Income Tax Appellate Tribunal - Chennai
Aurolab Trust, Madurai vs Assessee on 30 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'A'
BEFORE Dr.O.K.NARAYANAN, VICE PRESIDENT
AND SHRI HARI OM MARATHA, JUDICIAL MEMBER
I.T.A. No. 135/Mds/2011
Aurolab Trust, The Commissioner
No.1, Anna Nagar, Vs. of Income Tax-I,
Madurai - 625 020. Madurai.
PAN - AAATA 1142 P
(Appellant) (Respondent)
Appellant by : Shri V. Ramachandran
and Dr. Anita Sumanth
Respondent by : Shri Shaji P. Jacob, IRS
ORDER
PER Dr.O.K.NARAYANAN, VICE PRESIDENT This appeal is filed by the assessee. The appeal is directed against the order of the Commissioner of Income-tax-I, at Madurai passed under sec.12AA(3) of the Income-tax Act, 1961, cancelling the registration earlier granted to the assessee under :- 2 -: ITA 135/11 sec.12A. The registration has been cancelled through his proceedings dated 30.12.2010.
2. The assessee is a trust. It was created by the trust deed executed on 6.7.1992. The objects proclaimed in the trust-deed are the following :
(a) To establish and/ or build and/or maintain and/or run and/or improve and/or render financial assistance and/or make donations to and/or assist in the establishment, running, improving, or extension of hospitals, surgical homes, dispensaries, homes for the old, disabled or handicapped persons and institutions of medical research and such other similar Institutions as would give teaching and educating, medical and surgical treatment, care, cure, recuperation and other advantages to alleviate the sufferings of mankind.:- 3 -: ITA 135/11
(b) To take over any existing institutions of the kind referred to above and conduct, run, maintain, develop, extend and improve the same.
(c) To promote and carry on research in diseases and to promote education and research of innovation, experimental, preventive, curative and demonstrative kinds of various diseases prevalent among the people.
(d) To recruit, train and provide or to assist in recruitment and training medical and other staff for any such institutions with a view to attaining and in support of the said objects.
(e) To produce or manufacture or help to produce or manufacture medical equipments including ophthalmic instruments, lenses, surgical equipments and other accessories that are necessary for the treatment of patients or any product relating to the field of research and development of trust or activities of the trust and :- 4 -: ITA 135/11 generally make them available to the public or enter into any activity to facilitate the carrying on of business which is incidental to the attainment of main objects of the trust. The business or any activity amounting to business referred to above should be carried on satisfying the conditions laid down in the Income Tax Act from time to time for granting exemption, relief and rebate.
(f) To do all acts and deeds or lawful things as are incidental to or necessary and conducive to the attainment of the above objects or any of them provided however nothing hereinafter stated shall be deemed to include any object or purpose which is not a "charitable purpose" within the meaning of section 2(15) of the Indian Income Tax Act, 1961."
3. In the light of the above objects stated in the trust deed, the assessee had obtained registration under sec.12A as a charitable trust since 1992. The registration was granted by the Commissioner of Income-tax (Appeals) at Madurai on 9.10.1992. Thereafter, till passing of the impugned order by Commissioner of :- 5 -: ITA 135/11 Income-tax, the assessee trust has been enjoying exemption under sec.11(1)(a) of the Income-tax Act, 1961.
4. The order appealed against, passed by Commissioner of Income-tax under sec.12AA(3) is the culmination of enquiries made by the Commissioner in respect of the activities carried on by the assessee trust. The enquiries have been prompted by the materials furnished by the assessee trust along with the return of income filed for assessment year 2008-09. The Commissioner on perusal of report in form 3CD filed along with the return of income and the enclosures, found that the assessee trust is carrying on business activitities even though the objects of the trust are stated to be charitable in nature. It has been stated in the audit report that following are the activities carried on by the assessee trust ;
(a) Manufacturing and Trading in Intra Ocular Lens
(b) Manufacturing and Trading in Ophthalmic and Cardiovascular suture needles.
(c) Manufacturing and Trading in Ophthalmic Pharmaceutical products
(d) Manufacturing and Trading in Antiseptic Pharmaceutical products
(e) Manufacturing and Trading in Microsurgical blades :- 6 -: ITA 135/11
(f) Manufacturing and Trading in Bipolar Cautry
(g) Trading in Cataract Kits.
5. The Commissioner of Income-tax observed that the assessee is engaged in the activitities of manufacturing and trading in ophthalmic and cardiovascular products and accessories and the above activities are carried on as a business venture and therefore, the activities of the assessee trust could not be considered as charitable in nature. The Commissioner examined the relevant provisions of law contained in sec.11(4) and 11(4A) and stated that charitable or religious trusts can carry on business if the business is incidental to the attainment of the objects of the trust. He stated that the business income of a charitable trust or institution would be exempt if the business carried on by the trust or institution is incidental to the attainment of the objectives of the trust and carrying on the business should not be the primary object of the trust or institution. The Commissioner held that out of the seven objects pronounced in the trust deed, the assessee-company was carrying on one particular object alone which relates to manufacture and sale of :- 7 -: ITA 135/11 medical necessaries including ophthalmic instruments, lenses, surgical equipments etc.
