Approval u/s 10(23C)(iv) cannot be withdrawn for violation of certain compliance conditions

Population Services International Vs CIT (ITAT Delhi)

ITAT Delhi held that approval granted under section 10(23C)(iv) of the Income Tax Act cannot be withdrawn on the allegation of violation of certain compliance conditions, once the threshold conditions is duly satisfied.

Facts- The assessee was granted registration u/s. 12A of the Act on 06.12.1991 and u/s. 80G of the Act on 20.09.2007. The assessee was granted approval u/s. 10(23C)(iv) by the Central Board of Direct Taxes (CBDT) vide notification issued on 31.01.2007 and such approval was renewed in subsequent assessment years. In course of scrutiny assessment, AO while verifying the information gathered and available on record, was of the view that the assessee has violated the conditions of approval granted under section 10(23C)(iv) of the Act.

On the basis of observations, AO sent a proposal for withdrawal of approval granted u/s. 10(23C)(iv) of the Act. Accepting the proposal of AO, learned CIT (Exemption) granted approval for special audit and the special audit was entrusted to a chartered accountant firm.

Learned CIT(Exemption) issued a show-cause notice to the assessee to explain, why the approval granted u/s. 10(23C)(iv) of the Act should not be revoked.

After considering the submissions of the assessee, observations of AO and the Special Audit Report, learned CIT (Exemption) observed that the assessee could not come with a satisfactory explanation to reconcile the difference in the figures of foreign contribution as per the FCRA Account in Form FC-4 and as declared in the income and expenditure account. Further, he observed, though, the assessee claims itself to be a non-profit and non-Government organization, it is indulging in business activity with a profit motive and not doing any charitable work. Thus, learned CIT (Exemption) ultimately concluded that the assessee is not involved in charitable activity as defined u/s. 2(15) of the Act. Hence, the approval granted under section 10(23C)(iv) was required to be withdrawn. Accordingly, he did so, while referring to various provisions of section 10(23C) of the Act. Being aggrieved, the assessee is before us.

Conclusion-

Once the assessee satisfies the threshold conditions of section 10(23C)(iv) of the Income Tax Act, the approval granted cannot be withdrawn, that too, with retrospective effect, alleging violation of certain compliance conditions.

The Departmental Authorities have failed to differentiate between the threshold conditions and compliance conditions. The compliance conditions have to be examined in each assessment year and, in case, there is any violation in compliance conditions in any assessment year, assessee’s claim of exemption for the said assessment year can be rejected. However, that cannot be a reason to revoke the approval granted under section 10(23C)(iv) of the Act. One more factor which needs consideration is, till date, assessee’s registration under section 12A of the Act as a charitable institution subsists. In fact, approval granted under section 80G of the Act is still continuing. These facts reflect the dichotomy in the stand of the revenue. For the purpose of section 12A and 80G of the Act the assessee is recognized as charitable institution, whereas, for the purpose of section 10(23C)(iv) assessee loses its charitable status. This approach of the revenue is unacceptable.

FULL TEXT OF THE ORDER OF ITAT DELHI

Captioned appeal has been filed by the assessee assailing the order dated 16.03.2021 passed by learned Commissioner of Income Tax (Exemption), Delhi, revoking the approval granted under section 10(23C)(iv) of the Income-tax Act, 1961 (in short ‘the Act’).

2. Briefly the facts, as culled out from the records are, the assessee is a society registered under the Societies Registration Act, 1860, w.e.f, 18.06.1980. The main objects of the assessee include the following:

• To undertake activities in fields, such as, health services, nutrition and other related fields and to deal with malnutrition problems in India;
• To run, operate, undertake and maintain training and in-service training centers and/or program and to employ skilled personnel for the said purpose or furthering the cause of the society and to support Government’s objectives and priorities under the national health mission;
• To enlist the services of doctors, paramedical personnel, midwives, social scientists, gynecologists and other specialist and consultants and/or social workers, nurses and volunteers and to complement the efforts of the Government of India in priority health areas of maternal and child health, sanitation, tuberculosis, family planning and gender based violence. To use marketing approaches to fill gaps and address needs of the vulnerable population in the public health space of the country.

