MAHARASHTRA EX-SERVICEMEN CORPORATION,PUNE vs. CIT EXEMPTION, PUNE

The Ld. CIT(E) was of the opinion that the assessee is engaged in commercial activities and not pursuing any charitable activity. The trust deed does not have any clause providing that in the event of dissolution of Trust / Society / Non Profit Company, the funds / assets of the Trust / Society / Non Profit Company will be transferred only to some other Trust / Society / Non Profit Company having similar objectives. He accordingly rejected the application for grant of registration u/s 12AA of the Act.

Aggrieved with such order of the Ld. CIT(E) the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 16.06.2021 restored the matter to the file of the CIT(E) with a direction to consider the application de novo by observing as under: “9. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the grant of registration u/s 12AA of the Act. We carefully gone through the MOA, we found that the appellant company is formed to provide reemployment to ex-servicemen etc. On perusal of clause set out in Memorandum of Association, we are unable to discern clause creating an interest in property in favour of the public for any of the object listed u/s 2(15) of the Act, which is sine qua non for creation of charity. In-fact, we may point out that covenant in the MOA does permit the appellant company to distribute the profits in the form of dividend amongst its members and does not set out a condition that the income earned by the appellant company shall be deployed for the objects of the company. This would make the appellant company a commercial organization. However, the view of the ld. CIT (Exemption) that the appellant company is a commercial organization merely because it is generating huge revenue from year to year with mark-up on the cost of 10% to 12% cannot be upheld. The ld. CIT (Exemption) had not considered the matter in proper perspective. Therefore, in the interest of justice, the matter should be remanded back to the file of the ld. CIT (Exemption) for de-novo consideration of application on the touchstone of law laid down by the Hon’ble Supreme Court in the case of Ananda Social and Educational Trust vs. CIT, 272 Taxman 7 after giving due opportunity of being heard to the appellant. Thus, the grounds of appeal raised by the assessee are partly allowed for statistical purposes.”

Subsequently the Ld. CIT(E) issued a show cause notice on 03.11.2023, copy of which is placed at pages 174 to 180 of the paper book, asking the assessee to submit its explanation along with supporting evidence for the claim of eligibility for registration u/s 12AA of the Act. The assessee in response to the said notice filed elaborate submissions. However, the Ld. CIT(E) was not satisfied with the submissions made by the assessee and rejected the application for grant of registration u/s 12AA of the Act by observing as under:

Aggrieved with such order of Ld. CIT(E), the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee submitted that the assessee is a public limited company formed on 26.03.2002 pursuant to Maharashtra State Government's Resolution (GR) No.1099/2390 dated 18.01.2002 based upon decisions reached on KARGIL victory day, copy of which is placed at pages 239 to 244 of the paper book-II. He submitted that MESCO was carrying a belief that its activities get covered under scope of section 10(26BBB) and as such, entire income of MESCO was tax exempt. From assessment year 2008-09 onwards the assessee’s claim of exemption u/s 10(26BBB) of the Act was denied by holding that the assessee is not formed under any Central, State or Provincial Act. He submitted that the assessee filed application for registration u/s 12AA on 12.09.2019 which was rejected by the CIT(E). On appeal, the Tribunal restored the matter to the file of the CIT(E) for de-novo consideration. He submitted that after the order passed by the Tribunal the assessee amended the Memorandum of Association (MOA) and Articles of Association (AOA) after seeking the due approval for modification by the Legal Team of Govt. of Maharashtra on 05.07.2022. Referring to pages 49 to 99 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the amended MOA and AOA.

Referring to the order of the Ld. CIT(E) the Ld. Counsel for the assessee submitted that vide paras 4 to 7 of the order of Ld. CIT(E), he was of the opinion that despite the changes in MOA and AOA, yet, some such clauses exist which make MESCO a commercial organization instead of a charitable organization. He submitted that for the above purpose, the Ld. CIT(E) has referred to clauses 16 to 34 of the amended MOA. Referring to the said clauses, the Ld. Counsel for the assessee submitted that all these activities are included in category (B) of the amended MOA. He submitted that these objects are merely incidental or ancillary to the attainment of main activity. In other words, these ancillary activities are not the main activities of MESCO itself. He submitted that MESCO has deployed over 15,000 ex-servicemen as of present date. Therefore, objecting to presence of ancillary objects activities is incorrect. He submitted that mere presence with respect to some futuristic plausible incidental activities ought not disturb the decision as to charitable nature of main activity. Without prejudice to the above, he submitted that even if some ancillary objects are different than the main object, yet the position of the Income Tax Act needs to be considered. He submitted that as per the provisions of section 11(4) of the Act, even a business is permitted under the charity, provided books of account are separately maintained.

