Society running newspaper wins tax exemption - charitable purpose trumps commercial activity.

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Case Name

Principal Commissioner of Income Tax vs. Servants of People Society (High Court of Delhi)

ITA 161/2021 & C.M.No.40492/2021

Date: 16th November 2021

Key Takeaways

• Charitable purpose over commercial form: Even if an organization engages in commercial activities, it can still maintain charitable status if profits are used exclusively for charitable purposes
• Profit motive test: The key test is whether there’s an intent to distribute profits to shareholders/owners, not whether commercial activities generate income
• Consistency principle: Tax authorities cannot grant multiple registrations and exemptions and then later challenge the same organization’s charitable status
• Proviso interpretation: The first proviso to Section 2(15) doesn’t automatically exclude entities conducting activities for consideration if they’re essentially charitable in nature

Issue

Can a society that runs commercial activities (printing press and newspaper) still qualify for charitable tax exemptions under the Income Tax Act when all profits are used for charitable purposes?

Facts

The Servants of People Society was running a printing press and publishing a newspaper as part of carrying out the mandate of Late Shri Gopa Bandhu Dass’s will . The society had been enjoying various tax benefits - they had registration under Section 12A, recognition under Section 10(23C)(vi), and exemption under Section 80G of the Income Tax Act .

The tax department challenged this for Assessment Year 2011-12, arguing that since the society was engaged in commercial activities (printing and publishing), they shouldn’t get charitable exemptions. The case went through multiple levels - the Assessing Officer initially denied the exemption, but the CIT(A) allowed it, then the ITAT upheld the CIT(A)'s decision, and finally the tax department appealed to the High Court.

Arguments

Tax Department’s Arguments:

The Principal Commissioner argued that :

1. The Tribunal was wrong to allow exemption under Section 11
2. The society shouldn’t be treated as charitable since their activities fell under “advancement of any other object of general public utility” and were hit by the amended proviso to Section 2(15)
3. The activities were commercial in nature and yielded income/profit
4. Commercial income can’t become charitable just because it’s applied for charitable objects
5. The case should be tested against the Supreme Court judgment in Additional Commissioner of Income Tax Gujarat vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC)

Society’s Arguments:

The society contended that :

1. They were a charitable institution and mere receipt of fees/income doesn’t make them commercial
2. They were carrying out the mandate of Late Shri Gopa Bandhu Dass’s will
3. Income generated was used for charitable purposes with no profit motive
4. They weren’t involved in trade, commerce or business in the sense intended by the proviso

Key Legal Precedents

The court relied on several important precedents:

1. Commissioner of Income Tax (Exemptions) Delhi vs. Association of State Road Transport Undertakings (ITA No.154/2021): The court established that “the first proviso to Section 2(15) does not exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee” and that “the object of introducing first proviso is to exclude organizations which are carrying on regular business with profit motive with intent to distribute the profit to the shareholders/owners”
2. India Trade Promotion Organization vs. DGIT(E) 53 Taxmann.com, 404 (Delhi) 2015: The Delhi High Court “upheld the constitution validity of the proviso of section 2(15)” but “read down the strict and literal interpretation” and held that “mere receipt of fee or charge cannot be said that the assessee is involved in any trade, commerce or business”
3. Ram Kumar Aggarwal & Anr. vs. Thawar Das (through LRs) (1999) 7 SCC 303: Established that High Court’s jurisdiction under Section 100 CPC is confined to substantial questions of law
4. State of Haryana & Ors. vs. Khalsa Motor Limited & Ors. (1990) 4 SCC 659: High Court cannot reverse concurrent findings of fact in second appeal
5. Hero Vinoth (Minor) vs. Seshammal (2006) 5 SCC 545: When two inferences are possible from facts, the lower court’s finding won’t be interfered with

Judgment

The Delhi High Court dismissed the tax department’s appeal. Here’s their reasoning:

The court found that the society was genuinely charitable because :

• The profit generated from printing press and newspaper was used for charitable purposes
• There was no profit motive in the activities
• The society wasn’t involved in trade, commerce or business with intent to earn and distribute profit
• The mischief of Proviso to Section 2(15) was not attracted

The court emphasized that the society was “charitable in nature as the profit, if any, made by the assessee/society is being ploughed back for charitable activities” . They also noted the inconsistency in the tax department’s position - they had themselves granted the society registration under Section 12A, recognition under Section 10(23C)(vi) and exemption under Section 80G .

The court concluded there was “no perversity in the findings of the CIT(A) and ITAT” and dismissed the appeal as “bereft of merit” .

FAQs

Q1: Does running a commercial business automatically disqualify an organization from charitable status?

A: No, not necessarily. The key test is the purpose and use of profits, not the nature of activities. If profits are used exclusively for charitable purposes without any distribution to owners/shareholders, charitable status can be maintained.

Q2: What is the “mischief” of the proviso to Section 2(15)?

A: The proviso was introduced to exclude organizations that carry on regular business with profit motive and intent to distribute profits to shareholders/owners. It’s not meant to catch genuine charitable organizations that happen to earn income through some commercial activities.

Q3: Can the tax department challenge charitable status after granting multiple registrations and exemptions?

A: While legally possible, courts will consider the principle of consistency. If the department has granted Section 12A registration, Section 10(23C) recognition, and Section 80G exemption, it becomes difficult to later argue the organization isn’t charitable.

Q4: What’s the difference between commercial activity and commercial motive?

A: Commercial activity refers to the nature of operations (like running a business), while commercial motive refers to the intent behind those operations. An organization can engage in commercial activities without having a commercial motive if the purpose is charitable.

Q5: How does this judgment affect other similar organizations?

A: This judgment reinforces that organizations engaged in income-generating activities can maintain charitable status if they meet the “no profit distribution” test and use income for charitable purposes. It provides clarity on interpreting the proviso to Section 2(15).

1. The appeal has been heard by way of video conferencing.

2. Present appeal has been filed challenging the order dated 17th September, 2019 passed by Delhi Bench ‘A’ of Income Tax Appellate Tribunal in ITA No. 4984/Del/2015 for the Assessment Year 2011-12, whereby the appeal filed by appellant was dismissed. The relevant portion of the impugned order is reproduced here in below:-

“5. We have heard both the parties and perused the records

especially the impugned order, Paper Book filed by the Assessee

and the case laws relied therein as well as the relevant provisions

of the Act on the issue in dispute. We find considerable cogency in

the contention of the Ld. Counsel for the assessee that the assesse is

a charitable institution and mere receipt of fees and income etc.

cannot be said that the assessee is involved in any trade, commerce

or business. The assessee is carrying the mandate of the Will of

Late Shri Gopa Bandhu Dass in running the printing press and the

newspaper and the income so generated is used for charitable

purposes and apparently there is no profit motive in the activities of

the assessee and as such it cannot be said that the assessee is

involved in any trade, commerce or business and as such the

mischief of the Proviso of section 2(15) is not apparently attracted.

We further note that the Hon'ble Delhi High Court in the case of

India Trade Promotion Organization vs. DGIT9E) 53

Taxmann.com, 404 (Delhi) 2015 order dated 22.1.2015 has upheld

the constitution validity of the proviso of section 2(15) which was

under challenge being discriminatory in view of the Article 14

(Equality before law) of the Constitution of India but the Hon’ble

High Court has read down the strict and literal interpretation of the

Proviso to Section 2(15) and has held that mere receipt of fee or

charge cannot be said that the assessee is involved in any trade,

commerce or business and has accordingly allowed the relief to the

aforesaid case. After considering all the facts and circumstances of

the case, we are of the considered view that the assessee is a

charitable and non-profit institution and also found that assessee is

not involved in any trade, commerce or business activity which

attracts the mischief of the Proviso of section 2(15) of the Act and

the assessee has been enjoying the exemption u/s. 11(1) and also

u/s. 10(23C)(iv) in the past and accordingly following the principle

of consistency the AO was rightly directed to allow the exemption to

the assessee u/s. 11( 1 )of Act with all the consequential benefits by

the Ld. CIT(A). Hence, we do not find any infirmity in the order of

the Ld. CIT(A), therefore, we uphold the same and reject the

grounds raised by the Revenue and accordingly, dismiss the appeal

filed by the Revenue.

3. In the present appeal, the Principal Commissioner of Income Tax

(Exemptions) Delhi has proposed the following questions of law:-

“(1)Whether Hon’ble Income Tax Appellate Tribunal was correct in

the eyes of the law in allowing benefit of exemption u/s 11 of the

Income Tax Act, 1961 in the facts and circumstances of the present

case?

(2)Whether Hon’ble income Tax Appellate Tribunal was justified in

the eyes of law in treating the assessee as a charitable institution,

even when the activities of the assessed fall under the last limb of

Section 2(15) of the Income Tax Act, 1961, i.e. advancement of any

other object of general public utility and the same is hit by the

amended proviso to the said section?

(3)Whether Hon’ble Income Tax Appellate Tribunal was justified in

the eyes of law in passing the impugned order overlooking the fact

that the activities carried out by the assessee yielded income/profit to

the society and are commercial in nature?

(4)Whether Hon’ble Income Tax Appellate Tribunal was justified in

the eyes of law in holding the income earned by commercial activity

is charitable because of the application of the said income for the

charitable-object of the society?

(5)Whether the Ld. Income Tax Appellate Tribunal was justified in

the eye of law in passing the impugned order without testing the case

in terms of the Judgement of the Constitutional Bench of Hon’ble

Supreme Court in the case of Additional Commissioner of Income

Tax Gujarat Vs. Surat Art Silk Cloth Manufacturers

Association(1980) 121 ITR 1 (SC)?”

4. Learned Counsel for the appellant states that the Tribunal erred in

allowing benefit of exemption under Section 11 of the Income Tax Act,

1961 (hereinafter referred to as the ‘Act’) in the facts and circumstances of the present case. He submits that the Tribunal erred in treating the assessee as a charitable institution, even when the activities of the assessee fell under the last limb of Section 2(15) of the Act. He emphasises that the activities carried out by the assessee yielded income/profit to the society and were commercial in nature.

5. This Court in ITA No.154/2021 titled ‘Commissioner of Income Tax

(Exemptions) Delhi vs. Association of State Road Transport Undertakings

has held that it is settled law that the first proviso to Section 2(15) of the Act does not exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. This Court has further held that the object of introducing first proviso is to exclude organizations which are carrying on regular business with profit motive with intent to distribute the profit to the shareholders/owners.

6. A perusal of the paper book reveals that the assessee/society is

running a printing press and publishing a newspaper. The profit so

generated is used for charitable purposes and apparently there is no profit

motive in the activities of the assessee. As such it cannot be said that the

assessee is involved in any trade, commerce or business. Consequently, the

mischief of Proviso to Section 2(15) of the Act is not attracted.

7. In any event, the assessee/society is charitable in nature as the profit,

if any, made by the assessee/society is being ploughed back for charitable

activities. Further, the appellant itself has granted the assessee registration under Section 12A, recognition under Section 10(23C)(vi) and Exemption under Section 80G of the Act.

8. Consequently, this Court is in agreement with the findings of the

CIT(A) and ITAT that the assessee/society does not carry on any business,

trade or commerce with the intent of earning and distributing profit.

9. The Supreme Court in the case of Ram Kumar Aggarwal & Anr. vs.

Thawar Das (through LRs), (1999) 7 SCC 303 has reiterated that under

Section 100 of the Code of Civil Procedure the jurisdiction of the High

Court to interfere with the orders passed by the Courts below is confined to

hearing on substantial question of law and interference with finding of the

fact is not warranted if it involves re-appreciation of evidence. Further, the Supreme Court in State of Haryana & Ors. vs. Khalsa Motor Limited &

Ors., (1990) 4 SCC 659 has held that the High Court was not justified in law

in reversing, in second appeal, the concurrent finding of the fact recorded by both the Courts below. The Supreme Court in Hero Vinoth (Minor) vs.

Seshammal, (2006) 5 SCC 545 has also held that “in a case where from a

given set of circumstances two inferences of fact are possible, the one drawn by the lower appellate court will not be interfered by the High Court in second appeal. Adopting any other approach is not permissible.” It has also held that there is a difference between question of law and a “substantial question of law”. Consequently, this Court finds that there is no perversity in the findings of the CIT(A) and ITAT.

10. Accordingly, the present appeal being bereft of merit is dismissed

along with pending application.

MANMOHAN, J

NAVIN CHAWLA, J

NOVEMBER 16, 2021