Commissioner of Income Tax vs Krishi Upaj Mandi Samiti and Others

Sangeet Lodha, J.—Heard learned Counsel for the appellant.

This bunch of appeals arise out of a common order dt. 15th April, 2008 passed by the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur (in short ''Tribunal" hereinafter), whereby the appeals preferred by the Revenue against the orders passed by the Commissioner of Income Tax (Appeals) [in short "CIT(A)" hereinafter] have been dismissed and some of the appeals preferred by the assessee, stand partly allowed.

According to the learned Counsel for the Revenue following substantial questions of law as set out in the appeals arising out of the orders passed by the learned Tribunal, require adjudication by this Court:

Whether the learned Tribunal was justified in confirming the order of CIT(A) directing the AO to adopt the status of assessee as charitable trust in accordance with order of the Tribunal dt. 14th Sept., 2007 notwithstanding that the issue of registration u/s 12A is under challenge by the Revenue ?

Whether the learned Tribunal is justified in confirming the order of CIT(A) directing the AO to compute the income of the assessee after verifying the application of income as per the provisions of Section 19 of the Rajasthan Agriculture Produce Marketing Act, 1961 whereas, the income should be computed as per the provisions of the IT Act, 1961 ?

Whether/the learned Tribunal is justified in confirming the order passed by the CIT(A) directing the AO to allow deduction of contribution to Rajasthan Agriculture Marketing Board from the income of the assessee and to compute the income available for application to charitable purpose ignoring that the expenditure is not of revenue nature and the issue of registration u/s 12A of the IT Act, 1961 is under challenge by the Revenue ?

Whether the learned Tribunal is justified in confirming the order passed by the CIT(A) directing the AO in respect of the expenditure incurred on construction and repair work which is not of revenue nature ?

Whether the learned Tribunal has erred in law in dismissing the appeal of the Revenue ignoring the judgment of the Hon''ble Supreme Court rendered in the case of Agricultural Produce Market Committee, Narela, Delhi Vs. Commissioner of Income Tax and Another,

The relevant facts in nutshell are that the assessees are the market committees established by the Government of Rajasthan under the provisions of Section 6 of Rajasthan Agricultural Produce Market Act, 1961 (in short "the Act of 1961" hereinafter), which were treated as local authority for purposes of IT Act, 1961 (in short "the IT Act" hereinafter). During the relevant assessment year, the assessee claimed expenses incurred on construction and repair work of buildings, roads etc., but, the same were disallowed by the Assessing Officer ( in short "AO" hereinafter) treating them to be expenses of capital nature. The disallowance was made by the AO for the reason that the status of the assessee was taken as "local authority" as against the "public charitable institution" claimed by the assessee and accordingly, various additions of expenditures incurred were made by the AO under the head (a) expenditure incurred on construction and repair works and (b) contribution made to Rajasthan State Agricultural Marketing Board (in short "the Board" hereinafter).

The applications preferred by the assessees for grant of registration as "public charitable institution" u/s 12A of the IT Act, were rejected by their respective CITs. However, the appeals preferred by the assessees aggrieved by the orders passed by their respective CITs, were allowed by the Tribunal and accordingly, the respective CITs were directed to grant registration to the assessees u/s 12A of the IT Act. All the assessees were granted registration u/s 12A with retrospective effect i.e., from 1st April, 2002. Accordingly, the assessees acquired the status of "public charitable institution" as against the status of "local authority".

