2011 (10) TMI 155 - AT - Income Tax

Tribunal directs AO to verify separate books of account for construction business

Income-tax Officer, Ward 1(1), Moradabad Versus Moradabad Development Authority

The appeal was partly allowed with the Tribunal directing the AO to verify the maintenance of separate books of account for the construction business and ... Charitable object - activities of construction of houses, flats, shops etc. which are sold - AO observed that the activities are in the nature of carrying on of business. No charitable activity has been carried on by the assessee. - Held that:- The registration has not been cancelled till date. In other words, the registration is effective for this year. The grant of registration is not an empty formality as it has to be granted after satisfying that the objects are charitable in nature. Since the registration has effect for this year also, the object of the development authority will have to be taken as charitable in nature. - assessee has carried on systematic activities in a regular manner for construction of immovable properties as per plan, which have led to profit, and such activity is incidental to the main object of town planning, therefore, it is clear that the assessee has carried on a business which is incidental to attainment of objects of the authority. - Since there is no motive to make profit, the activity cannot be said to be a business activity. - matter restored to the AO to ascertain as to whether separate books have been maintained for construction business. If separate books have been maintained, deduction under sub-sections (1), (2), (3) and (3A) will be available to the assessee, otherwise not. Issues Involved:1. Applicability of Safdurjung Enclave Educational Society v. Municipal Corporation of Delhi [1992] 3 SCC 390.2. Eligibility for exemption under sections 11 and 12 of the Income-tax Act.3. Impact of registration under section 12AA on income exemption.4. Nature of activities carried out by the assessee and their classification as profit-making.5. Definition and classification of the assessee as an institution versus a trust under the Indian Trust Act.6. Other grounds that may arise during appellate proceedings.Issue-wise Detailed Analysis:1. Applicability of Safdurjung Enclave Educational Society v. Municipal Corporation of Delhi [1992] 3 SCC 390:The CIT(A), Bareilly, held that the facts of the case were different from Safdurjung Enclave Educational Society v. Municipal Corporation of Delhi, where activities run on commercial lines were not considered charitable. The CIT(A) distinguished the facts of the present case, noting that the decision relied on by the AO did not have any bearing on the current facts.2. Eligibility for Exemption under Sections 11 and 12 of the Income-tax Act:The CIT(A) concluded that the assessee was entitled to deduction under section 11, relying on the fact that such deductions were allowed in the past. The CIT(A) noted that there was no change in the facts and circumstances of the case during the year under consideration and that the AO did not gather any material to establish that the assessee was engaged in profit-making activities.3. Impact of Registration under Section 12AA on Income Exemption:The CIT(A) held that the income of the assessee was exempt as it was registered under section 12AA. The Tribunal supported this view, stating that once registration under section 12A was granted, the income of the assessee would be exempt under section 11, subject to the fulfillment of other conditions specified in sections 11 and 13 of the Act.4. Nature of Activities Carried Out by the Assessee and Their Classification as Profit-Making:The AO concluded that the activities of purchasing land, developing it, and selling houses, flats, and shops were similar to those carried out by private builders and developers, thus constituting business activities. The CIT(A) disagreed, noting that the activities were carried out to fulfill the objects of the assessee, which included town planning and providing amenities like roads, houses, and sewerage. The Tribunal also noted that the activities were incidental to the attainment of the objectives of the trust and that the assessee was not authorized to earn profit and distribute it to members.5. Definition and Classification of the Assessee as an Institution versus a Trust under the Indian Trust Act:The CIT(A) held that the income of the assessee was exempt even though it was classified as an institution and not a trust. The Tribunal noted that the assessee was constituted under a statute and had been in existence since 1973. The funds of the authority were to be applied only towards meeting the expenses incurred in the administration of the Act, and in case of dissolution, the surplus would go to the State Government. This distinguished the assessee from private builders.6. Other Grounds That May Arise During Appellate Proceedings:The Tribunal noted that the AO could take an independent view if any grave error of law had been committed earlier. The Tribunal directed the AO to ascertain whether separate books of account were maintained for the construction business. If separate books were maintained, the deduction under sections 11(1), (2), (3), and (3A) would be available to the assessee.Conclusion:The appeal was treated as partly allowed for statistical purposes, with the Tribunal directing the AO to verify the maintenance of separate books of account for the construction business and to examine the deductibility of capital expenditure, loan repayment, and amounts deemed to have been applied towards charitable purposes. The Tribunal upheld the view that the assessee was engaged in a charitable purpose and entitled to deduction under section 11, but further examination was required under section 11(4A).