Income Tax Appellate Tribunal - Hyderabad
Andhra Pradesh Foods,, Hyderabad vs Assessee on 15 May, 2015
ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad 'B' Bench, Hyderabad
Before Shri P.M. Jagtap, Accountant Member
& Smt.Asha Vijayaraghavan, Judicial Member
ITA No.1759/Hyd/2014
(Assessment year: 2005-06)
Andhra Pradesh Foods Director of Income Tax
IDA, Nacharam Vs. (Exemptions),
Hyderabad 500076 Aayakar Bhavan
PAN-AAATA 4938 R Hyderabad 500004
(Appellant) (Respondent)
For Assessee : Shri B. Satyanarayana Murty
For Revenue : Shri D. Sudhakar Rao, CIT (DR)
Date of Hearing : 07/05/2015
Date of Pronouncement : 15/05/2015
ORDER
Per Smt. Asha Vijayaraghavan, J.M.
This is an appeal preferred by the assessee against the order of the Director of Income Tax (Exemptions), Hyderabad dated 25.09.2014 u/s 12AA(3) of the Income Tax Act, 1961.
2. Briefly stated, the DIT (Exemption), through Notice dated 28.03.2014, proposed to cancel the Registration U/s.12A of the Income Tax Act, on the ground that the assessee is engaged in business activities, that the activities of the assessee resulting in high margins and that the assessee is not a charitable organisation as it is engaged in the business activity as a commercial concern and that it is a contractor to the Government of Andhra Pradesh.
3. The Government of Andhra Pradesh has instituted the ICDS Page 1 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad (Integrated Child Development Schemes) in various Districts with a view to implement various social welfare schemes.
4. The Government has decided to install a Centrally manufactured unit for production of Nutritious Food with the assistance of CARE & UNICEF in the year 1971. As a result, the AP Foods was set up for production of Nutritious Food to supply the Ready-to-Eat food to the beneficiaries as mentioned in above Para with the objective to serve the Government noble cause on no profit no loss basis. The Government from time to time allocates the beneficiaries every year and communicates to AP Foods. Accordingly, the Ready-to-Eat food is manufactured and supplied since last 30 years to the Government social welfare programmes. The AP.Foods is charging only the manufacturing cost for the food supplies made to various ICOS Projects and getting reimbursement from the Beneficiary Departments.
5. M/s. AP Foods is registered U/s.12A of the Income Tax vide Proceedings of HOtrs II/12A& 80G/79/86-87, with the main object of providing relief to the poor and Medical Relief. The DIT (E) claimed that he had perused assessment proceedings for 2005-06 and that as per form 3CD, it is shown that the assessee is carrying on the business of manufacturing and supplying of RTE Nutritious Food under govt. sponsored nutrition programmes. The DIT (E) further stated that in the notes to the computation, it is indicated that the institution was granted 12A that income constitutes income from business that the turnover is more than Rs.40,00,000 and so tax audit is carried out and thus, it was admitted that it is carrying on business. He referred to assessment records for 2006-07, 2007-08 with similar facts. According to the DIT (E) the assessee by carrying on the Page 2 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad business, forfeits the exemption in section 11 of the Income Tax Act.
6. The ld AR of the assessee explained that business is incidental to attaining the objects of the Trust and is permissible u/s 11(4A).
7. The ld AR also explained that the object of the institution is "relief of poor and medical relief" and that the amendment to section 2(15) w.e.f. 1.4.2009 does not disentitle the exemption u/s 11.
8. The ld AR also referred to the order of the CIT (A) for AY 2005-06, 2006-07, 2007-08 and 2010-11 wherein 12A registration has been granted.
