Institute for Development and Research in Banking Technology (IDRBT) vs. ADIT (ITAT Hyderabad)

(i) The ratio laid down in Sole Trustee, Loka Shikshana Trust v. Commissioner of Income-Tax, Mysore 101 ITR 234 (SC), CIT vs. Andhra Chamber of Commerce 55 ITR 722 (SC) and Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association 121 ITR 1 is that in the case of entity or organization whose objects are several, some of which are charitable and non-charitable; the test of predominant object for which the organization was set up is alone to be applied. Therefore, in the present case, the research and development in the Information Technology in the Banking Sector is the prime object for which the Appellant society was created by the Reserve Bank of India as is evident from the genesis of the organization. Offer of M.Tech course, Ph.D. programmes are only incidental for attainment of main objects of the organization. The primary object of promoting the technology in banking and financial sectors does not fall within the ambit of expression ‘education’ as defined above, since the said activity does not involve systematic instruction, schooling or training given to the young in preparation for the work of the life. The projects undertaken and the research activities by the society are only aimed at improvement of technology in Indian Banking and Financial sectors. As a result of developments in these areas, society at large shall be benefited and shall promote the welfare of general public. The improvement in technology related to Banking Sector leads to economic prosperity which enures for the benefit of entire community. Therefore, these objects can be said to be for advancement of any other objects of general public utility, which is a fourth limb in the definition of ‘charitable purpose’ in Section 2(15) of the Act. The principle enunciated by Hon’ble Apex Court in the case of CIT vs. Andhra Chamber of Commerce 55 ITR 722 holds good. When an object seeks to promote or protect the interests of a particular trade or industry, that object becomes an object of public utility, but not so, if it seeks to promote the interests of those who conduct the said trade or industry. The distinction between the protection of the interests of individuals and the protection of interests of an activity which is of general public utility goes to the root of the whole problem: CIT v. Andhra Chamber of Commerce, (1965) 55 ITR 722, 727 (SC); Addl. CIT v. Ahmedabad Millowners’ Association, (1977) 106 ITR 725, 738 (Guj)]. Applying the ratio laid down in the above cases to the facts of the present case, we have no demur to hold that the objects of the Appellant are aimed at improving the Information Technology in the Banking and Financial Sector. The question of private gain or profit motive cannot be attributed to the appellant society as the Reserve Bank of India is the creator of the appellant society. Therefore, undoubtedly, the objects of the trust fall within the ambit and scope of the expression “general public utility services”, which is a fourth limb of the definition of word “charitable” as defined under Section 2(15) of the Act.

(ii) As regards the proviso to Section 2(15) of the Act, it is clearly discernible from the CBDT’s Circular No.11 of 2008, dated 19.12.2008 and speech of the Hon’ble Finance Minister that the intention of Parliament in introducing the proviso to Section 2(15) of the Act is to deny exemption to those organizations or entities, which are purely commercial or business in nature or the commercial business entities, which wear the mask of a charity. The genuine charitable organizations are not affected in any way. It was further clarified that Chambers of Commerce and similar organizations rendering service to its Members could not be affected by introduction of the proviso. We, therefore, are required upon to find out whether the objects of the Appellant society are commercial or business in nature. Keeping this in mind, it is to be examined what is meant by the expression “commercial or business”. The words ‘trade’, ‘commerce’ and ‘business’ were enumerated and elucidated in Institute of Chartered Accountants of India v. Director-General of Income-tax (Exemptions) [2012] 347 ITR 99 (Delhi)

(iii) Applying the tests enumerated, by no stretch of imagination, it can be said that the Reserve Bank of India had set up the Appellant society with a profit motive. It is most significant to note that the provisions of the Reserve Bank of India do not empower it to carry on any activity with profit motive. The activities of the appellant society are charitable and are not in the nature of commercial, or business. When the main objects of the appellant society are not business, the incidental activity, which is pursued for attainment of the main objects, cannot be called “business”, merely because the appellant society renders services against payment as fees or cess, even if resulting in profit. The Hon’ble Apex Court in the case of CIT vs. Andhra Chamber of Commerce – (1965) 55 ITR 722 – laid down the principle that if the primary purpose of institution was advancement of objects of general public utility, it would remain charitable, even if some incidental or ancillary activity or the purpose for achieving the main purpose, was profitable in nature.

(iv) The rational that can be culled out from the above decisions is that once the primary objects of an institution are established to be in the nature of charity, then the proviso to section 2(15) of the Act can not be made applicable. In other words, the existence of the proviso in substance will not make any difference. The proviso will hit only such cases where the entity or organization is carrying on business activity with a profit motive in the garb of charitable purpose. It will not however affect the case of institution which are genuinely carrying on charitable activities. The words used by the legislature in the proviso “In the nature of trade, commerce or business”. If we give due importance to the above mentioned words, the only conclusion will be that the proviso will effect only such cases where the activities of a charitable institution can be considered to be in the nature of trade, commerce or business. In fact, the same controversy, which has been there in the past, whether a charitable institution is carrying on the activities only of charitable nature or is carrying on activities which are in the nature of business, is emerging from this proviso also. In other words, the proviso will not give rise to any new controversy which had not been in the past. The further words used in the proviso, that for a cess or fee or any other consideration, have to be read alongwith the nature of activities, i.e., trade, commerce or business. When an institution is carrying on activities in the nature of trade, commerce or business obviously it will be charging fee, etc. It may be charging fee even when rendering/providing services as part of charitable activity in order to supplement its income for carrying on charitable activities. In that case the proviso will not have any implication as the activities would not be in the nature of trade, commerce or business. Accordingly, the proviso inserted in the definition of ‘charitable purpose’ will not substantially have any impact on the meaning of charitable purpose.

(v) What needs to be considered is as to whether the charging of amounts from the banks for the services rendered by the appellant society would make the activity ‘commercial’ as held by the Assessing Officer. The mere fact that the appellant society had generated surplus, during the course of carrying on the ancillary objects, shall not alter the character of the main objects so long as the predominant object continues to be charitable and not to earn the profit. Please refer to the judgments rendered by the Hon’ble Apex Court in the cases of Addl. CIT vs. Surat Art Silk Cloth Manufacturers’ Association [1980] 121 ITR 1 and CIT v. A.P. State Road Transport Corporation [1986] 159 ITR 1. The ratio laid down in the cases (Surat Art Silk Cloth Manufacturers Association, Aditanar Educational Institution and American Hotel and Lodging Association Educational Institute) is that mere existence of surplus from the activity does not mean that it will cease to be one existing solely for charitable purpose. The test to be applied is only the nature of predominant activity to determine whether the institution is existing for charitable purpose or otherwise. Therefore, in the instant case also, the mere fact that there was a surplus from the ancillary activities carried on by the appellant society does not mean that its objects ceases to be charitable.