THE COMMISSIONER OF INCOME TAX - EXEMPTION vs. ASSOCIATION OF THIRD PARTY ADMINISTRATORS

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$~52 * IN THE HIGH COURT OF DELHI AT NEW DELHI Date of Decision: 20.01.2020 + ITA 1071/2018

THE COMMISSIONER OF INCOME TAX - EXEMPTION ..... Appellant Through: Mr. Abhishek Maratha, Senior Standing Counsel with Mr. Pratyaksh Gupta and Ms. Nupur Sharma, Advocates.

versus

ASSOCIATION OF THIRD PARTY ADMINISTRATORS ..... Respondent Through: Mr. Ravi Kant Chadha, Senior Advocate with Mr. Siddhant Chaudhary, Advocate.

CORAM: HON'BLE MR. JUSTICE VIPIN SANGHI HON'BLE MR. JUSTICE SANJEEV NARULA

SANJEEV NARULA, J (Oral): 1. The Commissioner of Income Tax – Exemption has filed the present appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) assailing the order dated 19.04.2018 passed by the Income Tax Appellate Tribunal (hereinafter referred to as the „ITAT‟). The present appeal proposes substantial questions of law, questioning the correctness of the findings of ITAT in relation to the activities of the assessee in the context of eligibility to get registration as a charitable organization under Section 12AA of the Act.

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the object clause of the trust deed. During the course of the arguments, the attention of the learned counsel was drawn to the decisions of the Supreme Court in the case of Additional Commissioner of Income Tax, Gujarat v. Surat Art Silk Cloth Manufactures Association (1979) 13 CTR (SC) 378 and Director of Income Tax v. Bharat diamond Bourse (2003) 259 ITR 0280. Mr. Maratha then sought time to go through the aforesaid decisions and address the Court on the same aspect. Today, Mr. Maratha argues that neither the CIT (E), nor the ITAT had passed the orders in line with the aforesaid judgments and while applying the test prescribed by the Constitution Bench of Supreme Court in the case of Surat Art Silk (supra), the Court has to independently consider the facts of each case and come to a conclusion as to whether the assessee would be entitled to the benefit of Section 12AA of the Act. Mr. Maratha then referred to the aims and objects of the trust and submitted that the same are in the nature of advancement of the business of health insurance for TPAs to get the industry status to TPA business and it was thus clear that the intent was to earn profit. He submitted that the income of TPAs is assessable to income tax and is not exempted under the Act. Further the insurance business too is assessable to income tax and is not exempted and, therefore, having regard to the objects of the trust, the ITAT has wrongly granted the benefit to the Respondent assessee.

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an application for registration of a trust or institution made under Section 12AA, the Principal Commissioner or Commissioner shall call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution; and the compliance of such requirements of any other law for the time being in force by the trust or institution, as are materials for the purpose of achieving its objects, and he may also make such inquiries as he may deem necessary in this behalf. Once he is satisfied about the objects of the trust or institution, and genuineness of its activities, he shall pass an order under the said provision. On this aspect, the Tax Authorities have looked into the aims and objects of the trust. Since the same is the backbone of the decision impugned before us, we consider it apposite to extract the same hereinunder:

“6. The aims and objects of the Trust shall be:

(i) To organize and arrange all licensed Third Party Administrators (TPAs) to be members of the Trust for mutual betterment of the TPA business;

(ii) To thrive for an industry status for TPA business;

(iii) To draft guidelines, procedures, documents for implementation of the above;

(iv) To organize seminars, training and educational sessions for all employees/associates of member TPAs;

(v) To devise and develop new products related to health insurance or insurance companies, TPAs and other related parties;

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(vi) To regulate and structure the TPAfees and to represent to insurance companies and other related parties, taking out insurance policies, on issues relating to TPAs as also others concerned with the insurance industry;

(vii) To organize and regulate the hospital network of TPAs and implement common procedures, standardized billing and standardized tariff and other related documentations;

(viii) To represent to regulatory bodies, Govt authorities, on behalf of member TPAs on matters related to TPA/insurance business with the object of improvement and development of TPA industry;

