2018 (2) TMI 769 - HC - Income Tax

Application u/s 12-AA denied - proof of charitable activities - society is getting preparation and distribution charges per child per month from the state govt., the activity in this field cannot be treated as charitable in nature - Held that - Merely because the State had itself not been able to cook and supply cooked food by way of mid-day-meals at it s schools and further because it out-sourced that part of the work, against consideration, it cannot be said that it transformed the activity into one in the nature of trade, commerce or business etc. Execution of a contract between two parties, in these facts cannot be decisive whether the activity itself was one purely in the nature of trade, commerce or business. What was more important is to examine whether assessee had engaged in an activity that was inseparably linked to and performed in continuation of the charitable scheme of the government. The fact that some money had been paid by the State to the assessee was only a necessary expense at the hands of the State. Looking at the nature of expenses met by the assessee one cannot escape the conclusion that similar expenses would have been incurred by the State, had it performed that work itself or though it s own agencies. The payments received were utilized to defray the expenses met to perform the task of cooking and supplying the meals as directed by the State government. It is also not the case of the revenue that the assessee was in any manner free to utilize either the materials supplied to it or food cooked by it, as per it s own wish/discretion. The assessee appears to have acted merely as an agent of the State. Therefore it would be wrong to conclude that because there existed a contract between the assessee & the government therefore the assessee was not pursuing a charitable purpose . On the other hand the activity performed by the assessee clearly appears to be inseparably linked to the charitable purpose of providing mid-day meals at village schools. Also, admittedly, the total receipts of the assessee were below the limit of ₹ 10,00,000/- as stipulated under the second proviso to Section 2(15) of the Act. Tribunal has rightly concluded that the restriction created by the first proviso to Section 2(15) of the Act did not operate against the assessee and therefore the activity of the assessee, even though it may have involved an activity in the nature of trade, commerce or business, etc., it would fall within the ambit of general public utility and therefore be a charitable purpose under Section 2(15) of the Act. Alternatively, if it be assumed that in that process the assessee engaged in an activity in the nature of trade, commerce or business, etc, then, because the receipts from such activity were below ₹ 10,00,000/-, the assessee was still entitled to registration under Section 12AA(1)(b)(ii) of the Act. - Decided in favour of assessee

Issues Involved:
1. Interpretation of Section 2(15) regarding "advancement of any other object of general public utility" and its exclusion from charitable purposes if involving trade, commerce, or business.
2. Eligibility of the assessee society for registration under Section 12-AA despite engaging in activities for a fee.
3. Legislative powers of the Commissioner of Income Tax (CIT) under Section 12-AA to determine the genuineness of activities before granting registration.
4. Determination of whether the assessee's activities qualify as charitable under the first proviso of Section 2(15).

Issue-wise Detailed Analysis:

1. Interpretation of Section 2(15) Regarding "Advancement of Any Other Object of General Public Utility":
The court examined whether the assessee's activities, particularly the preparation and supply of mid-day meals, constituted "advancement of any other object of general public utility" under Section 2(15) of the Act. The Commissioner of Income Tax (CIT) had ruled that the assessee's activities were contractual and leaned towards business activity, thus not qualifying as charitable. However, the Tribunal found that the assessee's activities were indeed for the public utility as they were aimed at addressing nutritional needs of school children, a welfare measure by the State Government. The Tribunal concluded that the assessee's activities fell within the ambit of general public utility and thus qualified as charitable, despite the contractual nature of the work.

2. Eligibility of the Assessee Society for Registration Under Section 12-AA:
The Tribunal directed the CIT to grant registration under Section 12-AA, noting that the assessee's total receipts were below ?10,00,000, as stipulated in the second proviso to Section 2(15). The Tribunal emphasized that the activity of preparing and supplying mid-day meals was for public utility and not for profit. The court agreed with this interpretation, stating that the second proviso to Section 2(15) provides an exception to the first proviso, allowing activities with receipts below ?10,00,000 to qualify as charitable.

3. Legislative Powers of the CIT Under Section 12-AA:
The CIT had argued that he had the authority to determine the genuineness of the assessee's activities before granting registration. The Tribunal, however, found that the CIT had misinterpreted the nature of the assessee's activities, which were aimed at public utility and not profit. The court upheld the Tribunal's view, noting that the CIT's decision was based on an erroneous interpretation of the contractual nature of the work, without considering the broader public utility aspect.

4. Determination of Whether the Assessee's Activities Qualify as Charitable:
The court examined whether the assessee's activities, despite being contractual, could be considered charitable. The Tribunal found that the activities were closely linked to the State Government's welfare scheme and were not profit-driven. The court agreed, stating that the payments received by the assessee were used to cover necessary expenses for performing the task, and the assessee acted as an agent of the State. The court concluded that the activities were inseparably linked to the charitable purpose of providing mid-day meals and thus qualified as charitable under Section 2(15).

Conclusion:
The court dismissed the appeal, affirming the Tribunal's decision to grant registration under Section 12-AA. It held that the assessee's activities were for the advancement of general public utility and qualified as charitable, even if they involved some trade, commerce, or business, as long as the receipts were below ?10,00,000. The court also clarified that the CIT's interpretation of the contractual nature of the work was incorrect, and the activities were indeed charitable. No costs were ordered.

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