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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI INTURI RAMA RAO, AM & SHRI S. S. VISWANETHRA RAVI, JM
ORDER
PER INTURI RAMA RAO, AM:
This is an appeal filed by the assessee company directed against the order of the ld. Commissioner of Income Tax (Exemption), Pune [‘the CIT (Exemption)’] dated 31.03.2021 passed u/s 12AA(1)(b)(ii) of the Income Tax Act, 1961 (‘the Act’) denying the grant of registration u/s 12AA of the Act.
The appellant raised the following grounds of appeal :- “1. The learned CIT-Exemption erred in law and on facts in not granting registration u/s 12AA of ITA, 1961 to the Appellant (i.e. MESCO).
2. Appellant contends that, Appellant made detailed submissions upon all issues raised, whereas, learned CIT-Exemptions, declined registration u/s 12AA on altogether erroneous and incorrect analogies without affording any further opportunity to the Appellant, to make a SAY in the matter and as such, vitiated principle of natural justice.
3. Learned CIT-Exemptions erred in law and on facts in holding that, a) Charging about 10% mark-up is a business activity b) Earning surplus of about 4% of revenue is not wafer-thin margin earned by charities c) Upon dissolution of MESCO, funds will be misused Learned CIT-Exemptions erred in law and on facts in making above and many other erroneous, fallacious, incorrect and frivolous observations; and further erred in declining registration u/s 12AA of ITA, 1961.
Appellant craves leave to add, alter, clarify, explain, modify, delete any of the grounds of appeal
, and to seek any just and fair relief.”
3. Briefly, the facts of the case are as under :- The appellant, namely, Maharashtra Ex-servicemen Corporation Ltd. is a company incorporated under the provisions of the Companies Act, 1956. It was formed in the year 2002 pursuant to the Resolution passed by the Government of Maharashtra for re-settlement of ex-servicemen of Indian Defence Forces. It was formed with the following objects :- (a) To make available employment, business and occupational opportunities to following persons/ beneficiaries in order of preference in Industries, Commercial, educational, social establishments, and departments including government, semi government, co-operatives, and corporations and private sector .... (b) To plan, promote, execute and organize, manage and implement the rehabilitation schemes for ex-servicemen. (c) To formulate and execute the schemes for welfare and economic up-liftment of the ex-servicemen ....
4. The Government of Maharashtra had provided a share capital of Rs.5 crores. The appellant company made an application in Form No.10A for grant of registration u/s 12A of the Act on 12.09.2019. On receipt of the said application, the ld. CIT (Exemption) issued a letter through ITBA portal on 30.01.2020 calling for certain information/clarification in order to enable him to satisfy himself as to the genuineness of the activities carried out by the appellant company. It is submitted before the ld. CIT (Exemption) that though the appellant company was incorporated in the year 2002 since it was under the bona-fide impression i.e. eligible for exemption u/s 10(26BBB) of the Act and, therefore, no application for grant of registration was made earlier. It is only after the realization of this mistaken impression, an application was made for grant of registration u/s 12A of the Act on 12.09.2019. The ld. CIT (Exemption) also perused the main objects as well as the other objects set out in the Memorandum of Association (MOA) and had come to the conclusion that other objects are not ancillary to the attainment of main objects and are independent by themselves, the appellant company had come into existence for commercial purposes not for the charitable purpose. The ld. CIT (Exemption) had also taken note of the clauses providing for distribution of profits to its members. The ld. CIT (Exemption) also noted that the appellant company also providing services to the civilian apart from the ex-servicemen. Finally, the ld. CIT (Exemption) on the analysis of the financial information of last 3 years i.e. assessment years 2017-18, 2018-19 and 2019-20 had made the following observations :- (i) The appellant company has been generating substantial revenue from year to year.
4 (ii) The appellant has been making significant mark-up on the cost i.e. mark-up of 7.98% in the assessment year 2017-18 and mark- up of 7.77% in assessment year 2019-20. (iii) The appellant company has been making a mark-up of 10% to 12% on the service charges. (iv) The appellant company is also engaged in the business activity of running a petrol pump.
Taking into consideration the above observations, the ld. CIT (Exemption) had come to the conclusion that the appellant company is engaged in the commercial activities not pursuing any charitable activities. Finally, the ld. CIT (Exemption) on perusal of the dissolution clause contained in Article of MOU had concluded that the balanced funds of the appellant company, if any, shall be distributed amongst its members in proportionate to the capital held by them. Accordingly, denied the grant of registration vide order dated 31.03.2021.
Being aggrieved, the appellant is before us in the present appeal.
It is submitted that the appellant company was incorporated by Government of Maharashtra pursuant to the Resolution passed on 18.01.2002 with the objects of providing re-employment for ex-servicemen etc. The copy of the Resolution was also placed before us. It is submitted that the ld. CIT (Exemption) ought not to have rejected the grant of registration taking into consideration, the issues of assessment i.e. the assessee company is generating surplus and making a mark-up of 10% to 12% on the service cost. He submitted that the form of organization to 5 pursue the charitable activity is irrelevant. He submitted that the appellant company had not distributed any dividend amongst its members and the company is totally controlled by Government of Maharashtra. Thus, he submitted that the ld. CIT (Exemption) was not justified in rejecting the application for grant of registration u/s 12A of the Act.
On the other hand, ld. Sr. DR had taken us through the clauses pertaining to allotment of shares, distribution of dividends etc. He submitted that the company is a commercial organization not intended to carry out any charitable activities. He heavily placed reliance on the order of the ld. CIT (Exemption) and prayed the appeal filed by the assessee company be dismissed.
We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the grant of registration u/s 12AA of the Act. We carefully gone through the MOA, we found that the appellant company is formed to provide reemployment to ex-servicemen etc. On perusal of clause set out in Memorandum of Association, we are unable to discern clause creating an interest in property in favour of the public for any of the object listed u/s 2(15) of the Act, which is sine qua non for creation of charity. In-fact, we may point out that covenant in the MOA does permit the appellant company to distribute the profits in the form of dividend amongst its members and does not set out a condition that the income earned by the appellant company shall be deployed for the objects of the company. This would make the appellant company a commercial organization. However, the view of the ld. CIT (Exemption) that the appellant company is a commercial organization merely because it is generating huge revenue from year to year