M/S. THE FERTILIZER ASSOCIATION OF INDIA,NEW DELHI vs. DDIT(E), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”, NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER

I.T.A.No.1325/Del/2015 A.Y. : 2010-11 THE FERTILIZER ASSOCIATION OF DDIT(E), INDIA, VS. TRUST CIRCL-IV, SHAHEED JEET SINGH MARG, CIVIC CENTRE NEW DELHI -110 067 NEW DELHI (PAN: AAACT0097M) (APPELLANT) (RESPONDENT)

Assessee by : Sh. Mayank Jain & Sh. Madhur Jain, Advocates. Department by : Sh. Umesh Chand Dubey, Sr. DR

ORDER PER H.S. SIDHU, JM

The Assessee has filed the present appeal against the impugned order dated 31/12/2014 passed by the Ld. Commissioner of Income Tax(A)-40, New Delhi on the following grounds:-

the corpus fund which is exempt under section 11(1)(d) of the Income Tax Act, 1961. 5. That the Ld. CIT(A) has erred in confirming the action of the AO of addition of voluntary contributions and training programme fee which was not received by the appellant. 6. The appellant craves leave of add or modify or amend any substitute any other grounds of appeal at the time of hearing.

have come within the ambit of section 2(15). The income of the assessee was assessed at Rs. 2,66,92,342/. On account of denial of exemption under section 11 and 12, following additions were made, surplus amounting to Rs. 1,46,473/-, expenditure on capital assets of Rs. 1,77,988/-, funds received taken to corpus of Rs. 72,32,295/- and Rs. 28,66,610/- with respect to voluntary contribution and membership fee were added to the income of the assessee. Another addition of Rs. 10,57,458/- was made on account of provision of doubtful debts in the income of the assessee.

5.1 It was further stated that the assessee is registered u/s 12A of the Act vide order dated 22.06.1994, F. No. DIT(E) 94-95/ T-362/94 147 by DIT(E) New Delhi. The activates/ object of the assessee apparently fall within the ambit of section 2(15) of the income Tax Act, 1961 being “Charitable Purpose”. Assessee has complied with provision of section 11/12 of the income tax Act and benefit of it is being allowed thereto. He 3

further stated that it is an admitted fact that the assessee has been availing exemption u/s 11(1) of the Act, since the year 1994.

5.2 It was further submitted that the proviso to section 2(15) was inserted by the Finance Bill, 2008. The then the Hon’ble Finance Minister while piloting the Finance Bill 2008 mentioned in his speech, the purpose of inserting the proviso which is reproduced below for reference: “I once again assure the House that genuine charitable organization will not in any way be affected. The CBDT will, following the usual practice, issue explanatory circular containing guidelines for determining whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Whether the purpose is a Charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would continue to be regarded as “advancement of any other object of general public utility. ”

5.3 The assessee’s counsel further submits there is no change in the activities of the business of the assessee and therefore must be allowed the exemption u/s 11(1) of the Act. The assessee’s counsel further states that even after the amendment by the Finance Act, 2009 in Section 2(15), there has been no change either in the object or in the nature of activities carried on by the assessee so as to be hit by the proviso to section 2(15) of the Act.

5.4 It was further submitted that during assessment years 2012-13 and 2013-14, the case of the assessee was selected for scrutiny by issuance of notice u/s 143(2) of the Act. The assessee made the submission with respect to exemption under section 11 of the Act and as to the nature of 4

activities of the assessee coming within the ambit of section 2(15) of the Act. The same was accepted by the Department that the assessee is carrying on activities of charitable nature and therefore no addition was made on that aspect, and the exemption was allowed to the assessee and the demand was nil.

5.5 Ld. Counsel for the assessee further stated that it is an admitted case of the Department that the denial of the exemption under section 11 and 12 of the Act was solely for the reason of the amendment in section 2(15) of the Act in the year 2009. It is submitted that neither in the assessment order nor in the order passed by the CIT(A), the department has alleged violation of any of the objects of the assessee. It is not specified as to which object was violated by the assessee. The said amendment in the proviso to section 2(15) has come under judicial scrutiny of various High Courts including the jurisdictional Hon’ble Delhi High Court. In the case of India Trade Promotion Organization Vs. Director General of Income Tax (Exemptions) & Others, W.P. (C) No. 1872/2013 dated 22.01.2015, the Hon’ble High Court was pleased to read down the said amendment and held that if the dominant and the prime objective of the institution is advancement of an object of general public utility, the institution has to be necessarily regarded as an institution established for charitable purposes irrespective of the fact that the activities are in the nature of trade, commerce or business. It was further held that charging of fee for providing service by an institution claiming itself to be established for charitable purpose would not lose its character of having been established for charitable purpose.

