DIRECTOR OF INCOME TAX (EXEMPTION) vs. SABARMATI ASHRAM GAUSHALA TRUST

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TAXAP/1162/2013HC GujaratGJHC24023332201315 January 2014Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE THE CHIEF JUSTICE MS. JUSTICE SONIA GOKANI15 pages
AI SummaryDismissed

What did the High Court hold?

The High Court agreed with the Tribunal's decision. It held that the Trust's objects, including breeding cattle, improving cow and oxen quality, producing and selling milk, holding agricultural lands, and establishing allied institutions, were for general public utility and charitable purposes under Section 2(15). Profit-making was neither the aim nor the primary object. The Court reasoned that incidental surpluses generated while pursuing charitable objectives do not render the activity as trade, commerce, or business. The proviso to Section 2(15) is intended to target activities truly in the nature of trade, commerce, or business carried out under the guise of public utility. The Court cited the Delhi High Court's decision in Institute of Chartered Accountants of India & Anr. vs. Director General of Income-Tax [Exemption] & Ors. to emphasize that each case must be examined on its own facts, and activities undertaken with a profit motive or on sound business principles are key indicators of business, which were not evident here. The appeal was dismissed.

What were the facts?

The Revenue is in appeal against the Income Tax Appellate Tribunal's order dated June 7, 2013. The dispute concerns the grant of exemption under Section 11 of the Income Tax Act to the assessee, Sabarmati Ashram Gaushala Trust. The Assessing Officer denied the exemption for Assessment Year 2009-2010, citing the newly introduced proviso to Section 2(15) of the Act, effective from April 1, 2009. The Assessing Officer concluded that the Trust's income generated from milk production and sale indicated it was not a charitable purpose. The CIT(A) upheld this order. The Tribunal, however, reversed the revenue authorities' decision, holding the Trust to be charitable and the proviso to Section 2(15) inapplicable.

What were the issues?

1. Whether the Appellate Tribunal erred in directing the Assessing Officer to provide exemption under Section 11 of the Income Tax Act to the assessee? 2. Whether the Appellate Tribunal erred in holding that the proviso to Section 2(15) of the Income Tax Act was not applicable to the facts and circumstances of the case? Assessee's Contentions: The Tribunal relied on the Finance Minister's speech and CBDT Circular No. 11/2008. It held that the Trust's objects were charitable, it operated on a non-commercial basis without a profit motive, and any incidental profit did not attract the proviso to Section 2(15). The Tribunal clarified its decision was specific to the peculiar facts and not applicable to trusts genuinely engaged in business under the guise of charity. Revenue's Contentions: The Revenue argued that the Tribunal erred in granting exemption under Section 11 and in holding the proviso to Section 2(15) inapplicable, implying that the Trust's activities, particularly milk production and sale, constituted business.

Which sections of the Income-tax Act were involved?

Section 11,Section 2(15)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL  No. 1162 of 2013

FOR APPROVAL AND SIGNATURE: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Ms. JUSTICE SONIA GOKANI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ DIRECTOR OF INCOME TAX (EXEMPTION)....Appellant(s) Versus SABARMATI ASHRAM GAUSHALA TRUST....Opponent(s) ================================================================ Appearance: Mr MR BHATT Sr Advocate with Mrs. MAUNA M BHATT, ADVOCATE for Appellant Mr SN SOPARKAR Sr Advocate with Mr. B S SOPARKAR, ADVOCATE for Opponent ================================================================ CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Ms. JUSTICE SONIA GOKANI 15 th January 2014

