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Posted on December 28, 2021
Non-Profit Making Body with the Objective of Protecting Trade or Commerce would be Eligible for Exemption
For discussing and understanding the topic given here the case of Bombay Chamber of Commerce and Mackinnon Mackenzie Building Vs ITO (ITAT Mumbai) has been taken. And the same has been discussed in the light of necessary provisions of the Income Tax Act such that there is an in-depth understanding being obtained.
Facts of the Case Law
The assessee who is involved in the case, i.e., Bombay Chamber of Commerce and Mackinnon Mackenzie Building is a non-profit company that was incorporated during the year 1924. It was incorporated or established for the purpose of promoting and protecting the trade, commerce, and manufacturing sector of India and in particular the trade, commerce, and manufacturing sector of the Bombay Presidency. The registration of this entity was coming under the Companies Act, 1956 which was the one in force prior to the Companies Act, 2013.
The assessee who is in question here was registered as a charitable trust under section 12A of Income Tax Act pertaining to an order which was dated 22.09.1988. This was prevailing up to the Assessment Year 2008-09 and was also made available with exemptions under section 11 of the Income Tax Act.
Under section 12A of Income Tax Act, charitable trusts, welfare societies, NGOs and other religious institutions shall be entitled to tax exemptions. But this shall only be made available on satisfaction of certain conditions or compliance requirements as per the law.
Section 12A deals with the trusts and institutions which were registered prior to 1996, and at the same time Section 12AA deals with trusts and institutions which were registered after 1996. The NGOs have to get a certification of 12A for getting the tax benefits, irrespective of whether they are formed and registered as a society, trust, or not-for-profit company under the Income Tax Act. And section 11 of the Income Tax Act also provides that exemption for income derived from property held under trust wholly for charitable or religious purposes to the extent, such income is applied for charitable or religious purposes in India shall be provided pertaining to the satisfaction of certain conditions.
Afterwards, the Director of Income-Tax (Exemptions) Mumbai (DIT(E)) issued an order that was dated on 16.12.2011 pertaining to the provisions of section 12AA (3) of the Act which was majorly concerning the retracting of the registration under section 12A of the Act on the point that the taxable person is not covered under the term “charitable purpose” as defined in section 2(15) of the Act.
Section 2(15) of the Income Tax Act defines the word ‘Charitable Purpose’ and as per this it includes the following:
– relief provided for the poor,
– medical relief,
– preservation of environment which includes preservation of watersheds, forests, and wildlife,
– preservation of objects or places or monuments of both historic and/or artistic relevance and interest, and
– any other object of public utility.
As per the DIT(E), the assessee Bombay Chamber of Commerce and Mackinnon Mackenzie Building does not meet the meaning or definition of charitable purpose as per section 2(15) as stipulated above.
The CIT(A) vide order dated 28.08.2014 dismissed the assesse’s appeal and on further appeal, the ITAT vide its common order dated 15.01.2016 has remanded the matter to the file of the ITO to decide the issue afresh, considering that it had restored the assesse’s registration under section 12A of the Act.
The ITAT also heard the plea which was made by the taxable person or the assessee in question against the order issued by DIT(E)’s stating the revocation of the 12A registration. The ITAT held that for revocation of registration under section 12AA (3) of the Act, the provisions of section 2(15) of the Act cannot be brought into consideration or play. This is because as per the provisions of section 12AA (3) of the Income Tax Act the cancelling of registration under this section shall be cancelled under the following circumstances:
- the actions and also the activities of a trust or institution are not genuine, or
- the activities are not being carried out in accordance with the objects of the trust or the institution in question.
Accordingly, the order of the DIT(E) was set aside and he has also been directed to restore the registration to the assesses. The CIT(A) confirmed the move or act of the AO and also not to take into thought or consideration the taxable persons charitable institution for the purposes of section 2(15) of the Act. He also specified that the activities of Trust would be hit by both the first and also the second proviso under section 2(15) of the Act.
The Honorable Tribunal noted that the important Clause 4 of the Memorandum of Association (MOA)of the taxable person or the assesses, provides that the income and property of the Association whensoever earned shall be applied as a whole towards the promotion of the purposes and objects of the Association, and no portion thereof shall be paid or transmitted directly or indirectly by way of bonus or dividend or otherwise or by way of profit to the persons who at any time are or have been members of the Association or to any person claiming the same through any of them.
Further, Clause 8 of the MOA also provides that on winding up, the surplus property remaining after satisfaction of all the debts, shall not be paid or distributed among the associates, but shall be moved to some other institution or institutions having similar purposes similar to the objects of the Association which is to be determined by the members of the Association.
Hence, it can be concluded that the members of the Association shall not benefit or gain personally through bringing members of such chamber or Association which here is the assesses as no portion of the income or the property will pay in a direct or indirect manner to them in the form of bonus, dividend, or such other name. And this shall be applicable on the winding up of the company also. So, it is clear that the assesses here is formed merely and strictly for the promotion and protection of the trade, commerce, and manufacturers of India without seeking to make profits for its members.
The Honorable Tribunal also interpreted the amendment with respect to section 2(15) of the Act and stated that the intention behind such amendment made to the section was to ensure entities carrying on commerce, business or regular trade, will not come below the purview of this section by bringing themselves within the purview of the definition of the term, namely the Charitable Purpose or the Charitable Object, which will influence the other entities which are formed for complying with the charity objects and are operating with the genuine object of charity providing.
The term “not involving any activity for profit” came up for discussion before the Supreme Court in ACIT Vs. Surat Art Silk Cloth Manufacturers Association (121 ITR 1) (SC), which was a case added, and the majority view was that the purpose should not involve the carrying on of any action for-profit would be satisfied if earning or making of profit is not the real purpose or the object of such entity or the establishment. The dominant or primary object of the trust has, therefore, been treated to be the determining factor.
The Honourable Tribunal also relied on the Judgment of India Trade Promotion Organization Vs. DGIT(E) (371 ITR 333) (Delhi) and have detected that the taxable person or the assessee ought to be regarded as recognised and formed for the charitable purpose as its first or dominant or the primary purpose are inter alia to promote and protect the trade, manufacturers and the commerce of India and in particular the trade, manufacturers and commerce, of the Bombay presidency and hence is entitled to exemption under section 11 of the Income Tax Act.
It also held further that the amounts received by the assesses are not in the nature of trade, commerce, or business as there was no sale or exchange of goods or any services. Hence, while considering and allowing the appeals made by the assesses, it was held that the activities carried out by the assesses would continue to be within the purview or nature of charitable activities as per the definition of section 2(15) of the Income Tax Act and the assesses shall be entitled to claim exemptions from tax as per section 11 of the Income Tax Act.