Whether when a chamber of industry derives income from services rendered to members and non-members, same is to be treated as 'business' warranting satisfaction of conditions u/s 11(4A) even though it has no profit motive - NO: HC

THE issues before the Bench are - Whether when a trade, professional or similar association, such as a chamber of commerce and industry dervies income from services provided to members and non members, the same can be considered as "business" warranting satisfaction of conditions u/s 11(4A), even though it is engaged in charitable activities and has no profit motives; Whether for the purpose of claiming exemption u/s 11, the dominant purpose test i.e. profit motive or charitable motive which needs to be applied, and not merely the generation of surplus; Whether charitable activities must
be carried on in such a manner that it does not result in any profit, even though when earning profit is only incidental to such activity; Whether when there is identity between the contributors and participators in the surplus of the association, the surplus is ought not to be taxed under the general principles of mutuality and Whether in terms of section 28(iii) the mutuality principle is destroyed, when the assessee is deriving income or making profits as a result of rendering specific services for its members in a commercial way. And the decision goes in favour of the assessee.

Facts of the case

The assessee is the PHD Chambers of Commerce and Industry which was established in 1909. It is registered under the Companies Act, 1956 and well as under Section 12A of the Income Tax Act, 1961 and from the AY 1996-97 up to the AY 2005-06, it was granted exemption u/s 11 of the Act. In making the assessments for the years under appeal, the AO for the first time denied the assessee’s claim for exemption of its income u/s 11. He held that the assessee was carrying on the business of rendering services not only to its members but also to non-members and therefore the provisions of Section 11(4A) were attracted, with the result that exemption u/s. 11(1) could be given only if (a) the business was incidental to the carrying out of the objects of the Trust and (b) separate books of accounts were maintained for the business. According to him, the activities of the asessee were not charitable in nature. The assessee’s appeal to the CIT (A) for the AY 2006-07 was accepted; the CIT(A) recorded a finding that none of the objects or activities undertaken by the assessee was sullied with a profit motive, that there was no business activity carried on by the assessee and, therefore, there was no need to maintain separate books of accounts for such activities. He also held that the generation of income was not a conclusive test for determining the charitable nature of the activities. He accordingly directed the AO to allow the exemption u/s 11 of the Act.

The Revenue carried the matter in appeal to the Tribunal in ITA No.1233/Delhi of 2010. The Tribunal held that the activities carried out by the assessee were “admittedly”in the nature of a business and, therefore, the provisions of Section 11(4A) were attracted, with the result that the assessee should maintain separate books of accounts for such activities. The Tribunal however held that the activities carried on by the assessee were charitable activities and a certificate of registration was also granted u/s 12A and, therefore, the only enquiry that can be carried out was whether the business carried on by the assessee was incidental to the attainment of the objects of the assessee and whether separate books of accounts were maintained for such business. The matter was thus restored by the Tribunal to the AO conducting the enquiry. Aggrieved, the assessee filed appeal before the High Court.

Having heard the parties, the High Court held that,

++ the questions of law sought to be urged on behalf of the appellant-assessee are several in number, but the crux of the issue is whether the Tribunal was right in law in holding that the provisions of Section 11 (4A) were attracted to the assessee’s case;

++ the nice question as to whether by rendering specific services to members and non-members for a fee, a trade, professional or similar association can be said to be carrying on a business activity needs to be examined. The further question to be addressed, with reference to Section 11(4A), would be whether such activities (which amount to a business) were incidental to the attainment of the objectives of trust or institution and whether separate books of accounts were maintained in respect of such activities. There can be no doubt that the activities of the nature described above, in the case of an assessee such as the present one, which is a trade association- Chamber of Commerce and Industry, established to protect the interests of trade and industry in Punjab, Haryana and Delhi- were activities which are incidental to the attainment of the objects of the chamber. We do not think that the Tribunal is justified in taking the view that the assessee, which is a chamber of commerce and industry, is carrying on business activities which require compliance with the conditions of Section 11(4A). In CIT, Madras vs. Andhra Chamber of Commerce, it was held by the Supreme Court that advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community; that prosperity would be shared also by those who engaged in trade, commerce and industry, but on that account the purpose was not rendered any the less an object of general public utility. Echoing these sentiments another Bench of equal strength of the Supreme Court in Commissioner of Income Tax, New Delhi vs. Federation of Indian Chambers of Commerce and Industries, New Delhi held that where the main object of the assessee was the promotion, protection and development of trade, commerce and industry in India, its income from conducting a trade fair, rent for space allotted and sale of entry and gate tickets, fees for arbitration etc. would be exempted from tax under Section 11 read with Section 2(15) of the Act. The “dominant purpose” test was applied to hold that the activities to earn income were not driven with the motive of profit-making. It would, therefore, appear that judicial thinking was never in favour of the view that the services performed by a trade, professional or similar association, such as a chamber of commerce and industry, were in pursuit of a business or trade with a profit motive;

++ section 10(6) of the Indian Income Tax Act, 1922 enacted as follows: “A trade, professional or similar association performing specific services for its members for remuneration definitely related to those services shall be deemed for the purpose of this section to carry on business in respect of those services, and the profits and gains therefrom shall be liable to tax accordingly.”;

++ a noticeable feature of the above provision is that the income from the specific services were “deemed for the purpose of this section”, to carry on business in respect of those services. The present Act, however, simply provides that the income derived by a trade, professional or similar association from specific services performed for its members shall be chargeable to income tax under the head “profits and gains of business”. The clause aims at destroying the principle of mutuality under which associations or combination of persons, in which both the contributors and the participators are identical, are kept away from the tax net on the principle of mutuality. The principle of mutuality is just this, namely, that where there is identity between contributors to and participators in a fund, there can arise no profit which can be made the subject matter of taxation. Section 28(iii) appears to have been enacted, as in the case of its predecessor, to bring to charge the surplus of a mutual association which would not otherwise be chargeable. The trade, professional or similar association, including a chamber of commerce and industry has no separate existence apart from the members constituting it and when the members pay fees for services rendered by the association and a surplus arises to the association, it actually belongs to the members who had availed of the service. Thus there is identity between the contributors to and participators in the surplus and under general principles of mutuality, the surplus ought not to be taxed. However, the clause has been enacted to ensure that such surplus does not enjoy any exemption. Since the surplus had to be brought to tax under a particular head, it was thought by the legislature that the head “profits and gains of business” would be the most appropriate head under which the surplus can be brought to tax. This does not, however, mean that a business is carried on by the association in the sense that there is a profit motive which drives the carrying on of the activity;

++ we are fortified in our view by a judgment of the Madras High Court where this question was directly considered in CIT vs. South Indian Film Chamber of Commerce wherein it was held that the underlying idea behind s. 28(iii) is that there must be a business from which income is derived and that in the course of such business specific services must be rendered for its members. It was further observed that the concept behind s. 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 profit-making was only an incident and not the means of achieving the object of public utility. So long as the object was charitable and so long as the income was not earned from an activity which was by itself designed to achieve the object of general public utility, the exemption cannot be denied;

++ in most of the cases, the services are performed in the true spirit of service to the members of the association (such as a chamber of commerce) and the fees charged are so calculated or fixed that it merely covers the costs incurred by the association in rendering the service. Since accuracy in matching the costs and the fees charged cannot be maintained consistently, there can arise a surplus. The mere arising of a surplus does not clothe the activity of performing the services for the members with a profit motive, which is essential in business. It has been observed by the Supreme Court in Surat Art Silk that where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. It was held as follows:- [“But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management.”];

++ the judgment of the Supreme Court in the case of Surat Art Silk is significant also for the reason that the earlier judgment in Indian Chamber of Commerce vs. CIT was overruled. It was held that the Court would not be justified in drawing the inference that the activity is driven by a profit motive merely because the activity resulted in profit. It was also held that “it was not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on, on no profit no loss basis or that profit shall be proscribed”;

++ the reason for the introduction of Section 10(6) of the old Act or Section 28(iii) of the new Act is, as already noted, to ignore the principle of mutuality and reach the surplus arising to the mutual association and this is clear from the fact that these provisions are confined to services performed by the association “for its members”. But at the same time, income received by the association from a non-member would be chargeable to tax because qua that activity, mutuality will be lacking since the recipient of the services is a non-member. There is no statutory provision as to what would happen if a mutual association deals with a non-member. It, however, stands to reason that 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;

++ the Tribunal in the present case disapproved the view taken by the Assessing Officer that by rendering professional services to members and non-members, it was not carrying on a charitable activity. This was because the assessee’s objects were charitable in nature and it was so registered under Section 12A. However, it tended to view the assessee’s activities as amounting to business. It even observed that “the admitted position of fact is that the assessee has been carrying on business activities”. This part of the order of the Tribunal was sought to be corrected by an application under Section 254(2) of the Act but that application was dismissed by the Tribunal, though with some clarification. The Tribunal noted that on this aspect the finding of the CIT(Appeals) was that the activities were carried on pursuant to the objects and, therefore, they do not constitute business. At the same breath it has also been observed that the receipts were earned by repetitive activities, which can rightly be termed as business. Having regard to the authorities which we have noticed above it is not proper to characterise the activities of the chamber as activities amounting to a business in the generally understood sense of the word, the most important feature of business being profit motive. It has not been suggested by the income tax authorities that the activities carried out by the assessee chamber were propelled by any profit motive. In such circumstances, it is proper to view the activities as driven by a charitable motive in the sense in which a charitable purpose is defined in Section 2(15) of the Act. In this view of the matter, we are satisfied that the provisions of Section 11(4A) are not attracted to the present case and a remand to the Assessing Officer for finding out whether the activities were incidental to the objectives of the trust and separate books of accounts were maintained for such business was unnecessary. We accordingly answer the substantial question of law framed by us in the negative, in favour of the assessee and against the Revenue. However, there shall be no order as to costs.