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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: Shri George George K, JM & Ms.Padmavathy S, AM
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, AM ITA No.517/Bang/2021 : Asst.Year 2016-2017 ITA No.518/Bang/2021 : Asst.Year 2017-2018 M/s.Karnataka State Seed & The Commissioner of Income- Organic Certification Agency tax (Exemption) v. Bengaluru. KAIC Premises, Opp:Bapist Hospital, Bellary Road Hebbal, Bengaluru – 560 024 PAN : AAATK6018Q. (Appellant) (Respondent) Appellant by : Sri.Mallah Rao, Advocate Respondent by : Sri.Srinivas T.Bidari, CIT-DR Date of Pronouncement : 20.07.2022 Date of Hearing : 20.07.2022 O R D E R Per George George K, JM : These appeals at the instance of the assessee are directed against two orders of the CIT(Exemption), both dated 03.03.2021 passed u/s 263 of the I.T.Act. The relevant assessment years are 2016-2017 and 2017-2018.
The Registry has noted delay of 157 days in filing these appeals. The CIT(E)’s order dated 03.03.2021 was received by the assessee on 05.03.2021. Therefore, the appeals ought to have been filed on or before 05.05.2021. Since the appeals have been filed only on 08.10.2021, the Registry has noted the above delay in filing these appeals before the Tribunal. However, the Hon’ble Apex Court in Cognizance For Extension of Limitation (in Miscellaneous Application No.21 of 2022
2 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. dated 10.01.2022), due to the pandemic situation, had excluded the period from 15.03.2020 to 28.02.2022 in computing the period of limitation for any suit, appeal, application or proceedings. Further, as per the judgment of the Hon’ble Apex Court, notwithstanding the actual balance period of limitation, all persons shall have a limitation period of 90 days from 01.03.2022. Further, the Hon’ble Supreme Court held that in the event the actual balance period of limitation remaining, with effect from 01.03.2022 is greater than 90 days, that larger period shall apply. In this case, the appeals have been filed before the ITAT on 08.10.2021 (i.e. well within the period of limitation contemplated by the Hon’ble Apex Court). Therefore, in view of the above judgment of the Hon’ble Apex Court, there is no delay in filing these appeals and we proceed to dispose of the same on merits.
Identical grounds are raised in these appeals, they read as follows:-
“1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Exemption) for the Assessment Year 2016-17, vide order dated 05.03.2021 is not maintainable in law and liable to be set aside in the interest of justice. 2. On the facts and circumstances of the case, the learned Commissioner, failed to appreciate the returns filed by the appellant and without considering the nature of service oriented certification activities of the appellant and made additions are excessive, thus the order of the CIT(Exemption) are liable to be set aside in the Interest of Justice. 3. On the facts and circumstances of the case, the learned Commissioner ought to have appreciated that, the commissioner ought to have appreciated that the activities of
3 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. the appellant which were verified by the assessing officer and granted exemption are correct. Thus, the commissioner ought to have refrained from denying the claim of the appellant in the interest of the justice. 4. On the facts and circumstances of the case, ought to have the commissioner erred in not considering the exemption granted to the appellant in the case and denied the claim of the appellant that it is against the law. Thus, the order of the relevant assessment year 2016-2017 are not maintainable in law and are liable to be set aside. 5. On the facts and circumstances of the case, the learned commissioner failed to appreciate that the appellant carried certification activities are totally exempted and the same has been verified by the assessing officer and the granted exemption is correct. Hence, the rejection of the claim by the commissioner is bad in law. 6. Without prejudice, the CIT (Exemption) levied tax and Interest are excessive, arbitrary and ought to be deleted. 7. For such other grounds that may be urged at the time of hearing, it is prayed that this Hon'ble authority may kindly allow the above appeal in the interest of justice and equity.”
