Gujarat High Court
Director Of Income Tax (Exemption) vs Sabarmati Ashram Gaushala ... on 15 January, 2014
Author: Akil Kureshi
Bench: Akil Kureshi, Sonia Gokani
O/TAXAP/1162/2013 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 1162 of 2013
FOR APPROVAL AND SIGNATURE:
HONOURABLE Mr. JUSTICE AKIL KURESHI
and
HONOURABLE Ms. JUSTICE SONIA GOKANI
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1 Whether Reporters of Local Papers may be allowed to see the
judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as to the
interpretation of the Constitution of India, 1950 or any order made
thereunder ?
5 Whether it is to be circulated to the civil judge ?
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DIRECTOR OF INCOME TAX (EXEMPTION)....Appellant(s)
Versus
SABARMATI ASHRAM GAUSHALA TRUST....Opponent(s)
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Appearance:
Mr MR BHATT Sr Advocate with Mrs. MAUNA M BHATT, ADVOCATE for Appellant
Mr SN SOPARKAR Sr Advocate with Mr. B S SOPARKAR, ADVOCATE for Opponent
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CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI
and
HONOURABLE Ms. JUSTICE SONIA GOKANI
15th January 2014
ORAL JUDGMENT (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI)
Revenue is in appeal against the judgment of the Income Tax Page 1 of 15 O/TAXAP/1162/2013 JUDGMENT Appellate Tribunal, Ahmedabad {"Tribunal" for short} dated 7th June 2013, raising following questions for our consideration : [A] "Whether the Appellate Tribunal has substantially erred in directing the Assessing Officer to provide exemption u/s. 11 of the I.T Act to the assessee ?"
[B] "Whether the Appellate Tribunal has substantially erred in holding that the proviso to Section 2 (15) of the I.T Act was not applicable to the facts and circumstances of the case ?"
The controversy centers around activities of the respondent assesseeSabarmati Ashram Gaushala Trust. The said Trust is engaged in the activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. The question raised by the Assessing Officer was with respect to granting exemption to the Trust under section 11 of the Income Tax Act, 1961 ["Act" for short]. The Assessing Officer pressed in service newly added proviso to Section 2 (15) of the Act introduced w.e.f 1st April 2009 by the Finance Act of 2010 to hold that the Trust cannot be considered as one created for charitable purposes. The Assessing Officer analyzed the accounts of the respondentassessee and came to the conclusion that considerable income was generated from the Page 2 of 15 O/TAXAP/1162/2013 JUDGMENT activity of milk production and sale. He, therefore, passed an order dated 21st December 2011 framing assessment for A.Y 20092010 denying benefit of Sections 11 & 12 to the assessee.
Assessee carried the mater in appeal. CIT [A] rejected the appeal and confirmed the order of the Assessing Officer. The assessee, therefore, approached the Tribunal in second appeal. Tribunal, by the impugned judgment, reversed the decision of the revenue authorities holding that the assessee is a charitable trust and proviso to section 2 (15) of the Act will not apply. The Tribunal relied on the Finance Minister's speech in the Parliament explaining proviso to Section 2 (15) as also the CBDT Circular No. 11/2008 of 19th December 2008. The Tribunal took note of the objects of the Trust and came to the conclusion that the Trust was carrying on its activities on noncommercial basis with no motive to earn profit. The aims and objects of the Trust were charitable in nature. While implementing such objects, if there was any profit, incidentally generated, the same would not be hit by proviso to section 2 (15) of the Act. In the conclusion, the Tribunal clarified that the decision was delivered in peculiar facts of the case and would not apply to a case where the trust is doing business or trade under the grab of charitable activities. The Revenue is therefore Page 3 of 15 O/TAXAP/1162/2013 JUDGMENT before us in the present Tax Appeal, raising aforementioned questions of law.
Having heard learned counsel for the parties and having perused the documents on record, we notice that Section 11 of the Act pertains to 'income from property held for charitable or religious purposes' and provides, inter alia, that the income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the Trust.
