M/S. ALL INDIA FINE ARTS & CRAFTS SOCIETY,NEW DELHI vs. ADIT (E), NEW DELHI

PER SUDHANSHU SRIVASTAVA, J.M.: ITA no. 1449/Del/2013 is preferred by the assessee against

order dated 24.12.2012 passed by the Ld. CIT (Appeals)-21, New

Delhi for assessment year 2009-10. ITA no. 1448/Del/2015 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.

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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

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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

4 ITA NO. 1448/Del/2015 & 1449/Del/2013 (All India Fine Arts & Crafts Society)

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. 6. 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. 7. 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

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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

6 ITA NO. 1448/Del/2015 & 1449/Del/2013 (All India Fine Arts & Crafts Society)

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 :-

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8 ITA NO. 1448/Del/2015 & 1449/Del/2013 (All India Fine Arts & Crafts Society)

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 ITA no. 2653/Del/2015 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

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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

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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

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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

12 ITA NO. 1448/Del/2015 & 1449/Del/2013 (All India Fine Arts & Crafts Society)

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

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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

14 ITA NO. 1448/Del/2015 & 1449/Del/2013 (All India Fine Arts & Crafts Society)

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

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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.

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7.0 In the final result, both the appeals of the assessee stand

allowed.

Order pronounced in the open court on 14.02.2019.

Sd/- Sd/- (R.K.PANDA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 14.02.2019 *BR*