreme Court.
The Hon'ble Supreme Court in the case of 'Surat Art Silk' (supra) in para 11 of
the decision has held that in the ordinary course, the different interpretation
should not be done if the words of the statute taken could not alter the meaning
of a statutory provision where such meaning is plain and unambiguous, but they can
certainly help to fix its meaning in case of doubt or ambiguity. The Hon'ble Supreme
Court thereafter discussed as to what would be the consequence of the construction
of the provisions contained for on behalf of the Revenue and held that in such an
event no trust or institution whose purpose is promotion of object to general public
utility would be able to carry on any business, even though such business is held
under trust or legal obligation to apply its income wholly to the charitable purpose
carried on by the trust or institution. However, the Hon'ble Supreme Court held
that in such an event the provisions of section ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh 11 (4) would be rendered wholly superfluous
and meaningless. The High Courts of Delhi and Pb. & Hry. followed the obove
construction made by the Supreme Court in the caae of 'Surat Art Silk Cloth Manufacturers
Assn.' (supra).
59. However,
the Govt. very soon, even before the coming of above interpretations by the High
Courts, realized the consequence that were likely to arise from the above amendment.
Therefore, taking into consideration the harsh and strict meaning of the first proviso,
it was felt that the plain and literal meaning to the first proviso would be of
great hardship to the trust or institution which were genuinely carrying out the
object of general public utility and that in the course of which it also generates
some incidental or ancillary income. It was under such circumstances that the second
proviso was brought in the next financial year itself with retrospective effect
so as to make the first proviso to section 2(15) workable and to remove the ambiguity
in the provisions of section 2(15) of the Act. Now with the insertion of second
proviso, meaning and interpretation which is more rational has to be arrived at.
However,
if the interpretation of section (2(15) as per the decision of the Hon'ble Pb. &
Hry. High court in the case of "Tribune Trust'(supra) and in other decisions
of the Delhi High court as discussed above considering the first proviso to section
2(15) alone and ignoring the subsequent amendments, is applied to the amended ITA
No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh section 2(15), then it will not only make the
second proviso to section 2(15) but also section 13(8) and corresponding amendments
to section 10(23C) and section 143(3) redundant, meaningless and inoperative and
the situation will be as if the second proviso was never inserted or existed in
the Act, what to say its subsequent amendment by way of increasing the limit of
Rs. 25 lacs and then to the 20% of the total receipts and other corresponding amendments
to section 10, section 13, and section 143. In our view, sticking to the interpretation
which was given by the Courts before introduction or bereft of second proviso to
section 2(15) of the Act, would lead to unintended construction, which will be against
the spirit of statutory provisions. The subsequent amendments, as discussed above,
in our view, definitely have a bearing on the interpretation which was done by the
Courts of law taking into consideration the harshness of the first proviso to section
2(15) alone. However, the leverage provided to the institution by way of insertion
of second proviso would prompt us re-think and re- appraise about the literal interpretation
of the section. The subsequent amendments brought in section 10(23C), section 13
and section 143 of the act with retrospective effect from 1.4.2009, the date on
which the first proviso comes in effect, also cannot be ignored or rendered redundant.
As it stands, post insertion of second proviso, allows the institutions to carry
on the incidental activity in the nature of trade, commerce or business while ITA
No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh pursuing objects of general public utility of
the trust or institution, but restricts the receipts to a specified limit. The said
limit perhaps was made so as to allow only genuine institutions to claim exemptions
who were carrying out the activity of charitable purposes and their motive is not
to earn huge profits.
60. Now,
let us, assume that the interpretation that the income derived by the Trust from
ancillary commercial activity while carrying out the pre-dominant object of general
public utility is totally exempt as stood canvassed by the Ld. Counsel for the assessee
in the light of the various case laws including the decision of the Hon'ble Jurisdictional
High Court of Punjab & Haryana in the case of 'The Tribune Trust' (supra) .
In that event the argument that can be reasonably put is that the second proviso
inserted by Finance Act 2010 with retrospective effect from 1.4.2009 allowing the
carrying out of the business activity up to the prescribed limit of receipts from
such activity would be applicable in those cases where an institution or trust is
carrying out the activity of advancement of general public utility but at the same
time its object is also to make profits as observed by the hon'ble Supreme Court
in the case of 'Surat Art Silk Cloth Manufactures Association' (supra) in respect
of the privy Council decision in the case of "Trustees of the Tribune"
(supra) and then by the Hon'ble Pb. & Hry. High court in respect of activities
carried out by the Tribune Press Trust in the case of "The Tribune Trust"
(supra), in ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh that event such institutions would also be eligible
to claim exemption u/s 2(15) subject to the condition that their total receipts
would not exceed the prescribed limit of Rs. 10 lacs or Rs. 25 lacs or 20% of the
total receipts as applicable from time to time. In that scenario, each and every
trust or institution indulged into business activity involving the providing of
some sort of public utility services will claim exemption if total receipt of such
institution does not exceed the prescribed limit. As held by the Hon'ble Supreme
Court in the case of 'CIT v. Gujarat Maritime Board' [2007] 295 ITR 561 /[2008]
166 Taxman 58 (SC), that he expression 'any other object of general public utility'
is of the widest connotation. The expression would prima facie include all objects
which promote the welfare of the general public.
61. A company
or trust involved in the insurance business for profit will claim that the object,
purpose and activity of the insurance activity is towards the advancement of object
of general public utility as it provides security against unforeseen events to the
insured . An industrialist will also claim exemption on the ground that by way of
establishing industry, it has contributed towards the advancement of object of general
public utility as with the establishment of industry, it generated employment and
that it has also contributed towards infrastructure development and boosting the
economy of the country. A manufacturer of medicine will also so claim that medicines
are made by him with the object ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh of providing people of country the essential
and useful drugs for fighting dreaded disease and sickness and even lifesaving drugs
and also contributing towards improvement of health of the people for advancement
of object of general public utility. A road contractor will also claim that the
road maintained or constructed by it, though with profit motive are for the advancement
of object of general public utility as it ease mode of transport not only of the
people but also of the goods and other material. Even a general merchant, opening
shop in a rural area or village may claim that though it is doing the retail business
with the motive of profit, however, it is also doing the activity of general public
unity by way of making available different goods on day to day need and necessity
of the people of the village who otherwise would have to travel large distances
to get the same. The taxation limits fixed by the Department will fail and the taxation
in respect of such persons doing different business will start only if their receipts
during the year would cross the limit as prescribed from time to time.
