2017 (1) TMI 53 - HC - Income Tax

Charitable activity - appellant was engaged in only one activity, namely, printing and publishing the newspaper - Held that - The appellants activities, therefore, constitute the advancement of an object of general public utility.That is, however, not sufficient for the appellants activities to fall within the definition of charitable purpose in Section 2(15) Profit is the predominant motive, purpose and object of the assessee. The assessee has over the years accumulated huge profits which today aggregate to several crores of rupees. The Tribunal referred to the income and expenditure account which shows that out of the total revenue of about Rs. 161 crores, a sum of Rs. 124.87 crores was received from the advertisements and Rs. 11.38 crores from the interest of F.D.Rs. only. Thus about 85% of the revenue was from advertisements and interest only. Rs. 17.49 crores was from the sale of newspapers and Rs. 3.07 crores was from subscriptions of the dailies. Moreover the balance in the corpus account was Rs. 121 crores. The respondents have not suggested that these profits have been used for any purpose contrary to the trust created in the Will. Nor is it suggested that the appellants will do so. It did occur to us at one stage that this fact would save the assessee from being excluded from the provisions of section 2(15) but on further reflection it does not. A person does not make profit for the sake of making profits. He does so with a purpose. The purpose is obviously within his special knowledge. He must, therefore, disclose it and the Assessing Officer must then test the case and analyse it. If that were not so it would enable an assessee to circumvent the provisions of the Act meant for the benefit of the persons engaged in activities for charitable purposes. They would accumulate huge profits for several years. The assessment in respect of these years would attain finality after about 8 years and cannot, thereafter, be reopened. After this period the assessee could utilize the profits for any purpose- charitable or otherwise. We hasten to add that the assessee before us has not done so and there is nothing to indicate that it will do so. It is, as we mentioned earlier, a highly reputed and respectable publication and is not likely to adopt such a course. That, however, is not the point. What is relevant is that in such a case any assessee would by this simple expedient circumvent the provisions of the Act. Thus the accumulation of a huge profit without any explanation for the same or without any indication that it is for the advancement of the object of general public utility would take the assessee out of the definition in Section 2(15) of charitable purpose . There is nothing in this case to show that the surplus accumulated over the years has been ploughed back for the charitable purposes. Although there were several other objects, the appellant s only activity was the business of printing and that activity was found to have been carried on on commercial lines. If, therefore, the predominant activity of the trust is charitable purpose and the profit resulting from its ancillary or incidental business activity, is for the charitable purpose only of the advancement of an object of general public utility, it is sufficient. It is not necessary that such income must also be for the advancement or the purpose of another charitable purpose as well. - Decided against assessee. Whether benefit of Section 11 should be granted to the assessee in view of the proviso to Section 2(15) of the Income Tax Act, 1961? - Held that - The assessee, namely, Moga Improvement Trust is undoubtedly an authority constituted in India. It is also constituted by or under a law, namely, the Punjab Town Improvement Act, 1922. Further, it is engaged for the purpose of dealing with and satisfying the need for housing accommodation. It is also constituted for the purpose of planning, development of improvement of cities, towns and villages or for both as is evident from Sections 22 to 28 of the PTI Act quoted above. The appellants, would, therefore, undoubtedly have been entitled to the benefit of Section 10(20A). The assessee would not have been entitled to the benefit of Section 10(20A) upon its omission by the Finance Act, 2002 with effect from 01.04.2003. Section 10(20A) of the Act did not contain any other requirement. It was wider than Section 2(15). However, Section 2(15) and the corresponding sections including Sections 11, 12, 12A and 12AA are independent of Section 10(20A) of the Act. Upon the omission of Section 10(20A), the provisions of the other sections were not affected. They remained intact. An assessee could have been entitled to the provisions of Section 10(20A) and the other provisions simultaneously. The omission of one, however, does not affect the validity or the existence of the others. The two provisions are distinct and independent of each other. Thus the omission of Section 10(20A) did not affect the rights of the parties claiming the benefit of Sections 2(15), 11, 12, 12A and 12AA of the Act. - Decided in favour of assessee

Issues Involved:
1. Interpretation of Section 2(15) of the Income Tax Act, 1961.
2. Applicability of the proviso to Section 2(15) post the 2008 amendment.
3. Determination of whether the activities of the appellant trust are charitable.
4. Analysis of the Tribunal's reliance on prior judgments.
5. Assessment of the appellant's revised return and its implications.
6. Evaluation of the Income Tax Appellate Tribunal's decision.
7. Determination of whether the activities of the Improvement Trust, Moga, are charitable.

Issue-Wise Detailed Analysis:

1. Interpretation of Section 2(15) of the Income Tax Act, 1961:
The core issue revolves around the interpretation of Section 2(15) and its proviso, particularly the definition of "charitable purpose" which includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. The judgment necessitated a comparison of the section as it stood from time to time and the judgments of the Supreme Court at the relevant times. The proviso introduced by the amendment in 2008 states that the advancement of any other object of general public utility shall not be considered a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce, or business for a fee or any other consideration.

2. Applicability of the Proviso to Section 2(15) Post the 2008 Amendment:
The amendment introduced in 2008, effective from 01.04.2009, aimed to limit the scope of "charitable purpose" by excluding activities involving trade, commerce, or business. The court examined if the appellant's activities fell within this exclusion. The court noted that the proviso applies to entities whose purpose is the advancement of any other object of general public utility and if such entities carry on commercial activities, they are not eligible for exemption under Sections 11 or 10(23C) of the Act.

3. Determination of Whether the Activities of the Appellant Trust are Charitable:
The appellant's activities were scrutinized to determine if they constituted the advancement of an object of general public utility and if they involved carrying on any activity for profit. The court referred to the Privy Council's judgment in the appellant's own case, which held that the activities constituted the advancement of an object of general public utility. However, the court also considered whether the activities involved a profit motive, which would exclude them from being considered charitable under the amended Section 2(15).

4. Analysis of the Tribunal's Reliance on Prior Judgments:
The Tribunal placed strong reliance on the Supreme Court's judgment in The Sole Trustee, Loka Shikshana Trust v. CIT, which was overruled by the judgment in CIT (Addl) v. Surat Art Silk Cloth Mfrs Assn. The Tribunal's abrupt conclusion that the Privy Council's judgment was no longer good law was scrutinized. The court emphasized that the activities of the appellant must be examined to determine if they involve a profit motive.

5. Assessment of the Appellant's Revised Return and Its Implications:
The appellant had filed a revised return out of caution, subject to a note stating that it believed it was still eligible for exemption under Section 10(23C)(iv). The court rejected the contention that the revised return implied an admission that the appellant did not fall within the ambit of Section 2(15). The court noted that filing a revised return to err on the side of caution is understandable to avoid potential penalties and interest.

6. Evaluation of the Income Tax Appellate Tribunal's Decision:
The Tribunal's decision to deny the exemption was based on the appellant's activities being commercial in nature. The court examined the Tribunal's findings, including the significant revenue from advertisements and interest, and the substantial profits accumulated over the years. The court agreed with the Tribunal that the appellant's activities involved a profit motive, thus falling within the exclusionary clause of the amended Section 2(15).

7. Determination of Whether the Activities of the Improvement Trust, Moga, are Charitable:
In the case of Improvement Trust, Moga, the Tribunal held that the trust's activities were for the advancement of an object of general public utility and not commercial in nature. The court upheld the Tribunal's decision, noting that the trust's activities were driven by public requirements and were incidental to its main purpose of town improvement. The court emphasized that the trust's activities did not involve a predominant profit motive, thus qualifying as charitable under Section 2(15).

Conclusion:
The court dismissed the appeal in ITA No. 62 of 2015, holding that the appellant's activities involved a profit motive and did not qualify as charitable under the amended Section 2(15). However, the court upheld the appeal in ITA No. 147 of 2016, recognizing the Improvement Trust, Moga's activities as charitable and not driven by a profit motive.

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