Date of Judgement:
10thFebruary 2022
Coram/judges:
The Hon’ble Mr. Justice T.S. Sivagnanam
The Hon’ble Mr. Justice Hiranmay Bhattacharyya
Parties to the Case:
Appellant - Creative Museum Designers
Respondent - Income Tax Officer, Exemptions, Ward-1(1), Kolkata
Subject
The appeal was filed by the Assessee against the consolidated order dated 14.08.2020 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata
in Income Tax Appeal (ITA) Numbers 1147-48/Kol/2018 &1608/Kol/2019 for the assessment years 2013-14 to 2015-16.
Legal Provisions
- Section 260A of Income Tax Act, 1961- which empowers appeal to High courts for orders passed in appeal by appellate tribunal.
- Section 11 of Income Tax Act, 1961- which deals with exemption of income held for charitable purposes from total taxable income.
- Section 12AA of Income Tax Act, 1961- which provides the procedure relating to registration of a trust or institution engaged in charitable activities under this act
- Section 2(15) of Income Tax Act, 1961- it defines ‘charitable purpose’for the purpose of income tax and includes relief of the poor, education, medical relief etc.
- Section 25 of Companies Act,1956- which laid down provisions related to company established for charitable purposes. (Now dealt by Section-8 of Companies Act, 2013)
Overview
- The Assessee company wasestablished by the National Council of Science Museum, Ministry of Culture, Government of India under Section 25 of the Companies Act, 1956. Its nature was charitable and purpose was dissemination of knowledge to the Indian society. The Assesseewas engaged in design and development of science museums, planetariums etc. and pursued research work in varied fields.
- The Assessee applied for registration under Section 12AA of the Act which was granted after proper scrutiny. The Assessee has worked on various turnkey projects.The RBI museums and financial literacy centre in Kolkata, was completed by the Assessee with the state of art facilities, interactive galleries, trained professional and was handed over to the RBI on 17.09.2018. The Assessee also successfully carried out a similar project with Surat Municipal Corporation.
- In the relevant income tax returns after these projects, the Assessee declared its income as Nil by claiming exemption under section 11 on the surplus generated by these projects.
- The assessing officer on, scrutiny of the returns, disallowed such exemption by stating that the surplus generated by the Assessee in the aforementioned activities was commercial in nature. To which, the Assessee moved an appeal against the order which was first dismissed by Commissioner of Income Tax (Appeal) and subsequently by Income Tax Appellate Tribunal.
- The learned council for the appellant in the given petition contended that CIT (appeal) and the tribunal failed to consider the charitable nature of activities. It was an educational activity as well as activity in the nature of general public utility and the object behind the projects implemented by the Assessee was to take forward the vision of the Government ministry in promoting education and learning among the general public in an informal and easy way.
- It was further submitted that the Assessee is incorporated under section 25 of companies act 1956 and unless its activities were non-profit, the company could not have been so incorporated.
- The learned counsel for the respondent contrarily argued that the tribunal has rightly examined the activities of the company and held them as commercial in nature. The work done by the Assessee in the assessment years under consideration were not charitable in nature particularly when no formal and systematic educational function has been discharged by the Assessee and what the Assessee undertook was a commercial project. The price bid proposed by the Assessee for tenders showed some profit element which would indicate that the project was intended for making profit and hence the order passed by assessing officer should be upheld.
Issues
- Whether the exemption under section 11 of the income tax act can be denied on basis of objectives even when the appellant (Assessee)was considered charitable entityat the time of registration u/s 12AA of the income tax act?
- Whether the activities of appellant company of setting up of museums, parks, interactive galleries, exhibits and other forms of dissemination of knowledge through informal means, at the behest of other public entities, be regarded as commercialised in nature and within the scope of the proviso to Section 2(15) of the Income Tax Act, 1961?
- Whether the Tribunal was justified in denying the exemption under Section 11 of the Act and its findings?
- Judgement Analysis
- The Honourable High Court evaluated the main objectives of the company laid down in its Memorandum of Association (MoA) at the time of incorporationas section 25 company and held that the tribunal has only referred to the incidental objects and missed out the main objects for which the Assessee company had been established.
- Pursuant to the clauses of MoA, there is an absolute prohibition on the company to apply its income and property for any other purpose other than that for promoting the objects set forth in the memorandum. The assessing officer, CIT(Appeal) and tribunal did not examine this effect of registration as section 25 company.
- The Assessee was branded as a contractor, which was a wrong approach to the matter, leading to misunderstanding regarding activities done by Assessee in lieu of its objective.
- The court was on the opinion that a museum is not constructed but conceived and developed. The object behind establishing a science centre is undoubtedly in public interest to educate the general public in an easy and attractive manner. A building contractor can hardly be said to be equipped to establish such institutions.
- The message and information which will be disseminated through the museum will be in the nature of a non-formal education and is based upon the material which has been evolved by the Assessee by proper research and executed for and on behalf of the RBI.
- The honourable court viewed the role of the Assessee in conceptualising, developing and establishing the museum as that of a “museum curator” who develops, interprets and explains the significance of the collections for the study, free choice education and learning
- Citing the decision in ICAI Accounting Research Foundation v. Director General of Income Tax (Exemptions) and other leading case laws; the court held that registration under section 25 of companies act, 1956 is no doubt relevant factor to consider application under section 12AA of income tax act as a section 25 company for all aspects considered as NGO. This fact leans the case in favour of The Assessee.
- The word ‘education’ in section 2(15) of income tax act was given a wider interpretation by court and not restrict it to mere formal education. To impart knowledge through a museum or a science park would no doubt fall within the meaning of ‘education’ as occurring in Section 2 (15) of the Act as has been decided by the Apex court in its various decisions.
- Just because a surplus has been generated, the activities of Assessee cannot be termed as commercial. Such profit of the Assessee would only be utilised in furtherance of objectives stated in MoA and hence should be exempted under section 11 of income tax act.
- Hence the Assessee and its activities in view of the honourable High Court were not for profit and falls within the definition of charitable activities under section 2(15) and the given appeal is allowed and the issues are decided in favour of the appellant.
Conclusion
The Honourable Court in the given Appeal laid down emphasis on an inclusive definition of Charitable activities and particularly education, so as to not restrict its meaning to formal education. It was also reiterated that the different limbs of the Government should act in coordination, so registration under companies act as a not for profit and charitable entity must be considered while deciding on its nature of activities under provisions of other acts.
Click here to download the original copy of the judgement