9. The DIT (E) further held as follows:
"3. Further it was noticed from a brief note filed on Andhra Pradesh Foods (Annexure-A), during the assessment proceedings for A.Y 2007-08, under Col. No.11 pertaining to budget/grant, it is mentioned, A.P. Foods does not receive any budget provision directly from the Govt. The nutrition budget is being provided to the Govt. Departments such as Directorate of Women & Child Welfare, Directorate of Municipal Administration of A.P. Govt. A.P. Foods supplies nutritious food to these departments and the cost of food supplies are reimbursed from the budgetary provision made to these departments. Thus, as per such note furnished during assessment proceedings, it is stated that the assessee institution is being reimbursed by the concerned departments the cost of manufactured food supplied by it. However, from the audited statement of accounts furnished by Andhra Pradesh Foods, filed with the returns of income for A.Y 2005-06 to 2007-08, it is seen that the assessee institution is operating as a business concern with profit motive. In Col.No.32(b) of the tax audit report Page 3 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad furnished in Form 3CD for A.Y 2005-06 the net profit margin on turnover is shown at 6.36%. Such net profit for A.Y 2006-07 is shown at 7.18%. Such net profit for the A.Y 2007-08 is shown at high margin of 12.67%. In the face of such high net profit from the turnover made by the assessee institution during different years, it clearly shows that Andhra Pradesh Foods is running purely as a commercial organization and hence, not entitled for registration u/s 12A of the Act".
10. In reply, the ld AR of the assessee submitted that the prices of the products of the assessee are fixed by the State Govt. and are revised from time to time and therefore, the financial results of the assessee cannot be controlled by the assessee. It was pointed out that the profits are ploughed back and used for carrying out the objects of the assessee.
11. The Director of Exemption further objected for granting registration u/s 12A in the show cause notice on the ground that the assessee is only a Contractor carrying the job entrusted to it. The ld AR replied that the assessee manufacture food for needy and supply to beneficiaries specified by the govt. at quantities fixed by the govt. and it is carrying out this at cost specified by the Supreme Court.
12. In reply, it was submitted that the assessee supplies the ready-to-eat food to pregnant women, under-nourished children and lactating mothers. The organization is fulfilling its objects by supplying food so produced to the beneficiaries for the implementation of schemes promoted by Women & Child Welfare Department of the Govt. of Andhra Pradesh and other such related programmes. The nutritious food produced by the assessee is not sold in the commercial market nor it is supplied to the parties other than the beneficiaries under the schemes referred to above. It cannot be referred to as a contractor to the Govt. of A.P as it is involved in manufacture and supply of the Page 4 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad food to the beneficiaries. Only, the supervisory activities is carried on by the Govt. of A.P. in bringing out schemes for the benefit of the beneficiaries and fixing a suitable price to meet the cost of manufacturing and other overheads.
13. It was also submitted that the assessee is promoted mainly for the purpose of tackling malnutrition among the pregnant women, under-nourished children and lactating mothers. Therefore, it is an organization producing nutritious food and supplying it to the beneficiaries. It was argued that simply because these activities are supervised and supported by the Govt. the DIT (E) cannot term the assessee as a contractor.
14. The ld DIT (E) pointed out in the show cause notice that the assessee is paying the taxes such as sales tax, service tax and VAT etc., as any other commercial organization. The ld AR reiterated that u/s 11(4A) the assessee will not be denied exemption u/s 12A in paying the other taxes.
15. The ld AR also submitted before the DIT (E) the objects of the Institution which are charitable in nature. The AR stated the facts that the Society is registered in the name of A.P. Nutrition Council and the factory is run by the Council in the name of A.P. Foods. The PAN No. and 12A registrations were applied in the trade name Andhra Pradesh Foods. The A.P. Nutritious Council has no other activity except the running of A.P. Foods. The assessee receives a schedule before the beginning of the year showing the beneficiaries and the quantities and nature of products to be supplied and the list of Anganwadis. On the basis of the schedule, the assessee manufactures and supplies the products, and gets a reimbursement at the predetermined costs. There are about 90,000 Anganwadis in the State of A.P. Thus the assessee is a charitable institution meeting the needs of poor.
Page 5 of 11ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad
16. The ld AR also pointed out that the issues raised by the DIT (E) have already been decided by the CIT (A) and hence the DIT(E) has no jurisdiction to pass order on the same issues.