3. The assessee was granted registration under section 12A of the Act on 06.12.1991 and under section 80G of the Act on 20.09.2007. The assessee was granted approval under section 10(23C)(iv) by the Central Board of Direct Taxes (CBDT) vide notification issued on 31.01.2007 and such approval was renewed in subsequent assessment years. In course of scrutiny assessment for assessment year 2016-17, the Assessing Officer while verifying the information gathered and available on record, was of the view that the assessee has violated the conditions of approval granted under section 10(23C)(iv) of the Act. The reasons for coming to such conclusion are as under:

• The foreign contributions received by the assessee have been shown differently in FCRA audited accounts and annual financial statements. Whereas, the assessee failed to explain the discrepancy between the figures.
• The books of account are not complete and entries made are not supported by proper vouchers.
• Figures of income and expenditure account are unverifiable in absence of matching figures from the relevant ledger
• The application of 85% of income towards charitable purpose, a condition precedent for granting approval under section 10(23C)(iv), remained unverifiable in absence of proper documents, evidences etc.
• No separate books of account are being maintained for business activity as required under section 11 (4A) of the
• The required Tax Audit Report in Form 3CD as per section 44AB has not been complied with.

4. Thus, on the basis of aforesaid observations, the Assessing Officer sent a proposal for withdrawal of approval granted under section 10(23C)(iv) of the Act. Accepting the proposal of the Assessing Officer, learned CIT (Exemption) granted approval for special audit and the special audit was entrusted to a chartered accountant firm. In the Special Audit Report furnished on 06.06.20 19, it was reported as under:

• The assessee was primarily engaged in promoting its own contraceptive brands on lines of a pharmaceutical company model, in the garb of promoting general awareness of contraceptives under the “PEHEL Project”, an initiative by the assessee and “NACO Project” floated by the Government, thereby, diverting donor’s money for promotion, brand establishment, mass advertisement of its own contraceptive brands. Thus, assessee is not carrying out charitable activities as envisaged under section 2(15) read with section 10(23C)(iv) of the Act.
• Expenses amounting to Rs.42,79,06,352/- have been incurred on ‘PEHEL Project’ on cash basis which works out to 38.62% of the total expenses of various projects. Whereas, the assessee failed to furnish the scope of work and agreement entered with Population Service International, Washington DC (“PSIDC”), which granted Rs. 86,00,48,605/- for implementation of various projects and assessee diverted almost 50% of such grant towards ‘Pehel Project’
• In the garb of spreading awareness of Intra Uterine Device (IUD) the assessee has promoted and increased the market feasibility of its own brand IUCD products FREEDOM-5 and FREEDOM-10 in a solely commercial manner.
• In so far as NACO Project promoted by Ministry of Health and Family Welfare, Departmental of AIDS Control, Government Of India for implementing Condom Social Marketing Programs in six states of Gujarat, Maharashtra, Odisha, Rajasthan, West Bengal and Karnataka, as per agreement dated 21.05.2014, the assessee is required to undertake promotion and advertisement for Deluxe Nirodh Condom Brand owned by Government of India. Whereas, while promoting Delux Nirodh Brand, the assessee has promoted its own Masti brand of Condoms by utilizing the resources. Though, as per agreement, sale of Delux Nirodh Condom brand and Masti brand are to be in the ratio of 70:30, however, assessee has sold Masti brand condoms in excess of 30% of total sale volume in NACO designated states, viz., Orissa, Rajasthan and West Bengal.
• The assessee made exorbitant profits from sale of condoms, both, Delux Nirodh brand and Masti brand, which were supplied through Government supply mechanism at a subsidized rate of only Rs.0.40 per piece to be sold at Rs. 40 per piece. Whereas, since Masti brand is sold at higher price of Rs. 1.09 per piece, the Assessee had sold more of Masti brand condoms due to high profit margin.
• The assessee also diverted the condoms supplied by Government for designated six NACO States to other non-designated States and in the process it earned huge unwarranted profits and established its brand and market presence in these non-NACO States as well.
• The assessee had entered into direct/indirect arrangement with PSI (India) Pvt. Ltd., another related company engaged in the business of buying, selling, distributing and otherwise dealing in contraceptives etc. One of the directors of the assesee is the Managing Director of PSI (India) Pvt. Ltd. The Masti brand of condom earlier marketed by the assessee was later on marketed by PSI India Pvt. Ltd. and in the process has generated surplus profit.

