Delhi High Court reads down first proviso to sec. 2(15); rescues genuine charities from its clutches

Facts:

a)The instant writ petition was filed for quashing of the first Proviso to Section 2(15) of the Income-tax Act, 1961 (‘Act').

b)The petitioner contended that the first proviso was arbitrary and unreasonable since the Finance Act, 2008 introduced it to deny the benefit of exemption to "purely" commercial entities, which wore the mask of a charity but it, hit even genuine charitable organizations.

c)The petitioner also contended that the first proviso clubs together two unequal entities, i.e., 'purely business and commercial entities' and 'charitable entities'; therefore, it is violative of Article 14 of the Constitution of India.

The High Court upheld the constitutional validity of first proviso and made following observations:

1)The Finance Act, 2008 introduced the first proviso to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It was not designed to hit those institutions, which had the advancement of the objects of general public utility at their heart and were charitable institutions.

2)First Proviso carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In order to determine whether the institution would fall within the ambit of first proviso to section 2(15), the dominant and the prime objective has to be seen behind both the activities.

3)If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'.

4)On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it would be regarded as an institution established for charitable purposes- INDIA TRADE PROMOTION ORGANIZATION V. DGIT (EXEMPTIONS) [2015] 53 taxmann.com 404 (Delhi)

Bombay High Court: Service tax on services of advocate/arbitral tribunal is constitutional

Levy of service tax on services provided by advocates and arbitral tribunal is constitutionally valid and not violative of Article 19(1)(g); further, exemption to services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs is based on intelligible differentia and not violative of Article 14.

Facts:

The petitioner, a practicing advocate, filed writ petition for declaration that section 65(105) (zzzzm) of the Finance Act, 1994 as inserted by the Finance Act, 2011 providing for service tax on services by advocates is null and void and ultra vires the Constitution of India.

The High Court held in favour of revenue as under:

1) There is no basis or foundation in the complaint by petitioner inasmuch as imposition of such levy does not burden the litigant or the consumer of justice. There is no substance in the complaint that the profession of advocates and legal profession itself has been treated on par with commercial or trading activities or dealings in goods and other services. Merely because of the role of the advocate, it does not mean that his position as an officer of the Court and part and parcel of administration of justice is in any way undermined, leave alone interfered with.

2) The Advocates and legal practitioners are known to pay professional taxes and taxes on their income. They are also brought within the purview of service tax because their activities in legal field are expanding in the age of globalization, liberalization and privatization. They are not only catering to individuals but business entities too. If it is found that the advocates are catering to affluent and rich class of litigants and recipients of legal services, then, the tax on the services rendered to them is definitely within the permissive sphere of legislation. That cannot be faulted.

3) Hence, activities carried out by advocates for consideration by way of fees, etc., amounts to 'service' and can be charged to service tax. Similarly, arbitration is also carried out for hefty fees and levy of service tax on services by arbitral tribunal is not invalid.

4) Levy of service tax is not violative of Article 19(1)(g) of Constitution, as it is a reasonable restriction and similar to income-tax and professional tax being paid by advocates. Since services provided to individuals and small businessmen having turnover upto Rs. 10 lakhs stands exempted, it does not deny justice to poor and needy. Further, such exemption to individuals and small businessmen does not transgress doctrine of equality under Article 14 of Constitution of India, as such exemption is based on intelligible differentia/classification.

5) Moreover, since service tax on non-exempt services provided by advocates/arbitral tribunal is payable by service recipients under reverse charge on and from 1-7-2012, such advocates/arbitral tribunal can no longer complain of levy of service tax. Even for period prior thereto when there was no reverse charge, levy of service tax could not be regarded as invalid and arguments that 'reverse charge be treated as retrospective' was to be set aside. - P.C. Joshi v. Union of India [2014] 52 taxmann.com 311 (Bombay)