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TMI Blog2015 (9) TMI 915X X X X Extracts X X X X X X X X Extracts X X X X ..... e purposes and the extent of actual charity carried out by HNF is not significant. However, in this Court’s opinion, Hamdard rightly contends that the DGIT(E) erroneously drew a distinction between corpus and non-corpus donations made by it to HNF. The resolutions of Hamdard placed on record clearly mandate that the interest income generated from corpus donations was to be utilized for charitable purposes. Revenue argument that Hamdard had been enjoying enormous profit margins year after year, generating considerable surplus and consequently, its activities cannot be considered as those of a charitable organisation runs afoul a plethora of Supreme Court decisions, the most recent being Queen’s Educational Society (2015 (3) TMI 619 - SUPREME COURT ), where, following the law laid down in Surat Art Silk [1979 (11) TMI 1 - SUPREME Court], Aditanar Educational Society [1997 (2) TMI 3 - SUPREME Court], and American Hotel and Lodging [2008 (5) TMI 17 - SUPREME COURT OF INDIA], the Court held that merely because an educational institution is generating surplus does not imply that it ceases to enjoy the benefit of exemption under Section 10(23C)(iii-ad) of the Act. This Court finds t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objects. Whether Hamdard accumulated its income in excess of five years? - Held that:- DGIT(E) has misintepreted the provision concerning accumulation of income, third proviso to Section 10(23C) (a), which forms condition (a) in the order granting exemption under Section 10(23C)(iv) dated 28.12.2007. That provision mandates that income accumulated in excess of 15% of the total income should be utilized within five years of the period of accumulation. It does not bar all forms of accumulation. The DGIT(E) has nowhere concluded that Hamdard accumulated in excess of 15% of the income, much less concluding that any amount in excess of 15% accumulated by Hamdard was not utilised within a period of five years of its accumulation. Further, Revenue’s contention that Hamdard had admitted a certain amount to be deemed income within the meaning of Section 11(3) of the Act does not conclusively determine the issue. It is settled that estoppel does not apply under the Act and the assessee can resile from an incorrect position it had adopted earlier (see CIT v. Bharat General Reinsurance, [1970 (12) TMI 5 - DELHI High Court ]). Did Hamdard invest its funds in violation of condition (b) sti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an object of general public utility from the definition of ‘charitable purpose’ if such entities carry on any activity of trade, commerce or business, irrespective of the nature of application of surplus generated from such activity. This unduly broad interpretation has been rejected by this Court in Institute of Chartered Accountants of India (2013 (7) TMI 205 - DELHI HIGH COURT ), where the Court held that while determining whether an assessee is carrying on business, the dominant purpose test laid down in Surat Art Silk [1979 (11) TMI 1 - SUPREME Court], albeit in a different context, would continue to apply. This Court has already held above that Hamdard’s dominant purpose is charitable in nature, and it is not guided by the motive of profit-making. Therefore, the first proviso to Section 2(15) does not alter the charitable status of the organisation - Decided in favour of assessee. Reopening of assessment - Held that:- In the order dated 25.05.2012, besides a general reference to Hamdard’s alleged failure to disclose all material facts, there is no reference to the particular facts which have not been disclosed. In such circumstances, this Court holds that the pre-conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013, Hamdard has challenged separate but identical orders dated 10.07.2013 passed by the Commissioner of Income Tax (Appeals) ( CIT(A) ) for AYs 2006-07, 2007-08, 2008-09 and 2009-2010, holding that Hamdard was not entitled to the benefit of exemption under Section 11 of the Act. Since the focal point of the dispute involves the withdrawal of Hamdard s exemption under Section 10(23C)(iv) of the Act, the Court would first discuss the facts in W.P.(C) 5711 of 2013 before proceeding to discuss the facts of the other writ petitions. The Income-tax department has hereinafter been referred to as Revenue , except in instances where the concerned officer is addressed specifically for contextual clarity. W.P.(C) 5711 of 2013 3. Hamdard is governed by its constitution dated 28.08.1948 (hereafter referred to as the Deed ), under which the partners of a business known as the Hamdard Dawakhana dedicated the said business to charity. Hamdard like its predecessor in interest - generates income from the manufacture and sale of Unani medicines and other allied products. The original Deed provided for Qaumi Income (charity) and Khandani Income (family income). However, the concept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneer in the development and growth of the Unani system of medicine. Hamdard has set up around 25 medical, educational, literary, scientific and cultural organisations including, inter alia, the All India Unani Tibbi Conference, Institute of History of Medicine and Medical Research, Indian Institute of Islamic Studies, Ghalib Academy, Rabea Girls Public School, Hamdard Education Society, Majeedia Hospital, Jamia Hamdard (University), Rufaida Nursing School, Hamdard Study Circle, Hamdard Coaching Centre, Hamdard Primary School, Hamdard College of Pharmacy etc. 5. To carry out its charitable activities, Hamdard created a special purpose vehicle, a registered society for philanthropic purposes, i.e Hamdard National Foundation (HNF) on 12.05.1964. HNF s objects and functions are as follows: The objects for which the Society is established are as follows:- 1. To receive, control and supervise proper utilisation of the income of the Foundation received from Hamdard Dawakhana (Wakf), Delhi, as Qaumi Income and from any other body, person or concern, Indian and foreign, in any form as aid, grant or bequests, with or without any condition, to protect and promote the interests o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haritable. Hamdard had been enjoying exemption under Section 10(23C)(iv) of the Act since AY 1984-85. For renewal of the said exemption for AY 2004-2005, Hamdard submitted its application in the prescribed form. The Revenue sought clarifications from Hamdard and upon an examination of the objects, activities and financial records, renewed the exemption under Section 10(23C)(iv) of the Act on 28.12.2007, with effect from AY 2004-2005, subject to certain conditions stipulated in the order dated 28.12.2007. 7. On 14.01.2009, the DGIT(E) issued a show cause notice to Hamdard, for 03.02.2009, for rescinding the exemption order dated 28.12.2007 on the ground that Hamdard had violated terms (a) and (c) of the exemption order. Hamdard responded to the said show cause notice on 30.01.2009 and alleged that the notice was vague and pre-mediated. The DGIT(E) sought several clarifications and responses from Hamdard, which were provided. While these proceedings were pending, on 24.12.2010, the DGIT(E) issued another notice for withdrawal of the exemption under Section 10(23C)(iv) of the Act, stating that conditions (a) and (c) imposed in the exemption order dated 28.12.2007 had been violated. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, the Revenue issued a notice to Hamdard under Section 148 of the Act, seeking to re-open its assessment proceedings for AY 2005-2006. The Revenue supplied the reasons for reopening assessment proceedings for AY 2005-06 to Hamdard on 16.04.2012. The said letter highlighted the sales and expenditure figures of Hamdard and based on such figures, concluded that Hamdard s activities were commercial in nature. It further stated that Hamdard had made huge surpluses and had made accumulations over the years for expansion of manufacturing units. Though Hamdard s objects are charitable, its activities were held to be not charitable in nature. Revenue also stated that Hamdard had violated Section 11(4A) of the Act by not maintaining separate books of accounts for incidental business activities, had not utilised the accumulations made during the relevant assessment year (AY 2005-06) in line with its objects and that it was giving donations to HNF, which was not in furtherance of its charitable activities. 11. According to Hamdard, all the material issues raised in the said reasons were disclosed and were known to the Revenue. Hamdard urged preliminary objections to the reopening of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat he was to go abroad for some official work and that he would take up the appeal after returning; he further expressed his inclination to await the passing of a fresh order by the DGIT(E), on the issue of exemption under Section 10(23C) (iv) of the Act. However, Hamdard in its rejoinder affidavit submits that these events transpired on 01.07.2013 and not on 29.06.2013, and that the reference to 29.06.2013 was an inadvertent error as the events described hereinabove had occurred on the next working day , which had been incorrectly stated as 29.06.2013. 16. Hamdard further states that on 08.07.2013, the second Respondent again called up the second petitioner asking him to go to his office. There, it is alleged, he made the second petitioner sign two order sheets, one for 28.06.2013 and the other for 08.07.2013. The same read as under: 28/06/2013 Shri Javed Naseem, C.A. (Corporate head finance) appeared for hearing and requested for adjournment. Shri V.K. Tiwari CIT (A) XXI was hearing this case and he has been transferred out in AGT-2013. order of CBDT, and in his place, I Md. Mohsin Alam CIT has taken over the change on 28/6/2013. The case is adjourned to 8/7/2013 at 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same for charitable objects. On the other hand, no part of its income is distributed or is capable of distribution for the private benefit of the mutawallis. 19. Considerable reliance is placed on the fact that Hamdard has been enjoying exemption from tax for a considerable period of time. Specifically, Hamdard cites this Court s decision in Additional Commissioner of Income Tax v. Hamdard Dawakhana (Wakf), [1986] 157 ITR 639, where its objects and the exact nature of its activities have been examined by this Court in detail in light of the Supreme Court s decision in ACIT v. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1, and were held to be charitable. It is submitted that this Court in the said decision had also held that Hamdard s objects fall within the ambit of the first three heads of charity under Section 2(15) of the Act, viz. medical relief , education and relief of the poor . It is emphasised that the decision in Hamdard Dawakhana (Wakf) has been consistently applied, followed and affirmed by this Court in a catena of judgments; including the case of Hamdard itself as also in the case of other parties. 20. As regards HNF, it is submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income generated from the manufacture and sale of Unani and Ayurvedic medicines for the attainment of the charitable objects. The details of accumulation and purpose thereof are a part of the return of income. Accumulation of income for the capital expansion of the asset is indispensable and incidental to put into effect the charitable purpose. No part of the surplus of Hamdard is distributable amongst the sons and grandsons of the Wakif Mutawallis, who are the current mutawallis. Like other employees of Hamdard, the mutawallis are also drawing nominal, fixed salaries. 23. As regards the investment in the Okhla and Manesar projects, Hamdard submits that the purpose and nature of the accumulations for these projects has been consistent since long and has been disclosed to and accepted by the Revenue at every stage. To support this contention, Hamdard relies upon the audited accounts filed by it with the Revenue for the Financial Years 2003-2004, 2004-2005, 2006-2007 and 2007-2008. 24. Mr. Tripathi submits that the accumulation of income for legitimate expansion of the activities of Hamard is merely ancillary to the predominant charitable purpose. Further, details of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modes, therefore, the Revenue s finding to the contrary is unfounded. No query or show cause, was raised in regard to this aspect of the matter. If the Revenue had issued a show cause regarding the violation of clause (b) of the third proviso to Section 10(23C) of the Act, Hamdard would have relied upon the details of its fixed deposits, being investments in specified modes, to show that the same had increased from ₹ 134.45 Crores in AY 2004-2005 to ₹ 419.56 Crores in AY 2012-2013. 29. Mr. Tripathi argues that the law laid down by the Supreme Court in CIT v. Thanti Trust, [2001] 247 ITR 985 has been misconstrued by the DGIT(E) in its application to Hamdard s case. Hamdard submits that the principle that a business undertaking can also be in the nature of a property held under a trust , entitling it to tax exemptions, finds statutory recognition in section 11(4) of the Act. In light of this Court s decision in CIT v. Mehta Charitable Prajnalay Trust, (2013) 357 ITR 560 (Del), it is urged that Section 11(4A) is not applicable to Hamdard s case, and thus, the DGIT(E) erred in concluding that condition (c) of the order of exemption had been violated. 30. Relying upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o genuine charitable organisations. 32. Thus, Hamdard submits that the scope, ambit and mischief of the newly introduced proviso is confined only to organisations which come under the fourth category of the definition of charitable purpose , namely advancement of any other object of general public utility and it is not the intention of the legislature to target institutions engaged in genuine charitable activities. Further, it is contended that this Court in Hamdard Dawakhana (Wakf) (supra) has held that Hamdard s objects and activities are specifically relatable to and identifiable with the first three heads of charity; and that Hamdard s business is a business held under trust and is merely incidental to the effectuation and fulfillment of the charitable purpose. Therefore, given the decision in Dharmadeepti v. CIT, (1978) 3 SCC 499, Hamdard s objects cannot be said to fall outside the scope of definition of charitable purpose in Section 2(15). Reopening of Assessment Proceedings 33. Hamdard contends that the reopening of assessment proceedings is based merely on a change of opinion on the same set of facts, and thus, the notice of reopening of proceedings and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the CIT(A) 36. Hamdard submits that the orders dated 10.07.2013 wrongly record the presence of the authorized counsel for Hamdard, who never attended any proceedings before the second respondent. No such presence is recorded in the order sheets of 28.06.2013 and 08.07.2013. The presence recorded in the order dated 10.07.2013 is contrary to the order sheets dated 28.06.2013 and 08.07.2013. Prior to 28.06.2013, the second Respondent had not even assumed charge of the office of CIT(A). Accordingly, on 19.07.2013, the counsel for Hamdard wrote to the second respondent, categorically refuting the factum of his presence, even once, in the appellate proceedings before the said officer. 37. Hamdard further contends that the orders dated 10.07.2013 do not deal with any submission or authority contained in the detailed written submissions dated 04.03.2013 and 06.05.2013, filed by it or the submissions made by Hamdard s counsel before Respondent No. 2 s predecessor. They are a replica of the order dated 22.02.2012 passed by the DGIT(E), which was set aside by this Court in WP No. 3598 of 2012. 38. According to Hamdard, a valuable right of oral hearing available to it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly notification dated 28.12.2007 under Section 10(23C)(iv) for AY 2004-05 onwards has been withdrawn. The assessment records for AY 2006-07 to 2009-10 show that Hamdard is carrying on the business of manufacturing and sale of medicine on commercial scale and donating a part of its surplus to its sister organization HNF. Revenue has relied on the following chart in support of its contention: AY 2006-07 AY 2007-08 AY 2008-09 AY 2009-10 Gross Surplus 352001618 390139031 650201108 842529235 Less:-15% as General reserve -52800243 58520855 97530166 126379385 Donations and Corpus Funds to HNF -158400000 294381000 292600000 348000000 Applied to Fixed Asseets -19311271 13604038 13230941 25342372 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DGIT(E) has correctly held that Hamdard violated conditions (a), (b) and (c) of the order granting exemption dated 28.12.2007. Hamdard has accumulated and applied its income towards its business activities involving manufacture and sale of unani medicines and other allied products. This does not constitute application/accumulation of income towards its objects. Further, Hamdard has accumulated its income in excess of five years, in violation of the second part of condition (a) in the order of exemption. 45. Mr. Madan reiterates that Hamdard has not invested its surplus in accordance with the provisions of Section 11(5) of the Act, as the said provision does not permit investment in business activities. He submits that none of the decisions relied upon by Hamdard deal with a case of investment in business. 46. As regards condition (c), it is stated that it is an admitted fact that Hamdard has not been maintaining separate books of accounts for its income applied to charitable activities. Hence, there is a blatant violation of condition (c) imposed in the order of exemption as well seventh proviso to Section 10(23C), which disentitles it for the exemption granted by the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, it is incorrect that the orders dated 10.07.2013 do not deal with Hamdard s submissions. 51. The second Respondent, while denying allegation that the second Petitioner met him on 29.06.2013 as it was not a working day, states that on 28.06.2013, the said petitioner attended the said respondent s office and requested for adjournment. Accordingly, the case was adjourned to 08.07.2013 for hearing. The second Respondent denies having called the second Petitioner on 08.07.2013, or that he was asked to sign the order sheets for 28.06.2013 on 08.07.2013. Analysis and Conclusions 52. As noted at the outset of this Court s judgment, the focal point of the six writ petitions involved here is the nature of the objects and activities carried out by Hamdard. Indeed, this Court s determination as regards Hamdard s entitlement to exemption under Section 10(23C)(iv) of the Act has a direct bearing on the outcome in W.P.(C) 3599 of 2013 (reopening of assessment for AY 2005-06) and WP (C) Nos. 5715, 5716, 5718 and 5729 of 2013 (validity of CIT(A) s orders dated 10.07.2013). Therefore, this Court proceeds to examine this issue first. Grounds for withdrawal of exemption un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv): a. Hamdard had applied as well as accumulated its income not in terms of its objects but towards its business activities, which was not its object. b. Hamdard had accumulated beyond 5 years, contrary to the second part of condition (a) stipulated in the order dated 28.12.2007. c. Hamdard made investment in business contrary to condition (b) stipulated in the said order. d. Hamdard s business is not incidental to the attainment of its objects and it did not maintain separate books of accounts (violation of condition (c)). e. In view of the amendment to Section 2(15) with effect from 01.04.2009, Hamdard cannot be held to be existing for charitable purpose . The DGIT(E) relied upon the Supreme Court s decision in Thanthi Trust (supra), and held that the decision in Surat Art Silk (supra) which was relied upon by this Court in Hamdard Dawakhana (Wakf) (supra) was no longer applicable on account of change of law. This court proceeds to examine the legality of each of the reasons, contained in the impugned order, for the withdrawal of exemption under Section 10(23C)(iv). 55. A clarification is called for at this stage, regarding the scope of applicability of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects and held them to be charitable withint the meaning of Section 2(15) of the Act. The clauses enumerating Hamdard s objects continue to remain the same and since the definition of charitable purpose applicable for the period prior to 01.04.2009 is identical to the one applied by this Court in Hamdard Dawakhana (Wakf), the issue concerning charitable nature of the organization prior to 01.04.2009 is no longer res integra. The court would examine the charitable nature of the organisation from 01.04.2009 onwards in the relevant section below. 58. That brings the court to the crucial issue to be considered i.e. whether Hamdard s objects fall within either or all of first three heads of charitable purpose stated in Section 2(15) or within the residual category. While examining Hamdard s objects, the DGIT(E) noted that its primary mode of expenditure on charitable activities is through HNF, and that its direct expenditure on charitable objects is negligible. Further, it was stated that HNF carries out its charity through four Section 12A registered entities, viz. Jamia Hamdard University (education), Hamdard Education Society (HES) (education and residual category), Business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sification of Hamdard s objects. The DGIT(E) s approach on this aspect is perplexing. On the one hand, it held that the nature of activity of third set of trusts, i.e. Jamia Hamdard University, HES, BEB and AIUTC would not impact the determination of nature of Hamdard s objects. On the other hand, the DGIT(E) relies on the fact the Hamdard does not carry out its charitable activities directly, and since its donees may choose to apply the donations to charitable activities falling in the residual category, Hamdard ought to be within the residual category. In the opinion of this Court, while the activities of donee trusts may have some relevance for determining the nature of Hamdard s objects for the purposes of Section 2(15), the primary basis for such determination must needs be Hamdard s trust deed containing its objects. 61. Now, coming to an examination of Hamdard s objects, Clause 44 (a) of the Deed dated 28.08.1948 lists out objects of public charity to include relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity of profit . At first look, it would appear that the obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereafter, which are identical to clauses 44 to 47 of Hamdard s Trust Deed. The fact that they have been classified under two different heads, viz. objects and functions is immaterial, as it is only a matter of form and does not alter the manner of application of donations received by HNF. 63. The DGIT(E) in the impugned order dated 21.08.2013 as well as in the affidavit on record admits that HNF s main activity is donation to Jamia Hamdard University which qualifies under education in Section 2(15). Further, it was noted that HNF is making relatively small donations to HES, BEB