Even big
institutions or companies will divide themselves into subsidiaries or smaller units
ensuring that income of each of such taxable unit or entity should not increase
the prescribed monetary limit of the receipts. Such an interpretation of the second
proviso to section 2(15) would lead to absolute absurdity, confusion and unwanted
and uncalled for consequences. Even it will be also an issue in dispute as which
of the activity/activities of ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh an assessee is/are towards the advancement of
object of General Public Utility though may be with profit making object also and
which of these is/are of a pure commercial venture. Thus. in our view, the different
but related provisos of the Act are to be read in harmony with each other. The interpretation
as canvassed for the period prior to the introduction of the second proviso, if
adopted now, will render the newly inserted amended provisions of the Act as infructuous
and redundant.
62. The
issue relating to the effect of insertion of first and second provisos to section
2(15) of the Act vide Finance Acts 2008 and 2009 respectively came into consideration
in the case of 'Jammu Development Authority vs. CIT' (supra) wherein, it has been
held that if activities of any Institution/Trust/Society under the fourth limb i.e.
`the advancement of any other object of general public utility' are in the nature
of trade, commerce or business for cess or fee and the receipts therefrom crosses
the prescribed limit then they are not eligible to continue with registration u/s
12A and the same is required to be withdrawn. However, subsequently the impact of
these provisions was also considered by the Coordinate Mumbai Benches of the Tribunal
in the cases of "Ghatkopar Jolly Gymkhana v. Director of Income-tax (E)"
reported in [2013] 40 taxmann.com 207 (Mumbai - Trib.) and "Cotton Textiles
Exports Promotion Council v. Director of Income-tax (Exemption), Mumbai reported
in [2014] 44 taxmann.com 168 [Judicial Member of this ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh Bench being party to the said decisions also)
wherein it has been held that the first proviso to section 2(15) is a very rigorous
provision which excludes the institution or trust from the definition of charitable
trust, if such trust carries activities in the nature of trade, commerce or business....irrespective
of the nature of use or application or retention of the income from such activity.
That, however, by the insertion of the second proviso w.e.f. 01.04.2009 the rigour
of the first proviso has been diluted and that the first proviso will not apply
even if the trust carrying on business activities in the course of its dominant
activities for the purpose of advancement of any other objects of general public
utility and the gross receipts from such activities is Rs.10.00 lacs or less in
the previous year. However where the gross receipts of a charitable institution,
from its business activities exceeds limit of Rs. 10 lakhs, assessee will not be
entitled for exemption or other admissible tax benefits for that relevant year but
it does not result in cancellation of its registration as charitable institution.
The above view, now has been affirmed by the Hon'ble Bombay High Court in the case
of Director of Income-tax (Exemption) v. North Indian Association [2017] 79 taxmann.com
410 (Bombay) wherein the Hon'ble High court while further relying upon its another
decision in the case of "DIT (Exemption) v. Khar Gymkhana[2016] 385 ITR 162/240
Taxman 407/70 taxmann.com 181 (Bom.) has duly taken note of the provisions of section
13(8) of the Act inserted ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh vide Finance Act 2012 w.r.e.f. 1.4.2009 as well
as the CBDT Circular No.21 of 2016 and though, held that merely because in one year
income of assessee-trust exceeded prescribed limit provided under second proviso
to section 2(15), that by itself, could not warrant cancellation of registration
of trust, however, where the receipts are hit by the proviso to Section 2(15) of
the Act, the benefit of exemption to its income for the previous year relevant to
the subject assessment year will not be available. However it has been further held
that if this happens on continuous / regular basis, it could justify further probe
/ inquiry before concluding that the trust is not genuine.
63. Though
in the above referred to decisions of Mumbai Bench of the Tribunal and that of the
Hon'ble Bombay High Court (supra), the question was whether the registration granted
u/s 12 to the charitable institution can be cancelled if the monetary receipts from
its business activity crosses the limit prescribed as per the second proviso to
section 2(15) of the Income Tax Act and it was held that the registration on this
ground granted to a charitable institution cannot be cancelled. However, it is to
be noted that it was also held that in the previous year during which such income
from business activity of the trust or institution crosses the prescribed limit,
benefit of exemption u/s 11 for that year will not be available to such trust or
institution. It is, therefore, to be noted that not only second proviso to section
2(15) of the Income Tax Act but also ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh insertion of corresponding provisions of section
13(8) of the Act have been duly noted and their effect discussed. What we want to
convey is that existence and effect of the amended provisions of sections 2(15),
section 13, section 23 and section 143 of the Act cannot be just ignored or negated
rather the same are to be read along with other relating provisions of the Act such
as sections 11(4) and 11 (4A) of the Act and a harmonious construction is to be
arrived at.
64. We
may point out here that in the decision of the Coordinate Amritsar Bench of the
Tribunal in the case of 'Hoshiarpur Improvement Trust (supra)', the issue relating
to the effect and consequences of insertion of the second proviso w.e.f. 1.4.2009
did not come for discussion , however, the Tribunal did take the note amendment
to section 2(15) by Finance Act 2015 w.e.f. 2016 and held that the new proviso,
with effect from 1st April 2016, seeks to exclude, from the scope of section 2(15),
the situations in which even in the course of pursuing advancement of any objects
of general public utility when any activities in the nature of trade, commerce or
business etc is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility, unless, the activity level remains
within the threshold limit i.e. receipts from such activities are less than twenty
percent of total receipts of that year. The relevant part of the order is reproduced
as under:
This substitution of proviso to Section
2(15), in our considered view, may be viewed as representing a paradigm shift in
the scope of the exclusion clause.