5.6 It was further stated by the ld. Counsel of the assessee that the said amendment therefore, is of no consequence in the present case of the assessee in view of the aforesaid authoritative and binding judgment of the jurisdictional High Court. The assessee submits that there is nothing on record to indicate that its activities are driven by profit motive or the 5

assessee is carrying out any activities outside its registered objects. There is infact no violation of section 11, 12 and 13 of the Act by the assessee. It is further asserted that mere charging of fee by the assessee for holding seminars or training would not ipso facto alter the nature of activities carried out by it. The fee charged is only for the objects mentioned above as the assessee conducts various seminars, training program, workshops, research as well as give awards to various persons of excellence to create awareness, impart knowledge about the fertilizers and do all endeavours to improve the soil fertility by improving the quality of the fertilizer which helps in producing the better quality food grains for the nation at large. Thus, the dominant object of the assessee is to help in overcoming the challenges faced by the fertilizer industries as well as the agriculturist in order to promote the agriculture. The said endeavour by the assessee benefits the public at large and besides many others, helps in improving the quality of good grain which has a direct impact on the health of the country. The assessee has further submitted at various research programs and journals are published on use of various elements like sulphur, potash, and nitrogen etc. to prepare a better fertilizer. Therefore, the objects of the assessee is charitable purpose and not for making profits going into some individual’s pockets.

5.7 It was the further contention of the assessee’s counsel that the fact that the registration granted to the assessee evidences the objects of the assessee’s trust were of advancement of object of general public utility and there is admittedly nothing on record to demonstrate any shift from this position, mere generation of surplus or charging of fee would not obliterate its overall object of general public utility.

5.8 The assessee’s counsel further states that the charging of fee for seminars and training is only incidental to the main object of the assessee being improvement and sustainable growth of agriculture and food independency. The purpose is not to benefit any individual manufacture or 6

group of manufactures but to hold awareness programs, undertaking training and research to improve the knowledge of the stake holders for a better livelihood and sustainable development of agriculture in India as a whole. There is nothing on record to substantiate that the income generated by the said activities were not utilized by the assessee for achievement of its main objects. It is important to note that neither the AO nor the Ld. CIT(A) has failed to point out any object for which the company has been incorporated, being violated by the assessee. It is further submitted that the department has failed to show any noncompliance as enumerated under section 13 of the Act, thus the impugned additions made by the revenue are liable to be deleted.

5.9 The assessee’s counsel further submits that promotion of trade, commerce and industries also comes within the purview of section 2(15) of the Act. The Hon’ble Supreme Court in the case of CIT Vs. Andhra Chamber of Commerce, 55 ITR 722, observed that the expression object of general public utility would not necessarily mean that the object should be to benefit the whole of mankind.

5.10 It was further submitted by the Ld. Counsel of the assessee that the judgment relied upon by the AO of the Hon’ble Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency dated 29.12.2012 cannot be relied upon as the Hon’ble Jurisdictional High Court in ITPO Case (Supra) disagreed with the view taken in the aforesaid judgment.

5.11 In view of the facts and circumstances of the present case, it was stated that the activities of the assessee are not hit by the proviso to section 2(15) of the Act and therefore the assessee must be allowed the exemption under section 11 of the Act. In support of the aforesaid arguments advanced by the Ld. Counsel of the assessee, he draw our attention towards the aims and objects of the society; relevant provisions 7

of section 2(15) of the I.T. Act, 1961 and filed the copy of the judgement rendered by the Hon’ble Delhi High Court in the case of India Trade Promotion Organization vs. Director General of Income Tax (Exemptions) & Others passed in WP(C) No. 1872/2013 dated 22.1.2015; Copy of ITAT, Delhi decision dated 20.2.2015 in the case of ADIT vs. Indian Medical Association passed in ITA No. 4291/Del/2012 and the copy of the Judgement rendered by the Hon’ble Supreme Court of India in the case of CIT vs. Andhra Chamber of Commerce reported in 55 ITR 722.

7.1 To decide the issue in dispute, we can gainfully refer here the objects of the assessee company, which read as under:-

i. To unite all firms, companies, corporation, associations and Individuals engaged in the Fertilisers Industry in India with a view to promoting the consideration and discussion of all 8

questions affecting the trade of Fertilisers and the interest of sound agriculture and for the improvement of the economics development of the Fertiliser and Agriculture Industries. ii. To institute, prosecute, develop and carry on all kinds of scientific and economic research in or in connection with process for the preparation and use of Fertiliser for the purpose of increasing soil fertility and crop production and in the interest of agriculture. iii. To carry out all kinds Scientific and economic investigations and other experiments for the purposes aforesaid and for improving for commercial purpose the manufacture, use and sale of such fertilizers for use in connection therewith. iv. To study and promote the application of science and scientific and economic methods to the manufacture of fertilizers and their utilization in the fields either alone or in conjunction with preparation with other materials. v. To study and introduce Fertilizer Industries in India schemes of standardization in commercial practices in manufacture and to improve same and extend use of fertilizers. vi. To construct develop and use scientific, chemical and agricultural experimental and other laboratories, plant and machinery and workshops and to employ all kinds of scientists, economists, chemists, agriculturists, engineers, mechanics, technical and other experts in connection therewith. vii. To make known to members and others upon such terms as the association may determine the results thereof all research discoveries, patents, and investigations made in connection with the above objects and to render services in connection therewith to the members and others and to 9

charge thereof or not, as the association may in any case determine.

