POPULATION SERVICES INTERNATIONAL,NEW DELHI vs. CIT(E), NEW DELHI

PER SAKTIJIT DEY, JM:

Captioned appeal has been filed by the assessee assailing

the order dated 16.03.2021 passed by learned Commissioner of

Income Tax (Exemption), Delhi, revoking the approval granted

under section 10(23C)(iv) of the Income-tax Act, 1961 (in short

‘the Act’).

assessee is a society registered under the Societies Registration

ITA No.433/Del/2021 AY: 2016-17

Act, 1860, w.e.f, 18.06.1980. The main objects of the assessee

include the following: • To undertake activities in fields, such as, health services,

nutrition and other related fields and to deal with

malnutrition problems in India; • To run, operate, undertake and maintain training and in-

service training centers and/or program and to employ

skilled personnel for the said purpose or furthering the

cause of the society and to support Government’s objectives

and priorities under the national health mission; • To enlist the services of doctors, paramedical personnel,

midwives, social scientists, gynecologists and other

specialist and consultants and/or social workers, nurses

and volunteers and to complement the efforts of the

Government of India in priority health areas of maternal

and child health, sanitation, tuberculosis, family planning

and gender based violence. To use marketing approaches to

fill gaps and address needs of the vulnerable population in

the public health space of the country.

the Act on 06.12.1991 and under section 80G of the Act on 2 | P a g e

ITA No.433/Del/2021 AY: 2016-17

20.09.2007. The assessee was granted approval under section

10(23C)(iv) by the Central Board of Direct Taxes (CBDT) vide

notification issued on 31.01.2007 and such approval was

renewed in subsequent assessment years. In course of scrutiny

assessment for assessment year 2016-17, the Assessing Officer

while verifying the information gathered and available on record,

was of the view that the assessee has violated the conditions of

approval granted under section 10(23C)(iv) of the Act. The

reasons for coming to such conclusion are as under: • The foreign contributions received by the assessee have

been shown differently in FCRA audited accounts and

annual financial statements. Whereas, the assessee failed to

explain the discrepancy between the figures. • The books of account are not complete and entries made are

not supported by proper vouchers. • Figures of income and expenditure account are unverifiable

in absence of matching figures from the relevant ledger

heads. • The application of 85% of income towards charitable

purpose, a condition precedent for granting approval under

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ITA No.433/Del/2021 AY: 2016-17

section 10(23C)(iv), remained unverifiable in absence of

proper documents, evidences etc. • No separate books of account are being maintained for

business activity as required under section 11(4A) of the

Act. • The required Tax Audit Report in Form 3CD as per section

44AB has not been complied with.

Officer sent a proposal for withdrawal of approval granted under

section 10(23C)(iv) of the Act. Accepting the proposal of the

Assessing Officer, learned CIT (Exemption) granted approval for

special audit and the special audit was entrusted to a chartered

accountant firm. In the Special Audit Report furnished on

06.06.2019, it was reported as under: • The assessee was primarily engaged in promoting its own

contraceptive brands on lines of a pharmaceutical company

model, in the garb of promoting general awareness of

contraceptives under the “PEHEL Project”, an initiative by

the assessee and “NACO Project” floated by the

Government, thereby, diverting donor’s money for

promotion, brand establishment, mass advertisement of its 4 | P a g e

ITA No.433/Del/2021 AY: 2016-17

own contraceptive brands. Thus, assessee is not carrying

out charitable activities as envisaged under section 2(15)

read with section 10(23C)(iv) of the Act. • Expenses amounting to Rs.42,79,06,352/- have been

incurred on ‘PEHEL Project’ on cash basis which works out

to 38.62% of the total expenses of various projects.

Whereas, the assessee failed to furnish the scope of work

and agreement entered with Population Service

International, Washington DC (“PSIDC”), which granted Rs.

86,00,48,605/- for implementation of various projects and

assessee diverted almost 50% of such grant towards ‘Pehel

Project’ • In the garb of spreading awareness of Intra Uterine Device

(IUD) the assessee has promoted and increased the market

feasibility of its own brand IUCD products FREEDOM-5 and

FREEDOM-10 in a solely commercial manner. • In so far as NACO Project promoted by Ministry of Health

and Family Welfare, Departmental of AIDS Control,

Government Of India for implementing Condom Social

Marketing Programs in six states of Gujarat, Maharashtra,

Odisha, Rajasthan, West Bengal and Karnataka, as per 5 | P a g e

ITA No.433/Del/2021 AY: 2016-17

agreement dated 21.05.2014, the assessee is required to

undertake promotion and advertisement for Deluxe Nirodh

Condom Brand owned by Government of India. Whereas,

while promoting Delux Nirodh Brand, the assessee has

promoted its own Masti brand of Condoms by utilizing the

resources. Though, as per agreement, sale of Delux Nirodh

Condom brand and Masti brand are to be in the ratio of

70:30, however, assessee has sold Masti brand condoms in

excess of 30% of total sale volume in NACO designated

states, viz., Orissa, Rajasthan and West Bengal. • The assessee made exorbitant profits from sale of condoms,

both, Delux Nirodh brand and Masti brand, which were

supplied through Government supply mechanism at a

subsidized rate of only Rs.0.40 per piece to be sold at Rs.

0.40 per piece. Whereas, since Masti brand is sold at higher

price of Rs.1.09 per piece, the Assessee had sold more of

Masti brand condoms due to high profit margin. • The assessee also diverted the condoms supplied by

Government for designated six NACO States to other non-

designated States and in the process it earned huge

6 | P a g e

ITA No.433/Del/2021 AY: 2016-17

unwarranted profits and established its brand and market

presence in these non-NACO States as well. • The assessee had entered into direct/indirect arrangement

with PSI (India) Pvt. Ltd., another related company engaged

in the business of buying, selling, distributing and

otherwise dealing in contraceptives etc. One of the directors

of the assesee is the Managing Director of PSI (India) Pvt.

Ltd. The Masti brand of condom earlier marketed by the

assessee was later on marketed by PSI India Pvt. Ltd. and in

the process has generated surplus profit.

Special Audit Report, learned CIT(Exemption) issued a show-

cause notice to the assessee to explain, why the approval granted

under section 10(23C)(iv) of the Act should not be revoked. In

response to the show-cause notice, the assessee furnished a

detailed reply vehemently objecting to the proposed withdrawal of

approval granted under section 10(23C)(iv) of the Act.

observations of the Assessing Officer and the Special Audit

Report, learned CIT (Exemption) observed that the assessee could

not come with a satisfactory explanation to reconcile the 7 | P a g e

ITA No.433/Del/2021 AY: 2016-17

difference in the figures of foreign contribution as per the FCRA

Account in Form FC-4 and as declared in the income and

expenditure account. Further, he observed, though, the assessee

claims itself to be a non-profit and non-Government organization

with a mandate to assist Government of India and State

Governments in the field of reproductive health, HIV/AIDS

prevention, eradication of tuberculosis and maternal and child

health with its main objects, in reality, it is indulging in business

activity with a profit motive and not doing any charitable work.

He observed, though, the assessee was involved in two major

projects promoted by Government, however, in the garb of

promoting such projects, the assessee, in fact, has promoted its

own products, thereby, increasing its market presence. In the

process, the assessee has diverted the donor’s money for

promotion, brand establishment by mass advertisement of own

contraceptive brands. The nature of activity is purely commercial

and no charity is involved. Thus, by diverting the Government

grants and donor’s fund to promote its own brand, the assessee

has not applied its income wholly and exclusively for the objects

for which it is established, hence, violated the conditions of third

proviso to section 10(23C) of the Act. Further, he observed, 8 | P a g e

ITA No.433/Del/2021 AY: 2016-17

though, the assessee under the provisions of the Act was

required to maintain separate books of account for its charitable

and business activities, however, the assessee did not do so.

Accordingly, the assessee violated the conditions of 7th proviso to

section 10(23C) of the Act. Thus, on the aforesaid premises,

learned CIT (Exemption) ultimately concluded that the assessee

is not involved in charitable activity as defined under section

2(15) of the Act. Hence, the approval granted under section

10(23C)(iv) was required to be withdrawn. Accordingly, he did so,

while referring to various provisions of section 10(23C) of the Act.

Being aggrieved, the assessee is before us.

assessee submitted, in accordance with its objects, the assessee

undertakes activities in the fields, such as, health services,

nutrition and other related fields and to deal with malnutrition

problems of people living in India. He submitted, for achieving

these objects, the assessee enlists the services of doctors,

paramedical personnel, mid wives, social scientists, gynecologists

and other specialists and consultants and/or social workers,

nurses and volunteers to complement the efforts of the

Government of India in priority health areas of maternal and 9 | P a g e

ITA No.433/Del/2021 AY: 2016-17

child health, sanitation, tuberculosis, family planning, and

gender-based violence. Using Marketing approaches, the

assessee facilitates to fill gaps and addresses needs of the

vulnerable population in the public health space of the country.

He submitted, looking at the charitable objects of the assessee,

the competent authority granted registration under section 12A

and 80G of the Act. He submitted, even approval under section

10(23C)(iv) of the Act was granted to the assessee, which

continued for years together.

assessee society, he submitted, the activities of the assessee are

not at all commercial in nature but to serve the low income and

vulnerable people of India for their health and well-being. He

submitted, the objects of the assessee, includes, to promote,

distribute and sell contraceptives, family welfare and/or planning

devices and drugs through social marketing techniques and to

make them more popular for the Indian masses. He submitted,

social marketing is a Government of India Scheme started in

1968. Under this scheme, contraceptives are made available to

people in India at highly subsidized rates. These contraceptives

are distributed through social marketing organizations, like 10 | P a g e

ITA No.433/Del/2021 AY: 2016-17

assessee. He submitted, as per the Government of India

guidelines, the social marketing organizations are required to

distribute and sale contraceptives at the price determined and

controlled by the Government, as, contraceptives include

condom, which is treated as essential drug, both, under the

Drugs and Cosmetics Act as well as under the Essential

Commodities Act. Government permits such social marketing

organizations to develop their own brands that will receive

additional promotion and packaging subsidy to create awareness

and acceptance of family planning amongst low-income

population. He submitted, in order to achieve the charitable

objects and also to promote the Government formulated scheme

for family planning etc., the assessee is working across the range

of health issues to include promotion of institutional deliveries,

construction of toilets, cervical cancer screening and treatment,

prevention of gender-based violence, family planning and

population control, management of tuberculosis, prevention of

HIV and sexually transmitted diseases and prevention of non-

communicable diseases. He submitted, in this regard, the

assessee has established non-financial Memorandum of

Understanding (MoU) with different State Governments to 11 | P a g e

ITA No.433/Del/2021 AY: 2016-17

technically assist in the implementation of Government

sponsored health program and activities. He submitted, the work

done by the assessee has been appreciated by various State

Governments. In this regard, he drew our attention to the letters

of appreciation issued by various State Governments.

departmental authorities as well as Special Audit Report, learned

counsel submitted, during the assessment year 20016-17, the

assessee had received grants from National AIDS Control

Association (NACO) to support NACO in preventing HIV and

sexually transmitted diseases and unwanted pregnancies by

promoting and marketing the condoms supplied by the

Government under the social marketing scheme. He submitted,

amongst various indicators of performance under this contract,

one of the indicators was, assessee will distribute Government

owned brand condoms, i.e., Deluxe Nirodh, and assessee’s own

brand Masti condoms in the ratio of 70:30, respectively. However,

both the products are supplied by Government itself under the

Government sponsored social marketing scheme. He submitted,

as per the agreement with the Government, the assessee had to

place its indent and make payment for supply of both the brands 12 | P a g e

ITA No.433/Del/2021 AY: 2016-17

of condoms. However, the Government failed to supply according

to indent. Therefore, the assessee had to invoke the arbitration

clause in the agreement and the Hon’ble High Court appointed

an arbitrator and concluded the proceedings in favour of the

assessee. He submitted, the allegation of CIT (Exemption) that

the assessee is undertaking commercial activities is unfounded

and baseless. He submitted, the expression

‘business/commercial activities’ would mean activities

undertaken systematically for earning profit. He submitted,

organized course of activity for earning profits as ‘profit motive’ is

an essential requisite for conducting business. In this regard, he

drew our attention to the decision of the Hon’ble Supreme Court

in case of CIT Vs. Distributors (Baroda) P. Ltd. 83 ITR 377 (SC).

sale of its own branded products, by no stretch of imagination it

can be labeled as ‘business’/’commercial activity’, as, there is no

profit motive, much less, any question of profit actually being

generated on sale of such products. He submitted, as per the

agreement, the assessee has to sale products, including its own

branded products, as per the price fixed by the Government. As a

result, he submitted, the assessee has suffered losses year-on- 13 | P a g e

ITA No.433/Del/2021 AY: 2016-17

year and no profit has actually been generated. He submitted, if

the grant received from the Government and PSI International is

excluded, the assessee will actually be in loss. Thus, he

submitted, the allegation that the assessee is indulging in

business and commercial activities with profit motive is far from

truth. He submitted, the Government itself distributes 55% of the

condoms free or at highly subsidized prices in the interest of

general public, therefore, to allege that the assessee is generating

profit, in such a case, is unacceptable. In this context, he drew

our attention to a decision of the Hon’ble Delhi High Court in

case of Reckitt Benckiser (India) Ltd. Vs. UOI, WP(C) No.

7705/2013, dated 10.07.2015.

(Exemption) regarding sale of Masti brand condoms, learned

counsel for the assessee submitted, the CIT (Exemption) himself

has stated that the purchase price of Masti brand condoms from

the manufacturer is Rs.1.64 per piece and sale price is 1.93 per

piece. From the small margin retained, the assessee had to incur

substantial expenditure on distribution and social marketing.

Therefore, the assessee actually ends up in loss. That being the

case, the allegation of generation of profit is without any basis. 14 | P a g e

ITA No.433/Del/2021 AY: 2016-17

respect of ‘PEHEL Project’, learned counsel submitted, the project

is an initiative of the assessee to contribute millennium

development goal through limiting births and reducing maternal

mortality amongst low-income women of reproductive age in 30

districts across three states, Uttar Pradesh, Rajasthan and Delhi.

He submitted, the program was undertaken in three phases.

First one from 2008-10, second phase from 2011-13 and third

phase from 2013-14. He submitted, the program has two

components; (a) prevention of unintended pregnancies by

promoting modern family planning methods including Intra-

Uterine Device (IUD); (b) Increasing access to safe and legal

Medical Termination of Pregnancy (MTP). He submitted, through

this project assessee seeks to harness the potential of the private

sector by creating a service delivery network to improve access to

high quality and affordable family planning methods in

concluding IUD and medical abortion services. He submitted, the

‘PEHEL Project’ has been funded by the parent organization

PSIDC by means of open funding for focus on expanding

awareness and access to family planning with an emphasis on

IUD and on increasing access to medical abortion. 15 | P a g e

ITA No.433/Del/2021 AY: 2016-17

authorities, learned counsel submitted, merely because 50% of

total grants received from the parent organization have been

incurred on ‘PEHEL Project’, does not make the activities non-

genuine or commercial in nature. He submitted, allegation of the

Revenue that the Intra-Uterine Contraceptive Device, Freedom 5

and Freedom 10 are promoted by the assessee to market its own

brand, is wholly without basis. He submitted, the assessee has

followed the principle of social marketing by introducing a brand

with a Maximum Retail Price (MRP) mandated by National

Pharmaceutical Pricing Authority (NPPA) so as not to undercut or

distort the Indian IUCD market to unfairly capture market share.

He submitted, the assessee has spent Rs.42.79 crores in

education, awareness and promotion of the brand. He submitted,

if examined from a commercial perspective, spending such a

huge amount for sales value of Rs.53 lakhs indicates that money

was predominantly utilized for promotion and for spreading

awareness and increasing acceptance of a method of family

planning. He submitted, in the aforesaid perspective, the

allegation that the assessee diverted the original donor’s mandate

and was not aligned to charitable activities, is both false and 16 | P a g e

ITA No.433/Del/2021 AY: 2016-17

inaccurate. He submitted, the sale and promotion of Freedom 5

and Freedom 10 were as per the agreement entered into with the

parent company and only for charitable purpose. He submitted,

the assessee did not commercialize or earn any profits out of the

mandate under the ‘PEHEL Project’. He submitted, the same is

confirmed by the parent organization. He submitted, while

alleging that the assessee has earned profit on sale of Freedom 5

and Freedom 10, the departmental authorities have considered

the sale price and purchase price alone, while ignoring other

substantial expenses like distribution cost, advertisement cost,

warehousing cost and other administrative cost. He submitted, if

the overall cost is considered, the assessee actually sales the

products at loss with no profit earning motive but to fulfill its

objectives of increasing awareness and targeting as many

number of households to support the Government initiative in

this regard. He submitted, contrary to allegations made by the

departmental authorities, facts on record would demonstrate that

the assessee has not made any profit on sale of contraceptive by

promoting its own brand.

assessee has nexus with another related party, viz., PSI India 17 | P a g e

ITA No.433/Del/2021 AY: 2016-17

Pvt. Ltd., engaged in similar business, learned counsel

submitted, PSI India Pvt. Ltd. is only a tenant of the assessee. He

submitted, though, Mr. Shankar Narayanan was recruited by the

assessee as a Senior Managing Director, however, he resigned

from his service in 2016 before joining PSI India Pvt. Ltd.

Therefore, nothing much can be read into the alleged relationship

between the assessee and PSI India Pvt. Ltd. He submitted,

generation of surplus cannot be a determinative factor for

determining whether a particular activity is for charitable

purpose or commercial nature. In this context, he drew our

attention to the following decisions:

ITR 1 (SC)

333 (Del)

granted approval under section 10(23C)(iv) of the Act for the

assessment year 2007-08 and it was renewed year after year till

its withdrawal by the impugned order. He submitted, when the

objects of the assessee have not changed, merely because of 18 | P a g e

ITA No.433/Del/2021 AY: 2016-17

introduction of proviso to section 2(15) of the Act w.e.f

01.04.2009, the activity carried on by the assessee cannot

become commercial. He submitted, even registration granted

under section 12A and 80G of the Act still subsists. Therefore,

charitable status of the assessee is established. He submitted,

even if, it is assumed that the assessee has generated some

surplus/profit from some commercial activity, however, they are

incidental or ancillary to the main charitable object of the

assessee.

the assessee has not maintained separate books of account for

its business and charitable activities, thereby, has violated 7th

proviso to section 10(23C)(iv) of the Act, learned counsel

submitted, irrespective of the fact that the assessee is not

involved in business activity, there is no requirement for

maintaining separate books of account as the assessee maintains

them on ERP software. He submitted, ERP software can be used

to compute figures for any segment of activity carried on by the

assessee. For such proposition, he relied upon the following

decisions:

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ITA No.433/Del/2021 AY: 2016-17

322 (Del. Trib.)

No.2346/Del/2014 & 4550/Del/2018 (Del. Trib.)

not have withdrawn the approval granted under section

10(23C)(iv) of the retrospectively. In support of such proposition,

he relied upon the following decisions:

4136/Del/2017 (Del. Trib.)

authorities as well as Special Auditor, learned Departmental

Representative submitted, various details called for by the

Assessing Officer were not furnished in course of assessment

proceeding relating to assessment year 2016-07. Drawing our

attention to the observations of the Assessing Officer, he

submitted, the assessee did not produce complete books of

account and other details in course of assessment proceeding. He 20 | P a g e

ITA No.433/Del/2021 AY: 2016-17

submitted, even before CIT (Exemption) also, the assessee did not

furnish all the books of account required to be maintained by the

assessee and reconciliation statements. He submitted, the

Special Auditor has made allegation in similar lines. Thus, he

submitted, the fact that the assessee has violated the conditions

of section 10(23C)(iv) of the Act is clearly established. He

submitted, merely because the assessee was granted approval

under section 10(23C)(iv) in earlier assessment years or has been

registered under section 12A and 80G of the Act cannot

automatically entitle the assessee to exemption under section

10(23C) of the Act. He submitted, whether the assessee has

fulfilled the conditions of section 10(23C) is the subject matter of

review depending upon change in facts and circumstances. He

submitted, if in subsequent years it is found that the assessee

has violated the conditions of section 10(23C) of the Act, the

competent authority is empowered to withdraw the approval

granted. Thus, he submitted, there is no reason to interfere with

the order passed by CIT (Exemption).

materials on record. We have also applied our mind to the

decisions relied upon. No doubt, the issue arising for 21 | P a g e

ITA No.433/Del/2021 AY: 2016-17

consideration before us is the validity of the order passed by

learned CIT (Exemption) withdrawing the approval granted under

section 10(23C)(iv) of the Act, that too, with retrospective effect.

Undisputedly, the assessee is a registered society created for the

purpose of promotion of charitable objects, including, to promote,

distribute and sale contraceptives, family welfare and/or family

planning devices and drugs through social marketing techniques

and to make them more popular for the Indian masses. The

targeted population amongst whom these charitable objects have

to be applied is the low income group people who are vulnerable

and affected by malnutrition and lack of proper health care etc. It

is a fact on record that the assessee has been registered as a

charitable institution under section 12A of the Act since

20.03.1989 and registration under section 80G of the Act has

been granted to the assessee on 20.09.2007. It is also a fact on

record that the CBDT has granted approval under section

10(23)(iv) of the Act to the assessee vide notification dated

14.03.1991. These facts clearly establish that various

departmental authorities in the past have recognized the

assessee as an organization having charitable objects and

essentially a charitable organization. It is a fact on record that 22 | P a g e

ITA No.433/Del/2021 AY: 2016-17

even as on date, assessee’s registration under section 12A and

approval under section 80G of the Act is intact. On a careful

reading of the impugned order of learned CIT (Exemption), it is

very much evident that the trigger point for revocation of

assessee’s approval under section 10(23C)(iv) of the Act is the

proposal given by the Assessing Officer while undertaking the

assessment proceeding for assessment year 2016-17. As

recorded by learned CIT (Exemption) in paragraph 6.2 of his

order, the proposal for cancellation of approval under section

10(23C)(iv) of the Act was mainly for the following reasons:

a) Difference in foreign contributions admitted in Income & Expenditure account as compared to the foreign contributions as per FCRA return in Form FC-4 filed by the assessee.

b) No separate books of account maintained for the business activity as required under 7th proviso to section 10(23C) of the I.T. Act, 1961.

c) The assessee is not carrying out any charitable activities as envisaged in Section 2(15) read with section10(23C)(iv) and other enabling sections of Income tax Act in true spirit and intention.

difference in foreign contribution shown in the income and

expenditure account and the FCRA return in Form FC-4, from

the stage of Assessing Officer itself, the assessee has explained 23 | P a g e

ITA No.433/Del/2021 AY: 2016-17

that as per the FCRA Regulations, the assessee has to show the

actual receipts received during the year. Whereas, in the income

and expenditure account, the assessee, in terms with Income Tax

Act has to show the foreign contribution on accrual basis. On a

perusal of the statutory audit report for the year ended 31st

March, 2016, it is observed, in a note forming part of the

financial statements, the auditor has specifically stated that

donations/grants received, other than the grants for specific

purposes, are regarded as income when it is reasonably expected

that the ultimate collection will be made during the year. Thus,

from the aforesaid, it is observed that the income/fund shown in

the income and expenditure account is on accrual basis, as, the

assessee was reasonably certain that it will receive the

grant/fund. From the details available on record, it is observed

that in FCRA return filed in Form FC-4, the assessee has shown

foreign contribution of Rs. 93,45,00,516/-, whereas, in the

income and expenditure account, the assessee has shown such

figure at Rs.107,61,69,730/-. Thus, the explanation of the

assessee that the foreign contribution in FCRA return has to be

shown on receipt basis is acceptable.

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not maintained separate books of account for the purpose of

foreign contribution under the Foreign Contribution Regulation

Act, 2010, is equally unacceptable. As brought to our notice by

learned counsel for the assessee, there is no mandate under the

Foreign Contribution Regulation Act, 2010 to maintain separate

books of account for foreign contribution and business activities.

The only requirement in law is, the assessee must maintain

separate bank accounts for foreign contribution, which the

assessee has complied. It is noteworthy, before the departmental

authorities, the assessee has specifically submitted that its

accounts are maintained in ERP software, viz., “Lawson” to

record transaction. It is understood, ERP software can be used to

compute figures of any segment of the entity. Further, we have

noted, in case of Ranbaxy Laboratories Ltd. Vs. ACIT (supra), the

Coordinate Bench, while considering the issue whether separate

books of account are required to be maintained where the

accounts are maintained on SAP ERP System, has observed that

SAP based ERP system of accounting tantamount to

maintenance of separate books of account. Thus, applying the

ratio laid down by Coordinate Bench, we have to accept 25 | P a g e

ITA No.433/Del/2021 AY: 2016-17

assessee’s plea that there is no necessity of maintaining separate

books of account, once the accounts are maintained in ERP

system. Thus, in view of the aforesaid, the allegation of the CIT

(Exemption) that due to non-maintenance of separate books of

account the condition of 7th proviso to section 10(23C) of the Act

is violated, deserves to be rejected.

whether it can be said that the assessee is not carrying out

charitable activity as envisaged in section 2(15) read with section

10(23C)(iv) of the Act. In this regard, the main allegation of the

departmental authorities is in relation to activities undertaking

by the assessee in two targeted projects, viz., ‘Pehel Project’ and

‘NACO Project’. As discussed earlier ‘Pehel Project’ is an initiative

of assessee’s parent organization, Population Services

International to contribute to millennium development goal

through limiting births and reducing maternal mortality amongst

low-income group women of reproductive age in 30 districts

across three states, Uttar Pradesh, Rajasthan and Delhi. The

said program is created for improving the health of women by

preventing unintended pregnancies by promoting modern family

planning methods including IUD and increasing access to safe 26 | P a g e

ITA No.433/Del/2021 AY: 2016-17

and legal MTP through medical abortion project. The allegation of

departmental authorities in this regard is twofold, firstly, in the

garb of charitable activity the assessee is actually promoting its

own products, viz., Freedom 5 and Freedom 10 and, secondly,

the expenses incurred go to indicate that the donation received

has been diverted to other business activities of the assessee. It

is observed, for the “Pehel Project’ the assessee has entered into

an agreement with its parent organization, a copy of which is at

page 115 of the paper-book. As per the terms of the agreement,

the assessee has to utilize the donation received for the purpose

of promoting/educating the cause of unintended pregnancy

which ultimately leads to improvement in nutrition and health of

the low income group women. Towards this objective, the

assessee has sold Freedom 5 and Freedom 10 at a price fixed by

National Pharmaceutical Pricing Authority. It is observed, while

alleging that the assessee earned profit from sale of these

products, the departmental authorities have not taken note of

the various costs incurred by the assessee, such as, distribution

cost, advertisement cost, warehousing cost and other

administrative cost. The departmental authorities have also

ignored the fact that a substantial part of the contribution 27 | P a g e

ITA No.433/Del/2021 AY: 2016-17

received was utilized for promotion and spreading awareness and

increasing acceptance of an alternative method of family

planning alien to the target population. It is a fact on record that

the allegation made by the departmental authorities is unilateral.

There is nothing on record to suggest that either the parent

organization or the Government Authorities have made any

allegation regarding the diversion of foreign contribution received

for any other purpose, except the purpose for which it was given

or it was utilized for the business gain of the assessee. Even,

there is no violation, as alleged, under the Foreign Contribution

Regulation Act. Thus, in absence of any contrary material

brought on record by the Revenue, it cannot be said that the

assessee has utilized the foreign contribution received in respect

of ‘Pehel Project’ for its own commercial gain.