20. The
paradigm shift is this. So far as the scope of earlier provisos is concerned, the
CBDT itself has, dealing with an assessee pursing "the advancement of any object
of general pubic utility", observed that "If such assessee is engaged
in any activity in the nature of trade, commerce or business or renders any service
in connection to trade, commerce or business, it would not be entitled to claim
that its object is for charitable purposes" because "In such a case, the
object of 'general public utility' will only be a mask or a device to hide the true
purpose which is trade, commerce, or business or rendering of any service in relation
to trade, commerce or business." The advancement of any objects of general
public utility and engagement in trade, commerce and business etc. were thus seen
as mutually exclusive in the sense that either the assessee was pursuing the objects
of general public utility or pursuing trade, commerce or business etc. in the garb
of pursing the objects of general public utility. As the CBDT circular itself demonstrates,
there could not have been any situation in which the assessee was pursing the objects
of general public utility as also engaged in trade, commerce of business etc. In
the new proviso, however, even when the assessee is engaged in the activities in
the nature of trade, commerce or business etc. and "such activity is undertaken
in the course of actual carrying out of such advancement of any other object of
general public utility" it is excluded from the scope of charitable purposes
only when "the aggregate receipts from such activity or activities during the
previous year, do not exceed twenty per cent of the total receipts, of the trust
or institution undertaking such activity or activities, of that previous year".
In other words, even when the activities are in the course of advancement of any
other object of general public utility, but in the nature of trade, commerce or
business etc, the proviso seeks to exclude it only when the threshold level of activity
is not satisfied. Whether such a statutory provision stands the legal scrutiny or
not is another aspect of the matter, and that is none of our concern at present
anyway, it is beyond doubt that the new proviso, with effect from 1st April 2016,
seeks to exclude, from the scope of section 2(15), the situations in which even
in the course of pursuing advancement of any objects of general public utility when
any activities in the nature of trade, commerce or business etc "is undertaken
in the course of actual carrying out of such advancement of any other object of
general public utility", unless, of course, the activity level remains within
the threshold limit i.e. receipts from such activities are less than twenty percent
of total receipts of that year."
65. We
may point out here that the Amritsar Bench of the Tribunal has held that substitution
of proviso to Section 2(15), by Finance ITA No. 1382/Chd/2016- Chandigarh
Lawn Tennis Association, Chandigarh Act 2015 has brought a paradigm shift in the
scope of the exclusion clause i.e first proviso to section 2(15) of the Act. However
the paradigm shift brought by the insertion of second proviso to section 2(15) did
not come for discussion before the Coordinate Bench of the Tribunal. In the first
proviso, the words 'if it involves' before the words 'the carrying on of any activity
in the nature of trade, commerce or business....' is crucial and important which
means that it is the carrying on of any other object of general public utility which
may involve the activity in the nature of trade, commerce or business. The activity
in the nature of trade, commerce or business should not be separately or distinctly
carried out but it should be a part of the main activity of the institution.
In our
view, by way of above amendment by Finance Act 2015, the Parliament just has reiterated
its earlier intention and purpose, as was for introducing the amendments to section
2(15) w.e.f. 1.4.2009, by way of again introducing the clause (a) to the proviso,
wherein, it has been mentioned that the first proviso is applicable if the receipts
are generated in actually carrying out the object of the general public utility
being incidental or ancillary to the main object. We do not find that the above
words introduced by the Finance Act 2015 are clarificatory or explanatory, rather
the same ,in our view, is reiteration of the wording which already was there in
the first proviso to section 2(15) of the Act. Rather the scope otherwise, of the
provisio has also been curtailed by bringing in the ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh more restrictive words "in the course of
actual carrying out of such advancement of any other object of general public utility"
in clause
(a) to
the proviso to section 2(15) of the act. These words are crucial in the light of
differentiation drawn between the phrases " in the course of the actual carrying
out of their primary purpose" and the phrase "the business is incidental
to the attainment of the objectives of the trust." by the Supreme Court in
the case of "CIT vs Thanthi Trust" (supra).
66. Now
coming to the point as to when the provisions of section 2(15) are read along with
other related or corresponding provisions in plain English grammar meaning, whether
they would render each or any of them redundant or inoperative, if it is so, which
provision is to be read and in what manner to arrive at the correct interpretation?
The relevant arguments and decisions that can be referred in this respect to are
enumerated as under:
(i) The
decision of Hon'ble Delhi High Court in the case of 'India Trade Promotion Organization
v. DGIT (Exemptions) (supra) wherein the hon'ble high court has held that if the
literal interpretation is given to the proviso to Section 2(15) of the Act, then
there would be no institution whatsoever which would qualify for the exemption under
Section 10(23C)(iv) of the said Act and the said provision would be rendered redundant.
That in order to save the Constitutional validity of the proviso, the same would
have to be read down and interpreted in the context of Section 10(23C)(iv).
(ii) That
section 11(4) recognizes that "property held under trust" includes a business
undertaking and, therefore, the business activity is not excluded from the charitable
activity or charitable purpose and that the literal and plain meaning to first proviso
to section 2(15) of the Act will make this section redundant. Reference has been
made to the decision of the Hon'ble Supreme Court in Surat Art Silk case wherein
the Hon'ble Supreme court has observed that Section 11(4) , would be rendered wholly
superfluous and meaningless, after the insertion of clause (bb) in section 13(1)
with effect from 1-4-1977.
(iii) Then
there is section 13(8) of the Income Tax Act, which states that nothing contained
in section 11 or section 12 shall operate so as to exclude any income from the total
income if the provisions of first proviso to clause (15) of section 2 become applicable
in the case of such person. This section if read isolation or in conjunction with
the first proviso to section 2(15) of the Act, will make the provisions of section
10 (23C) (iv) and section 11(4) of the Income Tax Act inoperative, meaningless or
redundant.
67. To
address all the above noted points of arguments and to properly analyse the relevant
provisions on the statute and their interse relation or effect ,we deem it proper
to reproduce, even at the cost of repetition, the relevant provisions here under:
"
Definitions.
Section
2.
In this
Act, unless the context otherwise requires, .................
(15) "charitable
purpose" includes relief of the poor, education, yoga, medical relief, preservation
of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh 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, or retention, of the income from
such activity, unless--
(i) such
activity is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility; and
(ii) the
aggregate receipts from such activity or activities during the previous year, do
not exceed twenty per cent of the total receipts, of the trust or institution undertaking
such activity or activities, of that previous year; (24) "income" includes--
(i) ........;
xxxxx (iia)
voluntary contributions received by a trust created wholly or partly for charitable
or religious purposes or by an institution established wholly or partly for such
purposes or by an association or institution referred to in clause (21) or clause
(23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause
(v) or by any university or other educational institution referred to in sub-clause
(iiiad) or sub-clause (vi) or by any hospital or other institution referred to in
sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral
trust. Xxxxxxx xxxxxxx Incomes not included in total income.
Section
10. In computing the total income of a previous year of any person, any income falling
within any of the following clauses shall not be included--
xxxxxxxxx
(23C) any income received by any person on behalf of-- xxxxxxxxx
(iv) any
other fund or institution established for charitable purposes which may be approved
by the prescribed authority , having regard to the objects of the fund or institution
and its importance throughout India or throughout any State or States; or
(v) any
trust (including any other legal obligation) or institution wholly for public religious
purposes or wholly for public religious and charitable purposes, which may be approved
by the prescribed authority , having regard to the manner in which the affairs of
the trust or institution are ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh administered and supervised for ensuring that
the income accruing thereto is properly applied for the objects thereof;
xxxxxxxx
Provided also that the income of a trust or institution referred to in sub- clause
(iv) or sub-clause (v) shall be included in its total income of the previous year
if the provisions of the first proviso to clause (15) of section 2 become applicable
to such trust or institution in the said previous year, whether or not any approval
granted or notification issued in respect of such trust or institution has been
withdrawn or rescinded;" Xxxxxx xxxxxx Income From Property Held For Charitable
Or Religious Purposes. Section 11.
(1) Subject
to the provisions of section 60 to 63, the following income shall not be included
in the total income of the previous year of the person in receipt of the income-- xxxx (4)
For the purposes of this section "property held under trust" includes
a business undertaking so held, and where a claim is made that the income of any
such undertaking shall not be included in the total income of the persons in receipt
thereof, the Assessing Officer shall have power to determine the income of such
undertaking in accordance with the provisions of this Act relating to assessment;
and where any income so determined is in excess of the income as shown in the accounts
of the undertaking, such excess shall be deemed to be applied to purposes other
than charitable or religious purposes.
(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 the trust or, as the case may be, institution, and separate books of account
are maintained by such trust or institution in respect of such business.
Xxxxxx
xxxxxxx Section 13. .............
(8) Nothing
contained in section 11 or section 12 shall operate so as to exclude any income
from the total income of the previous year of the person in receipt thereof if the
provisions of the first proviso to clause (15) of section 2 become applicable in
the case of such person in the said previous year.
Xxxxxxxx
ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh xxxxxxxx "ASSESSMENT" :
143. (1)...............
(3) On
the day specified in the notice,--
xxxxxxxx
Provided also that notwithstanding anything contained in the first and the second
proviso, no effect shall be given by the Assessing Officer to the provisions of
clause (23C) of section 10 in the case of a trust or institution for a previous
year, if the provisions of the first proviso to clause (15) of section 2 become
applicable in the case of such person in such previous year, whether or not the
approval granted to such trust or institution or notification issued in respect
of such trust or institution has been withdrawn or rescinded."
68. The
provisions of different sections as enumerated above, in our view, are to be read
to be in harmony with each other so that each and every section should aid and supplement
to the meaning and construction of other, so as to arrive at the correct interpretation
rather than to read any or each of them in contradiction of each other making the
other provision/s redundant and inoperative leading to confusion, anomaly and absurdity.
Therefore, these provisions are to be read as each provision of the section supplement
to other and not supplant the other and so that a reasonable construction may be
arrived at and applied as may be intended by the Parliament while introducing the
above provisions in the Statute.
69. In
our view, when we read the aforesaid relevant provisions of the different but related
sections in harmony to each other, a valid and proper construction can be arrived
giving a meaning interpretation .
Chandigarh
Lawn Tennis Association, Chandigarh 69 (1) The introduction of second proviso to
section 2(15) of the Act, as discussed above, has removed the anomalies which have
occurred due to the aforesaid different provisions present in the statute. The proposition
that if any surplus is generated from business activity which is again ploughed
back for the activities of the trust exemption u/s 11 is to be allowed has been
done away with by the crucial words " irrespective of the nature of use or
application, or retention, of the income from such activity" introduced in
the first proviso of section 2(15) of the Act.
69 (2).
Now, coming to the provisions of section 10(23C)(iv) of the Act, the income received
by any person, on behalf of any fund or institution established for charitable purposes
which may be approved by the prescribed authority, having regard to the objects
of the fund or institution and its importance throughout India or throughout any
State or States exempt from taxation. Now for approval to claim exemption u/s 10(23C)(iv),
the institute for the fund must fall in the definition of 'charitable purposes'
which includes activity under all or any limb as discussed above and can not be
said to be applicable solely for activity of General Public Utility. So far institutes
established for the objects of relief to the poor, education yoga, medical relief,
preservation of environment and preservation of monuments or places or objects of
artistic or historic interest, their income may be claimed as exempt u/s 10(23C)
(iv) if they otherwise fulfill the conditions as enumerated ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh u/s 10(23C)(iv) of the Act. So far as the institute
carrying on the advancement of any other object of general public utility, as noted
above, their commercial income has also not been excluded in the light of second
provision to section 2(15) of the Act but subject to the limit prescribed of the
quantum of receipts. In respect of the question that if an institute or a trust
will not be engaged in the commercial activity, it will not have any income and
where is the question of claiming exemption is cornered, we may point out here that
the income of a charitable institution cannot be only from commercial activity,
but there are other modes of income also as per the provisions of section 2(24)(iia)
of the Act. Voluntary contributions received by the trust created wholly or partly
for charitable or religious purposes and included in the definition of income apart
from voluntary contribution, such charitable trust or institution may receive grants
from other modes or activity which may not in strict term to be said to be the activities
in the nature of trade, commerce or business. Suppose, a trust or institutions engaged
in the activity of imparting training in sports receives a nominal registration
fee from the trainees. Can it be said to be an activity in the nature of trade,
commerce or business? The answer will be in negative. Whether a particular activity
is in the nature of trade, commerce or business is to be examined taking into consideration
the nature of activity, the object and purpose of such activity, the volume of such
activity and the nature and volume of ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh the receipts and further the application thereof
also. Every receipt of income, in our view, cannot be termed as activity in the
nature of trade, commerce or business.
69(3).
Moreover the restriction placed in the first proviso is only in respect of the institutions
or trusts carrying out the activity for the advancement of any other object of Public
Utility, and not in respect of activity for the other limbs of section 2(15). Hence,
it cannot be said that the first proviso controls, restricts or bars any institution
established for charitable purposes for carrying out the objects or activities in
respect of other limbs and generating incidental income also therefrom.