7.2 We further find that Section 2(15) of Income Tax Act, 1961 read as under:- “charitable purpose" includes relief of the poor, education, [yoga,] medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility: [Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless— (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;]”

7.3 We further note that the Hon’ble Delhi High Court in the case of India Trade Promotion Organization Vs. Director General of Income Tax (Exemptions) & Others, W.P. (C) No. 1872/2013 dated 22.01.2015, was pleased to hold as under:-

“46……The only thing that we have to examine is - whether the petitioner had been established for charitable purposes? The fact that it derives income does not, in any way, detract from the position that it is an institution established for charitable purposes. Therefore, in our view, merely because the petitioner derives rental income, income out of sale of tickets and sale of publications or income out of leasing out food and beverages outlets in the exhibition grounds, does not, in any way, affect the nature of the petitioner as a charitable institution if it otherwise qualifies for such a character.

This court in ICAI (II) (supra) held:- “67. The expressions “trade”, “commerce” and “business” as occurring in the first proviso to section 11

2(15) of the Act must be read in the context of the intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organised manner. The purpose and the dominant object for which an institution carries on its activities is material to determine whether the same is business or not. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. The object of introducing the first proviso is to exclude organizations which are carrying on regular business from the scope of “charitable purpose”. The purpose of introducing the proviso to Section 2(15) of the Act can be understood from the Budget Speech of the Finance Minister while introducing the Finance Bill 2008. The relevant extract to the Speech is as under:- ‘……. “Charitable purpose” includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under “charitable purpose”. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected.‘ The expressions “business”, “trade” or “commerce” as used in the first proviso must, thus, be interpreted 12

restrictively and where the dominant object of an organisation is charitable any incidental activity for furtherance of the object would not fall within the expressions “ business”, “trade” or “commerce”.”

objects of the activities of the petitioner are entirely for charitable purposes.” ….53. From the said decision, 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 that we must examine 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. We say so, because, 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, as pointed out above, in Arun Kumar (supra).

10(23C)(iv). When the expression "charitable purpose", as defined in Section 2(15) of the said 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. With respect, we do not agree with the views of the Kerala and Andhra Pradesh High Courts…..

selfsustaining in long-term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under the residuary clause – general public utility. The impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, substantially or in part must be funded by voluntary contributions. No such requirement has been pointed out or argued. A practical and pragmatic view is required when we examine the data, which should be analyzed objectively and a narrow and coloured view will be counter- productive and contrary to the language of Section 2(15) of the Act.” 58. 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 16

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.”

7.4 We further note that the Tribunal in similar facts in the case of ADIT Vs. Indian Medical Association, ITA No. 4291/Del/2012 dated 20.02.2015 held as under:- “43. From this, it is clear that prior to the introduction of the proviso to Section 2(15) of the said Act, there was no dispute that the petitioner was established for charitable purposes and, therefore, its income was not to be included in the total income and was, therefore, granted the benefit of exemption. We have already noted above, while discussing the facts of the case that the income received by the petitioner is from the letting out of space, sale of publications, sale of tickets and leasing out food and beverages outlets in Pragati Maidan. The dominant and main object of the petitioner is to organise trade fairs/exhibitions in order to promote trade, commerce and business not only within India, but internationally. This is done through the organization of trade fairs, including the 17

annual international Trade Fair and other exhibitions. It is for this purpose that the space is let out to various entities during the said fairs and exhibitions. All these activities, including the sale of tickets and sale of publications are an inherent part of the main object of the petitioner. It is clear from the facts of the case that profit making is not the driving force or objective of the petitioner. It is registered under Section2 5 of the Companies Act, 1956, which specifically applies to entities which intend to apply their profits, if any, or other income in promoting their objects and prohibits, the payment of any dividend to its members. This makes it clear that nay income generated by the petitioner does not find its way into the pockets of any individuals or entities. It is to be utilized fully for the purposes of the objects of the petitioner.

trade, commerce or business, the element of profit making is also very important."

