Central Institute Of Tool Design, ... vs Assessee

Central Institute of Tool Design, vs. Director of Income-tax Hyderabad. (Exemption), Hyderabad

PAN - AAEFC 8540 R (Appellant) (Respondent)

Assessee by : Shri S. Rama Rao Revenue by : Shri M. Ravindra Sai

Date of hearing 18-06-2015 Date of pronouncement 08-07-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal of the assessee is directed against order dated 27/06/20123 of ld. DIT(E), Hyderabad, rejecting assessee's application for grant of registration u/s 12AA of the Act..

2. There is a delay of 769 days in filing the appeal. Assessee has filed a petition seeking condonation of delay supported by an affidavit, wherein, the cause of delay has been explained in detail. It is stated by assessee in the petition that after the impugned order was passed by ld. DIT(E), the person incharge at the relevant point of time contacted some income-tax professional for further course of action in the matter. Since, the income-tax professional opined that in view of amendment made to section 2(15), the institution may not get registration u/s 12AA of the Act, appeal against the order of ld. DIT(E) was not filed. However, subsequently, the central auditors of the institution during the course of statutory audit of the society in July'14 observed that assessee is entitled for registration u/s 12AA of the Act 2 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

keeping in view the fact that similar societies of the central govt. functioning in other parts of the country spread over 10 states have been granted registration u/s 12AA of the Act. It was stated in the petition that after receiving the audit report in the month of August, 14, assessee society reviewed the entire issue and after discussions in the meeting of governing council of the institution at New Delhi on 27/08/14 decision was taken to engage services of tax expert for filing appeal before ITAT. Due to holidays and leave of the staff on account of Dasara and other festivals in the first week of October'14, appeal was prepared and filed finally on 19/10/14. Thus, it was submitted that the delay being unintentional and beyond the control of assessee, the same is to be condoned.

3. Ld. DR, though, opposed condonation of delay, finally, he expressed that he has no objection if the appeal is decided on merit.

4. Having considered the submissions of the parties and perused the material on record, we are of the view that delay is required to be condoned not only because of the fact that assessee is a central govt. institution but also due to the sufficiency of reasons shown by assessee for delay in filing the appeal. Accordingly condoning the delay of 769 days, we admit the appeal for hearing on merit.

5. Briefly, the facts are, assessee was established by the Govt. of India, under the Ministry of Small, Micro and Medium Industries with the technical help of the International Labour Organisation (ILO). Assessee, as stated by it, is one of the 18 such Tool Rooms established by the Govt. of India across different states. Subsequently, the govt. of India had decided to register the tool rooms as societies and as per the said decision assessee was registered as a public society under the Andhra Pradesh (Telangana Area) Public Societies Registration Act, 1350 Fasli. The main object of assessee society is to provide training facilities to technical personnel in designing and making tools, dyes and moulds. Assessee 3 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

institution on 02/11/2007 made an application in the prescribed manner before ld. DIT(E) seeking registration u/s 12A of the Act. As appears from record, since, assessee failed to comply to a notice issued seeking certain information, application for registration was rejected vide order dated 23/04/2008. Being aggrieved of the said order of rejection, assessee preferred appeal before the ITAT. ITAT vide order dated 09/04/2009 in ITA No. 05/Hyd/09 set aside the order of ld. DIT(E) and remitted the matter back to his file with a direction to decide the issue afresh after due opportunity of being heard to assessee. In pursuance to the direction of ITAT, proceeding were again taken up by ld. DIT(E) and he called upon assessee to furnish information and details in support of its claim that it is charitable institution.

6. Ld. DIT(E) after examining the information submitted by assessee noticed that, though, assessee claimed that it is conducting different courses and training programmes for various participants, but, actually it was seen that assessee in addition to receipts from services/training, has also got receipts from sale of finished products in different assessment years. Ld. DIT(E) observed that on verification of the annual accounts, it was found that assessee has shown various amounts towards stock-in-trade, finished goods, work- in-progress and raw materials. He also noted that sales tax assessments have been completed in case of assessee up to AY 2003-04 and assessments for AY 2004-05 & 2005-06 are pending. He also observed that apart from receipts from sales assessee has also income from royalty as found from income and expenditure account in different assessment years. Ld. DIT(E) observed that, though as per the objects of assessee, it is not supposed to indulge in commercial activities, but, assessee in fact has undertaken commercial activities generating receipts therefrom. He, therefore, held that activity of assessee cannot be considered to be charitable as it is engaged in commercial activity. Ld. DIT(E) referring to a decision of Hon'ble 4 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

Supreme Court in case of East India Industries (Madras) Pvt. Ltd. Vs. CIT [1967], 65 ITR 611, observed that a trust or society having both charitable and non-charitable objects is not eligible for exemption of its income, is, not entitled for registration u/s 12A of the Act. Accordingly, he rejected assessee's application for registration. Being aggrieved of the said order, assessee is before us.