69(4).
Moreover, the anomaly, if any, has been removed with the introduction of second
proviso to section 2(15) of the Act wherein the income from incidental or ancillary
commercial activity has also been allowed and included while carrying out the advancement
of object of general public utility also subject to the limit prescribed of the
receipts. The second proviso of the section is in consonance of the provisions of
section 11(4) & (4A) of the Income Tax Act.
69(5).
We may point out here that the provisions of sections 11(4) and 11 (4A) of the Act
are general provisions and are applicable to all the institutions claiming exemption
u/s 11 of the Act carrying out activity for charitable purposes. Definition of the
ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh 'Charitable purposes' as provided u/s 2(15)
of the Income Tax Act includes relief to the poor, education yoga, 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. Sub section 4A do not bar the carrying
on of business activity , however, puts restriction that such business should be
incidental to the attainment of the objectives of the trust or institution and separate
books of account are maintained. The restriction put by earlier section 13(1)(bb)
and after its omission and by the subsequently inserted section 11(4A) have been
well considered, interpreted and applied by the Hon'ble Supreme Court in the case
of "Thanthi Trust" (supra) and thus it can not be said to be said there
is any anomaly created by the above provisions . 69(6). Then there is sub section
(8) to section 13 of the Income Tax Act which states that nothing contained in sections
11 or 12 shall operate so as to exclude any income from total income of the previous
years if the provisions of first proviso to clause (15) of section 2 becomes applicable.
So the construction that any type of receipt which is incidental or ancillary to
the carrying out of the advancement of objects of general public utility will be
considered as income from charitable purposes if applied, such construction would
not only render the first and second proviso to section 2(15) as amended from time
to time and but also section 13(8) of the ITA No. 1382/Chd/2016-Chandigarh
Lawn Tennis Association, Chandigarh statute redundant and inoperative defeating
the purpose for which they were brought into statute by Parliament will be defeated.
At the same time, when we read the provisions of section 13(8) in isolation, it
will make the provisions of sections 11 (4) and 11 (4A) of the Act inoperative for
the institution carrying of object of advancement of general public utility, which
also involves the activity of carrying of business, trade or commerce generating
ancillary or incidental income. However, by the insertion of second proviso to section
2(15) as amended from time to time, the anomaly, if any, has been removed.
70. A harmonious
construction of these amended provisions will lead to the conclusion that each of
the provisions are in aid to and supplement each other. In our view, a reasonable
and meaningful construction that may be arrived now is that as per the provisions
of section 2(15) of the Act, 'charitable purposes' on the first part will include
relief to the poor, education, medical relief, preservation of environment and preservation
of monuments or places or objects of artistic or historic interest and advancement
of any other object of general public utility and further as per the provisions
of section 11(4) of the Act, such trust or institution can hold business assets
also. However, as per the provisions of section (4A), such business for profit should
be incidental to the attainment of the objectives of such trust or institution and
separate books of account are to be maintained. Further, to claim exemption u/s 10(23C)(iv) of the Act, the fund or institutes
must be established for charitable purpose and is approved / registered by the prescribed
authority having regard to their objects and importance throughout India and otherwise
fulfill the other conditions as enumerated u/s 10(23C) of the Income Tax Act. Here
we may point out the restriction put by section 11(4A) or section 13(8) do not in
any manner comes into play or otherwise restrict the business activity of the fund
or institutions established for charitable purposes and claiming exemption u/s 10(
23C)(iv) of the Act. But the restriction inter alia created by the provisos to section
2(15) read with the newly inserted 18 t h proviso to section 10( 23C) (as reproduced
above) and newly inserted proviso to section 143 (as inserted by Finance Act 2012
w.e.f. 1.4.2009) will apply that too only to the Institutions carrying on the activity
of advancement of any other object of General public utility and not to the institutions
established under other limbs of the definition of "Charitable Purposes".
Thus the provisos to section 2(15) or to section 10(23C) or to section 143 do not
make the provisions of section 10(23C)(iv) redundant or inoperative, but only put
some restrictions on the institutions carrying on the object of General Public Utility
in respect of their business activity.
71. As
per the second proviso to section 2(15) of the Act, income from incidental business
activity should not cross the limit as prescribed from time to time as per the amendments
carried out in ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh second proviso of the Income tax act and the
provisions of sections 11(4) & (4A) and section 10(23C)(iv) can be applied accordingly
and such a construction will not make any provision contrary or in contradiction
to the other, rather will supplement each other. Even the section 13(8) of the Act
can also be meaningfully applied which will be required to read in the light of
the second proviso to section 2(15) of the Act and thus harmonious construction
of the related provisions will give a meaningful and workable interpretation as
intended by the Parliament.
Hence,
in the light of discussion made above of the relevant provisions of the Act, the
interpretation that may be arrived is that for the trusts or the institutions carrying
on the activity included in the first part of definition of 'charitable purposes'
as defined u/s 2(15) of the Act viz. for the objects of relief to the poor, education
yoga, medical relief, preservation of environment and preservation of monuments
or places or objects of artistic or historic interest and are also carrying on the
business activity which is incidental to the attainment of objective of such trust
or institution [as provided u/s 11(4A)], they are entitled to claim exemption of
their income including the income from incidental business activity under section
11 of the Act subject to compliance or fulfilment of the otherwise required conditions
including inter alia registration of such trust or institution u/s 12 A of the Act
or maintaining of separate books of account regarding business activity as per the
provisions of section 11(4A) of the Act etc. and subject to the applicability
of the relevant provisions of section 11, 12 and 13 of the Act, irrespective of
the quantum of income earned from such incidental business activity. In other words,
there is no cap or limit prescribed for such receipts to be eligible for claiming
exemption from taxation u/s 11 of the Act.
As discussed
in the paras above of this order, any income received by a person on behalf of any
fund or institutions established for charitable purposes as included in the first
part of the definition as defined u/s 2(15) of the Act i.e. for the objects of relief
to the poor, education yoga, medical relief, preservation of environment and preservation
of monuments or places or objects of artistic or historic interest can be claimed
as exempt from levy of tax u/s 10(23C)(iv) of the Act irrespective of the quantum
of such income i.e without any cap or limit on such income subject to fulfilling
the other conditions as prescribed therein such as approval of such fund or institution
by the prescribed authority, having regard to the objects of the fund or institution
and its importance throughout India or throughout any State or States.
However,
the trusts or institutions carrying on such activity or established to carry on
such activity, as the case may be, that is falling in the last limb of the definition
of charitable purposes as defined u/s 2(15) of the Act i.e. for the advancement
of any other object of public utility which also involves the carrying of incidental 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, the restrictions inter alia put by the provisos to
section 2(15) such as that the incidental business activity should be in the course
of actual carrying out of the main object and the receipts therefrom should not
cross the limit or cap (as applicable from time to time) and further that it will
be immaterial that the funds or the profits from business activity are ploughed
back to sub serve the main or the predominant object of the trust. In this respect
the words "irrespective of the nature of use or application, or retention,
of the income from such activity" finding place in the first proviso to section
2(15) of the Act would come into play. However, the other restrictions as provided
under section 11(4A), 13(8) and 143(3) as discussed above, would accordingly apply
for claiming exemption u/s 11 of the Act; However, the restriction inter alia put
under the provisos to section 10(23C)(iv) and section 143(3) along with restrictions
put by the provisos to section 2(15), as discussed above, will apply for claiming
exemption u/s10(23) (iv). These restriction put under the provisos to section 2(15)
are applicable only to the activity of advancement of any other object of general
public utility.
72. However,
even after holding that the harmonious reading of the related provisions of the
Act, as discussed above, will lead to the conclusion that it cannot be said that
any of the related section is in contradiction to the other or in any manner
making inoperative or redundant the other, we still are of the view, that there
remains still an anomaly which has not been addressed by the Parliament till date
by way of introduction of the suitable provision. Suppose the income from incidental
and ancillary activity of an institution in the course of carrying out of activity
for advancement of object of general public utility crosses the limit, as prescribed
for different assessment years as per the provisos to section 2(15), can it be said
that such an institution will not be an institution carrying out the objects for
'charitable purposes'. For example for the assessment year 2009-10, the total receipts
of an institution from the ancillary activity in the shape of trade and commerce
or business are Rs. 9.95 lacs, the institution will be treated as an institution
for charitable purposes and its entire income exempt from taxation either u/s 11
or 10(23C) as the case may be, whereas, if there is a slight increase of Rs. six
thousands only in such business income, say it crosses the limit of Rs. 10 lacs,
i.e say at Rs. 10.01 lacs, then such trust or institution will be out of purview
of the 'charitable purpose' and its entire income will be included in the total
income, including the receipts which are not directly connected with the carrying
of the incidental activity in the nature of trade, commerce or business. Such an
anomaly will create utter confusion and will operate as restriction on the institution
genuinely involved in carrying out the objects of general public utility. The Institutes
which are rather carrying of the activity of general public utility
on large scale will not be entitled to claim the benefit under the provisions of
sections 11 & 12 of the Income Tax Act. Even the non-business income in the
form of voluntary contribution and donations or directly relating to charitable
activities (as discussed in para 61 (2) above) and not relating to the activity
in the nature of trade, commerce or business would also become taxable. The moment
the receipts from the commercial activity crosses the stipulated limit, the provisions
of section 13(8) of the Act and provisos to section 10(23C) and section 143 , as
the case may be, will come into play. It will mean that the entire income of an
institution carrying on the object of general public utility on a small scale involving
incidental commercial activity will be treated as exempt as it will not cross the
prescribed limit of Rs. 10 lacs or Rs. 25 lacs or 20% of the total receipt as applicable
for the different assessment years, however, the income of an institution carrying
on the activity of general public utility on large scale will become taxable if
the receipts from the incidental commercial activity crosses the limits as prescribed
for different assessment years as noted above. Though by way of amendment to second
proviso vide Finance Act 2015 w.e.f. 1.4.2016, the government has tried to remove
the anomaly by substituting fixed limit of receipts of Rs. 25 lacs with the 20%
of the total receipts, however, the question is that the receipts from the incidental
or ancillary commercial activity cannot, in our view, be controlled or restricted by way of measuring or controlling
the activities with golden scale or to say to check the same on day to day basis
and the stop carrying out the incidental activity, which otherwise may be necessary
to achieve the main object of general public utility, the moment the receipts touch
the threshold. The Hon'ble Supreme Court in the case of " Surat Art Silk Cloth
Manf. Assn." (supra) has held, "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."
The same analogy can well be applied in the facts and circumstances as discussed
above.
73. To
remove this anomaly, proper construction will be that the institution carrying out
the object of advancement of general public utility which involve the incidental
or ancillary activity in the nature of trade, commerce or business and generating
income therefrom, the income to such an extent as is limited by the second proviso
to section 2(15) of the Income Tax Act should be taken as exempt being treated as
income from charitable purposes as per the relevant provisions of sections 2(15),
section 10, section 11, section 12 or section 13, as the case may be and wherever
applied. The other income which is not from the commercial activity, such as, by
way of voluntary donations, contributions, grants or nominal registration fee etc.
or otherwise will remain to be from charitable purposes and eligible for exemption under the
relevant provisions. However, the income from activity in the nature of trade, commerce
or business over the above limit prescribed from time to time as per the second
proviso to section 2(15) of the Income Tax Act, should be treated as income from
the business activity and liable to be included in the total income. In this way,
the receipts of incidental business income while carrying out the objects of advancement
of general public utility, when these cross the limit prescribed u/s 2(15) of the
Act, will not render such institute as non-charitable bringing into taxation its
entire income including non-business income or even income from charitable activity
itself including voluntary contributions and donations. Only the business income
which will be over and above the prescribed limit will be subjected to taxation.
The above interpretation of the different provisions of the Act will lead to a harmonious
construction of the provisions removing hardship created by the first and second
proviso to section 2(15) read with section 13(8) of the Act and will also strive
to achieve the objects and purpose of sections 11(4) and 11 (4A), 10(23C)(iv) as
well as the provisions of section 2(15) along with its proviso and section 13(8)
of the Income Tax Act. Any other interpretation or conclusion, in our view, would
not be towards the achievement of the object or purpose for their insertion or introduction
in the statute and even will lead to hardship to the ITA No. 1382/Chd/2016-
Chandigarh
Lawn Tennis Association, Chandigarh institutions genuinely carrying on the activities
of advancement of general public utility.
74. After
holding as above, now, let us revert to the facts of the present case. The assessee
herein, inter alia, has taken a plea that that the assessee- association is involved
in imparting training to boys and girls in Tennis and is running a tennis academy
having coaches and instructor therefore the assessee trust can be said to be engaged
in imparting education and thus, is covered in the first limb of section 2(15) and
not under the last or residual limb. The Ld. Counsel, in this respect, has relied
upon the decision of the Delhi Bench of the Tribunal in the case of 'Pitanjali Yog
Peeth Nyas Vs ADIT' (Exemptions) (supra) wherein it has been held that imparting
training in Yoga amounts to educational activity.
75. We
are not convinced by the above argument of the ld. Counsel for the assessee. 'Education'
as defined under section 2(15) of the Act, in our view, can not be ascribed to such
an extended meaning. It does not appear the intention of the legislature to include
'training in sports' in definition and scope of term 'Education' for the purpose
of section 2(15) of the Act. Not only in general parlance but also in specific terms,
the sports activity is considered as a separate and distinct activity as compared
to 'education or studies'. The term training implies the act of imparting a special
skill or behavior to a person, but it is not exactly same as education, which is undertaken for the
purpose of furthering of knowledge and developing of intellect through a process
of systematic learning something in an institution that develops a sense of judgment
and reasoning. As discussed above in the opening paras of this order, Hon'ble supreme
court in the case of 'Sole Trustee, Lok Shikshana Trust vs. CIT'(supra) while further
relying on the decision of the Judicial Committee in the case of 'In re Trustees
of the Tribune' [1939] 7 ITR 415 (PC) has held that the word 'education' has not
been used in that wide and extended sense so far as the provisions of section 2(15)
of the Act are concerned. His Lordship Justice H.R. Khanna, writing the majority
view (for himself and Justice A.C. Gupta) observed as under :
"The
sense in which the word "education" has been used in section 2(15) in
the systematic instruction, schooling or training given to the young is preparation
for the work of life. It also connotes the whole course of scholastic instruction
which a person has received. The word "education" has not been used in
that wide and extended sense, according to which every acquisition of further knowledge
constitutes education. According to this wide and extended sense, travelling is
education, because as a result of travelling you acquire fresh knowledge. Likewise,
if you read newspapers and magazines, see pictures, visit art galleries, museums
and zoos, you thereby add to your knowledge. Again, when you grow up and have dealings
with other people, some of whom are not straight, you learn by experience and thus
add to your knowledge of the ways of the world. If you are not careful, your wallet
is liable to be stolen or you are liable to be cheated by some unscrupulous person.
The thief who removes your wallet and the swindler who cheats you teach you a lesson
and in the process make you wiser though poorer. If you visit a night club, you
get acquainted with and add to your knowledge about some of the not much revealed
realities and mysteries of life. All this in a way is education in the great school
of life. But that is not the sense in which the word "education" is used
in clause (15) of section 2. What education connotes in that clause is the process
of training and developing the knowledge, skill, mind and character
of students by normal schooling.
The question
as to whether a trust the object of which is to supply the people with an organ
of educated public opinion should be considered to be one for education or for any
other object of public utility was considered by the Judicial Committee in the case
of In re Trustees of the Tribune [1939] 7 ITR 415 (PC). In that case a person who
owned a press and a newspaper created a trust by his will by which his property
in the stock and goodwill of the press and newspaper was made to vest permanently
in a committee of certain members. It was the duty of the said committee of trustees
under the will "to maintain the said press and newspaper in an efficient condition,
and to keep up the liberal policy of the said newspaper, devoting the surplus income
of the said press and newspaper after defraying all current expenses in improving
the said newspaper and placing it on a footing of permanency". It was also
provided by an arrangement made subsequently that in case the paper ceased to function
or for only other reason the surplus of the income could not be applied to the object
mentioned above, the same should be applied for the maintenance of a college which
had been established out of the funds of another trust created by the same testator.
There was surplus income in the hands of the trustees after defraying the expenses
of the press and newspaper. Question arose as to whether that income was liable
to be assessed in the hands of the trustees. The Judicial Committee held that the
object of the settlor was to supply the province of the Punjab with an organ of
educated public opinion and this was prima facie an object of general public utility.
Their Lordships unequivocally expressed the view that they were not prepared to
hold that the property referred to in the various paragraphs of the will was held
for the purpose of "education" in the sense that word was used in section
4 of the Indian Income-tax Act of 1922. The above decision of the Judicial Committee
applies directly to the present case and, in view of this decision, we would hold
that the object of the appellant-trust was "the advancement of any other object
of general public utility".
76. So
far as the reliance of the ld. Counsel on the decision of the Delhi Bench of the
Tribunal in the case of 'Pitanjali Yog Peeth Nyas Vs ADIT'(Exemptions)'(supra) is
concerned, the Bench has considered the specific and distinct features of "yoga"
as compared to a game or sport. Apart from holding the systematic and regular classes
in Yoga as 'educational activity', the Chandigarh Tribunal has also held the 'Yoga' as falling
under the other limb 'medical relief'. It has been considered that the subject 'Yoga"
has been recognized as a separate stream of science and educational degrees courses
such as M.A. (Yoga Science), M.Sc. (Yoga Science), B.A. (Yoga Science) Post Graduate
Diploma in Panchkarma, Post Graduate Diploma in Yoga Science and Post Graduate Diploma
in Yoga Health and Cultural Tourism have been offered in the University set up by
the assessee trust in that case, which was duly recognized by the Govt. Even the
matter went in appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High
Court while admitting the appeal of the revenue has however held that the dissemination
of yoga or vedic philosophy or the practice of yoga or education with respect to
yoga was well within the larger term "medical relief" and that no substantial
question of law was involved on this aspect.
It is further
pertinent to mention here that yoga has been specifically included as a limb of
charity in section (15) of the Act w.e.f. 01.04.2016 on the same lines as education,
medical relief, relief to the poor, etc. In view of the above discussion, the case
law cited by the assessee is not applicable to the facts and circumstances of the
case. The contention of the assessee that the activity of the assessee of providing
training in tennis is education, therefor, can not be accepted, however, the same
can very well be said to be towards the advancement of any other object of general
public utility.
77. Now
coming to the point as to whether the activity of the assessee is hit by the provisos
to section 2(15) and other related provisions of the Act, it is neither the case
of the Assessing officer nor of the CIT(A) that the assessee is regularly following
commercial activity by exploiting its property and right to hold matches and thereby
earning income by way of allocating broadcasting rights, advertisements, sale of
tickets etc. The Ld. Counsel has brought on record that as per its aims and objects,
the assessee society is carrying on the activity of the promotion of game of the
tennis which also includes holding of domestic and international matches in tennis.
He has further submitted that rights to conduct matches like Devis Cup, which are
popular among the people are granted once a while to the assessee. That the assessee
has also been running Chandigarh Academy of Rural Tennis, wherein, boys and girls
from low income families of remote villages are selected, imparted training and
are trained in tennis at the cost borne by the assessee society. Even other schooling
expenses are borne by the assessee society. The Ld. Counsel in this respect has
placed reliance on the brochure and scheme of assessee society. The Ld. Counsel
has also placed on record the details of income derived from domestic as well as
international tournaments for the year 2008-09 onwards. As per the chart / documents
placed on record, for the year 2008-09, the assessee society organized six domestic
championships in tennis and four international matches. However, it suffered loss of Rs. 1,81,949/-in organizing
domestic tournament and a loss of Rs. 6,24,724.14 in organizing the international
tournament in tennis and thereby total loss of Rs. 8,06,673.14. For the year 2009-10,
the assessee society suffered loss of Rs. 2,89,190/- in organizing domestic tennis,
whereas, it received income of Rs. 6,28,468/- from organizing international tournament
thereby net profit of the assessee was at Rs. 3,39,278/-. For the year 2010-11,
the assessee society conducted 13 domestic tournaments suffering loss of Rs. 4,14,600/-
and one international event for junior players suffering loss of Rs. 20,253/- and
thereby totalling loss to Rs. 4,34,853/-. For the year 2011-12, the assessee suffered
loss of Rs. 5,20,968/- from domestic tournament whereas it got profits of Rs. 5,95,078/-
from international matches and the net income of the assessee stood at Rs. 74,110/-.
For the year 2013-14, the assessee got positive net income from holding of domestic
as well as international matches at Rs. 25,15,760/- and for the year 2012-13, the
assessee got allotted Davis Cup and it got a positive net income of Rs. 1,06,14,830/-
in respect of which exemption has been claimed for the year under consideration,
however the same has been denied by the Revenue authorities holding that the assessee
was indulged in commercial activity. However, for the next year 2013-14, the assessee
got net income of Rs. 25,15,760/-. For the year 2014-15, the assessee suffered loss
in domestic matches whereas it got positive income in one of the international tournament, whereas, he suffered loss in two
international tournaments and the net income of the assessee in holding all matches
came to Rs. 2,07,766/-. For the year 2015-16, the assessee suffered loss of Rs.
22,22,965/- and similarly for the year 2016-17, though the assessee got net positive
income from domestic matches, however, it suffered losses from holding of international
matches and the net result was of loss of Rs. 13,42,858/-.
78. The
Ld. Counsel for the assessee, therefore, has submitted that for the promotion of
game of tennis, catching young talent, not only out of urban population, but also
from rural population, imparting training in tennis to them and even financial help
including the schooling of the economically weak players is also done. So far as
the holding of Davis Cup and exploitation of the match rights was concerned, it
was explained that the assessee society need funds for carrying out its activities
and once and while it got right to organize match, which otherwise is part of main
object of the society in the course of carrying out its objects, it got incidental
income which is otherwise ploughed back for self- substance and for carrying the
aims and objects of the assessee society, hence, it cannot be said that the assessee
society's pre-dominant object is changed or that it has been indulged in commercial
activity.
79. We
find that except the above commercial exploitation of rights during the holding
of Davis Cup match, there is no dispute that the pre-dominant object of the assessee
society is promotion of game of tennis including the selection of players, training
of players, and conduct of matches both domestic and international. We, therefore,
do not think that the other income of the assessee such as from nominal registration
fees or nominal coaching fees which is charged so as to attract only the genuinely
interested trainees / players can be said to be its business income as it sans the
profit motive. The Ld. Counsel has explained in detail that the holding of matches
for commercial purpose is not a regular feature or regular activity of the assessee.
Even the Davis Cup was also organized as part of the objects of the assessee and
even the incidental income has been ploughed back and applied for carrying the aims
and objects of the assessee society. Therefore, in the light of the decision made
above, we hold that though the assessee Chandigarh Lawn Tennis Association is carrying
out the activities towards the advancement of objects of general public utility,
which is its dominant activity, however, it has also involved in carrying out the
incidental activity in the nature of trade, commerce or business in the course of
actual carrying out of advancement of object of general public utility by way of
commercially exploiting the rights of hosting the "Davis Cup Match". However,
as per the amended provisions of section 2(15), 10(23C), 11(4), 11(4A), 13(8) and
143(3) of the Income Tax Act and in view of our discussion and interpretation of
the relevant provisions as given above, the income of the assessee from the incidental and commercial
activity i.e. income from organizing of Davis Cup up to the limit prescribed as
per the second proviso to section 2(15), which for the assessment year under consideration
is Rs. 25 lacs, will be treated as income from 'charitable purposes' and the assessee
will be entitled to claim the exemption u/s 11 of the Act up to that extent in respect
of the said income along with other income, if any, from the non-business activity
of the assessee. However, the income over and above amount for Rs. 25 lacs from
the business activity i.e. from the exploitation of its right to hold Davis Cup
will be treated as 'business income' of the assessee and will be liable to include
in its total income. The assessing officer, therefore, is directed to bifurcate
the income from commercial activity and non-commercial activity and assess the income
of the assessee as directed above.
With the
above observations, the appeal of the assessee is treated as partly allowed.
Order pronounced
in the Open Court on 26.7.2018 Sd/- Sd/-
(ANNAPURNA GUPTA) (SANJAY GARG)
ACCOUNTANT
MEMBER JUDICIAL
MEMBER
Dated :
26.7.2018
Rkk
Copy to:
• The
Appellant
• The
Respondent
• The
CIT
• The
CIT(A)
• The
DR
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