M/S Water & Land Management Trg. & ... vs Assessee

M/s. Water and Land V/s. Director of Income-tax Management Training & (Exemption), Hyderabad Research Institute, Hyderabad

(PAN - AIYPA 2655 H)

(Appellant) (Respondent)

Appellant by : Shri A.V.Raghuranm

Respondent by : Shri D.Sudhakar Rao DR Date of Hearing 30.4.2015 Date of Pronouncement 13.5.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal filed by the assessee is directed against the order of the learned Director of Income-tax(Exemption) Hyderabad dated 30.7.2012, whereby he refused to grant registration sought by the assessee under S.12A of the Act.

2. The assessee in the present case is an institution which was established in the year 1983 under the overall control of the Irrigation Department of Government of Andhra Pradesh. It was converted and registered as a society in the year 1992 under the Societies Registration Act as an autonomous body. An application in Form No.10A was filed by it on 19.1.2012 seeking registration under S.12A of the Act. In order to dispose of the said application, a questionnaire was issued by the learned Director of Income- tax(Exemption) requiring the assessee to furnish the details on 2 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

specific points and also to produce books of account, bills and vouchers and other documents for verification. Besides complying with the said requirements of the Director of Income- tax(Exemption), the assessee also brought to the notice of the Director of Income-tax(Exemption) its main objects as under:-

"(a) To train different level Government functionaries of the department of irrigation and Command Area Development and the department of agriculture and other allied departments and agencies of the State Government dealing with aspects relating to water and land management in planning, designing, construction, operation and maintenance or irrigation and drainage networks etc., with due emphasis on micro-level functioning and "On-Farm" irrigation practices to ensure optimum utilization of Water and Land Resources;

(b) To ensure full understanding of the principles of efficient operational plans and improved irrigation practices at all levels of scheme management and among the farmers.

(c) To provide a better understanding among the water users of the optimal utilization of water and land resources and to inculcate a senses of belonging.

(d) To function as an apex body on all maters relating to water and land management and render advice to the State Government and the departments of the State Government, dealing with these matters pertaining to policies of water and land management with a view to improve the performance; and deal with any other issues entrusted by the government to the institute;

(e) To provide consultancy services to the Government, local bodies, associations and individuals in the areas of water and land management;

(f) To undertake intensive and need based research on water and land management with the 3 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

collaboration of other institutions, associations and societies interested in similar objects;"

It was also submitted on behalf of the assessee before the learned Director of Income-tax(Exemption) that it is recognised as one of the apex institutes in Andhra Pradesh and is known in India for the activities under participatory in irrigation management. It was submitted that WALAMTARI has decent infrastructure with class rooms and auditoriums for conducting classes and workshops/seminars. It was submitted that though the Government of Andhra Pradesh supports the institute through grants-in-aid, it earns sizeable portion of its income through capacity building services and through consultancies. It was submitted that the assessee society in consonance of its objectives organized various training for farmers at field training centres in the State.

3. After considering the submissions made by the assessee and the material placed on record before him, the learned Director of Income-tax(Exemption) noted that the assessee society was mainly functioning as a training institute for the purpose of training of various government officials in the field of water and land management and was also providing guidance to the farmers. He however, noted that the assessee at the same time was also rendering consultancy services to various organisations and earning substantial amount of income from the said activities. He held that although these services rendered by the assessee society in the matter of water and land management for the benefit of the farmers and other organizations fell under the ambit of advancing of an object of general public utility, the activity of providing consultancy services yielding substantial income was hit by the proviso to S.2(15) inserted in the statute by the Finance Act, 2008 4 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

with effect from 1.4.2009. Accordingly, relying on the said proviso, he held that the activity of the assessee of providing consultancy services yielding substantial income was sufficient to indicate commercial intention on the part of the assessee society, and therefore, the assessee society could not be considered as carrying on any charitable activity to be eligible for registration under S.12A of the Act. Accordingly, the registration sought by the assessee was denied by the learned Director of Income-tax(Exemption) vide his order dated 30.7.2012, which is impugned by the assessee in the present appeal filed before the Tribunal.

4. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the basic nature of the aims and objectives of the assessee society being charitable is not disputed by the learned Director of Income- tax(Exemption) in his impugned order. As a matter of fact, in pargraph no.3 of his impugned order, he has agreed that the services provided by the assessee society in the matter of water and land management for the benefit of the farmers and other organisations fell under the ambit of advancement of an object of general public utility. However, keeping in view one of the activities carried on by the assessee of providing consultancy services, which yielded substantial income, he held relying on the proviso to S.2(15) inserted in the statute by the Finance Act, 2008 with effect from 1.4.2009, that the entire activity of the assessee society cannot be considered as for 'charitable purpose' in order to be eligible for registration under S.12A of the Act. In this regard, it is observed that a similar issue had come up for consideration before the Hon'ble Delhi High Court in the case of India Trade Promotion Organisatiosn V/s. Director of Income-tax(Exemption) (1124 DTR (Del) 329) cited by the learned counsel for the assessee, 5 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

wherein the claim of the assessee, which was otherwise established to be for the purposes of advancement of an object of general public utility, for grant of approval u/s. 10(23C)(iv) was denied exemption by the learned Director of Income- tax(Exemption), relying on the proviso to S.2(15). Hon'ble Delhi High Court however, directed the learned Director of Income- tax(Exemption) to grant such approval to the assessee under S.10(23C)(iv), after considering the purposes and effect of the proviso to S.2(15) of the Act, as inserted in the statute by the Finance Act, 2008 with effect from 1st April, 2009 elaborately. The relevant portion of the observations of Hon'ble Delhi High Court in this context is extracted hereunder from the head-note of the Report (114 DTR)-

