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The Tax Publishers DCIT v. Semi Conductor Laboratory Deptt. of Space, GOI [ITA No. 151, 858 /Chd/2014, dt. 12-5-2016] : 2016 TaxPub(DT) 2534 (Chd-Trib) Charitable activities--Buying and selling whether hit by proviso to section 2(15), requirement to maintain separate set of books section 11(4A). Impact of section 13(8). *Facts:* Assessee society is a body under the aegis of Department of Space, Govt. of India. It was claiming exemption as a charitable organization dedicated to science and technology under the income tax act for all earlier asst. years and was also registered under section 12A of the act. The assessing officer during the assessment year on finding that the assessee was selling goods to Govt. departments lower rates thus is ineligible for exemption under section 11 due to operation of proviso to section 2(15). Also held that the selling activity was hit by section 40A(2)(b) thus denied the exemption under section 11. Separate books under section 11(4A) was not maintained and reading of section 13(8) was also warranted. On appeal the Commissioner (Appeals) held that the assessee works only on grants, so no separate books were warranted beyond what they were maintaining, the fact of sale is only to Govt. though at lower rates by itself does not hit section 40A(2)(b) as the same is not applicable for sales, thus if application of income is seen is squarely falling into the exemption of section 11 read with section 2(15). Aggrieved department went in appeal: Held in favour of the assessee that they were a charitable organization thus not hit by section 11(4A) beyond what they were maintaining the provisions of section 13(8) do not apply to the assessee as the dominant intent for what they were formed is being pursued in line year on year. Takeaways on the decision: Registration under section 12A does not mean income is exempt is a test to be seen/verified by assessing officer year on year. Requirement of section 11(4A) is warranted if any activity though being charitable nature is carried on with a profit/income arising there on. The carrying of profit/income or surplus alone cannot whittle down the charitable exemption. Section 11(4A) was in the statute even before proviso to Section 2(15) was inserted so does not bring in a new element to proviso to Section 2(15). As for buying and selling by itself can deny exemption under section 11: 20. In the present case, the only objection of the assessing officer in raising the proviso to section 2(15) of the Act is that the assessee is engaged in sale and purchase. Now the question arising before us is whether selling and purchasing of certain things amount to carrying of business so as to disentitle assessee the exemption under section 11 of the Act. Though a number of judgments were cited by both the sides, we would like to refer to the judgment of Delhi High Court in the case of India Trade Promotion Organisation v. DGIT (2015) 371 ITR 333 (Del), whereby the question was the constitutional validity of amendment to section 2(15) of the Act by inserting the said proviso. While adjudicating the issue the Hon'ble Court though held the proviso to section 2(15) of the Act to be not ultra-virus the constitution, however a 'reading down' of the proviso was advised by the Hon'ble Court. It has been very categorically held in the judgment that in pursuance of the provisions of this proviso in deciding whether any activity is in the nature of trade, commerce, or business, it has to be examined whether there is any element of profit making or not. Just by earning income, it cannot be said that the assessee is carrying on any business since it is only when such an assessee has an income that the question of not including it in its total income would arise. Therefore, merely because an institution which otherwise is established for charitable purposes receives income that would not make it any less a charitable institution. The most important finding given by the Court in this case to the extent relevant for the present appeal, are as under :-- " 58. In conclusion, we may say that the expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes."

The Tax Publishers

DCIT v. Semi Conductor Laboratory Deptt. of Space, GOI [ITA No. 151, 858 /Chd/2014, dt. 12-5-2016] : 2016 TaxPub(DT) 2534 (Chd-Trib)

Charitable activities--Buying and selling whether hit by proviso to section 2(15), requirement to maintain separate set of books section 11(4A). Impact of section 13(8).

Facts:

Assessee society is a body under the aegis of Department of Space, Govt. of India. It was claiming exemption as a charitable organization dedicated to science and technology under the income tax act for all earlier asst. years and was also registered under section 12A of the act. The assessing officer during the assessment year on finding that the assessee was selling goods to Govt. departments lower rates thus is ineligible for exemption under section 11 due to operation of proviso to section 2(15). Also held that the selling activity was hit by section 40A(2)(b) thus denied the exemption under section 11. Separate books under section 11(4A) was not maintained and reading of section 13(8) was also warranted. On appeal the Commissioner (Appeals) held that the assessee works only on grants, so no separate books were warranted beyond what they were maintaining, the fact of sale is only to Govt. though at lower rates by itself does not hit section 40A(2)(b) as the same is not applicable for sales, thus if application of income is seen is squarely falling into the exemption of section 11 read with section 2(15). Aggrieved department went in appeal:

Held in favour of the assessee that they were a charitable organization thus not hit by section 11(4A) beyond what they were maintaining the provisions of section 13(8) do not apply to the assessee as the dominant intent for what they were formed is being pursued in line year on year.

Takeaways on the decision:

Registration under section 12A does not mean income is exempt is a test to be seen/verified by assessing officer year on year.

Requirement of section 11(4A) is warranted if any activity though being charitable nature is carried on with a profit/income arising there on.

The carrying of profit/income or surplus alone cannot whittle down the charitable exemption.

Section 11(4A) was in the statute even before proviso to Section 2(15) was inserted so does not bring in a new element to proviso to Section 2(15).

As for buying and selling by itself can deny exemption under section 11:

20. In the present case, the only objection of the assessing officer in raising the proviso to section 2(15) of the Act is that the assessee is engaged in sale and purchase. Now the question arising before us is whether selling and purchasing of certain things amount to carrying of business so as to disentitle assessee the exemption under section 11 of the Act. Though a number of judgments were cited by both the sides, we would like to refer to the judgment of Delhi High Court in the case of India Trade Promotion Organisation v. DGIT (2015) 371 ITR 333 (Del), whereby the question was the constitutional validity of amendment to section 2(15) of the Act by inserting the said proviso.

While adjudicating the issue the Hon'ble Court though held the proviso to section 2(15) of the Act to be not ultra-virus the constitution, however a 'reading down' of the proviso was advised by the Hon'ble Court. It has been very categorically held in the judgment that in pursuance of the provisions of this proviso in deciding whether any activity is in the nature of trade, commerce, or business, it has to be examined whether there is any element of profit making or not. Just by earning income, it cannot be said that the assessee is carrying on any business since it is only when such an assessee has an income that the question of not including it in its total income would arise.

Therefore, merely because an institution which otherwise is established for charitable purposes receives income that would not make it any less a charitable institution. The most important finding given by the Court in this case to the extent relevant for the present appeal, are as under :--

" 58. In conclusion, we may say that the expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes."