Norka Roots, Trivandrum vs Assessee

Norka Roots, Vs. The Commissioner of Income-tax, Norka Centre, Trivandrum. Thycaud, Trivandrum-695014. [PAN: AACCR 7531A] (Assessee-Appellant) (Revenue-Respondent)

Assessee by Shri Mohan Pulickkal, Adv. Revenue by Shri M. Anil Kumar CIT/DR

Date of hearing 08/01/2015 Date of pronouncement 06/03/2015

ORDER

Per CHANDRA POOJARI, Accountant Member:

This appeal filed by the assessee is directed against the order dated 9th

January, 2014 passed by the CIT, Trivandrum, rejecting the application for

registration u/s. 12AA of the I.T. Act.

2. The brief facts of the case are that the assessee is a Government of Kerala

company registered under section 25 of the Company Act for protecting the

interests of non-resident Keralites. Originally, the assessee's application for

registration under section 12AA of the I.T. Act dated 12-04-2004 was rejected by

the CIT vide order dated 07-03-2005. Against the rejection, the assessee went in 2 I.T.A. No.179/Coch/2014

appeal before the Tribunal, Cochin Bench which remitted the matter back to the file

of the CIT vide order in I.T.A. No. 570/Coch/2006 dated 05/06/2006. On remission

by the Tribunal, the CIT passed fresh order dated 06/02/2007 and once again, the

CIT refused to grant registration under section 12AA of the Act. Against this, the

assessee went in appeal before the Tribunal. The Tribunal vide its order dated 5th

September, 2008 confirmed the denial of registration by CIT under section 12AA of

the Act. Against this, the assessee went in appeal before the High Court. The High

Court vide judgment in 31/2009 dated 19th March 2009 observed that a

Government agency promoted by the Government to protect the interests of non-

resident Keralites who are out of Kerala and India is certainly an object of general

public utility. Accordingly, the finding of the lower authorities was set aside.

Further, the Court observed that for deciding the issue of entitlement for registration

as a charitable institution, the CIT should verify the source of fund and utilization of

the same and the object of the charitable institution should be ascertained with

reference to source of fund and application of the same. The Court further

observed that if under cover of promoting interests of non-resident Keralites, the

assessee is engaged in collection of charges from them and making profits, then

certainly it is a profitable organization no matter no dividend is declared by virtue of

registration granted under section 25 of the Companies Act. The Court also

observed that if funds are expended for unnecessary travel and extravaganza, then

the same will reflect upon the true purpose of the organization. With these

observations, the High Court remitted the matter back to the file of the CIT for fresh 3 I.T.A. No.179/Coch/2014

consideration. On the above direction of the High Court, the CIT took up the matter

for hearing. However, the CIT was not convinced with the activities carried out by

the assessee and doubted the genuineness of the charitable activities, hence, he

refused to grant registration under section 12AA of the Act. Against this, the

assesseee is once again in appeal before us.

3. The Ld. AR submitted that the assessee organization was formed by the

Government of Kerala for a specific purpose and even the charges taken for various

services rendered by the assessee are decided/approved by the Government. The

Ld. AR relied on the following case law:

(i) Director of Income Tax (Exemption) vs. Sabarmati Ashram Gaushala Trust (2014) (362 ITR 539) (Guj.)

(ii) Addl. CIT vs. Surat Art Silk Cloth Mfrs. Assocn. (1980)(121 ITR 1) (SC).

(iii)Nirmal Trading Co. vs. CIT (121 ITR 54) (SC).

(iv) CIT vs. Samyuktha Gowda Saraswatha Sabha (2000) (245 ITR 242) (Mad.)

4. On the other hand, the Ld. DR relied on the order of the CIT.

5. We have heard both the parties and perused the record. We have carefully

gone through the main objects of the organization which as per the Memorandum of

Association are:

(a) To provide assistance of all kinds to non-resident Keralites in the State of Kerala or anywhere else in India or abroad and to take up with Government of Kerala and Government of India or other 4 I.T.A. No.179/Coch/2014

institutions/organizations both in India and abroad, any matter concerning the non-resident Keralites.

(b) To set up project/schemes including Pension Scheme for the welfare of non-resident Keralites and to evolve strategies for the re-settlement, establishment and re-integration of non-resident Keralites returning to Kerala and other states in India.

(c) To give a thrust to the industrial development of the State by channelizing the resources and expertise of non-resident Keralites and to help them to set up projects/ventures/enterprises in Kerala.