7.2.16 ……..In the absence of any adverse finding in regard to the activities of the trust we find that the department's case has no merits. In the course of hearing it was submitted by the Ld. Sr. DR on query that the registration till date has not been withdrawn. The date of the assessment order the record shows is 08.11.2011. The Ld. Sr. DR has also canvassed that the mere fact that the assessee has received financial support from the Ministry of Health and Family Welfare which fact it has been submitted does not mean that it is performing a charitable activity. On considering the judicial precedent cited we find that the Hon'ble High Court took into consideration in the facts of the ITPO that prime land was made available to the assessee to facilitate its objects of providing space on rent etc. for promotion of trade wherein the assessee apart from selling tickets etc was also providing food & beverage outlets and providing for water, electricity etc in the facts of the present case admittedly financial support is also provided to the assessee trust whose activities have not been assailed to be contrary to the aims and objects and we find that mobilizing resources towards its aims and objects that too within the methods enshrined by the trust deed which are ploughed back by the society towards its aims & objects to our minds does not cause any grievance to the Revenue. It goes without saying that financial support from the Ministry of Health and Family Welfare to the assessee necessarily would be based on the functions performed by the said trust and would necessarily be monitored at each and every step and stage with adequate checks and balances and would not be allowed to be frittered away carelessly. Accordingly

considering the judicial precedent cited and the arguments of the parties before the Bench and the peculiar facts and circumstances of the case which we have brought out in great detail in the earlier part of this order, we hold that the departmental grounds have no merit and deserve to be dismissed.

7.5 We further note that the Hon’ble Supreme Court in the case of CIT Vs. Andhra Chamber of Commerce, 55 ITR 722 has observed as under:- “10. The principal objects of the assessee are to promote and protect trade, commerce and industries and to aid, stimulate and promote the development of trade, commerce and industries in India or any part thereof. By the achievement of these objects, it is not intended to serve merely the interests of the members of the assessee. Advancement or promotion of trade, commerce and industry leading to economic prosperity ensures for the benefit of the entire community. That prosperity would be shared also by those who engage in trade, commerce and industry but on that account the purpose is not rendered any the less an object of general public utility. It may be remembered that promotion and protection of trade, commerce and industry cannot be equated with promotion and protection of activities and interests merely of persons engaged in trade, commerce and industry. …..

object of general public utility. In enacting the last paragraph of Section 4(3) the legislature has used language of great amplitude. “Charitable purpose” includes not only relief of the poor, education and medical relief alone, but advancement of other objects of general public utility as well. The clause is intended to serve as a special definition of the expression “charitable purpose” for the Act: it is again inclusive and not exhaustive or exclusive. Even if the object or purpose may not be regarded as charitable in its popular signification as not tending to give relief to the poor or for advancement of education or medical relief, it would still be included in the expression “charitable purpose” if it advances an object of general public utility. The expression “object of general public utility” however is not restricted to objects beneficial to the whole mankind. An object beneficial to a section of the public is an object of general public utility. To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or Province. It is sufficient if the intention to the benefit a section of the public as distinguished from specified individuals. Observations to the contrary made by Beaumont, C.J., in CIT v. Grain Merchants' Association of Bombay [ 6 ITR 427] that “an object of general public utility means an object of public utility which is available to the general public as distinct from any section of the public” and that objects of an association “to benefit works of public utility confined to a section of the public i.e. those interested in commerce” are not objects of general public utility, do not correctly interpret the expression “objects of general public utility”. The section of the community sought to be benefited must undoubtedly be sufficiently defined and identifiable by some common quality of a public or impersonal nature: where 21

there is no common quality uniting the potential beneficiaries into a class, it may not be regarded as valid.”

7.6 We further find considerable cogency in the assessee’s counsel submissions that the judgment relied upon by the AO of the Hon’ble Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency dated 29.12.2012 cannot be relied upon as the Hon’ble Jurisdictional High Court in ITPO Case (Supra) disagreed with the view taken in the aforesaid judgment.

7.7 We also agree with the submissions made by the Ld. Counsel of the

assessee that mere charging of fee from members or non-members for

rendering services like training, conducting seminars would not ipso facto

lead to denial of exemption. The dominant object of the assessee

remains charitable and the aforesaid activities are only incidental to the

main activity of the assessee. Also , the activities of the assessee are

benefiting the public at large at submitted by the Ld. Counsel for the

assessee. Furthermore, it is not the case of the department that any

change in objects had taken place in the relevant year so as to take the

assessee outside the ambit of section 2(15). The effect of the amendment

has been discussed elaborately by the Hon’ble Delhi High Court in ITPO

Case (supra) as well as the judgment of Apex Court in Andhra Pradesh

Chamber of Commerce(supra) and the test of dominant object has not

been altered even after the said amendment. We therefore hold that the

denial of exemption under section 11 and 12 in the case of the assessee

is not in accordance with law and accordingly the additions made by the

AO and confirmed by the CIT(A) are deleted.

Sd/- Sd/-

[L.P. SAHU] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 27/03/2017

“SRBHATNAGAR”