ORAL JUDGMENT (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI) Revenue   is   in   appeal   against   the   judgment   of   the   Income   Tax Appellate Tribunal, Ahmedabad   {“Tribunal” for short} dated 7 th  June 2013, raising following questions for our consideration :­ [A] “Whether   the   Appellate   Tribunal   has substantially erred in directing the Assessing Officer to provide   exemption   u/s.   11   of   the   I.T   Act   to   the assessee ?” [B] “Whether   the   Appellate   Tribunal   has substantially   erred   in   holding   that   the   proviso   to Section 2 (15) of the I.T Act was not applicable to the facts and circumstances of the case ?” The   controversy   centers   around   activities   of   the   respondent­ assessee­Sabarmati Ashram Gaushala Trust. The said Trust is engaged in the activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. The question raised by the Assessing Officer was with respect to granting exemption to the Trust under section 11 of the Income Tax Act, 1961 [“Act” for short]. The Assessing Officer pressed   in   service   newly   added  proviso  to   Section   2   (15)   of   the   Act introduced w.e.f 1 st April 2009 by the Finance Act of 2010 to hold that the Trust cannot be considered as one created for charitable purposes. The Assessing Officer analyzed the accounts of the respondent­assessee and came to the conclusion that considerable income was generated from the activity of milk production and sale. He, therefore, passed an order dated st December 2011 framing assessment for A.Y 2009­2010 denying benefit of Sections 11 & 12 to the assessee. Assessee carried the mater in appeal. CIT [A] rejected the appeal and confirmed the order of the Assessing Officer. The assessee, therefore, approached the Tribunal in second appeal. Tribunal, by the  impugned judgment, reversed the decision of the revenue authorities holding that the assessee is a charitable trust and proviso to section 2 (15) of the Act will not apply. The Tribunal relied on the Finance Minister’s speech in the Parliament explaining proviso to Section 2 (15) as also the CBDT Circular No. 11/2008  of 19 th December 2008. The Tribunal took note of the objects of the Trust and came to the conclusion that the Trust was carrying on its activities on non­commercial basis with no motive to earn  profit. The aims and objects of the Trust were charitable in nature. While implementing such objects, if there was any profit, incidentally generated, the same would not be hit by proviso to section 2 (15) of the Act. In the conclusion, the Tribunal clarified that the decision was delivered in peculiar facts of the case and would not apply to a case where the trust is doing business or trade under the grab of charitable activities. The Revenue is therefore before us in the present Tax Appeal, raising aforementioned questions of law. Having heard learned counsel for the parties and having perused the documents on record, we notice that Section 11 of the Act pertains to ‘income   from   property   held   for   charitable   or   religious   purposes’   and provides,  inter alia,  that the income derived from property held under trust wholly for charitable or religious purposes  shall not be included in the total income of the Trust. Term “Charitable Trust” is defined in Section 2 (15) of the Act which includes the relief to the poor, eduction, medical relief, preservation of   environment;   including   watersheds,   forests   and   wildlife   and preservation of monuments or places or objections of artistic or historic interest and  advancement of any other object of general public utility. Proviso to Section 2 (15) and further proviso whereof inserted by Finance Act 2010 w.e.f 1 st April 2009 read, thus ­ Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves  the  carrying  on of any  activity  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,   irrespective   of   the   nature   of   use   or application,   or   retention   of   the   income   from   such activity. Provided   further   that  the   first   proviso   shall   not apply if the aggregate value of the receipts from the activities referred to therein is twenty five lakh rupees or less in the previous year. The legal controversy in the present Tax Appeal centers around the first  proviso. In the plain terms, the proviso  provides for exclusion from the main object of the definition of the term “Charitable purposes” and applies only to cases of advancement of any other object of general public utility. If the conditions provided under the  proviso  are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue to proviso, would be excluded from the definition of “charitable trust”. However, for the application of the proviso, what is necessary is that the entity should  be involved in carrying on activities in the nature of trade, commerce or business, or any activity of rendering services in relation to any trade, commerce or business, for a cess or fee or any   other   consideration.   In   such   a   situation,   the   nature,   use   or application,   or   retention   of   income   from   such   activities   would   not   be relevant. Under the circumstances, the important elements of application of  proviso  are   that   the   entity   should   be   involved   in   carrying   on   the activities of any trade, commerce or business or any activities of rendering service in relation to any trade, commerce or business, for a cess or fee or any other consideration. Such statutory amendment was explained by the Finance Minister’s speech in the Parliament. Relevant portion of which reads as under :­ “I   once   again   assure   the   House   that   genuine charitable organizations will not in any way be affected. The CBDT   will,   following   the   usual   practice,   issue   an explanatory circular containing guidelines for determining whether any entity is carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their   activities   would   continue   to   be   regarded   as “advancement of any other object of general public utility”. In consonance with such assurance given by the Finance Minister on the floor of the House, CBDT issued a Circular No. 11 of 2008 dated 19 th December 2008 explaining the amendment as under :­ “3. The   newly   inserted   proviso   to   section   2   (15)   will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ ie., the fourth limb of the definition of ‘charitable purpose’ contained in section 2 (15). Hence, such entities will not be eligible for exemption under section 11 or under section 10 (23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on any activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

3.

1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under ‘any other object of general public utility’. Under the principle   of   mutuality,   if   trading   takes   place   between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside   body,   then   any   surplus   returned   to   the   persons forming such association is not chargeable to tax. In such cases,   there   must   be   complete   identity   between   the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as   well   as   mutual   organizations   and   their   activities   are restricted to contributions from and participation of only their members,   these   would   not   fall   under   the   purview   of   the proviso to section 2 (15) owing to the principle of mutuality. However,   if   such   organizations   have   dealings   with   non­ members, their claim to be chargeable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15).

3.

2 In the final analysis, however, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or   business   or   renders   any   service   in   relation   to   trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is ‘charitable purpose’ within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.” What thus emerges from the statutory provisions, as explained in the speech of Finance Minister and the CBDT Circular, is that the activity of a trust would be excluded from the term ‘charitable purpose’ if it is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess, fee and/or any other consideration.    It  is not  aimed at excluding  the genuine   charitable   trusts   of   general   public   utility   but   is   aimed   at excluding activities in the nature of trade, commerce or business which are masked as ‘charitable purpose’. Many activities of genuine charitable purposes which are not in the nature  of  trade,  commerce  or  business   may   still   generate  marketable products. After setting off of the cost, for production of such marketable products from the sale consideration, the activity may leave a surplus. The law   does   not   expect   the   Trust   to   dispose   of   its   produce   at   any consideration   less   than   the   market   value.   If   there   is   any   surplus generated at the end of the year, that by itself would not be the sole consideration   for   judging   whether   any   activity   is   trade,   commerce   or business ­ particularly if generating ‘surplus’ is wholly incidental to the principal  activities  of  the trust; which  is  otherwise for general   public utility, and therefore, of charitable nature. The Tribunal took into account the objects of the Trust, which are as under :­ “1. To breed the cattle and endeavour to improve the quality of the cows and oxen in view of the need of good oxen as India is prominent agricultural country and the cow milk as food is both conducive to and requisite for good health and longevity of human life. In order to improve the quality of the cattle, it is very essential to use a high quality bulls.   Hence   to   produce   and   to   get   produced   the   best pedigreed   bulls   and   to   castrate   the   scrub   bulls   and propagate the work   to prepare bullocks by castrating the bulls which do not become good bulls.

2.

To produce and to sell the cow milk and its various preparations so as to popularize the use of cow milk and do all other works for the same.

3.

To hold and cultivate or get cultivated agricultural lands, to keep grazing lands etc necessary or desirable for cattle keeping and breeding or to rehabilitate and assist Rabaris and Bharwads.

4.

To hold and cultivate other land also in order to experiment in the improvement in agriculture and obtain finance support in all the activities of the institution.

5.

To   make   necessary   arrangements   for   getting informatics and   scientific knowledge  and  to do  scientific research with regard to keeping and breeding of the cattle, agriculture, use of milk and its various preparations etc and to establish scientific laboratories, libraries, reading rooms relating   to   the   keeping   of   the   cattle,   improvement   of agriculture etc and recognize or assist such institutions.

6.

To   establish   other   allied   institutions   like   leather work etc and to recognize and help them in order to make the cow keeping economically viable successfully.

7.

To   publish   books,   periodicals,   monthlies, advertisements,   pamphlets,   statements   etc   from   time   to time   and   for   that   matter   to   arrange   for   printing   press, building etc in order to popularize the objects of the trust.

8.

To accept all the trusts and benefactions not inimical to the trust objects conditionally or otherwise.

9.

To open schools and hostels for imparting eduction in cow   keeping   and   agriculture   having   regard   to   the   trust objects or to help such schools and hostels and to make suitable arrangements for training workers required for the trust work.

10.

To get the money from time to time as required for the trust work by way of gift, borrow on securities of the trust properties or obtain in any other way as deemed fit by the trustees.

11.

To undertake such other activities from time to time for achieving or helping the trust objects as deemed fit by the trustees”. The Tribunal also noted that the objects were admittedly charitable in nature. The surplus generated was wholly secondary. It was, therefore, that the Tribunal held that the proviso to section 2 (15) of the Act would not apply. We are wholly in agreement with the view of the Tribunal. The objects of the Trust clearly establish that the same was for general public utility and where for charitable purposes. The main objectives of the trust are ­ to breed the cattle and endeavour to improve the quality of the cows and   oxen   in   view   of   the   need   of   good   oxen   as   India   is   prominent agricultural   country;   to   produce   and   sale   the   cow   milk;   to   hold   and cultivate agricultural lands; to keep grazing lands for cattle keeping and breeding;   to   rehabilitate   and   assist   Rabaris   and   Bharwads;   to   make necessary arrangements for getting informatics and scientific knowledge and to do scientific research with regard to keeping and breeding of the cattle,   agriculture,   use   of   milk   and   its   various   preparations,   etc.;   to establish other allied institutions like leather work and to recognize and help   them   in   order   to   make   the   cow   keeping   economically   viable;   to publish study materials, books, periodicals, monthlies etc., in order to publicize the objects of the trust as also to open schools and hostels for imparting eduction in cow keeping and agriculture having regard to the trust objects. All these were the objects of the general public utility and would squarely fall under section 2 (15) of the Act. Profit making was neither the aim nor object of the Trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19 th  December 2008 the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of ‘public utility’. Delhi High Court in case of Institute of Chartered Accountants of India & Anr. vs. Director General of Income­Tax [Exemption] & Ors.,   reported   in   [2012]   347   ITR   99   (Delhi)   considered   these   very provisions   in   the   context   of   activities   of   the   Institute   of   Chartered Accountants holding that the fundamental or dominant function of the Institute was to exercise overall control and regulate the activities of the members/enrolled chartered accountants and merely because the Institute was holding coaching classes which also generate income, the Court held that proviso to Section 2 (15) of the Act would not be applicable. It thus held and observed as under :­ “Section   2   (15)   defines   the   term   “charitable   purpose”. Therefore, while construing the term “business” for the said section, the object and purpose of the section has to be kept in mind. We do not think that a very broad and extended definition of the term “business” is intended for the purpose of interpreting and applying the first  proviso  to section 2 (15) of the Act to include any transaction for a fee or money. An   activity   would   be   considered   “business”   if   it   is undertaken with a profit motive, but in some cases this may not   be   determinative.   Normally,   the   profit   motive   test should   be   satisfied   but   in   a   given   case   activity   may   be regarded as business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles, and pursued with reasonable   continuity.   There   should   be   facts   and   other circumstances   which   justify   and   show   that   the   activity undertaken is in fact in the nature of business. The test as prescribed   in  Raipur   Manufacturing   Company  [1967]   19 STC 1 (SC) and  Sai Publication Fund  [2002] 258 ITR 70 (SC);   [2002]   126   STC   288   (SC)   can   be   applied.   The   six indicia stipulated in  Lord Fisher  [1981] STC 238 are also relevant. Each case, therefore, has to be examined on its own facts. In view of the aforesaid enunciation, the real issue and   question   is   that   whether   the   petitioner­Institute pursues the activity of business, trade or commerce. To our mind, the respondent while dealing with the said question has not applied their mind to the legal principles enunciated above and have taken a rather narrow and myopic view by holding   that   the   petitioner­Institute   is   holding   coaching classes and that this amounts to business.” In the result, we do not find that the Tribunal has committed any error and the Tax Appeal is therefore dismissed. {Akil Kureshi, J.} {Ms. Sonia Gokani, J.} Prakash*

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