Ita/73/2019 Of Nirmithi Kendra v. The Deputy Commissioner Of Income Tax(Exemptions)

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM TUESDAY, THE 7 DAY OF SEPTEMBER 2021 / 16TH BHADRA, 1943 ITA NO. 73 OF 2019 AGAINST THE ORDER IN ITA 45/Coch/2017 OF I.T.A.TRIBUNAL,COCHINBENCH, ERNAKULAM APPELLANT/APPELLANT: M/S NIRMITHI KENDRAAYYANTHOLE, THRISSUR-68003,REPRESENTED BY ITS EXECUTIVESECRETARY AND PROJECT MANAGER SRI BOSCO M.M.BY ADVS.ANIL D. NAIRSRI.SREEJITH R.NAIRSMT. ARYA ANILSRI.ACHYUT K PADMARAJSHRI.GOKULRAJ L. RESPONDENT/RESPONDENT: THE DEPUTY COMMISSIONER OF INCOME TAX(EXEMPTIONS)CENTRAL REVENUE BUILDING I.S PRESS ROAD, KOCHI-682 018 OTHER PRESENT: SC CHRISTOPHER ABRAHAM THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON07.09.2021, ALONG WITH ITA.121/2019, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM TUESDAY, THE 7 DAY OF SEPTEMBER 2021 / 16TH BHADRA, 1943 ITA NO. 121 OF 2019 AGAINST THE ORDER IN ITA 111/Coch/2018 OF I.T.A.TRIBUNAL,COCHINBENCH, ERNAKULAM APPELLANT/APPELLANT: M/s NIRMITHI KENDRANIRMITHI CAMPUS, BAZAR P.O., ALAPPUZHA, REPRESENTED BY ITS PROJECT ENGINEER, MR.GOPAKUMAR.BY ADVS.ANIL D. NAIRSRI.R.SREEJITHSMT. ARYA ANILSRI.ACHYUT K PADMARAJSHRI.GOKULRAJ L. RESPONDENT/RESPONDENT: THE DEPUTY COMMISSIONER OF INCOME TAX (EXEMPTION)WARD, ALAPPUZHA-688 001.THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON07.09.2021, ALONG WITH ITA.73/2019, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: JUDGMENT S.V.Bhatti, J. ITA Nos.73 & 121 of 2019 Heard the learned Advocates Mr.Anil D.Nair and Mr.ChristopherAbraham for the parties. 2. M/s Nirmithi Kendra/Assessee is the appellant in both the appeals. The Deputy Commissioner of Income Tax/Revenue is therespondent in the appeals. 3. The appeals are filed aggrieved by the following orders. 4. The common question of law raised in the appeals ariseunder Section 2(15) read with Section 12A of Income Tax Act (forshort "the Act"). The assessee is the registered Society under ITA Nos.73& 121 of 2019 4 Travancore Cochin Literary Scientific and Charitable Society videReg.No. A-354/88 dated 26.9.1988. The assessee was registeredunder Section 12A of the Act with CIT, Thiruvananthapuram videRegistration dated 23.4.2002. The assessee, for the assessment year2009-2010, on 15.3.2010 filed the income tax returns. The assessee-returns nil income after claiming Rs.9,74,882/ as applied forcharitable purpose. The assessment was taken up for scrutiny underSection 143(3) of the Act. The Assessing Officer through theassessment proceedings proposed to examine the claim of assesseeunder Section 12(5) read with Section 12A of the Act. In view of theproposed verification of the status of assessee for claimingexemption, the assessee was put on notice and in response theretothe assessee stated that the assessee is registered as a charitablesociety; the District Collector is the Chairman of the assesseeSociety; the other revenue officials such as RDO etc. either holdfunctional posts or the members of the society. According toassessee, the assessee is more or less like a Governmentorganization and not carrying on business for earning profits. The ITA Nos.73& 121 of 2019 5 ITA Nos.73& 121 of 2019 5 surplus realized is ploughed back for furthering the objects of thetrust. The claim made by the assessee was brought under the firstlimb of section 2(15) of the Act. Under the principle of mutuality,the surplus returned to the persons forming such association is notchargeable to tax. The Assessing Officer, upon examination of thebyelaws, books of account and the objects of the society rejected theclaim of assessee as rendering charitable purpose and exempt frompayment of income tax. The Assessing Officer clearly noted that thefact that a few Government officers are associated with theassessee/society even assumed to be correct, such society as suchwould not become a Government organisation. The assessee'sidentity is traceable to registration obtained under TravancoreCochin Literary Scientific and Charitable Societies Act. One of theobjects of the assessee is to take up construction work of any natureto establish a chain of retail outlets. In the subject financial year, theassessee has completed 34 building projects amounting toRs.2,17,64,238/-, advance amount against work-in-progress for andon behalf of various Government projects. Incidentally, the assessee has sold RCC doors and windows amounting to Rs.4,98,128/-. Theassessee has to fulfil its primary object ie. Construction work only.The construction work is an activity of trade, commerce or businessfor consideration. By declaring income of Rs.9,74,882/-, the doctrineof mutuality is unavailable to the assessee under Section 11(1)(a) ofthe Act. Finally, it is recorded that the