$ 52 * IN HIGH COURT OF DELHI AT NEW DELHI Date of Decision: 20.01.2020 + ITA 1071/2018 COMMISSIONER OF INCOME TAX - EXEMPTION Appellant Through: Mr. Abhishek Maratha, Senior Standing Counsel with Mr. Pratyaksh Gupta and Ms. Nupur Sharma, Advocates. versus ASSOCIATION OF THIRD PARTY ADMINISTRATORS Respondent Through: Mr. Ravi Kant Chadha, Senior Advocate with Mr. Siddhant Chaudhary, Advocate. CORAM: HON'BLE MR. JUSTICE VIPIN SANGHI HON'BLE MR. JUSTICE SANJEEV NARULA SANJEEV NARULA, J (Oral): 1. Commissioner of Income Tax Exemption has filed present appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act ) assailing order dated 19.04.2018 passed by Income Tax Appellate Tribunal (hereinafter referred to as ITAT ). present appeal proposes substantial questions of law, questioning correctness of findings of ITAT in relation to activities of assessee in context of eligibility to get registration as charitable organization under Section 12AA of Act. ITA 1071/2018 Page 1 of 19 2. Respondent-Association of Third Party Administrators (ATPA) filed application on 12.12.2005 seeking registration under Section 12A of Act. said application was rejected by DIT(E), vide order dated 30.06.2006 holding that certain objects of trust were not charitable and trustees had discretion in applying trust s income to any of objects. Aggrieved with aforesaid findings, assessee filed appeal before ITAT which resulted in order dated 30.04.2017, restoring matter to file of DIT(E) with direction to pass speaking order as to which of objects were of non-charitable nature, after giving opportunity of hearing to assessee. In compliance with directions of ITAT, CIT(E) after examining records, declined grant of registration to assessee, inter alia, on ground that ATPA is aiming at industry status for Third Party Administrator (TPA) business, and is working for mutual benefit of its members. Aggrieved with aforesaid order, assessee preferred appeal before ITAT. ITAT after examining records and having regard to objects of assessee, allowed appeal in favour of assessee and overturned order of CIT(E). Consequently CIT(E) was directed to provide registration to assessee under Section 12AA of Act. 3. Mr. Abhishek Maratha, learned Senior Standing Counsel assisted by Mr. Pratyaksh Gupta, Junior Standing Counsel has argued that reasoning given by ITAT is flawed. benefit of activities of association is limited to identifiable individual groups and it cannot be called public charitable institution. It was further argued that profit earning motive of assessee trust is predominant object, which can be discerned by reading ITA 1071/2018 Page 2 of 19 object clause of trust deed. During course of arguments, attention of learned counsel was drawn to decisions of Supreme Court in case of Additional Commissioner of Income Tax, Gujarat v. Surat Art Silk Cloth Manufactures Association (1979) 13 CTR (SC) 378 and Director of Income Tax v. Bharat diamond Bourse (2003) 259 ITR 0280. Mr. Maratha then sought time to go through aforesaid decisions and address Court on same aspect. Today, Mr. Maratha argues that neither CIT (E), nor ITAT had passed orders in line with aforesaid judgments and while applying test prescribed by Constitution Bench of Supreme Court in case of Surat Art Silk (supra), Court has to independently consider facts of each case and come to conclusion as to whether assessee would be entitled to benefit of Section 12AA of Act. Mr. Maratha then referred to aims and objects of trust and submitted that same are in nature of advancement of business of health insurance for TPAs to get industry status to TPA business and it was thus clear that intent was to earn profit. He submitted that income of TPAs is assessable to income tax and is not exempted under Act. Further insurance business too is assessable to income tax and is not exempted and, therefore, having regard to objects of trust, ITAT has wrongly granted benefit to Respondent assessee. 4. We have carefully examined record and given due consideration to contentions urged by Mr. Maratha. At initial stage of registration, we have to examine whether proposed activities of assessee can be considered charitable within meaning of Section 2 (15) of Act. On ITA 1071/2018 Page 3 of 19 application for registration of trust or institution made under Section 12AA, Principal Commissioner or Commissioner shall call for such documents or information from trust or institution as he thinks necessary in order to satisfy himself about genuineness of activities of trust or institution; and compliance of such requirements of any other law for time being in force by trust or institution, as are materials for purpose of achieving its objects, and he may also make such inquiries as he may deem necessary in this behalf. Once he is satisfied about objects of trust or institution, and genuineness of its activities, he shall pass order under said provision. On this aspect, Tax Authorities have looked into aims and objects of trust. Since same is backbone of decision impugned before us, we