9911796707
TMI Blog2025 (3) TMI 759X X X X Extracts X X X X X X X X Extracts X X X X ..... iso 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First Appellate Authority pertaining to Assessment Year (AY) 2009-10. 2. The core issue arising for consideration as per concise grounds of appeal of the assessee is as under: "Whether the proviso to Section 2(15) of the Income Tax Act, 1961 (hereinafter called the 'Act') disentitles the assessee from availing exemption under Sections (u/s.) 11 and 12 of the Act." 3. Before we delve into the issue in dispute, it is necessary to provide a brief background of the assessee and its activities. Initially, the export of diamond from India to abroad was unorganized. Therefore, the diamond exporters in India came together and formed Diamond Exporters Association for facilitating export of diamond. Subsequently, the diamond exporters found that there was need for setting up a diamond bourse in Bombay with customs clearance facilities for facilitating export of diamond and make trade more competitive in the international market. After deliberating on the request made by the Diamond Exporters Association, the Central Government, in 1984, accepted the proposal to set up a diamond bourse in Bombay. The Minerals and Metals Trading Corporation of India Ltd. (MMTC), a Central Government under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucture facilities, including handling, storage and clearance of import and export of diamonds, precious stones etc., on a cost recovery basis at the risk and expense of the assessee. After taking over the role of custodian, the MMTC took on sub-lease space at Diamond Plaza for a period of five years at monthly rent of Rs. 86,720/- with refundable security deposit of Rs. 52.03 lakhs for setting up the Bourse, which was subsequently sub-leased to the assessee. On 31 August, 1984, the Managing Committee of the assessee decided to treat the expenses incurred by the MMTC as a loan, which was to be returned with interest at 6 percent per annum. 6. Thus, the assessee was set up as a non-profit company with the principal object of facilitating diamond export so that maximum revenue could be earned by way of foreign exchange and also can make diamond trade more competitive at the international level. Subsequently, on 15.12.1986, an agreement was entered between MMTC and the assessee, under which, it was agreed that from 1st April, 1988 the activities of the Bourse would be carried out by the assessee and no more by MMTC. After taking over the operations from MMTC, to meet the expenditure r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal, the Revenue went in appeal before the Hon'ble Bombay High Court, and having failed there, preferred an appeal to the Hon'ble Supreme Court. However, while deciding the appeal of the assessee, Hon'ble Supreme Court upheld the decisions of the Tribunal and Hon'ble Bombay High Court holding that the assessee, having carried out charitable activities as per its objects, is entitled to claim exemption u/s. 11 of the Act. 10. When the issue stood thus, the Director of Income Tax, (Exemption) cancelled the registration certificate granted u/s. 12A of the Act to the assessee, vide order dated 27.12.2011, with retrospective effect on the ground that the activities of the assessee are hit by the proviso to Section 2(15) of the Act, hence, the objects of the assessee do not fall within the ambit of 'charitable purpose'. Based on the order cancelling registration u/s. 12A of the Act, the AO passed assessment orders for A.Ys 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10, rejecting assessee's claim of exemption u/s. 11 of the Act. 11. Against such decision of the AO, as well as, challenging the cancellation of registration u/s. 12A of the Act, assessee ultimately came in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for the assessee, in addition to the oral submissions made at the time of hearing, has furnished submissions in writing, as under: "17) Applicability of Proviso to Section 2(15) of the Act: i. The Finance Act, 2008 inserted Proviso to Section 2(15) of the Act. The Section 2(15) of the Act, as amended by the Finance Act, 2008, w.e.f. 01-04-2009 reads as under: "15) "charitable purpose" includes relief of the poor, education, medical relief, 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;" ii. The Memorandum explaining the provisions of the Finance Bill, 2008 lays down the legislative intent for insertion of Proviso to Section 2(15) of the Act. The relevant part of the Memorandum reads as under: "Streamlining the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oid tax liability as it was noticed that the object 'general public utility' was sometimes used as a mask or device to hide the true purpose, which was 'trade, commerce or business." From this, it is evident that the introduction of the proviso to Section 2(15) by virtue of the Finance Act, 2008 was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It was not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts and were charity institutions. The attempt was to remove the masks from the entities, which were purely trade, commerce or business entities, and to expose their true identities. The object was not to hurt genuine charitable organizations and, this was also the assurance given by the Finance Minister while introducing the Finance Bill 2008. 20) The expressions "trade", "commerce" and "business" as occurring in the first proviso to section 2(15) of the Act must be read in the context of the intent and purport of section 2(15) of the Act an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which occupies time, attention or labour of a person, and is clearly associated with the object of making profit". An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case activity may be regarded as a business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business. 