2025 (3) TMI 759 - AT - Income Tax

Proviso to Section 2(15) disentitles the assessee from availing exemption u/s. 11 and 12 or not? - determining if the activities of the assessee fall within the ambit of charitable purpose or not? - as per DR since the assessee had generated income from activities which are in the nature of trade and commerce and such receipts are not within the permissible limit in terms of proviso to Section 2(15) assessee is not entitled to claim exemption u/s. 11 HELD THAT - It is an undisputed fact on record that the main objects of the assessee based on which registration was granted u/s. 12A of the Act and which objects have been accepted to be of charitable nature up to the stage of Hon ble Supreme Court in assessee s case have not undergone any change till date. Therefore it has to be accepted that the assessee is a charitable organization existing for charitable purpose having the object of general public utility in terms of Section 2(15) of the Act. A careful reading of the proviso clearly indicates that it applies only to advancement of any other activities of general public utility . Pertinently the proviso introduced to Section 2(15) has undergone further changes subsequently. For the purpose of deciding the present appeal the proviso as originally introduced by Finance Act 2008 effective from 01.04.2009 would be relevant as it applies to the assessment year under dispute. Whether the assessee is either carrying on any trade commerce or business or is rendering any service in relation to any trade commerce or business for a cess or fee or any other consideration? - As could be seen from the main objects of the assessee it is not in any manner involved in any activity of trade commerce or business. There cannot be any doubt regarding this fact. Therefore it is necessary to see whether the second condition of any activity of rendering any service in relation to any trade commerce or business is applicable. Since the assessee itself is not carrying on any trade commerce or business it cannot be said that it is involved in any activity of rendering service in relation to any trade commerce or business. The assessee merely provides a platform to importers/exporters of diamonds and precious stones to facilitate import/export activity seamless and less cumbersome to make the trade more competitive in international market. In sum and substance the role of the assessee is akin to a trade promotion organization. In the facts of the present appeal admittedly the receipts of the assessee are on account of reimbursement of cost. Further the accounts of the assessee placed before us demonstrate that the cost recovery made by the assessee is as per cost without any excessive mark up. In fact there is no such allegation even by the Assessing Officer. Therefore assessee s object of any other activity of general public utility would not fall within the vice of proviso to Section 2(15) of the Act. We must observe introduction of proviso to section 2(15) of the Act ipso facto would neither negate assessee s existence for charitable purpose nor disqualify the assessee from enjoying exemption u/s. 11 of the Act. Applicability of the proviso to Section 2(15) of the Act has to be examined factually based on material available on record to demonstrate that a particular assessee though is engaged in advancement of object of general public utility however it is engaged in the activity of trade or commerce or business or is providing service related to activity of trade commerce or business by charging cess or fee or any other consideration. In the facts of the present appeal no cogent material has been brought on record by the AO to demonstrate that the assessee is either involved in the activity of trade or commerce or business or is providing any service related to trade or commerce or business. Further there is nothing on record to show that the assessee is charging any cess or fee or any other consideration which is markedly excessive of the cost incurred. We hold that the assessee is not hit by the proviso to Section 2(15) of the Act. As a natural corollary assessee would be entitled for exemption u/s. 11 of the Act. Assessee appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue considered in this judgment is whether the proviso to Section 2(15) of the Income Tax Act, 1961 disentitles the assessee from availing exemption under Sections 11 and 12 of the Act. This involves determining if the activities of the assessee fall within the ambit of 'charitable purpose' as defined under the Act, particularly in light of the amendment to Section 2(15) by the Finance Act, 2008, effective from 01.04.2009.

ISSUE-WISE DETAILED ANALYSIS

1. Relevant Legal Framework and Precedents:

Section 2(15) of the Income Tax Act defines "charitable purpose" to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. The proviso introduced by the Finance Act, 2008, specifies 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, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration.

The Tribunal, High Court, and Supreme Court had previously recognized the assessee as a charitable institution entitled to exemption under Section 11, based on its objects and activities.

2. Court's Interpretation and Reasoning:

The Court examined whether the activities of the assessee, which involve providing infrastructure and facilities for the import/export of diamonds, fall within the ambit of trade, commerce, or business as per the proviso to Section 2(15). It was noted that the assessee was established as a non-profit entity with the primary object of promoting diamond exports, which had been recognized as charitable by higher judicial authorities.

The Court interpreted the proviso to Section 2(15) as being applicable only to entities carrying out activities in the nature of trade, commerce, or business for a fee or consideration. The Court emphasized that the proviso was not intended to affect genuine charitable organizations.

3. Key Evidence and Findings:

The assessee's activities were found to be consistent with its objects of promoting diamond trade, which had been previously recognized as charitable. The Court noted that the assessee provided services on a cost-recovery basis, without any profit motive, and that the receipts were reimbursements of costs incurred.

The Court also referred to the legislative intent behind the proviso, which aimed to prevent entities operating on commercial lines from claiming charitable status. The Court found that the assessee's activities did not fall within this mischief.

4. Application of Law to Facts:

Applying the legal framework to the facts, the Court concluded that the assessee's activities did not constitute trade, commerce, or business. The reimbursement of costs did not amount to consideration for services rendered in relation to trade or commerce. Therefore, the assessee's activities were not hit by the proviso to Section 2(15), and it remained entitled to exemption under Section 11.

5. Treatment of Competing Arguments:

The Court considered the Department's argument that the assessee's activities involved trade or commerce due to the receipts from members and non-members. However, the Court found that these receipts were merely cost reimbursements and did not constitute income from trade or commerce. The Court also noted that the principle of mutuality applied, as the assessee operated on a non-profit basis for the benefit of its members.

6. Conclusions:

The Court concluded that the assessee's activities were charitable in nature and not affected by the proviso to Section 2(15). The assessee was entitled to exemption under Section 11 of the Act.

SIGNIFICANT HOLDINGS

The Court held that the proviso to Section 2(15) does not apply to the assessee, as its activities do not involve trade, commerce, or business. The Court preserved the principle that genuine charitable organizations, which operate on a cost-recovery basis without a profit motive, are not affected by the proviso.

Core Principles Established:

The judgment reinforced the principle that the proviso to Section 2(15) is intended to exclude entities carrying out commercial activities under the guise of public utility from claiming charitable status. It clarified that entities operating on a cost-recovery basis for charitable purposes are not affected by the proviso.

Final Determinations:

The appeal was allowed, and the assessee was entitled to exemption under Section 11 of the Income Tax Act.