6. The Commissioner further perused the profit and loss accounts and balance sheets of the assessee trust for the period covered by assessment years 2007-08 to 2010-11. The details examined by the Commissioner have been tabulated in page 4 of his order. As stated in the table, the assessee has manufactured and sold ophthalmic and medical items in the period relating to the assessment years 2007-08 to 2010-11. The total turnover of the assessee trust was `29,31,76,033/- for the assessment year 2007-08; ` 32,79,24,968 for assessment year 2008-09; `41,84,68,857/- for the assessment year 2009-10 and `45,68,24,768/- for the assessment year 2010-11. The Commissioner further observed that in order to achieve the above sales turnover, the assessee trust has incurred regular business expenditure like marketing commission and incentives to dealers, advertisement etc. The profit of the assessee trust from the above business was 49% of the turnover for the assessment year 2007- 08; 43% for the assessment year 2008-09 and 37% for the assessment year 2009-10. The assessee had made donations in :- 8 -: ITA 135/11 the above assessment years which accounted for 3%, 1% and 1% of the profits for the assessment year 2007-08, 2008-09, 2009-10 respectively. It was only for the assessment year 2010- 11 that the percentage of donations has been increased to 61% which amounted to ` 12,14,37,500/-. In respect of that donation also, the Commissioner found that the donations were predominantly made to its associate trust, M/s. Aravind medical Research Foundation. When the assessee has made a total donation of ` 12,14,37,500/- in the assessment year 2010-11, an amount of ` 12 crores has been made to Aravind Medical Research Foundation alone which accounted for 98% of the donations made by the assessee trust.
7. In the light of the above observations, the Commissioner of Income-tax held that even though the assessee trust has been registered as a charitable trust, it has not been carrying on any charitable activities in accordance with the objects proclaimed in its trust deed. The assessee trust is carrying on the business of manufacturing and selling of medical and ophthalmic items and the entire profit generated from the business is accumulated in the hands of the assessee itself as financial assets and wherever :- 9 -: ITA 135/11 donations have been made, the same have been substantially made to its own associate concern, M/s. Aravind Medical Research Foundation. He found therefore, that the assessee trust has not carried on any charitable activities. Accordingly, he issued notice to the assessee trust proposing to cancel its registration earlier granted under sec.12A. The assessee filed detailed objections against the notice issued by the Commissioner. The assessee trust contended that the products manufactured by the assessee are sold at affordable price benefiting the weaker sections of the society. The assessee contended that its activities related to medical relief, general public utility in the form of cost effective eye care products supplied to the poor and weaker sections of the society who undergo surgery in various non-profit hospitals and under various non-governmental organization initiatives. The assessee contended that it is participating in the movement to prevent blindness. The assessee trust relied on a series of decisions including that of the Hon'ble Supreme Court in the case of CIT v. Surat City Gymkhana (300 ITR 214), Addl. CIT v. Surat Art Silk Manufacturers Association (121 ITR 1).
:- 10 -: ITA 135/11
8. After examining the detailed objections filed and explained by the assessee trust, the Commissioner held that the explanations offered by the assessee trust are not sufficient to justify the characteristic features of the activities carried on by the assessee trust. The Commissioner found that the turnover of the assessee is increasing year after year and the profit is also increasing manifold and the whole activity is almost for the purpose of generating profit and in such circumstances, the assessee cannot be held to be a charitable trust as held by the Hon'ble Supreme Court in the case of Indian Chamber of Commerce v. CIT WB-II (101 ITR 234). The Commissioner of Income-tax explained that distributing ophthalmic and other medical accessories at low cost or concessional rate by itself is not a charitable activity. Even regular business houses are giving such price benefits to their customers. Therefore, the price advantage enjoyed by certain group of people cannot be the sole criteria to accept the contention of the assessee trust that it is carrying on charitable activitities. The Commissioner observed that no details are available in respect of the beneficiaries of the activities stated to be charitable carried on by the assessee. He further relied on the judgment of the Hon'ble Supreme Court in the :- 11 -: ITA 135/11 case of Yogiraj Charity Trust v. CIT (103-777) wherein it was held that where there are various objects of a trust, which are all independent objects and even if one of its objects cannot be described as a charitable, the claim of the entire trust for exemption must fail. The Commissioner held that in the case of the assessee trust, out of the seven objects, object clauses (e) and (f) fail to be a charitable one, for the way they are performed and the rest of the five objects (a) to (d) and (f) which are in the nature of charitable activities would not be of any help to the assessee trust, for the reason that those five objects have not been attended to by the assessee trust through its activities. He, accordingly, confirmed his proposal and cancelled the registration granted to the assessee trust under sec.12A on 9.10.1922. The assessee is aggrieved and therefore, the appeal before us.