The brief facts of the case are as follows: The assessee-society is registered u/s 12AA of the I.T.Act. It has also obtained approval u/s 10(23C)(iv) of the I.T.Act. The returns of income were filed for assessment years 2016-2017 and 2017-2018 by claiming exemption u/s 11 of the I.T.Act. The assessments were completed u/s 143(3) of the I.T.Act by accepting the returned income. Thereafter, the CIT(E) issued notice u/s 263 of the I.T.Act for assessment years 2016-2017 and 2017-2018. According to the CIT(E), the assessee’s activities of rendering certification of seeds falls within the meaning of trade, commerce or business. Therefore, the activities squarely falls within the ambit of
4 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. proviso to section 2(15) of the I.T.Act. The assessee filed objections to the proposed orders u/s 263 of the I.T.Act. However, the objections of the assessee were rejected and the CIT(E) passed the impugned orders for assessment years 2016-2017 and 2017-2018. The CIT(E) held that the assessee is not carrying out any charitable activities and in view of the proviso to section 2(15) of the I.T.Act, the assessee is not entitled to exemption u/s 11 and 12 of the I.T.Act. In taking the above view, the CIT(E) relied on the judgment of the Hon’ble Andhra Pradesh High Court in the case of M/s.Andhra Pradesh State Seed Certification Agency in WP No.31640 of 2011 (judgment dated 17.12.2012). The relevant finding of the CIT(E) reads as follows:-
“8. Since, the assessee trust is performing similar services as performed by M/s.Andhra Pradesh State Seed Certification Agency and the assessee has failed to prove that it is providing services to the farmers and public at large, it is observed that the assessee trust is not performing charitable activities and the services provided by the assessee trust are in the nature of trade, commerce and services. Accordingly, looking to the facts and circumstances of the case and in view of decision of the Hon’ble Andhra Pradesh High Court delivered in the case of M/s.Andhra Pradesh State Seed Certification Agency, it is further observed that the proviso to section 2(15) of the Act applies in the case of the assessee and the assessee is not eligible for exemption u/s 11 & 12 of the Act. 9. Therefore, the assessment order dated 28.12.2018 passed u/s 143(3) of the Act for A.Y. 2016-17 being erroneous and prejudicial to the interest of revenue is required to be revised. Accordingly, the JAO is directed to revise the assessment order for A.Y. 2016-17 as per the above observations.”
5 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. 5. Aggrieved by the orders of the CIT(E) for assessment years 2016-2017 and 2017-2018, the assessee has filed these present appeals before the Tribunal. The learned AR filed a paper book enclosing therein copy of certificate of registration under the Karnataka Societies Registration Act, 1860, copy of memorandum of association of the assessee-society, copy of 12A certificate issued by the Income Tax Department, copy of the order passed u/s 10(23C)(iv) of the I.T.Act, etc. The learned AR submitted that the judgment of the Hon’ble Andhra Pradesh High Court in the case of M/s.Andhra Pradesh State Seed Certification Agency (supra) relied on by the CIT(E) is distinguishable on facts. It was submitted that in the above case, the Hon’ble High Court was considering a fresh application of registration and not a case of cancellation as it was done in the instant case. Further, it was submitted that the SLP filed against the Hon’ble Andhra Pradesh High Court judgment in the case of M/s.Andhra Pradesh State Seed Certification Agency (supra) is pending adjudication by the Hon’ble Apex Court. The learned AR reiterated the submissions made before the Income Tax Authorities.
The learned Departmental Representative, on the other hand, submitted that the assessee is not entitled to exemption u/s 11 and 12 of the I.T.Act and the issue is squarely covered against the assessee by the judgment of the Hon’ble Andhra Pradesh High Court in the case of M/s.Andhra Pradesh State Seed Certification Agency (supra).
6 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. 7. We have heard rival submissions and perused the material on record. The assessee claims fees / service charges for rendering certification of seeds from seed producers / farmers. The Hon’ble High Court of Andhra Pradesh in the case of M/s.Andhra Pradesh State Seed Certification Agency (supra) was considering identical issue wherein the activities of the assessee in the said case was similar to the activities carried on by the assessee in the instant case. The Hon’ble High Court held that the activities of the assessee falls within the meaning of trade, commerce or business and is hit by proviso to section 2(15) of the I.T.Act. Further, it was held by the Hon’ble High Court that the assessee was not providing any charitable activities to farmers or public at large. Therefore, it was held that the assessee was not entitled to the benefit of section 10(23C)(iv) of the I.T.Act as well as exemption u/s 11 and 12 of the I.T.Act. The relevant finding of the Hon’ble High Court reads as follows:-
“14. Before dealing with the respective contentions, we propose to take note of Section 10 (23C) (iv) of the Act and Section 2 (15) of the Act. “Section 10. Incomes not included in total income: In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- ……….. (23C) any income received by any person on behalf of – ** ** ** (iv) any other fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance through out India or through out any State or States; or ………..” 15. Section 2 (15) as amended by Finance (Nos.2) Act, 2009 is as follows: “(15) “charitable purpose” includes relief of the poor, education, medical
7 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. relief, (preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,) and the advancement of any other object of general public utility:
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:”
A reading of the above provisions of the Income Tax Act show that income received by any person on behalf of an institution established for “charitable purpose” (as defined in Section 2 (15) of the Act) which may be approved by the prescribed authority alone would be excluded from the total income of a previous year of such person under Section 10 (23C) (iv) of the Act. While under the main part of Section 2 (15) activities which involve relief of the poor, education, medical relief, preservation of environment (including water sheds, forests and wild life) and preservation of monuments or places or objects of artistic or historic interests, would automatically come within the purview of “charitable purpose”, activities which advance “any other object of general public utility” would qualify only if such activity does not involve: (i) carrying on of any activity in the nature of trade, commerce or business; (ii) any activity of rendering any service in relation to any trade, commerce or business.
