Research Center for Organic Farming Is Charitable Activities Classified as “Relief of Poor” for Tax Exemption
Issue: Whether the activities of a charitable company, primarily engaged in promoting organic farming and supporting farmers, should be classified as “relief of poor” for the purpose of tax exemption under Section 11 of the Income-tax Act, 1961.
Facts:
- The assessee, a charitable company registered under Section 12A, aimed to establish a research center for organic farming, promote skill development, and engage in agro-product trade.
- The Assessing Officer (AO) considered the assessee’s activities to be primarily business-oriented and categorized them under “advancement of objects of general public utility,” denying exemption under Section 11.
- The assessee argued that their activities, including procuring produce from poor farmers, providing assistance, and conducting awareness programs, were charitable in nature, with business activities being incidental.
Decision:
- The court held that the assessee’s activities fell under the “relief of poor” category for the definition of “charitable purpose” under Section 2(15) and for exemption under Section 11.
- The court emphasized that the assessee’s primary focus was on supporting poor and marginal farmers, preventing their exploitation, and providing assistance, aligning with charitable objectives.
- The business activities were considered incidental to the main charitable goals.
- The court also noted that the AO overlooked evidence of substantial income being distributed to poor farmers, which further supported the assessee’s claim.
Key Takeaways:
- This case clarifies the interpretation of “charitable purpose” under Section 2(15), particularly concerning activities aimed at the “relief of poor.”
- It highlights that even if a charitable company engages in business activities, they can still qualify for tax exemption if their primary focus and activities are charitable in nature.
- The decision emphasizes the importance of examining the overall objectives and activities of a charitable organization, rather than focusing solely on the presence of business elements.
HIGH COURT OF KERALA
Biowin Agro Research
v.
Income-tax Officer Exemption Ward
Dr. A.K. Jayasankaran Nambiar and EASWARAN S., JJ.
IT Appeal NO.4 and 5 OF 2023
JANUARY 24, 2025
K. Srikumar, Smt. Ammu Charles and K. Manoj Chandran, Advs. for the Petitioner. Christopher Abraham, SC, Income Tax Department for the Respondent.
JUDGMENT
Dr. A.K. Jayasankaran Nambiar, J.- In these appeals, the appellant/assessee impugns the common order dated 24.02.2023 of the Income Tax Appellate Tribunal, Cochin Bench in I.T. Appeal Nos.2 and 3/Coch/2022 pertaining to the assessment years 2017-18 and 2018-19 respectively.
2. The brief facts necessary for disposal of these I.T. Appeals are as follows:
The appellant is a company registered under Section 8 of the Companies Act, 2013 for carrying out public charitable objects and is also registered as a charitable institution under Section 12A of the Income Tax Act [hereinafter referred to as the “I.T. Act”]. The main objects of the appellant/company as per its Memorandum of Association are as follows:
“1. To establish a world class research centre in the field of organic farming and to promote, encourage, establish, develop, maintain, organize, undertake, manage, operate, research in all kinds of biotechnological, organic, agricultural, horticultural, dairy, poultry and farm produces and products and to encourage research and development for promoting nutritious food-grains, cereals, seeds, soya-beans, corn, corn oils, cash crops, plants, flowers, vegetables, spices, coffee, edible oils, meat fish, eggs, and other human food products to ensure quality food products are made available to the society.
2. To initiate, carry out, execute, implement, aid and assist activities towards development in the organic farming sector in India and meeting the entire value chain’s requirements of approximately trained manpower in quantity and quality on a sustained and evolving basis and to prevent use of harmful chemicals and pesticides in agricultural activities in land through establishing, promoting academics of excellence and to coordinate participation of social partners, employers in the private sector, training providers, professional societies and NGOs/civil society groups in the process of skill development for the organic farming sector and to facilitate in setting up a robust and stringent certification and accreditation process for the Organic farming Sector to ensure consistency and acceptability of standards with approval of appropriate authorities.
3. To buy, sell, resell, import, export, transport, store, develop, promote, market or supply, trade, deal in any manner whatsoever in all type of agro-products and related goods on retain as well as on wholesale basis in India or elsewhere.”
3. The appellant filed Nil returns during the assessment years 2017-18 and 2018-19 respectively. The case of the appellant was however selected for scrutiny under Section 143(2) of the I.T. Act, and after hearing the appellant, the assessment was completed for the said years by disallowing the claim for exemption under Section 11 of the I.T. Act and demanding substantial amounts towards tax, cess and interest. Penalty proceedings under Section 270A were also separately initiated.
4. Essentially, the Assessing Officer found that the appellant company had earned a net profit from its business activities and had declared Nil taxable income after application of its income under Section 11 of the I.T. Act. However, the Assessing Officer also found that the appellant did not satisfy the requirement of application of income for “relief of the poor” for the purposes of Section 11 read with Section 2(15) of the I.T. Act and that the activities of the appellant were more in the nature of business activities carried on with a profit motive.
5. In the appeals carried by the appellant against the assessment orders, the First Appellate Authority upheld the order of the Assessing Officer inter alia by finding that although the appellant was established as a charitable company and was registered under Section 12A of the I.T. Act, its activities would attract only the later limb of the definition of “charitable purpose” under Section 2(15) that dealt with “advancement of an object of general public utility”. Consequently, the First Appellate Authority proceeded to hold that the appellant did not satisfy the requirement for exemption as per the proviso to Section 2(15) read with Section 11 of the I.T. Act. Although the appellant preferred further appeals before the Appellate Tribunal, the Tribunal also dismissed the appeals by sustaining the order of the First Appellate Authority.
6. Before us, the appellant raises the following substantial questions of law:
| (a) | Whether on the facts and in the circumstances of the case has not the learned tribunal gone wrong in finding that the object of the appellant is not “relief of the poor” ? |
| (b) | Ought not the learned Tribunal to have allowed the claim of exemption under Section 11 of the Act ? |
7. We have heard Sri.K.Sreekumar, the learned senior counsel, assisted by Smt.Ammu Charles, the learned counsel for the appellant/assessee and Sri.Christopher Abraham, the learned Standing Counsel for the Department.
8. The contentions of Sri.Sreekumar, the learned senior counsel for the appellant, briefly stated, are as follows:
| ■ | Referring to Circular No.11/2008 dated 19.12.2008, the appellant would contend that the finding that the activities carried on by the appellant do not attract the description of “Relief of the poor” for the purposes of Section 2(15) of the I.T. Act is wholly incorrect. It is argued that relief provided to small and marginal farmers would also qualify as “Relief of the poor”. The categorisation effected by the Ministry of Agriculture & Farmers Welfare, Government of India, is relied upon to show that a “Small farmer” refers to a farmer whose agricultural area is more than 1 hectare and upto 2 hectares either as owner or tenant or share proper. “Marginal farmer” refers to a farmer whose agricultural tract is upto 1 hectare for peasant farming. It is the case of the appellant that the small and marginal farmers residing in Wayanad, Kerala had obtained registration under the Organic Certification Standards implemented through the Agricultural and Processed Food Products Export Development Authority [APEDA], which is a body under the Ministry of Commerce and Industry, Government of India, and the said farmers were engaged in organic farming in accordance with the said Certification Program. Inasmuch as these small and marginal farmers found it almost impossible to sell their products as organic certified products in the national and international market, and they could not obtain organic certification on account of the stringent standards that were expensive to attain, they were being deprived of their rightful share in the national and international markets. It was in order to alleviate the hardship of such small and marginal farmers that the appellant sourced products from them by offering premium prices and marketing their products in India and abroad. After initially paying a base price for the products sourced from them, the appellant would thereafter share the higher price obtained by them consequent to receipt of fair trade premium amounts, with the said farmers so as to save them from poverty. The appellant contends therefore that its activities, which are in tune with the objects in the Memorandum of Association have necessarily to be seen as geared towards providing relief of the poor. |
| ■ | Reliance is placed on the decision in Thiagarajar Charities v. Additional Commissioner of Income-tax – to contend that the carrying on of business by the appellant is not the main object of the Trust but merely a means to attain the objects of a Trust. Inasmuch as the carrying on of business was only a means of achieving the object of the Trust which was to provide relief of the poor, the exemption claimed by the appellant could not have been denied by the Appellate Tribunal. Reliance is also placed on the decision in Commissioner of Income-tax – I, Lucknow v. Lucknow Development Authority, Gomti Nagar – to point out that in the absence of any material that was brought on record by the Department to suggest that the assessee was conducting its affairs on commercial lines with the motive of earning profit or that it had deviated from its objects as detailed in the Memorandum of Association, the proviso to Section 2(15) of the I.T. Act could not be held applicable to the appellant/assessee and it had to be seen as entitled to the exemption provided under Section 11 of the I.T. Act. |
| ■ | It is the specific case of the appellant that it had produced documents in the form of details of approximately 13,320 farmers, including therein the extent of their landholdings, to show their categorization as ‘small and marginal farmers’ based on the criteria prescribed by the Ministry of Agriculture & Farmers Welfare, to establish that its activities were intended to provide relief of the poor. The Tribunal, on the other hand, chose not to consider the said documentary proof produced by the appellant before it and proceeded to mechanically deny the exemption to the appellant. |
9. Per contra, Sri. Christopher Abraham, the learned Standing Counsel, while supporting the impugned orders of the First Appellate Authority and the Appellate Tribunal, further contends in the alternative that there never was an application of income by the appellant/company to the extent envisaged under Section 11 of the I.T. Act and no proof was produced before the Tribunal to substantiate the said fact. It is pointed out that in the absence of any discussion by the Assessing Authority, the Appellate Authority or the Appellate Tribunal on the merits of the claim for exemption, the impugned orders did not require to be interfered with.
10. We have considered the rival submissions and also perused the pleadings in the appeals and the documents and precedents made available before us at the time of hearing. It is clear from the pleadings before us that the appellant/company is engaged in the activity of procuring agricultural produce at premium price and reselling the same in the domestic and international market. In tune with the main objects in the Memorandum of Association of the appellant/company it effectively prevents the exploitation of farmers by middleman. There is also sufficient indication that the appellant provides assistance in the form of crop saplings, manure, awareness programs related to organic farming and sustainable farming methods designed to preserve the ecological systems. The receipts obtained by the appellant out of the aforesaid activities are stated to be utilised for the upliftment of farmers. It is apparently on account of the said objects pursued by the appellant/company that it was permitted to be registered under Section 8 of the Companies Act which deals with companies carrying out public charitable objects. It is for the same reason that they were granted registration under Section 12A of the I.T. Act as well. It cannot be in dispute therefore that the company is engaged in the pursuit of charitable objects and the only question that arises for consideration before us is with regard to the categorisation to be accorded to the activities carried on by the company. While the appellant/company would contend that its activities are geared towards providing relief of the poor which would include providing relief to small and marginal farmers in the light of Circular No.11/2008 dated 19.12.2008 issued by the Central Board of Direct Taxes, the contention of the Revenue is essentially that the activities of the appellant/company are more in the nature of business activities and that the carrying on of charitable objects is only incidental to such business activities; that the appellant is therefore engaged only in the advancement of other objects of general public utility.
11. Section 2(15) of the I.T. Act defines “charitable purpose” for the purposes inter alia of Section 11 of the I.T. Act, as follows:
“2. In this Act, unless the context otherwise requires.-
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(15) “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including water-sheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, 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 use or application, or retention, of the income from such activity, unless—
| (i) | such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and |
| (ii) | the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;” |
It is apparent from a reading of the definition of ‘charitable purpose’ that while it specifically includes “relief of the poor”, it also includes as a residual category the “advancement of any other object of general public utility”. In our view, a correct understanding of the scope of the definition would be to treat the first limb of the definition as referring to specific instances of charitable purpose and the last limb as a residual category encompassing therewith charitable purposes other than those that are specifically mentioned in the first limb. Accordingly, if we find that the activities of the appellant can be appropriately categorised under any of the categories falling in the first limb of the definition, then there is no occasion to look to the second limb of the definition. A reading of the definition, in its entirety also indicates that the criteria that decides whether an activity would fall within the first or the second limb of the definition would be whether or not the business activity carried on by the appellant manifests the pursuit of its main objects or is merely incidental thereto. In the case of the appellant/assessee, we find from the nature of the activities carried on by the assessee that the business activities are merely incidental to the pursuit of its main object which is to establish a world class Research Centre in the field of organic farming and to promote, encourage, establish, develop, maintain, organize, undertake, manage, operate, research inter alia in all kinds of biotechnological, organic, agricultural, horticultural, dairy, poultry and farm produces and products and to encourage research and development for promoting nutritious food-grains, cereals, seeds, soya-beans, corn, corn oils, cash crops, plants, flowers, vegetables, spices, coffee, edible oils, meat fish, eggs, and other human food products to ensure quality food products are made available to the society. The activity of “buying, selling, reselling, importing, exporting, transporting, storing, developing, promoting, marketing or supplying, trading”, dealing in any manner whatsoever in all type of agro-products and related goods on retail as well as on wholesale basis in India or elsewhere is only incidental to the first two main objects specified in the Memorandum of Association. The tests laid down in Thiagarajar Charities (supra) and Assistant Commissioner of Income Tax v. Thanthi Trust that hold that if a business is carried on solely for the purposes of attainment of a charitable object, it cannot be seen as a pursuit of the object itself, applies squarely in the case of the appellant/assessee and persuades us to hold that the activities of the assessee are intended to fulfill a charitable purpose of relief of the poor. We cannot find it in ourselves to accept the reasoning of the authorities below that the main object of the appellant/assessee was to carry out business and that the charitable purpose carried on by it was merely one for the advancement of an object of general public utility. This is more so because we find that the authorities below virtually ignored the evidence produced by the appellant to demonstrate that a substantial part of the income received by it was given to poor and marginal farmers from whom they had sourced organic agricultural produce. In our view, the payment of such amounts to the poor and marginal farmers, if proved, would have led the authorities below to conclude that the activities of the appellant were carried on with the object of providing relief of the poor. They would have arrived at such a conclusion by looking at the activities of the appellant company in a holistic manner and against the backdrop of its stated objects in its Memorandum of Association.
12. The impugned order of the Appellate Tribunal that upholds the finding of the authorities below is therefore set aside and the appeals allowed to the extent of holding that the activities of the appellant/assessee have to be seen as falling under the head of “relief of the poor” for the purposes of the definition of “charitable purpose” under Section 2(15) of the I.T. Act and for the purposes of computation of income and grant of exemption under Section 11 of the I.T. Act.
13. That said, we do find force in the submission of the learned counsel for the Department that there was no enquiry by the authority below, with reference to the accounts and documents produced by the appellant/assessee, on the aspect of whether the appellant had in fact satisfied the requirement of application of income in terms of Section 11 of the I.T. Act, for claiming the exemption. We feel that the assessment of the appellant/company under the I.T. Act for the assessment years 2017-18 and 2018-19 would not be complete unless the above exercise is also completed by the Assessing Officer. While allowing the I.T. Appeals therefore, by finding that the appellant would be entitled to the exemption under Section 11 of the I.T. Act as an entity providing relief of the poor, we remand the matter to the Assessing Authority to determine whether or not the appellant actually satisfied the requirement of application of income under Section 11 of the I.T. Act during the assessment years in question for the purposes of obtaining the benefit of exemption. The Assessing Authority shall complete the aforesaid exercise within an outer time limit of six months from the date of receipt of a copy of this judgment, after hearing the appellant/assessee and perusing the documents and other materials produced by the appellant to substantiate its contentions on merits.
The I.T. Appeals are thus allowed by answering Question No. (a) in favour of the assessee and against the revenue and remanding the matter to the Assessing Officer for a consequential finding on whether or not the appellant satisfies the requirement of application of income under Section 11 of the I.T. Act during the assessment years in question for obtaining the benefit of exemption.