Iapl/49/2014 Of Commissioner Of Income Tax v. Shri Balaji Samaj Vikas Samiti

Court No. - 35 A.F.R. Judgment Reserved on 06.12.2017Judgment Delivered on 09.02.2018 Case :- INCOME TAX APPEAL No. - 49 of 2014 Appellant :- Commissioner Of Income TaxRespondent :- Shri Balaji Samaj Vikas Samiti Counsel for Appellant :- Dhananjay Awasthi,S.S.C. I.T,ShubhamAgrawal Counsel for Respondent :- Suyash Agarwal Hon'ble Bharati Sapru,J.Hon'ble Saumitra Dayal Singh,J. (Per S.D. Singh) This appeal has been filed by the revenue underSection 260-A of the Act, 1961 (hereinafter referred to asthe Act) against the order of the Income Tax AppellateTribunal, Delhi Bench dated 26.7.2013, in ITA No.94/Del/2012, arising from the order passed by theCommissioner of Income Tax, Meerut dated 23.11.2011under Section 12-AA (1) (b) (ii) of the Act. It had beenadmitted on the following questions of law: “1. Whether the ITAT erred in law in giving relief to theassessee society by misinterpreting the provision andlanguage of Section 2 (15) where the language usedis "advancement" of any other object of "GeneralPublic Utility" shall not be a charitable purpose, if itinvolves carrying on of any activity in the nature oftrade, commerce or business, which is the case here? 2. Whether the ITAT erred in law in directing the C.I.T.to register the assessee society U/s 12-AA when theassessee does not fall under the provisions of Section2(15) which uses the language "any activity ofrendering any service in relation to any trade,commerce or business for a cess or fee" which is thecase here where the assessee is providing serviceswith a profit motive? 3. Whether the ITAT erred in law in curbing thelegislative powers provided to the C.I.T. U/s 12-AAregarding satisfaction that the activities are genuinebefore granting of registration? 4. Whether the ITAT has justified in directing the C.I.T. to register the society U/s 12-AA and not consideringthe facts that the assessee's sole activity was in thenature of trade, commerce or business which does notmake its activities as advancement of any activities ofgeneral public utility and, therefore, it was ineligible forregistration in terms of the first proviso of Section2(15) of I.T. Act.” While, the Commissioner of Income Tax, Meerut had rejected the assessee's application for grant ofregistration under Section 12-AA (1) (b) (ii) of the Act, theTribunal allowed the assessee's appeal and directed theCIT to register the assessee under Section 12-AA of theAct. The assessee claims itself to be a registered societyformed with the object to establish and run Health Club,Arogya Kendra, to organize emergency relief centers etc.It also claims to work to promote moral values,eradication of child labour and dowry etc. The assesseefiled an application under Section 12-AA of the Act, on17.5.2010 for grant of registration. At that time, admittedlythe assessee was engaged mainly in preparing andsupplying mid-day-meals to the students at primaryschools in various villages, against a contract awarded bythe Basik Shiksha Adhikari, Meerut. It appears, under the contract thus awarded, theassessee was authorized to prepare and supply mealsfrom the material/ingredients supplied by the Government of U.P. The assessee society received food preparationand distribution charges, on per child, per month basisfrom the Government of U.P. It is in the above factual background that theassessee claimed itself to have been engaged in anactivity for “advancement of any other object of generalpublic utility”, under Section 2(15) of the Act being a“charitable purpose”. The Commissioner of Income Tax considered theaforesaid facts. Also, he referred to the audited accountsof the assessee for the period up to 31.3.2011 and heldthat the assessee had not engaged in a charitableactivity. He held: It appears, under the contract thus awarded, theassessee was authorized to prepare and supply mealsfrom the material/ingredients supplied by the Government of U.P. The assessee society received food preparationand distribution charges, on per child, per month basisfrom the Government of U.P. It is in the above factual background that theassessee claimed itself to have been engaged in anactivity for “advancement of any other object of generalpublic utility”, under Section 2(15) of the Act being a“charitable purpose”. The Commissioner of Income Tax considered theaforesaid facts. Also, he referred to the audited accountsof the assessee for the period up to 31.3.2011 and heldthat the assessee had not engaged in a charitableactivity. He held: “As the society is getting preparation and distributioncharges per child per month from the state