NIRMITHI KENDRA V. THE DEPUTY COMMISSIONER OF INCOME TAX(EXEMPTIONS)

ITA/73/2019

AI Insights

The case involves two appeals by M/s Nirmithi Kendra against the orders of the Income Tax Appellate Tribunal, Cochin Bench, which denied them the status of a charitable organization under the Income Tax Act. The primary legal issue was whether the activities undertaken by the appellant, which included construction work and receipt of fees for such services, fell under the definition of 'charitable purpose' as per Section 2(15) of the Act. The Tribunal and the lower authorities found that the appellant's activities were commercial in nature, thus disqualifying them from tax exemption under the said section.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 688729 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 07-09-2021
• Assessment Year: misc
• Other Referred Cases: ACIT v Thanthi Trust (2001) 247 ITR 785, Commissioner of Income-tax-I, Lucknow v Lucknow Development Authority, Gomti Nagar, Director of Income-tax (Exemption) v Sabarmati Ashram Gaushala Trust, India Trade Promotion Organization v Director General of Income-tax (Exemptions), Ahmedabad Urban Development Authority v Assistant Commissioner of Income-Tax (Exemptions), Commissioner of Income-Tax-I, Jodhpur v Jodhpur Development Authority
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: CHRISTOPHER ABRAHAM
• Assessee Lawyers: ANIL NAIR; SREEJITH NAIR; ARYA ANIL; ACHYUT PADMARAJ; GOKULRAJ
• Keywords: Charitable purpose; Construction Work; Exemption from Income Tax; Trade, Commerce or Business
• Section: 143(3); 12A; 2(15); 11(1)(a); 11(4A)

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM TUESDAY, THE 7TH DAY OF SEPTEMBER 2021 / 16TH BHADRA, 1943 ITA NO. 73 OF 2019 AGAINST THE ORDER IN ITA 45/Coch/2017 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/APPELLANT: M/S NIRMITHI KENDRA AYYANTHOLE, THRISSUR-68003,REPRESENTED BY ITS EXECUTIVE SECRETARY AND PROJECT MANAGER SRI BOSCO M.M. BY ADVS. ANIL D. NAIR SRI.SREEJITH R.NAIR SMT. ARYA ANIL SRI.ACHYUT K PADMARAJ SHRI.GOKULRAJ L. RESPONDENT/RESPONDENT: THE DEPUTY COMMISSIONER OF INCOME TAX(EXEMPTIONS) CENTRAL REVENUE BUILDING I.S PRESS ROAD, KOCHI-682 018 OTHER PRESENT: SC CHRISTOPHER ABRAHAM THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 07.09.2021, ALONG WITH ITA.121/2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA Nos.73& 121 of 2019 2 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM TUESDAY, THE 7TH DAY OF SEPTEMBER 2021 / 16TH BHADRA, 1943 ITA NO. 121 OF 2019 AGAINST THE ORDER IN ITA 111/Coch/2018 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/APPELLANT: M/s NIRMITHI KENDRA NIRMITHI CAMPUS, BAZAR P.O., ALAPPUZHA, REPRESENTED BY ITS PROJECT ENGINEER, MR.GOPAKUMAR. BY ADVS. ANIL D. NAIR SRI.R.SREEJITH SMT. ARYA ANIL SRI.ACHYUT K PADMARAJ SHRI.GOKULRAJ L. RESPONDENT/RESPONDENT: THE DEPUTY COMMISSIONER OF INCOME TAX (EXEMPTION) WARD, ALAPPUZHA-688 001. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 07.09.2021, ALONG WITH ITA.73/2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA Nos.73& 121 of 2019 3 JUDGMENT ITA Nos.73 & 121 of 2019 S.V.Bhatti, J. Heard the learned Advocates Mr.Anil D.Nair and Mr.Christopher Abraham for the parties. 2. M/s Nirmithi Kendra/Assessee is the appellant in both the appeals. The Deputy Commissioner of Income Tax/Revenue is the respondent in the appeals. 3. The appeals are filed aggrieved by the following orders. Sl. No. Assessment year Date of Assessment Order Appeal before CIT and date of disposal Appeal before ITAT and date of order IT Appeal in High Court 1 2013-14 22.2.2016 ITA No.478/15-16 dated 25.11.2016 ITA No. 45/Coch/2017 dated 26.10.2018 ITA No.73 of 2019 2 2009-10 15.12.2011 ITA No.A-20/CIT(A)/KTM/ 2011-12 dated 20.3.2018 ITA No. 111/Coch/2018 dated 26.10.2018 ITA No.121 of 2019 4. The common question of law raised in the appeals arise under Section 2(15) read with Section 12A of Income Tax Act (for short \"the Act\"). The assessee is the registered Society under ITA Nos.73& 121 of 2019 4 Travancore Cochin Literary Scientific and Charitable Society vide Reg.No. A-354/88 dated 26.9.1988. The assessee was registered under Section 12A of the Act with CIT, Thiruvananthapuram vide Registration dated 23.4.2002. The assessee, for the assessment year 2009-2010, on 15.3.2010 filed the income tax returns. The assessee returns nil income after claiming Rs.9,74,882/- as applied for charitable purpose. The assessment was taken up for scrutiny under Section 143(3) of the Act. The Assessing Officer through the assessment proceedings proposed to examine the claim of