1. Let us consider a scenario wherein a commercial property devolved upon Mrs. A, aged 65 years, on account of death of her husband Mr. A. The property was already rented out by Mr. A to a Bank. As per the terms of agreement between Mr. A and Bank, the property would remain to be in the possession of Bank for next 5 years also and the annual maintenance expenses will be borne by Mr. A only. Apart from the maintenance expenses, brokerage of 1% of the annual rental was also payable to the Broker who was appointed by Mr. A. Is GST leviable on such rental income which will now be received by Mrs. A ? In other words, can it be said that since Mrs. A did not have a profit motive the rental services do not attract GST ?
2. Section 9(1) of the CGST Act, 2017 provides for the levy of tax on supply. Further the scope of “supply” has been provided u/s 7 of the said Act. Relevant portion of the said provision is reproduced below:
“Sec. 7(1) For the purposes of this Act, the expression “supply” includes —
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; …..”
3. Hence all forms of supply of goods or services such as rental (for our case) are covered in the scope of supply. However, the same shall be covered only if it is made or agreed to be made by a person in the course or furtherance of business. Hence a clear proposition emerges that only the supplies made in the course or furtherance of business can be made liable to tax.
4. The term “business” has been defined u/s 2(17) of the CGST Act, 2017. Relevant portion is also reproduced below for ready reference:
“Sec. 2(17) “business” includes —
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction”
5. The above definition thus encapsulates in sub-clause (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not the same is undertaken for a pecuniary benefit.
6. For the present case the provision of rental services cannot be considered as trade, manufacture, profession, vocation, adventure, wager or any other similar activity. Hence the only category it can fit is “commerce”. Now the term “commerce” has been defined by Bombay High Court in the case of Sakharam Narayan Kherdekar v. City of Nagpur Corporation AIR 1964 Bom 200 as to include any activity which implies some investment and runs the risk of profit or loss. Hence the intent of undertaking an activity for earning profit (whether or not profit actually accrues) is at the heart of a commercial activity. Thus we can conclude that an activity to be covered under supply requires an intent of earning profit (i.e. the test of profit-motive must be established).
7. Now the said sub-clause (a) also provides that the commercial activity shall be construed as business whether or not such activity is undertaken for a pecuniary benefit or not. Does pecuniary benefit connote an intent to earn profit ?
8. Black’s Law Dictionary defines the term “pecuniary benefit” as under:
“Monetary benefits. An award or compensation or benefit that is quantifiable in monetary terms.”
9. Hence undertaking an activity of commercial nature whether or not the same is for pecuniary benefit implies that whether or not such activity yields the benefit which can be quantifiable in monetary terms or not. Hence the intent behind the said clause (a) is to even cover the commercial transactions which are in the nature of barter or exchange wherein the benefit is in non-monetary terms.
10. Above expressed view is further fortified by a decision of New Zealand Court of Appeals in the case of Salvation Army v. Canterbury Hotel Union (1985) 2 NZLR 366. In this case the issue was whether the term “pecuniary benefits” will imply the gross increase in financial resources (e.g. sales) or it will imply an increase in the profit of the undertaking. The Court ruled that the said term implies the increase in or augmenting of financial resources. It does not not follow that the undertaking must be intended to show an overall commercial profit. Hence applying the ratio of the said decision we can conclude that the term “pecuniary benefit” under sub-clause (a) implies whether the benefit received out of the commercial activity can be expressed in monetary terms or not. It however does not rule out the intent of earning profit and hence the test of profit-motive is relevant.
11. One may also refer to similar provisions under the VAT Laws. As an example the definition of term “business” u/s 2(4) of the GVAT Act, 2003 reads as under:
“business” includes –
(i) any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make profit or gain and whether or not any profit or gain accrues from such trade, commerce, manufacture, adventure or concern”
12. As seen from the above the motive behind undertaking a transaction (i.e. whether to make profit or gain) was clearly excluded from the definition. We do not find such expression in the definition u/s 2(17) supra.
13. Hence we can conclude that the profit-motive test is not eliminated from the said sub-clause (a) in the definition of “business”. Hence in absence of motive to make profit, an activity should not be considered as business under the said sub-clause.
14. Now we must also consider the implications of sub-clause (c) in the definition of business. Said sub-clause provides that any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction shall also be considered as business.
15. Hence can it be said that the test of profit motive in the definition of business has been eliminated under the said sub-clause (c) ? This is because sub-clause (c) covers all the activities in the nature sub-clause (a) irrespective of volume, frequency, continuity or regularity.
16. We submit that for an activity to fall under sub-clause (c), the said activity should first fall under sub-clause (a). This is because the said sub-clause only covers those transactions which are in the nature of sub-clause (a). As discussed earlier sub-clause (a) does not eliminate the test of profit motive and hence only an activity done with an intent of earning profit can be covered within its ambit. Thus an activity undertaken without any intent of earning profit cannot be covered under sub-clause (a) and hence the same cannot be covered under sub-clause (c).
17. The said issue can also be looked at from another perspective. We would submit that the test of profit-motive and the test of volume, frequency, continuity or regularity are not the same.
18. Said issue had arisen before the Supreme Court in the case of State of Gujarat v. Raipur Manufacturing Co. Ltd. 1967 AIR 1066 (SC). In this case in the context of levy of sales tax on the sale of miscellaneous old and discarded items the Court held as under:
“We are unable to hold that in disposing of miscellaneous old and discarded items such as stores, machinery, iron scrap, cans, boxes, cotton ropes, rags etc. the Company was carrying on business of selling those items of goods. These sales were frequent and the volume was large, but it cannot be presumed that when the goods were acquired there was an intention to carry on the business in those discarded materials; nor are the discarded goods, by-products or subsidiary product of or arising in the course of the manufacturing process.”
19. Hence essentially the Court held that even the transactions done frequently and with large volume cannot be itself imply profit motive. Thus the test of profit motive is essentially the test to to be inferred from the circumstances. In the above case the Court further held as under with respect to the said test of profit motive.
“In actual practice, the profit motive may be easily discernible in some transactions : in others it would have to be inferred from a review of the circumstances attendant upon the transaction.”
20. The Court further held with respect to the test of profit-motive as under:
“But it does not arise merely because the price received by sale of discarded goods enters the accounts of the trader and may on an overall view enhance total profit, or indirectly reduce the cost of production of goods in the business of selling of which he is engaged.”
21. Hence we can conclude that the test of profit-motive is also not eliminated under sub-clause (c). It only eliminates the test of volume, frequency, continuity or regularity with which a particular activity is carried out.
22. Now coming to the issue at hand, it can be inferred from the circumstances that Mrs. A did not intend to carry out any business. The property devolved upon her on the death of her husband and even the rental agreement was executed by her husband. Hence we can conclude that in absence of the intent of making profit, the rental income in the hands of Mrs. A may not be subjected to GST.
23. Before we conclude we may also draw reference to C.B.E. & C. Press Release No. 78/2017 wherein it has been stated that the sale of old gold by an individual cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual). Perhaps the test of profit-motive has been applied in the said press release to reach the given conclusion.
24. Above discussion clearly brings home the point that the issue of profit-motive is very much alive in GST. It may have died under the erstwhile laws but has been given a re-birth under GST (whether consciously or not only legislators can tell !!).
(views are strictly personal)