case on hand comes withinthe ambit of 4[th] limb of Section 2(15) of the Act and the saidprovision read together with the proviso, there is no escape from theconclusion that the assessee cannot claim the status under Section12A of the Act and the activity carried on by the assessee does notcome within themeaningof charitable purpose warrantingexemption from income tax. The findings recorded by the AssessingOfficer are confirmed by the learned CIT (Appeals) and the Tribunalthrough orders Annexure B & C. We find it convenient to refer tothe conclusion recorded by the Tribunal. "As per the provisions of Section 2(15) of the IncomTax Act, 1961, the advancement of any other object ofgeneral public utility shall not be a charitable purpos,if it involves the carrying on of any activity in thenature of trade, commerce or business or any activityor running services in relation to any trade, commerce or business, for a cess or feee or any otherconsideration, irrespective of the nature of use orapplication, or retention of the income from suchactivity. Provided further, that the first proviso shallnot apply if the aggregate value of the receipts fromthe activities referred to therein is Rs.25 lakhs or lessin the previous year. Thus, provision of sec.2(15) areabundantly clear and does not require anyinterpretation. The activities carried on by the present assesseecannot be considered as activities of medical relief oreducation or relief to the poor. The correct way toexpress the nature of activities carried on by theassessee is to say that the assessee is carrying on"advancement of any other object of general publicutility". When that is the case, the assessee is hit bythe proviso to Sec.2(15) of the I.T.Act. The provisoreads that "advancement of any other object of generalpublic utility" shall not be a charitable purpose, if itsinvolving carrying on any activity in the nature oftrade, commerce or business, or any activity ofrendering any service relating to any trade, commerceor business, for a cess or fee or any otherconsideration, irrespective of the application ofmoney. Therefore, we find that the case of theassessee is hit by the proviso to section 2(15) of theI.T.Act and the assessee is not entitled for the benefitof section 11 of the Act on the income generated fromsuch activities" ..... By any stretch of imagination, it is notpossible to hold that the business carried on by theassessee is incidental to the objects mentioned in theMemorandum of Association. On the other hand, it isa pre-dominant activity carried on by the assessee. Inother words, "incidental" is an offshoot of the "mainactivities", inherent bye-prodct of the predominantactivities. The activities complementing the mainactivities are not in the nature of incidental to thebusiness. It is incidental if it is supporting theactivities to the main activities. In the present case,the activities carried on by the assessee is itselfprincipal activities and not incidental activities. Hence, it is not possible to hold that the constructionactivities carried out by the assessee is not protectedby the provisions of section 11(4A) of the Act. Inview of this, we do not find any merit in the argumentof the Ld.AR. Thus, this ground of appeal of theassessee is dismissed." 5. Finally, the Tribunal considered whether the activities carried on by the assessee were incidental to the attainment of the objects of the trust. Appreciating the circumstances of thecase and the circumstances in the reported judgment in ACIT v Thanthi Trust (2001) 247 ITR 785. the said contention of theassessee was also rejected. The Tribunal thrugh Annexure-Cdismissed the appeal of the assessee. Hence the appeal. 6. The assessee raises the following substantial questions of law: i.In the facts and circumstances of the case ought notthe Tribunal have held that the assessee is entitled for thebenefit of exemption and that proviso to section 2(15) doesnot apply to the appellant. ii.In the facts and circumstances of the case ought notthe Tribunal have held that in view of the certificate underSec.12A would continue in force, the authority below oughtnot have denied benefit of exemption." 