govt., theactivity in this field cannot be treated as charitable innature. In fact, this is a contractual work and leanstowards business activity. In such a case, even if thecontention of the applicant that it is engaged in theobject of the general public utility is accepted, thesame is in the nature of trade, commerce or businessas admittedly consideration is received for providingmid-day-meal.” On such reasoning, the Commissioner concluded that the assessee was not engaged in any charitablework. He therefore, rejected the assessee's applicationunder Section 12-AA of the Act. Upon appeal to the Tribunal, the Tribunal has, reliedupon the second proviso to Section 2(15) of the Act andheld, the assessee was entitled to registration underSection 12-AA of the Act. Sri Shubham Agarwal, learned counsel for therevenue submits that the Tribunal has in the first placemisread the order of the CIT in so far as the Tribunal hasassumed that the CIT had found that the activity of supplyof mid-day-meals was an activity of general public utility.No finding was recorded by the CIT to that effect.Therefore, the Tribunal has erred in making anassumption as to the same. Also, the Tribunal havingitself not recorded any finding that the activity of theassessee was charitable, it could not have directed theCIT to grant registration to the assessee. Second, Sri Shubham Agarwal, learned counsel forthe revenue submits that in fact the CIT had reasonedthat the activity of the assessee was purely contractual.According to him, it was therefore for the assessee tolead such evidence and establish that it was actuallyengaged in an activity of 'general public utility” and not anactivity covered under the first proviso to Section 2(15) ofthe Act. According to the learned counsel for the revenue,no such evidence was led by the assessee. Third, he submits according to the Commissioner theassessee was discharging purely commercial obligationsin pursuance of the contract awarded to it and it could notclaim benefit of exemption that may have been availableto a person/assessee/such as the State authoritiesengaged in providing free of cost mid-day-meals at villageschools. While the State was not charging any money for such an activity, the assessee was charging considerationto prepare and distribute such mid-day-meals. He therefore submits, the Commissioner had rightlyfound such work to be a business activity that fell withinthe description of trade, commerce or business appearingin the first proviso of Section 2(15) of the Act. Then, referring to the second proviso to Section 2(15) of the Act, learned counsel for the revenue submitsit does not create a right in favour of the assessee toobtain registration under Section 12-AA of the Act.According to him, there is no presumption in favour of theassessee pursuing a charitable purpose because it'sreceipts were below Rs. 10,00,000/-. According to him,despite that proviso, the burden continues to rest on theassessee to establish that he was engaged in an activityof “general public utility”. He therefore submits, the Commissioner had rightlyfound such work to be a business activity that fell withinthe description of trade, commerce or business appearingin the first proviso of Section 2(15) of the Act. Then, referring to the second proviso to Section 2(15) of the Act, learned counsel for the revenue submitsit does not create a right in favour of the assessee toobtain registration under Section 12-AA of the Act.According to him, there is no presumption in favour of theassessee pursuing a charitable purpose because it'sreceipts were below Rs. 10,00,000/-. According to him,despite that proviso, the burden continues to rest on theassessee to establish that he was engaged in an activityof “general public utility”. Responding to the above Sri Suyash Agarwal,learned counsel for the assessee submits that the CIThad got misdirected in his approach in not looking beyondthe first inference drawn by him as to the nature of theactivity being contractual. The further inference drawn bythe Commissioner that the assessee was engaged in abusiness activity is erroneous. Merely because a contracthad been awarded to supply and distribute mid-day-meals, it could not be said that the assessee wasengaged in a business activity or that it had profit motive. In that regard, he submits that the assessee is a Non-Government-Organization (NGO) and that a bareperusal of the income and expenditure account of theassessee as on 31.3.2011 extracted in the order of theCIT itself disclosed that it was not running for profit.Therefore, according to him the assessee was pursuing a“charitable purpose” in so far as it