The Tax Publishers2013 TaxPub(DT) 0453 (Del-HC) : (2013) 052 (I) ITCL 0197 : (2013) 357 ITR 0296 : (2014) 265 CTR 0318 : (2013) 212 TAXMAN 0194 : (2013) 095 DTR 0112

INCOME TAX ACT, 1961

--Charitable trust--Exemption under section 11Receipts derived by assessee treated as business income--Assessee-company was incorporated as chamber of commerce and industry and from assessment year 1996-97 up to 2006-07, it was granted exemption under section 11. During relevant assessment year, assessing officer denied assessee's claim for exemption under section 11 as he held that assessee was carrying on business of rendering services not only to its members but also to not-members and provisions of section 11(4A) were attracted Commissioner (Appeals) allowed assessee's appeal. Tribunal however, held that activities carried out by assessee were charitable activities and a certificate of registration was also granted under section 12A and, therefore, it restored issue to assessing officer to make enquiry whether business carried out by assessee was incidental to attainment of objects of assessee and whether separate books of accounts were maintained for such business. Held: As business of assessee was carried out which was incidental to attainment of its charitable object, section 11(4A) could not therefore be applied and assessee was entitled to exemption under section 11 if business was carried out without profit motive.

Section 28(iii) provides that the income derived by a trade, professional or similar association from specific services performed for its members will be brought to charge under the head 'profits and gains of business or profession'. The assessee is a Chamber of Commerce and in the course of pursuing its objects renders several services to its members such as certification, committee room services, secretarial services and facilities, energy audit etc. Some of the services are also rendered to non-members for a higher fee. The assessee also lets out space to members as well as non-members. In the opinion of the Tribunal, the assessing officer was not right in the characterisation of these services, both to the members as well as non-members, as non-charitable activities; however, it upheld the view of the assessing officer that in rendering these services the assessee was carrying on a business activity. [Para 7] There can be no doubt that the activities of the nature described above, in the case of an assessee such as the present one, which is a trade association-Chamber of Commerce and Industry, established to protect the interests of trade and industry in Punjab, Haryana and Delhi-were activities which are incidental to the attainment of the objects of the chamber. Court does not think that the Tribunal is justified in taking the view that the assessee, which is a chamber of commerce and industry, is carrying on business activities which require compliance with the conditions of section 11(4A). [Para 8] The trade, professional or similar association, including a chamber of commerce and industry has no separate existence apart from the members constituting it and when the members pay fees for services rendered by the association and a surplus arises to the association, it actually belongs to the members who had availed of the service. Thus, there is identity between the contributors to and participators in the surplus and under general principles of mutuality, the surplus ought not to be taxed. However, the clause 6 of section 10 has been enacted to ensure that such surplus does not enjoy any exemption. Since the surplus had to be brought to tax under a particular head, it was thought by the legislature that the head 'profits and gains of business' would be the most appropriate head under which the surplus can be brought to tax. This does not, however, mean that a business is carried on by the association in the sense that there is a profit motive which drives the carrying on of the activity. [Para 10] In most of the cases, the services are performed in the true spirit of service to the members of the association (such as a chamber of commerce) and the fees charged are so calculated or fixed that it merely covers the costs incurred by the association in rendering the service. Since accuracy in matching the costs and the fees charged cannot be maintained consistently, there can arise a surplus. The mere arising of a surplus does not clothe the activity of performing the services for the members with a profit motive, which is essential in business. [Para 12] The reason for the introduction of section 10(6) of the old Act or section 28(iii) of the new Act is, as already noted, to ignore the principle of mutuality and reach the surplus arising to the mutual association and this is clear from the fact that these provisions are confined to services performed by the association 'for its members'. But, at the same time, income received by the association from a non-member would be chargeable to tax because qua that activity, mutuality will be lacking since the recipient of the services is a non-member. There is no statutory provision as to what would happen if a mutual association deals with a non-member. It, however, stands to reason that such income would either be charged as business income or under the residual head, depending upon the question whether the activities of the association with the non-members amount to a business or otherwise. [Para 14] Section 28(iii) does is to constitute certain income of the association to be business income without affecting the scope of the exemption under section 11. Section 2(15) which incorporates the definition of 'charitable purpose' as including relief of the poor, education, medical relief and the advancement of any other object of general public utility, on the lines of what Sir Samuel Romilly suggested to the Court in Morise v. Durham Bishop of Durham (1805) 10 Ves Jr 522, shows that several mutual associations may also fall within the definition. Receipts derived by a chamber of commerce and industry for performing specific services to its members, though treated as business income under section 28(iii) would still be entitled to the exemption under section 2(15) read with section 11, provided there is no profit motive. [Para 15]. There is no dispute that the objects of the assessee are charitable in nature within the meaning of section 2(15). The Tribunal has so held and that finding is not under challenge by the revenue. Clause 4 of the memorandum of association proscribed the distribution of profit. [Para 17] Clause 3 of the articles of association categorises the members as follows: - patron members, ordinary members, professional members, association members, overseas members and honorary members. The procedure for admission to membership is set out in detail in clause 10 of the articles of association. The financial statements and the audited accounts for the years ended 31-3-2006 and 31-3-2007 have been placed; they were also placed before the assessing officer. The income of the assessee under various heads such as membership subscription, specialised services, services and facilities, meetings, seminars and training programmes (net), legal and arbitration fee, sale of publications (net), miscellaneous etc. have been separately shown in the income and expenditure account, against which the expenditure is set off. The entire surplus which amounted to Rs. 32,92,986 was taken to the general reserve; it was not distributed as dividend or profits. For the year ended 31-3-2006, there was a deficit of Rs. 63,67,202 which was also transferred to the general reserve. [Para 17] The Tribunal in the present case disapproved the view taken by the assessing officer that by rendering professional services to members and non-members, it was not carrying on a charitable activity. This was because the assessee's objects were charitable in nature and it was so registered under section 12A. However, it tended to view the assessee's activities as amounting to business. It even observed that 'the admitted position of fact is that the assessee has been carrying on business activities'. This part of the order of the Tribunal was sought to be corrected by an application under section 254(2) but that application was dismissed by the Tribunal, though with some clarification. The Tribunal noted that on this aspect the finding of the Commissioner (Appeals) was that the activities were carried on pursuant to the objects and, therefore, they do not constitute business. At the same breath it has also been observed that the receipts were earned by repetitive activities, which can rightly be termed as business. Having regard to the authorities which one has noticed it is not proper to characterise the activities of the chamber as activities amounting to a business in the generally understood sense of the word, the most important feature of business being profit motive. It has not been suggested by the income tax authorities that the activities carried out by the assessee chamber were propelled by any profit motive. In such circumstances, it is proper to view the activities as driven by a charitable motive in the sense in which a charitable purpose is defined in section 2(15). In this view of the matter, this court satisfied that the provisions of section 11(4A) are not attracted to the present case and a remand to the assessing officer for finding out whether the activities were incidental to the objectives of the trust and separate books of accounts were maintained for such business was unnecessary. [Para 18]

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