Benefits of Ss 12A and 80G cannot be allowed if there is no charitable activity and assessee undertakes only commercial activity

Society For The Small & Medium Exporters Vs DIT (ITAT Delhi)– In a case where the objects of the society may be charitable, but, in the absence of carrying on those activities despite the fact that the activities which were carried on were for the purpose of generating income, the society is not entitled for registration for that year.  Therefore, it is held that for assessment year 2008-09 and for subsequent years in which the assessee does not carry out charitable activity, the assessee has been rightly refused to get benefit of registration as charitable institution. The only activity which has been carried out is for the purpose of generating income, which is not a charitable activity in itself. Therefore, it is held that learned DIT (E) has rightly refused to grant registration to the assessee and his order is upheld.

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : G: NEW DELHI

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

ITA No. 3182 & 3183/Del/2008

Assessment Years: NA

Society for the Small Medium Exporters, B-488, Vasant Kunj Enclave, Delhi – 110079.

Vs. Director of Income Tax (Exemptions), Delhi.

(Appellant)                                             (Respondent)

 

Assessee by                               : Sh Revenue by                                : Sh

ri Anil Gupta, CA ri Amrit Kumar, Sr. DR

ORDER

PER I.P. BANSAL, JUDICIAL MEMBER

Both these appeals are filed by the assessee. They are directed against the consolidated order passed by the Director of Income Tax (Exemptions)-Delhi [for short DIT (E)] whereby DIT (E) has rejected the request of the assessee for grant of registration u/s 12A(a) and also exemption u/s 80G. Grounds of appeal in both the appeals read as under: –

ITA No. 3182/Del/2008

1. Because on a proper consideration of facts and circumstances ofthe case, the Director of Income Tax (Exemptions) was not justified in refusing registration u/s 12A(a) of the It Act, 1961, which order is contrary to facts, bad in law and be quashed.

2. Because the appellant society existing solely for charitable purposes, the Director of Income Tax (Exemptions) was not justified in refusing registration u/s 12A(a) ofthe Act.

3. Because the Director of Income Tax (Exemptions) has not appreciated the facts and circumstances of the case and has arbitrarily refused registration.

4. Because the Director of Income tax (Exemptions) has not justified in passing a consolidated order u/s 12AA(1)(b) and u/s 80G, both order should have been passed independently.

ITA No. 183/Del/2008

2. The assessee is a society formed under Memorandum of Association and Rules and Regulations, copy of which is placed at pages 37 to 49 of the paper book and is registered by the Registrar of Societies, Government of NCT of Delhi, Delhi vide Registration No.S/58510/2007 on 1^st May, 2007. Copy of certificate of registration is placed at page 50 of the paper book. For the first financial year ending on 31^st March, 2008, as per computation of income filed by the assessee in the return of income filed on 30^th September, 2008 copy of which is placed at pages 11-26, the ‘income from other sources’ has been shown at 2,25,86,589/-. From the said amount, application of income has been claimed at 1,92,30,363/- and accumulated income/set apart income is claimed at 33,56,226/-, which is within the permissible limit of 15%. In this manner, the return of income has been filed at nil.

3. The assessee being a society, for the purpose of seeking registration u/s 12A of the Act and for the purpose of seeking approval u/s 80G filed two applications with DIT (E) on 14^th February, 2008 in Form No.10A and 10G of the Act. Learned DIT (E) required the assessee to file certain documents which are listed at page 1 at Sl. No.(i) to (vi). In response, the assessee filed the details and from examination of income and expenditure account, it was noticed by learned DIT (E) that the assessee is engaged in the commercial activity, hence, he issued a show cause notice dated 21^st April, 2008 to the assessee to require it to explain as to how those activities are charitable in nature within the meaning of Section 2 (15) of the Act. Replies were filed dated 13^th May, 2008 and 9^th June, 2008 which have been stated to be considered by learned DIT (E). The assessee also has filed a note on the charitable activity in which it was mentioned that the assessee is engaged in the activity of providing help to the exporters. It is providing assistance regarding better and cost effective packaging. It is organising exhibitions to promote sales. On these submissions of the assessee, learned DIT (E) has found that income and expenditure statement for financial year 2007-08 (upto 15^th March 2008) revealed that the assessee is engaged in a commercial activity vide which trade fair has been organised. The assessee has taken space on rent by making of payment of licence fee of 1,25,00,000/- and it has incurred exhibition expenses of 52,42,998/-. It has also incurred several other expenses relating to organising of exhibitions.Thus, the income has been earned by giving space to any one who was desiring to participate in the exhibition. Fair charges of 2,50,65,900/- have been earned from various parties who have participated in the exhibition. It has also earned advertisement revenue of 1,45,000/- and, thus, the total revenue earned is 2,54,17,927/-. The service tax of 4,23,065/- has been paid and a profit of 43,63,858/- has been earned. Then, learned DIT (E), making reference to the proviso inserted in Section 2 (15) w.e.f. assessment year 2009-10 and after narrating the said proviso, has observed that w.e.f. assessment year 2009-10, a charitable institution engaged in the activity being advancement of any other project of public utility can neither carry on any trade, commerce nor business or can provide any service in relation to any trade, commerce or business for a fee, cess or any other consideration.

