2019 (2) TMI 1858 - HC - Income Tax

Court grants appellant charitable status under Income-tax Act, clarifies compliance with audit rules

Belgaum Urban Development Authority Versus Commissioner of Income-Tax

The Court allowed the appeal, granting the appellant registration under section 12A(1)(aa) of the Income-tax Act. The Court held that the appellant's ... Exemption u/s 11 - whether the activity carried on by the appellant would amount to an activity in the nature of trade, commerce or business to deny registration under section 12A? - appellant, which is a statutory authority constituted under the provisions of the Karnataka Urban Development Authorities Act, 1987 (hereinafter referred to as 'KUDA Act', for short), filed an application for registration under section 12A(1)(aa) - HELD THAT:- Under section 37 of the Act, the State Government can also transfer to the authority, lands, belonging to it for the purpose of development scheme. There are various provisions under the Act which are supplemental to the main object and purpose of the Act. The authority is also empowered to develop sites, layouts and allot sites to the eligible persons, as well as auction sites and generally carry out the objects and intentions of the KUDA Act. The activity of the appellant is thus a charitable activity as defined under the expression 'charitable trust' under section 2(15) of the Act. The activity of the appellant comes within the scope and ambit of the expression 'the advancement of any other object of general public utility'. The activity carried on by the appellant does not involve an activity which is in the nature of trade, commerce or business so as to come within the mischief of proviso to section 2(15). As already noted, the appellant is a statutory authority constituted under the provisions of the KUDA Act, whose object is to establish and develop urban areas in an orderly fashion. Even though the appellant-development authority may be involved in developing various residential or commercial areas and thereby preparing house sites or commercial sites and even alienating such sites through auction or through allotting to eligible persons, the said activity cannot be held to be profit motive so as to come within the mischief of the expression trade, commerce or business. The upshot of the aforesaid discussion is that the appellant-assessee is a statutory authority created under the Karnataka Urban Development Authorities Act, 1987. The purpose and intent of creation of the appellant-authority is to establish urban areas in Belgaum in a planned manner. The appellant-assessee being a statutory authority is under the control of the State Government, which has the power to issue directions to the authority as per section 65 of the Act. The said directions are those, which are necessary or expedient for carrying out the purposes of the Act and it shall be the duty of the assessee to comply with such directions. Even the utilization of funds by the assessee is fully controlled by periodical instructions issued by the Government. The funds standing in the name of the assessee is under the absolute control of the Government as the assessee functions in a fiduciary capacity. Therefore, following the judgment of Bagalkot Town Development Authority [2015 (12) TMI 1422 - KARNATAKA HIGH COURT], which has in turn followed the judgment of the hon'ble Supreme Court in the case of Gujarat Maritime Board, it is held that the assessee, being a statutory authority, created under the Karnataka Urban Development Authority Act, 1987 has to carry out its activity towards public purposes. Therefore, the argument advanced on behalf of the Revenue that the assessee was not entitled for exception under section 11 of the Act, is untenable and is rejected. In the circumstances, substantial question of law No.1 is answered in favour of the assessee. Applicability of the relevant rule in making an application for registration of charitable or religious trust - Non filing of audited accounts - HELD THAT:- The accounts need not be certified by a chartered accountant. The same is a requirement under rule 17B of the Rules wherein the said audit report is required to be furnished when registration is required under rule 17B of the Rules. That the appellant has sought for registration under section 12A(1)(aa) of the Act and hence it is only rule 17A of the Rules which applies. Respondent very fairly submits that there has to be compliance with rule 17A of the Rules and there can be no relaxation in that regard and if there is any compliance to be made by the appellant then this court may grant an opportunity to the appellant to comply with the said Rule. He, however, submitted that any non-compliance of the requirements of rule 17A of the Rules would not entitle the appellant from seeking registration under section 12A(1)(aa) of the Act. Consequently, substantial question of law No. 2 is answered by holding that the appellant would have to comply with all requirements stipulated under rule 17A of the Rules. If there has been any non-compliance with the same, then, the appellant is at liberty to comply with the said requirements in accordance with law. Issues Involved:1. Whether the activity carried on by the appellant amounts to an activity in the nature of trade, commerce, or business, thereby denying registration under section 12A of the Income-tax Act.2. Whether the Tribunal was justified in holding that the appellant had violated rule 17A of the Income-tax Rules, 1962, and that non-filing of audited accounts was not in accordance with rule 17A, thereby denying a statutory benefit.Issue-wise Detailed Analysis:Issue 1: Nature of Activity and Denial of Registration under Section 12AThe appellant, Belgaum Urban Development Authority, sought registration under section 12A(1)(aa) of the Income-tax Act, 1961, which was denied by the Commissioner of Income-tax and subsequently by the Tribunal. The Tribunal held that the appellant's activities were in the nature of trade, commerce, or business, thus not qualifying for registration under section 12A of the Act.The appellant argued that its activities are charitable in nature, as defined under section 2(15) of the Act, and not commercial or profit-driven. The appellant is a statutory authority constituted under the Karnataka Urban Development Authorities Act, 1987, with the objective of planned urban development. The activities include acquiring, holding, managing, and disposing of properties and carrying out building and engineering operations, which are aimed at public welfare and not profit.The Court referred to several judgments, including Sole Trustee, Loka Shikshana Trust v. CIT and CIT v. Bagalkot Town Development Authority, to establish that activities yielding profit could still be considered charitable if the profit is used for charitable purposes. The Court concluded that the appellant's activities fall within the scope of 'advancement of any other object of general public utility' and do not involve trade, commerce, or business. Therefore, the Tribunal's finding was deemed incorrect, and the appellant was entitled to registration under section 12A(1)(aa) of the Act.Issue 2: Violation of Rule 17A and Non-filing of Audited AccountsThe appellant contended that rule 17A of the Income-tax Rules, 1962, applies to their application for registration under section 12A(1)(aa) and not rule 17B. Rule 17A does not require the filing of audited accounts, whereas rule 17B does. The Tribunal had held that the appellant violated rule 17A by not filing audited accounts, thus denying the statutory benefit.The Court observed that rule 17A does not mandate the filing of audited accounts but has other stipulations that need to be complied with. The respondent's counsel agreed that compliance with rule 17A is necessary, and any non-compliance should be rectified by the appellant.The Court concluded that the Tribunal was incorrect in holding that there was a violation of rule 17A due to non-filing of audited accounts. The appellant is required to comply with the stipulations under rule 17A, and any non-compliance should be addressed accordingly.Conclusion:The appeal was allowed, and the substantial questions of law were answered in favor of the appellant. The Court set aside the order passed by the Tribunal and the Commissioner of Income-tax, thereby granting the appellant registration under section 12A(1)(aa) of the Income-tax Act. The appellant was also directed to comply with the requirements of rule 17A of the Income-tax Rules, 1962, if not already complied with.