INCOME TAX ACT, 1961

--Exemption under section 10(23)(iv)--Educational institutionCharitable purpose under section 2(15)--The Institute of Chartered Accountants of India and Mr. A. Chopra, President and Member of the Central Council of the Institute of Chartered Accountants of India (petitioners) have filed the present writ petition under Article 226 of the Constitution of India for setting aside the order dated 19-5-2009 passed by the Director General (Exemptions), (respondent) dismissing/rejecting the institute's application under section 10(23C)(iv) for the assessment year 2009-10 onwards. The petitioners have prayed that the respondent should be directed to recognize and grant approval to the petitioner-institute under the aforesaid section for the assessment years 2006-07, 2007-08, 2008-09 and 2009-10 and onwards. On 7-5-2008, the petitioner-institute had filed an application in Form No. 56 for grant of exemption under section 10(23C)(iv) for the assessment year 2009-10 onwards. The petitioners claim that the institution was/is established for charitable purpose as defined under section 2(15) and that they were/are complying with all conditions/pre-requisites and, therefore, they were entitled to exemption under section 10(2C)(iv). The impugned order dated 19-5-2009 has rejected the application on several grounds. Firstly, the petitioner-institute was holding coaching classes and, therefore, was not an educational institution as per the interpretation placed on the word 'education' used in section 2(15). Reliance was placed on Sole Trustee, Loka Shikshana Trust v. CIT (1975) 101 ITR 234 (SC) : 1975 TaxPub(DT) 0344 (SC) and Bihar Institute of Mining and Mine Surveying v. CIT (1994) 208 ITR 604 (Pat) ;1994 TaxPub(DT) 0865 (Pat-HC). Secondly, the petitioner-institute was covered under the last limb of charitable purpose, i.e., advancement of any other object of general public utility. In view of the amendment made in section 2(15) with effect from 1-4-2009 for the assessment year 2009-10 onwards, the petitioner institute was not entitled to exemption as it is an institution which conducts an activity in nature of business and also charges fee for consideration. It was earning huge profits in a systematic and organized manner and, therefore, it was not an institute existing for charitable purposes under the last limb of section 2(15). Thirdly, the petitioner-institute had advanced an interest free loan to a sister concern, namely, ICAI Accounting Research Foundation, of Rs. 565.20 lakhs. The petitioner-institute had accordingly violated the third proviso to section 10(23C) as the cumulated funds have not been invested in one or more specified funds/institutions stipulated in sub-section 5 to section 11. Held: The impugned order is cryptic and a myopic view has been taken without examining the legal principles. The aforesaid figures have been disputed and denied by the petitioner-institute on various grounds including the fact that it takes into account only direct expenses and does not include several expenses like common expenditure, cost of free study material given to the students for the purpose of coaching and depreciation of assets, salary paid to the staff employed by the branches, etc. These facts and aspects have not been examined and considered in the impugned order dated 19-5-2009. There have been subsequent developments, which are material and relevant. As court is setting aside the order, the Competent Authority will go into the said aspect afresh and examine the contentions raised by the assessee. The present writ petition is allowed and a writ of certiorari is issued quashing the impugned order dated 19-5-2009 passed by the Director General of IT (Exemptions) with a direction to reconsider the application filed by the petitioner institute under section 10(23C)(iv) in the light of the findings and observations made above.

A scrutiny of section 2(15) elucidates that charitable purpose for the purpose of the Act has been divided into six categories, namely, (i) Relief to the poor (ii) education (iii) medical relief, (iv) preservation of environment (including watersheds, forests and wildlife), (v) preservation of monuments or places or objects of artistic or historical importance and (vi) advancement of any other object of general public utility. [Para 5] The petitioner- institute will fall under the sixth category, i.e. advancement of any other object of general public utility. The petitioner institute cannot be regarded as an educational institute as the petitioner's main or predominant objective is to regulate the profession of, and the conduct of, Chartered Accountants enrolled with them. The petitioner is a statutory authority under the Chartered Accountants Act, 1949 (the CA Act”) and its fundamental or dominant function is to exercise overall control and regulate the activities of the members/enrolled Chartered Accountants. This is apparent from the CA Act, and the regulations framed under the said Act. [Para 6] The CA Act was enacted, as per the preamble, to make provisions for regulation of the profession of Chartered Accountants and for that purpose to establish an institute of Chartered Accountants. As per the statement of objects and purpose the enactment was to authorize incorporation of a autonomous professional body for the said purpose. The function and the object and purpose of the institute can be also gathered from section 15 of the CA Act, which prescribes functions of the council. [Para 7] No doubt, the petitioner holds classes and provides coaching facilities for candidates/articled and audit clerks who want to appear in the examinations and want to get enrolled as Chartered Accountants and as well as for members of the petitioner-institute who want to update their knowledge and develop and sharpen their professional skills, but this is not the sole or primary activity. The petitioner-institute may hold classes and give diploma/degrees to the members of their institute in various subjects but this activity is only an ancillary part of the activities or functions performed by the petitioner-institute. This one or part activity by itself, does not mean that the petitioner is an educational institute or is predominantly or exclusively engaged in the activity of education. The petitioner-institute is engaged in multifarious activities of diverse nature, but the primary and the dominant activity is to regulate the profession of Chartered Accountancy. For this purpose, it holds entrance examination and enrolls members. It regulates the conduct of its members, prescribes and fixes accountancy standards, etc. Thus, the impugned order dated 19-5-2009 passed by the respondent to the extent it has been held that the petitioner institute is covered by the last limb of section 2(15) and is not an institute providing education but for reasons different than those ascribed in the said order is uphld. This court is conscious of the fact that in Mohinder Singh Gill v. Chief Election Commissioner (1978) 1 SCC 405, and other cases, it has been held that only reasons mentioned in the impugned order can be looked into, but court has gone into the said aspect as one perceives there cannot be any cavil or dispute with regard to the object and purpose of the petitioner institute and the statutory functions assigned to them. It has done so to avoid any prolix and lengthy litigation on the said aspect, though the matter is being remitted to the authorities concerned on the second aspect, i.e., application of the first proviso to section 2(15) introduced with effect from 1-4-2009. [Para 10] As the first proviso to section 2(15) was introduced with effect from 1-4-2009, the scope and ambit of the said proviso to section 2(15) has to be examined and considered. Earlier orders under section 10(23C)(iv) are not relevant and are inconsequential, as they have not examined the scope and ambit of the first proviso. The proviso applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institute is not 'charitable' if it is involved in carrying on 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. The second part, 'any activity of rendering any service in relation to any trade, commerce or business' obviously intends to expand the scope of the proviso to include services, which are rendered in relation to any trade, commerce or business. The proviso further stipulates that the activity must be for a cess or fee or any other consideration. The last part states that the proviso will apply even if the cess or fee or any other consideration is applied for a charitable activity/purpose. The proviso has to be given full effect to. Thus, even if cess, fee or consideration is used or utilized for charitable purposes, the proviso and the bar will apply. An institution will not be regarded as established for charitable purpose/activity under the last limb, if cess, fee or consideration is received for carrying on any activity in nature of trade, commerce or business or for any activity of rendering of any service in relation to any trade, commerce or business, even if the consideration or the money received is used in furtherance of the charitable purposes/activities. In view of the first proviso, the decisions that the application of money/profit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the proviso and the bar/prohibition will apply. [Para 12] The most material and relevant words in the proviso are 'trade, business or commerce'. The activities which are undertaken by the institute/person should be in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. The three words 'trade', 'commerce' or 'business' have been interpreted by the Supreme Court and other courts in various decisions. [Para 14] 'Trade', as per the Webster's New Twentieth Centuary Dictionary (2nd Edition), means amongst others, 'a means of earning one's living, occupation or work. In Black's Law Dictionary, 'trade' means a business which a person has learnt or he carries on for procuring subsistence or profit; occupation or employment, etc. The meaning of 'commerce' as given by the Concise Oxford Dictionary is 'exchange of merchandise, specially on large scale'. In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. For the purpose of the first proviso to section 2(15), trade is sufficient, therefore