and AIUTC. It was held that HES is carrying out charitable activities falling in the first three categories as well as the residual category, whereas BEB and AIUTC are carrying out charitable activities under the residual category. This Court does not deem it necessary to examine the activities of HES, BEB and AIUTC in detail, for it has already found that Hamdard s and HNF s objects fall within the first three categories of charitable purpose under Section 2(15), and the fact that HNF s charitable activity carried out through Jamia Hamdard University - admittedly comprising of bulk of HNF s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sabyasachi Mukharji J. (as he then was) and Suhas Chandra Sen J. had to consider the question whether donation given by one charitable trust to another trust under the bona fide belief that the donee was a charitable trust would be covered by the provisions of Section 4(3) of the Indian Income-tax Act, 1922, which is the forerunner of Section 11 of the Income-tax Act, 1961. The Calcutta High Court, speaking through Sabyasachi Mukharji J., in terms, held that the assessed donor trust was entitled to exemption under Section 4(3) of the Income-tax Act. It must, therefore, be held that when a donor trust which is itself a charitable and religious trust donates its income to another trust, the provisions of Section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. Whether Hamdard accumulated and applied its income towards its objects? 68. The DGIT(E) held that Hamdard accumulated and applied its income towards expansion of its business and since Hamdard s business does not form a part of its objects, it was in violation of condition (a) imposed in the order of exemption dated 28.12.2007. Hamdard submits that the application of its current and accumulated surplus for sustaining and augmenting the income generating capacity of its charitable corpus constitutes an application for charitable purpose. It relies on the decisions in DIT v. Abul Kalam Azad Islamic Awakening 2013 VAD (Delhi) 44; DIT v. Govindan Naicker Estate, (2009) 315 ITR 237; CIT v. St. George Forana Church, (1988) 170 ITR 63. It is submitted that the application/permitted accumulation of its income for capital expansion and maintenance of charitable assets is indispensable and incidental to the effectuation of its charitable purpose. It would, therefore, be appropriate to first examine the objects of Hamdard, prior to determining whether its application and accumualation of income is in accordance with the same. 69. The starting point for discussion is this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haritable. Thus, in the present case, no doubt, the trust earns the money from the Hamdard Dawakhana. If that money is used for charitable purpose and not for the carrying on of any business at a profit, then the object of the trust is charitable, notwithstanding the source of the income. 19. It is hardly possible for a charitable trust to work with no source of income. So, the makers of the trust in the present case, dedicated a portion of the income of the business for being used for charitable purpose As long as the user of that money is charitable, then the exemption has to be granted. XXX XXX XXX 26. It was submitted before us that clause 46 shows that it is possible to use the trust even for running profitable businesses such as commercial institutions, schools, laboratories, inns and also by publication of books. Thus, a non-charitable purpose was visualised by this trust. 27. No doubt, the words actually used do suggest that conceivably the trust income could be used for non-charitable purposes. At the same time, we think that the object of the trust was not to use the income for non-charitable purposes. When one visualises that education and medical rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001) 247 ITR 785 and Section 11(4A), which was introduced subsequent to the decision in Surat Art Silk (supra). 71. The Supreme Court in Thanthi Trust did not discuss the issue of applicability of the test laid down in Surat Art Silk (supra) in light of the insertion of Section 11(4A). The DGIT(E) s ruling that Surat Art Silk (supra) is no longer applicable in light of the decision in Thanthi Trust presupposes, at the least, the applicability of Section 11(4A) to instances of businesses held in trust, such as the instant case (and it was so held by the DGIT(E), in its impugned order). However, this Court (for reasons explained in the section concerning violation of condition (c) below) holds that in light of the decision in CIT v. Mehta Charitable Prajnalay Trust, (2013) 357 ITR 560, Section 11(4A) is not applicable to Hamdard s case. Further, the Supreme Court in CIT v. Gujarat Maritime Board, (2007) 295 ITR 561 as well as in its recent decision in Queen s Educational Society (supra) has also applied the Surat Art Silk (supra) test to determine the dominant object of the respective assessees, notwithstanding its earlier pronouncement in Thanthi Trust (supra) and the insert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be a vital factor in determining the charitable nature of an entity (see M/s. GS1 India v. DGIT, [2014] 360 ITR 138; Institute of Chartered Accountants of India v. DGIT, [2013] 358 ITR 91; PHD Chamber of Commerce Industry v. DIT, (2013) 357 ITR 296). A look at Hamdard s Trust Deed and its activities unequivocally establish that they are not guided by profit motive. Indeed, in furtherance of the charitable purpose, Hamdard s Trust Deed dated 28.08.1948 was amended on 10.10.1985 with effect from 01.01.1973 to abolish the concept of family income; and all proceeds generated from Hamdard s activities are solely in furtherance of its charitable objectives. The relevant declaration reads as follows: 6. That the words Khandani Income and all provisions and references relating thereto, wherever they appear in the Wakf Deed and/or in the subsequent declarations, modifications and amendments thereto, or elsewhere, are abrogated, annulled and deleted therefrom and the Hamdard Dawakhana (Wakf) is 64/64 or 100% Charitable Wakf and there is no Khandani Income whatsoever and no private beneficiary whomsoever. 