Public utility exemption survives where a development authority's receipts are incidental and surplus is applied to urban development objects.

A statutory development authority engaged in planned urban development, housing, roads and civic amenities was treated as pursuing a public utility object, so its sale proceeds, rent, interest and cess did not by themselves amount to trade, commerce or business. The proviso to section 2(15) was therefore held inapplicable and exemption under section 11 remained available. Amounts placed in the Infrastructure Development Reserve Fund were regarded as earmarked for approved development projects, and the alleged section 13(1)(c) read with section 13(3) violation was not established on the facts. Once exemption was allowed, the remaining disallowances became academic and were not separately sustained.

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Issues: (i) whether the assessee development authority was entitled to exemption under section 11 of the Income-tax Act, 1961 despite the proviso to section 2(15); (ii) whether the amounts transferred to the Infrastructure Development Reserve Fund and the alleged violation of section 13(1)(c) read with section 13(3) disentitled the assessee from exemption.

Issue (i): whether the assessee development authority was entitled to exemption under section 11 of the Income-tax Act, 1961 despite the proviso to section 2(15).

Analysis: The assessee was constituted under the Uttar Pradesh Urban Planning and Development Act, 1973 to promote planned urban development and public utilities. Its activities, including development of land, houses, roads, parks and civic amenities, were held to be for the welfare of the general public and not for private profit. The existence of receipts from sale of plots, rent, interest, cess and similar collections did not by itself convert the activity into trade, commerce or business, because the predominant object remained public utility and any surplus was applied back to development work. The earlier jurisdictional decisions in the assessee's own case and in similar development authority matters were treated as applicable.

Conclusion: The assessee was entitled to exemption under section 11, and the proviso to section 2(15) did not apply to deny that benefit.

Issue (ii): whether the amounts transferred to the Infrastructure Development Reserve Fund and the alleged violation of section 13(1)(c) read with section 13(3) disentitled the assessee from exemption.

Analysis: The amounts credited to the Infrastructure Development Reserve Fund were treated as earmarked for projects specified by the Government committee and not as taxable income of the assessee in the ordinary sense. On section 13, the alleged employee concessions and allotment benefits were held not to attract the statutory mischief, since employees were not treated as specified persons within section 13(3) on the facts found. The other additions, including prior period expenses, provision for development expenses, TDS interest, deposit work, and other disallowances, were held to have become academic once exemption under section 11 was allowed.

Conclusion: The reserve fund addition and the section 13 objection did not defeat the assessee's exemption claim, and the remaining monetary disallowances were left without separate adjudication as infructuous.

Final Conclusion: The appeals were only partly successful, with the core exemption claim accepted and the surviving ancillary additions not independently sustained.

Ratio Decidendi: A statutory development authority formed for public welfare and urban planning, whose surplus is applied to its objects and whose receipts are incidental to those objects, is not carrying on trade, commerce or business merely because it earns revenue from development-related activities; the proviso to section 2(15) and section 13 disqualification provisions do not apply absent a real profit motive or use of income for specified persons.

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