If one of the objects is not “charitable purposes” within the meaning of s. 2(15) then also exemption u/s 11 & 12 will be available

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If one of the objects is not “charitable purposes” within the meaning of s. 2(15) then also exemption u/s 11 & 12 will be available

 

 

CANE DEVELOPMENT COUNCIL, MAWANA vs. COMMISSIONER OF INCOME TAX

ITAT, DELHI ‘B’ BENCH

I.P. Bansal, J.M. & Deepak R. Shah, A.M.

ITA No. 2948/Del/2009; Asst. yr. 2010-11

13th November, 2009

(2009) 28 CCH 0653 DelTrib

(2010) 128 TTJ 0316 : (2010) 33 DTR 0170 : (2010) 35 SOT 0308

Legislation Referred to

Section 2(15), proviso, 12AA

Case pertains to

Asst. Year 2010-11

Decision in favour of:

Assessee

Charitable trust—Registration under s. 12AA—Charitable purpose vis-a-vis scope of proviso to s. 2(15)—Assessee council was constituted under s. 5 of U.P. Sugar Cane (Regulation of Supply & Purchase) Act, 1953 to undertake programmes for development of cane varieties, cane seeds, sowing, fertilizers, manures, etc.—Assessee exists for charitable purposes in the nature of “advancement of any other object of general public utility”—It does not have any power to levy contribution on sugar factories or cane growers’ co-operative societies—Contributions are levied under the said Act, though payable to the assessee council—It does not charge any fee for rendering services—Therefore, it cannot be said that the assessee carries on any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess or fee—Further, if one of the objects is not “charitable purposes” within the meaning of s. 2(15) in view of the proviso thereof, the other objects if they are “charitable purposes” within the meaning of s. 2(15) the exemption as available under ss. 11 and 12 will still be available—Whether the assessee is to be denied exemption under s. 11(1) in view of proviso to s. 2(15) is to be looked into at the time of computation of income and not at the time of granting registration under s. 12AA—Therefore, CIT erred in withdrawing the registration under s. 12AA already granted to the assessee after accepting that its functions are for “charitable purposes”

Held:

The assessee council which is constituted under s. 5 of U.P. Sugar Cane (Regulation of Supply & Purchase) Act, 1953, was to carry out the specified functions. These functions were held to be “charitable purposes” within the meaning of s. 2(15) while granting registration under s. 12AA by an order dt. 15th Nov., 2007. The function of the assessee remains the same. Therefore, primarily it can be held that the functions performed by the assessee are charitable purposes in the nature of “advancement of any other object of general public utility”. The assessee does not have any power to levy contribution from sugar factories and cane growers’ co-operative societies. The contributions are levied under the U.P. Sugar Cane (Regulation of Supply & Purchase) Act, though payable to the assessee council. Therefore, it cannot be said that the assessee carries on any activity in the nature of trading, commerce or business or renders any services in relation to trade, commerce or business for a cess or fee. When the assessee undertakes its object, it does not charge any levy or fee for rendering services. Thus, it is incorrect to hold that the assessee is carrying on any commercial activities or that it renders any service in relation to trade, commerce or business for a cess or fees. The assessee receives grants and contribution which may include cess levied by the UP Government under U.P. Sugar Cane (Regulation of Supply & Purchase) Act but such amount is not levied under any authority available to the council itself. Therefore, the registration granted to the assessee could not have been withdrawn. It is also to be noted that apart from the services if any to the sugar mills, the assessee also performed various other functions like development of the zone, execution of development plan in all its essential like cane varieties, cane seeds, sowing programme, fertilizers and manures, development of irrigation and agricultural facilities, imparting technical training to cultivators etc. In respect of these functions, the assessee does not render services for a cess or fee. Therefore, these functions will still remain “charitable purposes” as defined in s. 2(15). If one of the objects is not “charitable purposes” within the meaning of s. 2(15) in view of the proviso thereof, the other objects if they are “charitable purposes” within the meaning of s. 2(15) the exemption as available under ss. 11 and 12 will still be available. Therefore, whether in view of the proviso to s. 2(15) the assessee is to be denied exemption under s. 11(1) will be looked into at the time of computation of income and not at the time of granting registration under s. 12AA where the objects are “charitable purposes” as defined and not in the nature of exception to s. 2(15) by way of proviso to s. 2(15). Therefore, the CIT was in error in outrightly rejecting or rather withdrawing the registration already granted under s. 12AA. Such facts are required to be examined at the time of framing assessment and not solely at the time of granting registration under s. 12AA. Since the assessee does not carry on any object which involves carrying on an 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 cess or fee, the assessee council is entitled to registration under s. 12AA. The registration granted to council shall be restored.

