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2015 (9) TMI 902
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....hether the manner in which these assessees are conducting their activities is such that the very basic character of 'general public utility', as set out in Section 2(15) of the Income Tax Act, 1961, is lost. As a corollary to this hypothesis being tested, it is also required to be examined whether even if the assessees are held to be pursuing an object of 'general public utility', on the common facts of these cases, the work being done by the assessee ceases to be for 'charitable purposes' due to first proviso to Section 2(15) which lays down that "the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business...........irrespective of the nature of use or application, or retention, of the income from such activity". As these common issues are involved in these eleven appeals, we have, with the consent of learned representatives appearing before us, considered it fit and proper to take up all these appeals together and begin by deciding this basic issue first, in the light of arguments advanced by the learned representatives represent....
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....y the learned counsel for the appellant-assessee and to pass fresh orders relating to assessment proceedings thereafter in accordance with law. Accordingly, the impugned orders passed by the Tribunal in all the appeals are set aside and the matter is remanded to the Tribunal to decide the same afresh in the light of the submissions made by the learned counsel for the appellant after affording an opportunity of hearing to the parties in accordance with law. Needless to say, anything observed hereinbefore shall not be taken to be expression of opinion on the merits of the controversy. Sincere efforts shall be made to decide the matter expeditiously. As a result, all the appeals stand disposed of" 3. The background in which the above issue arises in these appeals can be appreciated from a look at the relevant material facts leading to these appeals before us. 4. We will take up ITA No. 496/Asr/2013 as the lead case as the assessment year involved in this appeal is the first assessment year post insertion of Explanation to Section 2(15). As we go along, wherever necessary, we will also make references to facts of, and observations in, the other cases- as may be necessary. 5. By way....
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....t of registration shall not, by itself, confer on the trust any right to claim any part of its income as exempt, and the claim for exemption, if any, shall be examined by the AO on merits at the time of assessment for each year. 8. The assessee, vide his income tax return filed on 27.09.2010, claimed the entire income to be exempt under section 11 of the Act. This return was picked up for scrutiny assessment. In the course of the scrutiny assessment proceedings, the Assessing Officer noted that the assessee trust is set up, under the Punjab Towns Improvement Act 1922, (PTIA, in short) by the Government of Punjab and that the principal objective of the trust was to being about improvement in the town by the means set out under section 22 to 26 of the PTIA. The Assessing Officer, however, required the assessee to explain as to how the work done by the assessee trust, registered as pursuing objects of 'general public utility', qualifies to be eligible for exemption under section 2(15). It was explained by the assessee that the assessee trust is discharging the statutory duties, for development of the assigned area, under the PTIA and under the guidance, instructions and stric....
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.... and, hence entitled for exemption under section 11 and 12 of the Income Tax Act" . 9. None of these submissions, however, impressed the Assessing Officer. 10. The Assessing Officer was of the view that the aim of the assessee trust is "acquisition of land, to develop it and sell it in the shape of plots, flats and commercial booths, after calling the applications from public with some registration fees". He noted that these plots, shops and flats are sold at market rates. The Assessing Officer was of the view that these activities cannot be treated as advancement of any other object of "general public utility". The Assessing Officer further observed that, "these activities of the trust regarding construction of colonies, building of flats/shops is only to earn profits". While he did not dispute that trust is being "run as per the rules and regulations of the State Government", he was of the view that "functioning of the trust cannot be regarded as 'charitable' within the meanings of Section 2(15) of the Act" even as he noted that "the trust has so far implemented three residential colonies, namely scheme no. 10, 11 and 2, alongwith commercial booths, gardens, religious p....
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....ely, the claim for exemption collapses and the benefit of s. 11 will not be available to the entire income. However, if such activity is undertaken without profit motive, the object will be charitable purpose within the meaning of s. 2(15). Applying these tests to the facts of this case, the Assessing Officer concluded as follows; In the case of the assessee, the main object of the assessee is to earn profit and bringing in money. Application with certain amounts are called for, and, after public draw/auction, the flats/plots and commercial booths are sold. Income and expenditure account furnished by the assessee show the complete picture of the activities undertaken by the trust. In its reply also, the assessee trust has intimated that the Hoshiarpur Improvement Trust has launched three schemes, viz. Scheme no. 2, Scheme no. 10 and Scheme no 11, which has developed the land into shops and plots for sale. Income is earned from sale of forms, sale of shops/plots and fees is received for doing/managing the business activities just to earn profit. There is no activity of the trust which qualifies it as a charitable trust for claiming exemption under section 11 of the Income Tax Act. ....