9. The detailed grounds raised by the assessee trust in this appeal are extracted below :
"(a) The Commissioner of Income-tax erred in holding that the appellant does not deserve exemption under sec.11(1)(a) of the Act and accordingly erred in canceling the registration granted under sec.12A(a) of :- 12 -: ITA 135/11 the Act. The order of the Commissioner of Income-tax is against the weight of evidence and documents on record.
(b) The Commissioner of Income-tax ought to have seen that the appellant is a Trust constituted as early as 1992, its objects and activities have been under scrutiny, ever since the constitution of the trust has been submitting return regularly and the assessments have been completed in respect of all the assessment years upto 2007-08 accepting the claim of the Trust for exemption under sec.11 and that there are no changes in facts and circumstances. Consequently there is no justification for the Commissioner to take a different view from that which was adopted in all the aforesaid previous years.
(c) The Commissioner of Income-tax is wrong in his view that in so far as the appellant had spent a sum of ` 17,53,40,952/- on purchase of raw materials and other costs and was in receipt of interest of ` 17,94,06,260/-, export incentive of ` 14,77,643/-, profit :- 13 -: ITA 135/11 on sale of investment of ` 28,08,400/- and derived a net profit of ` 19,80,75,566/- it would lead to the conclusion that the Trust is engaged in business which yields profit and consequently the purpose of the Trust does not satisfy the requirements that it should be one "not involving the carrying on of any activity for profit".
This conclusion of the Commissioner of Income-tax is contrary to the settled position of law, as seen from a catena of cases decided by various Judicial Fora.
(d) The Commissioner of Income-tax is wrong in assuming that the decision of the Hon'ble Supreme Court in Loka Shikshana Trust supports the conclusion arrived at by him. The Commissioner ought to have seen that the position of law has to be determined based on sec.11(4A) of the Act. Loka Shikshana Trust case was decided without reference to sec.11(4A).
(e) The Commissioner of Income-tax failed to note that the decision in Loka Shikshana Trust case does not lay down the proposition that if the Trust carries on business which permits it to derive profit, the existence :- 14 -: ITA 135/11 of profit motive should be assumed or that the Trust should be held not eligible for the benefit of sec.11
(f) The Commissioner of Income-tax failed to note that the requirement of not involving in any activity for profit has to be understood in the light of the provisions of sec.11(4A) which clearly permits a business to be held under trust for charitable purpose and so long as the twin conditions of sec.11(4A) are satisfied, the benefit under sec.11 cannot be denied.
(g) The Commissioner of Income-tax is wrong in his observation that there is no element of charity in the activities carried on by the appellant. The Commissioner ought to have seen that the activity of manufacturing and marketing of Eye care products is an activity incidental to the attainment of the main object for charity pursued by the Trust and the Trust has complied with the twin conditions of sec.11(4A) of the Act. The Trust has maintained separate accounts in respect of the aforesaid activity and the income from the said activity has been used to feed the charity. :- 15 -: ITA 135/11 Thus, the activity was carried on as incidental to and for the attainment of the object of medical relief. Consequently, the Trust is entitled to relief under sec.11 and the registration of the Trust has to be continued.
(h) The Commissioner of Income-tax is wrong in holding that the Trust is not entitled to registration on the ground that there is no element of charity and it clearly shows non-advertence to the relevant statutory provisions and legal principles that should be applied in considering the eligibility for exemption under sec.11 and for registration under sec.12A(a).
(i) The Commissioner of Income-tax has failed to note that in the case of activity which yields profit the question to be considered is the satisfaction of the twin conditions under sec.11(4A). In so far as the Commissioner has not adverted to this aspect at all and has steered clear of the said provision, which has to be considered in this case, the conclusion is vitiated by non-application of mind.
:- 16 -: ITA 135/11
(j) The Commissioner of Income-tax has repeatedly stated that the institution sells medical products in India and abroad and has promoted the products and has acted in a commercial manner. He failed to note that the Hon'ble Supreme Court has unequivocally held that where a business is held upon Trust the business has to be carried on in a commercial manner and it does not detract from the charitable activity of the Trust, so long as the income from the business feeds the charity. This is the situation that applies in the appellant's case and the Commissioner having failed to consider this aspect has proceeded on erroneous lines in considering the eligibility of the Trust for registration under sec.12A(a) and exemption under sec.11.
(k) The Commissioner of Income-tax is wrong in stating that there are no beneficiaries to the Trust and in the absence of the beneficiaries, the organization cannot claim the colour of a Trust. He failed to note that the Trust has made donations to medical :- 17 -: ITA 135/11 institutions which constitute "medical relief" and hence his conclusion that the Trust is not doing any charitable activity and there are no beneficiaries is factually and legally incorrect. Equally erroneous is his conclusion that the activities of the institution are neither intended for charitable/medical relief nor for general public utility and are purely commercial ventures with profit motive. This conclusion is untenable and is totally opposed to facts.
