ICAI won the Income Tax Exemption Case in the High Court – Scope of the term “Charitable Purpose” defined by the High Court – In order to have a charity, you must have a source of income – Section 10(23C)(iv) September 2, 2009.
Director General of Income Tax (Exemption) has denied the exemption to Institute of Chartered Accountants of India (ICAI) under Section 10(23C)(iv) of the Income Tax Act, 1961 on the basis of following allegation:
“During the financial year 2003-04, 2004-05, 2005-06 and 2006-07, the Petitioner Foundation has mainly done contract work, for which it has received certain payments. These activities are basically the jobs done for third parties, for consideration received. Therefore, the Petitioner Foundation is providing professional services on regular basis, which amounts to doing business of providing professional services. Since professional services is a commercial activity, it cannot be taken as a ‘charitable activity’.”
While allowing the exemption u/s 10(23C)(iv) and issuing writ of direction/mandamus, honorable High Court of Delhi has observed the followings:
1. There is not even an iota of doubt that the Petitioner Foundation is involved in education and, thus, meets the description of „charitable institution.
2. It clearly follows that even these three projects were the research projects which were given to the Petitioner Foundation having regard to its expertise in this field. Therefore, these activities per se would not bring out the Petitioner Foundation out of the ambit of Section 2(15) of the Act. It can be said that the activities amounted to “Advancement of an object of general public utility” which also appears in the definition of charitable purpose in Section 2(15) of the Act.
3. In order to have a charity, you must have a source of income. The income may come from gifts, or it may come from running a business.
4. The circumstances under which the projects were undertaken make it clear that it was at the instance of the Government of India or the State Government for improving the accounting and budgetary systems in these local bodies. The expertise of the Petitioner Foundation in carrying out research in this field was sought to be utilized. Therefore, it cannot constitute “business/commercial activity”. Merely because some remuneration was taken by the Petitioner Foundation for undertaking these projects would not alter the character of these projects, which remained research and consultancy work.
5. The amended definition of charitable purpose would not alter the position
SUMMARY OF CASE LAW
The status which is granted by the Government to the ICAI Accounting Research Foundation itself is the recognition of the fact that it is essentially established for the purpose of education and/or for advancement of any other project of general public utility.
5. The Petitioner Foundation made an application dated 15.12.2006 to the Respondent No.1 herein in Form No. 56 for claiming exemption from income tax under Section 10(23C)(iv) of the Act taking the plea that it is covered by the expression “charitable purposes”, as defined in Section 2(15) of the Act. Certain information was asked by the Respondent No.1, which was supplied by the Petitioner Foundation from time to time. After considering this application, the Respondent No.1 ultimately rejected the request vide its order dated 28.12.2007 stating that the Petitioner Foundation did not qualify for approval under the aforesaid provision has been filed by the Petitioner Foundation assailing this order.
12. When we scan through the impugned order, we find that the main reason given by the Respondent No.1 is that during the financial year 2003-04, 2004-05, 2005-06 and 2006-07, the Petitioner Foundation has mainly done contract work, for which it has received Certain payments. These activities are basically the job s done for third parties, for consideration received. Therefore, the Petitioner Foundation is providing professional services on regular basis, which amounts to doing business of providing professional services . Since Professional services is a commercial activity, it cannot be taken as a charitable activity. Particulars of the various such jobs undertaken by the Petitioner Foundation and the amounts received for those consultancy services are also stated in the impugned orders. indicate that they broadly fall in two categories, which are as under :-
(a) The Petitioner Foundation is providing research and consultancy services to various Government bodies; the payments are made by these Government bodies and have been accounted for by the Petitioner Foun dation under the head “Research Contributions “. The payments so received are then used for making the payment to Researchers / Consultants hired by the petitioner to carry out the research work. Government projects were undertaken by the Petitioner Foundation, namely, that of Municipal Corporation of Delhi Municipal Corporation (KMC) project and Strengthening Rural Decentralization (SRD) project. Foundation had urged before the Respondent No.1 that these were not the business/commercial activities but simply research activities and, in fact, expertise was provided to the aforesaid bodies who wanted to streamline their accounting system. It was, therefore, in the nature of research activity only. This plea, however, is brushed aside by the Respondent No.1 in the following terms :-
“VI. The contention of the appellant that the Research activities are not any business/commercial activities but simply Research activities provided to various bodies for obtaining the objects of the foundation and are beneficial to the public at large, is not acceptable. The applicant is carrying on business activities of research and consultancy work on consideration received from government and non-government organizations. Activities of the applicant are akin to a contractor providing goods or services to a charitable hospital. The hospital may be doing charity by providing medical services, but contractor providing goods and services for consideration cannot be said to be engaged in charitable activities. Another example could be of a professor in an educational institution. An educational institution may be providing charity but professor rendering services for salary is not doi ng charity.”
(b) The Petitioner Foundation had also received monies from Infosys Technologies Limited in the form of Infosys Fellowship Fund. Though it is for grant of fellowship to deserving candidates under the Fellowship programme of the foundation in affiliation with Guru Gobind Singh Indraprastha University, the Respondent No.1 was of the view that even from this it would be concluded that the Petitioner Foundation is not doing charitable activity because of the reasons stated in this manner :-
“VII. Regarding the scheme of granting stipend and fellowship to students, it is noticed that funds for the same are being provided by Infosys Technologies Ltd. As per the agreement signed with Infosys Technologies Ltd., it is found that entire Endowment amount of Rs.9,00,000/ – per fellow is to be WP (C) No. 3032/2008 nsk provided by Infosys Technologies Ltd. if a fellow leaves in the middle of the programme, or finishes early with funds left in the account, Infosys will decide how the money is to be spent. This shows that this stipend and fellowship are being funded by Infosys Technologies Ltd. with the applicant playing only the role of a facilitator. Hence, the applicant cannot be said to be doing any charitable activity in this regard.”
The Respondent No.1 was also of the view that even if it is considered that the Petitioner Foundation was carrying on some other charitable activities, separate books of accounts were required to be maintained in respect of business of providing contractual services to various Government bodies as per proviso Section 10(23C)(iv) of the Act, which was not being done by the Petitioner Foundation. The submission of learned counsel for the petitioner in this behalf was that the main activities of the Petitioner Foundation carried out all along were educational and, thus, charitable in nature. The aforesaid activities are incidental to the attainment of its objective. Explanation of the petitioner is that at the instance of the aforesaid local bodies, namely, MCD, KMC and SRD, the Petitioner Foundation took up three projects with sole aim and endeavour to improve and reform preparation and presentation of accounts and accounting process, financial analysis and management practices in these urban local bodies. It is explained that the MCD project was taken up by the Petitioner Foundation in March 2002 and was successfully completed on 31.5.2006. This project arose out of the decision of the Government of India to implement accrual based accounting reform in the third year of the Government. This was new initiative in India where Controller of Accounts and Accountant General (CAG) had no prior exposure. Therefore, there was need for collection and assimilation of data and experience. This body, thus, wanted to utilize the expertise of the Petitioner Foundation by undertaking this project of applied/field research. The nature of work was essentially research. Based on the study undertaken by the Petitioner Foundation,publicat ion titled “Conversion of Accounts of Municipal Bodies to Accrual Basis – Issues,Concerns and Strategies ” has been published and made available to the public at large. Thus, according to the Petitioner Foundation, it assisted the MCD in preparing and presenting their annual financial statements, comprehensive annual financial reports, comprehensive reconstructing of the budget heads as well as refining their accounting process in their various zones, hand holding and assistance in setting up the financial management and budget office. The Petitioner Foundation had also carried out number of training programmes for the core group of Nodal Officers of MCD focusing on double-entry accounting system, computer awareness, bank reconciliation and familiarization with new data formats. In the implementation of the Fund Based Accrual System, the Petitioner Foundation also assisted MCD in introducing best practices which are being followed in leading Municipal Corporations world over.
14. Likewise, the Kolkata Municipal Corporation project was taken up by the Petitioner Foundation in July 2004 because it involved further study of some unique characteristics different from the above. This WP was successfully completed in September 2007. During this period, the Petitioner Foundation assisted Kolkata Municipal Corporation in the preparation of its financial accounts, carried out number of studies on business process re-engineering, and also conducted various management training programmes for capacity building etc. The Petitioner Foundation demonstrated to the Municipal Corporation the effects of what improved presentation of accounts can achieve, what improved financial analysis and management practices can provide and submitted its findings. The Petitioner Foundation also assisted the Municipal Corporation in preparing report on sustainability, containing specific recommendations of integrated capacity building exercise with organizational changes, and standardized formats of financial statements and established audit trails. The Kolkata Municipal Corporation was also provided by the Petitioner Foundation with a clear road map for strengthening its internal audit department.
15. In Strengthening Rural Decentralization (SRD) project, the team of the Petitioner Foundation carried out field visits to various Gram Panchayats (GPs) and Gram Unnayan Samitis (GUSs) spread across the 6 SRD Districts and other non-SRD Districts of West Bengal. In these field visits, the team of Petitioner Foundation carried out study of and assisted in framing proper accounting, auditing and procurements system and procedure in the case of GPs and GUSs, as a deliverable accounting manual, internal audit manual, as well as the procurement manual.
16. The aforesaid description of the three projects given by the Petitioner Foundation finds support from the annual reports as well as other documents produced and annexed by the Petitioner Foundation with this writ petition.
17. It clearly follows that even these three projects were the research projects which were given to the Petitioner Foundation having regard to its expertise in this field. Therefore, these activities per se would not bring out the Petitioner Foundation out of the ambit of Section 2(15) of the Act. It can be said that the activities amounted to “Advancement of an object of general public utility ” which also appears in the definition of charitable purpose in Section 2(15) of the Act. The only aspect, in this backdrop, which needs to be considered is as to whether charging of amount from the MCD, KMC etc. for undertaking these research projects would make the activity „commercial .,as held by the Respondent No.1 in the impugned order. Before we answer this, it would be apposite to take note of some of the judgments defining „charitable purpose.
18. The first case, which may be relevant on this aspect, is the judgment of this Court in the case of Additional CIT v. Hamdard Dawakhana, (1986) 157 ITR 639 (Del). In that judgment unamended definition of „charitable purpose .contained in Section 2(15) of the Act was considered. Following discussion contained in the judgment reproduced unamended definition as well, along with its interpretation :-
“15.The main point urged by Mr.the definition of “charitable purpose” stated in section 2(15) of the Act. This definition as in the 1961 Act is as follows : “‘charitable purpose’ includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.”
16. Thus, the emphasis is on the fact that this charity is carrying on a business, namely, the Hamdard Dawakhana. In fact, the dedication is of a business because the dedicated property is neither any building, nor any trade mark, but the business of the Hamdard Dawakhana. It is, therefore, urged that this is not a charitable purpose at all and hence no exemption can be granted. It is pointed out that out of the business of this trust, the khandani income is being earned by the mutawallis themselves, so there is no scope for saying that this is a charitable purpose.
17. We find that on a proper construction of the Act, this is not the meaning to be given to the definition. In order to have a charity, you must have a source of income. The income may come from gifts, or it may come from running a business. In this case, the trust is of a portion of the income of the Hamdard Dawakhana. Although the source of the income is a business, the object of the trust is not to run that business, but to utilise the income of that business for a charitable purpose. The income has been divided into two portions, i.e., khandani income and the qaumi income. That portion of the income which is not earmarked for charity is subject to tax, but the remaining portion has to be used for charitable purposes.
18. In our view. the entire point is now covered by the Supreme Court’s judgment in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association, (1980) 121 ITR 1. The court pointed out in that case that when the object of a trust was the carrying on of an object of general public utility, it is that object of general public utility which must not involve the carrying on of an activity for profit. It was pointed out that it was immaterial how the money for achieving or implementing such purpose was found. Whether that money was obtained by the running of an activity for profit or not, did not make the charity not charitable. Thus, in the present case, no doubt, the trust earns the money from the Hamdard Dawakhana. If that money is used for charitable purpose and not for the carrying on of any business at a profit, then the object of the trust is charitable, not with standing the source of the income.
19. It is hardly possible for a charitable trust to work with no source of income. So, the makers of the trust in the present case, dedicated a portion of the income of the business for being used for charitable purpose As long as the user of that money is charitable, then the exemption has to be granted.
19. The Madras High Court in CIT v. K.S. Venkatasubbiah Reddiar, (1996) 221 ITR 18 (Mad) had the occasion to discuss in detail as to what would constitute „business .and „profits and gains of business or profession. Taking note of the definition of the term „business under Section 2(13) of the Act and some other statutes giving similar definitions, the Court expressed the following view :-
“In that connection, while dealing with the same question under the Hyderabad General Sales-tax Act, the Supreme Court in State of Andhra Pradesh vs. H. Abdul Bakshi & Bros., (1964) 15 STC 644, observed as follows (headnote) :
“The expression ‘business’ though extensively used is a word of indefinite import. In taxing statutes it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.
“It is, therefore, clear that the two essential requirements for an activity to be considered as “business” are : (i) it must be a continuous course of activity; and (ii) it must be carried on with a profit motive …”
20. The principles which are laid down in both the aforesaid cases provide complete answer to the issue at hand. It is to be noted that the aforesaid projects undertaken on behalf of these local bodies is not a regular activity of the Petitioner Foundation. Primary activity remains the same, namely, research in accounting related fields. Even these projects which were taken up on behalf of those local bodies fit in the description of „research projects ., which can be termed as ancillary activity only. The circumstances under which the projects were undertaken make it clear that it was at the instance of the Government of India or the State Government for improving the accounting and budgetary systems in these local bodies. The expertise of the Petitioner Foundation in carrying out research in this field was sought to be utilized. Therefore, it cannot constitute„ business/commercial activity .. Merely because some remuneration was taken by the Petitioner Foundation for undertaking these projects would not alter the character of these projects, which remained research and consultancy work. It is so categorically held in Hamdard Dawakhana (supra). The important test is the application of the amounts received from those projects. It is nowhere disputed that the receipts are utilized by the Petitioner Foundation for advancement of its objectives. The Memorandum of Association specifically stipulates that these are not to be distributed to the Members as dividends or profits. It is clear that most of the amount received qua these projects was spent on the project and surplus, if any, is used for advancement of the objectives for which the Petitioner Foundation is established.
21. The amended definition of „charitable purpose .would not alter this position. No doubt, proviso to this definition clarifies that advancement of any other object of general public utility will not be treated as charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering service in relation to trade, commerce or business. However, what is not appreciated by the respondent No.1 is that the merely on undertaking those three research projects at the instance of the Government/local bodies. The essential character of the Petitioner Foundation cannot be converted into the one which carries on , cannot be treated as the activity which carries on trade, commerce or business or activity of rendering any service in relation to trade, commerce or business.
22. The only aspect which remains to be considered relates to the scholarships introduced by the Infosys Technologies Ltd. The amount received from this company is in the form of Infosys Fellowship Funds, which has been created for granting fellowships to the deserving candidates under the proposed Fellowship Programme in affiliation to the Guru Gobind Singh Indraprastha University. The annual reports give details of the working of this fellowship. The Petitioner Foundation has constituted an expert committee for selection of candidates for Infosys Fellowship Research Programme. For this purpose, advertisements are issued and applications invited from candidates interested in pursuing the research with the Petitioner Foundation under the said scheme. On that basis, the candidates are selected to conduct research, who are assigned research projects. For example, one candidate was awarded this fellowship on the research project “Legal Protection of Intellectual Property in Information Technology Industry “. The completion of such research projects lead to award of doctoral degree by the Guru Gobind Singh Indraprastha University. Surprisingly, only on the figment of imagination that a fellow leaves in the middle of the programme or finishes early with funds left in the account, as Infoss is to decide as to how the money is to be spent, with the Petitioner Foundation playing the role of a facilitator, the respondent No.1 has concluded that the Petitioner Foundation could not be said to be doing any charitable activity in this regard. It is too presumptuous a reasoning. What is ignored is that even if such eventuality occurs money has to be spent for the purpose for which it is allocated, namely, fellowship. The essential character of this fellowship is that a student is given the fellowship/scholars hip for undertaking research projects. We fail to understand as to how this essential character of the fellowship would alter merely because of distant possibility of a fellow leaving in the middle of the programme or finishing his research early.
23. One significant aspect which is totally ignored by the respondent No.1 is that the Petitioner Foundation is a deemed company under Section 25 of the Companies Act. This section reads as under :-
“25. Power to dispense with “Limited ” in name of charitable or other company. – (1) Where it is proved to the satisfaction of the Central Government that an association –
(a) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and (b) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may by licence, direct that the association may be registered as a company with limited liability, without the addition to its name of the word “Limited ” or the words “Private Limited “.
xx xx xx “
24. Thus, the status which is granted by the Government itself is the recognition of the fact that the Petitioner Foundation is essentially established for the purpose of education and/or for advancement of any other project of general public utility.
25. The impugned order of the Respondent No.1 is, accordingly, set aside. Rule is made absolute. Allowing this writ petition, direction/mandamus is given to the Respondent No.1 to accord requisite exemption to the Petitioner Foundation under Section 10(23C)(iv) of the Income Tax Act.