was working for the“advancement of an object of general public utility” beingto address the minimum nutritional requirements of thestudents attending village schools without any profitmotive. In any case, he would submit, the activity of theassessee is inseparably linked to and purelyconsequential to the welfare measure adopted by theState Government to provide mid-day-meals to studentsat village schools who may otherwise be malnourished orwho may otherwise dropout from school. The policy of theState Government being wholly for the advancement ofan object of general public utility, the assessee who hadbeen engaged to give effect to and to carry out suchpolicy, was clearly working for a charitable purpose. Then, in the alternative, learned counsel for theassessee submits that by virtue of the clear language ofthe second proviso to Section 2(15) of the Act, even if it isassumed that the assessee was engaged in an activity oftrade, commerce or business for consideration, yet, inview of the fact that his total receipts were below Rs.10,00,000/-, it was clearly entitled to registration under Section 12-AA of the Act. Having considered the argument so made bylearned counsel for the parties, we first take note of theprovision of Section 2(15) of the Act. It reads as below:- “2(15) “Charitable purpose' includes relief of the poor,education, medical relief, [preservation of environment(including watersheds, forests and wildlife) andpreservation of monuments or places or objects ofartistic or historic interest,] and the advancement ofany other object of general public utility. Provided that the advancement of any other object ofgeneral public utility shall not be a charitable purpose,if it involves the carrying on of any activity in thenature of trade, commerce or business, or any activityof rendering any service in relation to any trade,commerce or business, for a cess or fee or any otherconsideration, irrespective of the nature of use orapplications, or retention, of the income from suchactivity:” (emphasis supplied) Later, by Finance Act, 2010 second proviso toSection 2(15) of the Act was inserted withretrospective effect from 1.4.2009. It was reads asbelow:- Provided that the advancement of any other object ofgeneral public utility shall not be a charitable purpose,if it involves the carrying on of any activity in thenature of trade, commerce or business, or any activityof rendering any service in relation to any trade,commerce or business, for a cess or fee or any otherconsideration, irrespective of the nature of use orapplications, or retention, of the income from suchactivity:” (emphasis supplied) Later, by Finance Act, 2010 second proviso toSection 2(15) of the Act was inserted withretrospective effect from 1.4.2009. It was reads asbelow:- “Provided further that the first proviso shall not apply ifthe aggregate value of the receipts from the activitiesreferred to therein is ten lakh rupees or less in theprevious year;” (emphasis supplied) Also, by Finance Act, 2012, sub-Section (8) wasintroduced to Section 13 of the Act with retrospectiveeffect from 1.4.2009. It reads as below:- “Section 11 not to apply in certain cases. 13 (1)...... (2)....... (3)....... (4)....... (5)...... (6)....... (7)....... (8). Nothing contained in section 11 or section 12 shalloperate so as to exclude any income from the totalincome of the previous year of the person in receiptthereof if the provisions of the first proviso to clause15 of section 2 become applicable in the case of suchperson in the said previous year.” The first proviso to Section 2(15) of the Act appliesto an assessee who may claim to be engaged in'advancement of any other object of general public utility'.In respect of such an assessee it has been provided, ifthe activity, in respect of which it claims exemption be inthe nature of trade, commerce or business or any otheractivity rendering any service in relation of any trade,commerce or business for consideration, such activityshall not constitute an activity for charitable purpose.However, the second proviso to Section 2(15) of the Act(introduced by Finance Act, 2010 with effect from1.4.2009), created an exception to the first proviso. Thus,the first proviso to Section 2(15) of the Act would notapply in the event the receipt from activities referred toabove did not exceed Rs. 10,00,000/- in the previousyear. While agreeing with the view taken by the BombayHigh Court in the case of D.I.T. (Exemption) Vs. North Indian Association (supra), we have, in ITA No. 134 of2013 ACIT Vs. Agra Development Authority, decidedon 7.12.2017 held as below:- “Upon a co-joint reading of both the provisos