(l) The Commissioner of Income-tax is wrong in assuming that any of the objects of the Trust is non- charitable and he erred in invoking the ratio of the decision in Yogiraj Charity Trust. In the appellant's case, all the objects are charitable and the activity of manufacturing and marketing of Eye care products was carried on only to feed the charity and satisfies the requirements of sec.11(4A)."
10. Shri V. Ramachandran, the learned Senior Counsel along with Dr. Anita Sumanth, appeared for the assessee trust and argued the case at length.
:- 18 -: ITA 135/11
11. The learned counsel contended that the Commissioner of Income-tax has arrived at his conclusion in total disregard of basic features of the assessee trust. The assessee trust is manufacturing and selling ophthalmic lenses and other medical and surgical accessories not for the purpose of making profits but for the purposes of actively engaging in the health sector on a charitable basis especially to help the activities carried out to prevent blindness among the public. The assessee is closely associated with Aravind Medical Research Foundation and the trustees of both trusts are common and the assessee trustee is augmenting the efforts of Aravind Medical Research Foundation to provide low cost eye care support to the public, especially weaker sections of the society.
12. The learned counsel contended that the assessee is distributing its products in India as well as exporting outside India to meet the demand of WHO and the sales are made at a very concessional price compared to normal commercial market rate. The assessee is earning profit in those activities and earning of profit does not mean that the assessee trust is not carrying on charitable activities. The learned counsel explained that the :- 19 -: ITA 135/11 Commissioner of Income-tax has mis-construed the expression of business as a result of which he has made an impression that if a business is carried on by a charitable institution, running of the said business should not be run like the business run by an ordinary business man. The learned counsel explained that the proposition of the Commissioner of Income-tax is fallacious. He invited our attention to the definition "business" provided under clause (13) of sec.2, according to which "business" includes any trade, commerce or manufacture or adventure or any concern in the nature of trade, commerce or manufacture. A business is universally accepted as an activity for profit. Sec.11(4) specifically uses the expression "business undertaking" and provides that the income of the business undertaking shall be determined in the same manner as provided under Income-tax Act in respect of any other regular business undertaking. The learned counsel explained that sub-sec.(4A) of sec.11 refers to profits and gains of business. The expression "profits and gains of business" is identical to the expression used in sec.28 which refers to "profits and gains of business". He explained that therefore, a comparison of sub-sec.4 and (4A) of sec.11 with definition of "business" under sec.2(13) read with sec.28 and :- 20 -: ITA 135/11 Chapter IV D would clearly show that the business conceived under sub-sec.4 and (4A) of sec.11 has to be treated at par with regular business and does not have any different character, nor does it exclude making any profit.
13. The learned counsel, therefore, contended that the assessee carrying on the activities of manufacturing and selling of ophthalmic and medical products and generating profit in those activities does not disqualify the assessee trust to be a charitable institution . The assessee is doing all these activities to attain its objects of charitable purposes enshrined in the trust deed. He explained that there is no rule that the business carried on by a charitable institution should not be efficiently managed like a business carried on by a business house. If a business activity is carried on efficiently, there will be profit arising and that should not be a fetter against the contention of the assessee that it is a charitable trust.
14. The learned counsel further explained that the law has provided that a charitable trust may carry on a business incidental to the attainment of object of the trust and this proposition has been considered by Hon'ble Supreme Court in the case of ACIT v. :- 21 -: ITA 135/11 Thanthi Trust (247 ITR 735), wherein the court has held that all that it requires for the business income of a trust or an institution to be exempt is that the business should be incidental to the attainment of the objects of the trust or institution; that the business income is utilized by the trust or institution for the purpose of achieving the objectives of the trust or institution is, surely a business which is incidental to the attainment of the objectives of the trust; that in any event, if there be any ambiguity, the provision must be considered in a manner that benefits the assessee. The learned counsel explained that the present case of the assessee trust is squarely covered by the above judgment of the Hon'ble Supreme Court rendered in the case of ACIT v. Thanthi Trust (247 ITR 735) as the entire profits of the business carried on by the assessee trust is exclusively used for the purpose of the trust which are only charitable in nature.
15. Regarding the above said application of the profits of the assessee trust, the learned counsel explained that the Commissioner of Income-tax himself has stated in his order that the assessee had made donations to other charitable institutions in the course of its activities. All such donations having been :- 22 -: ITA 135/11 made to Aravind Medical Research Foundation cannot be a disqualification against the assessee. Even though Aravind Medical Research Foundation is an associate trust of the assessee and the trustees of both the trusts are common, there is no dispute that the other trust, Aravind Medical Research Foundation is carrying on charitable activities and therefore, the donations given by the assessee trust to Aravind Medical Research Foundation are nothing but application of funds for charitable purposes. He explained that the income generated by the assessee trust has been properly accounted and reported before the Assessing Authority year after year and explained the position many times in the course of the assessments completed under sec.143(3) and there is no case against the assessee trust that any portion of its income has been applied for non charitable purposes or used for the personal gains of the trustees. The assessee has accumulated its profits wherever possible and those accumulations have been made strictly in accordance with the law stated in the Income-tax Act, 1961 and all such accumulations have been approved by the Assessing Authority for all the assessment years in the past and in such :- 23 -: ITA 135/11 circumstances, there cannot be a view different from that the assessee has applied its income only for charitable purposes.
16. As the assessee has been established for carrying out charitable activities and one of the activities is of manufacture and sale of ophthalmic and medical products for the benefit of the general public and the said activity has been carried on by the assessee trust resulting in surplus income and the surplus having been accumulated in accordance with law and applied for charitable purposes by way of legitimate donations, uphold the undisputed legal status of the assessee as a charitable institution and therefore, the Commissioner of Income-tax has grossly erred in cancelling the registration granted to the assessee under sec.12A of the I.T. Act, 1961.
17. Meanwhile the price details of the products manufactured and traded by the assessee trust have been produced before us. The same have been produced to support its argument that the assessee trust is manufacturing and distributing essential medical aids comparatively at a lesser price for the public. The assessee has highlighted its argument on the price differentiation as one of the reflections of its charitable activities. :- 24 -: ITA 135/11
18. Some of the details furnished by the assessee trust are reproduced below for a ready comparison :
:- 25 -: ITA 135/11:- 26 -: ITA 135/11
Comparison of Aurolab's Laser price with competitor orice (in ` ) Product Aurolase 532 Oculight GLx Visulas 532s GYC 1000 Name (Aurolab) (Iris) (Zeiss) (NIDEK) Laser with 1,000,000 1,300,000 1,200,000 1,100,000 Slitlamp
19. Let us make a quick comparison of the price of various products as detailed by the assessee. Under the head Pharma Products, HPMC - 2% w/v is sold by the assessee at ` 125 for 2 ml. M/s. Shah & Shah, a private manufacturer also sells the said product at the same rate. In the case of same product for 3 ml. the rate of the assessee is ` 60 and again the rate of another private firm, M/s. Appasamy is ` 60. In the case of Trypan Blue 0.06% w/v, the assessee charges ` 100 per ml. whereas M/s. Biotech at ` 125 per ml. The price variation is not significant. This is the case with almost all the products manufactured and traded by the assessee. On an over all comparison of the price of various products, we find that the price charged by the assessee cannot be held to be "charitably low". In these circumstances, we are not in a position to accept the said contention of the assessee :- 27 -: ITA 135/11 that it is feeding charity through price differentiation of its products.
20. The learned Senior Counsel has also relied on the following decisions :
1. Thiagarajar Charitites v. Addl. CIT (225 ITR 1010)
2. CIT v. Karimia Trust (302 ITR 57)
3. DIT v. Wellington Charitable Trust (195 Taxman 232)
4. DIT(Exemptions) v. Govindu Naicker (315 ITR 237)
5. DIT(Exemptions) v. Span Foundation (178 Taxman 436)
6. CIT v. Jyothi Prabha Society (310 ITR 162)
7. DIT(Exemptions) v. Garden City Education Trust (191 Taxman
238)
8. Addl.CIT v. Surat Art Silk Manufacturers Association (121 ITR 1)
21. The learned counsel also contended to distinguish the facts of the present case from the decisions rendered in the cases of Sole Trustee, Loka Shikshana Trust v. CIT (101 ITR 234) and CIT v. P. Krishna Warrier (84 ITR 119).
:- 28 -: ITA 135/11
22. The learned counsel further argued that the assessee has been recognized as a charitable institution since its inception in 1992. The assessee has been availing the benefit under sec.11 for almost two decades. The activities of the assessee have been consistent through out. A number of times, the assessments were completed under sec.143(3). The Assessing Authority has over and again considered the scope and application of sec.11 in the case of the assessee trust for a period of two decades and granted exemption under sec.11 which show that the department is satisfied about the genuineness of the trust and the charitable nature of its activities. When this is the position, the Commissioner of Income-tax is not justified in breaking the chord of continuity relying on certain observations which do not have support either in facts or in law.
23. The learned Senior Counsel contended that the order of the Commissioner of Income-tax is unjustified, unwarranted and arbitrary. His order violates the principles of natural justice in so far as the Commissioner has proceeded on an erroneous presumption that the object of the assessee trust falls within the fourth limb of sec.2(15). The Commissioner has not adverted to :- 29 -: ITA 135/11 the materials submitted before him to establish that apart from the various donations given to Aravind Medical Research Foundation, the assessee has also spent considerable amount for creating infrastructure for the manufacture of eye care products which are used for the advancement of medical relief. Those expenditure incurred by the assessee trust constitute application of funds for charitable purposes. He, therefore, concluded that the order of the Commissioner of Income-tax may be set aside and the registration of the assessee trust under sec.12A be restored.
24. Shri Shaji P. Jacob, the learned Commissioner appearing for the Revenue, on the other hand, contended that the Commissioner of Income-tax-I, Madurai is justified in cancelling the registration granted to the assessee for good and sufficient reason that the assessee is not carrying on any charitable activities stated in its trust deed as its objects.