consider it apposite to extract same hereinunder: 6. aims and objects of Trust shall be: (i) To organize and arrange all licensed Third Party Administrators (TPAs) to be members of Trust for mutual betterment of TPA business; (ii) To thrive for industry status for TPA business; (iii) To draft guidelines, procedures, documents for implementation of above; (iv) To organize seminars, training and educational sessions for all employees/associates of member TPAs; (v) To devise and develop new products related to health insurance or insurance companies, TPAs and other related parties; ITA 1071/2018 Page 4 of 19 (vi) To regulate and structure TPAfees and to represent to insurance companies and other related parties, taking out insurance policies, on issues relating to TPAs as also others concerned with insurance industry; (vii) To organize and regulate hospital network of TPAs and implement common procedures, standardized billing and standardized tariff and other related documentations; (viii) To represent to regulatory bodies, Govt authorities, on behalf of member TPAs on matters related to TPA/insurance business with object of improvement and development of TPA industry; (ix) To create common data bank, exchange information pertaining to claim statistics, enrollment statistics and other related matters pertaining to member TPAs; (x) To initiate legal proceedings against defaulting hospitals, fraudulently insured and such other persons involved in malpractices or frauds pertaining to claims, cashless mechanism, insurance underwriting, etc.; (xi) To promote and create awareness for healthy living and to bring together all persons who subscribe to this common cause; (xii) To educate members about health insurance and comprehensive medical services; (xiii) To interact with various regulatory and other public and private sectors bodies for framing health-related and other beneficial schemes for people in general and those below poverty line, and also participate in implementation of such schemes whether as consultants, advisors or otherwise. Trust may also devise such packages as are of benefit to its members; (xiv) To publish books, periodicals and other literature in any ITA 1071/2018 Page 5 of 19 subject of medical science, healthy living and insurance which may be of interest to its members; (xv) To document all relevant information pertaining to health and hygiene; (xvi) To advise and if needed assist Government in formation and implementation of policies relating to health and other areas of insurance; (xvii) To promote education, research, training and professional development on health related issues; (xviii) To organize and promote conferences, seminars, lectures, workshops, public debates and exhibitions in furtherance of objectives of Trust; (xix) To offer awards, prizes, scholarships and stipends in promotion of aims and objects of Trust; (xx) To provide need-based grants and donations; (xxi) To cooperate and collaborate with other national institutions and agencies in furtherance of objectives of Trust; (xxii) To cooperate with institutions and associations having similar aims and objects; (xxiii) To borrow moneys for carrying out objects of Trust and for that purpose to create security by mortgage or charge or pledge or hypothecation of any immovable property of Trust; (xxiv) To establish any fund to further interest of Trust; (xxv) To establish institute for training and dissemination of knowledge among Third Party Administrators; ITA 1071/2018 Page 6 of 19 (xxvi) To undertake programmes which ensures raising of income levels and expanding employment opportunities of weaker sections of Trust, particularly of those living below poverty line and women by involving participants in planning, implementation and maintenance of activities taken up; (xxvii) To organize disadvantaged section of Trust and take steps for increasing their level of awareness with regard to programme and contents and facilities therein under government/non government programme, legal provisions etc. and also for increasing their bargaining power by promoting co- operative and group action; (xxviii) To raise or acquire funds or property from Central Government, State Government, Foreign Agencies, Non- Government Agencies, Charitable Trusts by way of donations or grants or contribution or by taking loan from public and private Financial Institutions and Banks. funds, properties, assets and all other resources, present and future of Trust shall be utilized for any or all purposes or objects of Trust as stated above and also for all other similar activities in furtherance of ideals of truth and non-violence; (xxix) To acquire by purchase or otherwise hold on lease, hire or rent or by exchange any movable or immovable property or properties; (xxx)To organize and maintain residential hostels, restaurants and other amenities for its members; (xxxi) To maintain and keep in good repair all buildings and common services; (xxxii)To constitute or cause to be constituted Regional Centres at convenient places to promote objectives of Trust; (xxxiii)To sell, give on lease or hire any property of Trust; ITA 1071/2018 Page 7 of 19 (xxxiv)To promote National Unity and International Peace and Amity; (xxxv) To aim towards Communal and Social Harmony and Brotherhood; (xxxvi) To undertake evaluation of Economic and Social projects; (xxxvii) To engage in any other lawful activity which may be conducive to promotion or attainment of any or all objects of Trust. 