By TIOL News Service

ALLAHABAD, FEB 19, 2018: THE issue is - Whether if the assessee-society enters into a contract with the State Govt to cook and supply mid-day meals at schools, such activity is necessarily in the nature of trade and business. NO is the answer.

Facts of the case

The Assessee-society, formed with the object to establish and run Health Club, Arogya Kendra and to organize emergency relief centers, filed an application u/s 12-AA of the Act for grant of registration. However, the CIT observed that the Assessee, at that time, 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 Government of U.P. and received food preparation and distribution charges, on per child, per month basis. However, the CIT after considering such facts, held that the Assessee was not engaged in a charitable activity and therefore, rejected the application for grant of registration u/s 12-AA(1)(b)(ii) of the Act. On Assessee's appeal, the Tribunal allowed the Assessee's appeal and directed the CIT to register the Assessee u/s 12-AA of the Act.

After hearing the parties, the High Court held 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 by Finance Act, 2010 with effect from 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. It had been found by the Commissioner, because the assessee had been paid preparation and distribution charges per child, per month, by the State Government, under a contract, therefore the activity of the assessee could not be treated as charitable in nature. That being the finding of the Commissioner, the Tribunal was not right in observing from the above, it is evident that the CIT himself has stated that supplying of mid-day meals can be accepted as an object of general public utility;

++ the Tribunal has, upon examination of the assessee's income & expenditure account found: (i) the total receipts (from the activity conducted by the assessee) were less than Rs. 10,00,000/-. Then, more importantly the Tribunal found (ii) the activity of the assessee 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 have been mentioned by the Commissioner at Rs. 2,432/- only. The Tribunal then concluded that the activity of the assessee was one of general public utility. 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 these facts cannot be decisive whether the activity itself was one purely in the nature of trade, commerce or business. What was more important is 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 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. Thus, 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 is 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. Therefore, on the basis of findings recorded by the Tribunal and the material examined by the Commissioner 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. In that view of the matter, the Tribunal has 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.

(See 2018-TIOL-307-HC-ALL-IT)