Whether it is imperative that in order to fall under residuary clause 'general public utility', a charitable institution has to be funded by voluntary contributions - NO: Delhi HC

THE issues before the Bench are - Whether in order to discern whether an activity is business, trade or commerce, profit motive is determinative and a critical factor; Whether when the propelling motive of a concern is 'general public good', it can be said it is working for profit; Whether in case an assessee carries on charitable activity under the residuary head 'general public utility', it would be considered as business; Whether it is imperative that in order to fall under the residuary clause 'general public utility', a charitable institution has to be funded by
voluntary contributions; Whether in case of charitable institutions, accumulation of funds is for business purposes only and Whether activity performed with the object of providing services to trade, commerce or business can be considered as of charitable nature. And the assessee's writ is allowed.

Facts of the case

Assessee is a 'Not-for-Profit' Society promoted by the Ministry of Commerce and Indian Industry, duly registered under the Societies Registration Act, 1860. It was registered as a charitable society in the year 1996 under the residuary clause of Section 2(15). It had prayed for quashing of the order passed by DGIT(E) denying them registration u/s 10(23C)(iv) and for issue of mandamus directing that registration/approval under the said Section should be granted. Department had not disputed the identity of the petitioner society founded and promoted by Department of Commerce, Ministry of Commerce and Industry, Government of India. It was also not disputed that object of assessee inter-alia includes creating awareness and promoting study of Global Standards regarding Company Prefix Number (GS1 standards), location numbering, EDI, ECR, automatic data collection and related services and technologies; research and development into these Global Standards; and providing education in universities and colleges regarding these standards. Department had accepted that the petitioner were carrying on charitable activity under the residuary heading "any other object of general public utility". Department had granted exemption to the petitioner u/s 12A vide w.e.f. 9th March, 1998 and u/s 10(23C)(iv) for AY 1996-97 onwards. Thus, there cannot be any dispute and the department had accepted that the object and purpose of the petitioner society was charitable i.e. advancement of object of general public utility.

Nevertheless the petitioner had been denied registration u/s 10(23C)(iv) on the basis that it had acquired intellectual property rights qua bar coding system from GS1 Global Office, Belgium and permits use of these intellectual property rights by third parties under licence agreements for initial registration fee of Rs 20,000 and subsequent annual registration fee of Rs 4000, enhanced to Rs 5000 from financial year 2006-07 onwards. No charitable activity was involved in permitting use of intellectual property right for consideration which was nothing but earning royalty income. This activity of the petitioner was in the nature of trade, commerce or business. According to the revenue, assessee had earned substantial net profits from business of coding system as the fee/income earned was significantly higher than the direct costs. Secondly the assessee was not maintaining separate books of accounts for the business/commercial activity, i.e. licensing bar coding system, and did not intended to do so in future. Thus there was violation of Section 11(4) and (4A). Thereby, the petitioner had violated proviso to Section 10(23C)(iv) for AYs 2007-08, 2006-07, 2005-06 and the petitioner does not meet the specified conditions of Section 10(23C)(iv) for AYs years 2008-09 onwards. In the present case the period in question is both prior and subsequent to the amendments made applicable vide Finance Act 2008 with effect from 1.4.2009. It was clear from Circular No. 11 of 2008 that the new proviso of Section 2(15) was applicable to the assessees who were engaged in commercial activities, i.e. carrying on business, trade or commerce, in the garb of 'public utility' to avoid tax liability as it was noticed that object of 'general public utility' was sometimes only a mask or device to hide the true purpose which was "trade, commerce or business."

Held that,

++ in the present case, 'the business' is not held in trust and neither is 'the business' feeding the charity. The very 'act or activity of charity' as claimed by the petitioner is regarded by the revenue as nothing but business, trade or commerce. Money received, of course is used and utilized for the charitable activities. Four reasons are elucidated and propound in the impugned order to state that the petitioner is engaged in business, trade or commerce and aforesaid encapsulated in the impugned order. Petitioner has acquired intellectual property rights, receives fee from third parties, which is nothing but payment of royalty, there is huge surplus of receipts over expenditure and payment is made by the petitioner to GS1 Global Services, Belgium. Can it be said that the petitioner is engaged in activities which constitute business, commerce or trade? As observed above, legal terms 'trade, commerce, or business' in Section 2(15), means activity undertaken with a view to make or earn profit. Profit motive is determinative and a critical factor to discern whether an activity is business, trade or commerce;

++ revenue acknowledges that the petitioner enjoys monopoly and has exclusive rights to issue global bar coding system GS1 in India. However the petitioner is not dealing or treating the prized rights as a right, which is to be exploited commercially to earn or generate profits. A coding system of this nature if marketed on commercial lines with profit motive would amount to business but when the underlying and propelling motive is not to earn profits or commercially exploit the rights but 'general public good' i.e. to promote and make GS1 coding system available to Indian traders, manufacturers, government etc, it will fail the test of business and meets the touchstone of charity. The petitioner is not directly or indirectly subjecting their activity to market mechanism/ dynamics (i.e. demand and supply), rather it is motivated and prompted to serve the beneficiaries. This is not a case of commercial exploitation of intellectual property rights to earn profits but rather a case where a token fee has been fixed and payable by the user of the global identification system;

++ we find that the petitioner fulfills the charitable activity test. It is apparent to us that Revenue has taken a contradictory stand as they have submitted and accepted that the petitioner carries on charitable activity under the residuary head 'general public utility' but simultaneously regards the said activity as business. Thus the contention of the Revenue that the petitioner charges fee and, therefore, is carrying on business, has to be rejected. The intention behind the entire activity is philanthropic and not to recoup or reimburse in monetary terms what is given to the beneficiaries. Element of give and take is missing, but decisive element of bequeathing is present. In the absence of 'profit motive' and charity being the primary and sole purpose behind the activities of the petitioner is perspicuously discernible and perceptible;

++ fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long-term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under the residuary clause 'general public utility'. The impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, substantially or in part must be funded by voluntary contributions. No such requirement has been pointed out or argued. A practical and pragmatic view is required when we examine the data, which should be analyzed objectively and a narrow and coloured view will be counter-productive and contrary to the language of Section 2(15) of the Act;

++ under the provisions of the Act, a charitable institution/ organization is to utilize specific percentage of their funds/income within the assessment year in question and carry forward is allowed subject to strict stipulations. There is no allegation or statement in the impugned order dated 17th November, 2008 that the petitioner has violated the said condition or requirements of the statute. No doubt that the petitioner has to make payment of part of fees collected to GS1 Global services, Belgium but this is natural as GS1 system is global and worldwide system. Petitioner has pointed out that during past years they have been receiving amounts from Government of India for furtherance of their objectives. A fact which is not denied and disputed. The petitioner is not only concerned with enrollment of members who are entitled to GS1 identification system but involved in promoting and spreading awareness about GS1 identification system and making it available to Indians for a small fee. Petitioner has to organize training camps, workshops and seminars all over India and as well as for Government departments/bodies and help them adopt the system. They have to publish material highlighting advantages of GS1 identification and how this can benefit the manufacturers and traders;

++ petitioner is providing services to persons engaged in trade, commerce or business who are the beneficiaries. Question is whether the legislative intent is to exclude from definition of charitable purpose any activity which has the aim and object of providing services to trade, commerce or business. The matter is not free from doubt but there are good reasons to hold that the bar or probation is not with reference to activity of the beneficiary but the activity of the assessee under the residuary clause. The intent is to exclude an assessee who carries on business, trade or commerce to feed the charitable activities under the last limb. Application of income earned from business is no longer relevant and cannot help an assessee. Circular No.11 of 2008 is to the said effect and does not promote contrary interpretation. The said circular clearly stipulates that the object of 'general public utility' should not be a mask or a device to hide the true purpose, which is trade, commerce or business or rendering any service in relation to trade, commerce or business. Director General (Exemption) has not interpreted the first proviso in this manner in this case. 7th proviso to Section 10(23C) of the Act supports our interpretation and the legislature has not omitted or suitably amended the said proviso to support the contrary interpretation. Even otherwise, the beneficiaries of GS1 system are not confined or restricted to persons from trade, commerce or business. The beneficiaries are present everywhere and the advantages are permeating and universal and would include consumers, government, beneficiaries of PDS etc. On the basis of reasoning given in the impugned order, we do not think that the petitioner can be denied benefit of registration/notification u/s 10(23C)(iv). In view of the aforesaid discussion, we allow the present writ petition and issue writ of certiorari quashing the order dated 17th November, 2008 and mandamus is issued directing the respondents to grant approval under Section 10(23C)(iv) and the same shall be issued within six weeks from the date copy of this order is received. The writ petition stands disposed of. There will be no orders as to cost.