that the assessee has earned profit by selling products, viz.,

Masti Brand of condoms in NACO project. The facts on record

reveal that, though, as per the agreement with the Government,

the Government has to supply the assessee two different brands

of condoms, viz., Delux Nirodh and Masti, which are to be sold in

the ratio of 70:30 respectively. However, the Government failed to 28 | P a g e

ITA No.433/Del/2021 AY: 2016-17

supply the required number of Delux Nirodh indented by the

assessee, which resulted in breach of contract and the assessee

had to invoke the arbitration clause and the Arbitrator passed an

award in favour of assessee. Thus, short supply of Delux Nirodh

by the Government compelled the assessee to sell more Masti

condoms. It is a further fact on record that condom is categorized

as essential drug and the pricing of condoms are regulated under

the Government regulations. Therefore, they have to be sold at

subsidized rates, as per ceiling fixed by the Government. No

adverse material has been brought on record by the Revenue to

demonstrate that the assessee has violated the pricing of the

products, as per the Government mandate. Moreover, there is no

allegation by any of the Government agencies, be it Central or

State, regarding promotion of assessee’s own brand at the cost of

Government brand of condoms. That being the factual position

emerging on record, it cannot be said that the assessee has

derived any undue benefit by promoting its own brand. In any

case of the matter, the assessee was granted approval under

section 10(23C)(iv) of the Act for the first time in the year 1991.

At the time of grant of approval under section 10(23C)(iv) of the

Act, the competent authority was satisfied that the assessee has 29 | P a g e

ITA No.433/Del/2021 AY: 2016-17

fulfilled the threshold conditions for approval under section

10(23C)(iv) of the Act.

renewed the approval year-after-year. In fact, learned Sr. Counsel

appearing for the assessee has placed on record scrutiny

assessment orders passed for assessment years 2004-05 to

2013-14, wherein, the Assessing officer has allowed exemption

under section 10(23)(iv) of the Act. Therefore, once the assessee

satisfies the threshold conditions of section 10(23C)(iv) of the Act,

the approval granted cannot be withdrawn, that too, with

retrospective effect, alleging violation of certain compliance

conditions. The Departmental Authorities have failed to

differentiate between the threshold conditions and compliance

conditions. The compliance conditions have to be examined in

each assessment year and, in case, there is any violation in

compliance conditions in any assessment year, assessee’s claim

of exemption for the said assessment year can be rejected.

However, that cannot be a reason to revoke the approval granted

under section 10(23C)(iv) of the Act. One more factor which

needs consideration is, till date, assessee’s registration under

section 12A of the Act as a charitable institution subsists. In fact, 30 | P a g e

ITA No.433/Del/2021 AY: 2016-17

approval granted under section 80G of the Act is still continuing.

These facts reflect the dichotomy in the stand of the revenue. For

the purpose of section 12A and 80G of the Act the assessee is

recognized as charitable institution, whereas, for the purpose of

section 10(23C)(iv) assessee loses its charitable status. This

approach of the revenue is unacceptable.

10(23C) of the Act cannot be revoked, more so, when the objects

of the assessee have remained same. We, for a moment, do not

say that the competent authority under no circumstances can

revoke the approval granted under section 10(23C)(iv) of the Act.

However, for doing so, the revenue must bring on record cogent

material to demonstrate that the assessee has deviated from the

core objects based on which approval under section 10(23C)(iv)

was initially granted to the assessee. It is also a fact on record

that the activities of the assessee are in the category of medical

relief to the poor. Thus, if we interpret the provisions of section

2(15) of the Act strictly, the proviso would not apply. That being

the case, by referring to the proviso to section 2(15) of the Act, it

cannot be said that the assessee is engaged in any activity of

business or commercial nature, hence, not existing for charitable 31 | P a g e

ITA No.433/Del/2021 AY: 2016-17

purpose. Thus, on overall consideration of facts and materials on

record and keeping in view the ratio laid down in the decisions

relied upon, we hold that the impugned order passed by learned

CIT (Exemption) withdrawing the approval granted under section

10(23C)(iv) of the Act is unsustainable. Hence, deserves to be set

aside. Accordingly, we do so.

Order pronounced in the open court on 30th November, 2022

Sd/- Sd- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER

Dated: 30th November, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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