Ms. Rano Jain, Accountant Member - These two appeals filed by the Revenue are directed against the separate orders of learned Commissioner of Income Tax (Appeals), Chandigarh dated 14.11.2013 and 22.8.2014, relating to assessment years 2010-11 and 2011-12 respectively, passed under section 250(6) of the Income Tax Act, 1961 (in short 'the Act').
2. Since the facts and circumstances are identical in both the appeals, the same were heard together and are being disposed off by this consolidated order for the sake of convenience.
3. We will take up the appeal of the Revenue in ITA No.151/Chd/2014 and the decision given in this appeal will apply to the case of the Revenue in ITA No. 858/Chd/2014 mutatis mutandis.
4. Briefly, the facts of the case are that the assessee, a society, is a body working under the Department of Space, Government of India. The main objective of the assessee is to undertake, aid, promote, guide and coordinate research and development in the field of semiconductor technology, micro-electro mechanical system and process technologies relating to semiconductor processing as per the Memorandum of Association and rules and regulations of the society. During the assessment proceedings, the Assessing Officer noted that the assessee had made certain purchases and sales and so he was of the view that the activities of the society were not of charitable nature. According to him, the sales were made at lower rates and so provisions of section 40A(2)(b) of the Income Tax Act, 1961 (in short 'the Act') were also attracted. The reply of the assessee was that it was a public utility concern falling under the Department of Space and products being developed were for specific requirement of various government departments. It was submitted that the assessee was not a profit-making concern or rendering any trade or business with profit-making as an objective in relation to any trade, commerce or business so as to fall under the proviso to section 2(15) of the Act. It was also stated that the assessee is registered under section 12AA of the Act for advancement of object of general public utility and strategic needs of the country i.e. for R & D purposes. As regards section 40A(2)(b) of the Act, it was stated that the same is not applicable since the sales were made to the Government Departments, which cannot be treated as sister concern only because they are organizations of Government. The Assessing Officer rejected all the contentions of the assessee and held that it was not eligible for exemption under section 11 of the Act and, therefore, the profit earned during the year from sales and purchases fall within the ambit of proviso to section 2(15) of the Act and were liable to be taxed.
5. Before the learned CIT (Appeals), it was stated that since the registration under section 12A of the Act has been granted by the Commissioner of Income Tax to the assessee, it has been impliedly held by the Commissioner of Income Tax that the activities of the assessee are covered by the definition of charitable purpose within the meaning of section 2(15) of the Act, the Assessing Officer cannot sit in judgment on the order of the Commissioner of Income Tax. The learned CIT (Appeals) agreeing with the submissions of the assessee allowed the grounds of the assessee with regard to the findings of the Assessing Officer that the assessee is not a charitable society though falling under the ambit of section 2(15) of the Act. Further, it was submitted that the amount utilized for addition to the capital assets of Rs.3,72,20,000/- was not considered by the Assessing Officer. It was also submitted that the observation of the Assessing Officer that the books of account were not separately maintained for grants is erroneous since the assessee works totally on grants. The observation of the Assessing Officer that the persons to whom the sales were made also were claiming exemption under section 11 of the Act is not correct since the sales were made to Government Department. The learned CIT (Appeals) after considering the submissions of the assessee, held that surplus of income over expenditure is less than 15% even if the addition to capital assets is not taken into account and so the case of the assessee is not hit by the provisions of section 11 of the Act. Accordingly, he held that the Assessing Officer was not right in taxing the surplus of Rs. 3,27,80,000/- by denying the exemption under section 11 of the Act to the assessee.
In the passing, he also mentioned that the observations of the Assessing Officer that the assessee did not provide any documentary evidence to the effect that the activities done by the assessee during the year were of charitable nature, is not relevant for the reason that the assessee was granted registration under section 12A of the Act by the Commissioner of Income Tax on the ground that the activities of the assessee were covered within the meaning of "charitable purpose", as defined in section 2(15) of the Act. Further, he observed that the view of the Assessing Officer that the sales were made at lower rates is not relevant because the sales are made only to the Government Department. Moreover, the provisions of section 40A(2)(b) of the Act do not apply to sales. In this way, the learned CIT (Appeals) allowed the appeal of the assessee.
6. Aggrieved by this, the Revenue has come up in appeal before us. The learned D.R. during the course of hearing before us, submitted that the fact the assessee is registered under section 12A of the Act by the Commissioner of Income Tax, does not debar the Assessing Officer to examine the nature and activities of the assessee and the observation of the learned CIT (Appeals) that the Assessing Officer cannot sit over the judgment of the Commissioner of Income Tax is not correct. The Assessing Officer was required not only to examine the claim of exemption in view of the provisions of sections 11 and 12 of the Act, as the Commissioner of Income Tax-II in his order under section 12AA of the Act dated 31.10.2008 itself had laid down that it is certified that this certificate does not entitle the applicant automatically to the exemption of its income under sections 11 and 12 of the Act. It has also been stated in the same certificate that the Assessing Officer shall be free to decide such claim of exemption of income to the assessee under sections 11 and 12 of the Act, after examining it on merits and after satisfying himself that the conditions and requirements laid down in this section are fulfilled by the assessee. The assessee undoubtedly, is having registration under section 12A of the Act. However, the activities carried on by it during the year show that it was carrying on the activities in the nature of business or commerce with an intention to earn profit. Therefore, the Assessing Officer is entitled to not allow exemption under section 11 of the Act.
7. The learned counsel for the assessee relied on the order of the learned CIT (Appeals). Further, it was stated that by holding that the assessee falls under the ambit of proviso to section 2(15) of the Act, the Assessing Officer had not appreciated the meaning of the word 'trade, commerce or business', which as per meaning of the said connotation as supported by various legal pronouncements is held to be any activity of such nature carried on with the object of earning profit, which element is missing in the present case. A heavy reliance was placed on the judgment of Hon'ble Supreme Court in the case of Khoday Distilleries Ltd. v. State of Karnataka [1995] 1 SCC 574, whereby the meaning of the term 'business and commerce' have been interpreted. With regard to the separate books of account, it was submitted that the assessee society works in totality against the Government grants only. Therefore, there is no need to maintain separate books of account. In fact, the books of account maintained by the assessee may be treated as separate books of account. In respect of the allegation of the Assessing Officer that the sales were made at lower rate to the sister concern, he submitted that the assessee being an autonomous body of Department of Space, Government of India is not a business organization working for profit so as to compare its strategic devices as any other profit making business organization. Its prices are not comparable in the market since the products manufactured by the assessee being for the strategic need of the nation are not available in the commercial or open market. The allegation of the Assessing Officer that the society or departments to whom the assessee had made sales were also making claim of exemption under section 11 of the Act, is also mis-conceived as the products are being supplied to various Government Departments and others are not in fact claiming exemption under section 11 of the Act.
8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that for the year under consideration, the assessee is a society, which have been granted registration under section 12AA of the Act. Therefore, it is eligible for exemption under section 11 of the Act. The Assessing Officer has denied the assessee exemption under section 11 of the Act in view of the first proviso to section 2(15) of the Act, which defines the meaning of charitable purpose. Though we should note here that in the order of the Assessing Officer he has mentioned only section 2(15) of the Act and not the proviso thereunder. However, we infer from the reading of the whole order that the Assessing Officer is denying exemption to the assessee in view of the first proviso to section 2(15) of the Act only.
9. Before proceeding further, there arises a preliminary question to be answered in this case. The assessee has been denied exemption under section 11 of the Act despite being registered under section 12A of the Act and the learned CIT (Appeals) has allowed the appeal of the assessee stating that the Assessing Officer need not examine the evidences to the effect that the activities done by the assessee during the year were all charitable in nature, is not relevant for the reason that the assessee was granted registration under section 12A of the Act by the Commissioner of Income Tax on the ground that the activities of the assessee were covered within the meaning of charitable purposes as provided in section 2(15) of the Act. However, we do not find ourselves in agreement with this finding of the CIT (Appeals) because though the registration under section 12A of the Act is a pre-requisite condition to claim exemption under section 11 of the Act, however, the Act grants power to the Assessing Officer to check the eligibility of the assessee for claim of exemption under section 11 of the Act on yearly basis from the assessment proceedings. We are also in agreement with the arguments of the learned D.R. that while granting registration under section 12AA of the Act, the Commissioner of Income Tax himself has laid down a condition that the certificate of the registration under section 12A does not entitle the assessee automatically to the exemption of its income under section 11 of the Act.
