Ip India Foundation,, Hyderabad vs Assessee

This is an appeal filed by the assessee against the order of the Directoir of Income Tax (Exempotions) Hyderabad dated 28.02.2014 with regard to rejection of application in Form 10A for Registration u/s 12AA of the I.T. Act, 1961.

2. Brief facts of the case are that IP India Foundation was incorporated on 20.06.2013 u/s 25 of the Companies Act, 1956. It has filed an application in Form No.10A on 01.08.2013 seeking registration u/s 12AA of the I.T. Act, 1961. The Director of Income Tax (Exemption) held that from the memorandum of association of the applicant company, it is being noticed that one of the main object of the company is to promote business activity. The DIT (E) referred to object clause No.2, under the

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Main Objects to be perused by the Company as mentioned in Part-A, reading as follows:

"To promote environmentally and socially responsible business practices by assessing and mitigating the environmental and social impacts for sustainable economic growth, to address....."

2.1 The DIT (E) further observed that the applicant intends to engage business practices for the purpose of economic growth, which does not come under the purview of "Charitable in nature"

as defined u/s 2(15) of the Act. The DIT (E) in this connection held as follows:

"2.1........Under the circumstances and when all the objects of the applicant company are not charitable, in my view, it will not be eligible for registration u/s 12AA of the Act. Further, in the said object clause which is descriptive in nature, there is also reference to promoting environmental sensitivity of the employees of the company through corporate social responsibility activities. The relevant part of that object clause-2 in this regard, is reproduced as under: ".... To increase the environmental and social sensitivity of employees and other stakeholders through various corporate social responsibility activities both directly through voluntary employee engagement programmes....."

2.2 Carrying on activities under corporate social responsibility programme, mandated u/s 35 of the Companies Act, 2013, by the parent company International Paper APPM Ltd., is entirely different as the activities in that regard are to be performed by the said parent company. Funding for the same are also to be made by the said parent company. Bringing awareness on environmental matter and on social issues of the employees of the company through such activity, cannot be said to be of charitable nature.

3. From the incidental objects of the assessee company, mentioned under Part-B of the MOA, it is

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noticed that the assessee also intends to let out buildings, houses and infrastructural facility etc., to different persons. In this context, it is pertinent to refer to the object clause No.3 under the Objects Incidental or Ancillary as mentioned in that Para, which is as under:

"To construct or let out or lease low-cost buildings and houses or any infrastructural facility for the poor, disadvantaged....."

3.1 Such activity of letting out houses and infrastructural facilities etc., as may be noticed, does not come under the purview of charitable purpose having regard to definition of charitable purpose as contained in section 2(15) of the Act. Though, during the proceedings, it was submitted that these activities are meant for the benefit of the poor, such activity of letting out properties by the company cannot be said to be charitable. Thus, under the circumstances, when the entire objects in the case of the applicant company are not charitable, it will not be eligible for registration u/s 12AA of the Act.

4. Further, it is noticed that the above company also intends to engage in litigation in different Courts of Law against different authorities for different purposes. The object clause No.11, in this regard under the Incidental Objects in Part-B is reproduced as under:

"To create and promote enlightened public opinion on various issues affecting the citizens of India and if necessary to take up, litigations in competent court of law and take any other lawful measures to safeguard rights and interest of all citizen...."

4.1 From the aforementioned object, it may be noticed that the applicant company also intends to file litigation against different authorities including government authorities while taking up different issues concerning the citizens of the society. In the fact of such an object, which is not at all charitable, it may be noticed that the entire objects of the applicant

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company are not charitable and hence under that circumstances, it will not be eligible for registration u/s 12AA of the Act.

4.2 Further, the object clauses 1 & 18, under the Incidental Objects mentioned under Part-B of the MOA of the applicant company are found to be not of charitable nature. Those clauses are reproduced as under:

"1. To create awareness on various social, moral and economic issues affecting the country and to direct this awareness to developing innovative means of generating resources financial, material and professional and channelize these resources through people and projects in the field towards the attainment of the main objects.

18. To enter into any arrangement with the Govt. or authorities supreme, municipal, local or otherwise that may seem conducive to the company's object or any of them and to obtain from any such govt. or authority any rights, privileges and concessions which the company may think it desirable to obtain and to carry out, exercise and comply with any such arrangement, rights, privileges and concessions".

4.3 Creating awareness on social, moral and economic issues etc., cannot be said to be charitable having regard to the meaning of "charitable purpose"

as defined in section 2(15) of the Act. Further, there is no clarity in the other object clause 18 referred above. As may be seen in that clause there is reference to obtaining of rights, privileges and concessions from the govt. or any other authority. However, in absence of any clarification regarding the nature and also purpose of the same, it cannot be said that the same area of charitable.

4.4 From the aforementioned discussion, it is thus evident that, all the objects in the case of the above company are not charitable. It shows the applicant company has got both charitable and non-charitable objects. Under these circumstances, the income of the assessee would not be eligible for exemptions u/s 11 Page 4 of 10 ITA No.739 of 2014 IP India Foundation, Hyderabad

of the Act. Rather, in view of existence of both charitable and non-charitable objects, it cannot be considered as a valid trust and hence would not be eligible for registration u/s 12AA of the Act. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in Yogiraj Charit Trust vs. CIT (103 ITR

777) wherein their Lordships made the following observations:

"The question is whether exemption can be granted where some objects are charitable and some non-charitable. Where there are several objects of a trust, some of which are charitable and some non-charitable, and the trustees in their discretion are to apply the income to any of the objects, the whole trust fails and no part of the income is exempt from tax. Where the objects are distributive, each and every one of the objects must be charitable in order that the trust might be upheld as a valid charity. If no definite part of the property or its income is allocated to charitable purposes and it would be open to the trustees to apply the whole income to any of the non-charitable objects, no exemption can be claimed. (See East India Industries (Madras) Pvt. Ltd. v. Commissioner of Income [1967] 65 ITR 611 (SC)and Mohammad-Ibrahim Riza Malak v. Commissioner of Income-tax AIR 1930 PC 226).

5. Further, it is noticed that the applicant company also intends to carry on business activity. It is pertinent to refer to the object clause No.17 under the said Incidental Objects under Part B of the MOA, which is reproduced as under:

"To apply for and obtain assistance from govt. and other organizations, companies, firms or other individuals, national and international for developing all or any of the business or business of the company".

5.1 From the above, it may be noticed that, there is no reference to any charitable purpose. From the specific mention to apply for assistance from different authorities for all or any of the business activity, it shows that the assessee company intends to carry on business activity which has no nexus with charitable

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activity. Under this circumstances, in my view the applicant company would not be eligible for registration u/s 12AA of the Act.

6. Further, it is noticed that there is ambiguity in the winding up clause in the case of the above company. Under Article X at page 6 of the MOA of the above company, while clarifying in that regard, it is mentioned as under:

"If upon the winding up or dissolution of the company there remains, after the satisfaction of all the debts and liabilities, any property whatsoever, the sum shall not be distributed amongst the members of the company, but shall be given or transferred to such other company having objects similar to the objects of this company, to be determined by the members of the company at or before the time of dissolution or in default thereof by the High Court of Judicature that has or may acquire jurisdiction in the matter".

6.1 From the above, it may be noticed that on winding up/dissolution of the applicant company, the remaining property i.e. after meeting all the liabilities, shall be transferred to other company having similar objects as that of the applicant company. However, under Article 86 under the head "winding up" at page 14 of the Articles of Association of the above company, where also there is reference to such issue, it is further mentioned as under:

"If the company shall be wound-up, the assets available for distribution amongst the members shall (subject to any rights attached to any new class of shares hereafter created) be applied in repayment of the capital paid up on the ordinary shares and any balance shall be distributed amongst the holders thereof in proportion to the number of ordinary shares held by them respectively".

