The Calcutta High Court recently comprising of a bench of Justices T.S. Sivagnanam and Hiranmay Bhattacharyya, remarked that when a Company has been established as a non-profit organization under the Companies Act, and its profits are applied solely for the promotion of its objects, its activities would by necessary implication fall under the definition of a “charitable purpose” under the Income Tax Act, 1961. (Creative Museum Designers Versus Income Tax Officer, Exemptions, Ward-1(1), Kolkata)
Facts of the Case
The Assessee established by the National Council of Science Museum under the Ministry of Culture, was registered under Section 25 of the Companies Act, 1956, is engaged in design and development of knowledge centers like science museums, planetariums, etc., had applied for registration as a charitable institution under Section 12AA of the Income Tax Act, 1961, which was granted to it. The Assessee had carried out various turnkey projects throughout the country, including for the Reserve Bank of India (RBI) and the Surat Municipal Corporation. The Assessee had filed its income tax return declaring its income to be nil after claiming exemption under Section 11 of the Income Tax Act.
The Assessing Officer held that the surplus generated by the Assessee Company was from commercial activities, and thus disallowed the exemption under the proviso to Section 2(15) and Section 13 (8) of the Act.
This appeal by the assessee was filed under Section 260 A of the Income Tax Act, 1961 is directed against the consolidated order passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in for the assessment years 2013- 14 to 2015-16.
Contention of the parties
The Learned Counsel appearing for the appellant assessee submitted that the order passed by the assessing officer as affirmed by CIT(A) and the tribunal are perverse, erroneous and arbitrary. It is submitted that the tribunal failed to consider that the activities of the assessee would be charitable within the meaning of Section 2(15) of the Act and would be regarded as an educational activity as well as activities in the nature of general public utility. Further, the tribunal ought to have noted that the assessee having been registered under Section 12AA of the Act, its objectives are to be necessarily accepted as charitable in nature and the same cannot be regarded as a commercial activity or activities done with an intention to earn profit.
Further, it was submitted that the assessee is not carrying on any activity with a view to earn profit but it is involved in the development of museums, science centers, planetariums, science parks, etc. which are undoubtedly centers of dissemination of knowledge and the assessee has to develop the necessary expertise for establishing these knowledge centers and substantial, technical and highly skilled work is involved, deployment of modern machinery and equipment, etc.
It was further submitted that the tribunal and the authorities committed a serious error in stating that the assessee is a contractor functioning in lieu of money and they are an agent engaged in the commercial activity of construction of a museum for RBI. It was further submitted that the assessee is registered under Section 25 of the Companies Act and therefore all its activities are deemed to be non-profit and unless and until the activities are so, the company cannot be registered under Section 25 of the Companies Act.
The counsel for the respondent sought to sustain the order passed by the tribunal by contending that the tribunal has examined the objects of the assessee company and it is clear that the activities done by them are commercial in nature and so far as the work done for RBI and assessee was selected to execute a project on a turnkey basis and after the project is completed, the assessee has to move out which will clearly show that they are in the nature of a contractor who has completed the work on payment of the requisite sums of money. Further, it is submitted that the tribunal noted that the price bid proposed by the assessee shows some profit element which would indicate that the project was intended for making a profit, it is commercial activity and not for any public utility directly. It was further submitted that the Tribunal rightly held that though the assessee is registered under Section 12A of the Act as a charitable institution, the work done by the assessee in the assessment years under consideration are not charitable in nature, particularly when no formal and systematic educational function has been discharged by the assessee and what was done by the assessee is a commercial project. Therefore, it was submitted that the tribunal rightly refused to interfere with the order passed by the CIT(A) who had affirmed the view taken by the assessing officer.
Courts Observation & Judgment
The bench noted that Section 11 of the Income Tax Act provides that income from property held under a charitable trust shall not be included in the total taxable income to the extent to which such income was applied to charitable purposes in India. Section 2(15) provides the definition of “charitable purpose”, which includes education or advancement of any other object of general public utility.
The bench after analysing the main objects of the Assessee Company under its Memorandum of Association observed that the ITAT did not consider the main objects for which the Assessee Company had been established.
The court remarked that the ITAT had misread the nature of the activities done by the Assessee Company qua the objects behind its incorporation under Section 25 of the Companies Act, 1956. The High Court held that the object behind the projects carried out by the Assessee, such as the establishment of science centres or museums on a turn-key basis, was in the public interest to educate the general public in an easy and attractive manner. It observed that the technical expertise and research done by the Assessee, for carrying out the projects for a specified purpose, could not be within the capacity of a contractor.
The bench allowing the appeal remarked, “When a Company has been established as a non-profit organization under the Companies Act, and its profits are applied solely for the promotion of its objects, its activities would by necessary implication fall under the definition of a “charitable purpose” under the Income Tax Act, 1961.
Thus, when the assessee has not been established for the purpose of earning profit and the income it generates has to be applied for promoting the objects as spelt out in the memorandum and no portion of the income can be directly or indirectly paid by way of dividend or bonus etc, it has to be necessarily held that the assessee is a not for profit organisation but public utility company and the activities of the company for which it has been established would undoubtedly show that the company by establishing knowledge parks, engaged in imparting education and also undertakes advancement of other aspects of general public utility to fall within the definition of charitable purpose as defined under Section 2 (15) of the Act.
In the result the appeal filed by the assessee is allowed and the substantial questions of law are answered in favour of the assessee. No costs.”
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