Aggrieved by the assessment orders, the assessees preferred appeals before the concerned CIT(A). Since during the pendency of the appeals before the CIT(A), the assessees'' appeals against the rejection of the applications for grant of registration u/s 12A were allowed by the learned Tribunal and the status of the assessees as "public charitable institution" was accepted therefore, the learned CIT(A) was requested to accept the status of the assessees as "public charitable institution" instead of "local authority" as adopted by the AO while passing the assessment orders. The CIT(A) while accepting the stand taken by the assessees as aforesaid directed the AOs to recompute the income after taking the status of assessees as "public charitable institution" as per the provisions of Sections 11, 12 and 13 of the IT Act. It was further directed that while computing the income of the assessees as "public charitable institution", the AO shall consider the objects of the institutions for which the agricultural produce market committees were established so also the provisions of the Act of 1961. After due consideration of the various provisions of the Act of 1961, the AO was directed to examine whether the facilities were provided by the agricultural produce market committee in the market area as defined in Section 4 and as per notification issued by the State Government to declare market area for the purpose of Act of 1961. It was observed by the CIT(A) that if any amount is applied expended for providing facilities as specified in Sub-section (9A) of Section 19 of the Act of 1961 outside the market area defined in Section 4, the utilisation of the market committee fund shall not be treated as spent to meet the object of public charitable institution. The AO was further directed to compute the income referred to in Section 11(1)(a) of the IT Act, in commercial sense and thereafter, to find out if the portion of income of the charitable institution is not applied for charitable purpose or is accumulated beyond the permitted limit. Precisely, the CIT(A) observed that the income which has not been applied for the charitable purpose or accumulated beyond prescribed limit for charitable purpose will not enjoy the immunity from taxation. While considering the provisions of Section 34A of the Act of 1961, which deals with the power of the State Government to issue directions to the market committees, the CIT(A) observed that Section 34A of the Act of 1961 does not empower the State Government to issue instructions beyond the purposes specified in Section 19 of the Act of 1961 for which the market committee fund or the marketing development fund shall be spent and further it does not empower the State Government to spend funds beyond the market area specified in Section 4 of the Act of 1961. Accordingly, the AO has been directed to consider this aspect of the matter as to whether the market committee funds were utilised and applied to meet the objects of the market committee as per the provisions of the Act of 1961. The AO was directed to treat the surplus of the charitable institutions as exempt if the institution has applied 85 per cent of the income for the charitable purpose and if not, to find out whether the provisions of Section 11(2) of the IT Act stands complied with. Regarding the deduction claimed by the assessees on account of expenditure incurred on construction and repair works, the CIT(A) directed the AO to allow all expenditure whether revenue or capital if the expenditure was incurred to meet the objects of the charitable institutions. Regarding contribution to the Board in terms of provisions of Section 18A of the Act of 1961, the CIT(A) observed that the amount taken away from the income of the market committee in the form of mandatory contribution is not available for application for charitable purpose with the market committee therefore, the AO should allow the deduction of contribution to the Board from the income of agricultural produce marketing committee to compute income available for application to the charitable purpose.

Further, appeals preferred by the Revenue aggrieved by the aforesaid orders dt. 25th Oct., 2007 passed by the CIT(A) have been dismissed by the learned Tribunal by the common order dt. 15th April, 2008 relying upon its earlier decisions in the matters involving identical issues.

At the outset, the learned Counsel appearing apprised the Court that an appeal preferred by the Revenue assailing the validity of the order passed by the Tribunal with regard to issue of registration of the agricultural produce market committee as "public charitable institution" has already been dismissed by this Court vide judgment dt. 18th March, 2008 in the matter of Commissioner of Income Tax Vs. K.U.M.S., . In the said decision, a Bench of this Court has held as under:

May be that the income received by the Samiti by way of cess or Mandi fees is not shown to be spent wholly for the purpose of relief of the poor, education, ''or medical relief, but under the scheme of the Act, being the Rajasthan Agricultural Produce Markets Act, 1961, the entire amount received by the Samiti is required to be spent for the purpose mentioned therein, which obviously Includes advancement of ''any other object of general public utility''. In that view of the matter, Samiti is entitled to be registered u/s 12A. In our above view, we are fortified by the judgments of Punjab & Haryana High Court in Commissioner of Income Tax Vs. Market Committee, and CIT v. Agricultural Produce & Market Committee (2007) 36 SITC 278.

In view of the aforesaid decision of this Court, in our considered opinion, the directions issued by the CIT(A) affirmed by the learned Tribunal directing the AO to recompute the income after taking the status of the assessees as "public charitable institution" as per the provisions of Sections 11, 12 and 13 of the IT Act, cannot be faulted with.