5. CIT (E) proceeded to decline registration relying upon aforenoted aims and objects, which have been read by ITAT to be sufficiently compliant in order to secure registration under Section 12A of Act. ITAT has examined several decisions on this aspect, including CIT v. Jaipur Stock Exchange Ltd. 2015 3 77 ITR 469, CIT (E) v. Yamuna Expressway Industrial Authority (2017) 395 ITR 18 and decision of this Court in PHD Chambers of Commerce and Industry v. DIT (E) (2014) 265 CTR (Del.) 318 and also CIT v. Andhra Chamber of Commerce (1965) 55 ITR 722 (SC) and has came to conclusion that assessee is entitled to registration. relevant portion of order of ITAT has been extracted hereinunder: 12. In view of decision rendered by Hon'ble Supreme Court and Hon'ble High Courts in judgment discussed in preceding paras, we are of considered view that applicant trust cannot be said to be engaged only for TPA members and their employees and working for mutual benefits of its members, but its objects are certainly aimed at providing to general public in field of insurance and health facilities. No doubt, ITA 1071/2018 Page 8 of 19 activities of TPA which is trade association for TPA business for benefits of its members and non-members, but it is established to protect interest of TPA members and work towards developing new products related to health insurance or insurance company and to structure TPA fees, which is like Chambers of Commerce and Industry. So it is certainly providing services to insurance sector, which in return benefits public at large. Moreover, at this stage, Commissioner (E) was not empowered to examine whether assessee was entitled for exemption u/s 11 or 12 as this issue was required to be examined at time of assessment. 13. In view of what has been discussed above, we are of considered view that ld. CIT has erred in rejecting application for registration u/s 12AA of Act filed by assessee. Consequently, appeal filed by assessee is allowed directing ld. CIT to provide registration u/s 12AA to assessee. 6. Constitution Bench of Supreme Court in case of Surat Art Silk Cloth Manufacturers Association (supra) has laid down test to decide whether trust or institution is charitable. relevant portion of said judgment reads as under: 6. But even if such contention were permissible, we do not think there is any substance in it. law is well settled that if there are several objects of trust or institution, some of which are charitable and some non-charitable and trustees or managers in their discretion are to apply income or property to any of those objects, trust or institution would not be liable to be regarded as charitable and no part of its income would be exempt from tax. In other words, where main or primary objects are distributive, each and everyone of objects must be charitable in order that trust or institution might be upheld as valid charity - Mohammed ITA 1071/2018 Page 9 of 19 Ibrahim Riza v. CIT [1930] LR 57 IA 260 and East India Industries ( Madras) Pvt. Ltd. v. CIT [1967] 65 ITR 611. But if primary or dominant purpose of trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to primary or dominant purpose would not prevent trust or institution from being valid charity - CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722. test which has, therefore, to be applied is whether object which is said to be non- charitable is main or primary object of trust or institution or it is ancillary or incidental to dominant or primary object which is charitable. It was on application of this test that in CIT v. Andhra Chamber of Commerce (supra), Andhra Chamber of Commerce was held to be valid charity entitled to exemption from tax. Court held that dominant or primary object of Andhra Chamber of Commerce was to promote and protect trade, commerce and industry and to aid, stimulate and promote development of trade, commerce and industry and to watch over and protect general commercial interests of India or any part thereof and this was clearly object of general public utility and though one of objects included taking of steps to urge or oppose legislation affecting trade, commerce or manufacture, which, standing by itself, may be liable to be condemned as non-charitable, it was merely incidental to dominant or primary object and did not prevent Andhra Chamber of Commerce from being valid charity. Court pointed out that if "the primary purpose be advancement of objects of general public utility, it would remain charitable even if incidental entry into political domain for achieving that purpose, e.g., promotion of or opposition to legislation