So far as the objection of the Ld. CIT(E) that the assessee has deployed 48 civilian persons instead of ex-servicemen for the respective jobs is concerned, he submitted that MESCO employs civilians only for those domains / areas which require specialized skill, knowledge in particular field such as IT, Legal, Finance, HR etc. and for which ex-servicemen could not be hired despite best efforts made to hire ex-servicemen only. Referring to the list of civilians employed by MESCO whose number is only 41 and copy of which is placed at page 282 of the paper book, he submitted that as of present date only 41 civilians have been employed as against 48 before a year. He submitted that these 41 civilians are engaged in such assignments for which ex-servicemen were not available.

The Ld. Counsel for the assessee submitted that the assessee undertakes recruitment of personnel through public advertisements published in newspapers, wherein a specific condition is stipulated that only ex-servicemen are eligible to apply. It is only in exceptional circumstances where no ex-serviceman responds to the said recruitment notice that MESCO, being left with no alternative, considers civilian candidates to fill the positions. Referring to pages 284 to 288 of the paper book-II, the Ld. Counsel for the assessee drew the attention of the Bench to sample copies of such recruitment advertisements.

So far as the observation of the Ld. CIT(E) that revenue of MESCO is substantial for assessment years 2018-19, 2019-20 and 2020-21 is concerned, he submitted that the revenue for these three years is about Rs.283 crore, Rs.258 crore and Rs.272 crore respectively. He submitted that since MESCO deploys over 15,000 ex-servicemen for various security related deployments, therefore, for paying salaries to these ex-servicemen, MESCO has to generate revenue by billing to the parties to whom, the security services are rendered. He submitted that generating revenue should not to be an objection, especially when the same is having close nexus with deployment of ex-servicemen. He submitted that giving opportunity of earning to these ex-servicemen is the key object of MESCO.

So far as the objection of the Ld. CIT(E) that MESCO earns significant mark-up ranging from 10% to 19% for which he rejected the application for registration u/s 12AA of the Act is concerned, he submitted that the above finding of the Ld. CIT(E) is factually incorrect. Referring to page 201 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the mark-up for various assessment years which are as under:

Referring to the decision of the Hon'ble Supreme Court in case of ACIT(E) Vs. Ahmedabad Urban Development Authority reported in 449 ITR 1 (SC), he submitted that the Hon’ble Supreme Court in the said decision has held that charging of mark-up/margin upto 20% of costs is perfectly eligible for coverage under a charitable activity status. Only after the mark-up starts rising above 20% of costs that the commercial angle / profit angle starts creeping into the process. He submitted that MESCO has never earned mark-up above 20% of costs. Therefore, mark-up test should not have vitiated the 12A registration entitlement of the assessee.

So far as the objection of the Ld. CIT(E) that upon dissolution, assets will be distributed to members of MESCO is concerned, he submitted that the members of MESCO are Maharashtra State Government (acting through Hon'ble Governor of Maharashtra). Secondly, profit distribution is not plausible as per amended AOA. The Ld. Counsel for the assessee drew the attention of the Bench to the old clauses before amendment and the new clause after amendment which are as under:

He submitted that the Ld. CIT(E) has glossed over the amended AOA submitted before him. Therefore, his objection for grant of registration on this issue is also incorrect.

The Ld. Counsel for the assessee submitted that MESCO is running one petroleum outlet at Malad, Mumbai where it has employed the Ex-Servicemen as Pump operators, generating employment for a staff of about 25 persons who are ex-servicemen/their dependents. The land at Malad was owned by the Department of Sainik Welfare (DSW) i.e. Government of Maharashtra. The MESCO was chosen as an entity to assume the petrol pump dealership. Referring to pages 253 to 279 of the paper book-II, he drew the attention of the Bench to the copy of dealership agreement between HPCL & MESCO and Lease agreement between DSW & HPCL. He submitted that the profits generated from the petrol pump is used for the key activity of MESCO and mark-up arising from petrol pump activity is very negligible. Therefore, from all counts the petrol pump activity does not disentitle MESCO from being a charitable activity.