5. Basis aforesaid allegations of the Assessing Officer and Special Audit Report, learned CIT(Exemption) issued a show-cause notice to the assessee to explain, why the approval granted under section 10(23C)(iv) of the Act should not be revoked. In response to the show-cause notice, the assessee furnished a detailed reply vehemently objecting to the proposed withdrawal of approval granted under section 10(23C)(iv) of the Act.

6. After considering the submissions of the assessee, observations of the Assessing Officer and the Special Audit Report, learned CIT (Exemption) observed that the assessee could not come with a satisfactory explanation to reconcile the difference in the figures of foreign contribution as per the FCRA Account in Form FC-4 and as declared in the income and expenditure account. Further, he observed, though, the assessee claims itself to be a non-profit and non-Government organization with a mandate to assist Government of India and State Governments in the field of reproductive health, HIV/AIDS prevention, eradication of tuberculosis and maternal and child health with its main objects, in reality, it is indulging in business activity with a profit motive and not doing any charitable work. He observed, though, the assessee was involved in two major projects promoted by Government, however, in the garb of promoting such projects, the assessee, in fact, has promoted its own products, thereby, increasing its market presence. In the process, the assessee has diverted the donor’s money for promotion, brand establishment by mass advertisement of own contraceptive brands. The nature of activity is purely commercial and no charity is involved. Thus, by diverting the Government grants and donor’s fund to promote its own brand, the assessee has not applied its income wholly and exclusively for the objects for which it is established, hence, violated the conditions of third proviso to section 10(23C) of the Act. Further, he observed, though, the assessee under the provisions of the Act was required to maintain separate books of account for its charitable and business activities, however, the assessee did not do so. Accordingly, the assessee violated the conditions of 7^th proviso to section 10(23C) of the Act. Thus, on the aforesaid premises, learned CIT (Exemption) ultimately concluded that the assessee is not involved in charitable activity as defined under section 2(15) of the Act. Hence, the approval granted under section 10(23C)(iv) was required to be withdrawn. Accordingly, he did so, while referring to various provisions of section 1 0(23C) of the Act. Being aggrieved, the assessee is before us.

7. Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted, in accordance with its objects, the assessee undertakes activities in the fields, such as, health services, nutrition and other related fields and to deal with malnutrition problems of people living in India. He submitted, for achieving these objects, the assessee enlists the services of doctors, paramedical personnel, mid wives, social scientists, gynecologists and other specialists and consultants and/or social workers, nurses and volunteers to complement the efforts of the Government of India in priority health areas of maternal and child health, sanitation, tuberculosis, family planning, and gender-based violence. Using Marketing approaches, the assessee facilitates to fill gaps and addresses needs of the vulnerable population in the public health space of the country. He submitted, looking at the charitable objects of the assessee, the competent authority granted registration under section 12A and 80G of the Act. He submitted, even approval under section 10(23C)(iv) of the Act was granted to the assessee, which continued for years together.

8. Drawing our attention to the Memorandum of Association of assessee society, he submitted, the activities of the assessee are not at all commercial in nature but to serve the low income and vulnerable people of India for their health and well-being. He submitted, the objects of the assessee, includes, to promote, distribute and sell contraceptives, family welfare and/or planning devices and drugs through social marketing techniques and to make them more popular for the Indian masses. He submitted, social marketing is a Government of India Scheme started in 1968. Under this scheme, contraceptives are made available to people in India at highly subsidized rates. These contraceptives are distributed through social marketing organizations, like assessee. He submitted, as per the Government of India guidelines, the social marketing organizations are required to distribute and sale contraceptives at the price determined and controlled by the Government, as, contraceptives include condom, which is treated as essential drug, both, under the Drugs and Cosmetics Act as well as under the Essential Commodities Act. Government permits such social marketing organizations to develop their own brands that will receive additional promotion and packaging subsidy to create awareness and acceptance of family planning amongst low-income population. He submitted, in order to achieve the charitable objects and also to promote the Government formulated scheme for family planning etc., the assessee is working across the range of health issues to include promotion of institutional deliveries, construction of toilets, cervical cancer screening and treatment, prevention of gender-based violence, family planning and population control, management of tuberculosis, prevention of HIV and sexually transmitted diseases and prevention of non-communicable diseases. He submitted, in this regard, the assessee has established non-financial Memorandum of Understanding (MoU) with different State Governments to technically assist in the implementation of Government sponsored health program and activities. He submitted, the work done by the assessee has been appreciated by various State Governments. In this regard, he drew our attention to the letters of appreciation issued by various State Governments.