7. Mr.Anil D.Nair argues that the activities of the assessee fromthe manner in which the circumstances are accepted by theauthorities under the Act, would come under the expression viz.the advancement of any other object of general public utility inSection 2(15) which deals with charitable purposes. The argumentproceeds that the definition is inclusive and from the consitution ofsociety and the persons managing the society, nature of activitiesundertaken by the assessee, the assessee is entitled to exemptionunder Section 12A read with section 2(15). He laid much emphasison the words in proviso to section 2(15) i.e. any activity ofrendering any service in relation to the trade, commerce orbusiness and such circumstance is absent in the case on hand andtherefore the proviso is not applicable to assessee. He is notdisputing the well established proposition of law and thepresumption available in fact that all the issues are dependent onthe specific circumstances the authorities or this Court would beconsidering and there is no direct precedent on the point insupport of the case of the assessee. For persuasive value, he ITA Nos.73& 121 of 2019 10 refers to the judgments reported in Commissioner of Income-tax-I,Lucknow v Lucknow Development Authority, Gomti Nagar[1],Director of Income-tax (Exemption) v Sabarmati Ashram GaushalaTrust[2],India Trade Promotion Organization v Director General ofIncome-tax (Exemptions)[3],Ahmedabad Urban Development Authority v Assistant Commissioner of Income-Tax(Exemptions)[4]and Commissioner of Income-Tax-I, Jodhpur v JodhpurDevelopment Authority[5]. He relies on Circular No.11/2008 dated19.12.2008 issued by CBDT. ITA Nos.73& 121 of 2019 10 refers to the judgments reported in Commissioner of Income-tax-I,Lucknow v Lucknow Development Authority, Gomti Nagar[1],Director of Income-tax (Exemption) v Sabarmati Ashram GaushalaTrust[2],India Trade Promotion Organization v Director General ofIncome-tax (Exemptions)[3],Ahmedabad Urban Development Authority v Assistant Commissioner of Income-Tax(Exemptions)[4]and Commissioner of Income-Tax-I, Jodhpur v JodhpurDevelopment Authority[5]. He relies on Circular No.11/2008 dated19.12.2008 issued by CBDT. 8. Mr.Christopher Abraham in reply argues that thecircumstances stated by the assessee are objectively considered byall the three authorities, and have as a matter of fact, found thatthe assessee acts as a middle man or agency between theGovernment/M.P.'s, MLA's on one hand and on another hand actsas Principal to the contractor for getting the Government worksexecuted from the funds allotted by the Government in this behalf. 1[2013] 38 taxmann.com 246(Allahabad) 2 [2014] 362 ITR 539 (Guj) 3 [2015] 371 ITR 333 (Delhi) 4 [2017] 396 ITR 323(Guj.) 5 [2017] 79 taxmann.com 361 (Rajasthan) Basically what the assessee undertakes is preparation of estimates,providing services to the execution of Government works by 3[rd]party agency/contractors. The said activity is provided by theassessee on receipt of 2.5% fee by way of Commission on the totalcost of project. This is a pure and simple business activity, amountis received from the Government, paid to the contractor for theexecuted work and there is nothing like general public utility whichissine quo non for extending the meaning of Section 2(15) of theAct. By referring to the activity particularly undertaken by theassessee through its contractor, is stepped up as charitablepurpose, then any and every contractor is doing the same work forgeneral public and they would stand on the same footing as theassessee and in such an event Section 2(15) of the Act receives notthe plain and literal meaning available from the language, butimaginative meaning which may result in defeating the inclusivedefinition. By referring to the CBDT Circular, he argues that CBDTCircular is voachsafingthe approach of the authorities under theAct to ensure evasion of tax, he prays for dismissing the appeal. ITA Nos.73& 121 of 2019 12 9. At the outset of our consideration, we preface paragraphs 3, 3.1 & 3.2 in the circular relied on by Adv.Anil D.Nair. "3. The newly inserted proviso to section 2(15) willapply only to entities whose purpose is'advancement of any other object of general publicutility, i.e. The forth limb of the definition ofcharitable purpose' contained in section 2(15).Hence, such entities will not be eligible for exemptionunder section 11 or under section 10(23C) of the Act,if they carry on commercial activities. Whether suchan entity is carrying on an activity in the nature oftrade, commerce or business is a question of factwhich will be decided based on the nature, scope,extent and frequency of the activity. 3.1 There are industry and trade associations whoclaim exemption from tax u/s 11 on the ground thattheir objects are for charitable purpose as these arecovered under 'any other object of general publicutility'. Under the principle of mutuality, if tradingtakes place between persons who are associatedtogether and contribute to a common fund for thefinancing of some venture or object and in thisrespect have no dealings or relations with anyoutside body, then any surplus returned to thepersons forming such association is not chargeable totax. In such cases, there must be complete identitybetween the contributors and the participants. 3.1 There are industry and trade associations whoclaim exemption from tax u/s 11 on the ground thattheir objects are for charitable purpose as these arecovered under 'any other object of general publicutility'. Under the principle of mutuality, if tradingtakes place between persons who are associatedtogether and contribute to a common fund for thefinancing of some venture or object and in thisrespect have no dealings or relations with anyoutside body, then any surplus returned to thepersons forming such association is not chargeable totax. In such cases, there must be complete identitybetween the contributors and the participants. Therefore, where industry or trade associations claimboth to be charitable institutions as well as mutualorganizations and their activities are restricted tocontributions from and participation of only theirmembers, these would not fall under the purview ofthe proviso to section 2(15) owing to the principle ofmutuality. However, if such organizations havedealings with non-members, their claim to becharitable organizations would now be governed bythe additional conditions stipulated in the proviso to ITA Nos.73& 121 of 2019 13 section 2(15). 3.2. In the final analysis, however, whether theassessee has for its object 'the advancement of anyother object of general public utility' is a question offact. If such assessee is engaged in any activity in thenature of trade, commerce of business or rendersany service in relation to trade, commerce orbusiness, it would not be entitled to claim that itsobject is charitable purpose. In such a case, theobject of 'general public utility' will be only a mask ora device to hide the true purpose which is trade,commerce or business or the rendering of anyservice in relation to trade, commerce or business.Each case would, therefore, be decided on its ownfacts and no generalization is possible. Assessees,who claim that their object is 'charitable purpose'within the meaning of Section 2(15), would be welladvised to eschew any activity which is in the natureof trade, commerce or business or the rendering ofany service in relation to any trade, commerce orbusiness." 10. The consideration of CBDT Circular, by straight and simple understanding, answers most of the submissions canvassed by theassessee. Let us examine the circumstances of the case viz. theregistration under the Societies Registration Act may not be theexclusive or only criteria for attracting Section 2(15) i.e. thedefiition of charitable purpose r/w Section 12A of the Act. Theassessee must satisfy the conditions stipulated in the definition.The assessee tries to bring its case within the ambit of 4[th] limb of ITA Nos.73& 121 of 2019 14 section 2(15) of the Act and attempts to wriggle out from the effectof proviso which deals with services in relation to trade, commerceor business. The contention, in our considered view, is completelyuntenable. The assessee receives amount from the Government,executes construction work for the benefit of the Governmentthrough contractors. The assessee receives fee by way ofcommission from the Government. The purpose of construction ofbuilding for Government cannot be accepted as an activity comingwithin the meaning of advancement of any other object of generalpublic utility. In our view the reason being the construction activityby itself does not advance any other object of general public utility.The general public utility from such construction is derived as factwith the facilities constructed by the assessee are put to utility. Theactivity undertaken by the assessee on one hand and on anotherhand with the ultimate purpose or user of buildings constructed bythe Government shall not be mistaken with one another. Theassessee is interpreting proviso by excluding one of the importantlimbs, viz. involves the carrying on of any activity in the nature of trade, commerce or business. The decision of the authorities areindependently considered and by taking note of CBDT Circular andabove reasoning, we are of the view that the substantial questionraised could be answered in favour of the revenue and against theassessee. Appeal fails and dismissed. ITA No.121 of 2019 By following the reasons stated in ITA No.73 of 2019 questionsare answered in favour of revenue and against the assessee.Appeal dismissed. No order as to costs. Sd/- S.V.BHATTI JUDGE css/ sd/- VIJU ABRAHAM JUDGE APPENDIX OF ITA 121/2019 PETITIONER ANNEXUREANNEXURE A ANNEXURE B ANNEXURE C APPENDIX OF ITA 73/2019 TRUE COPY OF THE ASSESSMENT ORDER DATED 22.2.2016 FOR THE YEAR 2013-14 ISSUED TO THE APPELLANT. TRUE COPY OF THE ORDER OF THE COMMISSIONER OFINCOME TAX (APPEALS) FOR THE YEAR 2013-14 ISSUED TO THE APPELLANTTRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH DATED 26.10.2018