(ix) To create common data bank, exchange information pertaining to claim statistics, enrollment statistics and other related matters pertaining to member TPAs;

(x) To initiate legal proceedings against defaulting hospitals, fraudulently insured and such other persons involved in malpractices or frauds pertaining to claims, cashless mechanism, insurance underwriting, etc.;

(xi) To promote and create awareness for healthy living and to bring together all persons who subscribe to this common cause;

(xii) To educate members about health insurance and comprehensive medical services;

(xiii) To interact with various regulatory and other public and private sectors bodies for framing health-related and other beneficial schemes for people in general and those below the poverty line, and also participate in implementation of such schemes whether as consultants, advisors or otherwise. The Trust may also devise such packages as are of benefit to its members;

(xiv) To publish books, periodicals and other literature in any

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subject of medical science, healthy living and insurance which may be of interest to its members;

(xv) To document all relevant information pertaining to health and hygiene;

(xvi) To advise and if needed assist the Government in the formation and implementation of policies relating to health and other areas of insurance;

(xvii) To promote education, research, training and professional development on health related issues;

(xviii) To organize and promote conferences, seminars, lectures, workshops, public debates and exhibitions in furtherance of the objectives of the Trust;

(xix) To offer awards, prizes, scholarships and stipends in promotion of the aims and objects of the Trust;

(xx) To provide need-based grants and donations;

(xxi) To cooperate and collaborate with other national institutions and agencies in furtherance of the objectives of the Trust;

(xxii) To cooperate with institutions and associations having similar aims and objects;

(xxiii) To borrow moneys for carrying out the objects of the Trust and for that purpose to create security by mortgage or charge or pledge or hypothecation of any immovable property of the Trust;

(xxiv) To establish any fund to further the interest of the Trust;

(xxv) To establish an institute for training and dissemination of knowledge among Third Party Administrators;

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(xxvi) To undertake programmes which ensures raising of income levels and expanding employment opportunities of the weaker sections of Trust, particularly of those living below the poverty line and women by involving participants in the planning, implementation and maintenance of activities taken up;

(xxvii) To organize disadvantaged section of Trust and take steps for increasing their level of awareness with regard to the programme and contents and facilities therein under government/non government programme, legal provisions etc. and also for increasing their bargaining power by promoting co- operative and group action;

(xxviii) To raise or acquire funds or property from Central Government, State Government, Foreign Agencies, Non- Government Agencies, Charitable Trusts by way of donations or grants or contribution or by taking loan from public and private Financial Institutions and Banks. The funds, properties, assets and all other resources, present and future of the Trust shall be utilized for any or all the purposes or objects of the Trust as stated above and also for all other similar activities in furtherance of ideals of truth and non-violence;

(xxix) To acquire by purchase or otherwise hold on lease, hire or rent or by exchange any movable or immovable property or properties;

(xxx)To organize and maintain residential hostels, restaurants and other amenities for its members;

(xxxi) To maintain and keep in good repair all buildings and common services;

(xxxii)To constitute or cause to be constituted Regional Centres at convenient places to promote the objectives of the Trust;

(xxxiii)To sell, give on lease or hire any property of the Trust;

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(xxxiv)To promote National Unity and International Peace and Amity;

(xxxv) To aim towards Communal and Social Harmony and Brotherhood;

(xxxvi) To undertake evaluation of Economic and Social projects;

(xxxvii) To engage in any other lawful activity which may be conducive to the promotion or attainment of any or all objects of the Trust.”

“12. In view of the decision rendered by Hon'ble Supreme Court and Hon'ble High Courts in the judgment discussed in the preceding paras, we are of the considered view that the applicant trust cannot be said to be engaged only for TPA members and their employees and working for mutual benefits of its members, but its objects are certainly aimed at providing to the general public in the field of insurance and health facilities. No doubt,

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activities of the TPA which is a trade association for TPA business for the benefits of its members and non-members, but it is established to protect the interest of TPA members and work towards developing new products related to health insurance or insurance company and to structure the TPA fees, which is like Chambers of Commerce and Industry. So it is certainly providing services to the insurance sector, which in return benefits the public at large. Moreover, at this stage, the Commissioner (E) was not empowered to examine whether the assessee was entitled for exemption u/s 11 or 12 as this issue was required to be examined at the time of assessment.

