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TMI Blog2011 (9) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... learning and education, and to understand various fields relating to the profession of accountancy - It is pointed out that the Executive Committee of the petitioner institute had considered the proposal for formation of ICAI University in February, 2004 and felt the need for formation of the said university - writ petition is allowed by way of direction to reconsider the application filed by the petitioner institute under Section 10(23C)(iv) of the Act - 1927 of 2010 - - - Dated:- 19-9-2011 - Dipak Misra And Sanjiv Khanna, JJ. N. K. Poddar, Sr. Adv. with Pramod Dayal, Adv. for the Petitioner Abhishek Maratha, Standing Counsel for the Revenue JUDGMENT Sanjiv Khanna, J 1. The Institute of Chartered Accountants of India and Mr. Amarjit Chopra, President and Member of the Central Council of the Institute of Chartered Accountants of India (hereinafter referred to as the petitioners) have filed the present writ petition under Article 226 of the Constitution of India for setting aside the order dated 19th May, 2009 passed by the Director General of Income-Tax (Exemptions), New Delhi (hereinafter referred to as the respondent) dismissing/rejecting the institu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the parties, it is necessary to examine Section 10(23C)(iv) and Section 2(15) after its amendment with effect from 1st April, 2009. The relevant provisions read as under: Section 2. Definitions- (15) charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be 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, irrespective of the nature of use or application, or retention, of the income from such activity: Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year. 10. Incomes not included in total income:- In computing the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ize incorporation of a autonomous professional body for the said purpose. The function and the object and purpose of the institute can be also gathered from Section 15 of the CA Act, which prescribes functions of the Council. For the sake of convenience Section 15 is reproduced below: 15. Functions of the Council.- (1) The duty of carrying out the provisions of this Act shall be vested in the Council. (2) In particular, and without prejudice to the generality of the foregoing power, the duties of the Council shall include- (a) the examination of candidates for enrolment and the prescribing of fees therefor; (b) the regulation of the engagement and training of a[articled and audit clerks]; (c) the prescribing of qualifications for entry in the Register. (d) the recognition of foreign qualifications and training for purposes of enrolment; (e) the granting or refusal of certificates of practice under this Act; (f) the maintenance and publication of a Register of persons qualified to practice as chartered accountants; (g) the levy and collection of fees from b[* * * *] members, examinees and other persons; (h) the removal of names from the Register and the restoration to the Regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion was left open but it was held that even if such fund was constituted, question would be considered and the Court would have to decide whether the functions so undertaken had become the dominant purpose. 10. No doubt, the petitioner holds classes and provides coaching facilities for candidates/articled and audit clerks who want to appear in the examinations and want to get enrolled as Chartered Accountants and as well as for members of the petitioner-institute who want to update their knowledge and develop and sharpen their professional skills, but this is not the sole or primary activity. The petitioner-institute may hold classes and give diploma/degrees to the members of their institute in various subjects but this activity is only an ancillary part of the activities or functions performed by the petitioner institute. This one or part activity by itself, does not mean that the petitioner is an educational institute or is predominantly or exclusively engaged in the activity of education. The petitioner institute is engaged in multifarious activities of diverse nature, but the primary and the dominant activity is to regulate the profession of Chartered Accountancy. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration is used or utilized for charitable purposes, the proviso and the bar will apply. An institution will not be regarded as established for charitable purpose/activity under the last limb, if cess, fee or consideration is received for carrying on any activity in nature of trade, commerce or business or for any activity of rendering of any service in relation to any trade, commerce or business, even if the consideration or the money received is used in furtherance of the charitable purposes/activities. In view of the first proviso, the decisions that the application of money/profit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the proviso and the bar/prohibition will apply. 13. Reliance place by the petitioners on Additional CIT versus Surat Art Silk Cloth Manufacturers Association, (1980) 121 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity. The learned judge also added that the restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object. (emphasis* supplied). We wholly endorse these observations. xxx If, for example, in the illustration given by us, it is found that the publication of the monthly journal is carried on wholly on commercial lines and the pricing of the monthly journal is made on the same basis on which it would be made by a commercial organisation leaving a large margin of profit, it might be difficult to resist the inference that the activity of publication of the journal is carried on for profit and the purpose is non-charitable. We may take by way of illustration another example given by Krishna Iyer J. in the Indian Chambe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Delhi, and also receives price for the goods within the State. But these are ancillary activities and do not in our judgment amount to carrying on trade within the State of Punjab. We need not refer in detail to cases such as Grainger and Son v. Gough (Surveyor of Taxes); F.L. Smith and Co. v. F. Greenwood (Surveyor of Taxes) and Firestone Tyre Co. Ltd. v. Lewellin which interpret the expression trade exercised within the United Kingdom in the English Income Tax Acts, for they merely lay down that for the purpose of the Income Tax Acts, there is no single, decisive or crucial test to determine whether the taxpayer exercises trade at a given place 15. The Supreme Court in Khoday Distilleries Ltd. v. State of Karnataka, (1995) 1 SCC 574 was of the opinion:- 68. There is no doubt that the word 'business' is more comprehensive than the word 'trade' since it will include manufacture which the word 'trade' may not ordinarily include. The primary meaning of the word 'trade' is the exchange of goods for goods or goods for money. However, the word 'trade' has also secondary meaning, viz., business carried on with a view to profit. In f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Webster's New Twentieth Centuary Dictionary (2nd edition), means amongst others, a means of earning one's living, occupation or work. In Black's ,Law Dictionary, trade means a business which a person has learnt or he carries on for procuring subsistence or profit; occupation or employment, etc. 17. The meaning of commerce as given by the Concise Oxford Dictionary is exchange of merchandise, specially on large scale . In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. For the purpose of the first proviso to section 2(15), trade is sufficient, therefore this aspect is not required to be examined in detail. 18. The word business is the broadest term and is encompasses trade, commerce and other activities. Section 2(13) of the Income Tax Act defines the term 'Business' as under:- 2. Definitions- xxx (13) business includes any trade, commerce or manufacture o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rasad Ray versus Income Tax Officer, [1981] 129 ITR 295 (SC), the Supreme Court has examined the scope of the term business in the general law or in common parlance as well as Indian Partnership Act, 1932 and held as under:- The expression business does not necessarily mean trade or manufacture only. It is being used as including within its scope professions, vocations and callings from a fairly long time. The Shorter Oxford English Dictionary defines business as stated occupation, profession or trade and a man of business is defined as meaning an attorney also. In view of the above dictionary meaning of the word business , it cannot be said that the definition of business given in s. 45 of the Partnership Act, 1890 (53 and 54 Vic. c. 39), was an extended definition intended for the purpose of that Act only. Section 45 of that Act says: . . . . . . . . . The expression ' business ' includes every trade, occupation, or profession. Section 2(b) of the Indian Partnership Act, 1932, also defines business thus: 'Business ' includes every trade, occupation and profession. The observation of Rowlatt J. in Christopher Barker and Sons v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the activities are for the purpose of paying off the outstanding liabilities. 25. In the State of Gujarat versus Raipur Manufacturing Company, (1967) 19 STC 1 (SC) it was stated that business is normally with the object of making profit. To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with profit motive and not for sport or pleasure. The expression profit motive does not postulate or intends that profit must, in fact, be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or a series of transactions. It predicates a motive which pervades the transaction(s) effected by the person in the course of his activity. Thereafter, it was observed as under: In actual practice, the profit motive may be easily discernible in some transactions: in others it would have to be inferred from a review of the circumstances attendant upon the transaction. For instance, where a person who purchases a commodity in bulk and sells it in retail it may be readily inferred that he has a profit motive in entering into the series of transactions of purchase and sale. A sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r an inference could be raised that the is carrying on the business of purchasing or selling of goods within the meaning of the statute. 27. We may now refer to some High Court judgments. In Sarojini Rajah versus CIT, (1969) 71 ITR 504 (Mad) in the context of difference between investment and business, the following observations, which we feel are relevant to the present context, have been made:- We think that the presence of commercial motive is a primary legal requisite of trade. Purchase and sale as a business deal in the present context may be another requisite. Intention to make a profit normally inspires trade and commerce, but it seems it may not be the essence of trade. Likewise, habitual dealing is ordinarily indicative of trade or commerce, but is not necessarily so, as pointed out by Rowlatt K. in Graham v. Green. There may be other legal requisites which may have to be satisfied with reference to the character of particular transactions in different kinds of trade or businesses. But whether these legal requisites are satisfied or are present will themselves, in their turn, be a mixed question of law and fact. The character of the motive or intention with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in which it is found. It is not the term of legal art but in its dictionary meaning it includes anything which is an occupation, as distinguished from pleasure-- anything which is an occupation or a duty which requires attention is business. It was also observed that business conveys in ordinary meaning the notion of a distinct enterprise (not necessarily for profit) having its distinct object, distinct management and distinct assets and liabilities. 