So far as the objection of the Ld. CIT(E) that the assessee has not provided concrete documentary evidence to prove that such activities are actually being carried out and there is no clear record of beneficiaries, eligibility criteria or actual disbursements of financial aid is concerned, he submitted that MESCO has already submitted details of financial assistance before the Ld. CIT(E) vide submission dated 08.11.2023.

The Ld. Counsel for the assessee referring to page 191 of the paper book drew the attention of the Bench to clause No.5 of the reply to CIT(E) where the assessee has given the details of financial assistance provided to the family members of deceased ex-servicemen. It has been submitted that till date MESCO has provided financial support to 258 persons whose details are given as per the Annexure.

So far as the objection of the Ld. CIT(E) that the assessee has been registered as company limited by shares under the Companies Act, 1956 and has not been registered under section 8 (Sec. 25 of 2013 Act) company and clearly does not have any structure of charitable trust, society, or Section 8 company is concerned, the Ld. Counsel for the assessee submitted that non-availment of section 8 / section 25 registration under the Companies Act does not lead to any tag of non-charitable activity of MESCO. He submitted that MESCO was and is and shall remain a helping compassionate hand mainly for ex-servicemen. He submitted that registration u/s 25 of the old Companies Act or section 8 of the new Companies Act is not a compulsion per se for getting registration u/s 12AA of the Act. The Ld. Counsel for the assessee referring to various State Corporations formed on the basis of GRs of the respective State Governments submitted that under identical circumstances those entities were allowed registration u/s 12AA of the Act.

Referring to the decision of the Delhi Bench of the Tribunal in the case of Army Welfare Placement Organization vs. DIT vide order dated 22.01.2015, he submitted that under identical circumstances the Tribunal has directed the CIT to grant registration u/s 12A of the Act.

Referring to the decision of the Kolkata Bench of the Tribunal in the case of M/s. Indian Ex-services League vs. CIT vide order dated 04.09.2019 for assessment year 2012-13, he submitted that under somewhat identical circumstances the Tribunal has set aside the 263 proceedings initiated by the CIT(E), Kolkata against the order passed u/s 143(3) of the Act allowing the assessee the benefit of exemption u/s 11 of the Act. He accordingly submitted that the grounds raised by the assessee should be allowed and the order of the Ld. CIT(E) be set aside and the assessee be granted registration u/s 12AA of the Act.

The Ld. DR on the other hand heavily relied on the order of the Ld. CIT(E). Referring to the order of the Ld. CIT(E) he submitted that the Ld. CIT(E) has given elaborate reasons while rejecting the application for grant of registration u/s 12AA of the Act. Therefore, the same should be upheld and the grounds raised by the assessee be dismissed.

We have heard the rival arguments made by both the sides, perused the order of the Ld. CIT(E) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Ld. CIT(E) in the instant case rejected the application for grant of registration u/s 12AA of the Act, the reasons of which have already been reproduced in the preceding paragraphs. So far as the first objection raised by the Ld. CIT(E) that the assessee is not registered u/s 8 (previous sec.25 of 2013 Act) of the Companies Act, 1956 is concerned, we find the assessee in the instant case is providing helping hand and employment opportunities mainly to ex-servicemen. We find merit in the arguments of the Ld. Counsel for the assessee that non-availment of section 8 / section 25 registration under the Companies Act does not lead to any tag of non- charitable activity of MESCO. In our opinion, registration u/s 25 of the old Companies Act or section 8 of the new Companies Act is not a compulsion per se for getting registration u/s 12AA of the Act. In any case, we find the requirements of registration u/s 8 / 25 of the Companies Act are fulfilled by MESCO in substance considering the yeomen object of the state government in providing helping hand and employment opportunities mainly to ex-servicemen. We find the government resolution for formation of MESCO, copy of which is placed at pages 239 to 244 of the paper book read as under:

In view of the above, we are of the considered opinion that the Ld. CIT(E) should not have rejected the application for grant of registration u/s 12AA of the Act on account of non-registration u/s 8 of the new Companies Act (previous section 25 of the old Act).