17. The DIT (E) however, held in his order as follows:
"since the assessee is not carrying on activity in accordance with charitable objects, but it is carrying on activity fully as a commercial organization as discussed above, it is a fit case for cancellation of registration u/s 12AA(3) of the Act. Hence, registration granted earlier to the assessee institution u/s 12A of the Act vide that order dated 23.3.1989 in F.No.H.Qrs.II/12A&80G/ 79/1986-87 is hereby cancelled w.e.f. 1.4.2005".
18. Aggrieved, assessee is in appeal before us. The ld Counsel for the assessee Shri Satyanarayana Murthy submitted as follows:
" As can be seen from the provisions of Sub section (4A) of Section 11 that even if an assessee carries on business, it will be entitled to the exemption provided U/s 11 if such business is incidental to attainment of the charitable objects of the assessee. The quantum of profits earned by an assessee from such business has no bearing to the provisions of the section 11 as detailed hereinabove. As long as the profits are utilised for the attainment of the objects of the assessee, it continues to enjoy the benefits provided u/s 11 of the Income Tax Act.
The word "Charitable purpose" is defined in Section 2(15) after the amendment in 2008, and the same is reproduced hereunder :
"charitable purpose" includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and Page 6 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad preservation of monuments or places or objects of artistic or historic interest.] and the advancement of any other object of general public utility:
Provided that tile 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 [twenty-five lakh rupees] or less in the previous year;] The Finance Act 2008 brought an amendment in the definition of Charitable Purpose in Section 2( 15) to include the First Proviso as detailed above. The definition of Charitable Purpose prior to the proposed amendment is as under:
"Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.
There are four limbs in the definition of charitable purpose. They are (1) Relief of the Poor, (2) Education, (3) Medical Relief, and
4) The advancement of any other object of general public utility As is evident from tile amendment, the fourth limb i.e.· the advancement of any other object of general public utility is hit by the amendment. It means a charitable organization claiming exemption U/s.11 ,of the Income Tax Act by claiming that it indulges in an advancement of general public utility, if it carries on business, trade or commerce, will forfeit the exemption provided therein after this amendment If the trade, business or commerce Page 7 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad is carried by a charitable organization pursuing objects covered by first 3 limbs i.e. Relief of tile Poor, Education and Medical Relief, it will continue to enjoy the exemption provided In Section 11 even after the amendment in the Finance Act, 2008. The restriction is only in the case of institutions claiming exemption U/s 11 under the Fourth and the residuary limbs of the definition of charitable purpose.
An analysis of all the Objects of M/s AP Foods, indicate that the organization is not only for the welfare of poor but also is pursuing Objects of Medical Relief. As all the objects pertain to "Relief of the Poor" and "Medical Relief', the assessee will continue to enjoy the exemption even after the amendment to Section 2(15) of the Income Tax Act".
All these details were placed before the Assessing Officer in the course of the assessments for the Assessment Years 2005-06, 2006-07, 2007-08, 2010- 11 and 2011- 12.
Thus, there is no prohibition in the Act that a charitable institution should not indulge in any business activity. The only restriction is that it should conform to the provisions of Sub-sections 4&4A of Section 11 of the Income Tax Act and the activity should come within the provisions of Section 2(15) defining the charitable purposes.
19. The ld Counsel relied on the decision in the case of ACIT vs. Thanthi Trust (247 ITR 785 (S.C). The ld Counsel also pointed out that all these aspects dealt with by the DIT (E) were considered CIT (A)-IV Hyderabad while disposing off the group appeals for the AYs 2005-06 2006-07, 2007-08 and 2010-11 wherein he had held as under:
"8.6 To sum up, I hold that the appellant was engaged in charitable purposes inthe nature of relief to the poor, that consequently, the first provisio to Section 2(15) did not apply to the appellant, and that the appellant had satisfied the conditions of Section 11 (4A) for AY 2010- Page 8 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad
11. The appellant is, therefore, eligible for exemption U/s 11 for A Y 2010-11".
20. It was submitted that the since the issues raised by the DIT (E) have already been decided by an officer of the rank of the CIT (A), the DIT (E) has no jurisdiction to decide on the same issues.