7. Ld. AR referring to the object of the society submitted before us the main object of the society is to impart training in designing and making tools, dyes and moulds, in the form of vocation education. It was submitted, society also imparts vocational training in both mechanical, engineering and computer aided design, VLSI, embedded systems, Mechatronics for post graduate students in collaboration with JNTU, Hyderabad and Osmania University. It was submitted, society also provides certain vocational courses and the main source of revenue for the society is vocational training fees. Ld. AR submitted, in order to sustain practical training in making dyes, moulds and tools, precision engineering manufacturing orders from public sector undertakings, Hindustan Aeronautics Ltd, Defence Research Laboratories and other government organizations are being undertaken. The design manufacture of tools, dyes and mounds is also a part of the vocational training. It was submitted that the objects of the society makes it clear that it is established basically for the training of technical personnel in design and making tools, dyes and moulds. All other objects are only ancillary in nature and are with a view to support the training of technical personnel. Thus, it was submitted that the main object of assessee being education, assessee is a charitable institution in terms with the definition of charitable purpose u/s 2(15) of the Act. Ld. AR submitted, if legislative history of section 2(15) which defines the word 'charitable purpose' is anlaysed, it would be seen that by virtue of amendment made to the said section w.e.f. 01/04/1984, the words 'not involving the carrying on of any activity for profit' were removed. Therefore, w.e.f.

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01/04/1984, there is no restriction in carrying of any activity for profit so long as such profit or gain is utilized for the purpose of the objects of the society as provided u/s 11 of the Act. Ld. AR submitted, receipts from sale of tools etc., manufactured in the process of training cannot be considered to be commercial activity as it is incidental to the training programmes undertaken by society, which is as per the object of the society. Ld. AR submitted, even the introduction of new proviso to sub-section (15) to section 2 with effect from 01/04/2009, will have no effect on assessee as the said proviso is applicable residuary clause, 'advancement of any other object of general public utility' whereas assessee is basically engaged in providing education. Ld. AR submitted, since the so called commercial activity is inextricably linked with the training activity of assessee, it cannot be said that assessee is a non-charitable institution. Ld. AR submitted, society is running on no profit no loss basis and the fee structure is always based on the nature of training provided. Therefore, uniform rate of fee is not fixed for course organized. In this context, it was submitted, since society is engaged in providing technical education in manufacture of tools and dyes moulds, etc., it has to establish necessary infrastructure like class rooms and other facilities besides providing technical training on the machinery used in the manufacture of dyes, etc. For this purpose, it has incurred substantial expenditure, which has to be reimbursed by the trainees, who undergoes training programme conducted by assessee. Therefore, considered in the aforesaid perspective, it cannot be said that assessee is engaged in commercial activity. As far as allegation of ld. DIT(E) that it has earned substantial amounts from sale of finished goods, it was submitted by ld. AR that tools are manufactured by trainees during the training programme, assessee makes available stocks of raw material to the trainees and the required plant and machinery is also provided. Trainees with the knowledge acquired during the class room course undertakes the process of production and resultant finished goods , waste materials, 6 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

etc. are sold. However, receipts from sale effected varies between 10% to 15% of the total income of assessee. Thus, it is clear that society is imparting technical education and in the process of providing such training certain products are produced which are sold. Therefore, the activities are considered as part of education. Only because sales are recorded in the books of account, it will not adversely effect assessee's entitlement to registration u/s 12A of the Act. As far as allegation of ld. DIT(E) that it is also earning royalty, ld. AR submitted, assessee used to impart vocational training in collaboration with ECIL, Secunderabad and another MSME organization i.e. prototype development centre, Agra and a part of the fees was received from them annually as a royalty which actually is training fees. Even otherwise also, receipts from royalty forms negligible part of the total receipts. Ld. AR submitted, for initial two years, assessee received grants from centre, because in the initial period grants were needed for establishment of the institution. Thereafter, assessee has to sustain itself for which it needed to generate fund. Thus, it was submitted by ld. AR that objects of assessee being education and all other activities being ancillary and incidental to the main object and fees received from those activities having been utilized for the main object, it cannot be said that assessee is not a charitable institution. Ld. AR submitted, at the stage of grant of registration u/s 12A, registering authorities has to be satisfied with two things, firstly, charitable nature of the object and secondly, genuineness of the activity. Any enquiry relating to assessee's eligibility for exemption u/s 11 can only be made by AO and not by ld. DIT(E). In support of his contention, ld. AR relied upon a number of decisions, which are as under:

