2021 (9) TMI 513 - AT - Income Tax

Exemption u/s 11 - Denial of registration to the assessee trust u/s 12AA - charitable activity u/s 2(15) - primary and the dominant object of the assessee society is to provide medical relief to poor and needy people and not to carry out any such activities for the purposes of earning profit - HELD THAT - The act of charging of fees for such services cannot by itself diminish the very objectives of setting up of the assessee society which is clearly for charitable purposes and not for purposes of profit. Such fees are towards recovery of cost of providing the ambulance services in terms of driver salary and regular maintenance, wear/tear etc and nominal surplus which get generated from such activities are again utilized for the purposes of its charitable activities. The act of undertaking charitable activities cannot at all times be expected to be undertaken from grants and donations and where as part of undertaking the charitable activities, the assessee is charging certain fees to recoup its cost and make its charitable activities self-sustaining, the same cannot lead to a conclusion that the very nature of its activities have lost the character of charity and such activities are undertaken for earning profits. Where as part of rendering of such activities, it recovers certain nominal fees to meet its operational and administrative expenses, the same will not disqualify it from being involved in carrying on charitable activities. As a settled position that the proviso to section 2(15) applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institution is not charitable if it is involved in carrying on 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, fee or any other consideration. In the instant case, the assessee society is carrying out charitable activities in the field of medical relief to the poor and needy section of the society and not in the field of general public utility and thus, the proviso to section 2(15) is not applicable and thus cannot be invoked. There are enough safeguards provided in the Act including by way of section 11(4A) to monitor the activities of the assessee society and the Revenue is at liberty to examine the same during the course of regular assessment proceedings - as far as the objects of the assessee society are concerned, the same are clearly charitable in nature and the assessee society therefore deserve to succeed in seeking registration u/s 12AA - Appeal of the assessee is allowed.

Issues Involved:
1. Denial of registration under Section 12AA of the Income Tax Act.
2. Interpretation of "charitable purpose" under Section 2(15) of the Income Tax Act.
3. Application of the proviso to Section 2(15) regarding activities in the nature of trade, commerce, or business.

Detailed Analysis:

1. Denial of Registration under Section 12AA:
The assessee trust appealed against the order of the CIT Exemption, Jaipur, which denied the trust registration under Section 12AA of the Income Tax Act. The CIT(E) argued that the trust was engaged in the business of providing manpower and contractual services of ambulance vans, which constituted a significant portion of its income and was not incidental but predominant.

2. Interpretation of "Charitable Purpose" under Section 2(15):
The term "charitable purpose" includes relief of the poor, education, yoga, medical relief, preservation of the environment, and the advancement of any other object of general public utility. The proviso to Section 2(15) states that if an entity engages in any activity in the nature of trade, commerce, or business for a fee or consideration, it will not be considered charitable unless such activity is incidental to the main objective and the aggregate receipts do not exceed 20% of the total receipts.

3. Application of the Proviso to Section 2(15):
The CIT(E) concluded that the trust's activities were not charitable as it was predominantly engaged in business activities. The assessee argued that its primary objective was to provide medical relief to the poor, and any income generated from ambulance services was utilized for charitable purposes. The assessee relied on various judicial precedents to support its claim that the dominant purpose of the trust was charitable, and incidental business activities did not disqualify it from being a charitable institution.

Judgment Analysis:

a. Dominant Purpose Test:
The Tribunal referred to several judicial precedents, including the Hon'ble Supreme Court and High Courts, which established that if the primary or dominant purpose of an institution is charitable, ancillary or incidental activities involving profit do not prevent it from being recognized as a charitable trust. The Tribunal emphasized the dominant purpose test, which examines whether the main objective of the trust is charitable and whether any profit-making activities are incidental.

b. Examination of Assessee's Activities:
The Tribunal found that the primary and dominant object of the assessee society was to provide medical relief to the poor and needy, not to earn profits. The ambulance services were provided on a cost-recovery basis, and any surplus generated was utilized for charitable activities. The Tribunal noted that the act of charging fees for services to recoup costs did not diminish the charitable nature of the trust's activities.

c. Applicability of Proviso to Section 2(15):
The Tribunal concluded that the proviso to Section 2(15) applies only to entities engaged in the advancement of "any other object of general public utility" and not to those providing medical relief. Since the assessee's activities were in the field of medical relief, the proviso was not applicable, and the trust's activities remained charitable.

d. Reference to CBDT Circular and Judicial Precedents:
The Tribunal referred to the CBDT Circular No. 11/2008, which clarified that entities engaged in education or medical relief would continue to be eligible for exemption as charitable institutions even if they incidentally carried on commercial activities. The Tribunal also cited the decision in Samarpan Samiti, which reinforced that incidental commercial activities do not disqualify a trust from being recognized as charitable.

Conclusion:
The Tribunal set aside the order of the CIT(E) and directed the CIT(E) to grant registration to the assessee society under Section 12AA of the Income Tax Act. The Tribunal held that the assessee's activities were charitable in nature, and the proviso to Section 2(15) was not applicable.

Order Pronouncement:
The appeal of the assessee was allowed, and the order was pronounced in the open Court on 09/09/2021.

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