(Paras 5 to 7)

Conclusion:

Assessee council constituted under s. 5 of U.P. Sugar Cane (Regulation of Supply & Purchase) Act, 1953 to undertake programmes for development of cane varieties, cane seeds, sowing, fertilizers, manures, etc., did not have any power to levy contribution from sugar factories and cane growers’ co-operative societies but the contributions are levied under the U.P. Sugar Cane (Regulation of Supply & Purchase) Act, though payable to the assessee council and therefore it was not covered by proviso to s. 2(15) and, therefore, assessee was entitled to registration under s. 12AA.

In favour of:

Assessee

Case referred to

Circular No. 11, dt. 19th Dec., 2008

Counsel appeared:

Prem Prakash & Mashkoor Ahmed, for the Appellant : Smt. Roli Aggarwal, for the Respondent

ORDER

DEEPAK R. SHAH, A.M. :

ORDER

This appeal by the assessee is directed against the order of the CIT, Meerut passed under s. 12AA(3) dt. 15th April, 2009 withdrawing registration earlier granted to the assessee under s. 12AA by order dt. 15th Nov., 2007.

  1. The assessee namely Cane Development Council, Mawana was formed by the order of the Cane Commr. dt. 3rd Dec., 1965. The assessee council was constituted under s. 5 of Uttar Pradesh Sugar Cane (Regulation of Supply & Purchase) Act, 1953 to perform, the following functions :

(a) to consider and approve the programme of development for the zone;

(b) to devise ways and means for the execution of the development plan in all its essentials such as cane varieties, cane seeds, sowing programme, fertilizers and manures;

(c) to undertake the development of irrigation and other agricultural facilities in the zone;

(d) to take necessary steps for the prevention and control of disease and pests and to render all possible help in the soil extension work;

(e) to impart technical training to cultivators in matters relating to the production of cane;

(f) to administer the funds at its disposal for the execution of the development scheme subject to the general or special direction of the Cane Commr.; and

(g) to perform other prescribed functions pertaining and conducive to the general development of the zone.

The area for which a development council is established is called “zone”.

The assessee was originally granted registration under s. 12AA of the Act by order dt. 15th Nov., 2007. The learned CIT in the impugned order thereafter noted that a proviso to s. 2(15) defining the phrase “charitable purposes” was added by the Finance Act, 2008 w.e.f. 1st April, 2009. As per substituted definition “charitable purposes” is defined 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 retention consideration, irrespective of the nature of use of application, or retention, of the income from such activity.”

The CIT also noted that the funds of the council are obtained from following sources :

(a) grants, if any made by the Indian Central Sugarcane Committees;

(b) grants, if any, made by the State Government;

(c) contributions made by the sugar factories (Gur, Rab or Khandsari sugar manufacturing units) and cane growers co-operative societies at rates to be prescribed; and

(d) any other sums which the State Government may require to be credited to it.

After noting the functions and the source of fund the CIT in para 9 of his order held :

“9………..For its purposes the council has the power to levy contributions from sugar factories and cane growers co-operative societies.”

The CIT in para 11 of his order noted that the assessee’s activities will ordinarily be not regarded as charitable because for each and every development activity it charges fees in the shape of contributions. The CIT in para 14 of his order held that the assessee provides services to sugar mills by developing all specified areas of sugar mill. Thus it can be said to be providing services in relation to a trade for a fee charged from them. Hence in view of the amended provision the objects cannot be considered to be charitable purposes. Accordingly, he withdrew registration granted under s. 12AA w.e.f. 1st April, 2008. The assessee is, therefore, in further appeal before us.