Section 8 of the Seeds Act, 1966 empowers the State Government or the Central Government in consultation with the State Government to establish, by notification in the official gazette, a certification agency for the State to carry out the functions entrusted to the certification agency by or under the Seeds Act. The petitioner was registered under the Andhra Pradesh (Telangana Area) Public Societies Registration Act, 1350 Fasli with registration No. 334/76. By G.O.Ms.No.435 Food and Agriculture (EP-II) Department dated 01-06- 1977, the State Government approved the proposal of the Director of Agriculture and directed that the petitioner shall carry on the functions of the certification agency under the Seeds Act, 1966 in the Andhra Pradesh State with effect from 01-06-1977. The objects of the petitioner have already been set out above. The petitioner thus certifies the Seeds which meet the minimum seeds certification standards as per Indian Minimum Seed Certification Standards, 1988. Seed growers enter into contract with a society/agent, who approaches the petitioner for certification of the seeds and after securing certification, they sell the certified seeds to the farmers at a market price determined by them. The petitioner collects a fee for providing certification as the process of certification involves technical and scientific evaluation of the seeds although the fee collected by it would be enough to enable it to sustain its activities and may not result in much profit. The term “advancement of any other object of general public utility” used in Section 2 (15) of the Act includes all objects to promote the welfare of the public particularly when the object is to promote or protect the interest of a particular trade or industry. The activity of the petitioner which facilitates sale of certified seeds to farmers therefore falls within “advancement of any other object of general public utility” included in the definition of the term “charitable purpose” as defined in Section 2 (15) of the Act but in view of the fact that certification of seeds by the petitioner facilitates trade, commerce or business
8 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. in the certified seeds by the client of the petitioner, the proviso to the said section would come into operation. Thus the petitioner’s activity assists the sale of certified seeds and is “in relation to any trade, commerce or business” and therefore its activity cannot be held to be a “charitable purpose”. In this view of the matter, we hold that the 1st respondent rightly rejected the application of the petitioner for approval under Section 10 (23C) (iv) of the Act.
In the case of Agricultural Market Committee (2 supra), this Court held that an Agricultural Market Committee established under the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966 is an institution established for “charitable purpose” entitled to be registered under Section 12A and 12AA of the I.T.Act and their income from property is not to be included in the total income of the previous year under Section 11 of the Act. After considering the provisions of the Act, the Division Bench of this Court held that the Agricultural Market Committees are constituted under the above Act for the sole purpose of protecting the interest of agriculturists, farmers and growers, that the purpose of the said Act is to enable purchasers to get a fair price for the commodities by eliminating middleman and provide regular market with all necessary facilities, that the income of the market committee from different sources is derived without any profit motive and is used to meet the expenditure for providing market facilities. In our view the said decision has no application to the present case and was based upon an interpretation of the various provisions of the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966 and the attention of the Division Bench does not appear to have been drawn to the proviso to Section 2 (15) of the I.T. Act more particularly the portion “any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration……….”. Since agricultural market committees render services “in relation to trade, commerce or business” by facilitating trade in agricultural commodities by farmers/growers of agricultural produce or livestock, we are of the opinion that the activity of agricultural market committee may not come within the ambit of “charitable purpose”.