So far as the next objection of the Ld. CIT(E) i.e. the assessee’s activity of running petrol pump, trading, leasing and construction which are inherently covered in nature of commercial and its financial statements show that it consistently earned substantial revenue from these activities is concerned, we find the assessee is running one petroleum outlet at Malad, Mumbai where it has employed the ex-Servicemen as Pump operators, generating employment for a staff of about 25 persons who are ex-servicemen/their dependents. Further, the land at Malad was owned by the Department of Sainik Welfare (DSW) i.e. Government of Maharashtra. We find MESCO was chosen as an entity to assume the petrol pump dealership and the copies of dealership agreement between HPCL & MESCO and Lease agreement between DSW & HPCL are available at pages 253 to 279 of the paper book-II. We find the profits generated from petrol pump is used for the key activity of MESCO and mark-up arising from petrol pump activity is not substantial. Further, a perusal of the financials of MESCO shows that the mark-up ranges between 3.70% to 12.92%, the details of which have already been reproduced in the preceding paragraphs (para 13 of the order).

We find the Hon'ble Supreme Court in case of ACIT(E) Vs. Ahmedabad Urban Development Authority reported in 449 ITR 1 (SC) at para 172 has observed as under: “172. Yet another manner of looking at the definition together with section 10(23) and 11 is that for achieving a general public utility object, if the charity involves itself in activities, that entail charging amounts only at cost or marginal mark-up over cost, and also derive some profit, the prohibition against carrying on business or service relating to business is not attracted-if the quantum of such profits do not exceed 20 per cent of its overall receipts.”

As per the above decision if the quantum of profits does not exceed 20% of its overall receipts, then no adverse view should be taken. Since in the instant case the profit rate / mark-up rate is below 20%, therefore, the Ld. CIT(E) in our opinion is not justified in rejecting the application u/s 12AA on this issue.

So far as the next objection of the Ld. CIT(E) that even after the amendment to clauses of Memorandum of Association and Articles of Association, its objects and activities are primarily commercial in nature are concerned, we find the main objects, objects incidental or ancillary to the attainment of main objects are as under:

A perusal of the above would show that the objects incidental or ancillary to the attainment of the main objects are nothing but merely incidental or ancillary to the main activity. The submissions of the Ld. Counsel for the assessee that the ancillary activities are not the main activities of MESCO itself could not be controverted by the Ld. DR. Further, in our opinion, mere presence with respect to some futuristic plausible incidental activities should not come in the way of granting registration u/s 12AA of the Act as long as the assessee has confined its activities to the attainment of its main objects. We, therefore, are of the considered opinion that the Ld. CIT(E) should not have rejected the application for grant of registration u/s 12AA of the Act on this issue.

So far as the objection of the Ld. CIT(E) that there is no clear record of beneficiaries, eligibility criteria or actual disbursements of financial aid and the assessee has not provided concrete documentary evidence to prove that such activities are actually being carried out is concerned, we find the assessee vide its submission dated 08.11.2023 before Ld. CIT(E), copy of which is placed at pages 181 to 200 of the paper book, at point No.5 (at page 191) has given the details of financial assistance to the family members of the deceased ex-servicemen. He has given the details of financial support to 258 persons. Therefore, holding that the assessee has not given the details is incorrect.

So far as the objection of the Ld. CIT(E) that the assessee has deployed about 48 civilian persons instead of deploying ex-servicemen for the respective jobs is concerned, we find the number of 48 persons against the employment of more than 15,000 ex-servicemen is very negligible. We find merit in the arguments of the Ld. Counsel for the assessee that those civilians were employed in respect of those domains / areas which require specialized skill, knowledge in particular field such as IT, Legal, Finance, HR etc. for which suitable ex- servicemen were not available. A perusal of the advertisements given by the assessee clearly shows that they have given advertisements for recruitment of only ex-servicemen. Therefore, holding the assessee as ineligible on account of employing few civilians, in our opinion, should not stand on the way for getting registration u/s. 12AA of the Act.

So far as the objection of the Ld. CIT(E) that the assessee has earned substantial revenue in assessment years 2018-19 to 2020-21 is concerned, we find whatever revenue has been earned, has been utilized for attaining the main objects of the assessee trust. As stated earlier, MESCO deploys over 15,000 ex- servicemen for various security related departments. For paying salaries and other benefits to these ex-servicemen, the assessee has to generate revenue by billing to the parties to whom the security services are rendered. Generating revenue in our opinion, should not to be an objection especially when the same is having close nexus with deployment of ex-servicemen. We find merit in the arguments of the Ld. Counsel for the assessee that giving opportunity of earning to these ex- servicemen is the key object of the assessee trust. Under these circumstances, we are of the considered opinion that this should not have been a stumbling block for getting registration u/s 12AA of the Act.

