WP (C) No. 3032/2008 nsk Page 1 of 22 REPORTABLE * IN THE HIGH COURT OF DELHI AT NEW DELHI + WP (C) No. 3032 of 2008 % Reserved on : August 13, 2009 Pronounced on : August 28, 2009 ICAI Accounting Research Foundation & Anr. . . . Petitioner through : Mr. N.K. Poddar, Sr. Adv. with Mr. Pramod Dayal, Advocate VERSUS Director General of Income Tax (Exemptions) & Ors. . . . Respondents through : Ms. Prem Lata Bansal, Advocate for the respondent Nos. 1 & 2. Ms. Sonia Mathur with Mr. Sumit Kumar Singh, Advocates for UOI/ Respondent No.3. CORAM :- THE HON‟BLE MR. JUSTICE A.K. SIKRI THE HON‟BLE MR. JUSTICE VALMIKI J. MEHTA 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. 1. The Chartered Accountants Act, 1949 was enacted by the Parliament with the purpose of regulating the profession of Chartered Accountants. Under this Act, Institute of Chartered Accountants of India (ICAI) has been set up and, thus, it is a statutory body. It is given the prime function of regulating the profession of Chartered Accountants. It also lays down accounting and auditing standards which are to be followed by all enterprises. The ICAI has set up the WP (C) No. 3032/2008 nsk Page 2 of 22 Petitioner No.1, namely, ICAI Accounting Research Foundation (hereinafter referred to as the „Petitioner Foundation‟). The main objective of this Foundation is to make it an academy for imparting, spreading and promoting knowledge, learning education and understanding in the various fields relating to the profession of Accountancy, like accounting, auditing, fiscal laws and policy, corporate and economic laws and policies, economics, financial management, financial services, capital and money markets, management information and capital systems, management consultancy services and allied disciplines. It is formed as a company and was registered on 14.1.1999 with the Registrar of Companies, Delhi vide Registration/Incorporation Certificate bearing No. 55- 97935/1998-99 issued under Section 25 of the Companies Act, 1956. It is, thus a deemed company and is having the status of an Academy. 2. The objectives of the Petitioner Foundation are set out in clause (III- A) of its Memorandum of Association and the relevant clause there of reads as under :- “To conceive, establish, promote, sponsor, take over, own, run, administer, operate, maintain, equip and control an academy for the purpose of imparting, dissemination, spreading and promoting knowledge, learning, education and understanding in the fields of accounting, auditing, fiscal laws and policy, corporate and economic laws and policies, economics, financial management, financial services, capital and money markets, management information and control systems, management consultancy services and allied disciplines by any means whatsoever including – (i) Conceiving, formulating, undertaking, conducting, fostering, aiding, promoting and providing facilities for prosecuting, core, fundamental, empirical, applied and other kinds of research work and projects and studies, either on its own or jointly or in collaboration with or at the instance of other persons and entities. WP (C) No. 3032/2008 nsk Page 3 of 22 (ii) Conceiving, organizing, holding, conducting and sponsoring training programmes, study courses, lectures, meetings, workshops, seminars, conferences and symposia either on its own or jointly or at the instance of other persons and entities and also instituting and establishing awards, aid, scholarships and fellowships. (iii) Conceiving, preparation, bringing out, printing and publishing either on its own or through or in collaboration with other persons and entities, papers, periodicals, magazines, books, journals either through print or any other media. (iv) Starting, establishing, running, maintaining and providing library and electronic database and exchange facilities and other information services.” 3. Clauses (v) and (vi) of the Memorandum of Association specifically provide that income and property of the company shall be applied solely for promotion of its objectives and no portion thereof shall be paid, directly or indirectly, by way of dividend, bonus or otherwise by way of profit to the members. Even remuneration or other benefit in monies is not to be given by the company to any of its members, whether officers or servants of the company or not, without the previous approval of the Central Government. Likewise, members are not to be appointed to any office under the company which is remunerated by salary, fees or in any other manner, without the previous approval of the Central Government. Even the alteration in the Memorandum of Association or Articles of Association of the company is not permitted without submitting the same to the Central Government and obtaining its prior approval. WP (C) No. 3032/2008 nsk Page 4 of 22 4. The Petitioner Foundation is also registered under Section 12-A read with Section 12-AA(i) of the Income Tax Act, 1961 (for short, the „Act‟) with effect from 14.1.1999, i.e. from the very first day of its incorporation/registration under Section 25 of the Companies Act. It is also recognized as a Scientific and Industrial Organization by the Government of India, Ministry of Science and Technology, Department of Science and Industrial Research, New Delhi under the Scheme of Re-organisation of Scientific and Industrial Research Organizations, 1988 vide Certificate dated 5.10.2006. This recognition was originally granted from 18.11.2003 to 31.3.2006 and was further extended vide Certificate dated 5.10.2006. 5. The Petitioner Foundation made an application dated 15.12.2006 to the Respondent No.1 herein in Form No. 56 for claiming exemption from income tax under Section 10(23C)(iv) of the Act taking the plea that it is covered by the expression “charitable purposes”, as defined in Section 2(15) of the Act. Certain information was asked by the Respondent No.1, which was supplied by the Petitioner Foundation from time to time. After considering this application, the Respondent No.1 ultimately rejected the request vide its order dated 28.12.2007 stating that the Petitioner Foundation did not qualify for approval under the aforesaid provision. The present writ petition has been filed by the Petitioner Foundation assailing this order. 6. If one is to go by the purpose and objective with which the Petitioner Foundation was created, namely, imparting, spreading and WP (C) No. 3032/2008 nsk Page 5 of 22 promoting knowledge, learning education, etc. in the fields related to the profession of Accountancy, it will clearly fall in those category of institutions which are devoted to research and are of charitable nature. Definition of „charitable purpose‟ is contained in Section 2(15) of the Act, which is as under :- “Charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility.” The aforesaid objective of the Petitioner Foundation would fall within the expression „Education‟, as appearing in the aforesaid definition. The vision of the Petitioner Foundation is to establish it as a co-research body with facilities to undertake research in the areas of accounting, auditing, capital markets, fiscal policies and other related disciplines and to develop quality pronouncements, documents, research papers on these subjects. 7. The Petitioner Foundation has placed on record its annual reports right from the year of inception, i.e. 1999-2000. A glance of these reports gives sufficient information about the actual activities undertaken by the Petitioner Foundation. In the first year of its establishment, it had identified the following research projects to be undertaken by it :-  Investment Decision Models of Retail and Institutional Investors – Use of Accounting Information.  Effect of Accounting Information in Published Annual Reports on Movement in Share Prices.  Considerations in Deciding Accounting Policies by Listed Companies. WP (C) No. 3032/2008 nsk Page 6 of 22  Current Accounting Practices of Local Bodies and Panchayats.  Current Risk Management Practices by Indian Companies.  Current Risk Management Practices by Banking Companies and Financial Institutions.  Fiscal Law Administration – Concept of Accountability.  Taxation of E-commerce Business.  The Structure of Accounting Profession in India – Its Future in WTO Regime.  Accounting Standards – Expectation Gap.  Ethical Standards for Professional Accountants/Auditors – A Study of Global Standards including Indian Standards. 8. The Petitioner Foundation also sought affiliation from Guru Gobind Singh Indraprastha University for offering Ph.D. programmes, which was granted. As a result, it enrolls Research Fellows and on successful completion of research study, a Doctoral Degree is granted by the University to those Research Fellows. During the past few years, the other projects and the nature of research conducted by the Petitioner Foundation included the following :- (a) Corporate Financial Communications; Trends and Practices of Business Groups in India. This research project seeks to ascertain observable trends in corporate financial reporting practices of companies in India (including MNC‟s operating in India) to establish how efficiently, clearly and transparently the performance is reflected in the audited financials, is communicated to shareholders and other stakeholders through medium of annual reports, Chairman speeches and Directors‟ Report. WP (C) No. 3032/2008 nsk Page 7 of 22 (b) Issues in Accounting – Valuation of Intangibles: The Research Project is undertaken with an aim to address the accounting issues in knowledge based industry with particular reference to bio-technology industry which is an emerging knowledge driven industry in India and promises a very high rate of growth. The industry based on high research and knowledge content gives rise to various types of intangible assets like patents, intellectual property rights, technical knowhow and human resources. The study is intended to focus on the accounting principles, policies and practices followed for recognition, measurement and disclosure of such assets. (c) Developing a code for Governance of Non-Governmental Organisations (NGOs): The research study primarily focuses on governance in NGO‟s. (d) Electronic Commerce and Direct Taxation: The objective of the research project is to bring out a publication describing the electronic commerce, the significance and the issues which arise in the context of application of existing income tax laws. (e) Legal protection of Intellectual Property Rights in Information Technology Industry: The research project titled “Legal protection of Intellectual Property Rights in Information Technology Industry” under the Infosys Fellowship Research Scheme is also taken up. Certain changes have been contemplated in the Infosys Fellowship Scheme WP (C) No. 3032/2008 nsk Page 8 of 22 Agreement, with a focus to enlarge the scope of the agreement to include the research scholars pursuing Ph.D. from other reputed Universities, to become eligible under the Infosys Fellowship Research Programme. (f) Research Study on Recognition, Measurement and Disclosure issues in Bio-Technology and other life science companies, Information Technology (IT) Companies and advertisement companies: A group of „Recognition, Measurement and Disclosure issues in Bio-Technology and other life science companies, Information Technology (IT) Companies and Advertisement Companies‟ was set up with the representatives from the office of Comptroller & Auditor General of India, The Institute of Chartered Accountants of India, Technology Development Board, Technology Networking and Business Development Division (CSIR), Consultants Development Council, and the Industry. Based on the presentation made by the leading companies in the areas, the Study Group circulated a questionnaire covering accounting and disclosure issues to large number of companies. The response received is being collated, analyzed and examined together with accounting policies and practices being followed in other countries. (g) Developing a code of Governance for Non-Profit Organisations (NPOs): The study on Code of Governance for Non Profit Organisation (NPOs) Sector is underway. The draft of the study prepared by Investment Information and Credit Rating Agency of India Ltd. WP (C) No. 3032/2008 nsk Page 9 of 22 (ICRA) on the above subject is considered by the Expert Group of the Petitioner Foundation. The study proposes to suggest the model code of governance for such organizations and would be brought out as a research publication under the Petitioner Foundation. (h) Electronic Commerce and Direct Taxation: In this project the study on Electronic Commerce and Direct Taxation commissioned is undertaken. (i) Financial and Accounting Reforms, Capacity Building and Related Strategies: The Petitioner Foundation joined the ICAI as co-partner for submission of proposals for carrying our research in the area of financial statements and accounting reforms to the Small projects Facility programme (European Union Projects). Out of the above proposals submitted, the proposal titled “Financial and Accounting Reforms, Capacity Building and Related Strategies” was accepted. As per the scope of the project, a detailed study on nine shortlisted urban local bodies on development of institutional framework along with strategies directed towards building capacity for undertaking the suggested reforms has been carried out. As a precursor to this project, the Petitioner Foundation has financed a project on evaluating the capacity for financial and accounting reforms in the cities of Amritsar, Jalandhar, Ludhiana, Chandigarh, Shimla, Delhi, Kolkata, Chennai, Mumbai, Nasik, Baroda and Ahmedabad. The research report was circulated to various concerned agencies including the World Bank and Asian Development Bank. WP (C) No. 3032/2008 nsk Page 10 of 22 (j) Impact of International Accounting Standards/International Financial Reporting Standards on the wider stakeholders: Oxford University of Business School (Accounting) has sent a request to Petitioner Foundation for collaborating with them for a research project on “Impact of International Accounting Standards/ International Financial Reporting Standards on the wider stakeholders”. 9. There are various other research projects of varied nature and it would not be necessary to incorporate all these activities as the aforesaid projects give sufficiently fair idea of the activities of the Petitioner Foundation. It has also plans to even set up ICAI University, for which action has already been initiated. It also contemplates to take strategic initiative to carry out the process of research studies and in this behalf move is to launch the promotional campaign for establishing direct contact with the Universities and other bodies on the one hand and reaching out to the potential researcher throughout the country on the other. 10. On the basis of the aforesaid activities, there is not even an iota of doubt that the Petitioner Foundation is involved in education and, thus, meets the description of „charitable institution‟. 11. These aspects are not even disputed by the respondent No.1. Notwithstanding the same, the Respondent No.1 has denied the exemption. What is the reason then? For this, we shall have to advert to the impugned order. WP (C) No. 3032/2008 nsk Page 11 of 22 12. When we scan through the impugned order, we find that the main reason given by the Respondent No.1 is that during the financial year 2003-04, 2004-05, 2005-06 and 2006-07, the Petitioner Foundation has mainly done contract work, for which it has received certain payments. These activities are basically the jobs done for third parties, for consideration received. Therefore, the Petitioner Foundation is providing professional services on regular basis, which amounts to doing business of providing professional services. Since professional services is a commercial activity, it cannot be taken as a ‘charitable activity’. Particulars of the various such jobs undertaken by the Petitioner Foundation and the amounts received for those consultancy services are also stated in the impugned orders. Those details indicate that they broadly fall in two categories, which are as under :- (a) The Petitioner Foundation is providing research and consultancy services to various Government bodies; the payments are made by these Government bodies and have been accounted for by the Petitioner Foundation under the head “Research Contributions”. The payments so received are then used for making the payment to Researchers/Consultants hired by the petitioner to carry out the research work. The particulars shown indicate that three Government projects were undertaken by the Petitioner Foundation, namely, that of Municipal Corporation of Delhi (MCD), Kolkata Municipal Corporation (KMC) project and Strengthening Rural Decentralization (SRD) project. The representative of the Petitioner WP (C) No. 3032/2008 nsk Page 12 of 22 Foundation had urged before the Respondent No.1 that these were not the business/commercial activities but simply research activities and, in fact, expertise was provided to the aforesaid bodies who wanted to streamline their accounting system. It was, therefore, in the nature of research activity only. This plea, however, is brushed aside by the Respondent No.1 in the following terms :- “VI. The contention of the appellant that the Research activities are not any business/commercial activities but simply Research activities provided to various bodies for obtaining the objects of the foundation and are beneficial to the public at large, is not acceptable. The applicant is carrying on business activities of research and consultancy work on consideration received from government and non-government organizations. Activities of the applicant are akin to a contractor providing goods or services to a charitable hospital. The hospital may be doing charity by providing medical services, but contractor providing goods and services for consideration cannot be said to be engaged in charitable activities. Another example could be of a professor in an educational institution. An educational institution may be providing charity but professor rendering services for salary is not doing charity.” (b) The Petitioner Foundation had also received monies from Infosys Technologies Limited in the form of Infosys Fellowship Fund. Though it is for grant of fellowship to deserving candidates under the Fellowship programme of the foundation in affiliation with Guru Gobind Singh Indraprastha University, the Respondent No.1 was of the view that even from this it would be concluded that the Petitioner Foundation is not doing charitable activity because of the reasons stated in this manner :- “VII. Regarding the scheme of granting stipend and fellowship to students, it is noticed that funds for the same are being provided by Infosys Technologies Ltd. As per the agreement signed with Infosys Technologies Ltd., it is found that entire Endowment amount of Rs.9,00,000/- per fellow is to be WP (C) No. 3032/2008 nsk Page 13 of 22 provided by Infosys Technologies Ltd. if a fellow leaves in the middle of the programme, or finishes early with funds left in the account, Infosys will decide how the money is to be spent. This shows that this stipend and fellowship are being funded by Infosys Technologies Ltd. with the applicant playing only the role of a facilitator. Hence, the applicant cannot be said to be doing any charitable activity in this regard.” The Respondent No.1 was also of the view that even if it is considered that the Petitioner Foundation was carrying on some other charitable activities, separate books of accounts were required to be maintained in respect of business of providing contractual services to various Government bodies as per proviso Section 10(23C)(iv) of the Act, which was not being done by the Petitioner Foundation. 13. The submission of learned counsel for the petitioner in this behalf was that the main activities of the Petitioner Foundation carried out all along were educational and, thus, charitable in nature. The aforesaid activities are incidental to the attainment of its objective. Explanation of the petitioner is that at the instance of the aforesaid local bodies, namely, MCD, KMC and SRD, the Petitioner Foundation took up three projects with sole aim and endeavour to improve and reform preparation and presentation of accounts and accounting process, financial analysis and management practices in these urban local bodies. It is explained that the MCD project was taken up by the Petitioner Foundation in March 2002 and was successfully completed on 31.5.2006. This project arose out of the decision of the Government of India to implement accrual based accounting reform in the third year of the Government. This was a WP (C) No. 3032/2008 nsk Page 14 of 22 new initiative in India where Controller of Accounts and Accountant General (CAG) had no prior exposure. Therefore, there was need for collection and assimilation of data and experience. This body, thus, wanted to utilize the expertise of the Petitioner Foundation by undertaking this project of applied/field research. The nature of work was essentially research. Based on the study undertaken by the Petitioner Foundation, publication titled “Conversion of Accounts of Municipal Bodies to Accrual Basis – Issues, Concerns and Strategies” has been published and made available to the public at large. Thus, according to the Petitioner Foundation, it assisted the MCD in preparing and presenting their annual financial statements, comprehensive annual financial reports, comprehensive reconstructing of the budget heads as well as refining their accounting process in their various zones, hand holding and assistance in setting up the financial management and budget office. The Petitioner Foundation had also carried out number of training programmes for the core group of Nodal Officers of MCD focusing on double-entry accounting system, computer awareness, bank reconciliation and familiarization with new data formats. In the implementation of the Fund Based Accrual System, the Petitioner Foundation also assisted MCD in introducing best practices which are being followed in leading Municipal Corporations world over. 14. Likewise, the Kolkata Municipal Corporation project was taken up by the Petitioner Foundation in July 2004 because it involved further study of some unique characteristics different from the above. This WP (C) No. 3032/2008 nsk Page 15 of 22 was successfully completed in September 2007. During this period, the Petitioner Foundation assisted Kolkata Municipal Corporation in the preparation of its financial accounts, carried out number of studies on business process re-engineering, and also conducted various management training programmes for capacity building etc. The Petitioner Foundation demonstrated to the Municipal Corporation the effects of what improved presentation of accounts can achieve, what improved financial analysis and management practices can provide and submitted its findings. The Petitioner Foundation also assisted the Municipal Corporation in preparing report on sustainability, containing specific recommendations of integrated capacity building exercise with organizational changes, and standardized formats of financial statements and established audit trails. The Kolkata Municipal Corporation was also provided by the Petitioner Foundation with a clear road map for strengthening its internal audit department. 15. In Strengthening Rural Decentralization (SRD) project, the team of the Petitioner Foundation carried out field visits to various Gram Panchayats (GPs) and Gram Unnayan Samitis (GUSs) spread across the 6 SRD Districts and other non-SRD Districts of West Bengal. In these field visits, the team of Petitioner Foundation carried out study of and assisted in framing proper accounting, auditing and procurements system and procedure in the case of GPs and GUSs, as a deliverable accounting manual, internal audit manual, as well as the procurement manual. WP (C) No. 3032/2008 nsk Page 16 of 22 16. The aforesaid description of the three projects given by the Petitioner Foundation finds support from the annual reports as well as other documents produced and annexed by the Petitioner Foundation with this writ petition. 17. It clearly follows that even these three projects were the research projects which were given to the Petitioner Foundation having regard to its expertise in this field. Therefore, these activities per se would not bring out the Petitioner Foundation out of the ambit of Section 2(15) of the Act. It can be said that the activities amounted to “Advancement of an object of general public utility” which also appears in the definition of charitable purpose in Section 2(15) of the Act. The only aspect, in this backdrop, which needs to be considered is as to whether charging of amount from the MCD, KMC etc. for undertaking these research projects would make the activity „commercial‟, as held by the Respondent No.1 in the impugned order. Before we answer this, it would be apposite to take note of some of the judgments defining „charitable purpose‟. 18. The first case, which may be relevant on this aspect, is the judgment of this Court in the case of Additional CIT v. Hamdard Dawakhana, (1986) 157 ITR 639 (Del). In that judgment unamended definition of „charitable purpose‟ contained in Section 2(15) of the Act was considered. Following discussion contained in the judgment reproduced unamended definition as well, along with its interpretation :- WP (C) No. 3032/2008 nsk Page 17 of 22 “15. The main point urged by Mr. Wazir Singh was based on the definition of "charitable purpose" stated in section 2(15) of the Act. This definition as in the 1961 Act is as follows : "'charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility