TaxTMI 
TaxTMI 
2016 (5) TMI 168
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....thority to pass the order in the case of appellant. 2.1 The order passed by the Deputy Director of Income tax (Exemptions), Circle 17(1), Bangalore under section 143(3) after withdrawal of the registration under 12A, is without jurisdiction, bad in law and liable to be quashed. 3. The learned Commissioner of Income tax (Appeals), Mysore has erred in concluding that the appellant is assessable in the status of 'Association of Persons'. The assessment made and the order passed on a wrong person i.e., under a different status, is bad in law and liable to be quashed. 4. The learned Commissioner of Income tax (Appeals), Mysore has erred in concluding that the appellant is not eligible for exemption under section 11 of the Income tax Act, 1961. 4.1 The learned Commissioner of Income tax (Appeals), Mysore has erred in concluding that (a) The activities carried on by the appellant are commercial in nature with an intention to make profits; (b) The appellant is hit by the proviso to section 2(15) read with section 13(8) of the Act. 4.2 On facts and in the circumstances of the case and law applicable, proviso to section 2(15) and....
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....ection 15 of the Act and the matter was carried to this Tribunal and further to the Hon'ble jurisdictional High Court. The Tribunal set aside the action of the authorities for cancellation of registration and held that the registration cannot be cancelled without satisfaction of the conditions stipulated under Section 12AA(3) of the Act. The revenue challenged the order of this Tribunal before the Hon'ble jurisdictional High Court but could not succeed as the Hon'ble High Court vide its decision dt.7.11.2014 dismissed the appeal filed by the revenue and upheld the view taken by the Tribunal. Despite the restoration of the registration under Section 12A, the Assessing Officer denied the exemption under Section 11 of the Act on the ground that the assessee fall within the purview of proviso to Section 2(15) of the Act. The assessee challenged the action of the Assessing Officer before the CIT (Appeals). The CIT (Appeals) concurred with the finding of the Assessing Officer and held that the cancellation of Registration under Section 12A is not very crucial factor in deciding the taxability of the income of the assessee which is held to have been attracted by amended provis....
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.... submitted that there is no change in the element of income as it was for the Assessment Year 2009-10. Therefore, this issue is now covered by the decision of this Tribunal in assessee's own case for the Assessment Year 2009-10. 5. On the other hand, the learned Departmental Representative has submitted that even if the proviso to Section 2(15) is held to be not applicable in the case of the assessee, the exemption under Section 11 is required to be examined as per the terms and conditions stipulated under the said provision and application of income by the assessee as required under the said provision. The learned D.R. has relied upon the orders of the authorities below. 6. We have heard the rival submissions as well as considered the relevant material on record. The assessee is a charitable institution and was granted Registration under Section 12A on 20.6.1988. The said registration is still subsists in view of the decision of this Tribunal as well as the Hon'ble jurisdictional High Court. As far as the issue regarding applicability of proviso to Section 2(15) of the Act is concerned, we note that this issue came up before this Tribunal for the Assessment Year 2009....
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....r to its incorporation. The assessee and its activities are therefore ring fenced to this special Act, namely KIAD Act. 21. The State Government can give directions to the assessee, as in its opinion, are necessary or expedient for carrying out the purposes of the Act and it is the duty of the assessee to comply with such directions [section 17 of KIAD Act]. 22. It was next highlighted that the assessee carries on its activities in accordance with the provisions of KIAD Act. It does not have the unfettered power to carry on its activities. It functions within the broad framework of the objectives laid down h the KIAD Act. 23. The website of the assessee which outlines its Aims and objectives and 'Functions. It states: "Aims & Objectives: (a) Promote rapid and orderly development of industries in the stale. (b) Assist in implementation of policies of Government within the purview of KIAD Act. (c) Facilitate in establishing infrastructure projects. (d) Function on "No Profit - No Loss" basis. Functions: (a) Acquire land and form industrial areas in the state. (b) Provide basic infrastructure in the industrial areas. (ç) Acquire land for Single Unit C....
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....d in section 2(15). The question therefore is whether the assessee's objective is covered within the phrase 'advancement of any other object of general public utility'? 28. The objectives of the assessee are explicit and cannot he circumvented. The assessee is a creation of law, It is not formed or set-up by any person(s) for any pecuniary benefit or commercial motive. The assessee owes its genesis to KIAD Act, a State Government legislation. The assessee's incorporation. Functioning, powers and scope are set out in the KIAD Act. Being a creation of a special law, compliance with the provisions therein is mandatory. The statute repeatedly emphasizes the need to carry on activities having regard to the objects of the Act. The object is promotion of Industries. It assists in implementation of polices of Government within the purview of KIAD Act. There is establishment of Infrastructure projects. Above all, it is under direct surveillance of State Government. 29. Industrialization is an initiation of social reform and economic development. It boosts the production and manufacturing segments. Employment would scale up; efficiencies stand enhanced and standardization b....
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....dustrialization. The assessee is a creation of law constituted for the purpose of development of industries and exists for public good. Its control and management is vested with the State Government. The benefit arising from its activities may be shared by persons engaged in the industrial sector. This however does not detract from its charitable character. The object of the assessee is clear; the functions are ring fenced and powers are frame all with a view to achieve industrial development in Karnataka. Development of industries has been construed to be 'advancement of general public utility' by the Apex Court. Activities of the assessee are therefore to be regarded as covered within the operative provisions of section 2(15). 33. It was also submitted that assessee has continuously devoted itself to the promotion of industries in the State of Karnataka. It has not been formed and is not carrying on activities with a motive to distribute its surplus. There is no intention to make profits. The objects are to carry out Industrial and infrastructure promotion. The surplus, if any, arising from the activities are solely utilized for the achievement of its objects and no port....
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....he financial statements of the Board primarily arises on account of bank interests. These are excess funds available with the Board which are housed with the banks to generate passive interest income. Thus, the core activity of industrialization of lands (the alleged business activity) does not fetch profits; the source of income which generates surplus is from bank interests and thereby not generated on account of Board's normal course of activities. 37. In view of all the above, it was submitted by the ld. counsel for the assessee that the action of the AO affirmed by CIT(A) that the activities of the assessee are commercial in nature thereby attracting the proviso to section 2(15) is incorrect, contrary to facts, bad in law and liable to be quashed. 38. Without prejudice, the assessee submits that eleemosynary element is not essential element of charity. It is also not a necessary element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price. The surplus generated. if it is held and applied for charitable purpose, the assessee has to be considered as existing for a charitable purpose. ....
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....kes development of industries and infrastructure in the state of Karnataka. It is not carrying on business; but executing the tasks assigned by the State Government under the KIAD legislation. There is no occasion for the office bearers to take the 'profit making' route as the funds and their deployment is under the surveillance of the State Government (through its office bearers/public servants). To conclude, the activities of the assessee do not constitute business. 42. The learned counsel for the Assessee referred to several judicial pronouncements. We will make a reference to those decisions at the appropriate place, to the extent it is necessary to dispose this appeal. 43. The learned DR placed strong reliance on the findings of the AO in the order of assessment and the order of the CIT(A). 44. We have given a very careful consideration to the rival submissions. The purpose for which the Assessee exists is for the 'advancement of any other object of general public utility". The fact that the Assessee enjoyed registration u/s.12AA of the Act in the past is itself sufficient to come to this conclusion. The withdrawn of registration u/s.12AA of the Act ....
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....;on 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 fact would have no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether ....
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.... 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 the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectl....
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.... than there would be loss. This by itself would demonstrate that the Assessee does not exist for profit. 47. The main aim and object for which the Assessee was established is to (a) Promote rapid and orderly development of industries in the stale. (b)Assist in implementation of policies of Government within the purview of KIAD Act. (c) Facilitate in establishing infrastructure projects.(d)Function on "No Profit - No Loss" basis. For the above purpose, the Assessee (a)Acquire land and form industrial areas in the state.(b)Provide basic infrastructure in the industrial areas.(ç) Acquire land for Single Unit Complexes.(d)Acquire land for Government agencies for their schemes and infrastructure projects. The dominant and main object of the Assessee is charitable and not for making profits. 48. 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 the Assessee. Rather the purpose for which the Assessee was created is to regulate and develop ....
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....er Section 11 of the Act. 7.1 Ground No.5 is regarding addition of Rs. 1.74 Crores on account of lump-sum lease charges received by the assessee. 7.2 On perusal of the audit report, the Assessing Officer found that the auditor has pointed out under statement of income to the tune of Rs. 5.81 Crores by the assessee. The assessee submitted before the Assessing Officer that the observation is basically in respect of lease transactions. The lease transactions have not been accounted as they were not sale transactions and only lease transactions. The Assessing Officer did not accept the explanation and contention of the assessee and after giving the benefit of cost and development of the land, the Assessing Officer arrived at figure of Rs. 1.75 Crores being excess amount collected by the assessee in respect of lease transactions. The Assessing Officer made the addition of the same as understated income. On appeal, the CIT (Appeals) has confirmed the action of the Assessing Officer. 7.3 Before us, the learned Authorised Representative of the assessee has submitted that the assessee has already disclosed this amount of lease rentals in the accounts. He referred to the Schedule R ....
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....e land. The lease transaction does not give an absolute ownership or title as it can be cancelled and re-entered. Further the assessee has been consistently following the accounting policy of recognizing the lease rental proportionate to the lease period and therefore the consistent accounting method followed by the assessee for a considerable long time cannot be disturbed when there is nothing on record to suggest that the accounting method followed by the assessee resulted avoidance of tax. Accordingly, we set aside the orders of the authorities below qua this issue and delete the additions made by the Assessing Officer. 8. Ground No.6 is regarding interest under Sections 234A & 234D which is consequential and mandatory. 9.1 The revenue has raised the following grounds : "1. The CIT (Appeals) has erred in ignoring the fact that the assessee has claimed depreciation on the assets the cost of acquisition of which was already claimed by the assessee and allowed by the Department as application of income under Section 11(1) in the respective year(supra)) of acquisition/purchase of such assets. 2. The CIT (Appeals) failed to appreciate the fact that allowance o....
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....nd allowed as application of income under Section 11(1)." 9.2 The only issue arises from the grounds of raised by the revenue is disallowance of depreciation on the ground that it would tentamount to double deduction. Firstly in the form of application of income in the year of acquisition of asset and consequently in the form of depreciation. 9.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that this issue is now covered by various judgments of the Hon'ble jurisdictional High Court as well as other High Courts. The learned Authorised Representative has pointed out that an identical issue has been considered by co-ordinate bench of this Tribunal in the case of DCIT Vs. Jyothi Charitable Trust vide order dt.11.6.2015 in ITA No.522/Bang/2014. Thus this issue is covered in favour of the assessee by various decisions of Hon'ble High Courts as well as by order of the co-ordinate bench. 9.4 On the other hand, learned Authorised Representative has relied upon the orders of authorities below. 9.5 Having considered the rival submissions and material on record, at the outset we note that this issue has be....
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....the case of CIT v. Market Committee, Pipli, 330 ITR 16 (P&H). The Hon'ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon'ble Punjab & Haryana High Court made a reference to the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon'ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon'ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon'ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR 28 (Kar), wher....