Tax Treatment of Capital Gains Under MAT Provisions Remains Unclear

December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 1 i

CONTENTS

ii December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 2

VOLUME 22 • ISSUE 7 • DECEMBER 1-15, 2011

contents
FOUNDER EDITOR :
U.K. BHARGAVA Direct Tax Laws
EDITOR : 605 Treatment of Capital Gains
RAKESH BHARGAVA under the provisions of
HON. COORDINATING EDITOR : MAT//S. RAJARATNAM
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December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 3 iii

CONTENTS

677 Accounts & Audit in Brief//RAJESH GOSAIN Service Tax
684 Carbon credits : A new dimension to the
accounting and taxation methods//DR. SUSHMA 694 Some Controversies in Service Tax//V.S. DATEY
BAREJA 701 The Ongoing Battle on Validity of Levy of Service
Tax on Renting of Immovable Property for
Commercial/Business use//V. PATTABHIRAMAN
708 Hindu marriage is a religious ceremony besides
being a social function//T.N. PANDEY

Corporate Laws
688 Conversion of Chartered Accountant (“CA”)
Firms into Limited Liability Partnerships (“LLP”)
//SARIKA GOSAIN

713 Service Tax Penalty & Reasonable Cause//
GAURAV GUPTA

Investment Planning
721 Recent changes in PPF & Small Saving Schemes
w.e.f. 1-12-2011

Stock Market
727 How shareholders are cheated by some promot-
ers//ARUN K. MUKHERJEE

•••

iv December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 4

DIRECT TAX LAWS

INTRODUCTION
1. Mr. N. A. Palkhivala, the eminent jurist,
described the tax on book profits as
"constitutionally illegal, economically unsound
and morally repugnant". But such tax has
marched ahead with liability becoming stiffer
with the each Finance Act. The tax liability
now referred to as Minimum Alternate Tax
(MAT) has been in vogue in different garbs
in sections 115J, 115JA and now in section
115JB, mutilating the book profits with many
deeming provisions out distancing book profits
computed under the company law with the
liability further enhanced with the progressive
hike in rates of taxes. One of the outstanding
issues, which is awaiting decision of the Apex
Court is regarding the treatment of capital
gains in the computation of the book profits.

2. RELEVANT JUDICIAL PRECEDENTS
2.1 The Ruling in Sutlej Cotton Mills Ltd.’s
case - The assessee-company had taken the
amount of sale proceeds of capital assets directly
to reserves without routing it through the Profit
& Loss Account (P&L). The Assessing Officer
questioned the computation in view of the fact
that the treatment of gains in the accounts did
not accord with the requirements of Parts II
and III of Schedule VI of the Companies Act,
and that, therefore, it had to be added to the
disclosed book profits so that liability for tax
S. RAJARATNAM on capital gains was not avoided. This treatment
Advocate & Tax Management was affirmed in first appeal and the matter
Consultant came before the Special Bench of the Tribunal
in Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993]
45 ITD 22 (Cal.)(SB).
The Tribunal did not question the right of the
Assessing Officer to recast the profit and loss
account. It did not agree with the contention

December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 5 605

DIRECT TAX LAWS

on behalf of the assessee, that whatever is assessee was entitled to treat the accretion to
shown in the books is bound to be accepted fixed assets, when realised, as capital reserve,
by the Assessing Officer "without questioning", particularly when the realised amount is
since acceptance of such a view would mean reinvested in another asset and not available
that the Assessing Officer is bound to accept for distribution as profits following the rule
book profits even in case of fraud or of ‘purposive interpretation’ in the light of
misrepresentation or where there has been a objects expressed in the Finance Minister’s speech
total disregard of the provisions of Parts-II and Memorandum explaining the provision in
and III of the Schedule VI of the Companies the absence of any allegation of fraud or
Act, which is the subject-matter of cross reference misrepresentation. In other words, the disclosed
in section 115J as well. There can be no inference, book profit cannot be lightly disturbed. The
that accounts approved by the Board of Directors Assessing Officer has got a right to make
have been prepared according to the requirements adjustments but only those specifically authorised
of company law. There is an implied authority under section 115J and not any other adjustment,
for the Assessing Officer to verify and satisfy where the profits in the profit and loss account
himself, whether the net profit as shown in are rightly computed as found in the instant
the P&L account is based upon accounts prepared case.
in accordance with Parts-II and III of the
The decision of the Supreme Court in McDowell
Schedule VI.
& Co. v. CTO [1985] 154 ITR 148/22 Taxman
The Tribunal would not, however, accept the 1, which was pressed into service by the revenue,
argument of the Revenue that the assessee was also considered by the Tribunal, but
knowing fully well, that it would be caught concluded that a mere tax mitigation cannot
within the mischief of section 115J, if capital be tax avoidance as decided by the Privy Council
gains had been credited to the P&L Account, in Challenge Corporation 187-(1) AC 155, where
took it to the capital reserve with the sole for revaluation of shares in the facts of the
object of avoiding tax. The Tribunal found case, it was held, cannot be treated as a colourable
that considering the objective of the provision action. A permissible accounting treatment within
to tax zero tax companies and the requirement the frame work of law with the incidental tax
of the Companies Act as regards computation advantage cannot be dismissed by characterising
of income as required under the company law, it as a "device".
the transaction relating to capital structure of
The ruling in Sutlej Cotton Mills Ltd.’s case
the company could not and need not form
(supra) was followed in GKW Ltd. v. Jt. CIT
part of Profit and Loss Account, which normally
[2000] 74 ITD 161 (Cal.), where it was decided
represents operating profits from trading
that profit on sale of capital assets cannot
transactions and not transactions relating to
form part of the book profits. In coming to the
investments. The need for disclosure of the
conclusion, the Tribunal cited two decisions in
profit on sale of investments is satisfied, if the
Pandit Deo Sharma v. CIT [1953] 23 ITR 226
information relating to them is available as a
(All.) and CIT v. Sugauli Sugar Works (P.) Ltd.
part of the accounts and not necessarily by
[1983] 140 ITR 286/[1981] 7 Taxman 163 (Cal.).
credit to the profit and loss account. There is
In the latter case, it was decided in the context
support for such a view in Spicer and Pegler’s
of section 41(1), that a mere credit in the
‘Book Keeping and Accounts’ and also in the
accounts does not justify taxation, if it was not
language of Parts-II and III of Schedule VI of
normal business profit. The decision of the
the Companies Act itself.
Calcutta High Court has since been affirmed
It was felt by the Tribunal as a matter of in CIT v. Suguali Sugar Works (P.) Ltd. [1999]
sound accepted accounting practice, that the 236 ITR 518/102 Taxman 713 (SC).

606 December 1 to 15, 2011 Taxmann’s Corporate Professionals Today Vol. 22 n 6

2.2 The ruling in Veekaylal Investment’s case - loss account but also as equally, if not more
The well-reasoned decision of the Special Bench importantly, in the balance sheet with Schedules
of the Tribunal in Sutlej Cotton Mills Ltd.’s case and Notes on Accounts.
(supra) has been specifically overruled by the
In Needle Industries (I) Ltd. v. CIT [1990] 183
Bombay High Court in CIT v. Veekaylal Investment
ITR 393/[1989] 46 Taxman 93 (Mad.), where
Co. (P.) Ltd. [2001] 249 ITR 597/116 Taxman
the company had credited insurance monies
104. The main reason, though not the sole
for loss of stocks due to fire directly to the
reason of the High Court, runs as under :
reserves, the inference was that it was sufficient
“The important thing to be noted is that disclosure, so that jurisdiction even within the
while calculating the total income under shorter time-limit under section 147(b) was
the Income-tax Act, the assessee is required held to be not available. The High Court found
to take into account income by way of that the credit to the reserves in the balance
capital gains under section 45 of the Income- sheet is sufficient information.
tax Act. In the circumstances, one fails
One has only to point out that moneys received
to understand as to how in computing
towards share capital, for example, is always
the book profits under the Companies
disclosed in the balance sheet and is not expected
Act, the assessee-company cannot consider
to be routed through profit and loss account.
capital gains for the purposes of computing
book profits under section 115J of the There is also a direct authority in CIT v. N.
Act.” Guin & Co. (P.) Ltd. [1979] 116 ITR 475/1
Taxman 124 (Cal.) for the view, that capital
There is a clear misdirection, in law, in the
gains cannot be equated with commercial profits
above reasoning, because section 45 could have
in the context of additional tax under section
no application, because of the non obstante
23A (now deleted) for inadequate distribution
clause with which section 115J (now sections
of dividend. It was decided with reference to
115JA and 115JB) is prefaced. Capital gain is
Palmer’s Company Law and Spicer and Pegler’s
a class of income deemed as income for purposes
Book Keeping and Accounts, that divisible profits
of computation of statutory income and cannot,
in business sense cannot include reserves and
therefore, be part of taxable book profits.
capital profits for purposes of distribution of
Accounting of book profits has to conform to
dividend by businessmen and accountants. The
accounting principles, mandatory accounting
Legislature itself had made a sharp distinction
standards and requirements of company law.
between profits and gains of business on one
The High Court has, no doubt, also justified
hand and capital gains on the other. At any
its decision on the further argument, that clause
rate, it is for the directors to decide, whether
(2) of Part II of Schedule VI of the Companies
the surplus realised on sale of capital asset
Act would require disclosure of non-recurring
should be treated as profits of the company
transactions of an exceptional nature, so that
and where it is channelised to reserves, "it is
such disclosure is necessary, whether it is on
not for the Income-tax Officer to lay down
capital or revenue account. What had been
that it should have been treated as profits".
overlooked is that, disclosure does not mean
Where the admitted position is that the directors
that it should be shown as income in profit
have taken the surplus to reserves, it was held
and loss account, even where it does not have
in this case, that such treatment is bound to
the character of income as is commonly
be accepted. This law should have an equal
understood. Information relating to capital gains
application for purposes of book profit tax,
is bound to be reported in the final accounts
the object of which is also to tax income,
of the assessee like various other items relating
which is not distributed as dividend. It is not,
to any company required to be given to the
therefore, surprising that the Special Bench of
shareholders not only by way of profit and


DIRECT TAX LAWS

the Tribunal in Sutlej Cotton Mills Ltd.’s case therefore, would be, what is not required to
(supra) relied upon this decision. be included in the case of deemed income like
capital gains, should not form part of book
2.2.1 Aftermath of Veekaylal’s case - The Tribunal
profits irrespective of accounting treatment.
in Kopran Pharmaceuticals Ltd. v. Dy. CIT [2009]
119 ITD 355 (Mum.) upheld the inclusion of In another case dealing with capital gains, the
capital gains as taxable book profits, though assessee had sold a rubber estate and claimed
it was taken by the assessee directly to the that the surplus was exempt as an agricultural
reserves following the decision in Veekaylal income, so as to be outside the purview of
Investment Co. (P.) Ltd.’s case (supra) as the taxation, whether it be in computation of statutory
decision was that of the jurisdictional High income or book profits. The Tribunal in Harrisons
Court. Same view was taken by the Tribunal Malayalam Ltd. v. Asstt. CIT [2009] 315 ITR
in Growth Avenue Securities (P.) Ltd. v. Dy. CIT (AT) 1/32 SOT 497 (Cochin) decided the issue
[2010] 126 ITD 179 (Delhi). on the basis that the sale of rubber estate by
way of slump sale of agricultural land has
Where the capital gains were credited to profit
character of an agricultural income and that
and loss account, it was treated as the only
the surplus is not, therefore, includible as a
justification for inclusion in CIT v. Indo Marine
part of taxable book profits. The Tribunal
Agencies (Kerala) (P.) Ltd. [2005] 279 ITR 372
adverted to the decisions of the several High
(Ker.), so that the controversy as to whether
Court’s including that of the Supreme Court
accounting treatment will make a difference
in Singhai Rakesh Kumar v. Union of India [2001]
to liability persists. This view was adopted by
247 ITR 150/115 Taxman 101 for its inference.
the Tribunal in ITO v. Frigsales (India) Ltd.
Being exempt under section 10, it fell outside
[2005] 4 SOT 376 (Mum.), where capital gains
the purview of the Minimum Alternate Tax
were credited to profit and loss account. Where
under section 115JB. In the view taken by the
the assessee had credited the gains in the P&L
Tribunal, it was not necessary to consider the
Account, the High Court in N.J. Jose & Co. (P.)
larger question, whether capital gains could
Ltd. v. Asstt. CIT [2010] 321 ITR 132/[2008]
be treated as part of income for purposes of
174 Taxman 141 (Ker.) found that there is no
MAT steering clear of the subsisting controversy.
provision for exclusion of such income in the
list of adjustments permitted under the Where the assessee had availed of the benefit
Explanation to section 115J. The same view of tax exemption for capital gains by investing
was taken in respect of capital gains on transfer the proceeds in approved bonds under section
of business by way of slump sale in CIT v. 54E, the issue was whether even in such a
Brindavan Beverages Ltd. [2010] 321 ITR 197/ case, non-taxable capital gains on account of
186 Taxman 233 (Kar.), in the light of the the relief, could be treated as liable for book
preponderant view in favour of including capital profits tax. Where capital gains are included
gains, where it is taken into account in the as part of the book profits, there is no entitlement
P&L account by the assessee. to concessions for such capital gains as was
found in Nafab India (P.) Ltd. v. Dy. CIT [2005]
Weight of evidence on the basis of decision
92 ITD 343 (Delhi).
in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/
122 Taxman 562 (SC) would appear to favour A view adverse to the taxpayer relying upon
the inference of liability on the basis of accounting decision in Veekaylal Investment Co. (P.) Ltd.’s
treatment, but the non-controversial inference, case (supra) was taken by the Special Bench
in law, is that mere accounting treatment cannot of the Tribunal in Rain Commodities Ltd. v. Dy.
create a liability in the context of computation CIT [2010] 4 ITR (Trib.) 551/40 SOT 265 (Hyd.)
of income. Should such a law be inapplicable (SB) in respect of long-term capital gains in
for book profits tax? The better reasoning, the view that exemption under section 47(iv)


available for transfer of asset to wholly owned treated as part of book profits. Any other view
subsidiary, normally available, will not be would make the tax on book profits a mockery
available for purposes of computation of book by making the taxable book profits even more
profits under section 115JB overlooking the different from the real book profits.
fact that the question of section 47 would arise
only where section 45 itself is applicable, and
CONCLUSION
that both the section 45 or 47 should not be
applicable because of the non obstante clause 3. The decision in Veekaylal Investment Co. (P.)
prefacing section 115JB. If section 45 is applicable, Ltd.’s case (supra) would need review in the
there should be no reason why exemption under light of reasoning in Sutlej Cotton Mills Ltd.’s
section 47 should not be applicable. But in this case (supra) and in the view that it is superseded,
case, the assessee had included the capital where capital gains is not credited to the profit
gains by crediting the same to the profit and and loss account, so that it may not be open
loss account but claimed it as a deduction in to the Assessing Officer to treat it as book
the computation of book profits, so that the profits, because of the bar against distortion
decision in Apollo Tyres Ltd.’s case (supra) was of accounts, which have become final, by
also relied upon. Where the assessee unwittingly adjustments not authorised by the Explanation
or under the wrong impression that the audit to the provision. If this could be the final
guidelines which require disclosure are view, it would make a difference between two
understood as requiring credit to the profit companies with different accounting treatment
and loss account, such credit invites liability, of such capital gains, so that a clarification or
where the accounting entries are treated as review may well be required as regards
binding. It is an unsatisfactory position of law, application of Apollo Tyre Ltd.’s case (supra) as
if this is the law. Incidentally, audit guidelines well, whether the income as per profit and
are sometimes understood as requiring every loss account is so sacrosanct as to be unalterable,
credit to the reserves to be routed through a point dealt with more satisfactorily in Sutlej
profit and loss account, but such guidelines Cotton Mills Ltd.’s case (supra), when it did not
do not bind the company, so that such take a rigid view on accounting treatment, but
understanding at best may only require the based its decision on merits of the case.
Auditor to record his qualification.
Now that this tax has to be carried over to
In case of depreciable assets, accounting the Direct Taxes Code with the same uncertainty
principles require the surplus to the extent of relating to treatment of capital gains, one would
depreciation allowed to be credited back to wish the reasonable interpretation confining
profit and loss account, so that the tax on the tax to real book profits which would find
capital gains relating to that extent cannot official acceptance too, by necessary amendment
possibly avoid liability, but even in such a to the Bill before it becomes a law.
case, the surplus over original cost cannot be
•••


DIRECT TAX LAWS
DIRECT TAX LAWS

INTRODUCTION

A Critical 1. Section 40(a)(ia) was introduced in the Income-
tax Act, 1961 by the Finance Act, 2004. The
said provision was introduced for better

Analysis of
compliance of TDS provisions. It has resulted
in augmenting the revenue through the
disallowance of various expenses on which
TDS is not deducted by the assessees. Under

the provisions the provisions of section 40(a)(ia), read with
TDS provisions the A.O. can disallow the
expenses where TDS is not deducted or paid

of section
in time with respect to the expenses claimed
by the assessee. It disallows the claim of even
genuine and admissible expenses claimed by
an assessee under the head “Income from

40(a)(ia)
Business & Profession”, if the assessee does
not deduct TDS on such expenses. The default
in deduction of TDS or its non-payment would
also result in levy of interest or penalty as
provided for under section 201, under section
221 and under section 271C. The Act also
provides for prosecution proceedings under
section 276B. The hue and cry over such a
harsh provision, is in continuum, especially
when the High Courts of Madras and Punjab
& Haryana have upheld the vires of the provision.
However, in view of hardship faced by the
assessees and different representations made,
the Finance Act, 2010 has liberalised the
provisions of section 40(a)(ia) w.e.f. AY 2010-
11 as per which the assessee will be entitled
to deduction of expenses if he has deposited
the TDS on or before the due date of filing
of return under section 139(1). In this article
some of the related aspects and recent cases
have been discussed.

NARAYAN JAIN
Advocate & Tax Consultant
EXPENSES WHICH ARE ALLOWED
SUBJECT TO DEDUCTION AND DEPOSIT
OF TDS (WHERE THE PAYMENT IS MADE
TO A RESIDENT)
2. As per section 40(a)(ia), the following payments
made to a resident shall be allowed as deduction


only if tax is deducted at source as per the during the previous year but paid after the
provisions of Chapter XVII-B and is deposited due date specified under section 139(1), such
as per the provisions of section 200(1) : an expenditure shall be allowed as a deduction
in computing the income of the previous year
(a) Interest - section 193 or section 194A (w.e.f.
in which such tax has been paid.
Asst. Year 2005-06)
(b) Payment to contractors/sub-contractors -
section 194C (w.e.f. Asst. Year 2005-06)
AMENDMENT MADE BY THE FINANCE
ACT, 2010 W.E.F. ASST. YEAR 2010-11
(c) Commission or brokerage - section 194H
(w.e.f. Asst. Year 2005-06) 3. Relaxing the provisions of section 40(a)(ia)
- Whether clarificatory in nature and with a
(d) Fees for technical services, fees for pro-
retrospective effect?
fessional services under section 194J (w.e.f.
Asst. Year 2005-06) and The matter was dealt with by the Mumbai
Special Bench of ITAT in Bharati Shipyard Ltd.
(e) Rent under section 194-I [w.e.f. Asst. Year v. Dy. CIT [2011] 132 ITD 53/13 taxmann.com
2007-08] 101 wherein it was held that any amendment
(f) Royalty under section 194J [w.e.f. Asst. which has not been given retrospective effect
Year 2007-08] by the Legislature, cannot be construed as
retrospective on solitary ground that original
However, in view of hardship faced by the provision caused some hardship to assessees.
assessees and different representations made, Relevant criteria to be taken into consideration
the Finance Act, 2010 has liberalised the for arriving at decision about retrospective or
provisions of section 40(a)(ia) w.e.f. Asst. Year prospective effect of a later provision, is to
2010-11. As per the amended provisions the unearth intention of the Legislature at time of
assessee will be entitled to deduction of introducing original provision and not whether
expenses if the assessee has paid the tax it caused hardship to taxpayers. If it was very
deducted at source (which was deducted/ well known at time of inserting original provision
deductible anytime during the previous year) that it is going to be harsh, then any subsequent
on or before the due date of filing of return relaxation in it will not be retrospective unless
under section 139(1). expressly so stated. The amendment brought
The Finance Act, 2008 had earlier granted out by Finance Act, 2010 to section 40(a)(ia)
marginal relief with retrospective effective from w.e.f. 1-4-2010 has only extended time for
the Asst. Year 2005-06 by providing that where depositing tax deducted at source by due date
the tax is deducted in the last month of the under section 139(1) from earlier lesser time
previous year, i.e., March, then the deduction available for compliance; other consequences
of expenses was allowed if the payment was of section 40(a)(ia) are still present in provision.
made within the due date of filing of return Thus, amendment by Finance Act, 2010 is not
of income under section 139(1). However, if aimed at removing any unintended hardship
to assessee, but to relax intended hardship to
the deduction was made between April to
some extent by increasing time available for
February and the tax was not paid within the
deposit of tax. When the amendment does not
previous year, deduction for such expenses
remove unintended hardship or is not
was not available.
explanatory, same cannot be held to be
2.1 If the TDS is paid after the due date of retrospective unless it is specifically provided
filing the return - In this connection it has now for. Therefore, amendment brought out by
been clarified by proviso to section 40(a)(ia) Finance Act, 2010 to section 40(a)(ia) w.e.f.
that where tax has been deducted after the 1-4-2010 being not remedial and curative in
end of previous year or has been deducted nature cannot be declared as having


DIRECT TAX LAWS

retrospective effect from date of insertion of liability. No exception can be taken to
provision, i.e., 1-4-2005. incorporation of a provision which excludes
right to seek permissible deduction in the event
Earlier decisions : The Mumbai Bench of ITAT
of failure of the assessee to deduct or to deposit
in the case of Bansal Parivahan (India) (P.) Ltd.
the deducted tax. Moreover, the proviso relaxes
v. ITO [2011] 43 SOT 619 and Ahmedabad Bench
the rigour. If in the subsequent years, one
in the case of Kanubhai Ramjibhai Makwana v.
makes the deduction or makes the deposit,
ITO [2011] 44 SOT 264/9 taxmann.com 55 had
one gets the benefit of deduction. The provision
held that the amendment by Finance Act, 2010
cannot be held to be harsh. There is no inherent
is remedial in nature, designed to eliminate
lack of jurisdiction on the part of the Legislature
unintended consequences which may cause
in enacting the provision providing for penalty
undue hardship to taxpayers and which made
for evasion of statutory liability.
the provision unworkable or unjust in a specific
situation is clarificatory in nature. The Earlier also at the time of introduction of section
amendment has to be treated as retrospective 40(a)(ia) into the statute book, the constitutionality
w.e.f. 1-4-2005. of the said provision was challenged before
the Madras High Court in the case of Tube
The above decisions have been followed in
Investments of India v. Asstt. CIT [2010] 325 ITR
Kulwant Singh v. ITO [2011] 10 taxmann.com
610/[2009] 185 Taxman 438. The Court rejected
25 (Ahd.) wherein Interest, commission, etc.,
the said challenge and upheld the validity of
were paid without deduction of tax at source
section 40(a)(ia) and the competence of the
for the Asst. Year 2005-06 and it was held that
Legislature in enacting such a provision on
amendments made in provisions of section
the ground that the said provision had been
40(a)(ia) by the Finance Act, 2008 and Finance
introduced in order to augment tax through
Act, 2010, being curative in nature, would
the mechanism of TDS and section 40(a)(ia)
apply with retrospective effect from
was in furtherance to the said objective.
1-4-2005 and held that where assessee deducted
tax at source from payments on account of
transportation charges for FY ending 31-3-2005 DISALLOWANCE OF FREIGHT CHARGES
and paid same to the credit of Government FOR NON-DEDUCTION OF TDS
before due date of filing of return, provisions
of section 40(a)(ia) could not be invoked for 5. Where there is no oral or written contract
disallowing those payments. with the transporter: Where there is no contract,
oral or written, with the transporter, the
provisions of section 194C do not apply. Hence,
CONSTITUTIONALITY OF no disallowance under section 40(a)(ia) is
SECTION 40(a)(ia) permissible - CIT v. Bhagwati Steels [2010] 326
ITR 108/[2011] 198 Taxman 275/9 taxmann.com
4. Recently in Rakesh Kumar & Co. v. Union
266 (Punj. & Har.), CIT v. United Rice Land Ltd.
of India [2010] 325 ITR 35/[2009] 178 Taxman
[2008] 174 Taxman 286 (Punj. & Har.), R.R.
481 (Punj. & Har.) wherein there was case of
Carrying Corporation v. ACIT [2009] 30 DTR
business disallowance of Interest, commission,
569 (Ctk.); Also refer Mrs. Kavita Chug v. ITO
etc., paid from which no TDS was deducted
[2011] 44 SOT 95 (Kol.).
and it was held that provisions of section
40(a)(ia) cannot be declared ultra vires on the
ground of being harsh and discriminatory. The DISALLOWANCE UNDER SECTION 40(a)(ia)
Legislature, in exercise of its taxing power,
6. Where assessee paid interest outside India
cannot only provide for levying tax, but it can
also provide for penal action for enforcing the for delayed payment for the purchase of
machinery without deduction of tax:
charge, if there is any evasion of tax or statutory


The interest paid by assessee is not interest prescribed in section 139(1), disallowance could
on loan but for delayed payment for the purchase not be made under section 40(a)(ia). In the
of machinery, therefore, the provisions of section result, the appeal filed by the assessee was
40(a)(i) are not attracted. Therefore, no disallowed.
allowance can be made under section 40(a)(i) -
7.3 In Dy. CIT v. Choice Sanitaryware Industries
CIT v. India Pistons Ltd. [2006] 282 ITR 632
[2011] 9 taxmann.com 120 (Rajkot) the case
(Mad.); CIT v. India Pistons Ltd. [2007] 295 ITR
related to Asst. Year 2005-06 where the assessee
550 (Mad.).
had paid certain sum to Clearing and Forwarding,
(C&F) agents besides payment of agency
7. SOME RECENT JUDGMENTS commission. The amounts consisted of
reimbursement of various expenses claimed
7.1 In Raja & Co. v. CIT (Central) [2011] 335
by C&F agents. The A.O. relying on Boards
ITR 381/196 Taxman 461 (Ker.) the assessee
Circular No. 715, dated 8-8-1995 held that
did not make any payment of tax at source
assessee was required to deduct tax on
in respect of inward freight charges paid for
reimbursement of expenses as well and made
goods purchased. The A.O. passed an assessment
impugned disallowance. Hon’ble ITAT held
order without considering disallowance under
that the circular in question is applicable only
section 40(a)(ia). The CIT in exercise of power
in cases where bills are raised for gross amount
under section 263, set aside assessment order
inclusive of professional fees as well as
and directed the A.O. to consider whether any
reimbursement of actual expenses. Since C&F
disallowance was required to be made under
agent raised two separate bills, one for
section 40(a)(ia). Since the assessee had not
commission and other for reimbursement of
deducted any tax at source while making
expenditure, CBDT’s Circular No. 715, dated
payments to transport contractors, impugned
8-8-1995 would not be applicable in such case
order of the CIT issued under section 263 for
and assessee would not be liable to deduct tax
considering disallowance under section 40(a)(ia)
on said payment. Also refer to ITO v. Dr.
was to be upheld.
Willmar Schwabe India (P.) Ltd. [2005] 3 SOT
7.2 In H.S. Mohindra Traders v. ITO [2011] 44 71 (Delhi).
SOT 43 (Delhi)(URO), assessee paid interest,
7.4 In Dy. CIT v. Divi’s Laboratories Ltd. [2011]
commission, etc., without deduction of tax at
131 ITD 271/12 taxmann.com 103 (Hyd.) it
source for Asst. Year 2007-08. Assessee was
was held that no tax is deductible under section
required to deduct tax on clearing charges,
195 on commission payable to non-resident
freight cartage inward and shipping expenses.
for services rendered outside India. Therefore,
A.O. found that tax was required to be deducted
payment of commission made to overseas agent
on these expenditures in month of February,
without deduction of TDS does not attract
2007 and assessee had deducted tax only in
disallowance under section 40(a)(ia).
month of March, 2007 and, thereupon, tax so
deducted was paid on 9-4-2007 and 12-6-2007. 7.5 In ITO v. UAN Raju Constructions [2011]
A.O. relying on provisions of section 40(a)(ia) 48 SOT 178/14 taxmann.com 184 (Visakha.)
held that since tax was not deducted and the case related to section 40(a)(ia), read with
deposited within stipulated time, the expenditure section 194C. In this case the assessee was a
could not be allowed. On appeal, CIT(Appeals) ‘Joint venture’ formed by a company and a
upheld disallowance. Hon’ble Delhi ITAT held proprietary concern with an objective to
that in view of fact that assessee having participate in tender process for construction
deducted tax in month of March, 2007 paid of highways and bridges. The assessee obtained
the same before due date of filing return as a contract from KRC. The said contract was


DIRECT TAX LAWS

not executed jointly by both parties but total payment is made to a group concern under
contract was divided between two parties in a cost sharing arrangement and the payment
an agreed ratio. The returns of income were is thus not for services but as reimbursement
filed for both years in status of ‘association of expenses. Therefore, TDS requirements do
of persons’, declaring NIL income. The A.O. not come into play at this stage. The disallowance
was of view that assessee should be treated was deleted.
as main contractor and members to whom
work was allotted should be treated as sub-
8. ‘PAYABLE’ OR ‘AMOUNTS/SUMS
contractor and, therefore, assessee should have
collected sub-contract commission from sub- PAYABLE’, CONNOTATION OF
contractors. Accordingly, A.O. computed income 8.1 Appellate Courts inundated with appeals
of assessee by treating 1 per cent of gross against provisions of section 40(a)(ia).The
receipt as income of assessee by way of sub- appellate courts have been inundated with
contract commission in both assessment years. appeals against AOs action in invoking the
The A.O. also observed that assessee had provisions of section 40(a)(ia) of the Act. One
deducted TDS at 1 per cent under section of the grounds agitated by assessees is that
194C on major portion of value of contract the section is applicable only to amounts which
allotted to its members but in Asst. Year 2005- are outstanding at the end of the year, i.e., the
06, TDS was not deducted. Accordingly, A.O. amounts payable and that the provision cannot
disallowed relatable amount by invoking be applied to the expenses actually “paid”
provisions of section 40(a)(ia). Held that, since during the year. This argument is accepted by
consortium of joint venture had been formed few Courts and Tribunals. However, recent
only to procure contract work and in reality, trend of the judgments is to the contrary, which
both parties had divided contract work between seems to be the correct view. Some precedents
themselves and declared income derived from in this respect are given hereunder.
their respective share of contract work in
their hands, there was no merit in presumption 8.2 Interpretation of the words ‘payable’ or
made by A.O. that assessee was main contractor ‘sums payable’:
and members were sub-contractors. Hence, 8.2.1 The provision reads as hereunder:
the question of estimation of income by way
of sub-contract commission did not arise; further “40. Notwithstanding anything to the
question of deduction under section 194C(2) contrary in sections 30 to 38, the following
and disallowance under section 40(a)(ia) also amounts shall not be deducted in computing
did not arise. the income chargeable under the head “Profits
and gains of business or profession”,—
7.6 In Emersons Process Management India (P.)
Ltd. v. Addl. CIT [2011] 47 SOT 157 (Mum.)(URO), (a) in the case of any assessee-
it was held that TDS requirements do not ** ** **
come into play in case of reimbursement of
(ia) any interest, commission or broker-
expenses and is a settled law. Undoubtedly,
age, rent, royalty, fees for profes-
these payments are made for the services
sional services or fees for technical
rendered but the TDS requirements would come
services payable to a resident, or
into play at the point of time when payments
amounts payable to a contractor or
are made to the person who is rendering the
sub-contractor, being resident, for
services or to the person with whom contract
carrying out any work (including
for rendering of these services is entered into.
supply of labour for carrying out
Here the issue dealt with a situation in which


any work), on which tax is deduc- “An amount may be payable without being
tible at source under Chapter XVII-B due. Debts are commonly payable long
and such tax has not been deducted before they fall due.”
or, after deduction, has not been paid
(c) According to West’s Legal Thesaurus/Dic-
on or before the due date specified
tionary: Paid means pay to discharge a
in sub-section (1) of section 139,-
debt. Payable : means Justly or legally
Provided that where in respect of any due (payable immediately). Uncollected
such sum, tax has been deducted in any (Outstanding debts). Unpaid, undischarged,
subsequent year, or has been deducted unsatisfied, unsettled, mature, owed, ripe,
during the previous year but paid after collectable, in arrears, redeemable.
the due date specified in sub-section (1)
8.2.3 Comparison of the provision as initially proposed
of section 139, such sum shall be allowed
to be enacted and after its enactment - On a
as a deduction in computing the income
comparison between the provision as initially
of the previous year in which such tax
proposed to be enacted and the one after its
has been paid.”
enactment it can be noticed that the Legislature
(emphasis supplied) consciously replaced the word “amounts credited
or paid” with the word “payable”. By changing
The provision clearly uses the term “payable”
the words from “credited or paid” to “payable”
and not “paid”. Hence, as per the literal
the legislative intent has been made clear that
construction no word can be substituted in
only the outstanding amount or the provision
place of the said word nor can any new word
for expense liable for TDS is sought to be
be supplied in the provision by the Courts.
disallowed in the event there is a default in
The language of the provision has thrown open
making compliance of the obligation laid under
the two terms “paid” and “payable” for judicial
Chapter XVII-B of the Act.
interpretation.
8.2.4 Decisions in favour of assessee - One of the
8.2.2 Meaning of terms “payable” and “paid” as
first decisions on this point was dealt in the
per judicial dictionaries:
case of Teja Constructions v. Asstt. CIT [2010]
(a) Oxford dictionary defines the terms “pay- 39 SOT 13 (Hyd.)(URO) wherein the provisions
able” and “paid” as under: of section 40(a)(ia) were interpreted by applying
payable (pay-a-ble) adjective [predic.] Rule of Literal Construction and it was held
that only those expenses can be disallowed
1. (of money) required to be paid; due: which are “payable” at the end of the year,
interest is payable on the money owing because the provision of section 40(a)(ia) uses
send a check, payable to the ASPCA the term “amounts payable” and not “amounts
2. able to be paid: it costs just $195, paid”. It was held that only those expenses
payable in five monthly instalments can be disallowed, for default in deducting
tax at source, which have not been actually
Noun (payables) spent by the assessee, though claimed in its
debts owed by a business; liabilities. books of account maintained on mercantile
system of accounting. Also refer to K. Srinivas
Paid: Past and past participle of PAY. Naidu v. Asstt. CIT [2010] 131 TTJ 17 (Hyd.)
(b) According to Black’s Law Dictionary (Sev- (UO) and Mrs. Shah Charulata Milind vide ITA
enth Edition) at p. 1150, the term ‘pay- No. l318/PN/2008 (Pune Bench).
able’ is defined as a sum of money that In the case of Jaipur Vidyut Vitran Nigam Ltd.
is to be paid. Another meaning to the v. Dy. CIT [2009] 123 TTJ 888, the Jaipur ITAT
term “payable” is given as under: relying on CBDT’s Circular No. 5 of 2005,


DIRECT TAX LAWS

dated 15-7-2005 held that the purpose of taxmann.com 7 (Kol.), the assessee made
introducing section 40(a)(ia) was to augment certain payments to contractors without
TDS compliance and to curb bogus payments. making any TDS and the A.O. disallowed
Hence, the payments which have been made those payments by invoking provisions of
and not found to be bogus cannot be disallowed section 40(a)(ia). On instant appeal, asses-
by invoking section 40(a)(ia) of the Act. The see contended that section 40(a)(ia) was
ITAT held that the bare provisions of section not applicable in a case where sum had
40(a)(ia) provide for disallowance of expenses been paid, as impugned section was with
for non-deduction of amount which remains reference to ‘sums payable’. The Hon’ble
payable to a resident in respect of certain Kolkata ITAT rejected the contention of
expenses. It is not applicable where expenditure the assessee and held that the issue had
is paid and is applicable only in cases where been considered by the ITAT, Kolkata
payments are due and outstanding. The word, Benches, Kolkata in ITA No. 1418 (Kol.)/
‘payable’ is not defined, though the word ‘paid’ 09 vide order dated 15-1-2010 in the case
is defined under section 43(2) to mean actually of Poddar Son’s Ex.L (P.) Ltd. v. ITO
paid or incurred. Hence, by implication the where it had been held as per para 6.6,
word “payable” does not include paid or that even if the sum payable or paid to
incurred. It placed reliance upon the decision the contractors or sub-contractors on which
of Teja Constructions’ case (supra). tax is deductible at source as per the
provisions of the Act, section 40(a)(ia) will
8.2.5 Decisions against the assessee - There are
be attracted. Since assessee has not de-
following 2 decisions against the assessee and
ducted TDS as per provisions of section
in favour of Revenue which have been
194C of the Act, it was held that the
pronounced by the Hon’ble Kolkata ITAT:
CIT(A) had rightly confirmed the action
(a) Matrix Glass & Structures (P.) Ltd. [ITA of the A.O. in making disallowance.
No. 658 (Kol.) of 2010] - It was held that Disallowance made by A.O. was upheld.
the plea that disallowance under section
40(a)(ia) can be made only on “payable”
amount cannot be accepted. It held that
CONCLUSION
such an interpretation would defeat the 9. The law has developed in the recent times
very purpose of enacting the said provi- with respect to the provisions of section 40(a)(ia).
sion. Even if the sum payable is paid and While as the Constitutionality of the section
TDS is not deducted and/or deposited, has been upheld, the ‘crack-down’, in law,
the provisions of section 40(a)(ia) would and the new ‘centre-point’ has been the
be attracted. Hon’ble ITAT further held interpretation of words ‘paid’, ‘payable’ and
that when the literal construction pro- ‘amounts payable’. There are differing views
duces unjust or unwarranted or absurd of various Tribunals on the point. The air may
result, then such, literal construction has be cleared now by either by a High Court’s
to be given a go by for the sake of verdict or by the CBDT’s intervention.
implementing the provision.
(b) Very recently, in Dy. CIT v. Ashika Stock
•••
Broking Ltd. [2011] 44 SOT 556/9


DIRECT TAX LAWS

Concept INTRODUCTION

of
1. In the current milieu of corporatisation of
the charities sector and the increasing influence
of CSR various new models of NGOs are

Facilitating
emerging. One of the new models of charitable
work is the concept of Mother NGO or a
Facilitating NGO which does not implement
programmes directly but generates funds and

NGOs resources for its downstream NGOs. The issue
here is whether such NGOs can be considered
as charitable in nature and whether they can
charge a facilitation fee without being deemed
as a commercial entities? The judicial precedents
on these issues have been given as FAQs in
the following paras:

2. A CHARITABLE ORGANISATION
WORKING THROUGH OTHERS ONLY
2.1 Can a Charitable Organisation be said to
be existing for a particular purpose when it
is not directly engaged in such a purpose but
is working through various other charitable
organisations? - In the case of Aditanar Educational
Institution v. Addl. CIT [1997] 90 Taxman 528
the Hon’ble Supreme Court laid down the
ratio for determining the purpose for which
an organisation exists. In this case the assessee
was registered solely for the educational purposes
but it imparted education through various
registered schools and colleges. The department
contended that the assessee itself was not
MANOJ FOGLA providing any education directly, therefore, it
CA
could not be considered as existing solely for
educational purposes. The Court observed that
it would rather be unreal and hyper-technical
to hold that the assessee-society was only a
financing body and would not come within
the scope of ‘other educational institution’ as


DIRECT TAX LAWS

specified in section 10(22). The relevant [2011] 198 Taxman 63. In this case the assessee
observation of the Court is as under : had received ` 2 crores as donation during the
year and had donated ` 2.07 crore to various
"It will be rather unreal and hyper-technical
NGOs and institutions. The Assessing Officer
to hold that the assessee-society is only
argued that giving money to various
a financing body and will not come within
organisations could not be considered to be a
the scope of ‘other educational institution’
charitable activity. He further argued that the
as specified in section 10(22). The object
funds given as inter-charity donation might
of the society is to establish, run, manage
not have been applied for charitable purposes.
or assist colleges or schools or other
It was held that the Assessing Officer had not
educational institutions solely for
pointed out violation of any provision of section
educational purposes and in that regard
13 by the assessee. The Commissioner (Appeals)
to raise or collect funds, donations, gifts,
as well the Tribunal, both had found that the
etc. Colleges and schools are the media
organisations to which donations were given
through which the assessee imparts
by the assessee during the assessment year in
education and effectuates its objects. In
question, were genuine charitable organisations.
substance and reality, the sole purpose
There was absolutely no material before the
for which the assessee has come into
Assessing Officer to show that the funds given
existence is to impart education at the
to those NGOs/institutions were used for
levels of colleges and schools and so,
personal benefit of the donor or any of its
such an educational society should be
directors.
regarded as an ‘educational institution’
coming within section 10(22)." 3.2 Can inter-charity donation be treated on
par with direct implementation of Charitable
2.2 The other relevant cases - The other relevant
Activities? - ‘End justifies the means’ is what
cases in this regard are: Addl. CIT v. Aditanar
the Courts have consistently held in determining
Educational Institution [1979] 118 ITR 235/[1980]
the charitable nature of an organisation. In
3 Taxman 56 (Mad.); CIT v. Rajagopal Educational
CIT v. J.K. Charitable Trust [1992] 196 ITR 31/
Trust [Special Leave Petition No. 6281 of 1986];
[1991] 59 Taxman 602 (All.), it was held a
Katra Education Society v. ITO [1978] 111 ITR
charitable purpose may be served in more
420 (All.); CIT v. Doon Foundation [1985] 154
than one way. One is to directly contribute for
ITR 208/22 Taxman 9 (Cal.); Agarwal Shiksha
the promotion of that cause; the other is to
Samiti Trust v. CIT [1987] 168 ITR 751/[1988]
contribute money to another charitable
36 Taxman 165 (Raj.); Governing Body of Rangaraya
organisation which advances that cause. In
Medical Colleges v. ITO [1979] 117 ITR 284
other words, the Allahabad High Court laid
(AP); and Secondary Board of Educations v. ITO
down the principles of treating the work done
[1972] 86 ITR 408 (Ori.).
through another charity on par with doing the
work directly. The Supreme Court in CIT v.
3. A CHARITABLE ORGANISATION Thanthi Trust [1999] 239 ITR 502, has also
MOBILISING DONATIONS AND THEN upheld the treatment of inter-charity donations
GIVING THEM AS INTER-CHARITY as valid application of funds. In this case the
Supreme Court further held that the Assessing
DONATIONS Officer cannot deny exemptions even if the
3.1 Can a Charitable Organisation be considered donee-trust has not expended the amounts
as charitable in nature when the entire donation received in the year of receipt. Similar views
mobilised is given as inter-charity donation? - were also taken in CIT v. Aurobindo Memorial
This issue was brought before the Delhi High Fund Society [2001] 247 ITR 93/[2000] 108 Taxman
Court in CIT v. HPS Social Welfare Foundation 271 (Mad.) and CIT v. Matriseva Trust [2003]


128 Taxman 261 (Mad.). To sum up, inter- of Income-tax (Exemptions) [2009] 183 Taxman
charity donations have been held as valid 462 (Delhi), the assessee was a foundation set-
applications for the purposes of section 11(1)(a). up by the Institute of Chartered Accountants
of India (ICAI) with the main objective to
make it an academy for imparting, spreading
4. NGOs PROVIDING NON-FINANCIAL
and promoting knowledge, learning, education
SUPPORT ONLY and understanding in various fields related to
4.1 Is it possible to create a Charitable Orga- profession of accountancy. It was a deemed
nisation which acts as a support organisation company under section 25 of the Companies
to another Charitable Organisation? (Such Act, 1956 and was having status of an academy.
support need not be financial in nature) - The assessee filed an application for claiming
Charitable purpose has never been confined exemption under section 10(23C)(iv) taking a
or given a narrow interpretation of expecting plea that it was covered by the expression
charities to physically implement the programmes ‘charitable purposes’ as defined in section 2(15).
themselves. The Courts have always held that The application was rejected on the grounds :
any activity which directly or indirectly supports (i) that the assessee had undertaken three
charitable activities or even charitable organi- research projects on behalf of the local
sations should be considered as a charitable bodies and had also received remunera-
activity. There was an interesting case in the tion for those projects which amounted to
Delhi High Court where one NGO formed a doing business of providing professional
charitable trust to manage its properties. The services; and
CIT denied it’s registration because according
to him managing the properties of another (ii) that the assessee had received monies from
NGOs was not a charitable purpose. The Delhi Infosys Technologies Limited in the form
High Court in the case of DIT (Exemption) v. of Infosys Fellowship Fund and, though
Pradan Property Holding Trust [IT Appeal No. it was for grant of fellowship to deserv-
361/2007, dated August 16, 2010, ruled that ing candidates for undertaking research
a trust constituted for the management of projects, yet if a fellow would leave in the
properties of another charitable society should middle of the programme or would finish
be considered as charitable in nature. The Court his research early with funds left in the
observed that the stated fact that the assessee account, only Infosys would decide how
does not carry on any independent charitable money was to be spent and, hence, the
activity was not enough to deny it registration assessee could not be said to be doing
under section 12AA. It further observed that any charitable activity in that regard. The
there was no reason why holding of properties issue raised was, whether merely on
cannot be said to be a charitable object. undertaking research projects at the in-
stance of the Government/local bodies
and taking remuneration for such projects,
5. CHARGING OF REMUNERATION OR essential character of assessee-foundation
ADMINISTRATIVE COST IN CASE OF A could be said to have been converted into
CHARITABLE PROJECT one which carried on commerce or busi-
ness or activity or rendering any service
5.1 Can any remuneration or fee charged against in relation to trade, commerce or busi-
any Charitable Project be considered as a ness? It was held that the charitable character
Commercial Activity? - In the case of ICAI would not change even if the foundation
Accounting Research Foundation v. Director General had charged fees against various projects.


DIRECT TAX LAWS

6. THE SUPREME COURT ON P.A. Inamdar v. State of Maharashtra AIR 2005
COMMERCIALITY AND EXISTENCE SC 3226.

OF PROFIT FOR CHARITABLE
ORGANISATIONS CONCLUSION
6.1 Courts decision in some of the cases - 7. In the light of the various judicial precedants
With regard to the issue of surplus generated it can be said that the term ‘charitable purpose’
by charitable organisation it is important to is very broad one and is not confined to a
study the observations of the Hon’ble Supreme narrow interpretation, i.e., the charitable work
Court in T.M.A. Pai Foundation v. State of Karnataka has to be directly implemented by the NGO.
[2002] 8 SCC 481. The 11-Judge Constitution To sum up, the following ratios emerge from
Bench has held that the private educational these judicial precedents :
institutions are bound to generate funds for u A charitable organisation can be said to
betterment and growth of the institutions for be existing for a particular purpose, even
which there may be a surpluses for furtherance if it is not directly engaged in such a
of education. Therefore, it is not only permissible purpose but is working through various
but an important requirement to run the other charitable organisations.
institutions of such strength. Further, in Aditanar
Educational Institution’s case (supra), the Hon’ble u Inter-charity donation is treated on par
Supreme Court has observed that when surplus with direct implementation of the chari-
is utilized for educational purposes i.e., for table activities.
infrastructure development, it cannot be said u A charitable organisation can be consid-
that the institution was having the object to ered as charitable in nature, even if the
make profit. The Hon’ble Supreme Court has entire donation mobilised is given as an
rightly observed time and again that surpluses inter-charity donation.
used for management and betterment of the
institutions could not be termed as profit. If u The revenue cannot argue that the funds
the stand of the Department/revenue is accepted given as inter-charity donation might not
to be correct, especially in the wake of the have been applied for charitable purposes
methodology adopted by the Assessing Officer in the absence of any evidence.
in ascertaining profits, then no educational u It is possible to create a charitable
institution like the petitioner-society could be organisation which acts as a support
said to be existing solely for educational purposes, organisation to another charitable
as in every case of an educational institution organisation. Such support needs not be
there is possibility of a profit. The Court further financial in nature.
held that no profiteering does not imply that
u Reasonable remuneration or fee charged
the institutions cannot have a reasonable surplus
against any charitable project cannot be
for future sustenance and expansion of the
considered as a commercial activity.
institute. It was held that upto 6-15 per cent
of the profit could be considered as reasonable u Existence of a surplus or profit as a part
and legitimate. This issue was further reaffirmed of charitable activity is permissible.
by the Supreme Court’s ruling in the case of
•••/SEC. 11


DIRECT TAX LAWS

INTRODUCTION
1. Before amendment by the Finance Act, 2008

Uncharitable
with effect from 1-4-2009, the definition of
‘charitable purpose’ contained in section 2(15)
of the Income-tax Act, 1961 (hereinafter called
‘the Act’) included “relief of the poor, education,
medical relief and the advancement of any

Face of
other object of general public utility.” The
newly substituted section 2(15), however, is as
follows: “Charitable purpose” includes “relief
of the poor, education, medical relief, preservation
of environment (including watersheds, forests

Charity and wildlife) and preservation of monuments
or places or objects of artistic or historic interest,
and the advancement of any other object of
general public utility :
Provided that the advancement of any other
object of general public utility shall not be a
charitable purpose, if it involves the carrying
on of any activity in the nature of trade, commerce
or business, or any activity of rendering any
service in relation to any trade, commerce or business,
for a cess or fee or any other consideration,
irrespective of the nature of use or application,
or retention of the income from such activity.
[Emphasis supplied].

PROFESSIONAL ASSOCIATIONS NO
LONGER CONSIDERED AS CHARITABLE
G.N. GUPTA INSTITUTIONS BY THE REVENUE
Advocate, Chairman CBDT (Retd.)
2. Till the assessment year 2008-09 most of the
professional associations were successfully
claiming that they were engaged in the
advancement of objects of general public utility,
despite the fact that they were charging
membership fees, selling professional journals
to members and public, deriving considerable
income from seminars and conferences and
often, from educational activities as well.
However, from the assessment year 2009-10
onwards, the revenue is more or less consistently
holding that such professional associations are


DIRECT TAX LAWS

now hit by the mischief of the provisions 2.2 CBDT’s Circular no. 11 of 2008 on this
contained in the proviso to section 2(15) and, issue - Similarly, it has been stated in the
therefore, are no longer entitled to be considered CBDT’s Circular No. 11 of 2008, dated 19th
as charitable institutions. This matter is likely December, 2008 [reported in 308 ITR (St.) 5]
to spawn a lot of litigation as the underlying that an entity with a charitable object, inter
issue is highly debatable and the stand hitherto alia, consisting of advancement of any object
taken by the revenue, to say the least, is rather of general public was eligible for exemption
simplistic in view of the following reasons & under section 11 of the Act. “However, it was
case laws : seen that a number of entities who were engaged
in commercial activities were also claiming
2.1 Rationale behind amendment to section
exemption on the ground that such activities
2(15) - At the very outset, it would be useful
were for the advancement of objects of general
to understand the rationale behind the
public utility in terms of the fourth limb of
amendment to section 2(15) by the Finance
the definition of “charitable purpose”. Therefore,
Act, 2008. The best way to do so would be
section 2(15) was amended vide Finance Act,
to refer to the relevant portion of the
2008, by adding a proviso.” (emphasis supplied).
Memorandum explaining the provisions in the
Further, para 3 of the said circular read as :
Finance Bill, 2008 reported in 298 ITR (St) 200-
“The newly inserted proviso to section 2(15)
201 which read as “It has been noticed that
will apply to entities whose purpose is
a number of entities operating on commercial
“advancement of any other object of general
lines are claiming exemption on their income
public utility”, i.e., the fourth limb of the definition
either under section 10(23C) or section 11 of
of “charitable purpose” contained in section
the Act on the ground that they are charitable
2(15). Hence, such entities will not be eligible
institutions. This is based on the argument
for exemption under section 11 or under section
that they are engaged in the “advancement of
10(23C) of the Act if they carry on commercial
an object of general public utility” as is included
activities. Whether such an entity is carrying
in the fourth limb of the current definition of
on an activity in the nature of trade, commerce
“charitable purpose”. Such a claim, when made
or business is a question of fact which will be
in respect of an activity carried out on commercial
decided based on the nature, scope, extent
lines is contrary to the intention of the provision.
and frequency of the activity.
With a view to limiting the scope of the phrase
“advancement of any other object of general 2.3 Facts emerging from conjoint reading of
public utility”, it is proposed to amend section the memo and CBDT’s circular - A conjoint
2(15) so as to provide that “the advancement reading of the Memo Explaining the provisions
of any other object of general public utility” of Finance Bill, 2008 & CBDT’s Circular dated
shall not be a charitable purpose if it involves 19-12-2008 will make it abundantly clear that
the carrying on of following activities : firstly, an entity not engaged in commercial
activities will not be hit by the mischief of
(a) any activity in the nature of trade, com-
proviso to section 2(15) of the Act and secondly,
merce or business or,
whether an entity is carrying on an activity
(b) any activity of rendering of any service in the nature of trade, commerce or business
in relation to any trade, commerce or busi- is a question of fact.
ness, for a fee or cess or any other con-
2.4 The issue is no longer res integra after the
sideration, irrespective of the nature of
decision in DIT (Exemptions) v. ICAI - In fact,
use or application of the income from
this issue is no longer res integra in view of
such activity, or the retention of such
the decision of the Hon’ble Delhi High Court,
income, by the concerned entity.” [Em-
dated 19th September, 2011 in the case of DIT
phasis supplied]
(Exemptions) v. Institute of Chartered Accountants


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