74. The Revenue urges that Hamdard had been enjoying enormous profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come in an immovable property . The word immovable property by natural reading, will include any type of land, residential or commercial property or any other form of property, which can be termed as immovable property as defined in the Transfer of Property Act. Thus, the society/ management is allowed to invest its surplus in immovable property, including commercial property. Thus, there cannot be a bar on management of Society to invest its surplus funds in acquisition of a commercial property as the law does not mandate any extra bar. 7.3 Coming to the other aspect that because the assessee is not carrying out any educational activity in this commercial property, therefore, the investment becomes for non-charitable purposes and the assessee has endeavored to enter into business operations. In our view the assessee's charitable objects include spreading education and opening of schools; investment even in commercial property assets remains charitable purposes so long as the income generated by it is applied to charitable objects. It has not been demonstrated that the assessee applied rent received from these properties to any non-charitable purposes. Besides, it has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the clauses pertaining to the application of amounts in Reserve Fund no longer exist; and the introduction of Section 13(1)(d) and Section 11(5), which preclude reinvestment of funds into business. 79. This Court does not find either of the aforesaid reasons for non-applicability of Hakim Abdul Hamid (supra) to be tenable. First, as regards the introduction of new statutory provisions, Section 13(1)(d) merely states that funds not invested or deposited in accordance with the provisions of Section 11(5) would not be available for exemption under Section 11 of the Act. The guiding provision for application of funds of a charitable institution, therefore, is Section 11(5). Section 11(5) does not in any manner precludes the application of funds of a charitable institution for its objects. This Court in Abul Kalam Azad Islamic Awakening has held that investment even in commercial property assets remains charitable purposes so long as the income generated by it is applied to charitable objects . As a result, the insertion of Section 11(5) or Section 13(1)(d) does not negative the applicability of this Court s decision in Hakim Abdul Hameed (supra) to the facts of this case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amdard would be required to invest funds in such activities in order to sustain its charitable purpose. In such circumstances, it is incomphrenesible that the DGIT(E) would construe Hamdard s application or accumulation of funds towards its activities, which constitute a part of its objects, as a violation of any of the statutory conditions imposed under Section 10 or Section 11 or those imposed by the order dated 28.12.2007. 81. In light of the above, this Court holds that the decision in Abul Kalam Azad Islamic Awakening (supra), where it was held the application of income derived from investment in commercial property to be the determining factor, is squarely applicable. Here, too, Hamdard, in accordance with its Trust Deed, has been applying and accumulating its income from business activities for charitable purposes. Hamdard has rightly placed reliance on this Court s decision in DIT v. Eternal Science of Man s Society, (2007) 290 ITR 535, where the Court allowed acquisition of moveable and immoveable property if it achieved the objects of a charitable trust. Therefore, this Court holds that Hamdard did not fail to apply or accumulate its income/surplus towards its objects. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odes specified in Section 11(5). In response to this contention, the Revenue submits that this issue was raised in the DGIT(E) s order dated 22.02.2012, which had been quashed by this Court in its order dated 11.04.2012. In other words, since all issues raised in the order dated 22.02.2012 were remanded by the Court for fresh determination, specific show cause for each individual violation/query was not required. Further, the Revenue submits that this was raised during the hearings, and Hamdard also made written submissions on the same on 21.05.2013. Since Hamdard has admittedly made investments in ongoing business activities, condition (b) of the order of exemption read with Section 11(5) of the Act has not been complied with. 85. A perusal of the order dated 22.02.2012 indicates that the Revenue had alleged violation of third proviso to Section 10(23C) of the Act. However, there was no finding on the same. Further, the written submissions filed by Hamdard, including the submissions dated 21.05.2013 relied upon by the Revenue, also do not deal with such allegation. Given these facts, this Court does not have any basis to accept the Revenue s contention that this issue was the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such trust or institution in respect of such business. 88. Given the similarity in the phraseology of Section 11(4A) and the seventh proviso to Section 10(23C)/condition (c), the DGIT(E) s approach of applying the principles of interpretation of the former provision for interpreting the applicability of the latter cannot be faulted with. Therefore, if Section 11(4A) were held to be applicable to Hamdard, so would condition (c)/seventh proviso, and vice-versa. As a corollary, if the nature of Hamdard s activities were such that no compliance with Section 11(4A) was required, the issue of violation of Section 11(4A) or condition (c) or the seventh proviso to Section 10(23C)(iv) would not arise. 