25. The learned Commissioner contended that the objects for which the assessee trust was set up are to establish and run hospitals, surgical homes, dispensaries, old age homes; to take over maintenance and management of such institutions; to promote research and study in matters relating to prevention of :- 30 -: ITA 135/11 diseases and invention of new drugs; to recruit, train and provide manpower in various health sector; to produce or manufacture ophthalmic instruments and other medical and surgical items and to do other acts of charity which are incidental to or necessary and conducive to the attainment of the main objects. The learned Commissioner has pointed out that in spite of the above exhaustive objects provided in its trust deed, the assessee has sought to carry on, only a single activity for all the years since its inception. That single activity carried on by the assessee trust is to manufacture and sell mainly Intra Ocular Lens along with manufacturing and trading in ophthalmic and cardiovascular suture needles and other surgical items. The products manufactured and traded by the assessee trust are related to medical field but that does not mean that the activity of manufacturing and trading in those items are charitable activities. The manufacturing and trading of the above items are mainly carried out by business undertakings and only for the reason that the products are used in medical field, it does not mean that the manufacture of those products, per se, is a charitable activity. The learned Commissioner explained that as the assessee is carrying on that activity alone and has not carried on any other :- 31 -: ITA 135/11 charitable activities, the business carried on by the assessee in the nature of manufacturing and trading cannot be treated as a business carried on by the assessee in the course of discharging its charitable obligations and incidental to the attainment of main objectives.
26. The learned Commissioner further explained that the Commissioner of Income-tax has analysed the working results of the assessee trust for the previous years relevant to the assessment years 2007-08 to 2010-11 on the basis of which he has made a finding of fact that the assessee is carrying on the activities of manufacturing and trading in Intro Ocular Lens and other medical and surgical products as if it is a business carried on with no let down in the profit rate or the profit margin. The profit earned by the assessee is very attractive ranging from 37% to 49%. The turnover of the assessee trust increasing year after year. The assessee is incurring all kinds of expenditure as incurred in the case of a private business man. Therefore, he contended that in the activity of manufacturing and trading in Intra Ocular Lens and other related products, there is no element of charity as to claim the benefit of exemption under sec.11. :- 32 -: ITA 135/11
27. The learned Commissioner further explained that the profit generated out of the business carried on by the assessee trust has been consistently capitalized by the assessee trust in the form of various financial assets. The only application of fund made by the assessee trust was donations made in various assessment years. Even the donations paid for the assessment years 2007-08, 2008-09 and 2009-10 were only a nominal part of the profits generated by the assessee trust for those assessment years. The donations were respectively ` 66,50,000/-, `30,66,000/- and ` 30,00,000/-. But for the assessment year 2010-11, the assessee has made a donation of ` 12,14,37,500/-. Out of the above amount, a sum of ` 12 crores has been given to its own associate trust, Aravind Medical Research Foundation. The assessee having not carried out any charitable activities in its entire life, but carrying on the business of manufacturing and trading in Intra Ocular Lens and other medical and surgical products and pursuing only on that object of the trust, cannot be said to have indulged in charitable activity only for the reason that in a particular assessment year a huge sum of amount was given to its own associate trust by way of donation. But for the amount given to its own associate trust, the donation made for the :- 33 -: ITA 135/11 assessment year 2010-11, almost all the profits generated out of its business activities have been converted into financial assets from time to time.
28. The learned Commissioner argued that as pointed out by the Commissioner of Income-tax -I, Madurai there is no evidence on record to show that the assessee had distributed Intra Ocular Lens either free of cost to the public or at any concessional rate to the public. There is nothing available on record to show that the sales were made by the assessee at a concessional rate ultimately to be benefited by weaker sections of the society.
29. In the above facts and circumstances of the case, the learned Commissioner contended that the Commissioner of Income-tax-I, Madurai is justified in relying on the decision of the Hon'ble Supreme Court in the case of Yogiraj Charity Trust v. Commissioner of Income-tax (103 ITR 777) wherein it was held that in spite of all other independent objects if any of the objects cannot be treated as charitable, the claim of entire trust for exemption has to fail. He further explained that in the present case, the situation is more vulnerable in the sense that the assessee trust has not carried out any other activity other than the :- 34 -: ITA 135/11 business activity of manufacturing and selling Intra Ocular Lens and other medical and surgical products.
30. The learned Commissioner explained that the Finance Act, 2008 which became effective from 1st April, 2009, from assessment year 2009-10 and subsequent assessment years has restated the meaning of charitable purpose by streamlining the definition thereof. Sec.2(15) defines charitable purpose to include relief of the poor, education, medical relief an the advancement of any other object of general public utility. It was noticed in the past a number of entities carrying on commercial activities claimed exemption either under sec.10(23C) or sec.11 by claiming themselves as charitable institutions. They always took shelter under the expression "advancement of an object of general public utility". The amendment sought to limit the scope of the phrase "advancement of any other object of general public utility". Accordingly, sec.2(15) has been amended to provide that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves to carry on of any activity in the nature of trade, commerce or business, any activity of rendering any service in relation to any trade, commerce or :- 35 -: ITA 135/11 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.