So far as the objection of the Ld. CIT(E) that upon dissolution, assets will be distributed to members of MESCO is concerned, we find the members of MESCO is Maharashtra State Government (acting through Hon'ble Governor of Maharashtra). Further, profit distribution is not possible as per the amended AOA. A perusal of the old clauses before the amendment and the new clause after the amendment have already been reproduced in the preceding paragraphs (para No.15 of the order). In our opinion, since the assessee has already amended its Articles of Association on the issue of distribution of profit after dissolution which the Ld. CIT(E) has not considered, therefore, we are of the considered opinion that the same should not have been viewed adversely for grant of registration u/s 12AA of the Act.

We find somewhat an identical issue had come up before the Delhi Bench of the Tribunal in the case of Army Welfare Placement Organization vs. DIT (supra) where the Tribunal directed the CIT to grant registration u/s 12A by observing as under: “9. We find that the nominal fees for the registration, which is a onetime fees, is barely enough to meet even partial costs of running this establishment, and the fact that such a nominal fees is charged from the registrants, in our humble understanding, cannot change the fundamental character of this charitable activity. Not only that the scale of fees is too modest and the facility of registration is restricted only to serving or former army personnel, and their dependents, the unambiguous objective of the assessee institution is to promote welfare of the army personnel and their dependents. There are no reasons to doubts bonafides of this well intended initiative of the Indian Army, by way of Army Welfare Placement Organization which is working under direct control of the Ministry of Defence in the Government of India. There is nothing on record whatsoever to suggest that this organization is set up on any commercial basis. It is only elementary that the mere fact that a fees is received from the registrants, by itself, cannot convert a charitable activity into a commercial activity. This position is recognized by the statue itself in second limb of Explanation to Section 2(15), a specific reference made is to the receipt of such fees from trade, commerce and business, and a further monetary limit is set out even on aggregate of fees even from trade, commerce or business. If receiving a fees simplicitor could be reason enough to hold that an activity can only be charitable activity, there could not have been any justification for such riders in the statute itself. That apart, time and again, the fundamental essence of a business activity is to earn profits but then a plain look at the objective (f), as reproduced in paragraph 4 earlier in this order, would show that clearly and unambiguously profit making cannot be an objective in this case. The assessee institution is set up by the Indian Army and it seeks to promote the wellbeing of their personnel after their retirement from the service, as also of the widows and dependents of the brave army men who sacrifice their lives, and help them integrate in the civil society by taking up suitable employment. This is surely an activity of general public utility, and, therefore, covered by the definition of ‘charitable purposes’ under section 2(15). The true test for deciding whether an activity is business activity is (i) whether the said activity undertaken with a profit motive, or (ii) whether the said activity has continued on sound and recognized business principles, and pursued with reasonable continuity. Clearly, therefore, in a situation in which an activity is not undertaken with a profit motive or on sound and recognized business principles, such an activity cannot be considered to be a business activity. We may, in this regard, usefully refer to the following observations made by Hon’ble Delhi High Court in the case of the Institute of Chartered Accountants of India Vs DGIT (Exemption) [(2011) 347 ITR 99 (Del)]: 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 s. 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.

We find the Kolkata Bench of the Tribunal in the case of M/s. Indian Ex- services League vs. CIT (supra) while setting aside the 263 order passed by the CIT(E) has observed as under: “9. On the above set of facts therefore, we are of the firm view that the activity of the appellant society which involved working as an interface for arranging employment/placement for the ex-service men in the form of security personnel / guards / labour in different organizations was in consonance with its aims & objectives. We are of the considered view that such activity did not come within the ambit of the expression “trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business” as contemplated by proviso to Section 2(15) of the Act. For these reasons, we hold that the ld. Pr.CIT was unjustified in invoking his revisionary jurisdiction u/s 263 and thereby substituting his subjective opinion in place of the AO for the purpose of denying the benefit of Section 11 as allowed by the AO. We therefore quash the order impugned before us and restore the order of the AO.”

In view of the above discussion and relying on the decisions cited (supra), we are of the considered opinion that the Ld. CIT(E) should not have rejected the application for grant of registration u/s 12AA of the Act. We, therefore, set aside his order and direct him to grant registration u/s 12AA of the Act. The grounds raised by the assessee are accordingly allowed.

In the result, the appeal filed by the assessee is allowed.