1. Chartered Ship Brokers Vs. DIT(E), 53 SOT 72 (Chennai)

2. ICAI Accounting Research Foundation Vs. DGIT, 321 ITR 73 (Del.)

3. Institute of Chartered Accountants of India and another Vs. DGIT, 358 ITR 91 (Del.) 7 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

4. Himachal Pradesh Environment Protection and Pollution Control Board Vs. CIT, 125 JJF 98 (Chandigarh Bench)

5. Sikkim Manipal University of Health, Medical and Technological Sciences Vs. CIT, 43 SOT 206 (Cal.)

6. St. Don Bosco Educational Society Vs. CIT, 90 ITD 477 (Lucknow).

7.1 Ld. AR submitted, while granting registration u/s 12A of the Act, ld. DIT(E) cannot consider the aspects which are to be examined at the time of grant of exemption u/s 11. In this context, he relied upon the following decisions:

1. CIT Vs. Surya Educational and Charitable Trust and Bahara Educational and Charitable Society, 355 ITR 280 (P&H).

2. Hardayal Charitable and Educational Trust Vs. CIT, 355 ITR 534 (All.)

3. DIT (E) Vs. Chartered Accountants Study Circle, 347 ITR 321 (Mad.)

7.2 As far as the decision relied upon by ld. DIT(E), ld. AR submitted, the facts involved in the said decision being totally different, ratio laid down in that case, will not apply to assessee's case.

8. Ld. DR, on the other hand, supporting the order of ld. DIT(E), submitted, perusal of objects of assessee society would clearly indicate that objects are not restricted to educational purpose alone.

Specifically referring to object clause 2 & 3, ld. DR submitted that they are in the nature of consultancy, which generates royalty income for assessee. Ld. DR submitted, since the object of assessee society is not purely educational, it cannot be said that the restriction imposed under proviso to 2(15) would not apply to assessee. He, therefore, submitted, since assessee has earned substantial revenue in different AYs from commercial activity, ld. DIT(E) was justified in rejecting assessee's application for grant of registration.

8 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

9. We have considered the submissions of the parties and perused the order of ld. DIT(E) as well as other material on record. It is clear from the order of ld. DIT(E) that he has considered assessee as non- charitable institution because it has receipts from the sale of finished goods and secondly it has earned royalty. Thus, ld. DIT(E) is of the view that as assessee is engage in commercial activity it is a non- charitable institution, hence, not eligible for registration u/s 12A of the Act. Before deciding the issue, let us examine the objects of assessee society which are as under:

"i) Training of the technical personnel in designing and making tools, dyes and moulds,

ii) Provision for advisory services to small scale units, including assistance in designing and developing tools for various processes,

ii) Recommending measures to standardize components, dyes, jigs and other tools,

iv) Production on a limited basis of dies, jigs, fixtures and gauges etc., subject to the condition that the job work undertaken by the CITD promote the training requirements of the institute,

v) To award Certificates as may be appropriate to those who have successfully completed the training course,

vi) To institute and award fellowships, scholarships, prizes and medals in accordance with the Rules and Regulations,

vii) To impose and recover affiliation and other fee and charges for services rendered,

viii) To sell or dispose of products, bye-products or waste material, arising out of or incidental to the sources of training."

9.1 Though, on a cursory look at the objects it appears that assessee society is engaged in various activities including consultancy, but, on deeper analysis certainly one gets the impression that primary object of the assessee is to impart training in various courses of preparing and designing tools, moulds, dyes etc., which is an activity in the field of education and all other objects are ancillary and incidental to the said main object. A plain reading of definition of 'charitable purpose' as provided u/s 2(15) of the Act would make it clear that the restriction imposed under the proviso to the said section applies to only the last limb, advancement of any 9 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

other object of general public utility'. There is no express provision u/s 2(15) of the Act, which restricts a trust or institution from undertaking any business or commercial activity if it comes under any other limb of 'charitable purpose'. Only requirement perhaps is, the assessee must not have profit motive and the income generated from commercial activity is utilized for achieving the charitable object. On going through the order of ld. DIT(E) it is clear that he has not expressed any opinion under which limb of 'charitable purpose' assessee's activity can be classified. Only observation made by him is assessee is involved in both charitable and non-charitable activities. Even, ld. DIT(E) has not specifically referred to the first proviso to section 2(15) while holding that assessee is not entitled for registration as it is engaged in commercial activity. However, as could be understood from the submissions of ld. DR, according to department assessee's activity comes under the last limb of section 2(15), hence, the proviso applies. Even assuming that assessee's objects/activity comes without the last limb, viz; 'advancement of any other object of general public utility', the proviso to section 2(15) will not automatically disqualify the assessee from being considered as a society established for charitable purpose only because it has receipts from sale of dyes, moulds etc. or from royalty. It has to be seen whether the primary or dominant purpose or object of the assessee is to carry out 'object of general public utility' or 'any activity of profit'. If for achieving its primary or dominant object of 'education' or even 'advancement of any other object of public utility' the society has earned some income from business it cannot be said that assessee has carried on business activity with a profit motive. Charitable activities also require operational/running expenses as well as capital expenses for being able to sustain itself and continue in long run. There is no such statutory mandate that a charitable institution falling under the residuary clause should be wholly, substantially or in part funded by voluntary contributions. The Hon'ble 10 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

Supreme Court in case of Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) has held as under:

"The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to I earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely, because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for II persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting I profit. That would not only be difficult of practical realization but would also reflect unsound principle of management."

9.2 Aforesaid principle laid down by the Hon'ble Apex Court still hold good even after introduction of proviso to section 2(15) by Finance Act, 2008 w.e.f. 01/04/2009. The words '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' was considered and interpreted by Hon'ble Delhi High Court in case of Institute of Chartered Accountants of India Vs. Director General of Income-tax (Exemptions), 347 ITR 99, as under:

"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. We do 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) of the Act 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 11 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

undertaken is infect in the nature of business. The test as prescribe in Raipur Manufacturing Co. (supra) and Sai Publication Fund (supra) can be applied. The six indicia stipulated in Lord Fisher (supra) are also relevant. Each case, therefore, has to be examined on its own facts."

9.3 Thus, the principle of law which emerges from the judicial pronouncements is, if the predominant object of a trust or institution is charitable and in the process of achieving that object some activity of commercial nature generating income is carried out, which again is utilized for charitable object, it cannot be said that the trust or institution is not established for charitable purpose. Moreover, the application of proviso to section 2(15), as rightly pointed out by ld. AR, has to be looked into at the stage of assessment while examining assessee's claim of exemption u/s 11 of the Act and not at the time granting registration u/s 12AA. This is because, though, the first proviso to section 2(15) of the Act excludes any activity of the nature of trade, commerce or business from being considered to be a charitable purpose, but, the second proviso to section 2(15) restricts the application of first proviso only to such trusts and institutions having receipts from commercial activity exceeding a prescribed limit in a particular previous year. Therefore, application of proviso to section 2(15) has to be looked into in every assessment year. Further, ld. AR has demonstrated before us, receipts from sales of finished goods and royalty forms only a small percentage of total receipts of the assessee. Therefore, it cannot be said that assessee is mainly engaged in commercial activity.

9.4 Another important aspect worth mentioning is, in course of hearing ld. AR brought to our notice, that similar institutions established in other parts of the country have been granted registration u/s 12AA of the Act. To substantiate such claim, he submitted registration certificates granted to similar institutions at Bhubaneswar, Indore and Aurangabad. Though, ld. AR submitted that 12 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

this fact was also placed before ld. DIT(E), but, the order of ld. DIT(E) is totally silent on the issue. Be that as it may, if similar institutions established by central govt. in other states having similar object have been granted registration u/s 12AA, as is the case in Bhubaneswar, Indore and Aurangabad, we do not find any justifiable reason why assessee should be deprived from availing such benefit. In the aforesaid facts and circumstances, we set aside the impugned order of ld. DIT(E) and remit the matter back to him to verify this aspect and if it is found that institutions in other places having similar object have been granted registration u/s 12AA, he may consider granting registration u/s 12AA of the Act to assessee. Ld. DIT(E) must afford reasonable opportunity of being heard to the assessee in the matter.

10. In the result, assessee's appeal is allowed for statistical purposes.

Pronounced in the open court on 8 th July, 2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 8 th July, 2015 kv Copy to:-

1) Central Institute of Tool Design, C/o Sri T.V. Subba Rao, CA, TVS Rao & Associates, N-421 & 422, 4 th Floor, Kubera Towers, Narayanaguda, Hyderabad - 500 029.

2) DIT(E), Aayakar Bhavan, Basheerbagh, Hyderabad. 3 Addl. DIT(E), Hyderabad

4) The Departmental Representative, I.T.A.T., Hyderabad.

Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed befor e auth or Sr.P.S Draft pr opose d & placed bef ore the secon d AM 3 Mem ber 13 ITA No. 1563/Hyd/2014 Central Institute of Tool Design, Hyd.

4 Draft discussed/appr oved b y second Mem ber VP 5 Appro ved Draft com es to the Sr.P.S./PS Sr.P.S. 6. Kept for pro nou ncem ent on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file go es to the Head Cle rk 9 Date of Dispatch of or der