6.2 From the above, it may be noticed, in case of winding up of the applicant company, the balance assets of the company i.e. the property of the company, after repayment of the paid up capital on the ordinary shares, shall be paid to the holders of the

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same in proportion to the number of ordinary shares held by them. This provision, as may be noticed, rather contradicts the earlier winding up clause referred to in Article X of the MOA. In the face of such ambiguity, the applicant company in this case, in my view, cannot be granted registration u/s 12AA of the Act".

2.2 Hence the registration sought u/s 12AA of the Act was refused and the application in Form No.10A rejected. Aggrieved, the assessee is in appeal before us.

2.3 The ld Counsel for the assessee Shri Samuel Nagadesi relied on the decision of the ITAT Kolkata Bench in the case of Indian Chamber of Commerce vs. Income Tax Officer (Exemption)-1, Kolkata (2014) 52 Taxmann.com, 52 (Kolkata Trib.)

2.4 The ld DR on the other hand relied on the orders of the DIT (Exemption).

3. We heard both the parties. It has been clearly established by various decisions that when the main object of the institution was "charitable in nature", then the activities carried out towards the achievement of the said, being incidental or ancillary to the main object, even if resulting in profit and even if it is carried out with non members, were all held to be "charitable in nature". The basic principle underlined the definition of charitable purposes remains unaltered even by amendment to section 2(15) of the Act

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w.e.f. 1.4.2009, though the restrictive first proviso was inserted therein. In the given facts of the case, the assessee's association's primary purpose was to give focus on areas of education, environment and engagement (community and employee). It has through constant and well monitored support aimed towards community sustainability. Therefore, they have focused on areas of education and environment, watershed management, women empowerment through skill development initiatives, provision of drinking water, youth empowerment, medical health camps, environmental conservation program, and promotion of sports and a host of extracurricular activities at local levels aimed towards community sustainability. Hence, the assessee association primary purpose was advancement of objective general public utility and it would remain charitable even if an incidental or ancillary activity or purpose of achieving the main purpose was profitable in nature. Hence the finding of the Director of Income Tax (Exemption) has mentioned in the object clause 17 under the said Incidental Objects under Part B of the MOA at Para 5 of his order stating it to be non-charitable does not disentitle the assessee for availing exemption u/s 12 of the I.T. Act. The relevant portion of the decision of the Kolkata Bench of the ITAT in the case of Indian Chambers of Commerce (2014) 52 Taxmann.com 52 (Kolkata-Trib) is reproduced here under:

"The concept behind section. 28(iii) is to cut at the mutuality principle being relied on in support of a claim for exemption, when the assessee was actually deriving income or making profits as a result of rendering specific services for its members in a commercial way.

The reason for the introduction of section 28(iii) is to ignore the principle of mutuality and reach the surplus arising to the mutual association and this is clear from the

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fact that these provisions are confirmed to services performed by the association 'for its members'. 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. section 28(iii) constitutes 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 purposes' simply shows that several mutual associations may also fall within the definition. The 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 11 read with section 2(15), provided there is no profit motive. Thus, assessee being a charitable Institution carrying on the object of promotion and development of trade and commerce and which was not involved in the carrying on of any activity in the nature of 'business', the said section 28(iii) does not apply.

Apex Court in the earliest CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 had clearly laid out the principle that if the primary purpose of an Institution was advancement of objects of general public utility, it would remain charitable even if an incidental or ancillary activity or purpose, for achieving the main purpose, was profitable in nature.

The basic principle underlying the definition of "charitable purpose" remained unaltered even on amendment in section 2(15) of the Act w.e.f. 1.4.2009 though the restrictive first proviso was inserted therein".

4. Respectfully following the Coordinate Bench decision, we allow the assessee's appeal.

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5. In the result, appeal filed by the assessee is allowed.

Order pronounced in the Open Court on 30th January, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 30th January, 2015.

Vnodan/sps Copy to:

1. Shri Samuel Nagadesi,CA, 408 Sri Ramakrishna Towers, Besides Image Hospitals, Ameerpet, Hyderabad 500073

2. Director of Income Tax (Exemptions), 3rd Floor, Annex Building, Ayakar Bhavan, Basheerbagh, Hyderabad 500004

3. The Director of Income Tax (Exemptions) Hyderabad

4. The CIT Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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