Providing essential commodities at subsidized rates is Charitable activity u/s 2(15)

ORDER

B. Ramakotaiah, Accountant Member – These appeals are by Revenue and cross-objections are by assessee against the orders of Ld. Commissioner of Income Tax (Appeals)-II, Hyderabad dated 30-07-2014 for the AYs. 2009-10 & 2011-12, on the issue whether assessee is involved in charitable activity or not?

2. Briefly stated, assessee is a Government company owned by Government of Andhra Pradesh, engaged in the business of providing. It filed return of income on 30-09-2009 claiming exemption u/s. 11 of the Income Tax Act [Act] of entire income of Rs. 1,47,35,757/-. The return was processed u/s. 143(1). Subsequently, a notice u/s. 148 was issued on the ground that:—

3. Coming to the facts and details of the case, the AO denied exemption u/s. 11 for the reasons mentioned below:—

4. Assessee submitted before the Ld. CIT (A) as under:—

“[1981] 130 ITR 28 (SC)Surat Art Silk Cloth Mfrs. Association case wherein held:

The test is “What is the predominant object of the activity – whether it is to carry out a charitable purpose or to earn profit? If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arise from the activity”

This view was again upheld by the Gujarat High Court on appeal by the revenue in [2014] 362 ITR 539 (Guj.)Director of Income Tax (Exemption) v. Sabarmati Ashram Gaoushala Trust wherein held:

“In plain terms the first proviso to section 2(15) of the Income Tax Act, 1961, inserted with retrospective effect from April 1, 2009, by the Finance Act, 2010, provides for exclusion from the main object of the definition of the term “charitable purposes” and applies only to cases of advancement of any other object of general public utility. If the conditions provided under the proviso are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue of the proviso, would be excluded from the definition of “charitable trust. The statutory provisions, as explained on the speech of the Finance Minister and Circular No. 11 of 2008, are that the activity of a trust would be excluded from the term “charitable purpose” if it is engaged in any activity in the nature of trade, commerce, or business or renders any service in relation to trade, commerce, or business for a cess, .fee or any other consideration. It is not aimed at excluding activities genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce, or business which are masked as “charitable purpose”. Many activities of genuine charitable purposes which are not in the nature of trade, commerce or business may still generate marketable products. After setting off of the cost, for production of such marketable products from the sale consideration, the activity may leave a surplus. The law does not expect the trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating “surplus” is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature. ”

Further, the above same view was upheld by the Hon’ble tribunal in the case of [2014] 160 TTJ (Hyd) 771 The Institute & Electronics Engineers Inc. v. Director of Income Tax (Exemption):

Charitable Trust – Registration U/s.12AA – Charitable purpose vis-a-vis profit motive – object of the assessee being in the nature of charitable activities, registration U/s.12AA cannot be denied on the ground that some profit has been earned by assessee, so long as provisions of 55. 11, 12 and 12AA are complied with and there is no violation of S. 13 – After the omission of the clause “not involving carrying any activities of profit” from s. 2 (15) by the Finance Act, 1983 w.e.f 1st April, 1983, the element of profit cannot be excluded from the definition” Charitable purpose”.’

Relying on the above case laws the appellant pleaded for exemption u/s. 11 of the I.T. Act, 1961.

5. After considering the detailed submissions of assessee, Ld. CIT (A) has held in favour of assessee stating as under:—

‘5. The appellant is engaged in the activity of procuring essential commodities like rice, wheat, oil, sugar, LPG Gas, Kerosene etc. etc., and sells them at subsidized rate through public distribution system and the beneficiaries are people falling below the poverty line, mostly, lower income groups. It is pertinent to mention that the provisions of section 2(15) were amended by Finance Act, 2008 w.e.f. 01.04.2009.

Before amendment the section read as under:

“Charitable purpose” includes relief to the poor, education, medical relief and advancement of any other object of general public utility.

After the amendment w.e.f. 01.04.2009 the section reads as under:

“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 use or application, or retention, of the income from such activity:

5.1 It is pertinent to mention that the CBDT vide Circular No. 11 of 2008 dated 19.12.2008 had explained in detail the purpose of this amendment as under:

Section 2(15) of the Income Tax Act, 1961 (‘Act’) defines “charitable purpose” to include the following:-

An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of ‘charitable purpose’. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of –

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.

2. The following implications arise from this amendment –

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.

2.2 ‘Relief of the poor’ encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11 (4A) or the seventh proviso to section 10(23C) which are that

Similarly, entities whose object is ‘education’ or ‘medical relief’ would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

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 fourth 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 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 or 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.

5.2 As evident from the clarification given in Circular no. 11 dated 19.12.2008, it is amply clear that this provision was brought into Act w.e.f. 01.04.2009 to prohibit certain industries and trade associations, claiming exemption u/s. 11 on the ground that their objectives are charitable in nature. It was further made clear that whether such entity is carrying out activity in the nature of trade or not depends on the facts of each case. Paragraph 2.1 of the Circular makes it amply clear that the activities aimed at providing relief to the poor, education, medical relief etc. etc. will fall u/s.2(15) even if such activity incidentally involves carrying on commercial activity. Further, para 2.2 of the Circular makes absolutely clear that ‘Relief of the poor’ encompasses a wide range of objectives for the welfare of the socially disadvantaged and the needy people like orphans, destitute, handicapped, disadvantaged women and children etc. etc. Therefore, the entities having such objectives will continue to be eligible for exemption even if they incidentally carry on commercial activity. The spirit of amendment brought in w.e.f. 01.04.2009 is not to deny the benefits to the organisations providing relief to the poor, rather it is aimed to deny exemption to the organizations claiming the benefit under the guise of providing relief to the poor.

5.2 It is pertinent to mention that the Hon’ble High court of Andhra Pradesh in the appellant’s own case in case Reference No. 59 of 1992 held that the Corporation is a Charitable Institution within the meaning of section 2(15). After elaborate discussion this judgement was delivered on 21.08.1990 much prior to the amendment to section 2(15). Nevertheless, the activities of the corporation remain same for decades right from inception to till date. After having considered all the information on record, the primary objective of the Corporation is to provide food to the poor at the subsidized rates which certainly falls within the ambit of section 2(15). In the process of providing food grains to the crores of people, the corporation should run itself in a commercial manner so that it can sustain itself, that does not mean the corporation is doing business activity. The primary purpose and objective of the very existence of the Corporation is to supply essential commodities to the needy, poor, therefore, fall within the ambit of section 2(15)’.

6. Aggrieved Revenue has raised the following grounds:—

“2. The learned CIT (A) erred in ignoring the fact that assessee-company is involved in purchase and sale of essential commodities like rice, wheat, LPG Gas, Sugar, Oil, Kerosene etc. at the prices fixed by the government and in turn gets subsidy and commission from the government and therefore it is trading/business with a motive to earn profit.

3. The learned CIT (A) has not discussed the issue of quality of rice, wheat, oil etc. being supplied through the PDS system and the amount of benefit that is passed on to the consumer/beneficiary. It is well known fact that the essential commodities supplied through PDS are of poor quality and are available at the same price in the open market. Therefore, there is no advancement of any object in the interest of general public.

4. The learned CIT (A) has erred in not discussing the issue of utilization of subsidy given by state government in purchasing the essential commodities to be supplied through PDS system by the assessee corporation. As these facts have not been brought on record, it is concluded that the subsidy amount has not been utilized for advancement of any other object of general public utility. Hence the assessee is not eligible for claim u/s 2(15).

5. The learned CIT (A) erred in ignoring the fact that assessee’s alleged claim of ‘general public utility’ is nothing but only a colorable device to conceal its real intention of conducting business with a profit motive”.

7. Ld. CIT-DR referring to the order of the AO and orders of ITAT on the issue in earlier years, submitted that the object of the company does not specifically mention relief of poor and its assessee own claim as ‘general public utility’. Referring to the observation of ITAT (TM case) about ‘general public utility’ and judgment of Hon’ble AP High Court and amended definition of Section 2(15), it was the submission that relief of poor is a wider term and a panoramic view cannot be taken if assessee subsidises the price and definition of Section 2(15) cannot be interpreted in the fashion considered by Ld. CIT. The phrases in the definition of ‘charitable nature’ are separate and destitute and cannot be considered in a broader view. It was further submitted that Government gives subsidy but not reimbursement. Therefore, assessee’s activity cannot be considered as ‘relief of poor’. It is a trading/business activity and there can be incidental benefit to poor but not main activity.

8. Ld. AR referring to the order of ITAT as well as Hon’ble High Court submitted that there is no doubt about the activities of assessee being charitable in nature and the issue was crystallized by the orders in earlier years. The amendment to Section 2(15) does not in any way effect assessee and there is no profit element in assessee’s activity of providing ration to the poor and weaker sections.

9. We have considered the rival contentions. In our view, the AO has unnecessarily disturbed the stand taken in earlier years when facts are same. All the arguments now raised by the AO have already been considered earlier and the ITAT in assessee’s own case A.P. State Civil Supplies Corpn. v. ITO [1991] 37 ITD 1 (Hyd.) (TM) has held as under:—

“The Memorandum of the assessee in item III has made a bifurcation between the main objects sub-division (a) and objects incidental or ancillary to the attainment of the main objects sub-division (b). Clause 28 falls in sub-division(b). The Memorandum itself describes the clause as an object incidental or ancillary to the attainment of the main objects. Merely because a profit resulted, the object does not cease to be charitable. No activity can be efficiently, properly, adequately or economically carried on unless it is carried on business principles. This is all that the ancillary and incidental objects spell out. Even assuming that any declaration of dividends was permissible under clause 28 of the Memorandum of Association as it stood before amendment, the dividend would go in its entirety to the Government, i.e., it goes to the public and consequently there would be no chance of any element of private gain, if by private gains it is meant that the gain ensure for individuals other than “State”. Even if dividends are to be declared, if its utilisation is for public purposes, the entity does not lose its character of charitable nature. The assessee was set up by assets transferred to it by the Government. It is only in the fitness of the things that in the event of the assessee company being wound up, whatever assets are left out of those which are received on transfer initially together with accretion thereto should revert to the Government which had transferred its own assets to the assessee company for setting up. Therefore, on the facts, the distribution of assets in the present case is only a return of the asset to the government with whose assets the assessee came into being. On the facts, therefore, article 132 also does not militate against the conclusion that the assessee is a charitable entity. For the aforesaid reason and on any analysis of the activities of the Corporation in the light of the various judicial pronouncements, the activities are charitable in nature within the meaning of section 2(15)”.

10. This view was upheld by the Hon’ble AP High Court in the appeal of Revenue in CR No. 59/1992 dt. 04-03-2003 as under:—

“The Tribunal noticed that the assessee is required to deal in food grains, foodstuffs, and other essential commodities. It is a Government run institution and its dominant object is to ensure supply of food grains. edible oils etc., to the masses through approved outlets by grant of substantial subsidies in order to hold the price line, which is the main object of price stabilization/equalization fund in Article 6. The Tribunal also noticed that in the particular assessment year, the State Government granted subsidy of Rs. 44,66,51,914/-, but for which, the Corporation would have suffered huge losses. It is under those circumstances, the Appellate Tribunal found that the assessee-institution itself has come into existence with an object to ensure distribution of food grains and edible oils to the masses through the approved outlets. For the purposes of the Act, the Appellate Tribunal found that the income derived by the Corporation is utilized for charitable purpose. Charitable purpose as defined in sub-section (2) of Section 15 of the Act includes the relief of poor, education, medical relief and the advancement of any other objects of general public utility. It is under those circumstances, the Appellate Tribunal held that the primary object of the assessee-Corporation is a charitable one.

The Tribunal applied the ratio laid down by the Supreme Court in C.I.T. v. Apsrtc and also another decision rendered by t.h.is Court in Girijan Cooperative Corporation Limited v. Commissioner of Income tax. The findings so recorded by the Appellate Tribunal, in our considered opinion, are not vitiated for any reason whatsoever. The Appellate TribW1al did not commit any error in upholdi.i1g the plea of the assessee that the main and dominant object of the assessee-Civil Supplies Corporation is a charitable one.

The Tribunal adverted to the point urged by the Revenue that there is a provision even in the Articles of Association for providing the manner and method in which the profits earned by the Corporation are to be utilized. It was the case of the Revenue that the very fact that the assessee-Corporation is entitled to make the profits makes its activities as business activity. It was Contended that the Civil Supplies Corporation indulges in pure and simple trading activity in the food grains like any other businessman. The Tribunal lightly pointed out, of course, relying upon the Supreme Court Judgment referred to above that no activity can be efficiently, properly, adequately or economically carried on unless it is carried on business principles. Mere provision in the memorandum of articles of association providing as to how the profits if any earned by the assessee-corporation are to be utilized itself shall have no bearing upon the question as to whether the assessee is a charitable one or not. The reasoning of the Tribunal, in our considered opinion, is neither perverse nor vitiated. At any rate, there is nothing on record to suggest that the Corporation made any profits as such. Even otherwise, the Tribunal noticed that the expression ‘not involving the carrying on of any activity for profit in Section 2(15) of the Act were omitted by the Finance Act, 1988 with effect from 1-4-1984. Therefore, the question as to whether the profit earned or capable of earning has any bearing on the question as to whether the Civil Supplies Corporation is a charitable organization or not has become academic.

For the aforesaid reasons, we do not find any reason or justification to take a different view other than one taken by the Appellate ‘Tribunal. As has been rightly observed by the Appellate Tribunal, even if any dividends are declared, the utilization of the ‘same by the Corporation is undoubtedly for public purpose. Therefore, the Corporation does not lose its character of charitable nature. In such view of the matter, the 1st question referred for our opinion is answered against the Revenue and in favour of the assessee.

So far as the next question is concerned, the Appellate Tribunal took the correct view that whether the amendment to clause 28 of the Memorandum of Articles of Association took effect from 16-11-1981, the date which fell prior to the commencement of the accounting period on 2-1- 1989 or a date which fell subsequent to the accounting period is of no consequence and has no relevance. Since the Tribunal had arrived at the conclusion that the activities are charitable in nature within the meaning of Section 2(15) of the Act, the view taken by the Tribunal is absolutely correct and does not suffer from any infirmity. For the aforesaid reasons, it is unnecessary to answer the question referred for our opinion at the instance of the assessee.”.

11. The assessee was established with an object to ensure supply of food grains, edible oils, dall etc., to the masses/general public through the approved outlets by State Civil supplies department by grant of substantial subsidies given by the Govt. and is a Corporation governed and controlled by the Govt. of A.P {then}. The main activities of the Corporation are purchase/procurement, storage and distribution essential commodities to the poor and needy people of the society in general. The Corporation is dealing in levy items like rice, edible oils, sugar etc. The Assessee Corporation has been carrying out its object of distribution of essential commodities to the people particularly to the poorer section of the society at lower prices with the support of subsidy being provided by the then Government of Andhra Pradesh. Without the subsidy the Corporation cannot survive. The sale price is less than the procurement price. This activity no way can be considered as trading activity. Whereas in the case of a trader or an ordinary business man sale price generally will be more than cost and there can not be rate fixed by government. Therefore, calling the activities of the assessee in the nature of an ‘ordinary business man does’ is totally incorrect and without any evidentiary value.

12. Further during the year under consideration, as submitted the organizations gross receipts are of Rs. 4249.11 cr and the net profit is Rs. 4.67 cr. The gross receipts includes sales of Rs. 2144.46 cr the following subsidies, of Rs. 2102.65 cr without which there would have been heavy losses:—

Thus, the activities of the assessee are unlike an ordinary business man or trader but can be considered in the nature of relief to the poor and therefore “charitable” and eligible for exemption of income u/s 11 of the Act.

13. As regards the issue of amendment to Section 2(15) of the Act, the provisions of Sec. 2(15) before and after amendment is as under:—

Before amendment

“charitable purpose” includes relief to the poor, education, medical relief and advancement of any other object of general public utility

After amendment ie. substituted for above by Finance Act, 2008, w.e.f. 01-04-2009

“charitable purpose” includes relief to the poor, education, medical relief and 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 income from such activity;

Prima facie upto and assessment year 2008-2009 “charitable purpose” includes relief of poor, education, medical relief and any other object of public utility. The sec 2(15) amended w.e.f. 1-4-2009 that advancement of any other object of general public utility shall not be a “charitable purpose” if it involves the carrying on of

14. Therefore from the above proviso point of view it is clear that in order to deny the benefit of exemption the activity must be advancement of any other object of general public utility and the above two conditions ie., (a) and (b) exist. As far as the first condition is concerned it is not in trading and it is a decided fact before various appellate authorities that the activities of the organization are charitable and hence the said proviso is not applicable. As far as the second condition is concerned ie. any activity of rendering of any service in relation to any trade commerce or business, for a fee or cess or any other consideration irrespective of the nature of use or application of the income from such activity, or the retention of such income by the concerned entity, it is essential that one should render any service in relation to any trade, commerce or business for a fee or cess or any other consideration and since assessee is neither a service organization nor rendering any services, this part of amendment is also totally not applicable to the case.

15. Some of the settled case laws in favour of assessee:—

Held:

This view was again upheld by the Gujarat High Court in DIT (Exemption) v. Sabarmati Ashram Gaushala Trust [2014] 362 ITR 539  wherein held:—

‘In plain terms the first proviso to section 2(15) of the Income Tax Act, 1961, inserted with retrospective effect from April 1,2009, by the Finance Act, 2010, provides for exclusion from the main object of the definition of the term “charitable purposes” and applies only to cases of advancement of any other object of general public utility. If the conditions provided under the proviso are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue of the proviso, would be excluded from the definition of “charitable trust. The statutory provisions, as explained on the speech of the Finance Minister and Circular No. 11 of 2008, are that the activity of a trust would be excluded from the term “charitable purpose” if it is engaged in any activity in the nature of trade, commerce, or business or renders any service in relation to trade, commerce, or business for a cess, fee or any other consideration. It is not aimed at excluding activities genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce, or business which are masked as “charitable purpose”. Many activities of genuine charitable purposes which are not in the nature of trade, commerce or business may still generate marketable products. After setting off of the cost, for production of such marketable products from the sale consideration, the activity may leave’ a surplus. The law does not expect the trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself not be the sale consideration for judging whether any activity is trade, commerce or business particularly if generating “surplus” is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature.’

(c) Institute & Electronics Engineers Inc. v. DIT (Exemption) [2014] 146 ITD 263 (Hyd.):—

‘Charitable trust – Registration u/s. 12AA- Charitable purpose vis-a-vis profit motive – object of the assessee being in the nature of charitable activities, registration u/s. 12AA cannot be denied on the ground that some profit has been earned by assessee, so long as provisions of SS. 11,12 and 12AA are complied with and there is no violation of S. 13 – After omission of the clause “not involving carrying any activities of profit” from S. 2(15) by the Finance Act, 1983 w.e.f 1st April, 1983, the element of profit cannot be excluded from definition “Charitable purpose”.’

16. In view of the principles laid down by the Hon’ble Supreme Court and in assessee’s own case by jurisdictional High Court, we uphold the order of Ld. CIT (A) and dismiss the grounds raised by Revenue.

17. Cross-Objections are raised in support of orders of Ld. CIT (A), therefore, they are academic in nature and are not required for specific adjudication.

18. In the result, the Revenue’s appeals are dismissed and Cross-Objections are treated as allowed.