Himachal Pradesh Environment vs. CIT (ITAT Chandigarh)

Proviso to s. 2(15) does not apply to incidental services rendered without profit motive

The assessee, a statutory Board, was set up for prevention of pollution of streams and wells in the State and other allied activities. It derived income from various testing charges etc. The CIT granted registration u/s 12AA of the Act on the basis that the activities of the assessee constituted a “charitable purpose” u/s 2 (15) and that its’ income was eligible for exemption u/s 11. S. 2 (15) was amended by the FA 2008 w.e.f AY 2009-2010 to provide that the term ‘advancement of any object of general public utility’ would not constitute a “charitable purpose” if “it involves the carrying out of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to such trade, commerce or business, for a cess or fees or any other consideration, irrespective of nature of use or application of the income from such an activity”. Pursuant thereto, the CIT withdrew the registration granted u/s 12AA on the ground that (i) the assessee was a ‘regulatory agency’ and not engaged in a ‘charitable activity’ and (ii) the activities were carried out in a commercial manner with a view to earn profits and so were excepted from the definition of the term “charitable purpose”. On appeal by the assessee, HELD reversing the CIT:

(1) The fact that the assessee is a regulatory body does not mean it cannot pursue an ‘object of general public utility’ which qualifies to be a charitable activity u/s 2(15). The scope of the expression ‘any other object of general public utility’ is very wide, though it excludes objects of private gain such as an undertaking for commercial profit even though the undertaking may subserve general public utility. On facts, as the assessee was engaged in the activities of “prevention, control or abatement of pollution”, its objects were of general public utility;

(2) The Proviso to s. 2 (15) inserted by the FA 2008 w.e.f AY 2009-10 can apply only to entities whose purpose is ‘advancement of any other object of general public utility’. The assessee was covered by a specific category inserted by the FA 2009 in s. 2(15) w.r.e.f 1.4.2009 i.e. “preservation of environment …” Consequently, the question whether the activity was in the nature of trade, commerce or business was irrelevant;

(3) The Proviso to s. 2(15) does not mean that in case an assessee receives any payment for anything done for trade, commerce or business, it will be hit by the said proviso. In accordance with the CBDT Circular, the Proviso applies only where the object of general public activity is a mask or device to hide the true purpose of trade, business or commerce, or rendering of any service in relation thereto. It does not apply to cases where the services rendered are purely incidental to or subservient to the main objective of ‘general public utility’;

(4) The contention of the CIT that as the assessee was regularly charging fees and charges it was engaged in an activity of “rendering service in relation to trade, commerce or business” was not correct because the expression ‘rendering of any service to trade, commerce or business’ was used in conjunction with the words ‘trade, commerce or business’ and following the principles of nosciter o soccis had to be interpreted in the same sense. A profit motive was the essence of trade, commerce or business, and where the services were rendered without a profit motive, such services will not have anything is common with trade, business or commerce. Accordingly, to fall within the second limb of the Proviso to s. 2(15), ‘rendering of service to trade, commerce or business’ must be such that it has a profit motive;

(5) On facts, the activities performed by the assessee trust were regulatory functions for the public good. The fees or charges were collected in the course of discharging these regulatory functions. Such fees and charges were not receipts in consideration of rendering services to trade, commerce or business;

(6) In any event, s. 12AA(3) confers jurisdiction to withdraw registration granted u/s 12 AA only when (a) the activities of the trust or the institution are not ‘genuine’ or (b) the activities of the assessee are not being carried out in accordance with the objects of the trust or the institution. The registration cannot be cancelled for other reasons. As the assessee’s activities could not be said to be non-genuine and as it was pursing the objects for which it was established, the registration could not be cancelled.