9. Drawing our attention to specific allegations of the departmental authorities as well as Special Audit Report, learned counsel submitted, during the assessment year 20016-17, the assessee had received grants from National AIDS Control Association (NACO) to support NACO in preventing HIV and sexually transmitted diseases and unwanted pregnancies by promoting and marketing the condoms supplied by the Government under the social marketing scheme. He submitted, amongst various indicators of performance under this contract, one of the indicators was, assessee will distribute Government owned brand condoms, i.e., Deluxe Nirodh, and assessee’s own brand Masti condoms in the ratio of 70:30, respectively. However, both the products are supplied by Government itself under the Government sponsored social marketing scheme. He submitted, as per the agreement with the Government, the assessee had to place its indent and make payment for supply of both the brands of condoms. However, the Government failed to supply according to indent. Therefore, the assessee had to invoke the arbitration clause in the agreement and the Hon’ble High Court appointed an arbitrator and concluded the proceedings in favour of the assessee. He submitted, the allegation of CIT (Exemption) that the assessee is undertaking commercial activities is unfounded and baseless. He submitted, the expression ‘business/commercial activities’ would mean activities undertaken systematically for earning profit. He submitted, organized course of activity for earning profits as ‘profit motive’ is an essential requisite for conducting business. In this regard, he drew our attention to the decision of the Hon’ble Supreme Court in case of CIT Vs. Distributors (Baroda) P. Ltd. 83 ITR 377 (SC).

10. He submitted, even assuming that the assessee undertook sale of its own branded products, by no stretch of imagination it can be labeled as ‘business’/’commercial activity’, as, there is no profit motive, much less, any question of profit actually being generated on sale of such products. He submitted, as per the agreement, the assessee has to sale products, including its own branded products, as per the price fixed by the Government. As a result, he submitted, the assessee has suffered losses year-on‑ year and no profit has actually been  enerated. He submitted, if the grant received from the Government and PSI International is excluded, the assessee will actually be in loss. Thus, he submitted, the allegation that the assessee is indulging in business and commercial activities with profit motive is far from truth. He submitted, the Government itself distributes 55% of the condoms free or at highly subsidized prices in the interest of general public, therefore, to allege that the assessee is generating profit, in such a case, is unacceptable. In this context, he drew our attention to a decision of the Hon’ble Delhi High Court in case of Reckitt Benckiser (India) Ltd. Vs. UOI, WP(C) No. 7705/2013, dated 10.07.2015.

11. Referring to the specific allegation of learned CIT (Exemption) regarding sale of Masti brand condoms, learned counsel for the assessee submitted, the CIT (Exemption) himself has stated that the purchase price of Masti brand condoms from the manufacturer is Rs. 1.64 per piece and sale price is 1.93 per piece. From the small margin retained, the assessee had to incur substantial expenditure on distribution and social marketing. Therefore, the assessee actually ends up in loss. That being the case, the allegation of generation of profit is without any basis.

12. As regards the allegation of the departmental authorities in respect of ‘PEHEL Project’, learned counsel submitted, the project is an initiative of the assessee to contribute millennium development goal through limiting births and reducing maternal mortality amongst low-income women of reproductive age in 30 districts across three states, Uttar Pradesh, Rajasthan and Delhi. He submitted, the program was undertaken in three phases. First one from 2008-10, second phase from 2011-13 and third phase from 20 13-14. He submitted, the program has two components; (a) prevention of unintended pregnancies by promoting modern family planning methods including Intra­Uterine Device (IUD); (b) Increasing access to safe and legal Medical Termination of Pregnancy (MTP). He submitted, through this project assessee seeks to harness the potential of the private sector by creating a service delivery network to improve access to high quality and affordable family planning methods in concluding IUD and medical abortion services. He submitted, the ‘PEHEL Project’ has been funded by the parent organization PSIDC by means of open funding for focus on expanding awareness and access to family planning with an emphasis on IUD and on increasing access to medical abortion.

12. Referring to the specific allegation of the departmental authorities, learned counsel submitted, merely because 50% of total grants received from the parent organization have been incurred on ‘PEHEL Project’, does not make the activities non-genuine or commercial in nature. He submitted, allegation of the Revenue that the Intra-Uterine Contraceptive Device, Freedom 5 and Freedom 10 are promoted by the assessee to market its own brand, is wholly without basis. He submitted, the assessee has followed the principle of social marketing by introducing a brand with a Maximum Retail Price (MRP) mandated by National Pharmaceutical Pricing Authority (NPPA) so as not to undercut or distort the Indian IUCD market to unfairly capture market share. He submitted, the assessee has spent Rs.42.79 crores in education, awareness and promotion of the brand. He submitted, if examined from a commercial perspective, spending such a huge amount for sales value of Rs.53 lakhs indicates that money was predominantly utilized for promotion and for spreading awareness and increasing acceptance of a method of family planning. He submitted, in the aforesaid perspective, the allegation that the assessee diverted the original donor’s mandate and was not aligned to charitable activities, is both false and inaccurate. He submitted, the sale and promotion of Freedom 5 and Freedom 10 were as per the agreement entered into with the parent company and only for charitable purpose. He submitted, the assessee did not commercialize or earn any profits out of the mandate under the ‘PEHEL Project’. He submitted, the same is confirmed by the parent organization. He submitted, while alleging that the assessee has earned profit on sale of Freedom 5 and Freedom 10, the departmental authorities have considered the sale price and purchase price alone, while ignoring other substantial expenses like distribution cost, advertisement cost, warehousing cost and other administrative cost. He submitted, if the overall cost is considered, the assessee actually sales the products at loss with no profit earning motive but to fulfill its objectives of increasing awareness and targeting as many number of households to support the Government initiative in this regard. He submitted, contrary to allegations made by the departmental authorities, facts on record would demonstrate that the assessee has not made any profit on sale of contraceptive by promoting its own brand.

14. As regards the allegation of the Special Auditor that the assessee has nexus with another related party, viz., PSI India Pvt. Ltd., engaged in similar business, learned counsel submitted, PSI India Pvt. Ltd. is only a tenant of the assessee. He submitted, though, Mr. Shankar Narayanan was recruited by the assessee as a Senior Managing Director, however, he resigned from his service in 2016 before joining PSI India Pvt. Ltd. Therefore, nothing much can be read into the alleged relationship between the assessee and PSI India Pvt. Ltd. He submitted, generation of surplus cannot be a determinative factor for determining whether a particular activity is for charitable purpose or commercial nature. In this context, he drew our attention to the following decisions:

1. CIT Vs. Surat Art Silk Cloth Manufacturers, 121 ITR 1 (SC)

2. ACIT Vs. Thanti Trust, 247 ITR 785 (SC)

3. India Trade Promotion Organization Vs. DIT (E), 371 ITR 333 (Del)

15. Proceeding further, he submitted, the assessee was earlier granted approval under section 10(23C)(iv) of the Act for the assessment year 2007-08 and it was renewed year after year till its withdrawal by the impugned order. He submitted, when the objects of the assessee have not changed, merely because of introduction of proviso to section 2(15) of the Act w.e.f 01.04.2009, the activity carried on by the assessee cannot become commercial. He submitted, even registration granted under section 12A and 80G of the Act still subsists. Therefore, charitable status of the assessee is established. He submitted, even if, it is assumed that the assessee has generated some surplus/profit from some commercial activity, however, they are incidental or ancillary to the main charitable object of the assessee.

16. As regards the allegation of learned CIT (Exemption) that the assessee has not maintained separate books of account for its business and charitable activities, thereby, has violated 7th proviso to section 10(23C)(iv) of the Act, learned counsel submitted, irrespective of the fact that the assessee is not involved in business activity, there is no requirement for maintaining separate books of account as the assessee maintains them on ERP software. He submitted, ERP software can be used to compute figures for any segment of activity carried on by the assessee. For such proposition, he relied upon the following decisions:

1. Ranbaxy Laboratories Ltd. Vs. ACIT, 68 com 322 (Del. Trib.)

2. M/s. Hughes Communication India Ltd. Vs. DCIT, ITA 2346/Del/2014 & 4550/Del/2018 (Del. Trib.)

17. Without prejudice, he submitted, the CIT (Exemption) could not have withdrawn the approval granted under section 10(23C)(iv) of the retrospectively. In support of such proposition, he relied upon the following decisions:

1. ACIT Vs. Agra Development Authority, 407 ITR 562 (All.)

2. Auro Lab Vs. ITO, 411 ITR 308 (Mad.)

3. Indian Medical Trust Vs. PCIT, 414 ITR 296 (Raj.)

4. Urmila Devi Charitable Trust Vs. CIT (E), ITA No. 4136/Del/2017 (Del. Trib.)

18. Strongly relying upon the observations of the departmental authorities as well as Special Auditor, learned Departmental Representative submitted, various details called for by the Assessing Officer were not furnished in course of assessment proceeding relating to assessment year 2016-07. Drawing our attention to the observations of the Assessing Officer, he submitted, the assessee did not produce complete books of account and other details in course of assessment proceeding. He submitted, even before CIT (Exemption) also, the assessee did not furnish all the books of account required to be maintained by the assessee and reconciliation statements. He submitted, the Special Auditor has made allegation in similar lines. Thus, he submitted, the fact that the assessee has violated the conditions of section 10(23C)(iv) of the Act is clearly established. He submitted, merely because the assessee was granted approval under section 10(23C)(iv) in earlier assessment years or has been registered under section 12A and 80G of the Act cannot automatically entitle the assessee to exemption under section 10(23C) of the Act. He submitted, whether the assessee has fulfilled the conditions of section 10(23 C) is the subject matter of review depending upon change in facts and circumstances. He submitted, if in subsequent years it is found that the assessee has violated the conditions of section 10(23C) of the Act, the competent authority is empowered to withdraw the approval granted. Thus, he submitted, there is no reason to interfere with the order passed by CIT (Exemption).

19. We have considered rival submissions and perused the materials on record. We have also applied our mind to the decisions relied upon. No doubt, the issue arising for consideration before us is the validity of the order passed by learned CIT (Exemption) withdrawing the approval granted under section 10(23C)(iv) of the Act, that too, with retrospective effect. Undisputedly, the assessee is a registered society created for the purpose of promotion of charitable objects, including, to promote, distribute and sale contraceptives, family welfare and/or family planning devices and drugs through social marketing techniques and to make them more popular for the Indian masses. The targeted population amongst whom these charitable objects have to be applied is the low income group people who are vulnerable and affected by malnutrition and lack of proper health care etc. It is a fact on record that the assessee has been registered as a charitable institution under section 12A of the Act since 20.03.1989 and registration under section 80G of the Act has been granted to the assessee on 20.09.2007. It is also a fact on record that the CBDT has granted approval under section 10(23) (iv) of the Act to the assessee vide notification dated 14.03.1991. These facts clearly establish that various departmental authorities in the past have recognized the assessee as an organization having charitable objects and essentially a charitable organization. It is a fact on record that even as on date, assessee’s registration under section 12A and approval under section 80G of the Act is intact. On a careful reading of the impugned order of learned CIT (Exemption), it is very much evident that the trigger point for revocation of assessee’s approval under section 10(23C)(iv) of the Act is the proposal given by the Assessing Officer while undertaking the assessment proceeding for assessment year 2016-17. As recorded by learned CIT (Exemption) in paragraph 6.2 of his order, the proposal for cancellation of approval under section 10(23C)(iv) of the Act was mainly for the following reasons:

a) Difference in foreign contributions admitted in Income & Expenditure account as compared to the foreign contributions as per FCRA return in Form FC-4 filed by the assessee.

b) No separate books of account maintained for the business activity as required under 7th proviso to section 10(23C) of the I.T. Act, 1961.

c) The assessee is not carrying out any charitable activities as envisaged in Section 2(15) read with section 1 0(23C)(iv) and other enabling sections of Income tax Act in true spirit and intention.

20. As regards the first allegation relating to the alleged difference in foreign contribution shown in the income and expenditure account and the FCRA return in Form FC-4, from the stage of Assessing Officer itself, the assessee has explained that as per the FCRA Regulations, the assessee has to show the actual receipts received during the year. Whereas, in the income and expenditure account, the assessee, in terms with Income Tax Act has to show the foreign contribution on accrual basis. On a perusal of the statutory audit report for the year ended 31^st March, 2016, it is observed, in a note forming part of the financial statements, the auditor has specifically stated that donations/grants received, other than the grants for specific purposes, are regarded as income when it is reasonably expected that the ultimate collection will be made during the year. Thus, from the aforesaid, it is observed that the income/fund shown in the income and expenditure account is on accrual basis, as, the assessee was reasonably certain that it will receive the grant/fund. From the details available on record, it is observed that in FCRA return filed in Form FC-4, the assessee has shown foreign contribution of Rs. 93,45,00,516/-, whereas, in the income and expenditure account, the assessee has shown such figure at Rs. 107,61,69,730/-. Thus, the explanation of the assessee that the foreign contribution in FCRA return has to be shown on receipt basis is acceptable.

21. The allegation of the Special Auditor that the assessee has not maintained separate books of account for the purpose of foreign contribution under the Foreign Contribution Regulation Act, 2010, is equally unacceptable. As brought to our notice by learned counsel for the assessee, there is no mandate under the Foreign Contribution Regulation Act, 2010 to maintain separate books of account for foreign contribution and business activities. The only requirement in law is, the assessee must maintain separate bank accounts for foreign contribution, which the assessee has complied. It is noteworthy, before the departmental authorities, the assessee has specifically submitted that its accounts are maintained in ERP software, viz., “Lawson” to record transaction. It is understood, ERP software can be used to compute figures of any segment of the entity. Further, we have noted, in case of Ranbaxy Laboratories Ltd. Vs. ACIT (supra), the Coordinate Bench, while considering the issue whether separate books of account are required to be maintained where the accounts are maintained on SAP ERP System, has observed that SAP based ERP system of accounting tantamount to maintenance of separate books of account. Thus, applying the ratio laid down by Coordinate Bench, we have to accept assessee’s plea that there is no necessity of maintaining separate books of account, once the accounts are maintained in ERP system. Thus, in view of the aforesaid, the allegation of the CIT (Exemption) that due to non-maintenance of separate books of account the condition of 7^th proviso to section 10(23 C) of the Act is violated, deserves to be rejected.

22. Now, the core issue which arises for consideration is, whether it can be said that the assessee is not carrying out charitable activity as envisaged in section 2(15) read with section 10(23C)(iv) of the Act. In this regard, the main allegation of the departmental authorities is in relation to activities undertaking by the assessee in two targeted projects, viz., ‘Pehel Project’ and ‘NACO Project’. As discussed earlier ‘Pehel Project’ is an initiative of assessee’s parent organization, Population Services International to contribute to millennium development goal through limiting births and reducing maternal mortality amongst low-income group women of reproductive age in 30 districts across three states, Uttar Pradesh, Rajasthan and Delhi. The said program is created for improving the health of women by preventing unintended pregnancies by promoting modern family planning methods including IUD and increasing access to safe and legal MTP through medical abortion project. The allegation of departmental authorities in this regard is twofold, firstly, in the garb of charitable activity the assessee is actually promoting its own products, viz., Freedom 5 and Freedom 10 and, secondly, the expenses incurred go to indicate that the donation received has been diverted to other business activities of the assessee. It is observed, for the “Pehel Project’ the assessee has entered into an agreement with its parent organization, a copy of which is at page 115 of the paper-book. As per the terms of the agreement, the assessee has to utilize the donation received for the purpose of promoting/educating the cause of unintended pregnancy which ultimately leads to improvement in nutrition and health of the low income group women. Towards this objective, the assessee has sold Freedom 5 and Freedom 10 at a price fixed by National Pharmaceutical Pricing Authority. It is observed, while alleging that the assessee earned profit from sale of these products, the departmental authorities have not taken note of the various costs incurred by the assessee, such as, distribution cost, advertisement cost, warehousing cost and other administrative cost. The departmental authorities have also ignored the fact that a substantial part of the contribution received was utilized for promotion and spreading awareness and increasing acceptance of an alternative method of family planning alien to the target population. It is a fact on record that the allegation made by the departmental authorities is unilateral. There is nothing on record to suggest that either the parent organization or the Government Authorities have made any allegation regarding the diversion of foreign contribution received for any other purpose, except the purpose for which it was given or it was utilized for the business gain of the assessee. Even, there is no violation, as alleged, under the Foreign Contribution Regulation Act. Thus, in absence of any contrary material brought on record by the Revenue, it cannot be said that the assessee has utilized the foreign contribution received in respect of ‘Pehel Project’ for its own commercial gain.