22) The purpose for which the Appellant Assessee is established and the scope of activities carried out by the Appellant Assessee is discussed in detail in the foregoing para's. On going through the same and the Memorandum of Association of the Appellant Assessee (Refer page 275 of the Paper Book), it is amply clear that the Appellant Assessee is established for the promotion of exports of Gem & Jewellery from India and to provide for this purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier order of the Hon'ble ITAT, Hon'ble High Court and Hon'ble Supreme Court for the reason that the same was rendered prior to the amendment in section 2(15) of the Act. In doing so, the Ld. CIT(A) failed to appreciate that the findings made by the Hon'ble ITAT, Hon'ble High Court and Hon'ble Supreme Court still holds the field even after the amendment in section 2(15), as now the very same activities is to be seen keeping in mind proviso to section 2(15). Once that is done, it is amply clear that the Appellant Assessee is not hit by the proviso to section 2(15). 29) The judgement of the Hon'ble Apex Court in the case of ACIT(E) vs Ahmedabad Urban Development Authority [2022] 449 ITR 1(SC) has specifically dealt with the aspects relating to the advancement of General Public Utility ("GPU") with respect to trade promotion bodies. The Hon'ble Supreme Court has held that in case of advancement of GPU by trade promotion bodies, the activities cannot fall under the ambit of trade, commerce, business. In other words, such trade promotion bodies should be operating on a not-for- profit basis. The Hon'ble Supreme Court has further held that in orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng" and a "members club"." The law regarding the tenets of mutuality is no more res integra. It has been settled in a catena of judicial pronouncements and academic works across multiple jurisdictions. In Bangalore Club v. CIT [2013] 350 ITR 509, the Hon'ble Supreme Court authoritatively quoted one of the earliest judicial pronouncements in New York Life Insurance Co. v. Styles (Surveyor of Taxes) [1889] 2 TC 460 thus: "When a number of individuals agree to contribute funds for a common purpose... and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them. I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits." The proposition of law is restated in Bankipur Club (supra) and Bangalore Club (supra) by placing reliance upon the following extract from Simon's Taxes Simon's Taxes, Volume B, 3rd Edition, Pgs. 159, 167: "... it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gem & Jewellery trade and Industry." 16. While verifying the aforesaid objects of the assessee, the DIT(E), being convinced that such objects fall within the ambit of any other activity of general public utility, accepted the assessee as an organization existing for charitable purpose within the meaning of Section 2(15) of the Act and accordingly granted registration u/s. 12A of the Act. Though, the said registration was cancelled by learned DIT(E) for a brief period, however, ultimately, was restored by the Tribunal while setting aside the order of cancellation. Thus, factually, as on date, registration granted u/s. 12A of the Act recognizing the assessee as a charitable institution/organization is intact. It is a fact on record that the AO had made an attempt to deny claim of exemption u/s. 11 of the Act to the assessee in AYs 1989- 90 and 1990-91 on the reasoning that the assessee does not have charitable objects as it has generated income from business activity. However, higher appellate authorities, such as, the Tribunal, Hon'ble jurisdictional High Court and Hon'ble Supreme Court, while reversing the decisions of the Departmental authorities, have unequivocally held that not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... November, 1984 the Collector of Customs, Bombay issued a notice under Section 8 of the Customs Act approving the MMTC situated at Diamond Plaza Building near Opera House as a 'Customs Area' for the purposes of storage and clearance of diamonds, gems etc. On the same day, another notification was issued under Section 45(1) of the Customs act approving MMTC as the Custodian of the imported cargo of such goods until their clearance in accordance with the provisions of the Customs Act. It was also notified that MMTC would be the custodian with regard to the export cargo until they are trans-shipped and handed over to the airlines at Sahar International Airport, Bombay. When MMTC was appointed as the custodian, it had incurred expenditure on behalf of the Bharat Diamond Bourse to the extent of about Rs. 81 lakhs for setting up of the bourse. On 31st August, 1984 the Managing Committee of the assessee resolved to treat the expenses incurred by MMTC as a loan which was to be returned with interest @ 6% per annum. MMTC had taken certain premises on lease in the Diamond Plaza which was sub-leased to the assessee on the same terms and conditions except for the deposit. The principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;charitable purpose', even though the bourse might have been registered as an institution established for charitable purpose within the meaning of Section 2(15) of the Act. 13. The decision of the Constitutional Bench of this Court in Additional Commissioner of Income Tax, Gujarat, Ahmedabad v. Surat Art Silk Cloth Manufacturers' Association, Surat really clinches the issue. The assessee in Surat Art Silk case was an association established to promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn Art Silk Cloth, Silk Cloth and Cotton Cloth. Its objects, as evidenced from the memorandum of association, included, inter alia, carrying on business in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, Silk Cloth and Cotton Cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of this members. The Constitutional Bench of this Court held that, if there are several objects of the institution, some of which are charitable and some non-charitable and the trustees or the managers in their discretion may apply the income of the institution of those objects, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds from India and to provide for this purpose trading halls and other utilities at a central place for Indian Exporters and Overseas buyer to carry on trade and commerce in diamonds with speed and in secure conditions. (ii) To establish and promote effective liaison between diamond trade and industry in India and abroad with a view to promoting their sales from India in International market. (iii) To promote, advance, protect and develop trade, commerce and industry in India relating to exports and imports of diamonds and (iv) To develop India as Modern and sophisticated diamond market by establishing and maintaining an international trading center in India for all those engaged as manufacturers, traders, exporters and importers, brokers/commission agents of diamonds." 