10. Now coming to the main issue whether the assessee is eligible for exemption under section 11 of the Act from the relevant assessment year in view of the fact that it is registered under section 12AA of the Act. Section 12AA provides for the procedure for registration of a trust or institution by the Commissioner of Income Tax. Section 11 of the Act provides for the definition of income from property held for charitable of religious purpose, which are basically the exemption provision, whereby an entity registered under section 12AA of the Act can avail exemption on the 'income from property held for charitable purpose', subject to the provisions of section 11 of the Act. Sub-section (1)(1A), (2), (3) and (4) are provisions with respect to the various conditions to be fulfilled by an assessee to avail exemption of any income derived by him from the property held for charitable purposes. All these sub-sections talks about the exemption of income subject to respective conditions provided therein. Sub-section (4) to section 11 is an exception to all these provisions and reads as under :
"(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of 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.]"
11. As per this section, the provisions of other sub-sections with respect to exemption under section 11 of the Act are not applicable in relation to any income earned by an assessee which is in the nature of profits and gains of business. Further, it also provides that profits and gains of this business may be allowable as exemption if the business is incidental to the attainment of the objectives of the trust. The same is available to an assessee with the condition that separate books of account are maintained in respect of such business.
12. Section 13 provides for the situation in which the provisions of section 11 are not applicable. Further, for the adjudication of the present appeal, the relevant sub-section is sub-section (8), which reads as under :
"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.]"
13. This sub-section provides that the exemption as provided under section 11 of the Act is not available to a person who does not fulfil the provisions as provided in the proviso to section 2(15) of the Act. The important term is 'in the said previous year'. This itself is evident to show the intention of Legislature is to provide for said verification on year to year basis by the Assessing Officer, while granting exemption under section 11 of the Act.
14. From the reading of all these provisions, we can very safely infer that an assessee can claim exemption under section 11 of the Act on income derived by it from the property held for charitable purposes subject to the condition provided under section 11 and subject to its registration under section 12A of the Act and the said exemption is not allowable to him if it does not satisfy the condition of first proviso to section 2(15) of the Act.
15. Since the reference in all the relevant sections are with respect to the 'income from property held for charitable purposes', we have to understand the meaning of charitable purpose first. This term is defined under section 2(15) of the Act as it stood from its inception, reads as follows :
'2(15) "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility]'
16. The charitable purpose always included the activities related to the relief of the poor, education, medical relief and advancement of any other object of general public utility. The activities related to the preservation of the environment and preservation of monuments or places or objects of artistic or historic interest were added to the charitable purpose by Finance (No. 2) Act, 2009 with retrospective effect from 1.4.2009. The term 'yoga' was inserted by the Finance Act, 2015 with effect from 1.4.2016.
17. First proviso to the said section was added by the Finance Act, 2008, which reads as under:
"Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;"
18. This proviso was inserted to section 2(15) of the Act as a rider to the charitable purpose involving advancement of any other object of general public utility. This amendment came in order to curb the entities which were formed for advancement of any other objects of general public utility and were availing exemption under section 11 of the Act while carrying on commercial activities. It was also clarified by the Circular No.11 of 2008 dated 19.12.2008 issued by the CBDT, whereby it has been categorically stated that if an assessee is engaged in the activities in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it cannot be entitled to claim that its objects are for charitable purposes. In such a case, an object of general public utility will be under a mask or device to hide the purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business.