21 The ld DR relied on the order of the DIT (E).
22. We heard both the parties. We find that circular dated 6.4.2011 clearly states that Sec. 12AA (3) is only operative w.e.f. A.Y 2011-12 onwards. In the case of DIT (E) vs. Moolchand Khairati Ram Trust (339 ITR 622) it has been held as follows:
"In sub-section (1) clause (b) and sub-section (3) of section 12AA of the Income Tax Act, 1961, cancellation of registration was provided where the registration was granted under clause (b) of sub-section (1). Further, cancellation under sub-section (3) was also provided where the registration was obtained at any time u/s 12A (whether under clause (a) or clause (aa) of sub-section (1) of section 12A). But this power of cancellation of registration u/s 12A came to be incorporated by way of amendment introduced by the Finance Act, 2010 w.e.f. June 1, 2010. Now w.e.f. June 1, 2010, the power vests with the Commissioner to cancel the registration granted under any of the clauses of sub-section (1) of section 12A.
The assessee trust obtained registration in December, 1974. Based on this the assessee got exemption of income-tax in the assessments u/s 143(3) of the assessment years 1996-97 to 2005-06. The Director of Income Tax cancelled the registration u/s 12AA(3) w.e.f. A.Y 2002-03 by his order dated June 30, 2009. The Tribunal set aside the order of cancellation. On appeal the High Court:
Held, dismissing the appeal, that the cancellation of Page 9 of 11 ITA No 1759 of 2014 Andhra Pradesh Foods Hyderabad registration was not valid".
23. We also are of the opinion that for invoking the provisions of section 12AA(3) the DIT (E) should establish that:
(a) The activities of the assessee are not genuine
(b) The activities are not carried on in accordance with the objects of the Institution.
24. In the present case the DIT (E) has not established that the conditions (a) and (b) mentioned in section 12AA(3) of the I.T. Act are attracted. Therefore, we find the order of the DIT (E) improper relying on the decision of the Tamil Nadu Cricket Association vs. DIT (E) Madras (360 ITR 633).
25. We also find that the Director of Income Tax has proceeded to hold that if business is carried on by a charitable organisation, it will forfeit its exemption. The assessee is producing nutritious food to supply the ready-to-eat food to pregnant women, under- nourished children and lactating mothers. The organisation is fulfilling its objects by supplying food so produced to the beneficiaries for the implementation of schemes promoted by the Women & Child Welfare Department of the Government of Andhra Pradesh and other such related programmes. The nutritious food produced by the assessee is not sold in the commercial market nor it is supplied to the parties other than the beneficiaries under the schemes referred to above. It cannot be referred to as a contractor to the Government of Andhra Pradesh as it is involved in manufacture and supply of the food to the beneficiaries. Only, the supervisory activities are carried on by the Government of Andhra Pradesh, in bringing out schemes for the benefit of the beneficiaries and fixing a suitable price to meet the cost of manufacturing and other overheads.
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26. Thus, there is no prohibition in the Act that a charitable institution should not indulge in any business activity. The only restriction is that it should conform to the provisions of sub- sections 4 & 4A of section 11 of the I.T. Act and the activity should come within the provisions of section 2(15) defining the charitable purposes.
27. For the reason given above, we set aside the impugned order of the ld DIT (E) and allow the appeal of the assessee.
28. In the result, assessee's appeal is allowed. Order pronounced in the Open Court on 15th May, 2015.
Sd/- Sd/-
(P.M. Jagtap) (Asha Vijayaraghavan)
Accountant Member Judicial Member
Hyderabad, dated 15th May, 2015.
Vnodan/sps
Copy to:
1. Venugopal & Chenoy, CAs, 4-1-889/16/2 Tilak Road, Hyderabad 500001
2. Director of Income Tax (Exemptions) Aayakar Bhavan, Hyderabad 500004
3. The ADIT(E) Hyderabad
4. The DR, ITAT, Hyderabad
5. Guard File By Order Page 11 of 11