(d) To facilitate the creation of a high caliber human resource pool, utilizing the educational and traditional advantages inherent in the State, to meet the changing global requirements by helping to set up higher and specialized centres of learning and training aimed at skill upgradation and to assist and monitor human resource export through transparent and lawful methods.

(e) To undertake the establishment, management and monitoring of a worldwide network of associations, organizations, and groups of Keralites residing and working outside the State, assist and encourage their activities and to channelize the contribution of non-resident Keralites for the all round development of the State. With no intention to distribute the surplus, if any, and any surplus money generated shall be ploughed back for the development and the functioning of the company.

In addition to the above objects, the trust has several other objects that are incidental or ancillary to the attainment of the main objects.

5.1 The main contention of the assessee is that the organization has been

rendering service to the non-resident Keralites and their activity should be classified

as relief to the needy persons. However, examination of the details filed by them do

not support the contention that they are providing relief to general public and

specifically non-resident Keralites. The organization do not cater to the emigrants

alone but to the broader non-resident community, which consists of all three classes 5 I.T.A. No.179/Coch/2014

viz the poor, middle as well as the rich and affluent class. It is seen that the

organization has not spent any of its earnings for relief. Even though the

organization claimed that the two schemes, viz. Santhwanam and Karunyam are

meant for the poor, however, the financial records clearly indicate that the

organization has not been using any of its money for these schemes but transfers

the grant received from the Government of Kerala. The details are produced in a

tabular form below:

Table 1

Sl. Financial Total Grants Santhwanam Karunayam % of No.. Year government Santhwanam utilisation funding Karunayam

1. 2006-07 NA 5,37,000 5,37,000 0 100%

2. 2007-08 17,88,799 17,89,000 5,93,000 0 33.1%

3. 2008-09 24,58,462 24.58 15,05,000 0 61.2%

4. 2009-10 70,09,065/- 70.09 35,42,000 0 50.5%

5. 2010-11 1,31,22,598 1,31,20,000 55,99,000 1.05 43.5%

6. 2011-12 1,16,31,737 0 54,59,500 50,000 47.36%

7. 2012-13 5,64,53,717 0 1,56,84,344 1,67,200 28.07%

5.2 Analysis of the above details clearly indicates that the organization had not

even fully utilized the grant sanctioned by the government towards these schemes.

Therefore there is no justification that the organization is engaged in relief for poor.

At best, it can be seen as an authorized agency for execution of the government

schemes such as Santhwanam and Karunyam. Therefore, the claim that they are

engaged in relief to the poor is without any basis.

5.3 The above facts illustrate that in the earlier years, i.e., upto 2008-09 the

organization had not spent any own money on welfare of the poor. These specific 6 I.T.A. No.179/Coch/2014

schemes meant for the lower and poorer sections of the society were met solely

from government grants and therefore their claim that they are engaged in relief to

poor is not found on facts or supported by evidences. They were merely an agency

for execution of these government formulated schemes. Therefore, the claim of

relief to poor is an incorrect and inadmissible claim.

5.4 Proceeding further the organization has submitted the details of various

programmes it has conducted between the years 2007-08 to 2012-13. It is seen

that apart from the schemes of Santhwana and Karunyam, other programmes such

as pre-departure orientation, mass publicity campaign, awareness campaign, skill

upgradation etc. were also carried out purely from Government funds. Vast

amounts of money from government funds have been spent on organizing

'Keraleeya Pravasi Sangamam' and 'Pravasi Bhartiya Diwas'. Being so, these

expenses cannot be claimed as relief for poor and may fall within the category of

the observation of the High Court "if funds are expended for unnecessary travel and

extravaganza', though incurred from government funds". Further, there is no doubt

that the activities of the organization are in consonance with the judgment of the

High Court that the objects are of "general public utility".