89. The DGIT(E) concluded that Section 11(4A) is applicable to Hamdard, even though it is admittedly a business held in trust. In so holding, the DGIT(E) relied on the Supreme Court s decision in ACIT v. Thanthi Trust (2001) 247 ITR 785, and ruled that the Court therein had rejected the distinction between a business held in trust and a business carried on by the trust insofar as the applicability of Section 11(4A) was concerned. Hamdard relied upon this Court s decision in CIT v. Meht ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust may hold a business as part of its corpus. It may carry on a business which it does not hold as a part of its corpus. But it seems to us that the distinction has no consequence insofar as section 13(1)(bb) is concerned. Section 13(1)(bb) provides, so far as is relevant to this case, that the provisions of section 11 shall not operate so as to include in the total income of the previous year of a Public Charitable Trust for the relief of the poor, education or medical relief which carries on any business, any income derived from such business unless the business is carried on in the course of the actual carrying out of a primary purpose of the Trust. Section 13(1)(bb), therefore, will apply to a Public Charitable Trust for the relief of the poor, education or medical relief that carries on a business, regardless of whether or not that business is held by the Trust in Trust, that is, as a part of its corpus. Even a business that is held by such a Trust as a part of its corpus is carried on by the Trust and, therefore, section 13(1)(bb) will apply to such Trust. (emphasis supplied) Although a similar contention was raised by the assessee s counsel in the context of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin clause (a). It is a Trust not an institution, so it does not fall within clause (b). It must, therefore, be held that for the assessment years in question the Trust was not entitled to the exemption contained in section 11 in respect of the income of its newspaper. 92. There is nothing to indicate that the Court rejected the distinction between a business held under trust and a trust carrying on business for the purposes of Section 11(4A). On the other hand, this Court in Mehta Charitable Prajnalay Trust (supra) was categorical in its ruling that Section 11(4A) of the Act does not apply to a business held under trust. The Court arrived at the said conclusion based on an elaborate discussion of the historical background of Section 11(4A), and the interpretation given by the Supreme Court to an analogous provision (Section 4(3)(ia)) under the 1922 Act. The Court held: 15. The question whether sub-section (4A) would apply even to a case where a business was held under trust was answered in the negative in several authoritative pronouncements starting from the judgment of the Lahore High Court in Gadodia Swadeshi Stores v. Commissioner of Income Tax, Punjab, (1944) 12 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption is that but for the proviso the enacting part of the section would have included the subject-matter of the proviso; but the clear language of the substantive provision as well as the proviso may establish that the proviso is not a qualifying clause of the main provision, but is in itself a substantive provision. In the words of Maxwell, the true principle is that the sound view of the enacting clause, the saving clause and the proviso taken and construed together is to prevail . So construed we find no difficulty, as we will indicate later in our judgment, in holding that the said clause (b) of the proviso deals with a case of business which is not vested in trust for religious or charitable purposes within the meaning of the substantive clause of section 4(3)(i). 16. Thus, if a property is held under trust, and such property is a business, the case would fall under Section 11(4) and not under Section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. 17. In view of the above settled legal position, we are unable to accept the contention urged on behalf of the revenue before us that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable organization/association without taking into account the activity undertaken by the assessee and the primary objective and purpose i.e. the activity and charity activity are one and the same The 'business' activity undertaken by the petitioner is integral to the charity/charitable activities. As noted above, the petitioner is not carrying on any independent, separate or incidental activity, which can be classified as business to feed and promote charitable activities. The act or activity of the petitioner being one, thus a single set of books of account is maintained, as what is treated and regarded by the Revenue as the 'business' is nothing but intrinsically connected with acts for attainment of the objects and goals of the petitioner. We fail to understand when the petitioner is maintaining the books of accounts with regard to their receipts/income as well as the expenses incurred for their entire activity then how it can be held that separate books of accounts have not been maintained for 'business' activities. The business activities are intrinsically woven into and part of the charitable activity undertaken. The business activity is not fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be applicable to entities doing core charity i.e. those falling in the non-residual category of Section 2(15). Indeed, the DGIT(E) could not have held the contrary in light of the umambiguous phrasing of the first proviso and this Court s decision dated 11.04.2013 in Hamdard s case in W.P.