The counsel for the petitioner submits that the petitioner is itself not engaging in any activity which is in the nature of trade, commerce or business and therefore it has to be held to be an agency whose activities are for “charitable purpose” under Section 2 (15) of the Act and therefore entitled to the benefit under Section 10 (23C) (iv) of the Act. The contention of the petitioner’s counsel if accepted would mean that the words “any activity of rendering any service in relation to any trade, commerce or business” in the first proviso to Section 2 (15) of the Act have to be ignored. This is not permissible because the High Court cannot substitute or ignore the wording in a provision in a statute. In Aswini Kumar Bose v. Arabinda Ghose AIR 1952 SC 368, the Supreme Court held that it is not a sound principle of construction to brush aside words in a statute as being inapposite surplusage, if they can have appropriate application in circumstances conceivably within the contemplation of the statute. In Mahindra and Mahindra’s case (5 supra), the Supreme Court held that the High Court cannot substitute the language in a statute or subordinate legislation.
The Memorandum explaining the provisions in the Finance Bill, 2008 and the budget speech of the Minister of Finance for 2008-2009 delivered on 29- 02-2008 extracted above clearly indicate that the first proviso to Section 2 (15) as extracted above was introduced by the Finance (Nos.2) Act, 2009
9 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. with effect from 01-04-2009 to exclude entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes from claiming to be engaged in activities for “charitable purpose”.
The Kerala High Court in Info Parks Kerala’s case (5 supra) took note of the above events and held as follows:
“Yet another important aspect to be noted in this context is that, after the amendment by incorporating a proviso to Section 2(15), the fourth limb as to the advancement of “any other object of general public utility” will no longer remain as charitable purpose, if it involves carrying on of:
(a) any activity in the nature of trade, commerce or business;
(b) any activity of rendering any service in relation to any trade, commerce or business for a cess or a fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity. The first limb of exclusion from charitable purpose under clause (a) will be attracted, if the activity pursued by the institution involves any trade, commerce or business. But the situation contemplated under the second limb [clause (b)] stands entirely on a different pedestal, with regard to the service in relation to the trade, commerce or business mentioned therein. To put it more clear, when the matter comes to the service in relation to the trade, commerce or business, it has to be examined whether the words “any trade, commerce or business” as they appear in the second limb of clause (b) are in connection with the service referred to the trade, commerce or business pursued by the institutions to which the service is given by the assessee. If the said words are actually in respect of the trade commerce or business of the assessee itself, the said clause (second limb of the stipulation under clause (b) is rather otiose. Since the activity of the assessee involving any trade commerce or business, is already excluded from the charitable purpose by virtue of the first limb (clause (a)) itself, there is no necessity to stipulate further, by way of clasue (b), adding the words “or any activity of rendering any service in relation to any trade, commence or business.
As it stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under clause (b) in relation to the service rendered by the assessee, the terms “any trade, commerce or business refer to the trade, commerce or business pursued by the recipient to whom the service is rendered (as there may be a situation involving letting out the premises for purposes other than involving trade, commerce or business as well).”
We endorse the said view of the Kerala High Court in the above case and we respectfully follow the same.
In the case of Institute of Chartered Accountants (3 supra), the Delhi High Court had taken the view that the activity of conducting coaching classes by the said institute was not enough to deprive the institute of approval under Section 10 (23C) of the Act and the matter was remitted to the Income Tax Department to consider the matter whether the institute carried on business or not when its primary and dominant activity is to regulate the profession of
10 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. chartered accountancy and to consider the application of the proviso of Section 2 (15) of the Act introduced with effect from 01-04-2009. Although there is discussion in this case and also the other case (4 supra) on the subject, there is no finality attached to the above issue as in both cases the matter was remitted to the department to consider the application of the said institute for approval under Section 10 (23C) (iv) of the Act. Therefore they are of no assistance to the petitioner.
We are also of the view that the decision of this Court in New Noble Education Society’s case (1 supra) is not applicable as the said decision relates to educational institutions claiming exemption under Section 10 (23C) (vi) of the Act and the provisions of Section 2 (15) of the Act were only referred to incidentally to hold that Section 2 (15) is wider in terms than Section 10 (23C) (vi) of the Act and that if the assessee’s case does not fall within Section 2 (15) of the Act, it is difficult to consider the assessee as coming under Section 10 (23C) (vi) of the Act. It is also observed that a certificate signed by the Commissioner of Endowments under Section 43 of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987 is only one of the factors but not conclusive proof that an assessee is a charitable institution existing solely for the purpose of education. On an appreciation of the facts relating to each of the petitioners in the said cases, the Court held that the existence of an educational institution solely for the purpose of education is a precondition for grant of approval and as the objects of the societies which were petitioners before the said Bench were not exclusively for educational purpose but included objects for non- educational purposes, the Chief Commissioner cannot be faulted for rejecting the applications seeking approval under Section 10 (23C) (vi) of the Act. This judgment therefore is of no assistance to the Revenue.