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Ibrahim Riza v. CIT [1930] LR 57 IA 260 and East India Industries ( Madras) Pvt. Ltd. v. CIT [1967] 65 ITR 611. But if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity - CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722. The test which has, therefore, to be applied is whether the object which is said to be non- charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable. It was on an application of this test that in CIT v. Andhra Chamber of Commerce (supra), the Andhra Chamber of Commerce was held to be a valid charity entitled to exemption from tax. The Court held that the dominant or primary object of the Andhra Chamber of Commerce was to promote and protect trade, commerce and industry and to aid, stimulate and promote the development of trade, commerce and industry and to watch over and protect the general commercial interests of India or any part thereof and this was clearly an object of general public utility and though one of the objects included the taking of steps to urge or oppose legislation affecting trade, commerce or manufacture, which, standing by itself, may be liable to be condemned as non-charitable, it was merely incidental to the dominant or primary object and did not prevent the Andhra Chamber of Commerce from being a valid charity. The Court pointed out that if "the primary purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose, e.g., promotion of or opposition to legislation concerning that purpose, was contemplated". The Court also held that the Andhra Chamber of Commerce did not cease to be charitable merely because the members of the Chamber were incidentally benefited in carrying out its main charitable purpose. The Court relied very strongly on the decisions in Commissioner of Inland Revenue v. Yorkeshire Agricultural Society [1920] 13 Tax Case 58 and Institution of

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Civil Engineers v. Commissioner of Inland Revenue [1931] 16 Tax Case 158 for reaching the conclusion that merely because some benefits incidentally arose to the members of the society or institution in the course of carrying out its main charitable purpose, it would not by itself prevent the association or institution from being a charity. It would be a question of fact' in such case "whether there is no such personal benefit, intellectual or professional, to the members of the society or body of persons as to be incapable of being disregarded.

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English grammar that the charitable purpose involves the carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit-making motive; the latter should not masquerade under the guise of the former. The purpose of the trust, as pointed out by one of us (Pathak, J.) in Dharmadeepti v. CIT (supra), must be "essentially charitable in nature" and it must not be a cover for carrying on an activity which has profit making as its predominant object. This interpretation of the exclusionary clause in section 2, clause (15) , derives considerable support from the speech made by the Finance Minister while introducing that provision. The Finance Minister explained the reason for introducing this exclusionary clause in the following words:

"The definition of 'charitable purpose' in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words 'not involving the carrying on of any activity for profit' should be added to the definition."

It is obvious that the exclusionary clause was added with a view to over-coming the decision of the Privy Council in the Tribune case where it was held that the object of supplying the community with an organ of educated (public opinion by publication of a newspaper was an object of general public utility and hence charitable in character, even though the activity of publication of the newspaper was carried on on commercial lines with the object of earning profit. The publication of the newspaper was an activity engaged in by the trust for the purpose of carrying out its charitable purpose and

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on the facts it was clearly an activity which had profit-making as its predominant object, but even so it was held by the Judicial Committee that since the purpose served was an object of general public utility, it was a charitable purpose. It is clear from the speech of the Finance Minister that it was with a view to setting at naught this decision that the exclusionary clause was added in the definition of "charitable purpose". The test which has, therefore, now to be applied is whether the predominant object of two activities involved in carrying out the object of general public utility is to subserve this charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity, that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg, J. when he said in Sole Trustee, Loka Sikshana Trust case (supra) that "if the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity". The learned Judge also added that the restrictive condition "that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit- making is not the real object" (emphasis supplied). We wholly endorse these observations.

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Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must necessarily be drawn, in the absence of some indication to the contrary, that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit. We do not think the Court would be justified in drawing any such inference merely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no

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such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit-making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost.

