2018 (8) TMI 2172 - HC - Income Tax

Profit From Plot Sales Not Enough To Cancel Charitable Trust Registration Under Sections 12AA and 2(15)

HC held that mere earning of profit from sale of plots by the assessee-trust could not justify denial or cancellation of registration u/s 12AA. The trust, ... Denial of Registration u/s 12AA - scope of definition of ‘charitable purpose’ u/s 2(15) of the Act was amended by Finance Act of 2008 w.e.f. 01.04.2009 - entire emphasis of the revenue is on the fact that the assessee-Trust had earned profits by selling plots. HELD THAT:- Only assessee-Trust had earned profits by selling plots itself cannot be a ground for denying the benefit u/s 11 especially when it is not disputed that the selling of plots and premises by the trust is only incidental and ancillary to its main purpose and the profits have been utilized for various general public welfare and public utilities. The assessee-Trust is a statutory body established for providing general public utilities and for development of localities within the municipal limits. The acquiring of land and selling of the plots is merely an ancillary activity carried out for the purpose of planned improvement of the area. It cannot be equated that statutory Trust has been formed to carry-on business of coloniser or developer. CIT was swayed by the fact that the profit was being earned and the said profit was converted into percentage to show that the margin of the profit was huge. There is not even iota of evidence on record to show that the said profit earned was not used for the purpose of general public utilities. There is no requirement in the provisions that the activities of charitable purposes have to be undertaken only by donations or have to be by financial aid of the government. Therefore, the CIT was not correct in cancelling the registration u/s 12AA especially when the surplus fund was being utilised for charitable purpose. Thus question of activities being carried out by assessee-Trust are charitable in nature or not, has been answered in favour of the assessee-Trust. ISSUES PRESENTED AND CONSIDERED 1. Whether the activities of the Improvement Trust fall within the meaning of 'charitable purpose' under Section 2(15) of the Income Tax Act as amended w.e.f. 01.04.2009 (proviso to Section 2(15)). 2. Whether cancellation of registration under Section 12AA(3) of the Income Tax Act (post-amendment challenge to pre-amendment registration) was justified on the material before the Commissioner of Income Tax. 3. Whether the Income Tax Appellate Tribunal complied with the High Court's remand directions to consider the proviso to Section 2(15) and the provisions of the Punjab Town Improvement Act, 1922 (1922 Act), and whether reliance on the Tribunal's earlier decision was permissible. 4. Whether precedents treating improvement trusts as akin to developers/colonisers or otherwise (including decisions relied upon by Revenue and earlier Tribunal decisions) are applicable or distinguishable on the facts. ISSUE-WISE DETAILED ANALYSIS Issue 1: Scope of 'charitable purpose' under amended Section 2(15) - whether the Trust's activities qualify Legal framework: Section 2(15) (as amended) includes 'advancement of any other object of general public utility' but excludes such object from being charitable if it involves activity in the nature of trade, commerce or business or rendering service for a cess/fee/consideration, irrespective of use/retention of income. Precedent treatment: The Court relied on its prior decisions addressing trusts constituted under the 1922 Act which held that town-improvement trusts undertake activities aimed at advancement of objects of public utility and that incidental sale/disposal of land pursuant to statutory schemes does not convert their functions into commercial ventures. Decisions cited by Revenue where statutory status alone was insufficient for exemption were examined and distinguished on facts. Interpretation and reasoning: The Court examined the statutory mandate and schemes under the 1922 Act (notably sections providing for framing development, expansion and housing schemes and section 28(2)(iii) permitting disposal of land in relation to schemes). It held that disposal/sale of plots is an ancillary power exercised in discharge of statutory town-improvement duties and not an independent commercial enterprise. The proviso in Section 2(15) targets activities that are essentially trade/commercial/profit-driven; mere incidental profit-making pursuant to statutory duties or where profits are applied to public utilities does not bring the Trust within the proviso's exclusion. The Court also had regard to the Trust's pleaded activities (reservations of land free of cost, donations, development works, subsidised amenities) and audited accounts showing losses across assessment years; the factual matrix supported the predominant public-utility purpose rather than profit motive. Ratio vs. Obiter: Ratio - where statutory objects and scheme-based powers lead to incidental disposal generating receipts used for public utilities, such activities do not fall within proviso's exclusion and the trust remains within 'charitable purpose' under Section 2(15). Obiter - general comments distinguishing statutory bodies' entitlement to exemption under unrelated constitutional provisions. Conclusion: The Court answered this issue in favour of the Trust - the activities qualify as charitable under amended Section 2(15) on the facts and statutory framework considered. Issue 2: Validity of cancellation of registration under Section 12AA(3) - sufficiency of satisfaction recorded by the Commissioner Legal framework: Section 12AA(3) empowers the Commissioner to cancel registration granted under Section 12AA where conditions for registration are not satisfied; cancellation requires satisfaction supported by material demonstrating non-genuineness or deviation from objects. Precedent treatment: Tribunal decisions (including those distinguishing improvement trusts from developers) and prior High Court rulings considering whether incidental profit disentitles a trust were considered. Authorities where statutory status alone did not confer exemption were distinguished because those cases involved different statutory contexts or facts indicating predominant commercial activity. Interpretation and reasoning: The Court found no material on record establishing that the Trust had deviated from its statutory mandate or that the profit-making activities were predominant or not applied to public welfare. The Commissioner's cancellation relied primarily on numerical profit margins from plot sales without showing diversion of funds from public-utility uses or non-genuineness. Given the Trust's statutory duties and the evidence of public-utility expenditures and audited losses in relevant years, the satisfaction to cancel registration was not sustained by adequate evidence. Ratio vs. Obiter: Ratio - cancellation under Section 12AA(3) cannot be based solely on incidental profit-making where profits are ancillary to statutory schemes and are used for public utilities; there must be material showing non-genuineness or deviation from objects. Obiter - narrower remarks on exercise of powers and usual practice on remand compliance. Conclusion: The Commissioner's cancellation was not justified on the material; the Tribunal's setting aside of cancellation (on these factual findings) was upheld. Issue 3: Compliance with remand directions and reliance on Tribunal's earlier decision Legal framework: On remand a Tribunal/authority must address the points directed by the High Court, including consideration of statutory proviso and relevant statutory provisions. Precedent treatment: The Court considered whether reliance on the Tribunal's earlier decision in a similar matter constituted compliant fresh decision-making; it noted that where the facts and legal questions are substantially the same, reliance on precedent for coverage is permissible, subject to addressing remand directions. Interpretation and reasoning: The Court observed that the Tribunal, on remand, expressly considered the proviso to Section 2(15) and the 1922 Act through its own earlier reasoning in a directly comparable matter; the departmental representative accepted coverage by that decision before the Tribunal. Given that this Court itself had earlier analysed the 1922 Act and the proviso in a leading decision involving similar trusts, a further remand would not achieve a different result. The Court further noted that the Tribunal's decision was factually grounded and consistent with the High Court's prior legal conclusions regarding such trusts. Ratio vs. Obiter: Ratio - reliance on an earlier Tribunal decision is permissible where the earlier decision addresses the remand-directed legal issues and the material facts are analogous; remand is unnecessary if the High Court's directions have effectively been satisfied through binding legal analysis already on record. Obiter - procedural preferences about fresh fact-finding on remand. Conclusion: The Tribunal's treatment complied substantively with the remand directions; no prejudice arose from reliance on the prior Tribunal decision in the circumstances. Issue 4: Applicability of authorities treating trusts as developers and other departmental precedents Legal framework: Distinction between statutory trusts constituted for public purpose and private developers/colonisers depends on predominant purpose and statutory mandate; the proviso to Section 2(15) requires an activity to be in the nature of trade/business to attract exclusion. Precedent treatment: Authorities relied upon by Revenue involving transport corporations, industrial area authorities or where statutory entities sought exemptions under different constitutional/statutory provisions were examined and distinguished on facts and legal context. Tribunal decisions finding non-advancement of general public utility were regarded as fact-specific and not determinative of other cases where statutory duties and application of surplus to public utilities exist. Interpretation and reasoning: The Court emphasised that powers to dispose of land under the 1922 Act are exercisable in furtherance of statutory schemes and are not independent commercial powers. Where sale/disposal is incidental to scheme implementation and surplus is utilised for public-utility purposes, the character remains non-commercial. Decisions where trusts were found to be akin to developers were treated as dependent on contrary factual matrices showing predominant commerciality. Ratio vs. Obiter: Ratio - factual inquiry into predominant purpose is decisive; precedents are not binding where the factual matrix differs materially. Obiter - remarks on limits of equating statutory trusts with private developers solely on land-disposal powers. Conclusion: The authorities relied upon by Revenue do not advance its case on these facts; the Trust is distinguishable from private developers and remains within charitable purpose. Overall Disposition The Court concluded that the activities of the Trust are charitable under amended Section 2(15); the Commissioner's cancellation under Section 12AA(3) was unsustained by material; the Tribunal's order setting aside cancellation (including its reliance on like decisions and consideration of the proviso and the 1922 Act) was acceptable; the departmental precedents were distinguishable. Accordingly, the appeals by the Revenue were dismissed.