ORDER
S. Grover, Judicial Member
1. The captioned appeal is directed against the order dated 2-2-1985
passed by the Commissioner, Delhi IV, New Delhi under Section 263(1) of
the Income-tax Act, 1961 (‘the Act’) in respect of the assessment year
1980-81. The primary contention is against the finding and decision
under the revisionary powers that the assessee foundation did not fall
within the ambit of charitable purposes, as defined in Section 2(75) of the
Act and, therefore, was not entitled to exemption under Section 11 of the
Act as a charitable institution. The action of the learned Commissioner
in computing the business income at Rs. 1,08,973 is also challenged in
the alternative, and denial of depreciation amounting to Rs. 17,398 is
further contested.
2. In the assessment order dated 23-3-1983 framed under Section 143(3)
of the Act by the ITO, Trust Circle V, New Delhi the facts stated are that the asscssee-society was formed and registered under the Societies Registration Act, 1860 at registration No. S/7466 of 1975 on 21-1-1975 by the Registrar of Societies, Delhi. It was registered (under Section 12A of the Act), registration given being DLI (C) i-539 by the Commissioner Delhi-II, New Delhi vide his office No. CIT/II/TE (82)/75/8062 dated 19-9-1975. Exemption in respect of grants and other receipts was granted under Section 80G of the Act up to 31-3-1977 by the said Commissioner vide his letter No. CIT-II/TE(82)/75/1836 dated 19-11-1976.
3. Return showing income of Rs. 2,060 was furnished on 13-6-1980
against which assessment came to be framed at Rs. 5,060 because the
assessee had set apart a sum of Rs. 93,132 under Section 11(1) (a) leaving
a surplus of Rs. 5,062 and its claimed deduction of Rs. 3,000 under
Section SOL of the Act was not allowed, being not admissible in the case
of an AOP. The following portion of the assessment, I am noticing below
to give the facts of this year, as also to project the pattern of receipts and
the sources thereof, as also the nature of expenses from the inception of
the foundation :
The assessee contributes interest-free loan to new entrepreneurs whose projects are financed by any of the All India Financial Institutions, like Industrial Finance Corporation of India; Industrial Development Bank of India; Industrial Credit & Investment Corporation of Indian Ltd., etc. During the year under consideration the assessee derived income of Rs. 3,72,530 which consisted of service charges of Rs. 66,359, application fees of Rs. 32,000, legal charges of Rs. 8,000, interest of Rs. 1,00,903, I.F.C.I, grant of Rs. 1,65,093 and miscellaneous receipts of Rs. 175. The asssessee had incurred expenses and applied income to charitable purposes aggregating to Rs. 2,74,336.
4. The Commissioner, however, gave a notice dated 17-5-1984 under
section 263(1) intimating that he intended to withdraw exemption under
Section 11. The assessee resisted invoking of the provision under Section
263 by filing a reply dated 4-7-1984, along with which a detailed note of
22 pages was submitted. The learned Commissioner, however, passed
the impugned order by which he withdrew the exemption and computed
taxable income at Rs. 1,08,973 by holding as follows :
(a) that the objects of the foundation did not conform to the requirements
of the definition of charitable purpose in Section 2(15), as such objects
were not of general public utility; and
(b) that the foundation was involved in activity of profit and the services
were being rendered and fee being charged from various entrepreneurs for
rendering services.
5. I heard Shri O.P. Vaish, the advocate for the appellant, at length and
was assisted by Shri S.K. Bansal for the revenue. The appellant founda
tion (‘RCF’ or ‘foundation’) has been sponsored by the Industrial Finance Corporation of India — IFCI — which is under the administrative control of the Ministry of Finance, Government of India and constituted by an Act of the Parliament.
6. RCF was inaugurated on 10-3-1975 by the then Minister of Industries
and Civil Supplies of the Central Government. According to the
Memorandum of Association and the rules, a copy of which has been filed,
its principal objects can be spelt out below :
(i) To help, aid, assist, finance, undertake and organise … , assistance to new entrepreneurs, technologists and professionals for promoting industrial projects by giving necessary guidance and financial assistance to enable them to subscribe to promoters’ equity of projects eligible for financial assistance from the Industrial Finance Corporation of India and other financial institutions and bodies corporate on such terms and conditions as may be decided upon by the foundation from time to time.
(ii) To render any assistance that may be ancillary or incidental to the aforesaid purposes, including giving of loans and advances free of interest or at nominal rate of interest, etc.
7. RCF funds are stipulated to mainly consist, inter alia, (i) loans from
the IFCI, with or without interest, out of the Benevolent Reserve Fund
established under Section 32B of the Industrial Finance Corporation Act,
1948; (ii) Loans and grants made available by the IFCI out of interest
differential funds arising out of lines of credit in D.M. to the IFCI from
the Kreditanstalt fur Wiederaufbau of West Germany and allocated to
the IFCI by the Government of India; (ii) All fees, service charges,
interest and other charges received by the foundation; and (iv) All dona
tions, gifts and other monies received by the foundation in any other
manner or from any other source.
8. The foundation income and property is statutorily stipulated to be
applied solely towards the promotion of its objects and no portion thereof
can be paid or transferred directly or indirectly by way of dividend, gift,
division, bonus or otherwise by way of profit to its members.
9. The nature and control of the management of the foundation can be
understood by stating that it is managed by the board of trustees,
consisting of besides, its chairman, two directors of the Board and the
executive director of the IFCI as ex-officio member and two persons
nominated by the board of IFCI to represent industry, finance, banking
and technical institutions, bodies of undertakings, two persons nominated
by the said board to represent All India Financial institutions and one
representative nominated by the Chairman of IFCI on behalf of
Kreditanstalt fur Wiederaufbau of Frankfurt (KFW).
10. Against the above background the learned Commissioner inferred
that the foundation was established to provide help, aid, finance and
organise the advancement and promotion of industry, trade and commerce, and such object was to be achieved by providing guidance and financial assistance to new entrepreneurs, technologists and professionals. In my considered opinion, however, it is the other way. The primary object is to help new entrepreneurs by giving interest-free loans and in the process the industry gets impetus for advancement. Therefore, the basic approach of the learned Commissioner made all the differences.
11. For the assessee, a statement of income and expenditure loan and disbursement from its inception to 31-12-1984 has been filed and is at page 159 of the paper book, from where I notice that for the said period advances by way of risk capital to the entrepreneurs amounted to Rs. 349.57 lakhs. The total recovery on account of all charges over the said period has been Rs. 18.66 lakhs only. The administrative cost of the foundation for the said period Rs. 36.36 lakhs. The deficit has been made partly out of the grants received from the IFCI and partly from investing the non-refundable grants and interest-free loans in short-term deposits until disbursement. The other heads of receipts and expenditure, which I like to notice, are as follows :
Rs.
1. Receipts from borrower on
account of SC, CSC, etc. 14.17 lakhs
2. Receipts on account of application
fees and legal charges. 4.49 lakhs
3. Miscellaneous income (Interest on STD, etc.) 28.43 lakhs
4. Expenditure grant recovered from IFCI 9.92 lakhs
5. Total income (1+2+3+4) 7.01 lakhs.
12. Shri S.K. Bansal, the departmental representative submitted that
keeping in view the findings of the Commissioner that foundation was
carrying on activities for profit which he emphasised was positive, the
assessee was rightly denied exemption under Section 11 read with section
2(15). Next Shri Bansal referred me to a decision of the Tribunal in the
case of Samaj Kalyan Parishad v. ITO [1984] 9 1TD 799 (Delhi) and
contended that the dominant and ancillary objects must be separated and
in such view of the matter also the assessee could not be held to be a
charitable institution.
13. For the assessee Shri Vaish submitted that if the revenue’s representa
tive’s argument was to be accepted, it would follow that the Commissioner’s
inferences should be taken as positive findings, which could not be a
correct approach. As far as Samaj Kalyan Parishad’s case (supra), Mr.
Vaish submitted that it was simply not applicable to the facts, because it
was held in that case that tai Ioring establishment was run on commercial
lines and that the assessee had derived substantial profit from such activity. There was further finding in that case by the Tribunal that income derived from a given business would be exempt only when such business is carried on in the course of actual carrying out of a primary purpose of the trust, which come within the ambit of Section 2(15) and such was not the situation in the said case.
14. The necessary facts have been given and the object and working of
the foundation has also been projected. Before proceeding further the
definition of the words’charitable purpose’ may be noticed, given under
Section 2(75) :
(15) ‘charitable purpose’ includes relief of poor, education, medical relief and the advancement of any other object of general public utility;
15. I have recorded the contentions of the parties and have referred to
the decision in Samaj Kalyan Parishad’s case (supra) and accept the
appellant-advocate’s contention that the decision in that case went
against the assessee because of the finding that profit activity was not
being carried to further the cause of the primary object. The cited
Tribunal decision is, therefore, not applicable.
16. I have given the necessary datas with regard to advancing of loans
and the related receipts and expenses with a purpose to show that activity
of profit can be only if activity is for profit. The Hon’ble Supreme.
Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association
[1980] 121 ITR 1 has laid down the golden principle, which is the law
of the land, that the true meaning of the last 10 words in Section 2(15),
‘not involving the carrying on of any activity for profit’, is that when
the purpose of a trust or institution is the advancement of an object
of general public utility, it is that object of general public utility
and not its accomplishment or carrying out which must not involve
the carrying on of any activity for profit. So long as the purpose
does not involve the carrying on of any activity for profit, the requirement
of the definition would be met and it is immaterial how the monies for
achieving or implementing such purpose are found, whether by carrying
on an activity for profit or not
17. The said principle has not been diluted but has been reaffirmed by
the later judgment in the case of CIT v. Federation of Indian Chambers of
Commerce & Industry [1981] 130 ITR 186 (SC).
18. Activity of profit should either be stipulated or profits should arise.
Considering the terms of advancing loans, which were free of interest and
keeping in view the actual facts prevailing, there was no question of mak
ing any profit at all. And in fact, not only no profits are made but there is
no likelihood of such event even in foreseeable future. When I observe
this I should not be understood to say that because of non-earning of
profit I am taking the view that dominant purpose of the foundation is as contemplated in the last 10 words of Clause (15) of Section 2. According to me, there has been no activity for profit at all.
19. As far as the learned Commissioner’s approach that there was an
activity for profit by the foundation, the same is held to be erroneous on
the face of it because : (a) the loans are advanced without interest; (b) no
securities are taken for the advance, except pledging of shares; (c) the
service charge of 1 per cent cannot possibly make any significant part even
of the administrative cost and this I have projected by the statistics
reproduced in this order; (d) the contingent service charge by way of one-
fourth of dividend when paid by the promoted company on the equity
shares acquired out of the loan from the foundation in its very nature
indicates recovery contingent upon the project yielding any profit. The
10 per cent terminal service charge is recoverable either through adjust
ment against the contingent service charge or at the end of the period of
repayment of loan. Such recovery thereof was, therefore, also dependent
on the successful implementation of the project and the due recovery of
the loan.
20. The most fundamental point is that no one proposing to take up any
activity for profit would venture to take up the activity that the foundation
is involved in. In the very nature of the working of the foundation, the
question of any profit from the activity does not arise at all.
21. Therefore, holding that the foundation is engaged in an object of
general public utility and its activities do not involve the carrying on of an
activity for profit, I hold that the basis of assessment under Section 143(3)
in respect of the assessment year under question was correct and the
learned Commissioner wrongly and unjustifiably assumed jurisdiction
under Section 263 for withdrawing the exemption under Section 11. I
accordingly vacate the Commissioner’s order and restore the assessment.
22. In the result, the appeal is allowed.