(emphasis supplied)

“The decision of the Constitutional Bench of this Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 2 SCC 31 really clinches the issue. The assessee in Surat Art Silk Cloth Mfrs. Association's case (supra) was an association established to promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth. Its objects, as evidenced from the memorandum of association, included, inter alia, carrying on business in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, and Cotton Cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of its members. The Constitutional Bench of this Court held that, if there are several objects of the institution, some of which are charitable and some non-charitable, and the trustees or the managers in their discretion may apply the

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income of the institution of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempted from tax. Where the main or primary objects are distributive, each and every one of the object must be charitable in order that the trust be held as a valid charity. But, if the primary or dominant purpose of the institution is charitable and another which, by itself, may not be charitable, but is merely ancilliary or incidental to the primary or dominant object, it would not prevent the institution from validly being recognized as a charity. The test to be applied is, whether the object which is said to be non- charitable is the main or primary object of the trust or institution or it is ancilliary or incidental to the dominant object which is charitable. Reiterating its earlier view in CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722, the Supreme Court said in Surat Art Silk Cloth Mfrs. Association's case (supra) that if the primary purpose is advancement of objects for general public utility, the institution would remain charitable, even if an incidental non-charitable object for achieving that purpose was contemplated. In the case of Andhra Chamber of Commerce (supra) it was held that a Chamber of Commerce did not cease to be charitable merely because the members of the chamber were incidentally benefited in carrying out its main charitable purpose. This Court approvingly followed the ratio in the case of Commissioner of Inland Revenue v. Yorkshire Agricultural Society [1928] 1 KB 611 and Institution of Civil Engineers v. Commissioner of Civil Revenue [1932] 1 KB 149 for reaching the conclusion that merely because some facilities incidentally arose to the members of a society or institution in the course of carrying out its main charitable purpose, that by itself would not prevent the institution from being a charity.

All subsequent judgments have noticed and followed the judgment of the Constitutional Bench in Surat Art Silk Cloth Mfrs. Association's case (supra) and the dominant purpose test evolved therein and applied them to the facts before them. Applying this dominant purpose test to the objects of the

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respondent-assessee it appears to us that there is no escape from the conclusion that it is validly recognized as an institution established for charitable purpose. The assessee's predominant objects are:

"(i ) To establish common facilities required to promote exports of diamonds from India and to provide for this purpose trading halls and other utilities at a central place for Indian Exporters and Overseas buyer to carry on trade and commerce in diamonds with speed and in secure conditions. (ii) To establish and promote effective liaison between diamond trade and industry in India and abroad with a view to promoting their sales from India in International market. (iii) To promote, advance, protect and develop trade, commerce and industry in India relating to exports and imports of diamonds and (iv) To develop India as Modern and sophisticated diamond market by establishing and maintaining an international trading centre in India for all those engaged as manufacturers, traders, exporters and importers, brokers/commission agents of diamonds."

These being the predominant objectives, we agree with the view taken by the Tribunal as well as the High Court that the assessee was rightly registered under section 11 by treating it as an institution established for charitable purpose within the meaning of section 2(15) of the Act.”

(emphasis supplied)

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the ITAT to be in consonance with the view of the Supreme Court. The primary or dominant object of the trust satisfies the conditions laid down under Section 2 (15) of the Act. Even if some ancillary or incidental objects are not charitable in nature, the institution would still be considered as a charitable organisation. As held by the Supreme Court in the case of DIT v. Bharat Diamond Bourse (supra), merely because some facilities were beyond its main object, that by itself would not deprive the institution of the benefits of a charitable organisation. Reiterating its earlier view in CIT v. Andhra Chambers of Commerce (1965) 55 ITR 722 (SC), the Constitution Bench of the Supreme Court in Surat Art Silk Cloth Manufacturers Association (supra) held that if the primary purpose of advancement of objects is for general public utility, the institution would remain charitable, even if there are incidental non-charitable objects for achieving the said purpose.

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SANJEEV NARULA, J

VIPIN SANGHI, J JANUARY 20, 2020 nk