15. These being the pre-dominant objectives, we agree with the view taken by the Tribunal as well as the High Court that the assessee was rightly registered under Section 11 by treating it as an institution established for charitable purpose within the meaning of Section 2(15) of the Act." 17. It is an undisputed fact on record that the main objects of the assessee based on which registration was granted u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommerce or business for a cess or fee or any other consideration. The meaning of the words 'trade', 'commerce' and 'business' have to be understood in their ordinary sense and as known in common parlance. The word 'trade' would mean exchange of goods for goods or for money. The word 'business', though, has been defined under section 2(13) of the Act, however, it is generic. 'Business' in its ordinary sense would mean an occupation, or profession which occupies time, attention or labour of a person and is generally undertaken with a profit motive. The word 'commerce' again is of same connotation as 'trade' or 'business'. 20. 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 mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. Therefore, to prevent misuse of the exemption provision in the statute intended for genuine charitable institutions/organizations, the proviso was introduced. As could be seen from the main objects of the assessee and the actual activity carried on, the assessee was set up as no profit company only for the purpose of promotion of import/export of diamond/gems in India and to provide infrastructure and other facilities including customs clearance for Indian diamond exporters and importers. It cannot be denied that not only the assessee came into existence with the concurrence of the Government of India in the Ministries of Finance and Commerce but initially activities now carried on by the assessee were carried on by MMTC. It is also a fact on record that assessee has been recognized as a charitable organization with charitable purpose by Highest Court of the country. It cannot be denied that the activities of the assessee have remained as it is since inception. 23. It is further relevant to observe, as per the proviso to Section 2(15) of the Act, the activity of trade, commerce or business or service related to trade or commerce or business must be for a cess or fee or any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned u/s 2(15) of the Act. It is relevant to observe, in a recent decision in case of ACIT vs. Ahmedbad Urban Development Authority [2022] 143 taxmann 278 (SC), the Hon'ble Supreme Court was seized with the issue of interpretation of the proviso to Section 2(15) of the Act. While concluding, the Hon'ble Supreme Court has observed as under: "253. In view of the foregoing discussion and analysis, the following conclusions are recorded regarding the interpretation of the changed definition of "charitable purpose" (w.e.f. 01.04.2009), as well as the later amendments, and other related provisions of the IT Act. A. General test under Section 2(15) A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ("cess, or fee, or any other consideration"); A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mble trade, commercial, or business activities. However, since their objects are essential for advancement of public purposes/functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of business or commercial receipts. This is in line with the larger bench judgments of this court in Ramtanu Cooperative Housing Society and NDMC (supra). B.2. However, at the same time, in every case, the assessing authorities would have to apply their minds and scrutinize the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up. If such is the case, then the receipts would indicate that the activities are in fact in the nature of "trade, commerce or business" and as a result, would have to comply with the quantified limit (as amended from time to time) in the proviso to Section 2(15) of the IT Act. B.3. In clause (b) of Section 10(46) of the IT Act, "commercial" has the same meaning as "trade, commerce, business" in Section 2(15) of the IT Act. Therefore, sums charged by such notified body, authority, Board, Trust or Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature. In that event, the claim for tax exemption would have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act. E. Non-statutory bodies E.1. In the present batch of cases, non-statutory bodies performing public functions, such as ERNET and NIXI are engaged in important public purposes. The materials on record show that fees or consideration charged by them for the purposes provided are nominal. In the circumstances, it is held that the said two assessee's are driven by charitable purposes. However, the claims of such non- statutory organisations performing public functions, will have to be ascertained on a yearly basis, and the tax authorities must discern from the records, whether the fees charged are nominally above the cost, or have been increased to much higher levels. E.2. It is held that though GS1 India is in fact, involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , commerce or business" based on its receipts and income (i.e., whether the amounts charged are on cost-basis, or significantly higher). If it is found that they are in the nature of "trade, commerce or business", then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption." 26. As could be seen from the aforesaid observations of the Hon'ble Supreme Court, charging of any amount towards consideration for any activity relating to the object of general public utility, which is on cost basis or with nominal amount above the cost, cannot be considered to be trade, commerce or business or any services in relation thereto. Hon'ble Supreme Court has further observed that only when the charges are markedly or significantly above the cost incurred, then they would fall within the mischief of cess or fee or any other consideration towards trade, commerce or business. These observations of Hon'ble Supreme Court apply to various category of assessee's including trade promotion bodies and non- statutory bodies. In the facts of the present appeal, admittedly, the receipts of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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