High Court Of Andhra Pradesh
Andhra Pradesh State Seed Certification Agency vs. CCIT-III, Hyderabad
Assessment Year : 2010-11
Section : 2(15), 10(23C)
Goda Raghuram And M.S. Ramachandra Rao, JJ.
W.P. No. 31640 Of 2011
December  17, 2012
ORDER
M.S. Ramachandra Rao, J. – The petitioner herein challenges the order dated 31-03-2011 of the Chief Commissioner of Income Tax, Hyderabad-III (1st respondent), rejecting the application dated 22-03-2010 filed for approval under Section 10 (23) (C) of the Income Tax Act, 1961 (for short “the Act”) for the assessment year 2010-11.
2. The petitioner is the Andhra Pradesh State Seed Certification Agency, a society registered in 1976 under the AP (Telangana Areas) Public Societies Registration Act, 1350 Fasli with registration No.334 of 1976 as per Certificate of Registration dated 22-04-1976. As per its Memorandum of Association, the following are its objects:
“(a) to see that cultivators adopt all scientific methods for production of quality seed in accordance with the Seed Act.
(b) to recognize varieties (and kinds where improved varieties are not available) eligible for seed certification and publish annually lists indicating the names of such varieties and kinds.
(c) to maintain a list of sources of breeder and foundation seeds approved by the Central Seed Certification Board in the case of variety grown in more than one State and by the State Seed Certification Board in the case of varieties of local importance.
(d) to verify upon receipt of an application for certification that the variety is eligible for certification that the application has been submitted in accordance with the procedure prescribed by the State Seed Certification Governing Board and that the source of seed used for planting is from approved sources.
(e) to provide for the inspection of a seed fields, seed processing plants and seed lots in accordance with the procedures outlined by the Central Seed Certification Board.
(f) to ensure that the seeds certified in the State conform to the Standards prescribed by the Central Seed Certification Board.
(g) to grant certificates, certification tags and seals etc., designed as per specifications provided by the Central Seed Certification Board and as per procedure by the State Seed Certification Governing Board.
(h) to carry out educational programmes designed to promote the use of certified seed including a publication listing co-operators in the seed certification programme and source of certified seed and provide such information to the Central Seed Certification Board and to publicise the same.”
3. The petitioner is established to act as a certification agency under Section 8 of the Seeds Act, 1966 and it certifies seeds which meet the minimum seed certification standards as per the Indian Minimum Seeds Certification Standards, 1988. It is asserted by the petitioner that its basic duty is to see that quality seeds are supplied to agriculturists; that it is a non profit, self sustaining organization created by the Government and is surviving on the certification charges levied for the technical and scientific services rendered by it to the seed producers/growers and agriculturists.
4. It is the contention of the petitioner that that it filed application in Form No.56 dated 08-03-2010 along with all necessary enclosures on 22-03-2010 before the Director of Income Tax (Exemptions) seeking renewal of approval under Section 10 (23C) (iv) of the Act for the assessment year 2010-11; that the Deputy Commissioner of Income Tax (H.Qrts), Office of Chief Commissioner of Income Tax, Hyderabad-III issued a notice dated 13-01-2011 seeking some clarification and also the details of accumulated amount during the previous five years; that the petitioner furnished the details sought, by replies dated 07-02-2011 and 11-02-2011; that another notice dated 08-03-2011 was issued by the Income Tax Officer (H.Qrs.) asking the petitioner to furnish audited accounts for the financial year 2009-10 relevant for the assessment year 2010-11; the petitioner furnished the details by replies dated 24-03-2011 and 28-03-2011; and by order dated 31-03-2011, the Chief Commissioner of Income Tax- III rejected the petitioner’s application on the following grounds:
(i) “that the activities of the agency were/are not in the nature of advancement of any objects of general public utility.
(ii) that the objects of the agency do not indicate any charitable activity or involve the advancement of any other objects of general public utility.
(iii) that the words or phrase ‘charitable purpose’ or ‘public utility’ do not find place in the objects of the agency.
(iv) that the agency is not carrying out its activities for any charitable purposes which is the basic requirement to be satisfied in terms of section 10 (23C) (iv) of the Act.
(v) that the agency is not registered under the provisions of the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987.”
