2025 (4) TMI 998 - HC - Income Tax

Development authority qualifies for charitable exemption under Section 2(15) despite receiving rent and premium income (15)

The Dy. Commissioner of Income Tax, 1 (1) Raipur, Chhattisgarh Versus Raipur Development Authority, Raipur, Chhattisgarh.

The Dy. Commissioner of Income Tax, 1 (1) Raipur, Chhattisgarh Versus Raipur Development Authority, Raipur, Chhattisgarh. - 2025:CGHC:17353 - DB 1. ISSUES PRESENTED and CONSIDEREDThe Court considered two core legal questions arising under the Income Tax Act, 1961, specifically concerning the applicability of the proviso to Section 2(15) in the context of a statutory development authority engaged in land development and sale. The issues were:(i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in law in holding that the proviso to Section 2(15) of the Income Tax Act is not applicable to the assessee society, despite its activities being commercial in nature.(ii) Whether the ITAT was justified in law in holding that the first proviso to Section 2(15) is not applicable to the assessee, which is engaged in the business of buying, developing, and selling lands, plots, flats, and developed properties, and whether the order is perverse on the facts and circumstances.2. ISSUE-WISE DETAILED ANALYSISIssue 1 & 2: Applicability of the proviso to Section 2(15) of the Income Tax Act to the assessee engaged in commercial activitiesRelevant legal framework and precedents:Section 2(15) of the Income Tax Act defines 'charitable purpose' to include relief of the poor, education, medical relief, preservation of environment, preservation of monuments, and advancement of any other object of general public utility (GPU). The proviso to Section 2(15), as amended over time, excludes from charitable purpose any advancement of GPU that involves trade, commerce, or business activities for a fee or consideration, unless such activities are undertaken in the course of actual carrying out of the GPU object and the receipts do not exceed prescribed limits (currently 20% of total receipts).Key Supreme Court precedents considered include:Commissioner of Income Tax v. Gujarat Maritime Board (2007): The Court held that the phrase 'any other object of general public utility' is of wide connotation and includes objects promoting welfare of the general public. The primary purpose and predominant object must be to promote public welfare for the purpose to be charitable. Ancillary or incidental commercial activities do not negate charitable status.Assistant Commissioner of Income Tax (Exemptions) v. Ahmedabad Urban Development Authority (2023): The Supreme Court analyzed the amended Section 2(15) and related provisions, clarifying that statutory authorities performing public functions may engage in activities resembling trade or commerce, but such receipts are excluded from the mischief of business receipts if charged at cost or nominal markup. The Court emphasized the need for assessing authorities to scrutinize whether charges are significantly above cost, indicating commercial profit motive, which would attract the proviso.Court's interpretation and reasoning:The Court noted that the assessee, a statutory authority constituted under Section 38(1) of the Chhattisgarh Nagar Tatha Gram Nivesh Adhiniyam, 1973, is mandated to implement development plans, prepare town development schemes, and acquire and develop land for urban expansion. The State Government exercises superintendence, control, and even dissolution powers over the assessee, indicating its statutory and public character.The Assessing Officer had made an addition of Rs. 21,62,94,042/- under the proviso to Section 2(15), alleging commercial nature of activities involving buying, developing, and selling land and properties. However, the CIT (Appeals) and the ITAT concurrently held that there was no material evidence that the assessee was conducting its affairs solely on commercial lines with a profit motive or had deviated from its statutory objects.The Court emphasized that the assessee's activities fall within the advancement of an object of general public utility as per the Act of 1973. The mere fact that the assessee charges for services or properties does not ipso facto render the activities commercial if such charges are on cost or nominal markup basis and the predominant object remains public welfare.The Court relied on the Supreme Court's guidance that statutory bodies performing public functions may have receipts resembling commercial receipts but are exempted from the proviso if not motivated by profit and if receipts are not significantly above cost. The Court found no evidence on record indicating that the assessee's receipts were significantly above cost or that it had a profit motive.Key evidence and findings:The record showed that the assessee was engaged in statutory functions of urban planning and development. The Assessing Officer's addition was based on aggregate receipts from rent, premium, interest, etc., without specific findings that the activities were commercial or profit-driven. The CIT (Appeals) and ITAT found no tangible material to prove commercial motive or deviation from statutory objects. The State Government's control and power to dissolve the authority further underscored the public character of the assessee.Application of law to facts:The Court applied the principles from Gujarat Maritime Board and Ahmedabad Urban Development Authority cases, concluding that the assessee's predominant object is charitable/public utility and that the proviso to Section 2(15) does not apply. The activities of buying, developing, and selling land were held to be in furtherance of statutory public functions and not commercial trade or business with profit motive.Treatment of competing arguments:The Revenue contended that the activities were commercial and profit-oriented, invoking the proviso to Section 2(15) and relying on the Supreme Court's recent decision in Ahmedabad Urban Development Authority. The assessee argued that the activities were statutory, public utility-oriented, and under government control, thus exempt from the proviso.The Court found the Revenue's contention unsubstantiated by evidence and concurred with the lower authorities that the assessee's activities were not commercial in nature with profit motive. The Court held that the Assessing Officer's addition was made without adequate material and was rightly set aside by the appellate authorities.Conclusions:The Court concluded that the proviso to Section 2(15) of the Income Tax Act is not applicable to the assessee. The assessee's activities fall within the ambit of charitable purpose as advancement of an object of general public utility. The addition made by the Assessing Officer was rightly deleted by the CIT (Appeals) and affirmed by the ITAT. The substantial questions of law were answered against the Revenue and in favor of the assessee.3. SIGNIFICANT HOLDINGSThe Court preserved and relied upon the following crucial legal reasoning from the Supreme Court judgments:'The said expression ['any other object of general public utility'] is of the widest connotation. The word 'general' in the said expression means pertaining to a whole class. Therefore, advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose.''If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose.''The amounts or any money whatsoever charged by a statutory corporation, board or any other body set up by the State Governments or Central Government, for achieving what are essentially 'public functions/services' (such as housing, industrial development, supply of water, sewage management, supply of foodgrain, development and town planning, etc.) may resemble trade, commercial, or business activities. However, since their objects are essential for advancement of public purposes/functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of business or commercial receipts.''In every case, the assessing authorities would have to apply their minds and scrutinise the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal markup. If such is the case, then the receipts would indicate that the activities are in fact in the nature of 'trade, commerce or business' and as a result, would have to comply with the quantified limit (as amended from time to time) in the proviso to Section 2 (15) of the IT Act.'The Court established the core principle that statutory authorities engaged in public functions and controlled by the State Government are entitled to exemption under Section 2(15) despite engaging in activities that may have commercial characteristics, provided there is no profit motive and charges are not significantly above cost.Final determinations on each issue:The ITAT was justified in law in holding that the proviso to Section 2(15) of the Income Tax Act is not applicable to the assessee, despite the commercial nature of some activities.The ITAT was justified in law in rejecting the applicability of the first proviso to Section 2(15) to the assessee engaged in buying, developing, and selling lands and properties, as the activities were statutory and public utility-oriented, not commercial trade or business with profit motive.The substantial questions of law were answered against the Revenue and in favor of the assessee, and the appeal was dismissed accordingly.