Imparting Education By Section 25 Company Is A Charitable Activity Under Income Tax Act: Calcutta High Court
A Bench of Calcutta High Court, consisting of Justices T.S. Sivagnanam and Hiranmay Bhattacharyya, has ruled that when a Company has been established as a non-profit organization under the Companies Act, and its profits are applied solely for the promotion of its objects, its activities would by necessary implication fall under the definition of a "charitable purpose" under the Income...
A Bench of Calcutta High Court, consisting of Justices T.S. Sivagnanam and Hiranmay Bhattacharyya, has ruled that when a Company has been established as a non-profit organization under the Companies Act, and its profits are applied solely for the promotion of its objects, its activities would by necessary implication fall under the definition of a "charitable purpose" under the Income Tax Act, 1961.
The Assessee Company, established by the National Council of Science Museum under the Ministry of Culture, was registered under Section 25 of the Companies Act, 1956. The Assessee, engaged in design and development of knowledge centers like science museums, planetariums, etc., had applied for registration as a charitable institution under Section 12AA of the Income Tax Act, 1961, which was granted to it. The Assessee had carried out various turnkey projects throughout the country, including for the Reserve Bank of India (RBI) and the Surat Municipal Corporation. The Assessee had filed its income tax return declaring its income to be nil after claiming exemption under Section 11 of the Income Tax Act. The Assessing Officer (AO), after conducting scrutiny assessment, held that the surplus generated by the Assessee Company was from commercial activities, and thus disallowed the exemption under the proviso to Section 2(15) and Section 13 (8) of the Act. The Assessee filed an appeal against the impugned order before the Commissioner of Income Tax (Appeals) (CIT(A)) which was dismissed. The Assessee filed an appeal before the Calcutta High Court after the appeal before the Kolkata Bench of ITAT was also dismissed against the Assessee.
The counsel for the Assessee before the Calcutta High Court submitted that since the Assessee Company was registered under Section 25 of Companies Act, 1956 all its activities were deemed to be non-profit. It was submitted that since the Assessee was registered as a charitable institution under the Income Tax Act, its objectives should have been accepted as charitable, and not as a commercial activity done with an intention to earn profit. The counsel for the department submitted that the activities of the Assessee Company, including the turnkey project for the RBI, were done in the nature of a contractor and were commercial in nature. He contended that even the price bid quoted by the Assessee had showed profit element. It was submitted that even though the Assessee was registered as a charitable institution under the Act, the work done by the Assessee was not charitable in nature and was a commercial project.
Section 11 of the Income Tax Act provides that income from property held under a charitable trust shall not be included in the total taxable income to the extent to which such income was applied to charitable purposes in India. Section 2(15) provides the definition of "charitable purpose", which includes education or advancement of any other object of general public utility. The Proviso to Section 2 (15) provides that the advancement of any 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 rendering of any service of the same nature, for a cess, fee or any other consideration.
The High Court, perusing the main objects of the Assessee Company under its Memorandum of Association, observed that the ITAT did not consider the main objects for which the Assessee Company had been established. The court ruled that the ITAT had misread the nature of the activities done by the Assessee Company qua the objects behind its incorporation under Section 25 of the Companies Act, 1956.
The High Court held that the object behind the projects carried out by the Assessee, such as the establishment of science centres or museums on turn-key basis, was in public interest to educate the general public in an easy and attractive manner. It observed that the technical expertise and research done by the Assessee, for carrying out the projects for a specified purpose, could not be within the capacity of a contractor.
Holding that the Assessee Company was a non-profit organisation that was engaged in imparting education and the advancement of general public utility, the High Court held that its activities would fall within the definition of a "charitable purpose" as defined under Section 2 (15) of the Act.
"Thus, when the assessee has not been established for the purpose of earning profit and the income it generates has to be applied for promoting the objects as spelt out in the memorandum and no portion of the income can be directly or indirectly paid by way of dividend or bonus etc, it has to be necessarily held that the assessee is a not for profit organisation but public utility company and the activities of the company for which it has been established would undoubtedly show that the company by establishing knowledge parks, engaged in imparting education and also undertakes advancement of other aspects of general public utility to fall within the definition of charitable purpose as defined under Section 2 (15) of the Act."
The High Court thus allowed the appeal against the impugned order of the ITAT.
Case Title: Creative Museum Designers Versus Income Tax Officer, Exemptions, Ward-1(1), Kolkata
Case Citation: 2022 LiveLaw (Cal) 70
Counsel For The Assessee: Mr. Pratyush Jhunjhunwala & Mr. Uttam Sharma
Counsel For The Department: Mr. Tilak Mitra & Mr. Radhamohan Roy