Income Tax Appellate Tribunal - Chennai
Nellai Tuticorin Nadar Mahamai ... vs Assessee on 29 January, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'D' : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI N.S. SAINI, ACCOUNTANT MEMBER]
I.T.A.No.1667/Mds/2010
Assessment year : 2007-08
M/s Nellai Tuticorin Nadar vs The Director of
Mahamai Paripalana Sangam Income-
No.488 Pantheon Road tax(Exemptions)
Egmore, Chennai - 600 008 Chennai
(Appellant) (Respondent)
Appellant by : Shri S.Sridhar
Respondent by : Shri Anirudh Rai
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
This appeal of the assessee, for assessment year 2007-08, is directed against the order of the DIT(E), Chennai, dated 29.1.2010, denying renewal of exemption u/s 80G of the Income-tax Act, 1961.
2. The assessee-society has filed an application in Form No.10G on 29.7.2009 for grant of renewal of exemption u/s 80G of the Act.
The DDIT(E)-IV, vide his report dated 21.1.2010 did not recommend for renewal of exemption because he found that the receipts of the :- 2 -: ITA 1667/2010 assessee-society are in the nature of trade/commerce/business which were evidenced from the accounts statement submitted before him.
In support of its case, the assessee-society filed a letter dated 28.1.2010 in the Office of the DIT(E), a copy of which was filed before us during hearing of the case. Before us, following grounds have been raised:
"1) The order of rejection of the application seeking approval under Sec. 80G of the Income tax Act in respect of donations to be received by the appellant-Trust passed by the Director of Income tax (Exemptions), Chennai is arbitrary and erroneous and have been based on wrong interpretation and classification of the activities of the Trust.
2) The Learned Director of Income tax (Exemptions) has erred in refusing to grant of approval to the Trust in respect of donations to be received by the Trust on the mistaken conclusion that the activity involving the appellant-Trust providing lodging to its members and the public is in the nature of trading.
3) The Learned Director of Income tax (Exemptions) has failed to appreciate that the activities involving providing of accommodation etc. for nominal charges only was only a means to an end and not the end itself. In other words, the appellant-Trust had been earning income from providing accommodation to the public visiting Chennai for nominal charges only to carry out the objects of the Trust, which is not prohibited.
4) The Learned Director of Income tax has further failed to note that the very act of providing accommodation to the public visiting Chennai (belong to poor community) at nominal rates is itself a charitable activity helping the public in general. 5) The Learned Director of Income tax ought to have followed the ratio of decision of the Madras High Court in the case of C.LT. vs. A.M.M. Arunachalam Educational Society reported in 243 ITR 229 (Mad) in which their :- 3 -: ITA 1667/2010 Lordships have ruled that when a trust is existing for running an educational institution its activity is not relevant for being accorded exemption u/s 10(22) , now Sec.
10(23C)(vi). Hence, the Director of Income tax has erred in rejecting the application of the appellant under Sec. 80G.
6) The Learned Director of Income tax (Exemptions) has further failed to elaborate how the activities cannot be treated as charitable and the conclusion is hence arbitrary and not based on any lawful reason.
7) The Learned Director of Income tax (Exemptions) has not met the reasoning expounded by the representatives of appellant-trust in their letter dated 27.01.2010 and also has not stated any reason for departing from the principles and instructions laid down in circular No. 11/08 dated 19.12.2008 issued by the Central Board of Direct taxes which is binding on the Learned Director.
8) The Learned Director of Income tax (Exemptions) has also not judiciously followed the principles stated in para 2.2 of the same circular of the Board wherein it has been stated that entities whose object is education or medical relief would also continue to be eligible for exemption as charitable institutions, even if they incidentally carryon a commercial activity. The appellant trust as its object providing education for which is running a school which is approved under Sec. 10(23C)(vi) by the Chief Commissioner.
9) The Learned Director of Income tax (Exemptions) has particularly failed to follow the pronouncement of the Board in the said circular in para 3.2 wherein it has been stated that each case would be decided on its own acts and no generalization is possible.