4. The assessee has carried out a commercial activity only of taking the premises on hire, incurring expenses to organise exhibition and, thereafter, inviting the participants to take space in the exhibition and charge the participants for taking such space in the exhibition. Such activity is systematic, and organised vide which the assessee has earned the income and such activity will be a commercial activity. The income has been earned from any one who is interested in taking space and participate in the exhibition, therefore, the activity of organising the exhibition is a commercial activity and the case of the assessee is covered by the proviso to Section 2 (15), therefore, the assessee is not entitled to exemption of income as its activities are not charitable. In this manner, the request of the assessee for grant of registration u/s 12A and grant of exemption u/s 80-G has been rejected vide the impugned order dated 24^th July, 2008. Aggrieved, the assessee has filed two separate appeals agitating therein the action of the DIT (E) in refusing the grant of registration u/s 12A and rejecting the request of the assessee for grant of exemption u/s 80-G.

5. Learned AR of the assessee has filed before us synopsis of his submissions/arguments. According to those arguments, the assessee society is registered under Societies Registration Act. Its aims and objects are duly recorded in the Memorandum of Association. Those objects are charitable in nature. All the details and documents called for by the DIT (E) were duly produced. The order of DIT (E) is a nonspeaking one so as it relates to non-grant of deduction u/s 80G(5) as the assessee has fulfilled all the criteria and the grant of exemption could not be denied to the assessee. According to learned AR, for considering the claim of the assessee u/s 80G, the assessee was required  to fulfill the following seven conditions which have been fulfilled by the assessee:-

7. He further submitted that the allegations of DIT (E) that the assessee is engaged in commercial activity is contrary to the record because the assessee society is newly incorporated in May, 2007 and it has started its operation solely with non-profit motive and for promotion of the products of its Members in the specified fields and was lacking much experience in this regard. While organising the exhibition or trade fairs one and all including the assessee society, for realising its aims and objects which included promotion of the products and skill of its members/ participants, or/ has to exist and compete in the business and economic environment (which is/ might be commercial or profit oriented) and, therefore, it has to incur cost at rates which are being paid by one and all, has not carried out activities for business/ profit purpose and these are with non-profit motive and, therefore, it has to charge the revenue at commensurate rates as market forces are out of bound and control of the assessee society. He submitted that profit/ gain/ surplus is a numerical result of revenue-income and expenditure for earning former which can either be positive or negative and it is not necessary that the assessee will all alone earns income out of it. He submitted that though for financial year 2007-08 a gain of 33.56 lac has been earned but in subsequent years i.e., for financial year 2008-09 and 2009-10 it has incurred loss of 42.63 lacs and 50,000/- approximately. He submitted that profit and gains, if any occurs to assessee, was only to be utilised for the purpose of promotion of the aims and object of the assessee society. He also relied upon the following decisions to claim that assessee’s request has wrongly been rejected:-

i) CIT vs. SCOPE (2009) (Delhi) 186 Taxman 142

ii) 18 SOT 563 (Delhi) (TM) Greater Kailash-II Welfare Assn. Vs. DIT (E)

iii) 106 ITD 531 (Delhi) (2007) Agarwal Mitra Mandal Trust vs. DIT (E)

iv) 11 SOT 632 (Delhi) (SB) (2007) Samaj Kalyan Parishad vs. ITO

v) 303 ITR 111 (Delhi) (2008) DIT vs. Mitsui and Co. Environmental Trust.

vi) 308 ITR 76 (Delhi) (2009) DIT (E) vs. Japan Chamber of Commerce & Ind.

vii) 11 SOT 737 (Delhi) (2007) DCIT vs. Beer Shiva Educational Social Welfare Society.

viii) M.P. Madhyam vs. JCIT (2004) (Indore) 89 TTJ 770

ix) CIT vs. Cosmopolitan Education Society (2000) (Raj) 244 ITR 494.

x) CIT vs. Ahmedabad Rana Caste Association (SC) (1983) 140 ITR 1.

xi) 55 ITR 722 (SC) (1965) CIT vs. Andhra Chamber of Commerce.

xii) Director of Income Tax vs. Bharat Diamond Bourse (2003) (SC) 126 Taxman 365

xiii) 181 ITR 354 (SC) (1990) P.C. Raja Ratnam Institution vs. MCD

xiv) 246 ITR 452 (Guj) (2000) N.N. Desai Charitable Trust

xv) 252 ITR 171 (AP) (2001) Sriramakrishna Sewa Ashram.

xvi) 256 ITR 690/121 Taxman 451 (Guj) (2002) Orpat Charitable Trust

xvii) 101 ITR 234 (SC) (1975) Sole Trustee, Loka Shikshana Trust vs. CIT

xviii) 118 ITD 207 (Asr.) (2009) Guru Gobind Singh Educational Society vs. CIT

xix) ACIT vs. South Point Montessori School (2007) (Gauhati) (TM) 107 ITD 65.

xx) 123 ITD 317 (Luck.) (2010) Kalyanam Karoti vs. CIT.

8. On The other hand, relying upon the order passed by the DIT (E), it was pleaded by learned DR that the claim of the assessee regarding registration u/s 12A and Section 80G has rightly been rejected by the DIT (E) and his order should be upheld. Learned DR pleaded that definition of ‘charitable purpose’ given in Section 2 (15) has been amended by the proviso and the activity of the assessee falls within that proviso, therefore, the claim of the assessee has rightly been rejected by the DIT (E).

9. In the rejoinder, it was submitted by learned AR that the proviso is applicable only from assessment year 2009-10. The application of the assessee as well as initial year for which the assessee is seeking registration and exemption u/s 80G is prior to that year. Therefore, at least for assessment year 2008-09 the claim of the assessee could not be rejected.

10. We have carefully considered the rival submissions in the light of the material placed before us. Copy of brief note of activities filed by the assessee before the DIT (E) is placed at page 57 of the paper book the text of which is as under:-

Society for the Small & Medium Exporters is promoted with the nation cause of promotion of exports of Indian Handicrafts to other parts of the world. It, not only, promotes the Indian culture in the world, at the same time, it helps us providing job to thousands of persons, pioneer in their traditional art but have limited market locally. Moreover they do not get the adequate margin on their products. The members of the society, who are mainly exporters, organise the market and people engaged in these activities provide material and tools, get the items produced, with the help of basic machines to accelerate the production, so that these small artist or labour earn adequate income for their work.In turn, nation earns lot of foreign exchange for the value of material exported. The society represents there exporters members to the Govt. and seek relief in policies to protect the interest of large community involved these activities. It provides a common platform for exporters as well as buyers through organised exhibitions to promote the Indian products. It also held conferences and meetings to promote Indian handicrafts items in the world and design and seek suitable amendments in the national policies.In view of the above, society propose to     under take following activities.

1. To represent Indian Handicrafts society, who earn their living hood through their art to the Govt.

2. To represent exporters for making policies to promote exports of Indian Handicrafts.

3. To organise exhibitions to provide international platform for exporters and buyers.

4. To organise meetings, conferences and seminars to develop new avenues policies for the promotion of export.

5. To assist the exporters in the development of the products as per international standards for easy accessibility in the international market.

Activities held till 29-02-2008.

The society had held one exhibition from 01-03-2008 to 04-03- 2008 in which approx. 230 exporters participated.”

11. It is not even the case of DIT (E) that prior to insertion of proviso to Section 2 (15) the main object of the assessee does not fall within the definition of charitable purpose as enumerated in Section 2 (15) of the Act which includes “the advancement of any other object of general public utility.” Section 2 (15) as amended w.e.f. assessment year 2009-10 read as under:-” (15) “Charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of 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, irrespective of the nature of the use or application, or retention, of the income from such activity.”

12. It has been clearly brought out in the order passed by the DIT (E) that the only activity which has been performed by the assessee during the initial year is holding an exhibition from 1^st March, 2008 to 4th March, 2008 in which 230 exporters had participated. Copy of audited accounts for the said year are filed at pages 1 to 10 of the paper book. The receipts in the income and expenditure account, apart from TDS collected and service tax collected are following amounts:-

13. Against those consolidated receipts of  2,25,86,589/-, the assessee has incurred 1,92,30,362.70 on account of various expenses relating to exhibition and it include depreciation of 72,243.85 and excess of income over expenditure amounting to 33,56,226/- has been carried to the balance sheet under the head ‘current liability.’ None of the items shown in the expenditure relate to the application of income by the assessee on the aims and objects stated in the Memorandum of Association. The receipts as well as the expenditure are relating only to the activity relating to organising the exhibition. Thus, during the financial year 2007-08, the assessee has not incurred any expenditure on its object stated in the Memorandum of Association. Rather, for earning income it has organised exhibition out of which profit of 33,56,226.30 has been earned. Similarly, accounts for financial year 2008-09 (assessment year 2009-10) are filed at pages 2 7-36 of the paper book. In that year also the assessee has carried out the activity of organising the exhibition.

14. It is the case of learned DIT (E) that the activity of the assessee of organising the exhibition is nothing but a commercial activity as the assessee is taking space on rent by making payment of the licence fee and it is incurring expenditure on organisation of exhibition. The space is given to any one who wants to participate in the exhibition. This activity of the assessee is systematic and organised and is, thus, a commercial activity. We find that this observation of DIT (E) is correct according to the facts of the case. Carrying on activity of organising exhibition, in the manner the assessee has carried it, is a commercial activity. No doubt, for the purpose of attaining the objects the assessee can do such activity if those are incidental to the charitable objects, but, at the same time, it has to carry out the charitable activities also to fulfil the objects stated in the Memorandum of Association. No document or evidence has been placed on record by the assessee to show that any activity of such nature has been carried out by the assessee which is in the fulfilment of the objects of the society for which it has been formed. No doubt, at the time of grant of registration u/s 12A, the CIT/DIT or the concerned authority is required to examine the fact that whether or not the objects of the institution are charitable in nature and if those objects falls within the definition of’charitable purposes’, then, he cannot refuse registration to that institution as the question regarding whether the assessee fulfils other conditions laid down in Section 11 can be examined at the time of framing the assessment. But, at the same time, along with examining the objects of the trust or institution the concerned authority has also to satisfy himself about the genuineness of the activity of that institution. The relevant portion of Section 12AA, which regulates such situation, read as under:

“12AA (1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of sub-section (1) of Section 12A, shall –

(a) all for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he –

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant:

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.”

15. The reading of above Section will reveal that the concerned authority while examining the claim of the assessee u/s 12A is empowered to call for such documents or information from the applicant which he thinks necessary to satisfy himself about the genuineness of activities of the institution and he is also empowered to make inquiries in that regard and it is only after such satisfaction he will either accept the claim of the assessee or reject the same. Thus, it is not a formality that the concerned authority merely on the basis of objects of the trust will grant the certificate of registration. If he is not satisfied with the genuineness of the activities, then, he can refuse the grant of registration. Learned DIT (E) in the present case has clearly found that the assessee has carried out commercial activity of organising the exhibition and such activity of the assessee is systematic and organised. No material has been placed before learned DIT (E) to prove that the assessee in the fulfilment of its object has applied any income earned from organising exhibition. Thus, it can be safely concluded that the assessee has not carried out any charitable activity either in this or the subsequent year.

16. Here, it will be relevant to mention the provision of Section 11(4A). Section 11 regulates income from property held for charitable or religious purposes. Sub-section (1), (2), (3) and (3A) regulate the circumstances in which such income is exempted u/s 11 and also provide the circumstances under which such income can be considered to be exempt. Sub-section 4A read as under;-

“(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.”

17. According to sub-section (4A) of Section 11, Sub-section (1), (2), (3) and (3A) will not be applicable in relation to any income of a trust or an institution being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or institution, as the case may be, and separate books of account are maintained by such trust or institution in respect of such business. Sub-section (4A) permits the institution to carry out any business activity if it is incidental to attainment of the objectives of the trust. Nowhere it has been shown by the assessee as a matter of fact that which of the objects of charitable purpose, mentioned in the object clause was pursued by it by organising such exhibition. It also implies that carrying on of commercial activity incidental to attainment of object is a separate activity for which the assessee is required to maintain separate books of account. The assessee does not maintain separate books of account of the institution to show the application of income for attainment of its objective and of the business carried on by it which it claims to be incidental to the attainment of objectives. In other words, even if the assessee claims that it has organized exhibition as a commercial activity for attainment of objectives of the society, even then it is necessary for it to show that in advancement of its objectives it has incurred certain expenditures on the objects stated in the Memorandum of Association. In fact, the assessee has not carried out any charitable activity in the year under consideration. The entire amount received by it cannot be considered as income as the income is only the surplus of the total receipts minus expenditure incurred to earn the total receipt. The entire receipts cannot be considered as income and expenditure incurred to earn those receipts cannot be considered as application of income for the purpose of attaining the objects. In fact, according to the facts of the case, no part of the income has been applied by the assessee for attainment of its objects. In other words, the assessee has not applied any part of its net income on the objectives stated in the memorandum of association which are claimed to be of charitable purpose which are “in advancement of any other object of general public utility.” Therefore, it cannot be said that the assessee has started the process of undertaking charitable activities. Therefore, the assessee does not fulfil the criteria laid down in Section 12AA, 12A read with Section 11 of the Act.

18. Therefore, though technically the objects of the assessee may fall within the ambit of “advancement of any other object of general public utility” as described in Section 2 (15) as it existed prior to assessment year 2009-10, but its claim even for assessment year 2008-09 is premature as it did not start its charitable activity in that year. Here, reference can be made to the decision of Honourable Kerala High Court in the case of Self Employers Service Society vs. CIT 247 ITR 18 (Ker.). In that case, it was held that though the bye-laws of the society would show that several charitable activities were included in the objects of the society, but the society was not able to do any of the charitable activities during the first year of its functioning. The proposal to start a technical educational institution was taken after the rejection of the application by the Commissioner and since the society did not do any charitable work, and the activities which it had carried on were only for the purpose of generating income for its members, it was held that rejection of application for registration was justified. However, an opportunity was given to the society to file a fresh application when it started charitable work and the Commissioner was directed to consider such application. According to judicial precedent laid down therein, in a case where the objects of the society may be charitable, but, in the absence of carrying on those activities despite the fact that the activities which were carried on were for the purpose of generating income, the society is not entitled for registration for that year.  Therefore, it is held that for assessment year 2008-09 and for subsequent years in which the assessee does not carry out charitable activity, the assessee has been rightly refused to get benefit of registration as charitable institution. The only activity which has been carried out is for the purpose of generating income, which is not a charitable activity in itself. Therefore, it is held that learned DIT (E) has rightly refused to grant registration to the assessee and his order is upheld.

19. As the assessee is not found to have fulfilled the criteria laid down in Section 12A and it is held that learned DIT (E) has rightly rejected the claim of the assessee regarding grant of registration under Section 12AA, we are of the opinion that the claim of the assessee u/s 80G has also been rightly refused. However, the assessee will be at liberty to approach the learned DIT (E) again in terms of the aforesaid decision, as and when it starts applying the business income towards charitable purpose and grant of registration is permitted by law as applicable for that year.

20. In view of the above discussion, we decline to interfere in the impugned order passed by the learned DIT (E) and the appeals filed by the assessee are dismissed.

21. The order pronounced in the open court on 29.04.2011.