5.5 On verification of the records and the materials furnished by the assessee, it

is seen that the organization is deriving income from providing certification service,

project ID Card, government grants, bank interest and other income which included 7 I.T.A. No.179/Coch/2014

fees collected from various centres of HRD, registration charges and services

charges. Further, 'other income' comprised of income from Photostat collection,

cover sales, registration fee etc. which are tabulated below:

Table 2

Receipt of Income 2006-07 2007-08 2008-09 2009-10 Income from certification 1,16,96,620 1,68,53,590 2,01,15,550 1,90,05,710 Bank interest 15,49,846 21,80,210 30,80,000 49,48,460 Project Identity card 0 0 38,57,792 83,45,655 Other Income* 2,33,471 12,24,819 2,52,396 3,51,262 *Photostat 0 0 45,036 0 *Cover sales 0 0 1,12,395 0 Total 1,40,16,937 2,20,47,480 2,99,21,651 3,96,60,152

5.6 For the subsequent years also, the organization has commercial receipts

exceeding crores of rupees as detailed below:

Table-3

Year Receipts 2010-11 4,30,56,034 2011-12 3,19,72,595 2012-13 3,33,42,452 2013-14 Not available

Thus it is evident that the organization is in receipt of commercial receipts of a

substantial order running into crores.

8 I.T.A. No.179/Coch/2014

5.7 Further, the expenditure incurred by the organization for the years 2006-

07 to 2009-10 are tabulated below:

Table-4

Particulars 2009-10 2008-09 2007-08 2006-07 Salaries & Allowances 89,49,377 79,03,199 76,98,202 64,37,285 Other Administrative Expenses 58,92,077 50,66,848 42,38,510 49,91,912 Percentage of Admn. Expenses 37% 43% 52% 80% to total expenditure

5.8 It is seen that the major item of expenditure is on administration which is

far in excess of amount spent on the objectives. Comparative figures of

expenditure incurred on administration and objectives of the organization are

tabulated below:

Table-5

Year Receipts Administrative expenses Own fund programmes (% of commercial receipts) 2006-07 1,34,79,937 Not available 0 2007-08 2,02,58,681 Not available 0 2008-09 2,74,63,189 4238510(15.43%) 0 2009-10 3,26,51,087 5066848 (15.52%) 661000 (2.02%) 2010-11 2,99,33,436 7761009 (25.93%) 975000 (3.26%) 2011-12 3,19,72,595 11502385 (35%) 1668000 (5.2%) 2012-13 3,33,42,452 10166559 (30.5%) 7482652 (22%) 2012-13 Not available 10739030 Not available

5.9 Analysis of the above table clearly indicates that the organization has

been expending a very small proportion of its own funds but merely executing 9 I.T.A. No.179/Coch/2014

schemes for the Government of Kerala. The organization has spent a mere 0%,

0%, 1.6%, 2.2%, 5.2% and 22% for the year from 2006-07 to 2012-13 and

against this, the administrative expenditure amounts to 14.16%, 12.7%, 18%,

35% and 30.5% for the respective years. In view of the above facts, it is

evident that very little has been done by the organization towards its charitable

objectives and substantial amounts have been spent to earn profits. Though the

organization is an agency for government sponsored schemes, but it is also a

commercial organization earning substantial money from commercial operation

such as certification, issue of identity cards etc. Thus it takes the character of a

commercial enterprise making profits.

5.10 The entire spectrum of data available from 2006-07 to 2012-13 indicate

that even before the introduction of the restriction of the proviso on "object of

general utility", the organization was carrying on profit making activities with

little or no application to charitable activities and whatever activity that was

claimed to have been carried out was government schemes solely funded though

government funds. Therefore, the assessee cannot shelter its commercial

operations, behind the cover of government funded charities. Being so, the

assessee is not entitled for registration u/s. 12AA as the facts of the instant case

do not fall within the meaning of the Income Tax Act and the organization is

commercial in character making extensive profits. 10 I.T.A. No.179/Coch/2014

5.11 Thus it is seen from the CIT order that the only activity performed by the

assessee is execution of the government schemes such as Santhwanam and

Karunyam. The assessee has also undertaken the activities of certificate

attestation for which the assessee has charged separate fees as enumerated in

Table 3. The assessee has also spent money towards administrative expenses

and as enumerated in Table 4 & 5, the assessee has done very little towards the

object stated in the Memorandum of Association but has spent substantial

amount to earn profits. Thus the receipts in Table 3 and Expenditure in Table 4

& 5 relate only to the activities which are commercial in nature. Thus during the

years 2006-07 to 2011-12 except for 2012-13, the assessee has not incurred any

expenditure on its objects stated in the Memorandum of Association.

6. It was the case of the Department that the activity carried out by the

assessee was commercial in nature and the assessee has charged fees to attest

the certificates. The activity of the assessee was systematic and organized and

was thus a commercial activity. The observation of the CIT that the assessee is

engaged in the activity of making profit is correct in the facts of the case.