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.... added and, on a more relevant note, a new proviso (i.e. fist proviso) was added to this provision, carving out an exception in the cases of 'advancement of any other object of general utility', and, by the immediately following Finance Act 2009, there was yet another proviso (i.e. second proviso) introduced to carve out an exception from the exception itself. In essence, the effect of these provisos was that even when an assessee was pursuing 'a charitable purpose' in the event of advancement of any other object of public utility' it would cease to be for charitable purposes if it involves (a) carrying on an activity in the nature of trade, commerce or business; or (b) rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of nature of use or application or retention of the income from such activity. However, these provisions are not to apply when the activities are such a modest scale that the value of receipts in respect of the same are less than Rs. 25 lakhs. These two provisos, as they stand now, are as follows: Provided that the advancement of any other object of general public util....
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....oth to be charitable institutions as well as mutual members, these would not fall under the purview of s. 2(15) owing to the principle of mutuality. However, if such organizations have dealings with the non-members, their claim for charitable institution would now be governed by the additional conditions stipulated in proviso to s. 2(15). 3.2 In the final analysis, whether the assessee has for its object 'the advancement of any other object of general public utility' is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in connection to trade, commerce or business, it would not be entitled to claim that its object is for charitable purposes. In such a case, the object of 'general public utility' will only be a mask or a device to hide the true purpose which is trade, commerce, or business or rendering of any service in relation to trade, commerce or business. Each case would, therefore, have to be decided on its own facts, and generalizations are not possible. An assessee who claims that their object is 'charitable purpose' within the meaning of s. 2(15) would be well advised ....
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....ral public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless- (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year 18. It may be noted that while the earlier proviso simply stated that exclusion from 'charitable purposes' will come into play "if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business ", the requirement of exclusion clause extends even to situations "in which such activity is undertaken in the course of....
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....dertaking such activity or activities, of that previous year". In other words, even when the activities are in the course of advancement of any other object of general public utility, but in the nature of trade, commerce or business etc, the proviso seeks to exclude it only when the threshold level of activity is not satisfied. Whether such a statutory provision stands the legal scrutiny or not is another aspect of the matter, and that is none of our concern at present anyway, it is beyond doubt that the new proviso, with effect from 1st April 2016, seeks to exclude, from the scope of section 2(15), the situations in which even in the course of pursuing advancement of any objects of general public utility when any activities in the nature of trade, commerce or business etc "is undertaken in the course of actual carrying out of such advancement of any other object of general public utility", unless, of course, the activity level remains within the threshold limit i.e. receipts from such activities are less than twenty percent of total receipts of that year. 21. As the above provisions, which, in our humble understanding, seeks to restrict the scope of Section 2(15) is effective fro....
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....Supreme Court's judgments in the cases of Lok Shikshan Trust v. CIT (supra) Indian Chamber of Commerce & Ors v. CIT (supra)], it may also be appropriate to briefly deal with the relevant developments. The CBDT instruction no. 1024 dated 7th November 1976 was issued in the light of the two Supreme Court rulings referred to above and it stated as follows: BOARD'S INSTRUCTION NO. 1024 DT. 7TH NOVEMBER, 1976 7th November 1976 Sec. 2(15) of the IT Act, 1961, defines "charitable purposes" as under: "Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. 2. In the definition of "charitable purpose" the expression "not involving the carrying on of any activity for profit" was added in the 1961 Act. The significance of this expression has been examined by the Supreme Court in the great detail in the cases of Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) and Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) . Commenting on this expression, their Lordships, in the case of the Indian Chamber of Commerce v. CIT et....
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.... views, expressed by Hon'ble Justice Khanna and Hon'ble Justice Gupta, in the case of Lok Shikshan Trust) did not meet the approval of a larger bench of Hon'ble Supreme Court in the case of CIT v. Surat Art Silk Clothes Manufacturers Association [(1980) 121 ITR 1 (SC)]. While doing so, Hon'ble Justice Bhagwati, in his order representing majority views, observed as follows: There is, however, one comment which is necessary to be made whilst we are on this point and that arises out of certain observations made by this Court in Sole Trustee, Loka Shikshana Trust's case (supra) as well as Indian Chamber of Commerce's case (supra). It was said by Khanna J. in Sole Trustee, Loka Shikshana Trust's case : "...if the activity of a trust consists of carrying on a business and there are no restrictions on its making profit, the Court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit." And to the same effect, observed Krishna Iyer J. in Indian Chamber of Commerce's case (supra) when he said : "An undertaking by a business organisation is ordinar....
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....upra) and on Hon'ble Supreme Court decisions in the cases of Indian Chamber of Commerce (supra) and Lok Shikshan Sansthan (supra) is devoid of any legally sustainable merits. These decisions are no longer good law, the relevant provision in the context of which the decisions were given does no longer exist on the statute, and the judicial precedent, which the CBDT instruction has interpreted, has already faded into oblivion. 26. It is, however, important to bear in mind the fact that, going by the circular no.372 dated 8th December 1983 issued by the Central Board of Direct Taxes explaining the amendments made by the Finance Act 1983, dropping of the words "not involving the carrying on any activity for profit" did not represent any paradigm shift or substantive amendment in law inasmuch as this amendment was stated to be only consequential to similar restriction now placed under section 11 itself. It was explained, in the aforesaid circular, as follows: Amendment of the definition of "charitable purpose"-Sec. 2(15) 8. Under s. 2(15) of the IT Act, "charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general p....
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....ains are derived from a business carried on by the trust or institution or from a business undertaking which is held in trust for such purposes. An exemption has, however, been made in relation to profits and gains of business in the following cases:- (a) where the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central Government in this behalf in the Official Gazette; (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution. 19.2 The exceptions mentioned under (a) and (b) above will not be available unless separate books of account are maintained by the trust or institution in respect of such business. In consequence of the new provisions made in sub-s. (4A) of s. 11, cl. (bb) of s. 13(1) of the IT Act (which restricted the exemption of business income in the case of charitable trusts and institutions for the relief of the poor, education or medical relief, only in cases where the business is carri....
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....to bring exemption of charitable or religious trusts in line with the corresponding provisions in section 10(23C)(iv) or (v) of sub-section (4A) of section 11 has been amended to permit trust and institutions to carry out business activities if the business activities are incidental to the attainment of its objective. The charitable or religious trust will no longer lose complete exemption from income-tax. However, the profits and gains from such business activity will be subjected to tax. CBDT circular no 642 dated 15th December 1992 [(1993) 199 ITR (St) 7 @7] In partial modification to para 15.8 (as extracted above) of the Circular No. 621, dt. 19th Dec., 1991 issued from F. No. 133/389/91-TPL, it is clarified that according to the provisions of section 11(4A) of the Income-tax Act, as amended through the Finance (No. 2) Act, 1991, with effect from 1st April, 1992, profits and gains of business in the case of a trust or institution will not be liable to tax if the business is incidental to the attainment of the objectives of the trust or institution, as the case may be. In addition, separate books of account are to be maintained by the trust or institution in respect of such b....
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....sing home. The profits of the nursing home owned and run by the trust will be exempt under s. 11(4), because the business is carried on by the trust in the course of the actual carrying out of the primary purpose of the trust. The concept of "profits to feed the charity", therefore, is applicable only to the first three heads of charity and not the fourth. It would be illogical and, indeed, difficult to apply the same consideration to institutions which are established for charitable purposes of any object of general public utility. Any profit-making activity linked with an object of general public utility would be taxable. The theory of the dominant or primary object of the trust cannot, therefore, be projected into the fourth head of charity, viz., "advancement of any other object of general public utility", so as to make the carrying on of a business activity merely ancillary or incidental to the main object. In fact, if any other view were to prevail, it would lead to an alarming result detrimental to the Revenue. 31. Clearly, therefore, so far as pre insertion of Explanations to Section 2 (15), i.e. prior to 1st April 2009, is concerned, the stand taken by the authorities be....
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....lic utility' will only be a mask or a device to hide the true purpose which is trade, commerce, or business etc" [referred to in the CBDT circular no. 11 dated 19th December 2008 issued at the point of time when first proviso to Section 2(15) was introduced]; and - second, in which any activities in the nature of trade, commerce or business etc are "undertaken in the course of actual carrying out of such advancement of any other object of general public utility", [insertion of new proviso to replace first and second proviso to section 2(15)- effective 1st April 2016 i.e. assessment year 2016-17]. As for the first category, post 1st April 2009 amendment, this category cannot be treated as covered by Section 2(15) but then that's not the case before us. It is not, and it cannot be, the case that the Government formed these trusts by legislating the Punjab Towns Improvement Act 1922 because it wanted to carry on the business as colonizer or developer. Therefore, by no stretch of logic, formation of trusts can be said to a mask or device to hide the true purpose of the doing business. The case of the revenue at best is that the manner in which the activities are carried out is ....
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....ood, CA and Shri J.S. Bhashi, Advocate have argued these appeals . My counter-submissions are as under :- It is submitted that there are two situations i.e. (a) Where the assessee's are rendering general public utility services and in rendering such services and due to exigency of rendering such service some surplus (not profit) results such assessee are not hit by the proviso to section 2(15) even if rendering of such services partake the character of trade, commerce or business or rendering services in relation to any trade commerce or business. (b) Where the assessee have the objective of rendering general public utility services but for doing so they first earn income by engaging themselves in activities in the nature of trade, commerce or business or rendering any service in relation to any trade and then apply such income to the charitable objects. Whereas in the former situation, registration under section 12AA would be allowable and also the exemption under section 11 & 12 but for the latter situation, no such privilege would be allowed as doing of trade, commerce or business or rendering any service in relation to trade commerce or business not treated as charitabl....
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.... common seal and can sue and be sued in its name as per section 3 of the Punjab Town Improvement Trust Act, 1922. In view of this difference also, the said judgment is not applicable to this case. It is further submitted that the trusts do not get any grant in aid from the state government. The Trusts have to first do business like a builder to earn money i.e. it purchases (acquires) property and divides the same into plot or build the same and sells the plot or the buildings which it raises both by way of reserve price (residential buildings or plots) and commercial plots or commercial buildings by auction. There is absolutely no doubt that when land or buildings are put on auction by the Trust, the intent is to make maximum profit and when it sells residential plots or residential buildings, it sells the same at reserve price. It is submitted that reserve price so fixed is fixed in such a manner a may take within its sweep huge profit a would be seen from the Annexure at page 9 of the paper book filed by Shri Z.S. Bhasin, Advocate which includes the following : (a) Conservancy charges for 5 years @ 10 percent per month per acre. (b) Provisions for unforeseen charges @ 15% per ....
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....as Rs. 5,03,30,800/- but in the year 2014, the price for the same plot was intimated at Rs. 10,43,65,946/-. Thus in a period of three year and a half, it had more than doubled the price of its plot measuring 60.35 marlas. An affidavit of Shri Charan Dass, ACIT, Pathankot is enclosed in support of this fact. If this is the way the Trust does charity by way of developing cities and town then certainly, it amounts to robbing Peter to pay Paul and surely such an activity cannot be clothed as charitable activity. In view of above, it is prayed that the appeals of the assessee be dismissed B: In the case of Amritsar Improvement Trust It is submitted the above appeals have been restored by the Hon'ble Punjab & Haryana High Court to the tribunal vide its order in ITA No.100 of 2014 (O&M) dated 06.08.2014 as per the directions contained in para 8 of the order. It is submitted that though the Hon'ble Punjab & Haryana High Court has directed the Tribunal to adjudicate the issue regarding the nature of activities of the appellant trust whether they are in the nature of charitable within the meaning of section 2(15) of the Act in respect of assessment years in question or not, keep....
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....rovider." The Trust also sells plots and building for commercial purposes to persons who do business for their own gain and likewise the Trust cannot be said to be doing any activity of charitable name as its activities fall, struco sensu, in the same domain as the activities of the Andhra Pradesh State Seed Certificate Agency (supra) fall. Its activity of selling plot and building for residence to persons though for the allottee it may not for commercial purpose but the way the Trust fixes its reserve price as discussed above, it is clear that the activity is commercial in nature for the Trust and not charitable. It is further pertinent to mention here that when the trust fixes the reserve price for residential as well commercial plots or buildings, it includes in its cost all the amenities which it promises to the people including all development charges like roads, sewerage, water supply, storm water drainage, street lighting and local distribution system and unjustified cost as per rough cost estimate of Punjab State Electricity Board and also provision for landscaping and further increased by overhead charges as mentioned at para 2 & 3 of the Annexure. Thus, it is clear tha....
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....is benevolence and generosity towards others and the community at large. Of course, it is important as to what are the activities of a charitable institution but what is even more important is what is the predominant motivation for such activities. No activity, by itself, could be charitable in nature when it is dominated and triggered by economic greed. There is no difference in what a soldier and a mercenary does, both use bullets to defend their interests, but while a soldier does it out of patriotism, a mercenary does it for monetary gain. The action is the same, and yet motivation for the actions are so materially different that the character of activity is altogether changed. Clearly, underlying motive and trigger for doing what a person does is, is important for determining whether such an action is in the course of business or charity. What is really, therefore, required to be carefully examined, in order to find whether an act of the institution is charitable or not, is not only to assess the work being done by the institutions, which claim to be pursuing charitable activities, but also the economic dynamics and motivations of such activities. 36. Learned Departmental Rep....
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....s which vitiates the charitable character of the activities. In the Indian Chamber of Commerce (supra), which has been relied upon by the Assessing Officer and referred to in CBDT Instruction no. 1024 (supra), it has been stated thus: "Ordinarily profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profit, the Court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit.". That apart, mere presence of these two items does not show that the underlying object of including these two items in the formula was profit maximisation. The inclusion for provision for unforeseen charges, in our understanding, is a fair and conservative approach to ensure that the costs incurred by the assessee trust are recovered from the end buyers of the residential units or land. The element of charity is not in giving away the residential units at subsidized or low prices but in pursing the object of advancement of object of general public utility in planned development of the are in....
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....short period of three and a half years, we are unable to comment upon the same as full facts relating thereto are not on record. That aspect, however, for the detailed reasons set out above, does not affect our conclusion anyway. 39. As for the decision of the coordinate bench in the case of the Punjab Urban Development Authority v. CIT [(2006) 103 TTJ 988 (Chandigarh)] , it is a case in which there is no mention about selling the residential units and plots at the price on the basis of a formulae laid down by the statute. In the present case, there is no dispute on this aspect, and that is a crucial aspect having bearing on the conclusions. There was also no, and could not have been any, occasion to consider the impact, what is referred to as 'kill effect', of the amendments by the Finance Act 2015. The revenue, thus, derives no advantage from this judicial precedent. As regards the decision of the coordinate bench in the case of Amritsar Improvement Trust (supra), on which so much reliance has been placed by the learned Departmental Representative, it is already set aside by Hon'ble jurisdictional High Court. As a matter of fact, in the course of proceedings before H....
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....n identically worded order dated 20th June 2011 in the matter of assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2007-08. 48. Grievances in these appeals, as pressed before us and in substance, are that on the facts and in the circumstances of the case, learned CIT(A) erred in deleting the disallowance of exemption under 11 r.w.s. 2(15) of Rs. 32,16,640 for the assessment year 2006-07 and of Rs. 5,39,12,792 for the assessment year 2007-08. 49. Learned representatives fairly agree that whatever we decide in the ITA No. 496/Asr/ 2013 will apply mutatis mutandis on these appeals as well. As we have decided that appeal in favour of the assessee, we see no reasons to take any other view of the matter in this case. Respectfully following our decision in the said case, we reject the grievance of the Assessing Officer in this case and hold that the assessee was indeed eligible for exemption under 11 r.w.s. 2(15) of Rs. 32,16,640 for the assessment year 2006-07 and of Rs. 5,39,12,792 for the assessment year 2007-08. The action of the CIT(A) is confirmed. 50. We now move to ITA Nos 636 and 637/Asr/2013 i.e. appeals of the assessee for the assessment yea....
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....ITA No. 496/Asr/ 2013 will apply mutatis mutandis on this appeal as well. As we have decided that appeal in favour of the assessee, we see no reasons to take any other view of the matter in this case. Respectfully following our decision in the said case, we uphold the grievance of the assessee in this case as well and direct the Assessing Officer to grant relief accordingly. The issue regarding enhancement of income, given the fact that the assessee is entitled to exemption under section 11 in respect of the same as well, is infructuous. 59. ITA No 336/Asr/2014 is also thus allowed in the terms indicated above. 60. Both the appeals filed by the Pathankot Improvement Trust are thus allowed as well. 61. We now take up ITA No. 417/Asr/2013 i.e. appeal filed by the Improvement Trust, Bhatinda. 62. By way of this appeal, the assessee has challenged correctness of the order dated 19th March 2013 passed by the CIT(A) in the matter of assessment under section 143(3) of the Act for the assessment year 2009-10. 63. Grievance of the assessee, in short and in substance, is that learned CIT(A) erred in declining exemption under section 11 read with section 2(15) on the ground that the asse....