Corporate Social Consortium vs. Ministry of Finance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Case Law Assignment II

Corporate Social Consortium vs. Ministry of Finance

 

 

 

 

 

Case Law Assignment II

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Introduction of the case:

 

 

The background of the case is at the Supreme Court of Nepal, Kathmandu. The court topic is of “Mandamus”. Mandamus is a judicial order from the Supreme Court to any corporation, government court or a public authority to do or not to do a specific act which that body is obliged under law to do or refrain from doing. It basically tells what to do or not to do according to the department’s statutory duty. The purpose of mandamus is to provide remedy for the defects of justice. The procedure is by filling a writ application of mandamus by the aggrieved party, stating the denial of his/her legal right from the defendant.

 

Case filed on 2066, Supreme Court Bench

 

Honorable Justice

 

Honorable Justice

 

Writ No.: 0598

 

 

Petitioner: Corporate Social Consortium (CSC), Application made by on behalf of CSC

 

Legal Representative

 

Respondent: Ministry of Finance

 

Legal Representative: Deputy Attorney General

 

Referred Acts:

 

Income Tax Act 2058 Section 2 (S)

 

Companies Act 2063 Section 3(3), 4, 166(1)

 

Association Registration Act 2034 Section 2(1)

 

 

Corporate Social Consortium is a non for profit, social benevolent organization working on the issue of HIV/AIDS. It is registered under companies act 2063, Section 166 (1). It files for a tax exemption certificate at the Inland Revenue Department, Patan. Inland Revenue Department, Lazimpat rejects the plea made by CSC sitting no provision made for such organizations in accordance to the Companies Act. CSC files a writ petition to the Supreme Court to change the decision made by IRD. The Supreme Court deals with three questions to come to a verdict. Those were: `

 

·         What is the objective and the meaning of Income Tax Act 2058, Section 2 (s)?

 

·         Does Corporate Social Consortium fall under the Income Tax act 2058, Section 2 (S) 1 for tax exemption?

 

·         Does corporate social consortium registered under Companies act 2063, Section 166(1) receive tax exemption certificate from the Inland Revenue Department?

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After evaluating all the three questions the Supreme Court on Sunday 2068/03/12 ordered the right to tax exemption to CSC by the IRD. In addition, as per mandamus the court directed the IRD to provide tax exemption to non for profit organization with a motive of social benevolence.

 

 

 

B. Parties and their claim

 

The Petitioner: Corporate Social Consortium

 

On 2065/07/05 Corporate Social Consortium is registered according to the Companies Act 2063 Section 166 (1). It is a social benevolent and social welfare company. The director of the organization is Mr. Meraj Roshan Thakuri. It has been registered as a nonprofit organization which does not share its profits with the shareholders of the company. The purpose of the company is to provide a platform for HIV/AIDS victims to establish themselves in the society as normal citizens.

 

In collaboration with various organizations such as NGO’s, INGO’s and government organizations it is trying to control the disease and asses the issue behind HIV/AIDS. It also deals with treating HIV/AIDS affected victims. The claim of the petitioner is that when it filed an application for tax exemption at Inland Revenue Department, Sanepa, the Inland revenue Department, Lazimpat on 2065/05/2 rejected the plea of CSC. CSC claims that it is a non for profit organization with no intention of distributing its profits to its promoters and should be eligible for tax exemption according to Income Tax Act 2034 Section 2 (S) 1. Additionally they have stated on their writ petition that the act by the Inland Revenue Department, Lazimpat is unconstitutional as it is against the Interim Constitution of Nepal, Section 32 and Section 107 (2). Also, the provision made for organizations registered Association Act 2034 should be made for organizations registered under the companies Act 2063 and be granted provisions similar to the Association Act. Hence, It claims that its right be restored by cancelling the decision made by the Inland Revenue Department.

 

The Respondent: Ministry of Finance and the Inland Revenue Department

 

The claim of Inland Revenue Department is that CSC is a non for profit organization registered under the company’s act 2063, and is not eligible for tax exemption as it is registered under the company’s act 2063 and a provision for tax exemption is only valid if an organization is registered under Association Act 2034. On 2066/10/4 the court asked the respondents for the reason for their decision. They claimed the decision of not providing tax exemptions due to the following reason:

 

The Director General of Inland Revenue department claimed that the company is not exempted from paying tax and submitting its financial data as CSC is registered under the Companies Act 2063 and cannot be tax exempted.

