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Income Tax Appellate Tribunal, DELHI BENCHES: “F” New Delhi
Before: SHRI G.D. AGRAWAL & SHRI SUDHANSHU SRIVASTAVA
PER SUDHANSHU SRIVASTAVA JUDICIAL MEMBER This appeal of the assessee is directed against the order dated 26.3.2014 of the Ld. Director of Income Tax (Exemptions), New Delhi rejecting the assessee’s application for grant of registration u/s 12AA of the Income Tax Act,1961.
Briefly, the facts of the case as borne out from the records, are that the assessee company has been promoted by National Skill Development Council (NSDC), All India Rubber Industries Association (AIRIA) and Automotive Tyre Manufacturer’s Association (ATMA) and as per its Memorandum its objectives include complementing the vocational education system for the Rubber Industry Sector in Rubber Skill Development Council vs DIT(E)
meeting nationwide requirements of appropriately trained manpower in quantity and quality across all levels on a sustained and evolving basis. As per the Memorandum of Association of the assessee it is seen that it is a Company incorporated u/s 25 of the Indian Companies Act, 1956 and its main objects are as under :-
1. To initiate, carry out, execute, implement, aid and assist activities towards skill development in the Rubber sector in India ("Sector") and meeting the entire value chain's requirements of appropriately trained manpower in quantity and quality on a sustained and evolving basis.
2. To develop a skill development plan for the Sector and maintain skill inventory. 3. To determine skills/competency standards and qualifications in consonance with the Sector norms.
4. To plan and execute training of trainers.
5. To promote academies of excellence. 6. To establish a well structured Sector specific labour market information System ("LMIS”) to assist planning and delivery of training.
7. To facilitate in standardizing the affiliation and accreditation process for the Sector.
8. To coordinate participation of social partners, employers in the private sector, training providers, professional societies and NGOs/civil society groups in the process of skill development for the Sector.
9. To identify the skill development needs of the Sector,review international trends in Sector skill development and identify Sector skill gaps and technology.
10. To do and undertake the task of educational and vocational skill upgrade for the Sector.
11. Facilitate in setting up a robust and stringent certification and accreditation process for the Sector to ensure consistency and acceptability of standards.
None of the object of the company will be carried out on commercial Basis.
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No object of the company will be carried out without obtaining the prior approval / No objection certificate from the concerned competent authorities wherever required and or prescribed.
The assessee institution on 19.9.2013 made an application in the prescribed manner before the Ld. Director of Income Tax (Exemptions) seeking registration u/s 12A of the Act. However, the Ld. DIT(Exemptions) was of the opinion that the assessee ‘s main source of income was grant received from NSDC i.e National Skill Development Council for the execution of projects allotted to it. Ld. DIT (Exemptions) also noted that as per clause 12 of pre distribution conditions of grant agreement, the assessee was bound to share its earnings after tax (EAT) with NSDC@15% till such time the entire grant amount was returned back to the NSDC.
The Ld. DIT (Exemptions) also noted that in order to execute the projects, the assessee had further outsourced the work relating to development of skill and semi skilled labour force to different organisations for different projects. Ld. DIT (Exemptions) also observed that the assessee has been charging fees from the candidates for providing skill-labour courses and providing them certificates for which it had already received advances from the NSDC. Accordingly, as per the Ld. DIT (Exemptions), the assessee was a service provider and its activities were in the nature of business. Therefore, as per the Ld. DIT (Exemptions) the conditions for granting registration u/s 12AA were not satisfied and the application for registration was rejected.
The Ld. AR, referring to the objects of the company, submitted before us that the assessee company as a part of its activities carries out skill gap studies in various
3 20x5 Rubber Skill Development Council vs DIT(E) states to identify skill development needs in the rubber industry. Another of its activities is to establish Labour Market Information System (LMIS) as a one stop data and information source on the labour market to integrate and map the supply versus demand needs and further to assist in planning and delivery of training. Ld. AR further submitted that the assessee also develops National Occupation Standards (NOS) specifying the standard of performance that individual must achieve when carrying out a function in the workplace, bringing together skills, knowledge and understanding. Another activity of the assessee company is to standardize affiliation, certification and accreditation process to measure competency. Yet another activity is to plan and execute training of trainers for educational and vocational skill upgrade in different areas in different states. He drew our attention to clause 17 of incidental objects of the company and submitted that fees, service charges, consultancy charges etc. are charged only in furtherance of the objects of the company and not for any other purposes. He also drew our attention to clause V which specifies that all incomes, earnings, movable and immovable properties of the company shall be solely utilised and applied towards the promotion of its aims and objects only as set forth in the memorandum of the company and no profit thereof shall be paid or transferred, directly or indirectly, by way of dividends, bonus, profits or in any manner whatsoever to the present or the past members of the company or to any person claiming through any one or more of the present or the past members. The Ld. AR submitted that it is clearly provided in the memorandum that none of the objects of the company will be carried out on commercial basis. He submitted that the Ld. DIT(Exemptions) even while holding that the aims and 4 20x5 Rubber Skill Development Council vs DIT(E) objects were of general public utility (GPU) u/s 2(15) of the Income Tax Act, 1961 completely mistook the assessee’s activities and wrongly labelled it as being in the nature of commercial activity holding it similar to any other training institute that charges a handsome fee for earning profits without appreciating the fact that the assessee company has been incorporated within the parameters laid down by the approach paper of the Govt. of India for the promotion of skill development councils.
Ld. AR also placed reliance on the following case laws:-
CIT vs. Vijay Vargiya Vani Charitable Trust (2014) 369 ITR 360 (Raj.)
2. Gujarat Cricket Association vs. DIT (E) 19 ITR (Trib) 520 (Ahm)
3. Central Institute of Tool Design vs. DIT(E) 41 ITR (Trib) 578 (Hyderabad)
The Ld. AR also drew our attention to pages 127 to 129 of the paper book which contains copies of registration certificate granted u/s 12A to other similar functioning skill development councils and submitted that since these skill development councils have been granted registration u/s 12AA of the Act, the assessee company should also be granted registration on a similar footing.
Ld. DR, on the other hand, submitted that the Assessee Company works on a commercial business model and is not charitable per se. She submitted that the affiliation fee being charged by the assessee is also not regulated and is determined by the market forces. She also submitted that in the case laws referred to by the Ld. AR the assessee was itself imparting the training whereas in the present case the assessee has only outsourced the training activity and has just acted as a facilitator.
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She submitted that the DIT (Exemptions) has rightly denied the grant of registration and that no interference was called for in the said order.
We have considered the rival submissions and perused the order of the Ld. DIT (Exemptions) as well as other material on record. It is clear from the order of the Ld. DIT (Exemptions) that he has considered the assessee as a non charitable institution because as per him the activities of the assessee are commercial in nature and hence not eligible for registration u/s12A of the Act. On a cursory look at the objects of the assessee, it is seen that the assessee is engaged in development of skills specifically for the Rubber Industry which can safely be called to be an activity in the field of education. All other objects are ancillary and incidental to the said main objects. A plain reading of the definition of charitable purpose as provided u/s 2(15) of the Income Tax Act, 1961 would make it clear that the restriction imposed under the proviso to the said section applies only to the last limb i.e advancement of any other object of general public utility. There is no express provision u/s 2(15) of the Act which restricts an institution from undertaking any commercial activity if it comes under other limb of charitable purposes. Only requirement is that the assessee must not have profit motive and the income generated from commercial activity is utilised for achieving the charitable object. Even assuming that the assessee’s objects / activities come under advancement of any other object of general public utility, the proviso to section 2(15) will not automatically disqualify the assessee from being considered as a society established for charitable purposes only because it has receipts in the form of grants, training fee or affiliation fee, etc. What has to be seen is whether the primary or the dominant purpose or object of the assessee is to carry