"The proviso to s. 2(15) does not make any distinction between entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business on the one hand and genuine charitable organizations on the other. It must be remembered that the Court is construing the expression "charitable purpose" not in a vacuum, but in the specific context of s. 10(23C)(iv). Sec. 10 deals with the incomes not included in total income. And, 510(23C)(iv) specifically deals with the income received by any person on behalf of, inter alia, an institution established for charitable purposes. Therefore, the meaning of the expression "charitable purposes" has to be examined in the context of s. 10(23C)(iv). Looking at the said expression from this stand point, it becomes clear that it has a reference to income. Because, it is only when such an institution has an income that the question of not including that income in its total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable purpose, receives income would not make it any less a charitable institution. Whether that institution, which is established for charitable purposes, will get the exemption under s. 10(23C)(iv) -would have to be determined by the prescribed authority having regard to the objects of the institution and its importance throughout India or throughout any State or States. There is no denying that having regard to the objects of the assessee and its importance throughout India in the field of advancement of promotion of trade and commerce, the assessee would be entitled to be regarded as an institution which would qualify for that exemption. The only thing that is to be examined is- whether the assessee had been established for charitable purposes'? The fact that it derives income does not, in any way, detract from the position that it is an institution established for charitable purposes. Therefore, merely because the assessee derives rental income, income out of sale of tickets and sale of 6 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

publications or income out of leasing out food and beverages outlets in the exhibition grounds, does not, in any way, affect the nature of the assessee as a charitable institution if it otherwise qualifies for such a character. To put it plainly, if an institution established for charitable purposes did not receive an income at all, then what would be the need for taking any benefit under s. 10(23C)(iv). Therefore, if a meaning is given to the expression 'charitable purpose' so as to suggest that in case an institution, having an objective of advancement of general public utility, derives an income, it would be falling within the exception carved out in the first proviso to s. 2(15), then there would be no institution whatsoever which would qualify for the exemption under s. 10(23C)(iv). And, the said provision would be rendered redundant. This is so, because, if the institution had no income, recourse to s. 10(23C)(iv) would not be necessary. And, if such an institution had an income, it would not, on the interpretation sought to be given by the Revenue, be qualified for being considered as an institution established for charitable purposes. So, either w?:y, the provisions of s. 10(23C)(iv) would not be available either because it IS not necessary or because it is blocked. Theintention behind introducing the proviso tos.2(q5) could certainly not have ben ro render teh provisions of s.10(23C)(iv) redundant.

Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been estebtishea for a charitable purpose. It is also important to note that one must examine as to what is the dominant activity of the institution in question. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. It is clear from the facts of the present case that the driving force is not the desire to earn profits but, the object of promoting trade and commerce not for itself, but for the nation-both within India and outside India. Clearly, this is a charitable purpose, which has as its motive the advancement of an object of general public utility to which the exception carved out in the first proviso to s. 2(15) would not apply. If a literal interpretation were to be given to the said proviso, then it would' risk being hit by Art. 14 (the equality clause enshrined in Art. 14 of the Constitution). It is well-settled that the Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down. It would be pertinent to reiterate that s. 2(15) is only a definition clause. Sec. 2 begins with the words, "in this Act, . unless the context otherwise requires". The expression "charitable purpose" , appearing in s. 2(15) has to be seen in the context of s. 10(23C)(iv). When the. expression "charitable purpose", as defined in s. 2(15), is read in the context of s .. 1O(23C)(iv) the Court would have to give up the strict and literal interpretation' sought to be given to the expression "charitable purpose" by the Revenue. The' introduction of the proviso to s. 2(15) by virtue of the Finance Act, 2008 was' directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb 'of an activity with the object of a general public utility. It was not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts and were charity institutions. The attempt was to remove the masks 7 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

from the entities, which were purely trade, commerce or business entities, and to expose their true identities. The object was not to hurt genuine charitable organizations. And, this was also the assurance given by the Finance Minister while introducing the Finance Bill, 2008......

In conclusion, the expression "charitable purpose", as defined in s. 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of s. 10(23C)(iv). It is also clear that if the literal interpretation is given to the proviso to s. 2(15), then the proviso would be at risk of running fowl of the principle of equality enshrined in Art. 14 of the Constitution of India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of s. 10(23C)(iv) because, the context requires such an interpretation. The correct interpretation of the proviso to s. 2(15) would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive tq earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. Thus, while upholding the Constitutional validity of the proviso to s. 2(15), it has to be read down in the manner indicated above. As a consequence, the impugned order dt. 23rd Jar:. , 2013 is set aside and a mandamus is issued to the respondent to grant approval to the assessee under s. 10(23C)(iv) within six weeks from the date of this judgment. "

In our opinion, the ratio of the decision of the Delhi High Court in the case of India Trade Promotion Organization (supra) is directly applicable to the issue involved in the present case and respectfully following the same, we set aside the impugned order of the learned Director of Income-tax (Exemption), with a direction to grant registration to the assessee society under S.12A of the Act.

8 ITA No.1598/Hyd/2012 M/s. Water and Land Management Training & Research Institute, Hyderabad

5. In the result, assessee's appeal is allowed.

Order pronounced in the court on 13th May, 2015

Sd/- Sd/-

(G.C.Gupta) (P.M.Jagtap) Vice President Accountant Member

Dt/- 13th May, 2015 Copy forwarded to:

1. M/s. Water and Land Management Training & Research Institute, C/o. Shri K.Vasant Kumar, A.V. Raghu Ram, Advocates, Flat No.610, 6th Floor, Babukhan Estate, Basheerbagh, Hyderabad-1.

2. Director of Income-tax(Exemption) Hyderabad

3. Asstt. Director of Income-tax(Exemption) I, Hyderabad

4. Departmental Representative ITAT Hyderabad

B.V.S