19. From the above analysis, it can be easily infer that the proviso is applicable to these entities which carry on the activities in the nature of trade, commerce or business for a cess, fee or any such consideration. However, we also see that the provisions of section 11(4A) of the Act specifically provides that the business which is incidental to the attainment of the objectives of the trust and if separate books of account are maintained for such business, the same will be eligible for exemption under section 11 of the Act. In fact, the substantive part of the provisions of section 11(4A) of the Act are more or less the same as are in the proviso to section 2(15) of the Act, whereby the entities involved in carrying on business are debarred from claiming exemption under section 11 of the Act. Further, section 13(8) of the Act also provides to exclude any income which is not in consonance with the first proviso to section 2(15) of the Act. Therefore, it is quite understandable that the intention of the Legislature is to examine on a yearly basis whether the entity claiming exemption under section 11 is involved in carrying on any business, trade or commerce. As per the second part of the proviso, these activities also should be for a cess, fee or any other such consideration. There is no bar on the income tax authority to check these conditions at the time of granting exemption under section 11 of the Act even if the assessee is laced with the registration under section 12A of the Act.
20. In the present case, the only objection of the Assessing Officer in raising the proviso to section 2(15) of the Act is that the assessee is engaged in sale and purchase. Now the question arising before us is whether selling and purchasing of certain things amount to carrying of business so as to disentitle assessee the exemption under section 11 of the Act. Though a number of judgments were cited by both the sides, we would like to refer to the judgment of Delhi High Court in the case of India Trade Promotion Organisation v. DGIT (2015) 371 ITR 333/229 Taxman 347/53 taxmann.com 404, whereby the question was the constitutional validity of amendment to section 2(15) of the Act by inserting the said proviso. While adjudicating the issue the Hon'ble Court though held the proviso to section 2(15) of the Act to be not ultra-virus the constitution, however a 'reading down' of the proviso was advised by the Hon'ble Court. It has been very categorically held in the judgment that in pursuance of the provisions of this proviso in deciding whether any activity is in the nature of trade, commerce, or business, it has to be examined whether there is any element of profit making or not. Just by earning income, it cannot be said that the assessee is carrying on any business since it is only when such an assessee has an income that the question of not including it in its total income would arise. Therefore, merely because an institution which otherwise is established for charitable purposes receives income that would not make it any less a charitable institution. The most important finding given by the Court in this case to the extent relevant for the present appeal, are as under :
'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 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 fowl 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.'
21. Undisputedly, the judgment was rendered in the context of section 10(23C) of the Act. However, the proposition laid down by the Court are equally applicable for exemption under section 11 of the Act. Now the position emerging is that while deciding whether an assessee is engaged in the activity in the nature of trade, commerce or business to come under the ambit of proviso to section 2(15) of the Act in the context of exemption under section 11, we have to see the prime objective of the assessee while carrying out these activities. If the prime objective is profit-making than the assessee would be caught under the provisions of this proviso. However, if the activities are not driven primarily to earn profit but primarily to do charity then exemption will be available to the assessee in question. In such a scenario, the profit-making activity may be incidental to the attainment of its object of general public utility as provided under section 11(4A) of the Act, which was a part of Statute even before the insertion of proviso to section 2(15) of the Act.