Assailing the validity of the various directions issued by the CIT(A) to the AO with regard to the assessment of the assessees to be carried out treating their status as "public charitable institution" it is submitted by the learned Counsel for the Revenue that the findings recorded by the CIT(A), affirmed by the learned Tribunal are ex facie contrary to facts and law. According to the learned Counsel the law applicable in the matter has not been examined by the learned Tribunal in correct perspective which has resulted in erroneous findings being arrived at. Drawing our attention to the earlier judgment of the Tribunal dt. 28th Sept., 2007 rendered in ITA No. 199/Jd/2007, Krishi Upaj Mandi Samiti, Anoopgarh and Ors. v. ITO [reported at (2008) 119 TTJ (Jd) 369 : (2008) 12 DTR (Jd)(Trib) 166-Ed.] the learned Counsel submitted that the learned Tribunal has seriously erred in holding that the contribution made to the Board would be considered as application irrespective of the fact that the amount has been actually spent by the Board in the relevant year or not and further that even the fund spent by the Board outside the local jurisdiction of the market committee would also make the assessee entitled to claim as application of income. The learned Counsel submitted that mere crediting of the amount in the account of the Board is not enough, the amount so credited must be spent by the Board within the relevant year only else the assessee cannot claim benefit of exemption u/s 11 of the Act of 1961. It is submitted by the learned Counsel that the learned Tribunal has seriously erred in holding that even the fund spent by the Board outside the local jurisdiction of the market committee concerned would also make the assessee entitled to claim as application of income.

We have considered the submissions of the learned Counsel for the appellant.

It is not in dispute that the application of the fund by the market committee and its overall functions are regulated by the provisions of the Act of 1961, which has been enacted by the legislature to provide for better regulation of buying and selling of agriculture produce and the establishment of the markets for agriculture produce in the State of Rajasthan so that the agriculturists may secure a fair return of their agriculture produce. The need of the said enactment was felt for the reason that the agriculturists being generally illiterate and ignorant about prevailing prices of their produce in the market were being exploited by the middlemen and profiteers.

Section 9 of the Act of 1961 deals with the functions and duties of the market committee. Section 17 of the Act of 1961 authorises the levy of market fee by the market committees. The market fees to be prescribed by the market committees is subject to a maximum to be prescribed by the Government under the rules and it has co-relation with the services to be rendered for carrying out the objects of the Act of 1961. Section 18 provides that all money received by the market committee shall be paid into a fund to be called "the market committee fund" and all expenditure incurred by the market committee under or for the purposes of the Act shall be defrayed out of the said fund. Section 18A casts an obligation upon the market committee to pay to the Board before 15th of every month, such amount as may be prescribed but not exceeding 10 per cent of the income derived by it from license fees, market fees and fines imposed by the Court. Section 19 provides for the purposes for which the market committee fund shall be expended which include the management of the market proper, the principal market yard, sub-market yards for which it is constituted, control and regulation of the running of the market in the interest of agriculturists and traders operating in the market and the behaviour of those who entered in the market for transacting business, and for providing facilities such as shelters, sheds, parking accommodations, water for persons, drought cattle, vehicles and pack animals coming or being brought to the market and on construction and repair of approach roads, culverts and bridges in the market area and for such other purposes, as may be specified by the State Government.

The Board has been established by the State Government u/s 22A of the Act of 1961 to carry out the purposes specified in Section 22J of the Act of 1961 and to tender advise to the Government and the market committees in relation to agricultural marketing as and when referred to. Section 22H provides for creation of the marketing development fund to be administered by the Board. Section 22J specifies the purposes for which the marketing development fund shall be utilised by the Board which inter alia includes construction of the market, roads and approach roads to the markets, construction of market yards and sub-yards and leasing or transferring these to the market committees.

For the purposes of carrying out the provisions of the Act of 1961, in exercise of power conferred by Section 36 of the Act of 1961, the State Government has framed the rules namely, "The Rajasthan Agriculture Produce Market Rules, 1963" (in short "the rules of 1963" hereinafter). As per Rule 45 of the Rules of 1963 , all money received by the market committee shall be credited to the fund called the market committee fund. Rule 52 provides that all works to be taken up by the market committees shall be executed and carried out by the Board in such manner as may be decided by the Board from time to time. That apart, the Board is empowered to specify the limits upto which the market committee may be allowed to carry out the construction works.

Thus, keeping in view the scheme underlying the Act of 1961 and the kind of services to be rendered in implementation of the objects set out, it can be safely concluded that there is a definite public purpose behind the said enactment.

From bare perusal of the various provisions of the Act of 1961 and the Rules made thereunder referred hereinabove, it is manifestly clear that both the statutory bodies i.e. the market committee and the Board controlling and managing the market committee fund are under an obligation to utilise the same for carrying out the purposes of the Act in accordance with the guidelines prescribed. The marketing committee takes the decision as per its own requirement for providing facilities in the market area such as, shelters, sheds, parking accommodation , construction and repair of the approach roads, culverts, bridges etc. and accordingly, prepares the budget and submits the same for sanction to the Board. It is the Board which is looking after the improvement and regulation of agricultural markets in the State. The works of planning and development of infrastructure i.e. construction and maintenance of roads within the market area and approach roads etc. are executed and carried out by the Board.

It is not in dispute that the amount given by the assessee to the Board for specific purpose on the approval of the project by the State Government. The learned Tribunal has rightly observed that the amount given is not a voluntary contribution by the assessee but towards the achievement of the object set out in the Act for which the assessee came into existence. It is not even the case of the Revenue that the assessee can claim the refund of the amount once given to the Board so as to execute and carry out the construction work. On the facts and in the circumstances of the case, the learned Tribunal has rightly held that the amount which remained unutilised cannot be treated as "advance" which presupposes existence of an element of getting the amount back in case the terms of the agreement are not complied with. Since the amount once given for a specific charitable purpose by the market committee to the Board is not refundable and the assessee is not in position to ensure that the amount is spent within the same year and also cannot call back the unspent amount therefore, so far as the assessee is concerned, the making of the payment to the Board by itself has to be treated as "application". In this view of the matter, we are in complete agreement with the finding arrived at by the learned Tribunal relying upon the decision of the Hon''ble Supreme Court in the matter of Commissioner of Income Tax Vs. Thanthi Trust, that the crediting of the amount in the account of the Board is enough and the Revenue cannot insist that the amount so given by the assessee must be spent within a relevant year only. In our considered opinion, the market committee having put its income to use in conformity with the provisions of the Act of 1961 for charitable purpose, it has to be treated as the application of the income for the charitable purpose in the relevant year.

The next question which comes for consideration is as to whether the assessee can claim the utilization of the fund by the Board including fund spent outside its market area as application of the income.

From bare perusal of the provisions of Section 11(1)(a) of the IT Act, it is manifestly clear that it does not contain any such inhibition that the application of the income for charitable purposes should be restricted to a particular place or the specified area. The words "to such purposes in India" used in said provision show that the application of the income for charitable or religious purposes anywhere in India shall be entitled for exemption in terms of Section 11(1)(a) of the IT Act. The application of the income for the purposes set out in the Act of 1961 by the market committee or the Board on its behalf may be in violation of the provisions of the Act of 1961 which regulates the utilisation of the market committee fund and market development fund but, for the purposes of exemption u/s 11(1)(a), it is wholly irrelevant inasmuch as, under the said provision, the only relevant consideration is that the income should be applied for charitable purposes in India. Moreover, as noticed by the learned Tribunal, as per the provisions of Section 34A of the Act of 1961, the State Government is empowered to give the Board or the market committees general instructions to be followed for carrying out the purposes of the Act which includes the directions relating to purposes for which and manner in which the market committee fund or the market committee development fund shall be spent and the manner in which the surpluses with the Board or the market committee shall be kept. Thus, it is not within the domain of the concerned market committee to restrict the utilisation of the amount contributed towards any ''charitable activity within its local jurisdiction. The learned Tribunal has rightly held that so long as activity remains charitable in conformity with the purposes defined in the Act of 1961, no fetters can be placed on the market committee for not spending the amount outside local jurisdiction.

In this view of the matter, we are in complete agreement with the finding arrived at by the learned Tribunal that the contributions made by the assessed towards "charitable activities extending beyond its local jurisdiction but within India shall be entitled for benefit of exemption u/s 11(1)(a) of the IT Act.

For the aforementioned reasons, we do not find any merit in these appeals, therefore, the same are hereby dismissed,