 

Rameshwor Khanal, Secretary of Ministry of Finance claimed that CSC is an organization that is exclusive from the type of organizations which are under the provision of tax exemption under the Income Tax Act 2058 Section 2(S) 1.

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C. Causes of the disputes:

 

The cause of the dispute is that the petitioner is claiming that the respondent has rejected its right to tax exemption by ignoring significance of the organization. The respondent is a government organization which has interpreted the law very narrowly and analyzed the organization as a non for profit organization only. Rather the petitioner claims the organization as a social benevolent and social welfare company working to tackle HIV/AIDS which is a social issue as well as a dangerous infectious disease. The cause of the dispute is also because of the insensitive nature shown by the government organizations on the matter of CSC’s meaning and objective.

 

 

 

D. Legal provisions given to profit not distributing company:

 

According to Companies Act 2063, Section 166 (1) notwithstanding anything contained elsewhere in this Act, any company may be incorporated to develop and promote any profession or occupation or to protect the collective rights and interests of the persons engaged in any specific profession or occupation or to carry on any enterprise for the attainment of any scientific, academic, social, benevolent or public utility or welfare objective on the condition of not distributing dividends. The above is the provision for incorporating a non for profit organization.

 

According to Companies Act 2063 Section 167 (1) notwithstanding anything contained in this Act or the prevailing law, the following matters of a company incorporated pursuant to Section 166 shall be as follows:

 

·         There shall not be required share capital to incorporate a company not distributing profits. Provided, however, that the company may receive membership fees from its members and receive any donation, gift pursuant to law for the accomplishment of its objectives.

 

·         No member of the company shall be liable for the debts and liabilities of the company except in the case where any member accepts such liability in writing the liability of the company, with specification of the limit of such liability; his/her liability shall be limited to the extent of that limit.

 

·         The company shall not distribute dividend, bonus or any other amount, from the profits earned by it, to its members or employees; and the profits earned by the company shall be used to increase the capital of the company or for the attainment of its objectives.

 

·         The company shall obtain prior approval of the Office to change objectives.

 

·         Any company not distributing profits shall not be merged with any company distributing profits.

 

·         The members of a company incorporated under this Chapter shall elect the directors from amongst themselves in such number as fixed in the articles of association, on the basis of one member one vote.

 

·         According to Income Tax Act 2058, section 2 (S) the organization entitled to enjoy exemption if it is:

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·         A social, religious, educational and benevolent organization of public nature established with non – profit motive.

 

·         An amateur sports organization so formed with a view to promoting social or sports related facilities that the organization or its members does not derive profits.

 

E. Major Tax Issues:

 

The major tax issues faced in this case by the petitioner and the respondent is that of taxation of nonprofit organization. As many acts are formulated in a narrow view and almost disregards correlation with any other act of the nation, it faces numerous problems. One such problem has been encountered in this case. The companies act majorly deals with the legal provision for incorporation and working of a particular types of companies but it is totally silent about the taxation policy the different types of companies are to follow. Also, another issue is that is anybody is registered according to a certain act is it entitled only to the provisions of that particular act or can it be related to other accts and enjoy facilities provided in that act. This is one of the main tax issues raised by the respondent side. Hence, mandamus is an effective way of rectifying laws but this is a non efficient way as it is very time consuming and issues have to be brought up to the authority rather than proactively dealt by the concerned body.

 

F. Verdict of Different Courts:

 

On Sunday, 2068/3/12 the joint bench of the Supreme Court, Honorable justice Tap Bahadur Magar and Honorable Justice Mr. Bharat Raj Upreti Magar, gave the verdict in favor of the Corporate Social Consortium. It has defined its verdict as follows:

 

·         Even though Corporate Social Consortium is registered under the companies act, it is same as the Association Registration Act 2034 and hence is eligible to be tax exempted.