Andhra HC (Pre-Telangana)
The Commissioner Of Income-Tax ... vs Water And Land Management Training And ... on 15 March, 2017
HONBLE SRI JUSTICE V.RAMASUBRAMANIAN AND HONBLE Ms. JUSTICE J.UMA DEVI
I.T.T.A. No.56 of 2017
15-3-2017
The Commissioner of Income-tax (Exemptions), Hyderabad Petitioner
Water and Land Management Training and Research Institute, H.No.1-8-121/3, Rajendranagar, Himayatsagar, Hyderabad-500 030
Counsel for the Petitioner: Mr. J.V. Prasad,
Senior Standing Counsel
Counsel for Respondent:Mr. K.Vasantkumar
<Gist:
>Head Note:
? Cases referred:
1. [2013] 356 ITR 360 (AP)
2. [2010] 329 ITR 404 (Ker)
HONBLE SRI JUSTICE V.RAMASUBRAMANIAN
AND
HONBLE Ms JUSTICE J.UMA DEVI
I.T.T.A.No.56 of 2017
Judgment: (per V.Ramasubramanian, J.)
This appeal is filed by the Revenue under Section 260A of
the Income Tax Act, 1961, raising the following reframed
substantial question of law:
Whether, on the facts and in the circumstances of the
case, the Tribunal is correct in law in holding that the
assessee is entitled to registration under Section 12A of
the Act, when some of the activities of the assessee are
found to be commercial in nature and its gross receipts
from such activities exceed, year on year, the limit set
out in the proviso to Section 2(15) of the Income Tax Act,
1961?
2. Heard Mr. J.V. Prasad, learned Senior Standing
Counsel for Revenue and Mr. K.Vasantkumar, learned counsel
appearing for the respondent.
3. Even according to the Revenue, the respondent/
assessee is an institution established in the year 1983 under
the control of the Irrigation Department of the Government of
Andhra Pradesh. The assessee filed an application in Form
No.10A on 19-01-2012 seeking registration under
Section 12AA of the Income Tax Act, 1961.
4. The Director of Income Tax (Exemptions) issued
a questionnaire and the assessee submitted its response.
The assessee claimed that the Government of Andhra Pradesh
started the institute through grant-in-aid and that a sizeable
portion of its income is earned through capacity building
service and through consultancies. The Director of Income Tax
observed that though the institute was mainly functioning as a
training institute, for the purpose of training Government
officials in the field of water and land management, the institute
was also providing guidance to the farmers and rendering
consultancy services to various organizations for a fee. With
this view, the Director of Income Tax (Exemptions) rejected the
application for registration.
5. As against the order of the Director, the assessee filed
a statutory appeal before the Tribunal. The Tribunal allowed
the application and directed registration, on the basis of the
decision of the Delhi High Court in India Trade Promotion
Organisation v. Director of Income Tax (Exemptions) [2015] 371
ITR 333 (Del)]. Aggrieved by the said order, the Revenue is
before us.
6. The main grievance of the appellant/department is that
the Tribunal did not take note of a judgment of the
jurisdictional High Court, namely, this Court rendered in A.P.
State Seed Certification Agency v. Chief CIT and a decision of
the Kerala High Court in Infoparks Kerala v. Deputy CIT , but
chose to follow the decision of the Delhi High Court, which
arose out of a challenge to the 1st proviso to Section 2(15) of the
Act. In other words, the contention of the department is that
the Hyderabad Bench of the Tribunal was bound by the
decision of the jurisdictional High Court and that when the
gross receipts made by the assessee from out of the activities
found to be commercial in nature, exceeded the limit set out in
the proviso to Section 2(15), the assessee was not entitled to
seek registration under Section 12A.
7. We have carefully considered the contentions of the
learned counsel for the department.
8. In order to test the veracity of the contentions,
we shall first take a look at the definition of the expression
charitable purpose appearing in Section 2(15) of the Act,
which reads as follows:
charitable purpose includes relief of the poor,
education, yoga, medical relief, preservation of
environment (including water-sheds, 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:
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
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;
9. It must be pointed out that the definition of the
expression charitable purpose, as inserted by Finance Act,
1983 with effect from 01-4-1984 read as follows:
Charitable purpose includes relief of the poor,
education, medical relief and the advancement of any
other object of general public utility.
But the said definition was completely changed by
Finance Act, 2008 with effect from 01-4-2009. Thereafter, by
an amendment under Finance Act, 2010, two provisos were
inserted. These two provisos were substituted by new provisos
under the Finance Act, 2015 with effect from 01-4-2016.
10. In the case on hand, the application for registration
was made on 19-01-2012. At the time when the application for
registration was made, the provisos that were available to
Section 2(15) read as follows:
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 twenty-five lakh rupees or
less in the previous year.