10) The Learned Director of Income tax (Exemptions) has grossly erred in treating the activities of the Trust as in the nature of trade and not charitable because the appellant- trust had been running a school out of the funds collected from the activities in so many years which is approved under sec. 10(23C)(vi) of the Income tax Act and he failed to appreciate that any charitable purpose cannot be carried out without finding some means of funds other than :- 4 -: ITA 1667/2010 donations which cannot always be ensured and the appellant has to find some on regular income for carrying out the objects of the Trust.
For these grounds and any other ground that may be adduced during the appeal proceedings, it is prayed that the impugned order rejecting the renewal of approval of donations under sec. 80G to the appellant-trust be quashed and the Director of Income tax (Exemptions) be directed to grant approval under Sec. 80G of the Income tax Act."
3. We have considered the rival submissions and have carefully examined the entire records available before us. It is an undisputed and accepted case that the assessee-society continued to be registered u/s 12AA of the Act and its registration has not been withdrawn u/s 12AA(3) of the Act. Section 80G deals with "deduction in respect of donations to certain funds, charitable institutions, etc.". If the trust is recognized u/s 80G(5), the donors get benefit of tax as referred in sub-clause(iv) of clause(a) of sub-section (2) only if it is established in India for a charitable purpose and if it fulfils the following conditions, namely:-
2[(i) where the institution or fund derives any income, such income would not be liable to inclusion in its total income under the provisions of sections 11 and 12 3[* * *] 4[5[***]] 6 [or clause (23AA)] 7[or clause (23C)] of section 10 :8
[Provided that where an institution or fund derives any income, being profits and gains of business, the condition that such income would not be liable to inclusion in its total :- 5 -: ITA 1667/2010 income under the provisions of section 11 shall not apply in relation to such income, if--
(a) the institution or fund maintains separate books of account in respect of such business;
(b) the donations made to the institution or fund are not used by it, directly or indirectly, for the purposes of such business; and
(c) the institution or fund issues to a person making the donation a certificate to the effect that it maintains separate books of account in respect of such business and that the donations received by it will not be used, directly or indirectly, for the purposes of such business;]]
(ii) the instrument under which the institution or fund is constituted does not, or the rules governing the institution or fund do not, contain any provision for the transfer or application at any time of the whole or any part of the income or assets of the institution or fund for any purpose other than a charitable purpose;
(iii) the institution or fund is not expressed to be for the benefit of any particular religious community or caste;
(iv) the institution or fund maintains regular accounts of its receipts and expenditure; 9[* * *]
(v) the institution or fund is either constituted as a public charitable trust or is registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India or under section 2510 of the Companies Act, 1956 (1 of 1956), or is a University established by law, or is any other educational institution recognised by the Government or by a University established by law, or affiliated to any University established by law, 11[12[***]] or is an institution financed wholly or in part by the Government or a local authority; 13[***] 14 [(vi) in relation to donations made after the 31st day of March, 1992, the institution or fund is for the time being approved by the Commis-sioner in accordance with the rules15 made in this behalf 15a[; and] :- 6 -: ITA 1667/2010 16 [***]] 15a [(vii) where any institution or fund had been approved under clause (vi) for the previous year beginning on the 1st day of April, 2007 and ending on the 31st day of March, 2008, such institution or fund shall, for the purposes of this section and notwithstanding anything contained in the proviso to clause (15) of section 2, be deemed to have been,--
(a) established for charitable purposes for the previous year beginning on the 1st day of April, 2008 and ending on the 31st day of March, 2009; and
(b) approved under the said clause (vi) for the previous year beginning on the 1st day of April, 2008 and ending on the 31st day of March, 2009.]
4. This trust is established in India and fulfills the above requisite conditions. The DIT(E) has mainly relied on lodge receipts to deny the benefit of section 80G(5). The receipts of the assessee-society during the year are of rent from hall and shop besides from sale of books etc. These activities were treated by the authorities as not charitable in nature. The society also runs a lodge which was treated by the authorities as purely commercial activity. It was argued that providing accommodation in the lodge by the Society to the lower middle class people visiting Chennai at a very low rates which were only sufficient to cover the maintenance, repair and other incidental expenses relating to the lodge, does amount to a charitable activity. These receipts in our considered opinion, in the given circumstances, when the facts have not been disputed, would not relate to any trade or :- 7 -: ITA 1667/2010 commerce activity, as such. It was stated before us by the ld.AR that the surplus funds were utilized on running the school maintained by the Society. It was stated that there is no evidence that any receipt over and above the expenditure from the lodge was being used for any other purpose. As a matter of fact, it was only a source of funds to generate income in the absence of donations on which always cannot be relied upon. Obviously, there has to be a perennial source of income to carry out its objects. We are aware that each case has to be considered on its individual merits and the question whether the society pursues its objects for charitable purpose or not is a question of fact. Running of a lodge cannot, ipso facto, be treated as a business activity. We do not find that there is any element of trade or business involved in the maintenance of the lodge, rather it is only a regular source for pursuing the objects by the society. There is no evidence on record to construe that providing an accommodation in the lodge was anyway related with any trade or commerce of any of the members of the society. On the contrary, it is found that this is in the advancement of the object of the general public utility. The society also runs a school which is providing education. The society does not receive any cess or fees or any consideration in relation to :- 8 -: ITA 1667/2010 the trade or commerce of the members but simply provides accommodation to the public and necessarily not to the members of the society. The definition of 'charitable purpose' given u/s 2(15) is an inclusive definition and is not exhaustive one. So, what is 'charitable purpose' is always a question which is open to interpretation. The charitable purpose has to be construed in the common parlance by applying common sense alone. It was stated that the society did not sell any flowers but the word 'flowers' used in the statement of accounts relates to the Golden Jubilee Souvenir which in Tamil is called "Malar" which means flower also. All these things have not been discussed by the DIT(E) in his order. Before us, reliance was placed on the Circular No.11 of 2008 dated 19.12.2008 in which 'charitable purposes' are enlisted.
"Section 2(15) of the Act defines "charitable purpose" to include the following:
(i) Relief of the poor
(ii) Education
(iii) Medical relief, and
(iv) The advancement of any other object of
general public utility.
An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in :- 9 -: ITA 1667/2010 commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of 'charitable purpose'. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states 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 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.
2. The following implications arise from this amendment -
2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2 (15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities.
2.2. 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carryon a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that :
(i) the business should be incidental to the attainment of the objectives of the entity, and :- 10 -: ITA 1667/2010
(ii) Separate books of account should be maintained in respect of such business.
Similarly, entities whose object is 'education' or 'medical relief' would also continue to be eligible for exemption as charitable institutions even if they incidentally carryon a commercial activity subject to the conditions mentioned above.
3. The newly inserted proviso to section 2( 15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' i.e. the fourth limb of the definition of 'charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10 (23C) of the Act if they carryon 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 the activity.
3.1. There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between 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 any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).
:- 11 -: ITA 1667/20103.2. In the final analysis, however, 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 relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business."
5. It is seen that none of the conditions mentioned in the circular hit the case of the assessee for recognition u/s 80G(5) r.w.s 2(15) of the Act. Obviously, these are inclusive and not exhaustive as we have mentioned above. Consequently, when the objects of the society are not found to be not charitable in nature and the Society continues to be registered u/s 12AA of the Act and the reasonings given by the DIT(E) to deny renewal of approval u/s 80G being not sufficient and plausible, we do not find any reason to deny exemption u/s 80G of the Act to the Society. We, therefore, direct the DIT(E) to grant approval u/s 80G to the assessee-society.
:- 12 -: ITA 1667/20106. In the result, the appeal stands allowed.
The order pronounced in the open court on 3.6.2011.
Sd/- Sd/-
(N.S. SAINI) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 3rd June , 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR