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2015 (10) TMI 480
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.... from 01-04-2009. The expression of charitable purpose, prior to the aforesaid amendment read as follows; "(15) "Charitable purpose" includes relief to the poor, education, medical relief and the advancement of any other object of general public utility" 4. The definition after the amendment reads as follows; "Charitable purpose" includes relief of the poor, education, medical relief, (preservation of environment(including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility; Provided 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 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". 5. It can be seen from the proviso to Sec.2(15) which came into effect ....
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....anitation system for various facilities like the urban local bodies or the customers themselves on payment of certain ETP , Supervision charges and water charges. As such, the assessee is hit by the newly introduced proviso to section 2(15) as it is directly engaged in the activities of trade, commerce or business, and is also rendering service of maintenance of various facilities on payment of certain charges. According to the AO, it is evident that the assessee has earned substantial amount of its Income by way of fees from the administrative, supervision and water charges. The assessee has generated receipts in excess of Rs. 25 lakhs for the current assessment year out of its commercial activities and hence the proviso to sec.2(15) is attracted in its case. Therefore the AO was of the view that that the income generated from the activities of assessee company clearly attracts the amended proviso to section 2(15) of the I.T. Act as amended by the Finance Act, 2008. He held that the assessee is providing services on payment of certain amount of fees and therefore its income is liable to be taxed, independent of cancellation of registration by the DIT(Exemption), Bangalore and asse....
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....nd authorized the urban local bodies namely municipalities and corporations by way of enactment of Karnataka Municipalities Act, 1964( Chapter V) to carry out the obligations of Water Supply and Drainage facilities in their respective areas. Thus the urban local bodies carry out the activities of provisions of water supply and drainage facilities in fulfillment of the obligations under the Constitution of India. Thus the urban local bodies (Municipalities and Corporations) in carrying out the obligations and functions prescribed under the Constitution of India cannot be said to carrying on any activity in the nature of trade, commerce or business as envisaged in proviso to section 2(15) of the Act. 13. The assessee at the instance of the State Government or the Urban Local Bodies carries out the activities of investigation, preparation of schemes for regulation and development of drinking water and drainage facilities. These activities are carried out strictly in accordance with directions rules and regulations framed by Government. 14. While the assessee's major task is to take up capital works (98.60% of expenditure for Assessment year is on capital works as against 1.40% o....
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.... This interest charged has not been received from urban local bodies for more than a decade. However, the assessee has no option, but to charge interest as per Water Supply Regulations, 1985 approved in the Government Order No. HUD 16 UMS 83 Bangalore dated 14.06.1985. 20. The assessee is operating on no profit basis. This is substantiated by the actual income received on operations of the Assessee and the expenditure incurred. The Assessee pointed out that the following table would show that the Assessee has actually incurred a loss on its operations and is operating on a no profit basis:- Amount in Rs.(Cr.) Particulars 31/3/11 ETP Charges 52.75 Water Charges 5.27 Other Income 3.33 TOTAL (A) 61.35 Less: Expenses on employee's remuneration 28.07 Operation and maintenance expenses 18.05 Administrative Expenses 17.20 Depreciation 1.18 TOTAL (B) 64.5 NET LOSS (3.15) 21. Accordingly, even in complying with the constitutional obligations, the assessee has been carrying on its activities in a real charitable manner and by no stretch of imagination could it be considered as ....
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....it by the Constitution of India; further, the assessee is actually incurring losses on its operations. It was also submitted that the assessee has to follow the directions, rules and regulations formulated by the State Government without any discretion of its own. Accordingly, it was argued that the assessee is a genuine charitable institution, to which the legislature does not intend to deny exemption. Thus, the proviso to section 2(15) of the Act does not apply to the assessee. 24. The Assessee also explained as to how the rates for supply of water are fixed. The estimates for Water Supply and Underground Drainage projects are prepared adopting the current schedule of rates approved by the Assessee and Public Works Department. After estimates are sanctioned, the recognized systems to carry the work is by contract work. The contractor is selected by inviting tenders in accordance with procedures prescribed in Karnataka Transparency Act in Public Procurement Act, 1999 [KTPP Act]. The tenders received are compared with the estimated rates. The tenderer whose tender is lowest and fulfils all the prescribed financial and technical eligibility criteria is selected. Thus, rates are f....
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....order of the CIT(A). We will first deal with the applicability of the proviso to Sec.2(15) of the Act to the Assessee. 29. The Assessee was established as a corporation under KARNATAKA ACT No. 25 OF 1974 (First published in the Karnataka Gazette Extraordinary on the Twenty-first day of August, 1974). THE KARNATAKA URBAN WATER SUPPLY AND DRAINAGE BOARD ACT, 1973. The preamble to the Act gives the objects and reasons which reads thus: "An Act to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban areas of the State of Karnataka. WHEREAS it is expedient to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban areas of the State of Karnataka and for matters connected therewith;" 30. By Sec.3 of the KUWSDB Act, the Assessee was created as a body corporate. The said provision reads as follows: "Sec.3. Creation and incorporation of the Board.- The duty of carrying out the provisions of this Act shall, su....
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.... (d) any other matter which is supplemental, incidental or consequential to any of the above functions; and (e) such other functions as may be prescribed. (2) No scheme estimated to cost more than ten lakhs of rupees shall be carried out by the Board except with the previous approval of the State Government. 18. General powers of the Board.- The Board shall for the purpose of carrying out its functions under this Act. have the following powers, namely:- (i) to acquire and hold such movable and immovable property as it deems necessary and to lease, sell or otherwise transfer any such property subject to such conditions as may be prescribed; (ii) to acquire under the Land Acquisition Act, 1894 (Central Act I of 1894) any land or any interest therein required by the Board for implementing any schemes; (iii) to incur expenditure and undertake any work in any area in the State for the preparation and execution of such schemes as it may consider necessary for the purpose of carrying out the provisions of this Act, or as the case may be, the functions entrusted to it by the Government ; (iv) to enter into any contract; an....
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.... water and sewerage charges. The dominant and main object of the Assessee as we have already seen is to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban areas of the State of Karnataka. The source of income of the Assessee as can be seen from the income side of the Income and expenditure account is from (a) establishment, administration & supervision charges it receives from ULBs, water charges levied by it, interest on funds kept with the bank on deposits. The funds that are not immediately required for execution of schemes are parked in deposits. The Assessee also is in receipt of rental income. The other income of the Assessee is from fines, sale of tender forms, registration/renewal fees, sale of scrap, cost of SR book, other receipts, P & L contribution of board, Vendor assessment charges. 34. A look at the income stream of the Assessee clearly reveals that all the activities from which the Assessee derives income are an inherent part of the main object of the Assessee. It is clear from the facts of the case that profit making is not the driving force or objective of ....
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.... from 01.04.2009 has two parts. The first part has reference to the carrying on of any activity in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service _in relation to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess' or fee' or any other consideration, income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retention of such income is irrelevant for the purposes of construing the activities as charitable or not. (ii) If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. If a literal interpretation is to be given to the proviso, then it may be concluded that this ....
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....urpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression "charitable purpose", as defined in Section 2(15) of the said Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression "charitable purpose" by the revenue. (viii) The expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of th....