THE ERNAKULAM DISTRICT AGRI HORTICULTURE SOCIETY,KOCHI vs. INCOME TAX OFFICER, KOCHI

This is an appeal against the order of CIT(A), National Faceless Appeal Centre (NFAC), Delhi, dated 12.11.2021, for Assessment Year 2012-13.

The assessee is an institution registered under Travancore Cochin, Literary Scientific and Charitable Societies Registration Act, 1955, with the object of fostering mutual assistance and fellow feeling Page 2 of 9 among the public who are interested in agri-horticultural activities. The assessee is also into the activity of supplying to people and institutions planting materials, fertilizers, pesticides, tools, etc., providing garden owners technical advice and literature, conducting training classes and conducting fruit flower and vegetable shows. The assessee is registered under section 12AA of the Income Tax Act, 1961 (hereinafter called ‘the Act’)., w.e.f. Assessment Year 2009-10. For the year under consideration, the assessee filed the return on 19.10.2012 declaring total income of Rs.Nil. The case was selected for scrutiny under CASS and a notice under section 143(2) of the Act was duly served on the assessee. The assessee filed various details in terms of books of accounts and other details. The assessment was completed at Nil demand. Subsequently, a notice under section 154 of the Act dated 24.08.2016 was served on the assessee by stating that the object of the assessee can only be regarded as charitable purpose under the residual category of the definition of charitable purposes in section 2(15) of the Act viz., the advancement of any other object of public utility and that the deduction under section 11(1)(a) of the Act of Rs.6,31,697/- in the order of assessment was not correct. The assessee filed its objections before the AO by stating that the assessee’s activities are to be classified under preservation of environment as per the new category of activities inserted by the Finance Act 2009 to be treated as charitable activity u/s.2(15) of the Act. The AO did not accept the submissions and passed the order under section 154 of the Act treating the assessee as an AOP denying the exemption under sections 11 or 12 of the Act. The AO enhancedthe total income of the assessee to Rs.2,58,910/- and arrived Page 3 of 9 at the tax demand of Rs.1,73,680 by applying maximum marginal rate.Aggrieved, the assessee preferred an appeal before the CIT(A) who upheld the order of the AO. 3. Learned AR submitted that the AO while passing the order under section 154 of the Act has invoked the residual clause under section 2(15) of the Act which is for general public utility. However, the assessee is formed for the specific charitable purpose of preservation of environment and therefore the proviso to section 2(15) of the Act is not applicable to assessee’s case. Learned AR submitted that the income generated by the assessee is arising out of the various activities such as collection from conducting flower shows, sale of saplings and training which are all related to main object of the assessee which is preservation of environment. Therefore, the learned AR submitted that the assessee’s objects are charitable purposes and accordingly the treatment of the assessee as AOP should be set aside. Learned DR relied on the order of the lower authorities.

We heard the rival submissions and perused the material on record. The issue contended here is whether the activities of the assessee would fall within the specific charitable activities as given in section 2(15) or advancement of any other general public utility in which case the proviso to section 2(15) would be applicable whereby the assessee cannot involve in any activity in the nature of trade, commerce or business. We notice that the assessee is registered under section 12AA of the Act vide order dated 29.09.2009. In the said order Page 4 of 9 of registration which is extracted below does not specify clearly the under which category the assessee is registered under section 12AA of the Act.

It is also noticed that the AO has considered the entire income derived from the various activities as listed below and has allowed the Page 6 of 9 expenses attributable to arrive at the net taxable income of Rs.2,58,910/- by invoking provisions of section 154 of the Act and denied the exemption. Particulars Amount – Rs. Sale of Plant & Seeds 10,94,522 Bank Interest 59,180 Commission on consignment sales 17,475 Cochin flower show & Haritholsavam 30,37,635 Total 42,08,812

It is submitted that the fees collection from Cochin flower show which contributes majorly to the revenue of the assessee is a special event done under the directives of the district authorities to celebrate tourism promotion and the as part of the event members of the public are recognized for running and maintenance of gardens and nurseries for which the major portion of the fees is spent. The other source of revenue it is submitted that is from sale of plants and seeds which cannot be termed as trade or commerce in nature but is in the nature of prevention of environment and is below the monitory limit as per the proviso to section 2(15).

The Hon’ble Supreme Court in the case of ACIT(E) vs Ahmedabad Urban Development Authority[2022] 143 taxmann.com 278 (SC) has considered the issue of 'charity' for tax exemption purposes by interpreting the definition of 'charitable purpose' in section2(15) of the Act. Accordingly, the general test under section 2(15) is held to be – Page 7 of 9 “A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”); A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected (“actual carrying out…” inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016); A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment. A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), Page 8 of 9 reaffirm this interpretation and bring uniformity across the statutory provisions.” 8. In assessee’s case from the letter of registration does not provide clarity as to whether the assessee is registered under a specific category of charitable purpose or the residual clause. The application of the residual classification can be done provided the activities does not fit in any specific purpose as per the objects of the Trust. Further even if the assessee’s objects are falling under the category of general public utility the taxability of income earned by the assessee need to be looked at in the light of the above decision of the Hon’ble Supreme Court. In view of this we remit the issue back to the AO to consider the issue afresh and decide considering the principles laid down by the Hon’ble Supreme Court. Needless to say that the assessee may be given a reasonable opportunity of being heard.

In the result, appeal is allowed for statistical purposes. Pronounced in the open court on the date mentioned on the caption page.