(C) 3598 of 2012, whereby it quashed the order dated 22.02.2012. On the applicability of the first proviso to Section 2(15), the Court noted: We may note here that the first proviso to sub Section was amended by Finance (No.2) Act, 2009 with retrospective effect from 01.04.2009. The said proviso is applicable in cases where an assessee claims that it is carrying on charitable purpose covered by the residuary clause i.e. advancement of any other object of public utility . The proviso is not applicable in case an assessee or institution claims that it is carrying on charitable purpose like relief to poor, education, medical relief etc., i.e. purposes which have been specifically enumerated and stated in the earlier part of Section 2(15). 98. This Court holds that arguendo if Hamdard s objects were to be construed to be falling within the residual category of charitable purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said cases. Genuine charitable organizations will not in any way be affected.' The expressions business , trade or commerce as used in the first proviso must, thus, be interpreted restrictively and where the dominant object of an organisation is charitable any incidental activity for furtherance of the object would not fall within the expressions business , trade or commerce . XXX XXX XXX 70. Although in [Surat Art Silk] the statutory provisions being considered by the Supreme Court were different and the utilisation of income earned is, now, not a relevant consideration in view of the express words of the first proviso to section 2(15) of the Act, nonetheless the test of dominant object of an entity would be relevant to determine whether the entity is carrying on business or not. 99. More recently, this Court in India Trade Promotion Organization v. Director General of Income-tax (Exemptions), [2015] 371 ITR 333, while adjudicating upon the constitutional validity of the first proviso to Section 2(15), read down the said proviso when applied in the context of Section 10(23C)(iv) and reiterated the dominant purpose test discussed in Institute of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 against the re-opening of assessment were dismissed by the ADIT(E) on 25.05.2012. The said order provided the following reasons for Hamdard s prelminary objections against the reopening of assessment for AY 2005-06: The Notice u/s 148/147 has been issued to you in case of A.Y. 2005-06 based on the reasons recorded before issuance of such notice and upon cancellation of Sec. 10(23C)(iv) Registration by Ld. DGIT(E). The facts brought in your return for A.Y. 2005-06 have not been disclosed all the facts properly (sic) which could lead to assessment. Even, when an Organization has lost its charitable status retrospectively, claim of exemption by that organization tantamount to furnishing of false particulars and failure on part of assessee to disclose fully and truly all material facts necessary for assessment. XXX XXX XXX The AO in this case has not changed its opinion but based on the exemption status of the assessee and changed facts circumstances of the case has re-opened it u/s 147/148 of the I.T. Act. When assessee's exemption has been withdrawn by a higher authority, AO has to give effect to that Order as assessee now falls under the non-exempt category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(E) for the reopening of assessment proceedings, contained in the orders dated 16.04.2012 and 25.05.2012, the Revenue s case does not succeed. It is evident from these orders that the reopening of assessment was premised on the withdrawal of Hamdard s exemption under Section 10(23C)(iv) of the Act by the CIT(A) s order dated 22.02.2012. Indeed, owing to withdrawal of exemption the ADIT(E) refused to rely on the precedent cited by Hamdard. The order dated 22.02.2012 withdrawing the exemption has been set aside by this Court on 11.04.2012 in W.P.(C) 3598/2012. Even the subsequent order dated 28.07.2013, withdrawing the exemption under Section 10(23C)(iv), has been set aside in W.P.(C) 5711 of 2013 above. The reasons for reopening of assessment stated in the orders dated 16.04.2012 and 25.05.2012 are identical to those contained in the order dated 28.07.2013. Therefore, in light of this Court s order in W.P.(C) 5711 of 2013, the basis for re-opening of assessment proceedings for AY 2005-06 does not survive. Consequently, the notice of reopening dated 27.03.2012 and orders dated 16.04.2012 and 25.05.2012 passed by the ADIT(E) are hereby quashed. WP (C) Nos. 5715, 5716, 5718 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , does not even find mention in the four impugned orders, notwithstanding that this fact was highlighted by Hamdard in its written submissions dated 06.05.2013. The case law cited by Hamdard in its written submissions of the said date also do not find any mention in the impugned orders. This Court cannot go into the propriety of Hamdard s submission that the second Respondent got orders dated 28.06.2013 and 08.07.2013 signed by Hamdard s representative on a false pretext. However, the other facts discussed above are sufficient to establish that the second Respondent violated principles of natural justice in passing the impugned orders. Even on merits, it is apparent that the ground for denial of exemption under Section 11 is that Hamdard is not engaged in charitable activities within the meaning of Section 2(15) of the Act. The CIT(A) held in this regard as follows: 4.9 I have considered the order of the AO and the submissions of the assessee and I do not find any merit in the submissions of the assessee. There is no dispute and it is in fact admitted by the assessee that the assessee is engaged in business activities of manufacturing and sale of Hamdard medicines. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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