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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI R.K.PANDA & SHRI SUDHANSHU SRIVASTAVA
order dated 24.12.2012 passed by the Ld. CIT (Appeals)-21, New Delhi for assessment year 2009-10. is assessee’s appeal against order dated 05.01.2014 passed by the Ld. CIT (Appeals)-40, New Delhi for assessment year 2010-11. Both the appeals were heard together as the issues involved were identical and they are being disposed of through this common order for the sake of convenience.
2.0 Brief facts of the case for Assessment Year 2009-10 are that the assessee society is a registered society carrying on various activities like organizing camps for senior and junior artists in painting, sculpture, graphics and drawing, giving awards to artists for their performance/s, organizing exhibitions on all India basis in the field of painting, drawing, sculpture and graphics and giving awards to deserving participants, publication of magazines and booklets and providing assistance to aged artists. The return of income for the year under consideration was filed declaring income at Rs. Nil. The case was selected for scrutiny and during the course of assessment proceedings the AO required the assessee society to explain its nature of activities and also to describe the method of earning the different kinds of income earned by it. Thereafter, after considering the submissions of the assessee, the AO required the assessee to further explain as to why the benefit u/s 11 and 12 of the Income Tax Act, 1961 (hereinafter referred to as ‘The Act’) should be allowed to the assessee in view of the amended Section 2(15) of the Act introduced with effect from 01.04.2009 relevant A.Y. 2009-10 as the activities of the society fell in the category ‘advancement of an object of general public utility’ and further as the income from art gallery and sale of paintings, considered to be business income, exceeded Rs. 10,00,000/-. Thereafter, after considering the response of the assessee, the AO proceeded to hold that the activity of the assessee fell within ‘object of general public utility’ and was, therefore, hit by the two provisos to Section 2(15) of the Act. The AO noted that the society had recovered maintenance charges of Rs. 14,08,110/- from the various artists and had also earned Rs. 20,00,000/- from sale of art objects.
Accordingly, the AO proceeded to disallow the assessee’s claim of exemption u/s 11 and 12 of the Act and brought to tax the entire excess of income over expenditure amounting to Rs. 4,67,37,354/- and after disallowing depreciation on the ground that double deduction could not be allowed added back another amount to Rs. 14,87,114/-. The assessment was completed at an income of Rs. 4,82,24,468/-.
2.1 The assessee’s appeal before the Ld. CIT (Appeals) was also dismissed vide order dated 24.12.2012 and now the assessee is in appeal before the ITAT and has raised the following grounds of appeal:-
“1. The CIT(A) has, in view of the facts & circumstances of the case and in law, grossly erred in upholding the order passed under section 143(3) of the Income Tax Act, 1961 by the Ld. A.O. 2. The CIT(A) has, in view of the facts and circumstances of the case and in law, grossly erred in upholding the action of the AO in treating the society as engaged into the activity in nature of trade, commerce and business.
3. The CIT(A) has, in view of the facts and circumstances of the case and in law, grossly erred in upholding the action of the AO in treating the sale of paintings as activity in nature of trade, commerce and business.
4. That on the facts and circumstances of the case, the Ld. AO and CIT(A) has erred in terming nature of business as running of art galleries and the activities of the society as activities falling in the nature of Trade, Commerce and business.
5. That the CIT(A) and Ld. AO has erred in law and on facts in withdrawing the benefits of Section 11 and 12 and in making an addition of Rs. 4,67,37,354/- which is excess of income over expenditure as per Income & Expenditure A/c and assessing the income of the assessee on maximum marginal rate of taxation. The grounds given in the order by the assessing officer are vague, arbitrary and unrelated to the activities carried on by the appellant.
That the Ld. AO and CIT(A) has erred in not recognizing the fact the society is a charitable society and registered under section 12A of the Act and thus eligible to exemptions under section 11 and 12.
That the explanations filed and the materials available on records have not been properly considered and legally interpreted. The addition made cannot be justified with the material on record. Such action of assessing authority is in violation of rules of natural justice. 8. That the interest u/s 234B has been wrongly and illegally charged and the appellant denies its liability of interest to be charged under said sections. 9. That the assessing authority has erred in not giving the credit of tax paid or tax deducted at source and claimed by the Assessee as refund.”
2.2 In assessment year 2010-11 (ITA no. 1448/Del/2015), the return was filed declaring an income of Rs. 1,01,29,716/- and in this year also the case was selected for scrutiny. In this year also the AO was of the view that the assessee was hit by the proviso to section 2(15) of the Act as the assessee was carrying out advancement of any other object of general public utility. In this year the assessment was completed at an income of Rs. 19,99,86,200/- after denying the assessee the claim of exemption u/s 11 and 12 of the Act and by taxing the entire excess of income over expenditure amounting to Rs. 18,60,216/- and after making a disallowance of depreciation amounting to Rs. 13,84,030/- again on the ground that depreciation as well as purchase of capital assets as application of income would amount to double benefit being given to the assessee. The assessee’s appeal in this year was also dismissed by the Ld. CIT (Appeals) by holding that there was no merit in the submissions of the assessee for claiming exemption u/s 11(1) of the Act.
2.3 The assessee is now before the ITAT against this order dated 05.10.2014 and has raised the following grounds of appeal :-
The Ld. CIT (A) has, in view of the facts & circumstances of the case and in law, grossly erred in upholding the order passed under section 143(3) of the Income Tax Act, 1961 by the Ld. AO.
The Ld. CIT (A) has, in view of the facts and circumstances of the case and in law, grossly erred in upholding the action of the Ld. AO in treating the society as engaged into the activity in nature of trade, commerce and business.
The Ld. CIT (A) has, in view of the facts and circumstances of the case and in law, grossly erred in upholding the action of the Ld. AO in treating the sale of paintings and maintenance charges by providing the Galleries on hire as activities in nature of trade, commerce and business.
That the Ld. CIT (A) and Ld. AO has erred in denying the exemption u/s 11/12 to the appellant erroneously holding that (i) the receipts from renting of Gallary and sale of paintings are in the nature of business (ii) the receipts from the above activities exceeds Rs. 10 lacs being the statutory threshold limit prescribed in the second proviso to section 2(15) for the purposes of denial of the exemption.
That the Ld. CIT (A) has in view of the facts & circumstances of the case and in law, grossly erred in upholding the Rental Income, FDR interest and Bank interest as activity of Activity of the Society falling in the nature of Trade, Commerce & Business without giving any reasonable opportunity of being heard and without confronting the same whereas the Ld. AO never disputed the same
6. That the Ld. CIT (A) and Ld. AO has erred in law and on facts in withdrawing the benefits of Section 11 and 12 and in making an addition of Rs. 1,86,02,167/- which is excess of income over expenditure as per Income & Expenditure A/c and assessing the income of the assessee on maximum marginal rate of taxation. The grounds given in the order by the assessing officer are vague, artbitrary and unrelated to the activities carried on by the appellant.
7. That the Ld. AO and Ld. CIT (A) has erred in not recognizing the fact the society is a charitable society and Registered under section 12AA of the act and thus eligible to exemptions under section 11 & 12.
That the explanations filed and the materials available on records have not been properly considered and legally interpreted. The addition made cannot be justified with the material on record. Such action of assessing authority is in violation of rules of natural justice. 9. That the appellant craves your honor’s leave to add, alter, modify, change, substitute, withdraw any of the grounds of appeal at any stage of appellant proceedings.”
3.0 The Ld. Authorised Representative submitted that the assessee’s case was covered in its favour by the judgment of the Hon’ble Delhi High Court in the case of India Trade Promotion Organisation vs. DGIT (Exemptions) reported in (2015) 371 ITR 333 (Delhi) wherein the Hon’ble Delhi High Court has read down the provision of Section 2(15) and has ruled that merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. Reliance was also placed on order of ITAT Delhi Bench in the case of ITO (E) vs. The Indian Golf Union in wherein vide order dated 04.07.2018 the ITAT Delhi Bench had also taken similar view by following the judgment of the Hon’ble Delhi High Court in the case of India Trade Promotion Organisation vs. DGIT (E) (supra). The Ld. Authorised Representative further submitted that there was no profit motive behind the activities being carried out by the assessee society and the pre-dominant purpose remained charitable and just because the assessee society had charged fees for rent and maintenance while letting out the art galleries and had also earned income from sale of paintings, it could not be said that the entire activity had become commercial in nature.
3.1 The Ld. Authorised Representative further submitted that the issue in assessment year 2010-11 was also identical and the arguments would be the same for that year also and the same were not being repeated for the sake of brevity.
4.0 In response, the Ld. Sr. Departmental Representative placed reliance on the concurrent findings of both the lower authorities and vehemently argued that the nature of activities is commercial inasmuch as the assessee was selling paintings, letting out property and was enjoying huge surplus from the various activities being carried out by it. The Ld. Sr. DR submitted that it was apparent that the motive of the assessee society was to earn profits and, therefore, the assessee’s claim of exemption u/s 11(1) had rightly been denied.