6 20x5 Rubber Skill Development Council vs DIT(E) out object of general public utility or any other activity with a profit motive. If for achieving its primary or dominant object of education or even advancement of any other object of public utility, the assesee company has earned some income from fee etc., it cannot be said that the assessee has carried on a business activity with a profit motive. Charitable activities also require operational/running expenses as well as capital expense for being able to sustain itself and continue in the long run. There is no such statutory mandate that a charitable institution falling under the residuary clause should be wholly, substantially or in part be funded by voluntary contributions only. The Hon’ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers’ Association (1980) 121 ITR 1 (SC) has held as under (page 25):
The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to sub serve the 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
In our opinion, the aforesaid principle laid down by the Hon'ble Apex court still holds good even after the introduction of proviso to section 2(15) by the Finance Act, 2008 with effect from April 1, 2009. The words "any activity in the nature of 7 20x5 Rubber Skill Development Council vs DIT(E)
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" was considered and interpreted by the Hon’ble Delhi High Court in the case of Institute of Chartered Accountants Of India v. DGIT (Exemptions) 347 ITR 99 (Delhi), as under (page 123):
"Section 2(15) defines the term 'charitable purpose'. Therefore, while construing the term 'business' for the said section, the object and purpose of the section has to be kept in mind. We do not think that a very broad and extended definition of the term ‘'business' is intended for the purpose of interpreting and applying the first proviso to section 2(15) of the Act to include any transaction for a fee or money. An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases this may not be determinative. Normally, the profit motive test should be satisfied but in a given case activity may be regarded as business even when profit motive cannot be established/ proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognised business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business. The test as prescribed in State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 19 STC 1 SC and CST v. Sai Publication Fund [2002] 258 ITR 70 SC ; [2002] 126 STC 288 SC can be applied. The six indicia stipulated in Customs and Excise Commissioners v. Lord Fisher [1981] S. T. C. 238 are also relevant. Each case, therefore, has to be examined on its own facts,"
Thus, the principle of law which emerges from the judicial pronouncements is that if the predominant object of a trust or institution is charitable and in the process of achieving that object some activity of commercial nature generating income is carried out, which again is utilised for the advancement of its charitable objects, it
8 20x5 Rubber Skill Development Council vs DIT(E) cannot be inferred that the trust or institution is not established for charitable purposes. Moreover, the issue of applicability of the proviso to section 2(15) has to be examined at the stage of assessment while adjudicating the assessee’s claim of exemption under section 11 of the Income Tax Act, 1961 and hence it is not germane at the time of considering the issue of granting registration under section 12AA. This is so because, though, the first proviso to section 2(15) of the Act excludes any activity of the nature of trade, commerce or business from being considered to be a charitable purpose, but, the second proviso to section 2(15) restricts the application of first proviso only to such trusts and institutions having receipts from commercial activity exceeding a prescribed limit in a particular previous year. Therefore, the application of the proviso to section 2(15) has to be looked into in every assessment year.
During the course of hearing, it was also brought to our notice that some
similar institutions having similar objects as that of the assessee company have been granted registration under section 12AA of the Act and copies of their registration certificates were available in the Paper Book. In our view if similar institutions having similar objects have been granted registration under section 12AA of the Income Tax Act, 1961, there is no justifiable reason as to why the assessee should be deprived from availing of such benefit. In the aforesaid facts and circumstances, we set aside the impugned order of the learned Director of Income-tax (Exemptions) and remit the matter to the Ld. DIT (Exemptions) to verify this aspect and if it is found that similar institutions in other places having similar objects have been granted registration under section 12AA, he may consider
9 20x5 Rubber Skill Development Council vs DIT(E) granting registration under section 12AA of the Act to the assessee. The learned
Director of Income-tax (Exemptions) must afford reasonable opportunity of being heard to the assessee in the matter.
In the result, the assessee's appeal is ·allowed for statistical purposes.