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

October 2nd, 2009

Himachal Pradesh Environment vs. CIT

(ITAT Chandigarh)

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 A.Y. 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 canceled.

New Direct Tax Code may Lose out on Relief to Poor

October 2nd, 2009

Income Tax officials have objected to replacement of the word “charitable” with “welfare” for tax relief purposes in the new Direct Taxes Code (DTC), saying it could lead to misuse of concessions that are aimed at encouraging people to undertake activities for the welfare of poor.

Giving their feedback on the DTC to the Finance Ministry, senior tax officials from Mumbai and Ahmedabad have said that substituting “charitable” with “welfare” could widen the ambit of tax relief and benefit even those not-for-profit organisations which do not focus on welfare of poor.

Arguing that the word “welfare” would dilute the element of benevolence, essential for charitable purposes, they said, original definition for charities (as in Income Tax Act, 1961) should be included in the new tax code.

The draft of the DTC, which was unveiled by Finance Minister Pranab Mukherjee in August for public debate, is likely to be tabled in the monsoon session of Parliament next year.

“In the present I-T Act, the exemptions of providing relief to common man were categorised as income derived from property held for charitable or religious purposes while the new tax code calls it as computation of income of non-profit organisations,” a senior I-T official said.

While deciding cases of violation of tax exemption cases the I-T tribunals and courts across the country have interpreted “charity” with benevolence but in the new definition there can be “a non-profit service but no benevolence”.

For instance, an NGO, which runs an expensive multi-specialty hospital, may not earn profit, with no individual getting any dividends, but the hospital will always be away from the reach of the poor due to its exorbitant costs, an official explained.

The new DTC has defined the provisions of NGO’s and their activities from section 86 to 96 which aim to replace sections 11 to 13 and 10 (23C) of the present I-T Act.

Tax officials have said that the phrase “advancement of any other object of general public utility” under the permitted welfare activities in Section 96(g) of the new Direct Tax Code (DTC) is ambiguous and there should be more clarity on it.

I-T officers have also said that the “permitted welfare activity” under the same section, pertaining to preservation of environment, including watersheds, forests and wildlife, fall under the purview of respective state governments and hence would lead to ambiguities in deciding cases of exemption.

Germany to get Less Taxing for Indians

October 1st, 2009

The some-pain-no-gain era of double payments by Indian workers on temporary assignments abroad will no longer happen in Germany at least. They will now not be required to pay social security taxes there as the India-Germany Social Security Agreement (SSA) signed last year comes into effect on Thursday.

This is the second such pact after the India-Belgium SSA. A social security agreement, or totalisation agreement, is a reciprocal program that prevents double payment to social security systems. Thus, when India signs such an agreement with a country, Indian workers on temporary assignment will not be required to contribute to the social security system there, if they are already contributing to the Employees Provident Fund Organisation (EPFO).

Similarly, temporary workers from that country on assignment to India would not need to contribute to EPFO if they pay social security taxes in their home country. Contribution to social security systems in most developed countries is mandatory. But temporary foreign workers on short stays rarely qualify for social security benefits as withdrawals are permitted usually after contributing for over 10 years. So, while employees do not get any benefit, it puts additional burden on employers too as they usually have to contribute to the social security system in their country and India.

In fact, some countries that get large numbers of temporary Indian workers end up collecting substantial sums on this count, but the employees get no benefit from its proceeds. According to estimates, for instance, Indian IT professionals in the US contribute close to $1 billion every year on social security taxes. Interestingly, until last year, it was not mandatory for international workers in India to contribute to EPFO. Now, EPFO is the recognised Indian agency under the totalisation agreements that India is entering into.

Whistle-blowers deserve protection: Khurshid

October 1st, 2009

People who blow the whistle on scams or wrongdoings in companies need official protection, but regrettably there is no structure in place to encourage them to do so, feels Corporate Affairs Minister Salman Khurshid.

“Many companies (and) chartered accountants complain to me that we don’t have a listener to our whistle. Where do we go and blow our whistle. This is a big problem.”

He was replying to questions about reports that there was insider trading in Satyam.

If we are to encourage people who have special knowledge, and in public interest should be disclosing that to someone, I think it’s a very good idea. “There are ways of protecting the identity, the interest of the whistle-blower, but we also know that we have not put anywhere in the country a structure for whistle-blowing, inviting whistle-blowers,” he said.

On the reports about the Satyam deal – a day before the scam broke out – that Tech Mahindra was looking at a merger deal with Satyam Computer, and another suitor L&T was purchasing shares of Satyam, Khurshid asserted that there was complete transparency in the bidding process.

“You can speculate about anything, but there was a completely open and transparent bidding… Under an open transparent bidding, somebody who has a locus (standi) can always come and say that it was acceptable for such and such reasons,” he said.

Insurers against New Tax Regime for Policies Sold before April 2011

October 1st, 2009

Insurance companies have asked the government to shift to the new tax regime under the Direct Tax Code only for those policies sold after the proposed Code came into effect from April 2011.

The draft code, circulated for public comments, had suggested that life insurance policies should be taxed at the time of maturity. So, the contribution and accumulation would be exempt from tax payments, but the government would levy tax on the withdrawal amount. The exempt-exempt-tax (EET) method of taxation is proposed to be introduced from April 2011 and would also cover policies purchased before the cut-off date.

On its part, the Life Insurance Council, the industry lobby, has suggested that only policies sold from April 2011 should be subjected to the new system of levy. The companies argued that it would be unfair on individuals who had purchased a cover after factoring in possible returns. Through the Direct Tax Code, the terms were proposed to be changed mid-way through the policy term.

“A person who started saving early did not know that the maturity amount would be taxed. We would like to protect his investment. There are a number of issues which needs to be addressed,” said Life Insurance Council Secretary General SB Mathur.

Life and general insurance companies are demanding a reduction in the proposed rate of minimum alternate tax (MAT), proposed at 2 per cent, to 0.25 per cent on the grounds that the rate suggested in the draft document was too high.

Further, insurance companies are seeking an exemption from the payment of tax on the profit derived from the sale of investment. “The general insurance industry has reported underwriting losses of around Rs 4,732 crore during 2008-09. The implementation of the new tax code will bring down the investment yield substantially,” said SL Mohan, Secretary General of General Insurance Council.

Most general insurance companies make provisions for underwriting losses through treasury gains and end up reporting profits.“The grandfathering provision would reduce the tax burden on investments for some time, but the real issues such as MAT would still be relevant,” said Bajaj Allianz General Insurance’s Chief Executive Officer Swaraj Krishnan.

High Court has no Power to Condone Delay

October 1st, 2009

CIT vs. Mohd. Farooq

(Allahabad High Court – Full Bench)

U/s 260A, High Court has no power to condone delay

Section 260A permits the filing of an appeal to the High Court within 120 days. In CIT vs. Velingkar Brothers 289 ITR 382 (Bom) (FB), The Full Bench held that the Court had power to condone delay u/s 260A. However, in Hongo India 236 E.L.T. 417 and Chaudharana Steels 238 E.L.T. 705, the Supreme Court held in the context of sections 35H & 35G of the Excise Act, that in the absence of specific powers, the High Court has no power to condone delay. On the question whether the said judgement of the Supreme Court would apply to s. 260A as well, HELD:

(1) The Income-tax Act is a complete Code in itself. While the Commissioner, Commissioner (Appeals) and Tribunal have been given power to condone delay, no such power has been conferred upon the High Court u/s 260A. In the absence of a provision in s. 260A conferring jurisdiction to condone delay in filing the appeal, the Limitation Act would not apply and the delay cannot be condoned;

(2) The argument that s. 260A (7) provides for the applicability of the Code of Civil Procedure and that as under Order XLI Rule 3-A of the CPC delay can be condoned, the same should apply to s. 260A is not correct because Order XLI Rule 3-A of the CPC is not an independent provision conferring jurisdiction on the Appellate Court to condone the delay, but provides for the procedure to be followed for filing and considering the application for condonation of delay;

(3) The argument that the principles of natural justice demand that in case the appellant shows sufficient cause, the appeal deserves to be heard, though presented beyond the period of limitation is also not acceptable because the remedy of appeal is a statutory right and it has to be presented in accordance with the procedure, the manner and within the time prescribed by the Statute. The principles of natural justice are not remotely attracted so far as the question of limitation is concerned;

(4) The appeals were accordingly dismissed as barred by limitation.

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

Himachal Pradesh Environment vs. CIT

(ITAT Chandigarh)

New Direct Tax Code may Lose out on Relief to Poor

Whistle-blowers deserve protection: Khurshid

“Many companies (and) chartered accountants complain to me that we don’t have a listener to our whistle. Where do we go and blow our whistle. This is a big problem.”

Insurers against New Tax Regime for Policies Sold before April 2011

High Court has no Power to Condone Delay

CIT vs. Mohd. Farooq

(Allahabad High Court – Full Bench)

U/s 260A, High Court has no power to condone delay

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