concerning that purpose, was contemplated". Court also held that Andhra Chamber of Commerce did not cease to be charitable merely because members of Chamber were incidentally benefited in carrying out its main charitable purpose. Court relied very strongly on decisions in Commissioner of Inland Revenue v. Yorkeshire Agricultural Society [1920] 13 Tax Case 58 and Institution of ITA 1071/2018 Page 10 of 19 Civil Engineers v. Commissioner of Inland Revenue [1931] 16 Tax Case 158 for reaching conclusion that merely because some benefits incidentally arose to members of society or institution in course of carrying out its main charitable purpose, it would not by itself prevent association or institution from being charity. It would be question of fact' in such case "whether there is no such personal benefit, intellectual or professional, to members of society or body of persons as to be incapable of being disregarded. xxxx xxxx xxxx 17. next question that arises is as to what is meaning of expression "activity for profit". Every trust or institution must have purpose for which it is established and every purpose must for its accomplishment involve carrying on of activity. activity must, however, be for profit in order to attract exclusionary clause and question, therefore, is when can activity be said to be one for profit? answer to question obviously depends on correct connotation of proposition "for". This proposition has many shades of meaning but when used with active participle of verb it means "for purpose of" and connotes end with reference to which something is done. It is not, therefore, enough that as matter of fact activity results in profit but it must be carried on with object of earning profit. Profit-making must be end to which activity must be directed or, in other words, predominant object of activity must be making of profit. Where activity is not pervaded by profit motive but is carried on primarily for serving charitable purpose, it would not be correct to describe it as activity for profit. But where, on other hand, activity is carried on with predominant object of earning profit, it would be activity for profit, though it may be carried on in advancement of charitable purpose of trust or institution. Where activity is carried on as matter of advancement of charitable purpose or for purpose of carrying out charitable purpose, it would not be incorrect to say as matter of plain ITA 1071/2018 Page 11 of 19 English grammar that charitable purpose involves carrying on of such activity, but predominant object of such activity must be to subserve charitable purpose and not to earn profit. charitable purpose should not be submerged by profit-making motive; latter should not masquerade under guise of former. purpose of trust, as pointed out by one of us (Pathak, J.) in Dharmadeepti v. CIT (supra), must be "essentially charitable in nature" and it must not be cover for carrying on activity which has profit making as its predominant object. This interpretation of exclusionary clause in section 2, clause (15) , derives considerable support from speech made by Finance Minister while introducing that provision. Finance Minister explained reason for introducing this exclusionary clause in following words: "The definition of 'charitable purpose' in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving public purpose, get fully paid for benefits provided by them namely, newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving general knowledge of public. In order to prevent misuse of this definition in such cases, Select Committee felt that words 'not involving carrying on of any activity for profit' should be added to definition." It is obvious that exclusionary clause was added with view to over-coming decision of Privy Council in Tribune case where it was held that object of supplying community with organ of educated (public opinion by publication of newspaper was object of general public utility and hence charitable in character, even though activity of publication of newspaper was carried on on commercial lines with object of earning profit. publication of newspaper was activity engaged in by trust for purpose of carrying out its charitable purpose and ITA 1071/2018 Page 12 of 19 on facts it was clearly activity which had profit-making as its predominant object, but even so it was held by Judicial Committee that since purpose served was object of general public utility, it was charitable purpose. It is clear from speech of Finance Minister that it was with view to setting at naught this decision that exclusionary clause was added in definition of "charitable purpose". test which has, therefore, now to be applied is whether predominant object of two activities involved in carrying out object of general public utility is to subserve this charitable purpose or to earn profit. Where profit-making is predominant object of activity, purpose, though object of general public utility, would cease to be charitable purpose. But where predominant object of activity is to carry out charitable purpose and not to earn profit, it would not lose its character of charitable purpose merely because some profit arises from activity. exclusionary clause does not require that activity must be carried on in such manner that it does not result in any profit. It would indeed be difficult for persons in charge of trust or institution to so carry on activity, that expenditure balances income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg, J. when he said in Sole Trustee, Loka Sikshana Trust case (supra) that "if profits must necessarily feed charitable purpose under terms of trust, mere fact that activities of trust yield profit will not alter charitable character of trust. test now is more clearly than in past, genuineness of purpose tested by obligation created to spend money exclusively or essentially on charity". learned Judge also added that restrictive condition "that purpose should not involve carrying on of any activity for profit would be satisfied if profit- making is not real object" (emphasis supplied). We wholly endorse these observations. ITA 1071/2018 Page 13 of 19 19. There is, however, one comment which is necessary to be made whilst we are on this point and that arises out of certain observations made by this Court in Sole Trustee, Loka Sikshana Trust case (supra) as well as Indian Chamber of Commerce case (supra). It was said by Khanna, J. in Sole Trustee, Loka Shikshana Trust case: "... if activity of trust consists of carrying on business and there are no restrictions on its making profit, court would be well justified in assuming in absence of some indication to contrary that object of trust involves carrying on of activity of profit." And to same effect, observed Krishna Iyer, J. in Indian Chamber of Commerce case (supra) when he said: "An undertaking for business organisation is ordinarily assumed for profit unless expressly or by necessary implication or by eloquent surrounding circumstances making of profit stands loudly negatived pragmatic condition, written or unwritten proved by proscription of profits or by long years of invariable practice or spelt from some strong surrounding circumstances indicative of anti-profit motivation - such condition will nullify for charitable purpose" Now we entirely agree with learned Judges who decided these two cases that activity involved in carrying out charitable purpose must not be motivated by profit objective but it must be undertaken for purpose of advancement or carrying out of charitable purpose. But we find it difficult to accept their thesis that whenever activity is carried on which yields profit, inference must necessarily be drawn, in absence of some indication to contrary, that activity is for profit and charitable purpose involves carrying on of activity for profit. We do not think Court would be justified in drawing any such inference merely because activity results in profit. It is in our opinion not at all necessary that there must be provision in constitution of trust or institution that activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no ITA 1071/2018 Page 14 of 19 such express provision, nature of charitable purpose, manner in which activity for advancing charitable purpose is being carried on and surrounding circumstances may clearly indicate that activity is not propelled by dominant profit motive. What is necessary to be considered is whether having regard to all facts and circumstances of case, dominant object of activity is profit-making or carrying out charitable purpose. If it is former, purpose would not be charitable purpose, but, if it is latter, charitable character of purpose would not be lost. (emphasis supplied) 7. Further, Supreme Court in case of Bharat Diamond Bourse (supra), referring to Constitution Bench decision in case of Surat Art Silk Cloth Manufacturers Association (supra), while dealing with similar question relating to registration of institute for charitable purpose, observed as under: decision of Constitutional Bench of this Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 2 SCC 31 really clinches issue. assessee in Surat Art Silk Cloth Mfrs. Association's case (supra) was association established to promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth. Its objects, as evidenced from memorandum of association, included, inter alia, carrying on business in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, and Cotton Cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of its members. Constitutional Bench of this Court held that, if there are several objects of institution, some of which are charitable and some non-charitable, and trustees or managers in their discretion may apply ITA 1071/2018 Page 15 of 19 income of institution of those objects, trust or institution would not be liable to be regarded as charitable and no part of its income would be exempted from tax. Where main or primary objects are distributive, each and every one of object must be charitable in order that trust be held as valid charity. But, if primary or dominant purpose of institution is charitable and another which, by itself, may not be charitable, but is merely ancilliary or incidental to primary or dominant object, it would not prevent institution from validly being recognized as charity. test to be applied is, whether object which is said to be non- charitable is main or primary object of trust or institution or it is ancilliary or incidental to dominant object which is charitable. Reiterating its earlier view in CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722, Supreme Court said in Surat Art Silk Cloth Mfrs. Association's case (supra) that if primary purpose is advancement of objects for general public utility, institution would remain charitable, even if incidental non-charitable object for achieving that purpose was contemplated. In case of Andhra Chamber of Commerce (supra) it was held that Chamber of Commerce did not cease to be charitable merely because members of chamber were incidentally benefited in carrying out its main charitable purpose. This Court approvingly followed ratio in case of Commissioner of Inland Revenue v. Yorkshire Agricultural Society [1928] 1 KB 611 and Institution of Civil Engineers v. Commissioner of Civil Revenue [1932] 1 KB 149 for reaching conclusion that merely because some facilities incidentally arose to members of society or institution in course of carrying out its main charitable purpose, that by itself would not prevent institution from being charity. All subsequent judgments have noticed and followed judgment of Constitutional Bench in Surat Art Silk Cloth Mfrs. Association's case (supra) and dominant purpose test evolved therein and applied them to facts before them. Applying this dominant purpose test to objects of ITA 1071/2018 Page 16 of 19 respondent-assessee it appears to us that there is no escape from conclusion that it is validly recognized as institution established for charitable purpose. assessee's predominant objects are: "(i ) To establish common facilities required to promote exports of diamonds from India and to provide for this purpose trading halls and other utilities at central place for Indian Exporters and Overseas buyer to carry on trade and commerce in diamonds with speed and in secure conditions. (ii) To establish and promote effective liaison between diamond trade and industry in India and abroad with view to promoting their sales from India in International market. (iii) To promote, advance, protect and develop trade, commerce and industry in India relating to exports and imports of diamonds and (iv) To develop India as Modern and sophisticated diamond market by establishing and maintaining international trading centre in India for all those engaged as manufacturers, traders, exporters and importers, brokers/commission agents of diamonds." These being predominant objectives, we agree with view taken by Tribunal as well as High Court that assessee was rightly registered under section 11 by treating it as institution established for charitable purpose within meaning of section 2(15) of Act. (emphasis supplied) 8. Taking note of aforesaid decisions, we find that observations of ITA 1071/2018 Page 17 of 19 ITAT to be in consonance with view of Supreme Court. primary or dominant object of trust satisfies conditions laid down under Section 2 (15) of Act. Even if some ancillary or incidental objects are not charitable in nature, institution would still be considered as charitable organisation. As held by Supreme Court in case of DIT v. Bharat Diamond Bourse (supra), merely because some facilities were beyond its main object, that by itself would not deprive institution of benefits of charitable organisation. Reiterating its earlier view in CIT v. Andhra Chambers of Commerce (1965) 55 ITR 722 (SC), Constitution Bench of Supreme Court in Surat Art Silk Cloth Manufacturers Association (supra) held that if primary purpose of advancement of objects is for general public utility, institution would remain charitable, even if there are incidental non-charitable objects for achieving said purpose. 9. Having given our thoughtful consideration to this issue, we are not persuaded by submissions advanced by Mr. Maratha, learned Senior Standing Counsel. Merely because objects of trust are for advancement of business of TPA, it would not ipso facto render trust to be non-charitable. objects of trust are not exclusively for promotion of interests of TPA members. objects are to provide benefit to general public in field of insurance and health facilities. In course of carrying out main activities of trust, benefits accruing to TPA members cannot, by itself, deny institution benefit of being charitable organisation. ITA 1071/2018 Page 18 of 19 10. For foregoing reasons, we find no substantial question of law arising for our consideration. Accordingly, appeal is dismissed with no orders as to cost. SANJEEV NARULA, J VIPIN SANGHI, J JANUARY 20, 2020 nk ITA 1071/2018 Page 19 of 19 Commissioner of Income-tax-Exemption v. Association of Third Party Administrator