5. Challenging the said order, the petitioner has filed the present writ petition.
6. The petitioner contends that that it has been filing income tax returns claiming exemption under the provisions of the Act as it is existing solely for charitable purposes; that such approval/exemption was granted under Section 10 (23C) (iv) for the assessment years 1984-85 to 1988-89, 1989-90 to 1991-92, 1992-93 to 1994-95 and 1995-96 to 1997-98; that the petitioner had suffered losses for the period 1998-99 to 2004-05 and therefore there was no need for claiming exemption for the said period and it did not file any application seeking approval/exemption for that period. It contended that with effect from 22-08-2003, it was granted registration under Section 12-AA of the Act vide proceedings of the Director of Income Tax (exemptions) dated 01-01-2004 for the purposes of Sections 11 and 12 of the Act; and that the action of the 1st respondent in rejecting the application of the petitioner for approval under Section 10 (23C) (iv) of the Act is arbitrary, illegal and violative of the provisions of the Act.
7. Petitioner contended that the 1st respondent erred in holding that the petitioner is not a public charitable institution; that the fact that the petitioner is not registered under Section 43 of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987 cannot be a ground to deny exemption under Section 10 (23C) (iv) of the Act; that the 1st respondent ignored the fact that the petitioner was established by the State Government to carry out the functions of a Certification Agency under the Seeds Act, 1966 in terms of G.O.Ms.No.435 Food and Agriculture (EP-II) Department dated 01-06-1977 and the provisions of the A.P. Charitable and Hindu Religious Institutions and Endowments Act, 1987 have no application at all; that the 1st respondent erred in holding that the petitioner has not rendered its services directly to the farmers but only to its clients/agents who are engaged in trading of certified seeds with profit motive and hence the activities of the petitioner are not for the advancement of any other object of general public utility and so are not for charitable purpose; that the 1st respondent erred in holding that the provisions of Section 10 (23C) (iv) of the Act would apply to an institution only if it is existing for charitable purposes and if there is no charity involved, it would mean that the institution is being run for profit; that the petitioner was granted approval under Section 10 (23C) (iv) of the Act for the earlier years by the Government of India and the Central Board of Direct Taxes and as there is no change in the activities of the petitioner since its inception, the 1st respondent erred in rejecting the application of the petitioner for exemption under Section 10 (23C) (iv) of the Act.
8. Counter affidavit was filed on behalf of the 1st respondent refuting the above contentions and contending that he had passed a reasoned order on the issue whether the objects of the petitioner-agency are for a charitable purpose or not by carefully analyzing the financial accounts for the financial year 2009-10; that the activities of the petitioner do not indicate involvement of any charitable activity or advancement of any other objects of general public utility; that the requirement of registration under Section 43 of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987 was held to be relevant by the Andhra Pradesh High Court in its order dated 11-11-2010 in W.P.No.21248 of 2010 New Noble Education Society v. Chief CIT-I [2011] 201 Taxman 33/12 taxmann.com 267 wherein the High Court had held that the term “education” is covered by the definition of “charitable purpose” under Section 2 (15) of the I.T. Act and also covered under the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987, that the Chief Commissioner of Income Tax was justified in not granting approval under Section 10 (23C) (iv) of the Act on the ground that the petitioner institutions therein were not registered under the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987. He also contended that the activities of the petitioner indicate that seed growers enter into a contract with some Society/Agent, who then approach the petitioner for certification and as such the direct beneficiaries of the activities of the petitioner are not the farmers but those who sell the certified seeds to the farmers at a market price determined by them; that the over all functioning of the petitioner is akin to a corporate profit earning service provider; that even the objects of the petitioner show that it is engaged in certifying the varieties of seeds grown by the clients who finally carry out trade or commerce in the certified seeds; that the objects of the petitioner either individually or in combination do not indicate that the petitioner provides services directly to the farmers or makes any direct sale of certified seeds to the farmers or exercises any control over the fixation of the price by the clients who get the certification and carry out the trade in certified seeds and therefore the application of the petitioner was rightly rejected by him under the impugned order.
9. Heard Sri A.V. Krishna Koundinya, learned Senior Counsel for the petitioner and Sri J.V. Prasad, learned Standing Counsel for the respondents.
10. The counsel for the petitioner reiterated the contentions stated in the affidavit filed in support of the writ petition and relied upon the following documents:
(i) The provisions of the Seeds Act, 1966.
(ii) Note on petitioner’s activities
(iii) Extracts from Official Hand book on Seed Certification (Central Seed Certification Board, Ministry of Agriculture & Rural Reconstruction, Govt. of India).
(iv) G.O.Ms.No.372 issued by Food & Agriculture (EP-II) Department, Govt. of Andhra Pradesh.
(v) Memorandum of Association.
(vi) Certificate of Registration No.334 of 1976.
