Activity of arranging placement for ex-servicemen as security personnel held charitable

Activity of arranging placement for ex-servicemen as security personnel/guards in different organizations was charitable u/s 2(15) of the Income Tax Act

ABCAUS Case Law Citation:
ABCAUS 3149 (2019) (09) ITAT

Important case law relied upon by the parties:
Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1

Activity of arranging placement for ex-servicemen held charitable u/s 2(15)

In the instant case, appeal was preferred by the assessee against the revision order of the CITpassed u/s. 263 of the Income-tax Act, 1961 (the Act).

The appellant society was an association of retired military persons which was registered under the Societies Registration Act, 1961. The primary object of the appellant society was to provide assistance to ex-service men and help them to return to civil life by re-settlement programmes and self-help/employment. And also assist their [retired military persons] dependents to overcome any distress circumstances.

The appellant society was registered under Section 12A of the Income-tax Act, 1961 as a charitable organization. For last 30 years, the appellant society was assessed by the Revenue after granting benefit of exemption u/s 11 of the Act. For the relevant AY, the appellant society had filed a return of income declaring net deficit.

The case of the appellant society was assessed u/s 143(3) and the benefit of Section 11 & 12 was allowed by the AO. Subsequent thereto the Pr. CIT in exercise of his revisionary jurisdiction issued a show cause notice u/s 263 of the Act directing it to show cause as to why the assessment order should not be held to be erroneous in so far as prejudicial to the interests of the Revenue for wrongly allowing exemption u/s 11 of the Act in respect of the income derived from services rendered. According to the Pr. CIT, services rendered by the appellant society did not qualify as ‘charitable purpose’ within the meaning of Section 2(15) of the Act.

In response the appellant society furnished written explanation wherein it was submitted that the ‘services rendered’ by the appellant society comprised of the activity of assisting and obtaining employment for the ex-service men by way of placing them as security personnel in different organizations. It was submitted that the said service was provided without any profit motive and the charges received from the organizations was disbursed amongst the ex-service men only and a miniscule sum per bill from the organizations was retained by the society to meet its administrative and establishment costs and overheads.

It was therefore claimed by the appellant that this activity which involved providing financial assistance and employment/placement for the ex-servicemen by getting them jobs postretirement was a charitable act and squarely came within the definition of ‘charitable purpose’ as set out in Section 2(15) of the Act.

The appellant society submitted that this activity by itself was neither in the nature of trade or commerce or any activity of rendering service in relation to any trade or commerce and therefore the show cause issued by the Pr. CIT was untenable on facts and in law.

The Pr. CIT however was not agreeable to the contentions put forth by the appellant society. According to the Pr. CIT, the appellant society was engaged in the business of providing manpower services and that such activity of the appellant society was beyond its aims & objectives as set out in its Memorandum.

The Pr. CIT further noted that the service charges received from the organizations constituted almost 96.27% of the total receipts and therefore concluded that activity of providing manpower being conducted in an organized and systematic manner with a profit motive and thus it violated provisions of Section 2(15) of the Act.

Referring to the proviso to Section 2(15) of the Act, the Pr. CIT held that the activities of the appellant society was outside the scope of Section 2(15) of the Act and hence denied the benefit of Section 11 allowed by the AO in respect of income from service charges received by the appellant society.

The Tribunal opined that in order to fall in the ken of the mischief of proviso to Section 2(15), it is necessary for the authority to demonstrate that the activity was/is in the nature of trade, commerce or business and was/is conducted by the assessee by itself for the purpose of earning or deriving any gain or profit in its own right. Carrying on trade, commerce or business should be shown to be the object or intent of the assessee.

The Tribunal stated that the proviso to Section 2(15) of the Act, is not to be applied in every case where an activity of a charitable organization is conducted in pursuit of its charitable object, though ostensibly appears to be in the nature of trade or commerce or business. One has to examine as to whether the activity conducted by the organization or trust is with a view to achieve the charitable objects for which it is established.

In the present case, the Tribunal noted the object of the assessee society was not to provide manpower placement/services as a part of its business. The crucial point to be noted in this regard was that the objective with which such activities is conducted by the assessee/appellant society. The society was established with one of the principal objects of assisting the retired military/ex-servicemen to find avenues for employment post superannuation. Most of the members of the society are retired army personnel belonging to lower ranks such as jawans, lance-naiks, naiks, havaldars etc. Most of these members are less educated who joined the armed forces at a very young age and based on their physical fitness are recruited and therefore being not highly educated or technically trained. They are trained mainly to perform patrol/guard duties during their tenure in the armed forces. During the time when they are in active defence service, they are posted in remote and far flung areas to guard the boarders of India [even at Siachein glaciers and forward posts] where they do not have any access not only to civic amenities but also do not have access to any training facilities for equipping themselves after post-retirment. In view of the strenuous and rigorous regime followed in armed forces, these personnel retire at middle-ages [mostly by 35 to 40 years] and after having sacrificed their best of adult-hood for the services of the Nation, away from their near and dear ones, when they retire at middle ages as discussed, they are required to be suitably be rehabilitated when they return to civil life from their tough regimental life.

The Tribunal noted that in view of the fact that these ex-servicemen personnel are not technically qualified or trained in skilled jobs and at the same time required to be financially secured in post retired life; the assessee society acted as an interface for their economic up-liftment and help them in obtaining employment to meet their cost of livelihood.

The Tribunal opined that the activities of the assessee society towards economic up-liftment of such ex-service men in India by assisting in obtaining stable employment were therefore definitely charitable in nature. Such an activity undertaken by the assessee society itself was not in the nature of trade, commerce or business and it would be quiet un-charitable to brand them so, unless facts reveal so.

Therefore the Tribunal held that the activities in the above nature could not be treated as activities in the nature of trade, commerce or business as contemplated in proviso to section 2(15). Therefore, the CIT had characterized the activities of the assessee trust as commercial in nature without going into the circumstances in which the activities are carried on by the assessee society.

The Tribunal placed reliance in the judgment of the Hon’ble Supreme Court wherein it was held that where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit.

The Tribunal pointed out that the appellant society could not be equated to an entity or body corporate which provides manpower services. Its main activity was not supplying manpower to PSUs but to empower financially weak and un-skilled ex-servicemen and thus ensure that they are able to earn a decent livelihood. The amount retained by the appellant trust was only Rs.4-5 lacs which was not even 2% of the total sum. The entire sum (except the fee retained) was otherwise disbursed amongst the ex-servicemen. Therefore it could not be said that rendering manpower services was the predominant object of the Trust and hence it was not hit by the rigors of the proviso to Section 2(15) of the Act.

The Tribunal also pointed out that it was not in dispute that the activities carried out by the society were in conformity with its object clause contained in the Memorandum which was before the Pr. CIT at the time when the registration under Section 12A was granted. It was also undisputed that in all the past income-tax assessments, the benefit of exemption u/s 11 read with Section 2(15) was granted by the tax authorities treating the identical activities to be in the nature of charitable activity. Therefore the factual matrix of the assessee’s case in the year under consideration was same as in the past. If the same set of activities were considered by the Revenue to be charitable in nature then there was no reason for the AO to depart from the view regularly followed in the past.

Therefore, the Tribunal opined that at the time when the AO passed the order u/s 143(3) allowing the assessee benefit of exemption u/s 11 of the Act, it could not be said that the view followed by him was ‘unsustainable in law’ so as to constitute the order u/s 143(3) to be erroneous and prejudicial to the interests of the Revenue for the purposes of Section 263 of the Act.

The Tribunal opined that the activity of the appellant society which involved working as an interface for arranging employment/placement for the ex-service men in the form of security personnel / guards / labour in different organizations was in consonance with its aims & objectives. Such activity did not come within the ambit of the expression “trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business” as contemplated by proviso to Section 2(15) of the Act.

Therefore the Tribunal held that the Pr.CIT was unjustified in invoking his revisionary jurisdiction u/s 263 and thereby substituting his subjective opinion in place of the AO for the purpose of denying the benefit of Section 11 as allowed by the AO.

Accordingly, the Tribunal quashed the order impugned and restored the order of the AO.

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