Carrying on activity in an organized manner was commercial activity. No doubt,

for the purpose of attaining the objects the assessee could do such activity if it

was incidental to the charitable objects, but at the same time, it has to carry out

the charitable activities also to fulfil the objects stated in the Memorandum of

Association. No document or evidence had been placed on record by the 11 I.T.A. No.179/Coch/2014

assessee to show that any activity of charitable nature has been carried out by

the assessee which was in the fulfillment of the objects of the assessee for which

it has been formed. No doubt, at the time of grant of registration u/s. 12AA, the

CIT/DIT or the concerned authority is required to examine the fact that whether

or not the objects of the institution are charitable in nature and if those objects

fall within the definition of 'charitable purposes', then he cannot refuse

registration to that institution as the question regarding whether the assessee

fulfils other conditions laid down in section 11 of the Act can be examined at the

time of framing the assessment. But at the same time, alongwith examining the

objects of the trust or institution, the concerned authority has also to satisfy

himself about the genuineness of the activity of that institution.

7. The reading of section 12AA will reveal that the concerned authority while

examining the claim of the assessee u/s. 12AA is empowered to call for such

documents or information from the assessee which he thinks necessary to satisfy

himself about the genuineness of activities of the institution and, he is also

empowered to make inquiries in that regard and it is only after such satisfaction

he will either accept the claim of the assessee or reject the same. Thus it is not

a formality that the concerned authority merely on the basis of the objects of

trust will grant the certificate of registration carried on by it which it claimed to

be incidental to the attainment of objectives. In other words, even if the

assessee claimed that it had organized activities as commercial activity for 12 I.T.A. No.179/Coch/2014

attainment of objectives of the assessee, even then it was necessary for it to

show that in advancement of its objectives it had incurred certain expenditure on

the objects stated in the Memorandum of Association. In fact, the assessee had

not carried out any charitable activity. The entire amount received by it could not

be considered as income as the income is only the surplus of the total receipts

minus expenditure incurred to earn the total receipts. The entire receipts could

not be considered as income and expenditure incurred to earn those receipts and

it could not be considered as application of income for the purpose of attaining

the objects. The assessee has not applied any part of its net income on the

objectives stated in the memorandum of association which were for

advancement of any other object of general public utility. The assessee did not

carry out any charitable activity in the relevant years. The activity of distribution

of funds received by the assessee from the Government to various beneficiaries

cannot be considered as charitable activity. Therefore, though technically the

objects of the assessee may fall within the ambit of "advancement of any other

object of general public utility as described in section 2(15) as it existed prior to

assessment year 2009-10, but it did not carry out any charitable activity. In fact,

the only activity which was carried out was for the purpose of generating income

which is not a charitable activity in itself and hence the assessee is not entitled

for registration under section 12AA of the Act. In our opinion, the CIT has rightly

rejected the claim of the assessee regarding grant of registration under section

12AA of the Act. Accordingly, we uphold the order of the lower authorities. 13 I.T.A. No.179/Coch/2014

8. In the result, the appeal filed by the assessee is dismissed.

Pronounced in the open court on 06/03/2015.

Separate order sd/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 06/03/2015 GJ Copy to:

1. Norka Roots, Norka Centre, Thycaud, Trivandrum-695014.

2. The Commissioner of Income-tax, Trivandrum.

5. D.R., I.T.A.T., Cochin Bench, Cochin.

6. Guard File.

By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin 14 I.T.A. No.179/Coch/2014

N.R.S.Ganesan

9. The High Court by judgment dated 19-03-2009 in ITA No. 31 of 2009

found that the governmental agency promoted by Government to protect

the interest of Non Resident Keralites, who are out of Kerala and India is

certainly an object of general public utility. Accordingly, the order of this

Tribunal was set aside by the High Court. However, the matter was

remanded back to the file of the Commissioner of Income-tax with a

direction to verify the source of funds and utilization of the same. The High

Court specifically observed that under the cover of promoting interest of

Non Resident Keralites, if the assessee is engaged in collection of charges

from them and making profit, then certainly, it is a profitable organization;

no matter no dividend declared by virtue of registration granted u/s 25 of

the Companies' Act. The High Court also observed that if the funds were

expended for unnecessary travel and extravaganza, then the same will

reflect upon the true purpose of the organization. In fact, the Kerala High

Court has observed as follows in the judgment dated 19-03-2009:

" 3.......... Therefore, a Governmental agency promoted by the Government to protect the interests of non-resident Keralites who are out of Kerala and India is certainly a object of general public utility. The findings of the authorities below to the contrary are set aside. However, we find that before deciding the entitlement for registration as charitable institution, the Commissioner should verify the source of fund 15 I.T.A. No.179/Coch/2014

and utilization of the same. Even though this is an exercise to be done every year in the course of assessment, after granting registration, we feel the object of the institution should be ascertained with reference to source of fund and the application of the same. If under cover of promoting interests of non-resident Keralites, appellant is engaged in collection of charges from them and making profit, then certainly it is a profitable organization no matter no dividend is declared by virtue of registration granted under S3ection 25 of the Companies Act. If funds are expended for unnecessary travel and extravaganza then the same will reflect upon the true purpose of the organization. The question of imitation raised by the appellant is neither tenable nor would advance the case of the appellant because in the first round, the Tribunal did not accept the limitation, but set aside the order and remanded the matter for fresh consideration. Secondly by getting declaration that the matter is time barred, appellant will not get registration more so because appellant's application is not an application for renewal and an application for fresh registration. We therefore reject this contention also. Since these are matters not considered by the Commissioner or the Tribunal, and since after registration appellant was engaged in six year of operation, we dispose of the appeal by setting aside the orders of the Tribunal and that of the Commissioner and by restoring the matter to the Commissioner for fresh decision, but Commissioner is directed to consider original application after calling for particulars, particularly statement of accounts, as stated above."

16 I.T.A. No.179/Coch/2014 10. While considering the application of the assessee for

registration u/s 12AA consequent to the direction of the Kerala High

Court, the Commissioner of Income-tax found that the assessee is

collecting huge money under the cover of services such as

certification, issue of identity card, etc. In fact, the Commissioner of

Income-tax extracted the receipts at page 12 of his order which

reads as follows:

Table 2 Receipt of Income 2006-07 2007-08 2008-09 2009-10 Income from 1,16,96,620 1,68,53,590 2,01,15,550 1,90,05,710 certification Bank interest 15,49,846 21,80,210 30,80,020 49,48,460 Project Identity 0 0 38,57,792 83,45,655 card Other Income* 2,33,471 12,24,819 2,52,396 3,51,262 *Photostat 0 0 45,036 0 *Cover sales 0 0 1,12,395 0 Total 1,40,16,937 2,20,47,480 2,99,21,651 3,96,60,152

11. From the material available on record it is seen that the

assessee is making huge profit from collection made from the Non

Resident Keralites under the guise of providing service to them. As

found by the Kerala High Court the assessee was promoted by

Government of Kerala with the object of protecting the interest of

Non Resident Keralites who are out of Kerala and India. The Kerala

High Court specifically found that the government agency promoted 17 I.T.A. No.179/Coch/2014

by Government to protect the interest of Non Resident Keralites,

who are out of Kerala and India is certainly an object of public utility.

This Tribunal may not be able to go beyond the finding of the High

Court. Therefore, I am of the considered opinion that the assessee

is a charitable institution with an object of general public utility.

12. However, the High Court found that before deciding the

entitlement for registration as charitable institution, the source of

fund and utilization has to be verified. As extracted above, the

source of fund is the charges collected from the Non Resident

Keralites for providing services such as certification, issue of identity

card, etc. The assessee is claiming Rs.8,57,677 towards travelling

expenses. However, the details of travelling expenditure are not

available. It is not known whether the travels are required for

carrying out all the object of the trust or not? In view of the specific

direction of the High Court that the Commissioner of Income-tax has

to examine whether the funds were used for unnecessary travels

and extravaganza and in the absence of any material to suggest that

these expenses claimed by the assessee towards travelling is

absolutely necessary to carry out the object of the trust, the

presumption would be that it may be unnecessary and extravagant.

Since the assessee is making profit out of the collections made from 18 I.T.A. No.179/Coch/2014

the Non Resident Keralites it is a profitable organization as held by

the Kerala High Court. Therefore, I am of the opinion that the

assessee is not entitled for registration u/s 12AA of the Act.

13. In the result, the appeal of the assessee stands dismissed.

sd/-

(N.R.S. Ganesan) JUDICIL MEMBER Cochin, Dt : 6th March, 2015 Pk/-