(vii) G.O.Ms.No.435 issued by Food & Agriculture (EP-II) Department, Govt. of Andhra Pradesh.
(viii) Notification No.79 issued by Food & Agriculture (EP-II) Department, Govt. of Andhra Pradesh.
(ix) Rules of petitioner society
(x) Memorandum No.18-6/81-SD issued by Government of India, Ministry of Agriculture (Deptt. of Agriculture & Co-operation), New Delhi.
(xi) Memorandum No.18-2/85-SD.IV issued by Government of India, Ministry of Agriculture & Rural Development, (Dept. of Agriculture & Co-operation), New Delhi.
(xii) D.O.No.18-10(1)96-SD.IV issued by Government of India, Ministry of Agriculture (Deptt. of Agriculture & Co-operation), New Delhi. Along with Minutes of the 13th Meeting of SCCB.
(xiii) Lr.No.18-10(i)/96-SD.IV issued by Government of India, Ministry of Agriculture (Deptt. of Agriculture & Co-operation), New Delhi.
(xiv) Lr.No.18-9,’96-SD.IV issued by Government of India, Ministry of Agriculture (Dept. of Agriculture & Co-operation), New Delhi.
(xv) Statement showing the Revenue & Expenditure for the Financial year 2009-10 along with Crop-wise Revenues calculated for the Crop year 2009-10 separately.
11. He also relied upon the judgment in CIT v. Agricultural Market Committee [2012] 20 taxmann.com 420 (AP), DIT (Exemptions) v. Institute of Chartered Accountants of India [2011] 202 Taxman 138/14 taxmann.com 5 (Delhi) and Institution of Chartered Accountant of India v. Director General of Income Tax (Exemptions) [2011] 202 Taxman 1/13 taxmann.com 175 (Delhi).
12. Sri J.V. Prasad, learned Standing Counsel for the Income Tax Department, supported the order of the 1st respondent and relied upon the decisions in State of UP v. Mahindra and Mahindra [2011] 42 VST 365 (SC), Info Parks v. DIT [2010] 329 ITR 404/186 taxmann.com 328 (Ker.), Tata Iron & Steel Co. v. State of Jharkhand [2005] 4 S.C.C. 272, State Level Committee v. Morgardshammar [1996] 1 S.C.C. 108, Controller of Estate Duty v. Kantilal[1976] 105 ITR 92 (SC) and Director of Inspection and Audit v. C.L. Subramaniam [1994] 3 SCC 615. He also relied upon the Memorandum explaining the provisions of the Finance Bill, 2008 and the budget speech of the Minister of Finance on 29-02-2008 while proposing amendment to the term “charitable purpose” defined in Section 2 (15) of the Income Tax Act which was subsequently passed by the Parliament vide the Finance (No.2) Act, 2009 (Act 33 of 2009) by Section 3 (a) (with retrospective effect from 01-04-2009. In the said speech, it was observed by the Minister of Finance that “charitable purpose” includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under “charitable purpose”. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be effected.” A proviso to clause (15) of Section 2 of the Income Tax Act, 1961 which defines the term “charitable purpose” to the following effect was added by way of amendment:
“(15) “charitable purpose” includes …
Provided that the advancement of any other 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 any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:”
He contended that on a true interpretation of Section 10 (23C) (iv) read with Section 2 (15) (as amended by the Finance (No.2) Act, 2009) clearly indicates that the petitioner’s activity of certification of seeds is a service “in relation to any trade, commerce or business” as the petitioner facilitates trade, commerce or business by its clients/agents in the certified seeds and therefore the petitioner was rightly denied the benefit of the exemption.
13. We have noted the contentions of both parties.
14. Before dealing with the respective contentions, we propose to take note of Section 10 (23C) (iv) of the Act and Section 2(15) of the Act. “Section 10. Incomes not included in total income:
In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- ………..
(23C) any income received by any person on behalf of –
(iv) any other fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance through out India or through out any State or States; or ………..”
15. Section 2 (15) as amended by Finance (No.2) Act, 2009 is as follows:
“(15) “charitable purpose” includes relief of the poor, education, medical relief, (preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,) and the advancement of any other object of general public utility:
Provided that the advancement of any other 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 any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:”
16. A reading of the above provisions of the Income Tax Act show that income received by any person on behalf of an institution established for “charitable purpose” (as defined in Section 2(15) of the Act) which may be approved by the prescribed authority alone would be excluded from the total income of a previous year of such person under Section 10(23C) (iv) of the Act. While under the main part of Section 2(15) activities which involve relief of the poor, education, medical relief, preservation of environment (including water sheds, forests and wild life) and preservation of monuments or places or objects of artistic or historic interests, would automatically come within the purview of “charitable purpose”, activities which advance “any other object of general public utility” would qualify only if such activity does not involve:
(i) carrying on of any activity in the nature of trade, commerce or business;
(ii) any activity of rendering any service in relation to any trade, commerce or business.
17. Section 8 of the Seeds Act, 1966 empowers the State Government or the Central Government in consultation with the State Government to establish, by notification in the official gazette, a certification agency for the State to carry out the functions entrusted to the certification agency by or under the Seeds Act. The petitioner was registered under the Andhra Pradesh (Telangana Area) Public Societies Registration Act, 1350 Fasli with registration No. 334/76. By G.O.Ms.No.435 Food and Agriculture (EP-II) Department dated 01-06- 1977, the State Government approved the proposal of the Director of Agriculture and directed that the petitioner shall carry on the functions of the certification agency under the Seeds Act, 1966 in the Andhra Pradesh State with effect from 01-06-1977. The objects of the petitioner have already been set out above. The petitioner thus certifies the Seeds which meet the minimum seeds certification standards as per Indian Minimum Seed Certification Standards, 1988. Seed growers enter into contract with a society/agent, who approaches the petitioner for certification of the seeds and after securing certification, they sell the certified seeds to the farmers at a market price determined by them. The petitioner collects a fee for providing certification as the process of certification involves technical and scientific evaluation of the seeds although the fee collected by it would be enough to enable it to sustain its activities and may not result in much profit. The term “advancement of any other object of general public utility” used in Section 2 (15) of the Act includes all objects to promote the welfare of the public particularly when the object is to promote or protect the interest of a particular trade or industry. The activity of the petitioner which facilitates sale of certified seeds to farmers therefore falls within “advancement of any other object of general public utility” included in the definition of the term “charitable purpose” as defined in Section 2 (15) of the Act but in view of the fact that certification of seeds by the petitioner facilitates trade, commerce or business in the certified seeds by the client of the petitioner, the proviso to the said section would come into operation. Thus the petitioner’s activity assists the sale of certified seeds and is “in relation to any trade, commerce or business” and therefore its activity cannot be held to be a “charitable purpose”. In this view of the matter, we hold that the 1st respondent rightly rejected the application of the petitioner for approval under Section 10 (23C) (iv) of the Act.
18. In the case of Agricultural Market Committee (supra), this Court held that an Agricultural Market Committee established under the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966 is an institution established for “charitable purpose” entitled to be registered under Section 12A and 12AA of the I.T.Act and their income from property is not to be included in the total income of the previous year under Section 11 of the Act. After considering the provisions of the Act, the Division Bench of this Court held that the Agricultural Market Committees are constituted under the above Act for the sole purpose of protecting the interest of agriculturists, farmers and growers, that the purpose of the said Act is to enable purchasers to get a fair price for the commodities by eliminating middleman and provide regular market with all necessary facilities, that the income of the market committee from different sources is derived without any profit motive and is used to meet the expenditure for providing market facilities. In our view the said decision has no application to the present case and was based upon an interpretation of the various provisions of the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966 and the attention of the Division Bench does not appear to have been drawn to the proviso to Section 2 (15) of the I.T. Act more particularly the portion “any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration……….”. Since agricultural market committees render services “in relation to trade, commerce or business” by facilitating trade in agricultural commodities by farmers/growers of agricultural produce or livestock, we are of the opinion that the activity of agricultural market committee may not come within the ambit of “charitable purpose”.
19. The counsel for the petitioner submits that the petitioner is itself not engaging in any activity which is in the nature of trade, commerce or business and therefore it has to be held to be an agency whose activities are for “charitable purpose” under Section 2(15) of the Act and therefore entitled to the benefit under Section 10(23C)(iv) of the Act. The contention of the petitioner’s counsel if accepted would mean that the words “any activity of rendering any service in relation to any trade, commerce or business” in the first proviso to Section 2(15) of the Act have to be ignored. This is not permissible because the High Court cannot substitute or ignore the wording in a provision in a statute. In Aswini Kumar Bose v. Arabinda Ghose AIR 1952 SC 368, the Supreme Court held that it is not a sound principle of construction to brush aside words in a statute as being inapposite surplusage, if they can have appropriate application in circumstances conceivably within the contemplation of the statute. In Mahindra and Mahindra’s case (supra), the Supreme Court held that the High Court cannot substitute the language in a statute or subordinate legislation.
20. The Memorandum explaining the provisions in the Finance Bill, 2008 and the budget speech of the Minister of Finance for 2008-2009 delivered on 29-02-2008 extracted above clearly indicate that the first proviso to Section 2 (15) as extracted above was introduced by the Finance (No.2) Act, 2009 with effect from 01-04-2009 to exclude entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes from claiming to be engaged in activities for “charitable purpose”.
21. The Kerala High Court in Info Parks Kerala’s case (supra) took note of the above events and held as follows:
“Yet another important aspect to be noted in this context is that, after the amendment by incorporating a proviso to Section 2(15), the fourth limb as to the advancement of “any other object of general public utility” will no longer remain as charitable purpose, if it involves carrying on of:
(a) any activity in the nature of trade, commerce or business;
(b) any activity of rendering any service in relation to any trade, commerce or business for a cess or a fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity. The first limb of exclusion from charitable purpose under clause (a) will be attracted, if the activity pursued by the institution involves any trade, commerce or business. But the situation contemplated under the second limb [clause (b)] stands entirely on a different pedestal, with regard to the service in relation to the trade, commerce or business mentioned therein. To put it more clear, when the matter comes to the service in relation to the trade, commerce or business, it has to be examined whether the words “any trade, commerce or business” as they appear in the second limb of clause (b) are in connection with the service referred to the trade, commerce or business pursued by the institutions to which the service is given by the assessee. If the said words are actually in respect of the trade commerce or business of the assessee itself, the said clause (second limb of the stipulation under clause (b) is rather otiose. Since the activity of the assessee involving any trade commerce or business, is already excluded from the charitable purpose by virtue of the first limb (clause (a)) itself, there is no necessity to stipulate further, by way of clasue (b), adding the words “or any activity of rendering any service in relation to any trade, commence or business.
As it stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under clause (b) in relation to the service rendered by the assessee, the terms “any trade, commerce or business refer to the trade, commerce or business pursued by the recipient to whom the service is rendered (as there may be a situation involving letting out the premises for purposes other than involving trade, commerce or business as well).”
22. We endorse the said view of the Kerala High Court in the above case and we respectfully follow the same.
23. In the case of Institute of Chartered Accountants (supra), the Delhi High Court had taken the view that the activity of conducting coaching classes by the said institute was not enough to deprive the institute of approval under Section 10 (23C) of the Act and the matter was remitted to the Income Tax Department to consider the matter whether the institute carried on business or not when its primary and dominant activity is to regulate the profession of chartered accountancy and to consider the application of the proviso of Section 2(15) of the Act introduced with effect from 01-04-2009. Although there is discussion in this case and also the other case (4 supra) on the subject, there is no finality attached to the above issue as in both cases the matter was remitted to the department to consider the application of the said institute for approval under Section 10 (23C) (iv) of the Act. Therefore they are of no assistance to the petitioner.
24. We are also of the view that the decision of this Court in New Noble Education Society’s case (supra) is not applicable as the said decision relates to educational institutions claiming exemption under Section 10(23C)(vi) of the Act and the provisions of Section 2(15) of the Act were only referred to incidentally to hold that Section 2(15) is wider in terms than Section 10(23C)(vi) of the Act and that if the assessee’s case does not fall within Section 2 (15) of the Act, it is difficult to consider the assessee as coming under Section 10(23C)(vi) of the Act. It is also observed that a certificate signed by the Commissioner of Endowments under Section 43 of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987 is only one of the factors but not conclusive proof that an assessee is a charitable institution existing solely for the purpose of education. On an appreciation of the facts relating to each of the petitioners in the said cases, the Court held that the existence of an educational institution solely for the purpose of education is a precondition for grant of approval and as the objects of the societies which were petitioners before the said Bench were not exclusively for educational purpose but included objects for non-educational purposes, the Chief Commissioner cannot be faulted for rejecting the applications seeking approval under Section 10(23C)(vi) of the Act. This judgment therefore is of no assistance to the Revenue.
25. For the above reasons, we hold that the 1st respondent had rightly rejected the application of the petitioner for approval under Section 10(23C)(iv) of the Act on the ground that the petitioner has not rendered its services directly to the farmers but is rendering its services directly to its clients/agents who are engaged in trading of the certified seeds with profit motive and therefore its activities are not for the “advancement of any other object of general public utility” and hence not for “charitable purpose” in view of second limb of the first proviso to Section 2(15) of the Act.
26. Accordingly, the writ petition is dismissed. No costs.
[Citation :Â 356 ITR 360]