30. In Institute of Chartered Accountants in England and Wales vs. Customs and Excise Commissioners, (1999) 1 W.L.R. 701, the House of Lords examined the question whether the aforesaid institute was liable to pay value added tax for supply of goods and services as it was issuing licences and certificates under three enactments for a fee. Question arose whether the Institute was carrying on economic activity for the purposes of Value Added Tax Act, 1994, the definition of which is rather extensive and wide. However, the expression 'business' was examined with reference to the statutory mandate imposed on the institute and whether the statutory activities can be classified as a business, and it was observed as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. No doubt, the definition of business given in Section 2(5-A) of the Act even without profit motive is wide enough to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture and any transaction in connection with or incidental or ancillary to the commencement or closure of such trade, commerce, manufacture, adventure or concern. If the main activity is not business, then any transaction incidental or ancillary would not normally amount to business unless an independent intention to carry on business in the incidental or ancillary activity is established. In such cases, the onus of proof of an independent intention to carry on business connected with or incidental or ancillary sales will rest on the Department. Thus, if the main activity of a person is not trade, commerce etc., ordinarily incidental or ancillary activity may not come within the meaning of business . To put it differently, the inclusion of incidental or ancillary activity in the definition of business presupposes the existence of trade, commerce etc. The definition of dealer contained in Section 2(11) of the Act clearly indicates tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, the Bombay High Court held that an agriculturist did not necessarily fall within the definition of a 'dealer' under Section 2(c) of the C.P. and Berar Sales Tax Act (21 of 1967), merely because he sold or supplied commodities. It must be shown that he was carrying on a business. It was held that it must be established that his primary intention in engaging himself in such activities must be to carry on the business of sale or supply of agricultural produce. This High Court held that there was 'nothing to show that the petitioner acquired these lands with a view to doing the business of selling or supplying agricultural produce. According to (the assessee), he (was) principally an agriculturist who also deals in cotton, coal, oilseeds and groundnuts?. (emphasis supplied) He was having agriculture for the purpose of earning income from the fields but there was nothing to show that he acquired the lands with the primary intention of doing business of selling or buying agricultural produce. This decision was approved by this Court in Dy. Commr. of Agricultural Income Tax and Sales Tax v. Travancore Rubber and Tea Co. and it was held that where the only facts esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 'business' and these sales and purchases abovementioned could not be subjected to sales tax. Likewise, in State of T.N. v. Cement Research Institute of India it was held that the Institute was an organisation, the objects of which were to promote research and other scientific work, that the laboratories and workshops were maintained by the organization for conducting experiments, and that though the cement manufactured as a result of research was sold, it could not be considered to be a trading activity within Section 2(d) of the Tamil Nadu General Sales Tax Act, 1959. Again in Tirumala Tirupati Devasthanam v. State of Madras the dispute arose with regard to the sales of silverware etc. which are customarily deposited in the hundis by devotees. It was held by the Madras High Court that the Devasthanam's main activities were religious in nature and these sales were not liable to tax. (No doubt, the case related to a period where the profit motive was not excluded by statute.) We are of the view that all these decisions involve the general principle that the main activity must be 'business' and these rulings do support the case of the respondent-Port Trust. (e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h case, therefore, has to be examined on its own facts. 34. In view of the aforesaid enunciation, the real issue and question is that whether the petitioner-institute pursues the activity of business, trade or commerce. To our mind, the respondent while dealing with the said question has not applied their mind to the legal principles enunciated above and have taken a rather narrow and myopic view by holding that the petitioner institute is holding coaching classes and that this amounts to business. This is apparent from a reading of paragraph 4 and a part of paragraph 5 of the impugned order, which are as under: 4. Thus, the word 'education' used in the above sections is the process of training and developing of knowledge, skill, mind and character of students by normal schooling. The coaching cannot be treated at par with normal schooling. In normal schooling the education culminates in some certificate, degree etc. but in coaching this does not take place. The issue of coaching classes also came up before Hon'ble High Court in the case of Bihar Institute of Mining and Mine Surveying vs. CIT (1994) 208 ITR 608 (Patna). It was held that coaching of the students i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain the standards of members. Further, Section 30-A of the CA Act empowers the Central Government to give such direction or special directions to the Council constituted under Section 9 to ensure compliance and the Council in discharge of their functions is required to comply with the said directions. Section 30 of the CA Act empowers the Council to make regulations for carrying out the provisions of the Act, including the standard and conduct of examination, the qualifications for entry of any person in the register as a member of the institute, the conditions under which any examination or training may be treated as equivalent to the examination and training prescribed for members of the Institute, the training of articled and audit clerks and the regulation and maintenance of status and standards of professional qualifications. The Institute has framed the Chartered Accountants Regulations, 1988 and the said Regulations provide for training of students, their examination, award of degrees and membership of the Institute. 36. It may be noted that the petitioner institute provides education and training in their post qualification courses, corporate management, tax management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... you are not careful, your wallet is liable to be stolen or you are liable to be cheated by some unscrupulous person. The thief who removes your wallet and the swindler who cheats you teach you a lesson and in the process make you wiser though poorer. If you visit a night club, you get acquainted with and add to your knowledge about some of the not much revealed realities and mysteries of life. All this in a way is education in the great school of life. But that is not the sense in which the word education is used in clause (15) of Section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by formal schooling. 37. In this regard we may also refer to the decision of Gujarat High Court in Saurashtra Education Foundation versus CIT, (2005) 273 ITR 139 (Guj) wherein it has been held as under: The exemption is granted to the income of a university or other educational institution. The expression, educational institution would, therefore, take colour from the preceding word, university . Noscitur a sociio (a word is known by the company its keeps) is a well settled rule of interpretation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition of knowledge. The observations of the Supreme Court do not confine the word education only to scholastic instructions but other forms of education also are included in the word education . As noticed above, the word schooling also means instructing or educating. It, therefore, cannot be said that the word education has been given an unduly restricted meaning by the Supreme Court in the said decision. Though, in the context of the provision of section 10(22), the concept of education need not be given any wide or extended meaning, it surely would encompass systematic dissemination of knowledge and training in specialised subjects as is done by the assessee. The changing times and the ever widening horizons of knowledge may bring in changes in the methodology of teaching and a shift for the better in the institutional set-up. Advancement of knowledge brings within its fold suitable methods of its dissemination and though the primary method of sitting in a classroom may remain ideal for most of the initial education, it may become necessary to have a different outlook for further education. It is not necessary to nail down the concept of education to a particular formula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of printing, publishing and selling of books? 40. Y.K. Sabharwal, J. (as his lordship then was) has held as under: I have no difficulty in accepting the contention of Mr. Dastur, learned counsel for the appellant, that for the purpose of claiming exemption under clause (22) of section 10, the source of income is not relevant and, therefore, the question whether the income of the press is from sale and printing of books, is of no consequence and on that ground exemption cannot be denied to the appellant............. The imparting of education is service to the society. From the language of section 10(22), it does not appear that without any such service in India, the Legislature intended to exempt the total income of the assessee. I do not think that from the language of section 10(22), it can be said that the hands of the court are so tied that it cannot read into this provision, the requirement of imparting education or some other educational activity in this country. A university or other educational institution which exists solely for educational purposes and not for purposes of profit though not established in India but having some educational ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have been disputed and denied by the petitioner-institute on various grounds including the fact that it takes into account only direct expenses and does not include several expenses like common expenditure, cost of free study material given to the students for the purpose of coaching and depreciation of assets, salary paid to the staff employed by the branches etc. In this regard the petitioner-institute in the written submissions has pointed out as under: 31. The Assessee Institute does not get any grant from any source and the only source of its income is fees received from its members and students. For providing quality education to its students, the Assessee Institute charges very nominal fees from its students and in turn provides them with the study material, course modules, infrastructural facilities, library services, books/reading material, web based teaching e-learning, facility of interaction with faculty etc. This is done purely on a charitable basis, without any profit motive, and in terms of its statutory duties and obligations under the Chartered Accountants Act, 1949 and the Regulations made there under: 32. The receipts from holding such coaching/revisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference: Assessment Year Fees charged for providing coaching (Rs.In lacs) Direct Expenditure incurred in coaching (Rs.In lacs) Direct Surplus arising in providing coaching* (Rs.In lacs) 2002-03 115.36 68.03 47.33 2003-04 178.51 96.63 81.88 2004-05 192.08 110.46 81.62 2005-06 237.11 133.14 103.97 2006-07 228.40 139.95 88.45 2007-08 301.90 164.75 137.15 2008-09 385.99 172.18 213.81 * Direct surplus before charging common administrative expenses referred to in the Table appearing under paragraph 33 above. 35. The surplus generated out of the activities of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assessee and the department to reach a fair and just conclusion. Moreover, the first proviso to section 2(15) is not applicable to the assessment year 2005-06. 44. With regard to the third reasoning that section 11(5) has been violated, it has been recorded in the order dated 19th May 2009 as under:- 9. The other issue involved is that the applicant has advanced the interest free loan to its sister concern namely 'ICAI Accounting Research Foundation. On examining the balance sheet as on 31.03.2008, it is seen that there is outstanding balance of ₹ 565.20 lakhs made as interest free advance to ICAI Accounting Research Foundation. Thus, this amount has not been invested in prescribed securities. As per 3rd proviso of Section 10(23C), the accumulated fund should be invested in one or more of the form or modes specified in sub-section (5) of Section 11. The applicant has advanced an amount of ₹ 565.20 lakhs to ICAI Accounting Research Foundation which is not the prescribed mode u/s 11(5). Thus the applicant has also violated the 3rd proviso of Section 10(23C). 45. ICAI Accounting Research Foundation (ICAI-ARF, for short) has been incorporated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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