Charitable purpose test for development authority receipts keeps section 11 exemption intact and defeats incidental business-style disallowances.

A statutory urban development authority's development and sale of sites were treated as incidental to its public utility object, so the proviso to section 2(15) and section 13(8) did not apply to deny exemption under section 11. The controlling test was the predominant charitable purpose, not the presence of surplus or incidental receipts. On that basis, the accompanying additions and disallowances, including prior period expenses, assets written off, deposits, cess liabilities, rent recoverable, and delayed service tax interest, were not sustained where they were either already dealt with on facts or became untenable once section 11 exemption was upheld.

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Issues: (i) Whether the assessee's activities of development and sale of sites were hit by the proviso to section 2(15) and section 13(8) of the Income-tax Act, 1961 so as to deny exemption under section 11; (ii) whether the various additions and disallowances made by the Assessing Officer, including prior period expenses, assets written off, electrical deposits, slum clearance cess, workers welfare cess, rent recoverable, and interest on late payment of service tax, were liable to be sustained.

Issue (i): Whether the assessee's activities of development and sale of sites were hit by the proviso to section 2(15) and section 13(8) of the Income-tax Act, 1961 so as to deny exemption under section 11.

Analysis: The assessee was found to be a statutory urban development authority carrying out planned development, infrastructure creation, and related public utility functions. The Tribunal followed its own earlier orders and the settled position that the test is the predominant object of the activity, not the mere existence of surplus. Sale and auction of sites were treated as incidental to the statutory object and not as a trade or business carried on with a profit motive. The activities were therefore treated as falling within charitable purpose under section 2(15), and the restrictive proviso was held inapplicable.

Conclusion: The assessee was held entitled to exemption under section 11, and the revenue's challenge on this issue failed.

Issue (ii): Whether the various additions and disallowances made by the Assessing Officer, including prior period expenses, assets written off, electrical deposits, slum clearance cess, workers welfare cess, rent recoverable, and interest on late payment of service tax, were liable to be sustained.

Analysis: Once exemption under section 11 was upheld, the disallowances based on business income principles and section 43B were not sustainable. The Tribunal also accepted the Commissioner (Appeals)' findings that the prior period expenses and other items had been dealt with on facts either by allowing them or by remanding them for verification, and no contrary material was shown by the revenue to disturb those findings. The interest on delayed service tax payment was also not treated as a penal disallowance on the facts of the case.

Conclusion: The relief granted by the Commissioner (Appeals) on the impugned additions and disallowances was sustained.

Final Conclusion: The revenue's appeals were dismissed in full, and the assessee's claim of exemption remained undisturbed together with the consequential relief on the disputed additions.

Ratio Decidendi: For a statutory development authority, incidental receipts or surplus from development activities do not by themselves attract the proviso to section 2(15); the controlling test is whether the activity is predominantly carried on for a charitable public utility object rather than profit, and once section 11 applies, business-style disallowances premised on taxability of such receipts cannot stand.

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