  1. The learned counsel for the assessee Shri Prem Prakash submitted that originally the assessee council was granted registration which is not in dispute. Therefore, it proves that the objects of the assessee are charitable purposes as earlier defined. The learned CIT has wrongly observed that “the council has power to levy contribution from sugar factories and cane growers co-operative societies.” The assessee has no power to levy any contribution. The contribution, if any, is levied by UP Government under UP Sugar Cane (Regulation of Supply & Purchase) Act, 1953. That Act itself provides that contribution levied under said Act shall be payable to cane development councils established. Thus, there is difference between levy of contribution and receiving the contribution itself at the instance of State Government Act. The learned counsel further submitted that the contribution received by the assessee is to be used as per orders of the Sugar Commr., Uttar Pradesh, Lucknow and it has no concern with the administrative expenses or with the providing services to the catchments areas of the contributing entities. The assessee can provide services within its zone and not outside its zone. The assessee has received contributions from the following sugar mills :
  2. Sambhaoli Sugar Mills vs. Sambhaoli, D-Ghaziabad.
  3. Nanglamal Sugar Mills vs. Nanglamal, T&D-Meerut.
  4. Daurala Sugar Mills vs. Daurala, T-Sardhana, D-Meerut.
  5. Mawana Sugar Mills vs. Mawana, T-Mawana, D-Meerut.

Above three sugar mills at serial Nos. 1 to 3 are not in the zone of the appellant and are outside its zone and sugar mill at serial No. 4 is in the area of the appellant and hence the contention of the CIT that the contribution levied by the council is being utilized for providing services to the catchment areas of the contributing entities. The appellant can spent any money in its zone although contributions may be received from the sugar mills outside its zone.

He further submitted that even the observations made in para 14 are factually incorrect. It was submitted that the areas in which the council provides services are and are not specified areas of the sugar mills as there is no specified area of the sugar mills and if there is specified area of sugar mills, council is not bound to develop any area of sugar mills whether the same is within the campus of sugar mills or outside the campus of the sugar mills. Areas allotted to each council are called ‘zone’ and the council can spent any amount within its ‘zone’ only and not outside its ‘zone’.

The council has not spent any amount in the development of the areas which may be within areas of 3 sugar mills although contributions were also made by them as there is no specified area of any sugar mill.

It was further submitted that the main source of receipt of the council is grant/subsidies which is received from various institutions or scheme of the State Government like (i) District Plan Subsidy for Nursery; (ii) 10 km. Scheme; (iii) Centrally Sponsored Cane Demonstrator; (iv) Centrally Sponsored Cane Nursery; (v) Centrally Sponsored Cane Agricultural; (vi) Centrally Sponsored Hot Water Plant; (vii) Centrally Sponsored Dip Irrigation; (viii) Centrally Sponsored Soil Testing; (ix) Centrally Sponsored Bio Fertilizers; (x) Centrally Sponsored Cane Seed Transport; (xi) Centrally Sponsored Scheme for Contige; (xii) Contribution for Road from Sugar Mills; (xiii) Road Fund Deduction; (xiv) Transport Subsidy for Sugar Mills; (xv) District Plan Construction of Road Head; (xvi) Samta Mulak Plan for Demonstration; (xvii) Samta Mulak Plan for Free Cane Seed; (xviii) Samta Mulak Plan for Member’s Fee; (xix) Samta Mulak Plan for Seed Treatment; (xx) Samta Mulak Plan Foundation Nursery; (xxi) MLA Fund; (xxii) Atma Yojna Demonstration.

These grants/subsidies can be spent for specific purpose only and not for any other purpose. Thus in fact the appellant council acts as an agent of UP Government to implement the policies of the Government in serving the people of the villages in its zone. This fact has also been accepted by the learned CIT in para 13 of his order wherein it was observed that “In most cases the councils function as a conduit for certain sums provided by the UP Government.” It was accordingly pleaded that since the objects of the assessee are “advancement of any other object of general public utility” and for such objects the assessee which was originally granted registration under s. 12AA, cannot be withdrawn as the objects of the assessee do not involve carrying on of any activity in the nature of trading, commerce or business or any activity of rendering any service for a cess or fee.

