W.P (C) No. 1927-2010 Page 1 of 57 * IN THE HIGH COURT OF DELHI AT NEW DELHI + WRIT PETITON (CIVIL) NO. 1927 OF 2010 Reserved on : 21st July, 2011. % Date of Decision : 19th September, 2011. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & ANR. .... Petitioners Through Mr. N.K. Poddar, Sr. Advocate with Mr. Pramod Dayal, Advocate. VERSUS THE DIRECTOR GENERAL OF INCOME TAX (EXEMPTIONS), DELHI & ORS. …..Respondents Through Mr. Abhishek Maratha, Standing Counsel for the Revenue. CORAM: HON’BLE MR. JUSTICE DIPAK MISRA, THE CHIEF JUSTICE HON'BLE MR. JUSTICE SANJIV KHANNA 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not ? Yes. 3. Whether the judgment should be reported in the Digest ? Yes. SANJIV KHANNA, J.: The Institute of Chartered Accountants of India and Mr. Amarjit Chopra, President and Member of the Central Council of the Institute of Chartered Accountants of India (hereinafter referred to as the petitioners) have filed the present writ petition under Article 226 of the Constitution of India for setting aside the order dated 19th May, 2009 passed by the Director General of W.P (C) No. 1927-2010 Page 2 of 57 Income-Tax (Exemptions), New Delhi (hereinafter referred to as the respondent) dismissing/rejecting the institute‟s application under Section 10(23C)(iv) of the Income-Tax Act, 1961 (Act, for short) for the assessment year 2009-10 onwards. The petitioners have prayed that the respondent should be directed to recognize and grant approval to the petitioner institute under the aforesaid Section for the assessment years 2006-07, 2007- 08, 2008-09 and 2009-10 and onwards. 2. On 7th May, 2008, the petitioner institute had filed an application in form No. 56 for grant of exemption under Section 10(23C)(iv) of the Act for the assessment year 2009-10 onwards. The petitioners claim that the institution was/is established for charitable purpose as defined under Section 2(15) of the Act and that they were/are complying with all conditions/pre-requisites and, therefore, they were entitled to exemption under Section 10(2C)(iv) of the Act. The impugned order dated 19th May, 2009 has rejected the application on several grounds. Firstly, the petitioner institute was holding coaching classes and, therefore, was not an educational institution as per the interpretation placed on the word “education” used in Section 2(15) of the Act. Reliance was placed on Sole Trustee, Loka Shikshana Trust versus W.P (C) No. 1927-2010 Page 3 of 57 Commissioner of Income Tax, [1975] 101 ITR 234 (SC) and Bihar Institute of Mining and Mine Surveying versus CIT, [1994] 208 ITR 604 (Patna). Secondly, the petitioner- institute was covered under the last limb of charitable purpose, i.e. advancement of any other object of general public utility. In view of the amendment made in Section 2(15) of the Act with effect from 1st April, 2009 for the assessment year 2009-10 onwards, the petitioner institute was not entitled to exemption as it is an institution which conducts an activity in nature of business and also charges fee or consideration. It was earning huge profits in a systematic and organized manner and, therefore, it was not an institute existing for charitable purposes under the last limb of Section 2(15) of the Act. Thirdly, the petitioner-institute had advanced an interest free loan to a sister concern, namely ICAI Accounting Research Foundation, of Rs.565.20 lacs. The petitioner-institute had accordingly violated the third proviso to Section 10(23C) as the cumulated funds have not been invested in one or more specified funds/institutions stipulated in sub- section 5 to Section 11 of the Act. 3. To decide the contentions raised by the parties, it is necessary to examine Section 10(23C)(iv) and Section 2(15) W.P (C) No. 1927-2010 Page 4 of 57 after its amendment with effect from 1st April, 2009. The relevant provisions read as under: “Section 2. Definitions- (15) “charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests 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: Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year. 10. Incomes not included in total income.— In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— (23-C) any income received by any person on behalf of— W.P (C) No. 1927-2010 Page 5 of 57 (iv) any other fund or institution established for charitable purposes which may be notified by the Central Government in the Official Gazette, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States” 4. The core or real controversy raised in the present writ petition, as we perceive, relates to two issues. Whether the petitioner is an institution which carries on charitable activities in the nature of education or advancement of any other object of general public utility and secondly, in case the petitioner- institute is engaged in the activity of advancement of any other object of general public utility, can the institute be denied exemption in view of the proviso to Section 2(15), which was introduced with effect from 1st April, 2009. 5. A scrutiny of Section 2(15) of the Act elucidates that charitable purpose for the purpose of the Act has been divided into six categories, namely, (i) Relief to the poor (ii) education (iii) medical relief, (iv) preservation of environment (including watersheds, forests and wildlife), (v) preservation of monuments or places or objects of artistic or historical importance and (vi) advancement of any other object of general public utility. W.P (C) No. 1927-2010 Page 6 of 57 6. The petitioner- institute will fall under the sixth category, i.e. advancement of any other object of general public utility. The petitioner institute cannot be regarded as an educational institute as the petitioner‟s main or predominant objective is to regulate the profession of, and the conduct of, Chartered Accountants enrolled with them. The petitioner is a statutory authority under the Chartered Accountants Act, 1949 (the “CA Act”) and its fundamental or dominant function is to exercise overall control and regulate the activities of the members/enrolled Chartered Accountants. This is apparent from the CA Act, and the regulations framed under the said Act. 7. The CA Act was enacted, as per the preamble, to make provisions for regulation of the profession of Chartered Accountants and for that purpose to establish an institute of Chartered Accountants. As per the statement of objects and purpose the enactment was to authorize incorporation of a autonomous professional body for the said purpose. The function and the object and purpose of the institute can be also gathered from Section 15 of the CA Act, which prescribes functions of the Council. For the sake of convenience Section 15 is reproduced below: W.P (C) No. 1927-2010 Page 7 of 57 “15. Functions of the Council.- (1) The duty of carrying out the provisions of this Act shall be vested in the Council. (2) In particular, and without prejudice to the generality of the foregoing power, the duties of the Council shall include- (a) the examination of candidates for enrolment and the prescribing of fees therefor; (b) the regulation of the engagement and training of a[articled and audit clerks]; (c) the prescribing of qualifications for entry in the Register. (d) the recognition of foreign qualifications and training for purposes of enrolment; (e) the granting or refusal of certificates of practice under this Act; (f) the maintenance and publication of a Register of persons qualified to practice as chartered accountants; (g) the levy and collection of fees from b[* * * *] members, examinees and other persons; (h) the removal of names from the Register and the restoration to the Register of names which have been removed; (i) the regulation and maintenance of the status and standard of professional qualifications of c[members of the Institute]; (j) the carrying out, by financial assistance to persons other than members of the Council or in any other manner, of research in accountancy; (k) the maintenance of a library and publication of books and periodicals relating to accountancy; and (l) the exercise of disciplinary powers conferred by this Act. [a] Substituted for the words “articled clerks” by the Chartered Accountants (Amendment) Act (15 of 1959) S.13 (1-7-1959). [b] Words “chartered accountants”, omitted, ibid. [c] Substituted for the words “chartered accountants”, ibid.” W.P (C) No. 1927-2010 Page 8 of 57 8. Similarly, the functions of the Council can be gathered from Section 30, which authorizes the Council to make regulations for the purpose of carrying out the objects of the CA Act. Sub-section 2 to Section 30 authorises and permits regulations to be made in the matter of the standard and conduct of examinations; qualifications for entry of the name of any person in the register as its member; the conditions under which examination or training may be treated as equivalent to examination or training prescribed; manner in which and conditions for entry into the register of members; fee payable for membership of the institute and annual fee payable, training of articled and audit clerks, fixation of limits within which premium may be charged from the articled clerks etc, regulation and maintenance of the status and standard of professional qualifications of members of the institute etc. 9. In Commissioner of Income-Tax, Bombay versus Bar Council of Maharashtra, (1981) 130 ITR 28 (SC), the Supreme Court had examined whether the Bar Council of Maharashtra, a body corporate established under the Advocates Act, 1961, qualifies and can be regarded as „charitable institution‟ under the last limb of Section 2(15) of the Act. Looking at the preamble, W.P (C) No. 1927-2010 Page 9 of 57 nature and functions of the Bar Council prescribed under the Advocates Act, 1961, it was held that the primary purpose and object of the Bar Council is the advancement of the object of general public utility and hence it is covered by Section 2(15). However, with reference to the provisions that permitted constitution of one or more funds for the indigent, disabled or other Advocates and the effect thereof, the question was left open but it was held that even if such fund was constituted, question would be considered and the Court would have to decide whether the functions so undertaken had become the dominant purpose. 10. No doubt, the petitioner holds classes and provides coaching facilities for candidates/articled and audit clerks who want to appear in the examinations and want to get enrolled as Chartered Accountants and as well as for members of the petitioner-institute who want to update their knowledge and develop and sharpen their professional skills, but this is not the sole or primary activity. The petitioner-institute may hold classes and give diploma/degrees to the members of their institute in various subjects but this activity is only an ancillary part of the activities or functions performed by the petitioner institute. This one or part activity by itself, does not mean that the petitioner is W.P (C) No. 1927-2010 Page 10 of 57 an educational institute or is predominantly or exclusively engaged in the activity of education. The petitioner institute is engaged in multifarious activities of diverse nature, but the primary and the dominant activity is to regulate the profession of Chartered Accountancy. For this purpose it holds entrance examination and enrolls members. It regulates the conduct of its members, prescribes and fixes accountancy standards, etc. 11. Thus, we uphold the impugned order dated 19th May, 2009 passed by the respondent to the extent it has been held that the petitioner institute is covered by the last limb of Section 2(15) and is not an institute providing education but for reasons different than those ascribed in the said order. We are conscious of the fact that in Mohinder Singh Gill versus Chief Election Commissioner (1978) 1 SCC 405, and other cases it has been held that only reasons mentioned in the impugned order can be looked into, but we have gone into the said aspect as we perceive there cannot be any cavil or dispute with regard to the object and purpose of the petitioner institute and the statutory functions assigned to them. We have done so to avoid any prolix and lengthy litigation on the said aspect though the matter is being remitted to the authorities concerned on the second W.P (C) No. 1927-2010 Page 11 of 57 aspect i.e. application of the first proviso to Section 2(15) of the Act introduced with effect from 1st April, 2009. 12. As the first proviso was introduced with effect from 1st April, 2009, the scope and ambit of the said proviso to Section 2(15) of the Act has to be examined and considered. Earlier orders under Section 10(23C)(iv) are not relevant and are inconsequential, as they have not examined the scope and ambit of the first proviso. The proviso applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institute is not “charitable” if it is involved in carrying on 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. The second part, “any activity of rendering any service in relation to any trade, commerce or business” obviously intends to expand the scope of the proviso to include services, which are rendered in relation to any trade, commerce or business. The proviso further stipulates that the activity must be for a cess or fee or any other consideration. The last part states that the proviso will apply even if the cess or fee or any other consideration is applied for a charitable activity/purpose. The proviso has to be given full effect to. Thus, even if cess, fee or consideration is used or W.P (C) No. 1927-2010 Page 12 of 57 utilized for charitable purposes, the proviso and the bar will apply. An institution will not be regarded as established for charitable purpose/activity under the last limb, if cess, fee or consideration is received for carrying on any activity in nature of trade, commerce or business or for any activity of rendering of any service in relation to any trade, commerce or business, even if the consideration or the money received is used in furtherance of the charitable purposes/activities. In view of the first proviso, the decisions that the application of money/profit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the proviso and the bar/prohibition will apply. 13. Reliance place by the petitioners on Additional CIT versus Surat Art Silk Cloth Manufacturers Association, (1980) 121 ITR 1 (SC) may not be fully appropriate after introduction of the first proviso as the statutory requirements were then different. Utilization of the funds or income earned W.P (C) No. 1927-2010 Page 13 of 57 whether for charitable purpose or otherwise is not relevant now in view of the first proviso and cannot be a determining factor for deciding whether the petitioner institute is covered by Section 2(15) of the Act. In the said decision, it was held that the primary or dominant purpose of the trust or institution has to be examined to determine whether the said trust/institution was involved in carrying out any activity for profit. If the “object” of the trust or institution was to carry out object of general public utility and this was the primary or dominant purpose and not carrying on any activity for profit, the same would satisfy the requirements of Section 2(15) as it existed. It was immaterial whether members had benefitted from some of the activities. The aforesaid observations of the Supreme Court in the said case and other cases will be relevant only for determining and deciding the question whether the trust or institution is carrying on any business. In pursuance to the above stated, the following paragraphs are reproduced:- “3. ….The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit- making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a W.P (C) No. 1927-2010 Page 14 of 57 charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg J. when he said in Sole Trustee, Loka Sikhshana Trust's case [1975] 101 ITR 234, 256 (SC) that: “If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.” The learned judge also added that the restrictive condition “that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object.” (emphasis* supplied). We wholly endorse these observations. xxx If, for example, in the illustration given by us, it is found that the publication of the monthly journal is carried on wholly on W.P (C) No. 1927-2010 Page 15 of 57 commercial lines and the pricing of the monthly journal is made on the same basis on which it would be made by a commercial organisation leaving a large margin of profit, it might be difficult to resist the inference that the activity of publication of the journal is carried on for profit and the purpose is non-charitable. We may take by way of illustration another example given by Krishna Iyer J. in the Indian Chamber of Commerce [1975] 101 ITR 796 (SC) where a blood bank collects blood on payment and supplies blood for a higher price on commercial basis. Undoubtedly, in such a case, the blood bank would be serving an object of general public utility but since it advances the charitable object by sale of blood as an activity carried on with the object of making profit, it would be difficult to call its purpose charitable. Ordinarily, there should be no difficulty in determining whether the predominant object of an activity is advancement of a charitable purpose or profit-making. But cases are bound to arise in practice which may be on the border line and in such cases the solution of the problem whether the purpose is charitable or not may involve much refinement and present real difficulty.” 14. The most material and relevant words in the proviso are “trade, business or commerce”. The activities which are undertaken by the institute/person should be in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. The three words “trade”, “commerce” or “business” have been W.P (C) No. 1927-2010 Page 16 of 57 interpreted by the Supreme Court and other courts in various decisions. The word “trade” was elucidated in the case of State of Punjab v. Bajaj Electricals Ltd., (1968) 2 SCR 536. It has been opined:- “3. The expression “trade” is not defined in the Act. “Trade” in its primary meaning is the exchanging of goods for goods or goods for money; in its secondary meaning it is repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile, as distinguished from the liberal arts or learned professions or agriculture. The question whether trade is carried on by a person at a given place must be determined on a consideration of all the circumstances. No test or set of tests which is or are decisive for all cases can be evolved for determining whether a person carries on trade at a particular place. The question, though one of mixed law and fact, must in each case be determined on a consideration of the nature of the trade, the various steps taken for carrying on the trade and other relevant facts. 4. In the present case, the respondent has no shop or office within the State of Punjab. The respondent supplies goods within the State pursuant to orders received and accepted at New Delhi, and also receives price for the goods within the State. But these are ancillary activities and do not in our judgment amount to carrying on trade within the State of Punjab. We need not refer in detail to cases such as Grainger and Son v. Gough (Surveyor of Taxes); F.L. Smith & Co. v. F. Greenwood (Surveyor of Taxes) and Firestone Tyre Co. Ltd. v. Lewellin which interpret the expression “trade exercised W.P (C) No. 1927-2010 Page 17 of 57 within the United Kingdom” in the English Income Tax Acts, for they merely lay down that for the purpose of the Income Tax Acts, there is no single, decisive or “crucial” test to determine whether the taxpayer exercises trade at a given place” 15. The Supreme Court in Khoday Distilleries Ltd. v. State of Karnataka, (1995) 1 SCC 574 was of the opinion :- “68. There is no doubt that the word „business‟ is more comprehensive than the word „trade‟ since it will include manufacture which the word „trade‟ may not ordinarily include. The primary meaning of the word „trade‟ is the exchange of goods for goods or goods for money. However, the word „trade‟ has also secondary meaning, viz., business carried on with a view to profit. In fact, the words „trade‟ and „industry‟ are also used interchangeably many times. It all depends upon the context in which the words occur. In Words and Phrases Legally Defined, 3rd Edn., (Vol. 4; R-Z) by John B. Saunders, the word „trade‟ is explained as: “ „Trade‟ in its primary meaning is the exchange of goods for goods or goods for money and in a secondary meaning it is any business carried on with a view to profit, whether manual or mercantile, as distinguished from the liberal arts, or learned professions and from agriculture. However, the word is of very general application, and must always be considered in the context in which it is used. As used in various revenue Acts, ‘trade’ is not limited to buying and selling,