31. The learned Commissioner further explained that in the above legal scenario the activity carried on by the assessee involves nothing but carrying on of an activity in the nature of trade, commerce and business for which the assessee is charging price. In such circumstances, even if a portion of income is donated to another charitable institutions, it does not make the assessee a charitable institution. He, therefore, contended that in the light of restated sec.2(15), the activities carried on by the assessee trust cannot be treated as charitable activities and therefore, the Commissioner of Income-tax has rightly cancelled its registration under sec.12AA of the I.T.Act, 1961.
32. With reference to the contention of the learned counsel appearing for the assessee that the Commissioner has violated the principles of natural justice by taking a difference view against the consistent view of the Department for all the assessment years in the past, the learned Commissioner contended that the Commissioner of Income-tax was not empowered in the past to :- 36 -: ITA 135/11 cancel a registration once granted. There was no enabling provision in the Act. After the introduction of sub-sec.(3) to sec.12AA(1A) with effect from 1.10.2004 and after the enlargement of that sub-section with effect from 1.6.2010, the law gave authority to the Commissioner of Income-tax to cancel the registration for good and valid reasons. As soon as the law provided for such enabling provision, the Commissioner of Income-tax initiated action to cancel the registration of the assessee trust. Therefore, a valid registration for the past , does not give any right to the assessee to argue that there was a consistency in the matter of registration enjoyed by the assessee society. In the past, the Department had no way to cancel the registration. Now, provision is available in the Act and it has been acted upon by the competent authority.
33. The learned Commissioner further argued that the assessing authority might have completed a number of assessments including under sec.143(3) accepting the accumulation petitions filed by the assessee trust. The assessing authority might have under the impression that the assessee trust was contemplating immediate involvement in charitable :- 37 -: ITA 135/11 activities. But even after a long period of existence, it was found that the asessee trust was not carrying on charitable activities, even though it was enjoying the benefits of sec.11. It is at that point of time that the Commissioner of Income-tax has made his intervention. Therefore, there is no case of violation of principles of natural justice in the present case as alleged by the learned Counsel appearing for the assessee.
34. The learned Commissioner, thus, concluded that in the light of the activities carried on by the assessee trust, the Commissioner of Income-tax-I, Madurai has rightly cancelled its registration. He prayed that the appeal filed by the assessee may be dismissed.
35. In spite of the wide ranging arguments advanced by both sides, we find that the basic facts relating to the activities carried on by the assessee trust are by and large out of dispute. The assessee trust was created as per trust deed dated 6.7.1992. The registration under sec.12A was granted on 9.10.1992. Thereafter till the assessment year 2010-11, the assessee trust has been holding the registration valid and enjoying the benefits of sec.11 of the I.T. Act. The assessee is manufacturing Intra :- 38 -: ITA 135/11 Ocular Lens and other surgical accessories. These items are sold locally as well as exported outside India. The profit generated in the business carried on by the assessee is ranging from 37% to 49%. The assessee accumulated a major portion of its profits earned in the course of business, of course, following the procedures prescribed by law. The only application made by the assessee trust out of its disposable fund is to give donations to other charitable trusts. The principal beneficiary of such donations made by the assessee trust from time to time is its own associate trust, Aravind Medical Research Foundation. In a nutshell this is the background picture of the case.
36. Now, the question is whether the activity carried on by the assessee trust could be treated as charitable or not . It has been repeated a number of times in this order as to what are the objectives declared in the trust deed. One of the objects declared in the trust deed is the production or manufacture and sale and distribution of ophthalmic lens, surgical equipments and other accessories etc. There is no contradiction when it is stated that the only activity carried on by the assessee trust since its creation has been the sole function of manufacture and sale of intra Ocular :- 39 -: ITA 135/11 Lens and other surgical accessories. As a matter of fact it has to be brought on record that the manufacturing activity is the only activity carried on by the assessee trust during the entire period of its life, so far.
37. Therefore, the question to be considered if further modified is, whether the activity of manufacturing and selling of Intra Ocular Lens and other surgical accessories is charitable activity or not. As the assessee trust has not carried out any other activities in nature as provided in the trust deed, the business activity carried on by the assessee has to be evaluated independently without the company of other objects theoretically provided in its trust deed. When other objects of charity provided in the trust deed are de-linked from the company of other objects, it is to be seen as to whether the actual activity of manufacturing and trading carried on by the assessee trust is charitable in nature as construed under sec.11. As that is the only activity carried on by the assessee, the said activity cannot be treated as activity for the advancement of any other object of general public utility in the light of the law stated in sec.2(15) as it stood with effect from 1.4.2009. The law has stated that carrying on of a business, :- 40 -: ITA 135/11 shall not be considered as a charitable activity, irrespective of the nature of the application of its profit or disposable funds. In the light of this law, it is to be seen that even if the assessee trust has made donations to other charitable trusts and has accumulated the available funds in accordance with law, it does not mean that the assessee is carrying on a charitable activity for the reason that it is carrying on a business. The fall out of the legal position is that the contention of the assessee that it has not applied its income for non charitable purposes would not be relevant in considering this case, because the law has provided that the application of income is not the criteria to decide the nature of an institution whether charitable or not, if the said institution is carrying on business in the nature of manufacture, trade, commerce etc.