  1. The learned Departmental Representative Smt. Roli Aggarwal on the other hand, relied upon the impugned order as summarized above.
  2. We have considered the relevant facts and arguments advanced. The assessee council which is constituted under s. 5 of Uttar Pradesh Sugar Cane (Regulation of Supply & Purchase) Act, 1953, was to carry out functions as enumerated above. These functions were held to be “charitable purposes” within the meaning of s. 2(15) of the Act while granting registration under s. 12AA by an order dt. 15th Nov., 2007. The function of the assessee remains the same. Therefore, primarily it can be held that the functions performed by the assessee are charitable purposes in the nature of “advancement of any other object of general public utility”. The dispute arose in view of the insertion of proviso to s. 2(15) of the Act. The purpose of the aforementioned proviso was explained by the CBDT in Circular No. 11, dt. 19th Dec., 2008 [(2009) 221 CTR (St) 1]. Para 3 of the said circular reads as under :

“The newly inserted proviso to s. 2(15) will apply only to entities whose purpose is advancement of any other object of general public utility i.e., the fourth limb of the definition of ‘charitable purpose’ contained in s. 2(15). Hence, such entities will not be eligible for exemption under s. 11 or under s. 10(23C) of the act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.”

Para 3.2 of the said circular is also relevant which is extracted herein :

“In the final analysis, however, whether the assessee has for its objects the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessee, who claim that their object is ‘charitable purpose’ within the meaning of s. 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.”

In the present case it is seen that the assessee does not have any power to levy contribution from sugar factories and cane growers’ co-operative societies. The contributions are levied under the Uttar Pradesh Sugar Cane (Regulation of Supply & Purchase) Act, though payable to the assessee council. Therefore, it cannot be said that the assessee carries on any activity in the nature of trading, commerce or business or renders any services in relation to trade, commerce or business for a cess or fee. When the assessee undertakes its object, it does not charge any levy or fee for rendering services. Thus, it is incorrect to hold that the assessee is carrying on any commercial activities or that it renders any service in relation to trade, commerce or business for a cess or fees. The assessee receives grants and contribution which may include cess levied by the UP Government under Uttar Pradesh Sugar Cane (Regulation of Supply & Purchase) Act but such amount is not levied under any authority available to the council itself. We, therefore, hold that the registration granted to the assessee could not have been withdrawn.

  1. It is also to be noted that apart from the services if any to the sugar mills, the assessee also performed various other functions like development of the zone, execution of development plan in all its essential like cane varieties, cane seeds, sowing programme, fertilizers and manures, development of irrigation and agricultural facilities, imparting technical training to cultivators etc. In respect of these functions, the assessee does not render services for a cess or fee. Therefore, these functions will still remain “charitable purposes” as defined in s. 2(15) of the Act. Under s. 11(1)(a) of the Act, income portion from property held under trust to the extent to which such income is applied to charitable or religious purposes in India shall not be included in the total income of the trust or institution. Even under s. 11(4A) the profits and gains of any business will not be exempt only to the extent of such profit where separate books of accounts were maintained in respect of such business. Therefore, in respect of other activities the exemption as granted under ss. 11(1), 11(2) and 11(3) will still be allowable. In the same manner, if one of the objects is not “charitable purposes” within the meaning of s. 2(15) of the Act, in view of the proviso thereof, the other objects if they are “charitable purposes” within the meaning of s. 2(15) of the Act, the exemption as available under ss. 11 and 12 will still be available. Therefore, whether in view of the proviso to s. 2(15) of the Act, the assessee is to be denied exemption under s. 11(1) of the Act will be looked into at the time of computation of income and not at the time of granting registration under s. 12AA of the Act where the objects are “charitable purposes” as defined and (sic—not) in the nature of exception to s. 2(15) by way of proviso to s. 2(15) of the Act.

Therefore, the CIT was in error in outrightly rejecting or rather withdrawing the registration already granted under s. 12AA of the Act. Such facts are required to be examined at the time of framing assessment and not solely at the time of granting registration under s. 12AA of the Act.

  1. Since in the present case we have held that the assessee does not carry on any object which involves carrying on an 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 cess or fee, the assessee council is entitled to registration under s. 12AA of the Act. The registration granted to council shall be restored.
  2. In the result, the appeal is allowed.

 

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