23. As regards the allegation of the Departmental Authorities that the assessee has earned profit by selling products, viz., Masti Brand of condoms in NACO project. The facts on record reveal that, though, as per the agreement with the Government, the Government has to supply the assessee two different brands of condoms, viz., Delux Nirodh and Masti, which are to be sold in the ratio of 70:30 respectively. However, the Government failed to supply the required number of Delux Nirodh indented by the assessee, which resulted in breach of contract and the assessee had to invoke the arbitration clause and the Arbitrator passed an award in favour of assessee. Thus, short supply of Delux Nirodh by the Government compelled the assessee to sell more Masti condoms. It is a further fact on record that condom is categorized as essential drug and the pricing of condoms are regulated under the Government regulations. Therefore, they have to be sold at subsidized rates, as per ceiling fixed by the Government. No adverse material has been brought on record by the Revenue to demonstrate that the assessee has violated the pricing of the products, as per the Government mandate. Moreover, there is no allegation by any of the Government agencies, be it Central or State, regarding promotion of assessee’s own brand at the cost of Government brand of condoms. That being the factual position emerging on record, it cannot be said that the assessee has derived any undue benefit by promoting its own brand. In any case of the matter, the assessee was granted approval under section 10(23C)(iv) of the Act for the first time in the year 1991. At the time of grant of approval under section 10(23C)(iv) of the Act, the competent authority was satisfied that the assessee has fulfilled the threshold conditions for approval under section 10(23C)(iv) of the Act.

24. It is a fact on record that thereafter the authorities have renewed the approval year-after-year. In fact, learned Sr. Counsel appearing for the assessee has placed on record scrutiny assessment orders passed for assessment years 2004-05 to 2013-14, wherein, the Assessing officer has allowed exemption under section 10(23)(iv) of the Act. Therefore, once the assessee satisfies the threshold conditions of section 10(23C)(iv) of the Act, the approval granted cannot be withdrawn, that too, with retrospective effect, alleging violation of certain compliance conditions. The Departmental Authorities have failed to differentiate between the threshold conditions and compliance conditions. The compliance conditions have to be examined in each assessment year and, in case, there is any violation in compliance conditions in any assessment year, assessee’s claim of exemption for the said assessment year can be rejected. However, that cannot be a reason to revoke the approval granted under section 10(23C)(iv) of the Act. One more factor which needs consideration is, till date, assessee’s registration under section 1 2A of the Act as a charitable institution subsists. In fact, approval granted under section 80G of the Act is still continuing. These facts reflect the dichotomy in the stand of the revenue. For the purpose of section 12A and 80G of the Act the assessee is recognized as charitable institution, whereas, for the purpose of section 10(23C)(iv) assessee loses its charitable status. This approach of the revenue is unacceptable.

25. In the aforesaid scenario, the approval under section 10(23C) of the Act cannot be revoked, more so, when the objects of the assessee have remained same. We, for a moment, do not say that the competent authority under no circumstances can revoke the approval granted under section 10(23C)(iv) of the Act. However, for doing so, the revenue must bring on record cogent material to demonstrate that the assessee has deviated from the core objects based on which approval under section 10(23C)(iv) was initially granted to the assessee. It is also a fact on record that the activities of the assessee are in the category of medical relief to the poor. Thus, if we interpret the provisions of section 2(15) of the Act strictly, the proviso would not apply. That being the case, by referring to the proviso to section 2(15) of the Act, it cannot be said that the assessee is engaged in any activity of business or commercial nature, hence, not existing for charitable purpose. Thus, on overall consideration of facts and materials on record and keeping in view the ratio laid down in the decisions relied upon, we hold that the impugned order passed by learned CIT (Exemption) withdrawing the approval granted under section 10(23C)(iv) of the Act is unsustainable. Hence, deserves to be set aside. Accordingly, we do so.

26. In the result, the appeal is allowed.

Order pronounced in the open court on 30^th November, 2022