38. Therefore, it is our considered opinion that the action of the Commissioner of Income-tax is justified in the light of the definition of the expression "charitable purpose" provided insec.2(15) of the I.T. Act, 1961. This is because the singular activity of carrying on of business continued by the assessee trust through out its life cannot be treated as a charitable activity. :- 41 -: ITA 135/11
39. The application of funds and profits of the business carried on by a trust shall be relevant for the purpose of sec.11, only after it is primarily held that the institution is established for carrying on charitable purpose and in fact, the said institution is carrying on such activities. Therefore, carrying on of the singular activity of business against other charitable objectives stated in the trust deed is not sufficient to claim the status of a charitable institution. The litmus test of a charitable institution is that it should primarily carry on charitable activities. The law relating to charity provided in the Income-tax Act, 1961 has not diluted in any way the real meaning and concept of the expression "charity". Charity is the noble cause meant for the benefit and upliftment of the down trodden, poor and the needy. Charity is not a technical concept safeguarded by legal jargons. Charity is not an edifice built on logical deliberations. Charity is a divine reflection of human civilization which finds ways and means to help the needy, to protect the helpless, to support the poor and to work for the betterment of the society and man kind. So what is necessary is actual work of charity, how so ever humble it might be. If the assessee fails in this basic test, it is not necessary to proceed further to find out how the assessee has applied its profit/ :- 42 -: ITA 135/11 disposable funds; whether it has accumulated or it has been donated. The claim of the assessee fails at the threshold itself. Where the assessee has not carried on any charitable activities but only a business and even if a part of that business income is applied for charitable purposes, still the assessee could not be treated as an institution entitled for the benefit of sec.11. It is for such institution, the Act has provided the scheme under sec.80G. There is a distinction between carrying on of charitable activities and donations for charitable purposes. In the first case that of charitable activities, the institution is engaged in charitable activities. Charity is its soul. But in the latter case, the activities are business activities even though, as a good samaritan a portion of its income is given for charity. That is only an appropriation of income. It is to take care of such situation that the Act has provided for sec.80G. They are not entitled for claiming deduction under sec.11. We are afraid that the assessee falls in this category. Even though charitable activity is a liberal manifestation, the frame of a charitable institution under the provisions of the Income-tax Act is strictly defined. The assessee has been carrying on the sole function of manufacture and sale of Intra Ocular Lens and other products. The assessee :- 43 -: ITA 135/11 is earning high amount of profits from year to year. There is nothing on record to show anything about concessional price collected for distribution of such products among needy public. Even though the assessee has accumulated its profits as per income-tax law, that accumulation has become a tool of capitalization of its funds. Sec.11(4A) provides for satisfying of two conditions to claim the benefits of sec.11, in the case of an institution earning income from profits and gains of business. The first condition is that the business is incidental to the attainment of the objectives of the trust. The second condition is that separate books of account are to be maintained in respect of such business. As far as this case is concerned, the second condition is satisfied. But the question is whether the assessee has satisfied the first condition that whether its business has been carried on as a business incidental to the attainment of its objectives or not.
40. Carrying on of a business to be incidental to the charitable activities of a trust, it is necessary that the trust should also carry on the charitable activities stated as its objects. Carrying on of the business should only be in the course of carrying on of its charitable activities. Therefore, carrying on of the main objects of :- 44 -: ITA 135/11 the charitable activities is an indispensable requirement for claiming the statutory recognition as a charitable institution. Carrying on of the business alone, without carrying on the proclaimed charitable objectives does not make the business incidental to the carrying on of the principal charitable activities. The assessee has proclaimed five objectives as principal charitable objectives and two objects [objects (e) and (g)] to carry on business incidental to the attainment of other five main objectives of the trust. But in the present case, the assessee has converted the incidental objects as the main object of the assessee being that of carrying on of full-fledged business and chose not to carry on the proclaimed main objects of the charitable activities. In these circumstances, we have to hold that the business carried on by the assessee trust cannot be considered as business incidental to the attainment of main objects of charity. We have to hold therefore that, the assessee has not satisfied the first condition of sec.11(4A).
42. After considering the facts and circumstances of the case and the applicable law, we find that the Commissioner of Income- tax-I, Madurai is justified in cancelling the registration granted to the assessee under sec.12A. His order is upheld. :- 45 -: ITA 135/11
43. In result, this appeal filed by the assessee is dismissed.
Order pronounced on Wednesday, the 11th day of May, 2011 at Chennai.
Sd/- Sd/- (HARI OM MARATHA) (Dr. O.K.NARAYANAN) Judicial Member Vice-President Chennai : 11th May, 2011 mpo*
Copy to : Appellant/Respondent/CIT/CIT(A)/DR