Term "Charitable Trust" is defined in Section 2 (15) of the Act which includes the relief to the poor, eduction, medical relief, preservation of environment; including watersheds, forests and wildlife and preservation of monuments or places or objections of artistic or historic interest and advancement of any other object of general public utility. Proviso to Section 2 (15) and further proviso whereof inserted by Finance Act 2010 w.e.f 1st April 2009 read, thus 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, Page 4 of 15 O/TAXAP/1162/2013 JUDGMENT 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 legal controversy in the present Tax Appeal centers around the first proviso. In the plain terms, the proviso provides for exclusion from the main object of the definition of the term "Charitable purposes" and applies only to cases of advancement of any other object of general public utility. If the conditions provided under the proviso are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue to proviso, would be excluded from the definition of "charitable trust". However, for the application of the proviso, what is necessary is that the entity should be involved in carrying on activities in the nature of trade, commerce or business, or any activity of rendering services in relation to any trade, commerce or business, for a cess or fee or any other consideration. In such a situation, the nature, use or application, or retention of income from such activities would not be Page 5 of 15 O/TAXAP/1162/2013 JUDGMENT relevant. Under the circumstances, the important elements of application of proviso are that the entity should be involved in carrying on the activities of any trade, commerce or business or any activities of rendering service in relation to any trade, commerce or business, for a cess or fee or any other consideration. Such statutory amendment was explained by the Finance Minister's speech in the Parliament. Relevant portion of which reads as under : "I once again assure the House that genuine charitable organizations will not in any way be affected. The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether any entity is carrying on 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. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as "advancement of any other object of general public utility".
In consonance with such assurance given by the Finance Minister on the floor of the House, CBDT issued a Circular No. 11 of 2008 dated 19th December 2008 explaining the amendment as under : Page 6 of 15 O/TAXAP/1162/2013 JUDGMENT "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' ie., 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 carry on commercial activities. Whether such an entity is carrying on any 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 Page 7 of 15 O/TAXAP/1162/2013 JUDGMENT members, their claim to be chargeable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15).
3.2 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."
What thus emerges from the statutory provisions, as explained in the speech of Finance Minister and the CBDT Circular, is that the activity of a trust would be excluded from the term 'charitable purpose' if it is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess, Page 8 of 15 O/TAXAP/1162/2013 JUDGMENT fee and/or any other consideration. It is not aimed at excluding the genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce or business which are masked as 'charitable purpose'.
Many activities of genuine charitable purposes which are not in the nature of trade, commerce or business may still generate marketable products. After setting off of the cost, for production of such marketable products from the sale consideration, the activity may leave a surplus. The law does not expect the Trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating 'surplus' is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature. The Tribunal took into account the objects of the Trust, which are as under : "1. To breed the cattle and endeavour to improve the quality of the cows and oxen in view of the need of good oxen as India is prominent agricultural country and the cow milk as food is both conducive to and requisite for good health and longevity of human life. In order to improve the Page 9 of 15 O/TAXAP/1162/2013 JUDGMENT quality of the cattle, it is very essential to use a high quality bulls. Hence to produce and to get produced the best pedigreed bulls and to castrate the scrub bulls and propagate the work to prepare bullocks by castrating the bulls which do not become good bulls.
2. To produce and to sell the cow milk and its various preparations so as to popularize the use of cow milk and do all other works for the same.
3. To hold and cultivate or get cultivated agricultural lands, to keep grazing lands etc necessary or desirable for cattle keeping and breeding or to rehabilitate and assist Rabaris and Bharwads.
4. To hold and cultivate other land also in order to experiment in the improvement in agriculture and obtain finance support in all the activities of the institution.
5. To make necessary arrangements for getting informatics and scientific knowledge and to do scientific research with regard to keeping and breeding of the cattle, agriculture, use of milk and its various preparations etc and to establish scientific laboratories, libraries, reading rooms relating to the keeping of the cattle, improvement of agriculture etc and recognize or assist such institutions.
6. To establish other allied institutions like leather work etc and to recognize and help them in order to make the cow keeping economically viable successfully.