this aspect is not required to be examined in detail. [Para 17] The word 'business' is the broadest term and is encompasses trade, commerce and other activities. section 2(13) defines the term Business as under: - '2. Definitions- xxx (13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. [Para 18] The word 'Business' is a word of large and indefinite import. Section 2(13) defines business to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The intention of the legislature is to make the definition extensive as the term inclusive” has been used. The legislature has deliberately departed from giving a definite import to the term business” but made reference to several other general terms like trade”, commerce”, ”manufacture. [Para 19] In Black Law's dictionary, Sixth Edition, the word business has been defined as under: Employment, occupation, profession or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood. Union League Club v. Johnson, 18 Cal. 2d 275 Enterprise in which person engaged shows willingness to invest time and capital on future outcome. Doggett v. Burnet, 62 App.D.C. 103, 65 f.2D 191, 194. That which habitually busies or occupies or engages the time, attention, labour and effort of persons as a principal serious concern or interest or for livelihood or profit. [Para 20] According to Sampath Iyengar's Law of Income Tax (9th edition), a business activity has four essential characteristics. Firstly, a business must be a continuous and systematic exercise of activity. Business is defined as an active occupation continuously carried on. Business vocation connotes some real, substantive and systematic course of activity or conduct with a set purpose. Second essential characteristic is profit motive or capable of producing profit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure Bharat Development (P) Ltd. v. CIT (1982) 133 ITR 470 (Del) : 1982 TaxPub(DT) 0178 (Del-HC). The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction. [Para 21] It may be, however, pointed out that the term profit motive” is not only the sole or relevant consideration that has to be kept in mind. It is one of the aspects. Normally intention to earn profit is required. Emphasis, however it does appear, has shifted and the concept and principle of economic activity” has gained acceptability. The definition of the term business” may also vary when one is examining taxability under Sales Tax, Excise Duty, Value Added Tax, etc., because these are not taxes on income but the taxable event occurs because of the 'economic activity' involved. Even if a person/an organization is carrying on trading on the principle of 'no loss no profit', it may be liable to pay taxes or comply with the statute when the charge, or incidence of tax, is on the 'economic activity'. This concept is today well recognized in European Union and England. [Para 29] Section 2(15) defines the term 'charitable purpose'. Therefore, while construing the term business for the said section, the object and purpose of the section has to be kept in mind. Court does not think that a very broad and extended definition of the term business is intended for the purpose of interpreting and applying the first proviso to section 2(15) to include any transaction for a fee or money. 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 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 infact in the nature of business. [Para 33] In view of the aforesaid enunciation, the real issue and question is that whether the petitioner-institute pursues the activity of business, trade or commerce. To one mind, the respondent while dealing with the said question has not applied their mind to the legal principles enunciated above and have taken a rather narrow and myopic view by holding that the petitioner institute is holding coaching classes and that this amounts to business. This is apparent from a reading of paragraph 4 and a part of paragraph 5 of the impugned order. [Para 34] The view is clearly laconic, cryptic and does not examine and consider the legal concept of the term business” and apply the law to the given facts section 15 of the CA Act prescribes the object and purpose of the Council under whose supervision the institute is to act and has been given the duty of carrying out the provisions of the CA Act. This section has been quoted above and clearly reflects that the institute has been given the duty and function to approve academic courses, conduct examinations for enrolment, prescribe fee, make regulations for encouragement, training of articled and audit clerks, prescribe qualification for registration, grant or refuse to grant certificate of practice and regulate and maintain the standards of members. Further, section 30-A of the CA Act empowers the Central Government to give such direction or special directions to the Council constituted under section 9 to ensure compliance and the Council in discharge of their functions is required to comply with the said directions. Section 30 of the CA Act empowers the Council to make regulations for carrying out the provisions of the Act, including the standard and conduct of examination, the qualifications for entry of any person in the register as a member of the institute, the conditions under which any examination or training may be treated as equivalent to the examination and training prescribed for members of the Institute, the training of articled and audit clerks and the regulation and maintenance of status and standards of professional qualifications. The Institute has framed the Chartered Accountants Regulations, 1988 and the said Regulations provide for training of students, their examination, award of degrees and membership of the Institute. [Para 35] It may be noted that the petitioner institute provides education and training in their post-qualification courses, corporate management, tax management and information system audit. It awards certificates to members of the institute who successfully complete the said courses. Post-qualification diploma courses are also conducted in several fields. The examination conducted by the petitioner institute consists of Common Proficiency Test, Professional Education Examination, Professional Competence Examination, Accounting Technician Course, Integrated Professional Competence Course, final and post-qualification courses. The conduct of these courses cannot be equated and categorized as mere coaching classes which are conducted by private institutes to prepare students to appear for entrance examination or for pre-admission or examinations being conducted by the universities, school-boards or other professional examinations. The courses of the institute, per se, it does appear, cannot be equated to a private coaching institute. There is a clear distinction between coaching classes conducted by private coaching institutions and the courses and examinations which are held by the petitioner-institute. [Para 36] The question, which remains unanswered in spite of the aforesaid finding that the petitioner institute also undertakes educational activity, is whether the petitioner was carrying on any business, trade or commerce. This question requires an answer but remains unanswered as it was not addressed and examined in the impugned order dated 19-5-2009 in proper perspective. The reasoning given in the order is with reference to the fee charged, expenditure and profit earned which is mentioned in paragraph 5 of the impugned order. The impugned order is cryptic and a myopic view has been taken without examining the legal principles. The aforesaid figures have been disputed and denied by the petitioner-institute on various grounds including the fact that it takes into account only direct expenses and does not include several expenses like common expenditure, cost of free study material given to the students for the purpose of coaching and depreciation of assets, salary paid to the staff employed by the branches, etc. [Para 41] These are factors which require detailed consideration and examination by the respondent. One does not intend to go into and examine the said aspects on merits in the present writ petition as these are issues which require adjudication and decision at the first level, i.e., when the issue and question of exemption under section 10(23C)(vi) is examined by the respondent. These are also questions of facts. Accordingly, while setting aside the impugned order dated 19-5-2009, the respondent is directed to examine the said aspect in the light of the observations and findings made above. [Para 42] In the present case, one is concerned with the order under section 10(23C)(iv) which casts an onus both on the assessee and the department to reach a fair and just conclusion. Moreover, the first proviso to section 2(15) is not applicable to the assessment year 2005-06. [Para 43] With regard to the third reasoning that section 11(5) has been violated, it has been recorded in the order dated 19-5-2009 as under:- 9. The other issue involved is that the applicant has advanced the interest free loan to its sister concern namely ICAI Accounting Research Foundation. On examining the balance sheet as on 31-3-2008, it is seen that there is outstanding balance of Rs. 565.20 lakhs made as interest free advance to ICAI Accounting Research Foundation. Thus, this amount has not been invested in prescribed securities. As per 3rd proviso of section 10(23C), the accumulated fund should be invested in one or more of the form or modes specified in sub-section (5) of section 11. The applicant has advanced an amount of Rs. 565.20 lakhs to ICAI Accounting Research Foundation which is not the prescribed mode under section 11(5). Thus, the applicant has also violated the 3rd proviso of section 10(23C). [Para 44] ICAI Accounting Research Foundation (ICAI-ARF) has been incorporated by the petitioner institute with an objective to impart training, to promote knowledge, learning and education, and to understand various fields relating to the profession of accountancy. It has been stated that ICAI-ARF is a company and an institution enjoying exemption under section 10(23C)(iv) read with section 11 Reliance has been placed on decision of this Court in ICAI Accounting Research Foundation & Anr. v. Director General of IT (Exemptions) & Ors. (2010) 321 ITR 73 (Del). Special Leave Petition filed by the revenue against the said judgment has been dismissed. All the factual aspects, the manner, the mode and why the payments were made have been set out. It is pointed out that the Executive Committee of the petitioner institute had considered the proposal for formation of ICAI University in February, 2004 and felt the need for formation of the said university. This was approved in principle in the meeting of the Council of the petitioner institute in March, 2004. On the basis of legal opinion, ICAI ARF was incorporated under section 25 of the Companies Act, 1956. Reference is made to section 15(2)(j) of the CA, Act. Thereafter, the Executive Committee of the petitioner institute in November, 2004 approved the action for creation of ICAI ARF. The reason why payments were made to Jaipur Development Authority and Govt. of Rajasthan have been explained in the written arguments by the petitioner- institute. It is stated that substantial payments have been refunded. The petitioner- institute maintains that it never granted any loan and/or advance to ICA-ARF. The monies in question were paid directly to the Jaipur Development Authority and the Government of Rajasthan and the ICAI- ARF used no portion for its own purpose, at anytime, whatsoever. Accordingly, the petitioner- institute maintains that there has been no violation of section 13, section 11(5) or the third proviso to section 10(23C)(iv). Reliance is also placed on assessment order dated 27-12-2010, for the assessment year 2008-09 passed in the case of the petitioner-institute. Reference is also made to some circulars issued by CBDT. [Para 45] These facts and aspects have not been examined and considered in the impugned order dated 19-5-2009. There have been subsequent developments, which are material and relevant. As court is setting aside the order, the Competent Authority will go into the said aspect afresh and examine the contentions raised by the assessee. [Para 46] The present writ petition is allowed and a writ of certiorari is issued quashing the impugned order dated 19-5-2009 passed by the Director General of Income Tax (Exemptions) with a direction to reconsider the application filed by the petitioner institute under section 10(23C)(iv), in the light of the findings and observations made above. [Para 47] Directions are also issued to the Director General to consider the application of the petitioner institute under section 10(23C)(iv) for the assessment years 2006-07 to 2008-09. [Para 48]