2013 (10) TMI 19 - HC - Income Tax

Charitable activities u/s 2(15) - exemption u/s 10(23C) - Whether receipt of royalty in lieu of IPR is charitable activity or not - Requirement of separate books of accounts Registration of charitable institution u/s 10(23C) of the Income Tax Act Held that - the contention of the Revenue that the petitioner charges fee and, therefore, is carrying on business, has to be rejected. The intention behind the entire activity is philanthropic and not to recoup or reimburse in monetary terms what is given to the beneficiaries. Element of give and take is missing, but decisive element of bequeathing is present. In the absence of -profit motive and charity being the primary and sole purpose behind the activities of the petitioner is perspicuously discernible and perceptible. As observed above, fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long-term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under the residuary clause -general public utility Regarding separate books of accounts - Held that - We fail to understand when the petitioner is maintaining the books of accounts with regard to their receipts/income as well as the expenses incurred for their entire activity then how it can be held that separate books of accounts have not been maintained for business activities. The -business activities are intrinsically woven into and part of the charitable activity undertaken. The -business activity is not feeding charitable activities. In any case, when we hold that the petitioner is not carrying on any business, trade or commerce, question of requirement of separate books of accounts for the business, trade or commerce is redundant. Restriction under First proviso to section 2(15) - Held that - Question is whether the legislative intent is to exclude from definition of charitable purpose any activity which has the aim and object of providing services to trade, commerce or business. The matter is not free from doubt but there are good reasons to hold that the bar or probation is not with reference to activity of the beneficiary but the activity of the assessee under the residuary clause. Value of Ra. 10 lacs (Now ₹ 25 lacs) under Second proviso to section 2(15) - Held that - A small charitable organization that receives token fee of more than ₹ 80,000/- a month or now ₹ 2,00,000/- per month approximately, would disqualify and lose their charitable status. The object of the proviso is to draw a distinction between charitable institutions covered by last limb which conduct business or otherwise business activities are undertaken by them to feed charity. The proviso applies when business was/is conducted and the quantum of receipts exceeds the specified sum. The proviso does not seek to disqualify charitable organization covered by the last limb, when a token fee is collected from the beneficiaries in the course of activity which is not a business but clearly charity for which they are established and they undertake. Petitioner can be denied benefit of registration/notification under Section 10(23C)(iv) - Decided in favor of assessee.

Summary

Issues Involved:
1. Denial of registration under Section 10(23C)(iv) of the Income Tax Act.
2. Nature and character of the petitioner's activities.
3. Maintenance of separate books of accounts.
4. Interpretation of statutory provisions and amendments.
5. Applicability of Circular No. 11 of 2008.
6. Difference between business and charity.

Detailed Analysis:

1. Denial of Registration under Section 10(23C)(iv):
The petitioner, a not-for-profit society, sought quashing of the order dated 17th November 2008, which denied them registration under Section 10(23C)(iv) of the Income Tax Act. The denial was based on two grounds: (a) the petitioner's activities were considered commercial due to the fees charged for intellectual property rights, and (b) failure to maintain separate books of accounts for business activities.

2. Nature and Character of Activities:
The petitioner's activities involved promoting and creating awareness about GS1 standards, which are globally recognized coding systems. The court noted that the petitioner's primary objective was charitable, as it promoted a universal identification system beneficial for various sectors, including government and private entities. The court emphasized that the petitioner's activities did not have a profit motive, which is crucial in determining whether an activity is charitable or commercial.

3. Maintenance of Separate Books of Accounts:
The respondents argued that the petitioner failed to maintain separate books of accounts for its commercial activities. The court rejected this argument, stating that the petitioner's activities were intrinsically connected to its charitable objectives. Therefore, maintaining separate books was unnecessary as the activities were not independent business ventures but part of the charitable mission.

4. Interpretation of Statutory Provisions and Amendments:
The court examined Section 2(15) of the Income Tax Act, both before and after its amendment by the Finance Act, 2008. The amendment introduced a proviso that excluded activities involving trade, commerce, or business from being considered charitable if they charged a fee. However, the court referred to the Supreme Court's decision in Additional CIT v. Surat Cloth Manufacturers Association, which held that the primary purpose of the trust or institution should be examined to determine its charitable nature. The court concluded that the petitioner's primary purpose was charitable, despite earning fees.

5. Applicability of Circular No. 11 of 2008:
The court referred to Circular No. 11 of 2008 issued by the Central Board of Direct Taxes, which clarified that entities engaged in commercial activities under the guise of public utility would not qualify for tax exemption. The court found that the petitioner's activities did not fall under this category, as their primary objective was charitable, and the fees charged were nominal and not indicative of a profit motive.

6. Difference Between Business and Charity:
The court distinguished between business activities and charitable activities, emphasizing that charity is driven by altruism and the desire to serve others, whereas business is driven by profit. The court noted that the petitioner's activities, including charging a nominal fee for the GS1 coding system, were not commercial but aimed at promoting a public utility. The fee was necessary for sustainability and did not convert the charitable activity into a business.

Conclusion:
The court allowed the writ petition, quashing the order dated 17th November 2008, and directed the respondents to grant approval under Section 10(23C)(iv) of the Income Tax Act within six weeks. The court emphasized that the petitioner's activities were charitable and not commercial, and the denial of registration was unjustified.