assessee under Section 12(5) read with Section 12A of the Act. In view of the proposed verification of the status of assessee for claiming exemption, the assessee was put on notice and in response thereto the assessee stated that the assessee is registered as a charitable society; the District Collector is the Chairman of the assessee Society; the other revenue officials such as RDO etc. either hold functional posts or the members of the society. According to assessee, the assessee is more or less like a Government organization and not carrying on business for earning profits. The ITA Nos.73& 121 of 2019 5 surplus realized is ploughed back for furthering the objects of the trust. The claim made by the assessee was brought under the first limb of section 2(15) of the Act. Under the principle of mutuality, the surplus returned to the persons forming such association is not chargeable to tax. The Assessing Officer, upon examination of the byelaws, books of account and the objects of the society rejected the claim of assessee as rendering charitable purpose and exempt from payment of income tax. The Assessing Officer clearly noted that the fact that a few Government officers are associated with the assessee/society even assumed to be correct, such society as such would not become a Government organisation. The assessee's identity is traceable to registration obtained under Travancore Cochin Literary Scientific and Charitable Societies Act. One of the objects of the assessee is to take up construction work of any nature to establish a chain of retail outlets. In the subject financial year, the assessee has completed 34 building projects amounting to Rs.2,17,64,238/-, advance amount against work-in-progress for and on behalf of various Government projects. Incidentally, the assessee ITA Nos.73& 121 of 2019 6 has sold RCC doors and windows amounting to Rs.4,98,128/-. The assessee has to fulfil its primary object ie. Construction work only. The construction work is an activity of trade, commerce or business for consideration. By declaring income of Rs.9,74,882/-, the doctrine of mutuality is unavailable to the assessee under Section 11(1)(a) of the Act. Finally, it is recorded that the case on hand comes within the ambit of 4th limb of Section 2(15) of the Act and the said provision read together with the proviso, there is no escape from the conclusion that the assessee cannot claim the status under Section 12A of the Act and the activity carried on by the assessee does not come within the meaning of charitable purpose warranting exemption from income tax. The findings recorded by the Assessing Officer are confirmed by the learned CIT (Appeals) and the Tribunal through orders Annexure B & C. We find it convenient to refer to the conclusion recorded by the Tribunal. \"As per the provisions of Section 2(15) of the Incom Tax Act, 1961, the advancement of any other object of general public utility shall not be a charitable purpos, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity or running services in relation to any trade, commerce ITA Nos.73& 121 of 2019 7 or business, for a cess or feee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity. Provided further, that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is Rs.25 lakhs or less in the previous year. Thus, provision of sec.2(15) are abundantly clear and does not require any interpretation. The activities carried on by the present assessee cannot be considered as activities of medical relief or education or relief to the poor. The correct way to express the nature of activities carried on by the assessee is to say that the assessee is carrying on \"advancement of any other object of general public utility\". When that is the case, the assessee is hit by the proviso to Sec.2(15) of the I.T.Act. The proviso reads that \"advancement of any other object of general public utility\" shall not be a charitable purpose, if its involving carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service relating to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the application of money. Therefore, we find that the case of the assessee is hit by the proviso to section 2(15) of the I.T.Act and the assessee is not entitled for the benefit of section 11 of the Act on the income generated from such activities\" ..... By any stretch of imagination, it is not possible to hold that the business carried on by the assessee is incidental to the objects mentioned in the Memorandum of Association. On the other hand, it is a pre-dominant activity carried on by the assessee. In other words, \"incidental\" is an offshoot of the \"main activities\", inherent bye-prodct of the predominant activities. The activities complementing the main activities are not in the nature of incidental to the business. It is incidental if it is supporting the activities to the main activities. In the present case, the activities carried on by the assessee is itself principal activities and not incidental activities. ITA Nos.73& 121 of 2019 8 Hence, it is not possible to hold that the construction activities carried out by the assessee is not protected by the provisions of section 11(4A) of the Act. In view of this, we do not find any merit in the argument of the Ld.AR. Thus, this ground of appeal of the assessee is dismissed.\" 5. Finally, the Tribunal considered whether the activities carried on by the assessee were incidental to the attainment of the objects of the trust. Appreciating the circumstances of the case and the circumstances in the reported judgment in ACIT v Thanthi Trust (2001) 247 ITR 785. the said contention of the assessee was also rejected. The Tribunal thrugh Annexure-C dismissed the appeal of the assessee. Hence the appeal. 6. The assessee raises the following substantial questions of law: i. In the facts and circumstances of the case ought not the Tribunal have held that the assessee is entitled for the benefit of exemption and that proviso to section 2(15) does not apply to the appellant. ii. In the facts and circumstances of the case ought not the Tribunal have held that in view of the certificate under Sec.12A would continue in force, the authority below ought not have denied benefit of exemption.\" ITA Nos.73& 121 of 2019 9 7. Mr.Anil D.Nair argues that the activities of the assessee from the manner in which the circumstances are accepted by the authorities under the Act, would come under the expression viz. the advancement of any other object of general public utility in Section 2(15) which deals with charitable purposes. The argument proceeds that the definition is inclusive and from the consitution of society and the persons managing the society, nature of activities undertaken by the assessee, the assessee is entitled to exemption under Section 12A read with section 2(15). He laid much emphasis on the words in proviso to section 2(15) i.e. any activity of rendering any service in relation to the trade, commerce or business and such circumstance is absent in the case on hand and therefore the proviso is not applicable to assessee. He is not disputing the well established proposition of law and the presumption available in fact that all the issues are dependent on the specific circumstances the authorities or this Court would be considering and there is no direct precedent on the point in support of the case of the assessee. For persuasive value, he ITA Nos.73& 121 of 2019 10 refers to the judgments reported in Commissioner of Income-tax-I, Lucknow v Lucknow Development Authority, Gomti Nagar1, Director of Income-tax (Exemption) v Sabarmati Ashram Gaushala Trust2, India Trade Promotion Organization v Director General of Income-tax (Exemptions)3, Ahmedabad Urban Development Authority v Assistant Commissioner of Income-Tax (Exemptions)4and Commissioner of Income-Tax-I, Jodhpur v Jodhpur Development Authority5. He relies on Circular No.11/2008 dated 19.12.2008 issued by CBDT. 8. Mr.Christopher Abraham in reply argues that the circumstances stated by the assessee are objectively considered by all the three authorities, and have as a matter of fact, found that the assessee acts as a middle man or agency between the Government/M.P.'s, MLA's on one hand and on another hand acts as Principal to the contractor for getting the Government works executed from the funds allotted by the Government in this behalf. 1 [2013] 38 taxmann.com 246(Allahabad) 2 [2014] 362 ITR 539 (Guj) 3 [2015] 371 ITR 333 (Delhi) 4 [2017] 396 ITR 323(Guj.) 5 [2017] 79 taxmann.com 361 (Rajasthan) ITA Nos.73& 121 of 2019 11 Basically what the assessee undertakes is preparation of estimates, providing services to the execution of Government works by 3rd party agency/contractors. The said activity is provided by the assessee on receipt of 2.5% fee by way of Commission on the total cost of project. This is a pure and simple business activity, amount is received from the Government, paid to the contractor for the executed work and there is nothing like general public utility which is sine quo non for extending the meaning of Section 2(15) of the Act. By referring to the activity particularly undertaken by the assessee through its contractor, is stepped up as charitable purpose, then any and every contractor is doing the same work for general public and they would stand on the same footing as the assessee and in such an event Section 2(15) of the Act receives not the plain and literal meaning available from the language, but imaginative meaning which may result in defeating the inclusive definition. By referring to the CBDT Circular, he argues that CBDT Circular is voachsafing the approach of the authorities under the Act to ensure evasion of tax, he prays for dismissing the appeal. ITA Nos.73& 121 of 2019 12 9. At the outset of our consideration, we preface paragraphs 3, 3.1 & 3.2 in the circular relied on by Adv.Anil D.Nair. \"3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility, i.e. The forth limb of the definition of charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act, if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 3.1 There are industry and trade associations who claim exemption from tax u/s 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to ITA Nos.73& 121 of 2019 13 section 2(15). 3.2. In the final analysis, however, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce of business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is 'charitable purpose' within the meaning of Section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.\" 10. The consideration of CBDT Circular, by straight and simple understanding, answers most of the submissions canvassed by the assessee. Let us examine the circumstances of the case viz. the registration under the Societies Registration Act may not be the exclusive or only criteria for attracting Section 2(15) i.e. the defiition of charitable purpose r/w Section 12A of the Act. The assessee must satisfy the conditions stipulated in the definition. The assessee tries to bring its case within the ambit of 4th limb of ITA Nos.73& 121 of 2019 14 section 2(15) of the Act and attempts to wriggle out from the effect of proviso which deals with services in relation to trade, commerce or business. The contention, in our considered view, is completely untenable. The assessee receives amount from the Government, executes construction work for the benefit of the Government through contractors. The assessee receives fee by way of commission from the Government. The purpose of construction of building for Government cannot be accepted as an activity coming within the meaning of advancement of any other object of general public utility. In our view the reason being the construction activity by itself does not advance any other object of general public utility. The general public utility from such construction is derived as fact with the facilities constructed by the assessee are put to utility. The activity undertaken by the assessee on one hand and on another hand with the ultimate purpose or user of buildings constructed by the Government shall not be mistaken with one another. The assessee is interpreting proviso by excluding one of the important limbs, viz. involves the carrying on of any activity in the nature of ITA Nos.73& 121 of 2019 15 trade, commerce or business. The decision of the authorities are independently considered and by taking note of CBDT Circular and above reasoning, we are of the view that the substantial question raised could be answered in favour of the revenue and against the assessee. Appeal fails and dismissed. ITA No.121 of 2019 By following the reasons stated in ITA No.73 of 2019 questions are answered in favour of revenue and against the assessee. Appeal dismissed. No order as to costs. Sd/- S.V.BHATTI JUDGE sd/- VIJU ABRAHAM JUDGE css/ ITA Nos.73& 121 of 2019 16 APPENDIX OF ITA 121/2019 PETITIONER ANNEXURE ANNEXURE -A TRUE COPY OF THE ASSESSMENT ORDER DATED 15.12.2011 FOR THE YEAR 2009-2010 ISSUED TO THE APPELLANT. ANNEXURE -B TRUE COPY OF THE OTRDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), FOR THE YEAR 2009- 2010 ISSUED TO THE APPELLANT. ANNEXURE -C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH AT 26.10.2018. ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER DATED 15.12.2011 FOR THE YEAR 2009-10 ISSUED TO THE APPELLANT. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE YEAR 2009-10 ISSUED TO THE APPELLANT. ANNEXURE C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH DATED 26.10.2018. ITA Nos.73& 121 of 2019 17 APPENDIX OF ITA 73/2019 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER DATED 22.2.2016 FOR THE YEAR 2013-14 ISSUED TO THE APPELLANT. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) FOR THE YEAR 2013-14 ISSUED TO THE APPELLANT ANNEXURE C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH DATED 26.10.2018 "