11. Therefore, for the purpose of answering the question
of law raised in this appeal, we will have to take note of the
definition contained in Section 2(15) together with the two
provisos that were in the Statute from 01-4-2012 up to
01-4-2016.
12. A careful look at the definition of the expression
charitable purpose appearing in Section 2(15) would show
that it is an inclusive definition and not an exhaustive
definition. This is clear from the usage of the word includes.
The definition includes within its ambit, (1) relief of the poor,
(2) education, (3) yoga, (4) medical relief,
(5) preservation of environment including water-sheds, forests
and wildlife, (6) preservation of monuments or places or
objects of artistic or historic interest and (7) the advancement
of any other object of general public utility. Interestingly, the
first proviso does not deal with anyone of the first 6 items,
namely, relief of the poor, education, yoga, medical relief,
preservation of environment and preservation of monuments
or places. The first proviso as it stood before 01-4-2016 or
even as it stands after 01-4-2016 deals only with one of the
7 items covered by the substantive part of the definition,
namely, advancement of any other object of general public
utility.
13. The second proviso takes away from the ambit of the
first proviso, even an activity relating to the advancement of
any other object of general public utility, if the aggregate value
of the receipts from the activities referred to in the first proviso
is Rs.25 lakhs or less in the previous year.
14. In other words, the scope and ambit of Section 2(15)
should be understood in simple terms as follows:
(i) that 7 items of activities indicated in the substantive
part of Section 2(15) would come within the meaning of the
expression charitable purpose
(ii) that in respect of the last item, namely, advancement
of any other object of general public utility, the activity will
come within the purview of Section 2(15) only if it satisfies the
conditions prescribed in the first proviso and
(iii) that even those activities relating to advancement of
any other object of general public utility which go out of the
purview of the substantive part of Section 2(15) on account of
the first proviso, may come back within the ambit of the
substantive provision, if the aggregate value of the receipts is
Rs.25 lakhs or less in the previous year.
15. Keeping the scope of Section 2(15) in mind, if we
come back to the facts of the present case as admitted by the
department, it could be seen that the assessee is admittedly an
institute functioning mainly as a training institute for the
purpose of training various Government officials in the field of
water and land management. The factual finding recorded in
paragraph-3.0 of the order of the Director of Income Tax
(Exemptions) may be usefully extracted as follows:
From such submissions made during the course of
proceedings, though it is noticed that the above institute
was mainly functioning as a training institute for the
purpose of training of various government officials in the
field of water and land management and was also
providing guidance occasionally to the farmers, at the
same time, it is noticed that the assessee was also
rendering consultancy services to various organizations,
from which it has earned substantial amount of income
during the accounting years ended on 31.03.2009,
31.03.2010 and 31.03.2011. Providing of consultancy
services is one main objective of the assessee-society, as
may be noticed from the objects of the society referred to
by the assessee, reproduced above. Such services in the
matter of Water and Land management for the benefit of
the farmers and other organizations fall under the ambit
of advancing of an object of general public utility.
16. Even without disputing the findings recorded by the
Original Authority, it could be easily seen that the main fallacy
in the conclusion reached by the Director, lay in the fact that
all the activities of the assessee were linked by the Director
only to the last of the 7 items that form part of Section 2(15). In
other words, both the Director as well as the Tribunal thought
that the activities of the assessee would fall within the ambit of
the words advancement of any other object of general public
utility. By doing so, the Original Authority as well as the
Tribunal omitted to take note of the activity, namely,
preservation of environment including water-sheds, forests
and wildlife. If these authorities had understood the activity
carried out by the respondent to have a direct causal
connection to the activity of preservation of environment, they
would not have invoked the first proviso to Section 2(15). This
is where the respondents appear to have gone wrong.
17. In Infoparks Kerala, the question that arose before
a single Judge of the Kerala High Court was as to whether the
refusal of the department to issue an exemption certificate
under Section 197 of the Income Tax Act, 1961, after the
incorporation of the proviso to Section 2(15) was justified or
not. The refusal to register an institution under Section 12A
was not the issue before the single Judge of the Kerala High
Court. Therefore, the said decision cannot be taken to have
been rendered in the context of the question whether
an assessee would be entitled to registration and if so under
what circumstances. Therefore, the decision of the Kerala High
Court is not helpful to the department.
18. In A.P. State Seed Certification Agency, the question
that arose before a Division Bench of this Court was as to
whether the rejection of an application for approval under
Section 10(23C) of the Act for a particular assessment year was
correct or not. In the said case, the appellant/assessee already
had a registration under Section 12AA of the Act. There was no
issue before this Court as to whether the grant of registration
to the assessee in that case under Section 12AA was correct or
not. Section 10(23C) deals with incomes not included in total
income. Therefore, the question that was examined by the
Division Bench of this Court in A.P. State Seed Certification
Agency was with respect to the inclusion of a particular income
while computing the total income of the previous year. It did
not relate to the entitlement of the institution to registration
under Section 12AA. This Court never found fault with the
grant of registration to the assessee in that case. Therefore, the
question as to whether the respondent is entitled to registration
under Section 12AA cannot be examined on the strength of the
decision in A.P. State Seed Certification Agency.
19. Insofar as the decision of the Delhi High Court in
India Trade Promotion Organisation is concerned, we have
already indicated that what was under challenge before the
Delhi High Court was the vires of the first proviso to
Section 2(15). Interestingly, the case before the Delhi High
Court also arose, as in the case of A.P. State Seed Certification
Agency, on account of the refusal under Section 10(23C).
Eventually, the Delhi High Court, granted relief to the assessee,
but upheld the constitutional validity of the first proviso. The
Delhi High Court did not agree with the view taken by a Bench
of this Court in A.P. State Seed Certification Agency.
20. The fact that the question raised in the present writ
petition is not the one that was decided by a Bench of this
Court in A.P. State Seed Certification Agency, is beyond any
pale of doubt. Therefore, the refusal of the Tribunal to follow
the decision of this Court in A.P. State Seed Certification Agency
cannot be found fault with. It is only in cases where the very
same question of law had been raised and decided by the
jurisdictional Court that the Bench of the Tribunal located
within the jurisdiction of the said High Court is bound to follow
the same. But that is not the case with A.P. State Seed
Certification Agency. At the cost of repetition, it should be
pointed out that we are concerned in this case with the refusal
of registration to the assessee under Section 12AA,
in contrast to A.P. State Seed Certification Agency which
admittedly had registration under Section 12AA and which was
not in dispute.
21. As rightly pointed out by Mr. K.Vasantkumar,
learned counsel for the respondent, Section 13(8) of the Income
Tax Act, 1961, inserted by the Finance Act, 2012 with effect
from 01-4-2009 makes it clear that nothing contained in
Section 11 or 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
Section 2(15) become applicable in the case of such person in
the said previous year. Therefore, at the stage of grant of
exemption, the question of looking at the gross receipts does
not arise. To understand it in simple terms, we must look at
the provisions as providing 2 gate passes. The 1st gate pass is
in Section 12AA. The 2nd is under various provisions
which deal with exemptions or exclusion of income.
The respondent/assessee is actually at the outer gate.
The very 1st entry pass is denied to the respondent, on
a wrong application and understanding of the scope of Section
2(15). It is only after an institution is granted registration
under Section 12AA that the examination of the gross receipts
year after year for the purpose of finding out the eligibility for
exemption would arise. This has also been clarified by a
Circular issued by the Central Board of Direct Taxes in
Circular No.21/2016, dated 27-5-2016. Paragraph-2 of the
said Circular reads as follows:
2. Section 2(15) of the Act provides definition of
charitable purpose. It includes advancement of any
other object of general public utility provided it does not
involve carrying on of any activity in the nature of trade,
commerce or business etc. for financial consideration.
The 2nd proviso to said section, introduced w.e.f. 01-04-
2009 vide Finance Act 2010, provides that in case where
the activities of any trust or institution is of the nature of
advancement of any other object of general public utility
and it involves carrying on of any activity in the nature of
trade, commerce or business; but the aggregate value of
receipts from such commercial activities does not exceed
Rs.25,00,000/- in the previous year, the purpose of such
trust/institution shall be deemed as charitable despite
it deriving consideration from such activities. However, if
the aggregate value of these receipts exceeds the
specified cut-off, the activity would no longer be
considered as charitable and the income of the trust/
institution would not be eligible for tax exemption in that
year. Thus an entity, pursuing advancement of object of
general public utility, could be treated as a charitable
institution in one year and not a charitable institution in
the other year depending on the aggregate value of
receipts from commercial activities. The position remains
similar when the first and second provisos of section
2(15) get substituted by the new proviso introduced w.e.f.
01-4-2016 vide Finance Act, 2015, changing the cut-off
benchmark as 20% of the total receipts instead of the
fixed limit of Rs.25,00,000/- as it existed earlier.
22. Therefore, we are of the considered view that the
Director of Income Tax (Exemptions) as well as the Tribunal
committed 2 mistakes, namely, (a) that of overlooking the
first 6 activities covered by Section 2(15) and focusing on the
7th activity which has a correlation to the first proviso and
(b) that of looking at the gross receipts even before the grant of
registration.
23. Hence, the question of law raised by the department
is answered against the department and the appeal is
dismissed. The miscellaneous petitions, if any, pending in this
appeal shall stand closed. No costs.
___________________________
V.RAMASUBRAMANIAN, J.
_______________ J.UMA DEVI, J. 15th March, 2017