Providing mid day meals to students is charitable activity as general public utility u/s 2(15)-High Court

Providing mid day meals to students is charitable activity as general public utility u/s 2(15)-High Court uphelds ITAT order directing registration u/s 12AA 

ABCAUS Case Law Citation:
ABCAUS 2209 (2018) (02) HC

The Challenge/Grievance:
The Revenue had filed the appeal under Section 260-A of the Income Tax Act, 1961 (Act) against the order of the Income Tax Appellate Tribunal (Tribunal/ITAT) directing he Commissioner of Income Tax (CIT) to register the respondent assessee under Section 12-AA(1)(b)(ii) of the Act

Brief Facts of the Case:
The assessee was a registered society formed with the object to establish and run Health Club, Arogya Kendra, to organize emergency relief centers etc. It also claimed to work to promote moral values, eradication of child labour and dowry etc.

The assessee filed an application under Section 12-AA of the Act for grant of registration. At that time, the assessee was engaged mainly in preparing and supplying mid-day-meals to the students at primary schools in various villages, against a contract awarded by the Basik Shiksha Adhikari (BSA).

Under the said contract, the assessee was authorized to prepare and supply meals from the material/ingredients supplied by the Government of U.P. The assessee society received food preparation and distribution charges, on per child, per month basis from the Government of U.P. 

According to the assessee this activity was covered under “advancement of any other object of general public utility”, under Section 2(15) of the Act being a “charitable purpose”. 

The CIT refused the registration under Section 12AA of the Act on the ground that the activity of the assessee was in the nature of trade, commerce or business as, admittedly, the society was getting preparation and distribution charges per child per month from the state Govt. for providing mid-day meals. The CIT was of the view that  it was a contractual work and amounted to business activity. He opined that even if the contention of the applicant that it was engaged in the object of the general public utility was accepted, the same was in the nature of trade, commerce or business as consideration was received for providing mid-day-meal. Therefore, the CIT, considering the proviso to Section 2(15), refused to register the assessee-society.

Upon appeal, the Tribunal found that the receipts of the society were below the amount specified in the second proviso to Section 2(15) of the Act. Accordingly it held that the activity of the assessee would fall within the ambit of an object of general public utility and, therefore, a charitable purpose under Section 2(15). The ITAT held that the assessee was entitled to registration under Section 12-AA of the Act.

Contentions made on behalf of the Petitioner Revenue:
The Revenue contended that the second proviso to Section 2(15) of the Act does not create a right in favour of the assessee to obtain registration under Section 12-AA of the Act. It was submitted that there is no presumption in favour of the assessee pursuing a charitable purpose because it’s receipts were below the specified amount and despite that proviso, the burden continues to rest on the assessee to establish that he was engaged in an activity of “general public utility”.

Contention made on behalf of the Respondent Assessee:
It was submitted that inference drawn by the CIT that the assessee was engaged in a business activity was erroneous. Merely because a contract had been awarded to supply and distribute mid-daymeals, it could not be said that the assessee was engaged in a business activity or that it had profit motive.

It was contended that the assessee was pursuing a “charitable purpose” in so far as it was working for the “advancement of an object of general public utility” being to address the minimum nutritional requirements of the students attending village schools without any profit motive.

It was submitted that the activity of the assessee was inseparably linked to and purely consequential to the welfare measure adopted by the State Government. The policy of the State Government being wholly for the advancement of an object of general public utility, the assessee who had been engaged to give effect to and to carry out such policy, was clearly working for a charitable purpose.

Alternatively,it was submitted that by virtue of the clear language of the second proviso to Section 2(15) of the Act, even if it was assumed that the assessee was engaged in an activity of trade, commerce or business for consideration, yet, in view of the fact that his total receipts were below specified amount it was clearly entitled to registration u/s 12AA.

Observations made by the High Court:
The Hon’ble High Court observed that the first proviso to Section 2(15) of the Act applies to an assessee who may claim to be engaged in ‘advancement of any other object of general public utility’. In respect of such an assessee it has been provided, if the activity, in respect of which it claims exemption be in the nature of trade, commerce or business or any other activity rendering any service in relation of any trade, commerce or business for consideration, such activity shall not constitute an activity for charitable purpose. However, the second proviso to Section 2(15) of the Act (introduced wef 1.4.2009), created an exception to the first proviso. Thus, the first proviso to Section 2(15) of the Act would not apply in the event the receipt from activities referred to above did not exceed Rs. 10,00,000/- in the previous year

The Hon’ble High Court observed that The Tribunal upon examination of the assessee’s income & expenditure account found that  the total receipts from the mid day meal activity were less than Rs. 10,00,000/-. More importantly the Tribunal found that the activity of the society involved preparation of mid-day-meals and it’s supply to primary schools in villages as directed by the State Government; the assessee incurred kitchen expenses; salary expenses and; transportation expenses. Other than that, the assessee incurred nominal office expenses & telephone charges. Total excess of income over expenditure mentioned by the CIT was Rs. 2,432/- only. The Tribunal then concluded that the activity of the assessee was one of general public utility. The revenue did not dispute the correctness of the aforesaid findings of the Tribunal. Also, no material had been brought on record to doubt the correctness of this finding of the Tribunal.

The Hon’ble High Court opined that merely because the State had itself not been able to cook and supply cooked food by way of mid-day-meals at it’s schools and further because it out-sourced that part of the work, against consideration, it cannot be said that it transformed the activity into one in the nature of trade, commerce or business etc. Execution of a contract between two parties, in those facts cannot be decisive whether the activity itself was one purely in the nature of trade, commerce or business. What was more important was to examine whether assessee had engaged in an activity that was inseparably linked to and performed in continuation of the charitable scheme of the government.

The Hon’ble High Court further observed that the fact that some money had been paid by the State to the assessee was only a necessary expense at the hands of the State. Looking at the nature of expenses met by the assessee one cannot escape the conclusion that similar expenses would have been incurred by the State, had it performed that work itself or though it’s own agencies.

The Hon’ble High Court opined that at the hands of the assessee, the payments received were utilized to defray the expenses met to perform the task of cooking and supplying the meals as directed by the State government. It was also not the case of the revenue that the assessee was in any manner free to utilize either the materials supplied to it or food cooked by it, as per it’s own wish/discretion. The assessee appears to have acted merely as an agent of the State.

The Hon’ble High Court opined that on the basis of findings recorded by the Tribunal and the material examined by the CIT, it would be wrong to conclude that because there existed a contract between the assessee & the government therefore the assessee was not pursuing a “charitable purpose”. On the other hand the activity performed by the assessee clearly appears to be inseparably linked to the ‘charitable purpose’ of providing mid-day meals at village schools. Also, admittedly, the total receipts of the assessee were below the limit of Rs. 10,00,000/- as stipulated under the second proviso to Section 2(15) of the Act.

The Hon’ble High Court opined that, the Tribunal had rightly concluded that the restriction created by the first proviso to Section 2(15) of the Act did not operate against the assessee and therefore the activity of the assessee, even though it may have involved an activity in the nature of trade, commerce or business, etc., it would fall within the ambit of general public utility and therefore be a charitable purpose under Section 2(15) of the Act.

Decision/ Conclusion/Held:
In view of the fact that the society was engaged solely to implement the welfare scheme of the state government to provide mid-day-meals to students at its various village schools, it was rightly held to be engaged in an activity of general public utility. Alternatively, if it be assumed that in that process the assessee engaged in an activity in the nature of trade, commerce or business, etc, then, because the receipts from such activity were below Rs. 10,00,000/-, the assessee was still entitled to registration under Section 12AA(1)(b)(ii) of the Act.