5.0 We have heard the rival submissions and have also perused the material on record. We agree with the averment of the Ld. Authorised Representative that the assessee’s case is favourably covered for the assessee by the ratio of the judgment of the Hon’ble Delhi High Court in the case of India Trade Promotion Organisation vs. DGIT (E) (supra), wherein vide judgment dated 22.01.2015, the Hon’ble Delhi High Court, while upholding the constitutional validity of proviso to Section 2(15) of the Act, has laid down the strict and literal interpretation of the proviso to Section 2(15) of the Act. The Hon’ble Delhi High Court has held that mere receipt of fee or charge will not mean that the assessee is involved in any trade, commerce or business. In the case of India Trade Promotion Organisation, the Ld. DGIT (E) had passed an order stating that though the assessee was engaged in “the advancement of any other object of general public utility”, as per s. 2(15) of the Act, its object could not be regarded as “charitable purposes” due to the new proviso to s. 2(15) and further that it was not eligible for exemption u/s 10(23C)(iv). It was held by the Ld. DGIT (E) that as the assessee had huge surpluses in banks, it had given its space for rent during Trade Fairs and Exhibitions, it had received income by way of sale of tickets and income from food and beverage outlets in Pragati Maidan, etc, the assessee was rendering service to a large number of traders and industrialists in relation to trade, commerce and business and was, therefore, hit by the expanded list of activities contained in the proviso to Section 2(15). It was further observed by the Ld. DGIT (E) that the service of allotting space and other amenities like water, electricity and security, etc. to the traders to conduct their exhibitions fell within the ambit of any activity of rendering any service in relation to trade, commerce or business. The assessee filed a writ petition before the Hon’ble Delhi High Court claiming that the First Proviso to section 2(15), as amended by the Finance Act, 2008, was arbitrary and unreasonable and violative of Article 14 of the Constitution of India. The Hon’ble Delhi High Court held in the favour of the assessee. The relevant observations of the Hon’ble High Court are as under:
(i) It is apparent that merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. It is also important to note as to what is the dominant activity of the institution in question. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. It is clear from the facts of the present case that the driving force is not the desire to earn profits but, the object of promoting trade and commerce not for itself, but for the nation – both within India and outside India. Clearly, this is a charitable purpose, which has as its motive the advancement of an object of general public utility to which the exception carved out in the first proviso to Section 2(15) of the said Act would not apply; (ii) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). It is well settled that the courts should always endeavour to uphold the Constitutional validity of a provision, and in doing so, the provision in question may have to be read down; (iii) Section 2(15) is only a definition clause. The expression “charitable purpose” appearing in Section 2 (15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression “Charitable Purpose”, as defined in Section 2(15) of the Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression “charitable purpose” by the revenue. In conclusion, we may say that the expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. Thus, while we uphold the Constitutional validity of the proviso to Section 2(15) of the said Act, it has to be read down in the manner indicated by us.” 5.1 Thus, the Hon’ble Delhi High Court has held that merely because a fee or some other consideration is collected or received by an institution, it would not loose its character of having been established for a charitable purpose. Undisputedly, in the present case the dominant activity of the assessee society is not business trade or commerce but its activities are for the promotion of art, craft and culture for the Indian artists in India. The Assessing Officer has himself reproduced the main objectives of the assessee society as per the Memorandum of Association in his assessment order and they are: (i) fostering and developing fine and applied arts in India to promote appreciation by means of publications, lectures, Conferences, Demonstration, Exhibition etc.;(ii) organizing and establishing a national art gallery in New Delhi; (iii) organizing art exhibitions and societies in India and abroad; (iv) acting as Central Organization of Arts and Crafts in India etc. It is also undisputed that the assessee society has carried out activities in the form of annual art exhibitions, camps for senior and junior artists, providing maintenance to aged artists etc. It is also not the department’s case that any part of surplus was diverted from the society and applied for any personal benefit of any member or office bearer of the society. Therefore, it can be safely concluded that the dominant activity of the assessee society is not business, trade or commerce and, accordingly, any incidental or ancillary activity like hiring out of art gallery or selling paintings would not also fall within the categories of trade, commerce or business.
5.2 We also note that the Hon’ble Delhi High Court in the case of India Trade Promotion Organisation vs. DGIT (Exemption) (supra) has also duly considered Circular No. 11 of 2008 issued by the CBDT and has observed that the proviso to Section 2(15) of the Act, which was inserted by Finance Act, 2008, was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity in the object of a general public utility but was not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts and were charity institutions.
5.3 Therefore, after duly considering the objects of the assessee society, the settled legal position with respect to interpretation of proviso of Section 2(15) of the Act and respectfully following the ratio of the judgment of the Hon’ble Delhi High Court in the case of India Trade Promotion Organisation vs. DGIT (Exemption) (supra) we are unable to concur with the observations and findings of both the lower authorities and while setting aside the orders of the Ld. CIT (Appeals), we direct the AO to allow the assessee the benefit of exemption u/s 11 & 12 of the Act for assessment year 2009-10.
6.0 Since the issue in assessment year 2010-11 is identical, therefore, for the same reasoning as given by us in assessee’s appeal for assessment year 2009-10 while allowing the assessee’s appeal, we allow assessee’s appeal for assessment year 2010-11 also. In this year also the order of the Ld. CIT (Appeals) is set aside and the AO is directed to allow the assessee the benefit of exemption u/s 11 & 12 of the Act to the assessee.
7.0 In the final result, both the appeals of the assessee stand allowed.
Order pronounced in the open court on 14.02.2019.