22. In the present case, there is no finding by any of the lower authorities that the assessee was involved in any activities which was not in consonance of its objects on the basis of which it was granted registration under section 12AA of the Act. From the perusal of the Memorandum of Association of the assessee placed in Paper Book page 18 onwards. Apart from other objects, we see that the objects involved the following also:
"(a) |
to undertake, aid, promote, guide and coordinate research in the field of semiconductor technology, Micro Electro Mechanical Systems (MEMS) and process technologies relating to semiconductor processing. |
(b) |
to generate assignments for design, development, production and manufacture of semiconductor based electronic components, sensors, Very Large Scale Integrated (VLSI) circuits and MEMS. |
(c) |
to establish, maintain and manage laboratories, workshops, stores and other units for carrying out research and development work in the area of semiconductors and microelectronics. |
(c) |
to produce, manufacture, purchase or sell in relation to the aforesaid products and others allied thereto, or connected thereon for their production, manufacture or use and to purchase, produce all devices, articles, materials or things whether raw, manufactured, processed or produced or assembled or otherwise brought into existence which are connected in any way in or in relation to the aforesaid products in India or abroad." |
23. At point (d), we observe that to produce, purchase or sell is one of the main objects of the society. These were the objects on the basis of which it was given the registration under section 12AA of the Act. Therefore, it can not be said that by engaging in activities of sale and purchase the assessee is deviating from its objects. No doubt has been cast at any stage in respect of the fact that the assessee is formed primarily to do research and development activities for strategic defence needs of the nation. The products developed in this process are unique in nature and no other entity manufactures the same. There is no doubt about the fact that prior to the insertion of proviso to section 2(15) of the Act, there was no dispute as the income of the assessee being eligible for exemption under section 11 of the Act, meaning thereby that even if the assessee was earning any profit out of business carried on by it, the same was exempt under section 11 of the Act on the basis of the fact that the same was applied for charitable purposes. However, proviso to section 2(15) of the Act changes the scenario in the sense that it in fact carves out from the ambit of charitable purposes, those activities being of business in nature, irrespective of its application, whether for charitable or for charitable purpose. Here the mandate of Delhi High Court in the case of India Trade Promotion Organization (supra) of reading down the proviso comes into play, whereby one has to look to the dominant object of the assessee, whether it is to do charity or to do business. This implicitly allows the carrying of charitable activities and business hand in hand, subject to the conditions provided herein. This also explains the purpose of presence of sub-section (4A) to section 11, even after the insertion of proviso to section 2(15) of the Act.
24. Further, in the present case there is another clause No.60 in its Memorandum of Association, which reads as under :
"60. If, on the winding up or dissolution of the Society, there shall remain, after the satisfaction of all its debts and liabilities, any property whatsoever the same shall not be paid to, or distributed among, the members of the Society or any of them but shall be dealt with in such manner as the Government may determine."
25. From the reading of the above, it is also seen that even at the time of winding up or dissolution the assets of the assessee will not go to the benefit of any specific person but will be dealt with in such a manner as the Government may determine. In view of the above, it is quite clear that definitely the object of the society contains sale and purchase as one of its objects, still the ultimate object is not to give benefit to some specific person. Nowhere in his order, the Assessing Officer has been able to bring on record any material or evidence that the assessee is carrying on any activity which is driven by object of profit making. The assessee manufactures articles as required by the Government and sell those to the Government concern only. Another fact coming out from the order of the Assessing Officer that the assessee is making sales to the concern which was less than market rate, this fact also strengthens the case of the assessee that it is not driven by profit motive. No allegation of violation of any provision of section 13 of the Act is coming out from the order of the Assessing Officer nor it was contended before us. If the assessee does not do the activity of sale and purchase, it will come to a standstill and will not be able to work and the objects for which registration was granted to it will cease to exist. In order to attain its objects it has to in any case, carry on activities of sale and purchase. In this view, we do not find that the activities of sale and purchase which have been questioned by the Assessing Officer have been carried on by the assessee with the objective to earn profit. Once it is seen that the object of the assessee is not to carrying on the business for profit motive, we can very easily infer that whatever activities in the nature of business the assessee is carrying are all incidental to attainment of its main object. In such a scenario, the provisions of section 11(4A) of the Act comes into play and the assessee has to maintain separate books of account for said business. However, in the present case, the assessee is carrying all its activities out of grants received by the Government, therefore, there cannot be two separate set of books. This fact has not been controverted by the Assessing Officer, nor the learned D.R. while arguing before us, does the same.
26. In view of the above, as per the proposition laid down by the Delhi High Court in the case of India Trade Promotion Organization (supra), the case of the assessee is not hit by the proviso to section 2(15) of the Act. Therefore, for the assessment year under consideration, the assessee is eligible for exemption under section 11 of the Act.
27. In the result, both the appeals of the Revenue are dismissed.