7. To publish books, periodicals, monthlies, advertisements, pamphlets, statements etc from time to time and for that matter to arrange for printing press, building etc in order to popularize the objects of the trust. Page 10 of 15
O/TAXAP/1162/2013 JUDGMENT
8. To accept all the trusts and benefactions not inimical to the trust objects conditionally or otherwise.
9. To open schools and hostels for imparting eduction in cow keeping and agriculture having regard to the trust objects or to help such schools and hostels and to make suitable arrangements for training workers required for the trust work.
10. To get the money from time to time as required for the trust work by way of gift, borrow on securities of the trust properties or obtain in any other way as deemed fit by the trustees.
11. To undertake such other activities from time to time for achieving or helping the trust objects as deemed fit by the trustees".
The Tribunal also noted that the objects were admittedly charitable in nature. The surplus generated was wholly secondary. It was, therefore, that the Tribunal held that the proviso to section 2 (15) of the Act would not apply.
We are wholly in agreement with the view of the Tribunal. The objects of the Trust clearly establish that the same was for general public utility and where for charitable purposes. The main objectives of the trust are to breed the cattle and endeavour to improve the quality of the cows and oxen in view of the need of good oxen as India is prominent Page 11 of 15 O/TAXAP/1162/2013 JUDGMENT agricultural country; to produce and sale the cow milk; to hold and cultivate agricultural lands; to keep grazing lands for cattle keeping and breeding; to rehabilitate and assist Rabaris and Bharwads; to make necessary arrangements for getting informatics and scientific knowledge and to do scientific research with regard to keeping and breeding of the cattle, agriculture, use of milk and its various preparations, etc.; to establish other allied institutions like leather work and to recognize and help them in order to make the cow keeping economically viable; to publish study materials, books, periodicals, monthlies etc., in order to publicize the objects of the trust as also to open schools and hostels for imparting eduction in cow keeping and agriculture having regard to the trust objects.
All these were the objects of the general public utility and would squarely fall under section 2 (15) of the Act. Profit making was neither the aim nor object of the Trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19 th December 2008 the proviso aims to attract those activities which are truly in the Page 12 of 15 O/TAXAP/1162/2013 JUDGMENT nature of trade, commerce or business but are carried out under the guise of activities in the nature of 'public utility'.
Delhi High Court in case of Institute of Chartered Accountants of India & Anr. vs. Director General of IncomeTax [Exemption] & Ors., reported in [2012] 347 ITR 99 (Delhi) considered these very provisions in the context of activities of the Institute of Chartered Accountants holding that the fundamental or dominant function of the Institute was to exercise overall control and regulate the activities of the members/enrolled chartered accountants and merely because the Institute was holding coaching classes which also generate income, the Court held that proviso to Section 2 (15) of the Act would not be applicable. It thus held and observed as under : "Section 2 (15) defines the term "charitable purpose". Therefore, while construing the term "business" for the said section, the object and purpose of the section has to be kept in mind. We do not think that a very broad and extended definition of the term "business" is intended for the purpose of interpreting and applying the first proviso to section 2 (15) of the Act to include any transaction for a fee or money. 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 Page 13 of 15 O/TAXAP/1162/2013 JUDGMENT regarded as 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 justify and show that the activity undertaken is in fact in the nature of business. The test as prescribed in Raipur Manufacturing Company [1967] 19 STC 1 (SC) and Sai Publication Fund [2002] 258 ITR 70 (SC); [2002] 126 STC 288 (SC) can be applied. The six indicia stipulated in Lord Fisher [1981] STC 238 are also relevant. Each case, therefore, has to be examined on its own facts.
In view of the aforesaid enunciation, the real issue and question is that whether the petitionerInstitute pursues the activity of business, trade or commerce. To our mind, the respondent while dealing with the said question has not applied their mind to the legal principles enunciated above and have taken a rather narrow and myopic view by holding that the petitionerInstitute is holding coaching classes and that this amounts to business."
In the result, we do not find that the Tribunal has committed any error and the Tax Appeal is therefore dismissed.
{Akil Kureshi, J.}
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O/TAXAP/1162/2013 JUDGMENT
{Ms. Sonia Gokani, J.}
Prakash*
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