UNITED SISTERS FOUNDATION,MUMBAI vs. ITO EXEM. WARD 2(4), MUMBAI, MUMBAI

Briefly stated, the assessee, United Sisters Foundation, is a company incorporated under section 25 of the Companies Act, 1956 and is registered under section 12A of the Act vide order dated 17.11.2014. It was also granted approval under section 80G. The objects of the assessee, as noted in the assessment proceedings, are broadly directed towards welfare and development of women, women’s health and fitness, breast-cancer awareness and empowerment through education, dissemination of literature, mass education through radio and television, exhibitions, shows, campaigns, competitions and other supporting events. During the year under consideration, the assessee organised an event known as “Pinkathon”, which is stated to be a marathon organised for women with the object of promoting women’s fitness, health, awareness and empowerment. In connection with the

The assessee filed its return of income for the year under consideration on 21.09.2015 declaring Nil income. The case was selected for scrutiny. It was noticed during the assessment proceedings that, although the assessee held registration under section 12A, in the return of income exemption had been claimed under section 10(23C)(iv). The assessee explained before the Assessing Officer that this was an inadvertent mistake while filing the return and that its income was otherwise eligible for exemption under section 11 by virtue of its subsisting registration under section 12A. It was further explained that the audit of the accounts had already been carried out and the audit report was dated 21.08.2015; however, Form No.10BB applicable to an institution claiming exemption under section 10(23C) had been furnished instead of Form No.10B applicable to the claim under section 11. During the course of assessment proceedings, the assessee furnished Form No.10B and requested the Assessing Officer to determine its entitlement to exemption under sections 11 and 12 in accordance with law. The assessee contended that an inadvertent reference to an incorrect provision in the return and furnishing of an incorrect audit form could not, by themselves, defeat the substantive exemption otherwise available on the strength of

The Assessing Officer, however, did not accept the explanation of the assessee regarding the claim under an incorrect provision. He observed that the assessee was a professionally managed section 25 company and that a similar claim under section 10(23C)(iv) had also been made in the succeeding assessment years. According to him, therefore, the claim could not simply be regarded as an inadvertent error. Be that as it may, the Assessing Officer proceeded to examine the claim of exemption under section 11 on merits and, in substance, the principal reason for its ultimate denial was his conclusion that the assessee’s sponsorship receipts attracted the proviso to section 2(15) and consequently section 13(8).

In this regard, the Assessing Officer noticed that the total receipts of the assessee during the year were ₹3,51,53,300, out of which sponsorship receipts aggregated to ₹3,36,00,000. Apart from the same, the assessee had shown donations of ₹12,94,000, event-organising receipts of ₹1,54,700 and registration fees of ₹1,04,600. The Assessing Officer further noticed from the transaction information available with him

In response, the assessee explained that the sponsorship receipts were intrinsically connected with the charitable event organised by it and could not be treated as receipts from trade, commerce or business merely because the sponsors derived publicity or promotional visibility from their association with the event. It was submitted that the predominant purpose of the assessee was charitable and that Pinkathon was organised for advancement of women’s fitness, health and empowerment. The sponsorship was essentially a mode of mobilising resources for carrying out such activities and the assessee was not carrying on any independent commercial business or rendering commercial services to the sponsors. The assessee also relied upon judicial precedents for the proposition that the true nature of the activity and its dominant purpose were required to be examined rather than merely the existence of receipts or generation of surplus.

The Assessing Officer rejected the aforesaid explanation. According to him, the concerns which had sponsored the marathon had incurred the expenditure for advertisement

The assessee carried the matter in appeal before the learned CIT(A). Insofar as the claim under section 11 was concerned, the assessee reiterated that the incorrect claim under section 10(23C)(iv) and filing of Form No.10BB instead of Form No.10B were inadvertent procedural errors; that the audit itself had been completed within time; and that Form No.10B had been furnished during the assessment proceedings before completion of the assessment. The learned

On the substantive issue of applicability of section 2(15), the assessee submitted before the learned CIT(A) that Pinkathon was organised in furtherance of its objects concerning women’s welfare, fitness and empowerment and that sponsorship received for conducting such an event could not acquire the character of commercial receipts merely because the sponsors themselves derived promotional benefit. The learned CIT(A), however, observed that the Memorandum of Association furnished before him contained an object clause which had been modified in an Extraordinary General Meeting held on 22.08.2019, i.e., much after the relevant previous year. According to him, despite being called upon to do so, the assessee had failed to establish from the original object clause prevailing during the relevant year that conducting a marathon was itself one of its objects. He further observed that the assessee had received sponsorship

The learned CIT(A) also distinguished the decision relied upon by the assessee in ADIT (Exemptions) v. Indian Medical Association on the ground that therein the sponsorship receipts were found to have been utilised for medical relief and advancement of medical science, which were expressly amongst the objects of that institution; whereas, according to him, in the present case the assessee had failed to establish that conducting the marathon formed part of its objects during the relevant year. He thus concurred with the Assessing Officer that the proviso to section 2(15) stood attracted and consequently section 13(8) operated to deny exemption under sections 11 and 12. The addition of ₹2,58,39,236 was accordingly sustained. Against the aforesaid findings, the assessee is in appeal before us.

Before us, the learned counsel for the assessee submitted that the entire approach of the authorities below proceeds on an erroneous premise that the sponsorship receipts of ₹3.36 crore, merely because of their magnitude and because the sponsors may have claimed the corresponding payments as business expenditure, acquired the character of receipts from

The learned counsel further submitted that the learned CIT(A) has proceeded on an erroneous understanding that unless conducting a “marathon” was expressly mentioned as a separate object in the Memorandum of Association applicable during the relevant year, the activity necessarily fell outside the objects of the assessee. According to him, such an approach confuses the charitable object with the means or activity through which that object is pursued. The assessee’s objects specifically contemplated welfare and

Adverting to the sponsorship receipts, the learned counsel submitted that no commercial services whatsoever were rendered by the assessee to the sponsors. Sponsorship was essentially a mode of mobilising financial resources for organising Pinkathon and for pursuing the assessee’s charitable activities. The authorities below, according to him, attached undue importance to the circumstance that the sponsors had treated their respective contributions as advertisement or business expenditure. The treatment of an outgoing in the books of the payer, he submitted, cannot determine the legal character of the corresponding receipt in the hands of the recipient. A sponsor may associate itself with a charitable event for corporate visibility or promotional considerations and may consequently claim the expenditure for its own business purposes; nevertheless, the character of the activity undertaken by the charitable institution has to be

The learned counsel further submitted that the mere existence of a sizeable sponsorship receipt or generation of surplus could not, without anything more, bring the activity within the expression “trade, commerce or business” occurring in the proviso to section 2(15). What was required to be examined was the intrinsic character of the activity, its relationship with the charitable objects, the manner in which it was conducted and the purpose for which the receipts were generated. The surplus of ₹2,58,39,236 arose in the course of the event and was available only for application towards the objects of the assessee. There was no distribution of profit or private benefit to any member or participant. Reliance in this regard was placed upon the principles enunciated by the Hon’ble Supreme Court in Assistant Commissioner of Income- tax (Exemptions) v. Ahmedabad Urban Development Authority for the proposition that applicability of the proviso to section 2(15) has to be examined having regard to the true nature and character of the activity and not merely from the fact that receipts or surplus have arisen in the course thereof.

The learned counsel also assailed the separate reasoning adopted by the learned CIT(A) with regard to Form No.10B. He submitted that the assessee had filed its return on 21.09.2015 and the accounts had already been audited, the audit report itself being dated 21.08.2015. The error occurred because, while filing the return, exemption was inadvertently claimed under section 10(23C)(iv) instead of section 11 and, correspondingly, Form No.10BB was furnished instead of Form No.10B. Once the mistake was noticed during assessment proceedings, the correct Form No.10B was furnished before completion of the assessment. Thus, according to him, this was not a case where the accounts had not been audited or where the assessee sought to create eligibility for exemption after the event; it was merely a case of furnishing an incorrect statutory form consequent to an erroneous claim under an incorrect provision. The assessee throughout possessed a valid registration under section 12A. It was therefore submitted that such procedural error could not extinguish an otherwise subsisting substantive claim under section 11. The learned counsel accordingly submitted that neither the proviso to section 2(15) nor section 13(8) was attracted and the addition of ₹2,58,39,236 deserved to be deleted.

We have heard the rival submissions and perused the material placed before us as well as the orders of the authorities below. The core issue requiring our adjudication is whether, in the facts of the present case, the sponsorship receipts received by the assessee in connection with organisation of Pinkathon could be characterised as receipts arising from an activity in the nature of trade, commerce or business so as to attract the proviso to section 2(15) and, as a consequence, section 13(8). There is no dispute that the assessee is a section 25 company and was holding a valid registration under section 12A during the relevant year. Nor is there any finding that such registration stood withdrawn or cancelled. The controversy essentially arises because substantial sponsorship was received in connection with Pinkathon and because, according to the authorities below, the sponsors had treated the corresponding payments as expenditure incurred for advertisement or promotion of their respective businesses.

At the outset, we find that one of the principal reasons which weighed with the learned CIT(A) was that the assessee could not demonstrate that conducting a “marathon” was specifically mentioned as one of its objects during the relevant year. In our opinion, this approach places an unduly literal construction upon the objects of a charitable institution and,

Examined from this perspective, Pinkathon was a marathon organised for women and the stated purpose of the event was promotion of women’s health, fitness, awareness and empowerment. These are not purposes extraneous to the

We are also unable to subscribe to the principal reasoning of the Assessing Officer that since the sponsors had treated their payments as advertisement or business expenditure in their respective books, the corresponding receipts necessarily became business receipts in the hands of the assessee. The character of an expenditure in the hands of the payer and the character of the receipt in the hands of the recipient operate in different juridical fields and one does not inexorably determine the other. A commercial entity may sponsor a charitable, sporting, cultural or social event because its association with such event affords visibility to its brand and may, for that reason, regard the expenditure as having been

The magnitude of sponsorship receipts, in our view, does not alter this position. The sponsorship receipts amounted to ₹3.36 crore and admittedly constituted the predominant part of the assessee’s total receipts of ₹3,51,53,300. These figures are undoubtedly relevant factual circumstances, but magnitude by itself is not synonymous with commerciality. The proviso to section 2(15) does not contemplate that an otherwise charitable activity becomes trade, commerce or business merely because the resources mobilised for carrying it out are substantial or because a surplus results therefrom. The anterior and indispensable inquiry is whether the activity itself answers the description of trade, commerce or business

There is yet another important statutory infirmity in the reasoning of the learned CIT(A). While applying the proviso to section 2(15), he has proceeded on the basis that sponsorship receipts of ₹3.36 crore exceeded 20% of the total receipts of ₹3,51,53,300 and has computed 20% thereof at ₹70,30,660. However, the appeal before us relates to A.Y. 2015-16. The formulation whereby the exception to the proviso was linked to the aggregate receipts from the specified activity not exceeding 20% of the total receipts was introduced by the Finance Act, 2015 with effect from 01.04.2016 and was expressly made applicable from A.Y. 2016-17 onwards. For the year under consideration, the statutory regime then prevailing contained the monetary threshold of ₹25 lakh. Thus, the learned CIT(A) has applied to A.Y. 2015-16 a statutory formulation which had not yet come into operation. His finding founded upon the 20% test, therefore, cannot be sustained. This, however, does not by itself conclude the matter in favour of the assessee because the sponsorship receipts admittedly exceeded the ₹25 lakh threshold applicable for the relevant year. The determinative question still remains whether the receipts arose from an activity in the

On that determinative question, the material before us does not support the conclusion drawn by the authorities below. The assessee organised a women’s marathon having a discernible nexus with its objects concerning women’s health, fitness and empowerment. Sponsorship was mobilised in connection with that event. There is no finding of any independent commercial undertaking, nor any material showing that the assessee had departed from its institutional objects and entered the market as a commercial event organiser. Equally, the mere presence of promotional benefit to the sponsors does not convert the activity of the assessee into their business or into a business of its own. In applying the proviso to section 2(15), the activity has to be viewed in its setting and substance. An incidental commercial interface cannot be isolated from the underlying charitable activity and treated as conclusive of its character, unless the manner and surrounding circumstances demonstrate that what is ostensibly charitable has, in substance, assumed the attributes of trade, commerce or business. No such factual foundation has been brought out in the present case.

The principles explained by the Hon’ble Supreme Court in ACIT (Exemptions) v. Ahmedabad Urban Development

Once the proviso to section 2(15) is held inapplicable on the facts of the case, the consequential invocation of section 13(8) also cannot survive. Section 13(8) operates where the provisions of the first proviso to section 2(15) become applicable to the person concerned for the relevant previous year. It does not create an independent disqualification divorced from section 2(15). Therefore, the very foundation on

This leaves us with the separate objection relating to the audit report in Form No.10B. Here also, the facts require to be viewed in their correct perspective. It is not a case where the assessee’s accounts had remained unaudited. The audit report was admittedly dated 21.08.2015, i.e., even prior to filing of the return on 21.09.2015. The error arose because the assessee, while filing the return, claimed exemption under section 10(23C)(iv) instead of section 11 and consequently furnished Form No.10BB instead of Form No.10B. During the assessment proceedings, when the mistake was noticed, the assessee asserted its claim under section 11 and furnished Form No.10B before completion of the assessment. Thus, the substantive act of audit stood completed within time; what remained defective was the statutory form furnished consequent upon the incorrect provision under which exemption had initially been claimed. The Assessing Officer was therefore in possession of the requisite material before framing the assessment and, indeed, examined the assessee’s entitlement under section 11 on merits.

In these circumstances, we do not find justification for treating the procedural lapse as destructive of the substantive exemption. The assessee possessed a subsisting registration

Thus, viewed cumulatively, the reasons assigned by the authorities below for denying exemption cannot be sustained. The absence of the specific expression “marathon” in the objects cannot sever an activity demonstrably connected with women’s health, fitness and empowerment from those objects; the treatment of sponsorship expenditure in the books of the sponsors cannot determine the character of the receipt in the hands of the assessee; the magnitude of sponsorship and resultant surplus cannot substitute for a factual finding that the assessee itself carried on trade, commerce or business; and the 20% threshold relied upon by the learned CIT(A) was,

We accordingly set aside the impugned order and direct the Assessing Officer to allow the assessee’s claim of exemption under section 11 in accordance with law. Consequently, the addition of ₹2,58,39,236 made by denying the benefit of sections 11 and 12 is directed to be deleted. The substantive grounds raised by the assessee are accordingly allowed.

In the result, the appeal of the assessee is allowed.