toSection 2(15) of the Act, the legislative intent appearsnot to allow exemption to an assessee who mayengage in an activity mentioned in the first proviso toSection 2(15) of the Act, if his receipts for a previousyear exceed Rs. 10,00,000/-. At the same time thebenefit is not to be denied to such an assessee it hisreceipts in the previous year do not exceed Rs.10,00,000/-. The activities of any assessee are conducted on aday-to-day basis and accounts are made up at theyear end. Therefore, at the relevant time i.e. duringthe previous year relevant to an assessment year, itmay not always be predicted or determined or knownas to whether the receipts (from activities have beenspecified in the first proviso to Section 2(15) of theAct) exceed the statutory limit of Rs. 10,00,000/- set inthe second proviso to Section 2(15) of the Act. The activities of any assessee are conducted on aday-to-day basis and accounts are made up at theyear end. Therefore, at the relevant time i.e. duringthe previous year relevant to an assessment year, itmay not always be predicted or determined or knownas to whether the receipts (from activities have beenspecified in the first proviso to Section 2(15) of theAct) exceed the statutory limit of Rs. 10,00,000/- set inthe second proviso to Section 2(15) of the Act. Then Section 13(8) of the Act had also beenincorporated with retrospective effect from 1.4.2009i.e. the date of introduction of the first proviso toSection 2(15) of the Act. Thus notwithstanding a pre-existing registration certificate under Section 12A ofthe Act, if as a fact, it were found during theassessment proceedings of an assessee (holdingregistration under Section 12A or Section 12AA of theAct), that it's receipts arising from the activity (fallingunder the first proviso to Section 2(15) of the Act),exceeded the limit of Rs. 10 lacs in the relevantprevious year, such receipts would not be eligible forexclusion from the total income of that assesseeunder Section 11 or 12 of the Act. The scheme of the Act has to be understood that thebenefit of exemption otherwise available undersections 11 and 12 of the Act has to be denied to theassessee in question if his receipts arising fromactivities falling under the first proviso to Section 2(15)exceed Rs. 10 lacs, but not otherwise. ….... ….... …....The Act therefore neither contemplates an inviolable right to claim exemption solely on the strength of aregistration certificate nor does the Act appear tocontemplate that in case of an opinion being formedby the Commissioner that an assessee is engaged inan activity specified in the first proviso to section 2(15)of the Act, he must necessarily seek to cancel theregistration granted by him earlier. In fact, the Actcarves out a middle path by allowing the registrationto stand but it's benefit to be deprived in assessmentproceedings in certain specified circumstances.” Coming to the activity of the assessee in this case ithad been found by the Commissioner, because theassessee had been paid preparation and distributioncharges per child, per month, by the State Government,under a contract, therefore the activity of the assesseecould not be treated as charitable in nature. That being the finding of the Commissioner, theTribunal was not right in observing from the above, it isevident that the learned CIT himself has stated thatsupplying of mid-day meals can be accepted as an objectof general public utility. However, as to the nature of activity of the assessee, the Tribunal itself observed as under:- “It is clarified by the learned counsel that the onlyactivity carried on by the assessee during the yearunder consideration was for preparation of mid-daymeals and is supply to the primary schools in thevillages as per the direction of the government.Therefore, the kitchen expenses and salary expenseswere for the preparation of mid-day meals andtransportation expenses were for supply of such mid-day meals to the various primary schools. The onlyother expenditure was telephone charges at Rs.12,833/- and office rent at Rs. 14,400/- which arearound Rs. 1,000/- per month which is necessary to supervise the activity of preparation and supply ofmid-day meals.” In view of the above, we are of theopinion that the activity of the assessee falls within theambit of object of general public utility which is alsoaccepted by the learned CIT himself in paragraph 4 ofhis order reproduced above by us.” supervise the activity of preparation and supply ofmid-day meals.” In view of the above, we are of theopinion that the activity of the assessee falls within theambit of object of general public utility which is alsoaccepted by the learned CIT himself in paragraph 4 ofhis order reproduced above by us.” The Tribunal has, upon examination of theassessee's income & expenditure account found: (i) thetotal receipts (from the activity conducted by theassessee) were less than Rs. 10,00,000/-. Then, moreimportantly the Tribunal found (ii) the activity of theassessee involved preparation of mid-day-meals and it'ssupply to primary schools in villages as directed by theState Government; the assessee incurred kitchenexpenses; salary expenses and; transportation expenses.Other than that, the assessee incurred nominal officeexpenses & telephone charges. Total excess of incomeover expenditure have been mentioned by theCommissioner at Rs. 2,432/- only. The Tribunal thenconcluded that the activity of the assessee was one ofgeneral public utility. Learned counsel for the revenue does not disputethe correctness of the aforesaid findings of the Tribunal.No material had been brought on record to doubt thecorrectness of this finding of the Tribunal. Merely because the State had itself not been able tocook and supply cooked food by way of mid-day-meals atit's schools and further because it out-sourced that part ofthe work, against consideration, it cannot be said that it transformed the activity into one in the nature of trade,commerce or business etc. Execution of a contractbetween two parties, in these facts cannot be decisivewhether the activity itself was one purely in the nature oftrade, commerce or business. What was more importantis to examine whether assessee had engaged in anactivity that was inseparably linked to and performed incontinuation of the charitable scheme of the government. The fact that some money had been paid by theState to the assessee was only a necessary expense atthe hands of the State. Looking at the nature of expensesmet by the assessee one cannot escape the conclusionthat similar expenses would have been incurred by theState, had it performed that work itself or though it's ownagencies. Thus, at the hands of the assessee, the paymentsreceived were utilized to defray the expenses met toperform the task of cooking and supplying the meals asdirected by the State government. It is also not the caseof the revenue that the assessee was in any manner freeto utilize either the materials supplied to it or food cookedby it, as per it's own wish/discretion. The assesseeappears to have acted merely as an agent of the State. Therefore, on the basis of findings recorded by theTribunal and the material examined by the Commissionerit would be wrong to conclude that because there existeda contract between the assessee & the government therefore the assessee was not pursuing a “charitablepurpose”. On the other hand the activity performed by theassessee clearly appears to be inseparably linked to the'charitable purpose' of providing mid-day meals at villageschools. Also, admittedly, the total receipts of theassessee were below the limit of Rs. 10,00,000/- asstipulated under the second proviso to Section 2(15) ofthe Act. In that view of the matter, the Tribunal has rightlyconcluded that the restriction created by the first provisoto Section 2(15) of the Act did not operate against theassessee and therefore the activity of the assessee, eventhough it may have involved an activity in the nature oftrade, commerce or business, etc., it would fall within theambit of general public utility and therefore be a charitablepurpose under Section 2(15) of the Act. In that view of the matter, the Tribunal has rightlyconcluded that the restriction created by the first provisoto Section 2(15) of the Act did not operate against theassessee and therefore the activity of the assessee, eventhough it may have involved an activity in the nature oftrade, commerce or business, etc., it would fall within theambit of general public utility and therefore be a charitablepurpose under Section 2(15) of the Act. Accordingly, we answer question nos. 1, 2 & 4raised in this appeal thus: In view of the fact the assesseewas engaged solely to implement the welfare scheme ofthe state government to provide mid-day-meals tostudents at its various village schools, it was rightly heldto be engaged in an activity of general public utility.Alternatively, if it be assumed that in that process theassessee engaged in an activity in the nature of trade,commerce or business, etc, then, because the receiptsfrom such activity were below Rs. 10,00,000/-, theassessee was still entitled to registration under Section 12AA(1)(b)(ii) of the Act. Question no.3 as framed does not arise in thisappeal. The appeal is accordingly dismissed. No order as tocosts. Order Date :- 9.02.2018 Mini