For the above reasons, we hold that the 1st respondent had rightly rejected the application of the petitioner for approval under Section 10 (23C) (iv) of the Act on the ground that the petitioner has not rendered its services directly to the farmers but is rendering its services directly to its clients/agents who are engaged in trading of the certified seeds with profit motive and therefore its activities are not for the “advancement of any other object of general public utility” and hence not for “charitable purpose” in view of second limb of the first proviso to Section 2 (15) of the Act. 26. Accordingly, the writ petition is dismissed. No costs.”
Since the facts considered by the Hon’ble Andhra Pradesh High Court is identical to the facts of the instant case, we hold that the CIT(E) is justified in invoking the revisionary powers u/s 263 of the I.T.Act and denying the benefit of exemption u/s 11 and 12 of the I.T.Act.
The assessee has raised a contention that the CIT(E) has erred in cancelling the registration u/s 12AA without following
11 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. due procedure u/s 12AA(3) of the I.T.Act. This contention of the assessee is devoid of any merits. The CIT(E) in the impugned orders u/s 263 of the I.T.Act has not cancelled the registration u/s 12A of the I.T.Act but only denied the benefit of exemption u/s 11 of the I.T.Act for the reason that the assessee’s activities are hit by proviso to section 2(15) of the I.T.Act. We notice that the SLP is pending before the Hon’ble Apex Court against the judgment of the Hon’ble Andhra Pradesh High Court. In the event, the judgment of the Hon’ble Andhra Pradesh High Court is set aside or reversed by the Hon’ble Apex Court, the assessee shall be at liberty to move necessary rectification petition.
Before concluding, it is to be mentioned that after the case was heard, the assessee has filed a memo enclosing therein the judgment of the Hon’ble Rajasthan High Court in the case of CIT v. Manna Trust in DB ITA No.1/2021 (judgment dated 12.01.2022). It is submitted that the judgment of the Hon’ble Rajasthan High Court is applicable to the facts of the instant case and not that of the Hon’ble Andhra Pradesh High Court relied on by the CIT(E). Since the learned AR has filed a Memo, the case reposted for hearing on 20.7.2022.
The judgment of the Hon’ble Rajasthan High Court held that when registration u/s 12AA of the I.T.Act is still in force and the revenue does not dispute the nature of charitable activities, the CIT(E) is not entitled to invoke the revisionary
12 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. jurisdiction u/s 263 of the I.T.Act. This judgment of the Hon’ble Rajasthan High Court is of no assistance to the assessee. As mentioned earlier, the CIT(E) has not cancelled the registration u/s 12AA of the I.T. Act, but only denied the exemption u/s 11 of the I.T.Act for the reason that the assessee’s activities are hit by proviso to section 2(15) of the I.T.Act, since it is charged fees for the services rendered and the receipt of such fee exceeds 20% of the total turnover.
The Hon’ble jurisdictional High Court in the case of Director of Income-tax (Exemption)( and Anr. v. Karnataka Badminton Association reported in (2015) 378 ITR 700 (Karn) had held that cancellation of registration u/s 12AA(3) of the I.T.Act is not warranted for the reason that the assessee is hit by first proviso to section 2(15) of the I.T.Act. It was observed by the Hon’ble High Court that the revenue’s interest is protected by virtue of section 13(8) introduced by the Finance Act, 2012 with effect from 1st April, 2009. Section 13(8) provides that “nothing contained in section 11 or 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year”. Thereby meaning irrespective whether the registration u/s 12A is in force when assessee is hit by first proviso to section 2(15) of the I.T.Act, exemption u/s 11 or 12 of the I.T.Act can be denied by virtue of section 13(8) of the I.T.Act. For the aforesaid reasoning and the judicial pronouncements, cited
13 ITA Nos.517 & 518/Bang/2021. M/s.Karnataka State Seed & Organic Certification Agency. supra, we hold that the CIT(E) is justified in cancelling the benefit of exemption u/s 11 of the I.T.Act. It is ordered accordingly.
In the result, the appeals filed by the assessee are dismissed.
Order pronounced on this 20th day of July, 2022.
Sd/- Sd/- (Padmavathy S) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 20th July, 2022. Devadas G*
Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT (Exemption), Bangalore. 4. The Addl.CIT(Exemption), Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore