TaxTMI 
TaxTMI 
2016 (5) TMI 1175
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....ssioner of Income-tax (Appeals) for enhancement of income is illegal and bad in law. 3. That, in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in enhancing the income by making the addition of Rs. 6,58,59,246 on account of excess of income over expenditure, which is illegal, bad in law and without jurisdiction. The enhancement itself is illegal, bad in law and without jurisdiction. 4. That the Assessing Officer/Commissioner of Income-tax (Appeals) failed to appreciate that the appellant-trust has been taken over by the Punjab Government on and with effect from April 12, 2007, and it continued to be custodian owner of the assessee-trust till March 31, 2008, and the income has been wrongly and illegally assessed in the hands of the assessee. 5. That, in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the disallowance of exemption under section 11 of the Act on the ground that the activities carried out by the assessee-appellant is not for charitable purpose as per section....
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....in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the disallowance under section 11 of the Act on the ground that the activities carried out by the assessee is not for charitable purpose as per section 2(15) of the Act. In any case it is wrongly held that the assessee-trust is not entitled to exemption under section 11 of the Act. 3. That, in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in making the addition/disallowance of the expense under the head of work bill of Rs. 15,55,47,181 on the ground that the said expense is capital in nature not revenue in nature. The same is wrongly and illegally upheld by the Commissioner of Income-tax (Appeals). 4. That, in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law in making the addition of Rs. 76,27,744 by disallowing the deduction on the ground that the assessee has not paid/deposited the said amount in the employees provident fund before the due date of filing ....
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....llate Tribunal had decided this issue in favour of the assessee, under similar facts and circumstances. 5. The learned Departmental representative, on the other hand, placed reliance on the impugned order. 6. The grievance of the assessee by way of ground No. 5 for the assessment year 2008-09 and ground No. 2 for the assessment year 2010-11, under similar facts and circumstances, stands answered in favour of the assessee by the Income-tax Appellate Tribunal, vide order dated September 10, 2015, for the assessment years 2009-10 and 2011-12 (Hoshiarpur Improvement Trust v. ITO [2016] 45 ITR (Trib) 682 (Amritsar). The Commissioner of Income-tax (Appeals)'s order for the assessment year 2008-09 is dated December 12, 2013, and the Commissioner of Income-tax (Appeals)'s order for the assessment year 2010-11 is also dated December 12, 2013. The learned Commissioner of Income-tax (Appeals) thus, obviously did not have the benefit of the Income-tax Appellate Tribunal order dated September 10, 2015. 7. In the Income-tax Appellate Tribunal order for the assessment years 2009-10 and 2011-12, it has been held as follows (page 695 of 45 ITR (Trib)) : "Before we address ....
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....r any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity : Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the previous year.' Explaining the scope of these provisions, a co-ordinate Bench of this Tribunal in the case of Himachal Pradesh Environment Protection and Pollution Control Board v. CIT [2011] 9 ITR (Trib) 604 (Chandigarh), has observed as follows (page 611) : 'It is also important to bear in mind that the insertion of proviso to section 2(15) does not mean that in case an assessee is to receive any payment for anything done for trade, commerce or business, the assessee will be hit by the said proviso. It may be recalled that elaborating the scope of this amendment, Central Board of Direct Taxes, vide Circular No. 11, dated December 19, 2008 [2009] 308 ITR (St.) 5; [2009] 221 CTR (St.) 1, has observed as follows : "3. The newly amended section 2(15) will apply only to the entities whose purpose is 'advancement of any other object of gener....
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....ring of any service in relation to any trade, commerce or business." (emphasis supplied) As the above Central Board of Direct Taxes circular, which is binding on the Commissioner of Income-tax under section 119(1)(a) of the Act, aptly puts it, whether the assessee has, as its object, advancement of any other object of general public utility is essentially a question to be decided on the facts of the assessee's own case and where the object of general public utility is only a mask or device to hide the true purpose of trade, business or commerce, or rendering of any service in relation thereto, the assessee cannot be said to be engaged in a charitable activity within the meaning of section 2(15) of the Act. As a corollary to this approach adopted by the tax administration, in our considered view, it cannot be open to the learned Commissioner of Income-tax to contend that where an object of general public utility is not merely a mask to hide the true purpose or rendering of any service in relation thereto, and where such services are being rendered as purely incidental to or as subservient to the main objective of 'general public utility', the carrying on of bona....
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....e or business', the requirement of exclusion clause extends even to situations 'in which such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility'. In other words, the exclusion clause, by the proviso to section 2(15), was earlier triggered by 'involvement in any activity in the nature of trade, commerce or business, etc.,' but, post- Finance Act, 2015, amendment, it will be triggered even if 'such an activity in the nature of trade, commerce or business, etc., is under taken in the course of carrying out such advancement of any other object of general public utility'. This substitution of the proviso to section 2(15), in our considered view, may be viewed as representing a paradigm shift in the scope of the exclusion clause. The paradigm shift is this. So far as the scope of earlier provisos is concerned, the Central Board of Direct Taxes itself has, dealing with an assessee pursing 'the advancement of any object of general pubic utility', observed that 'if such assessee is engaged in any activity in the nature of trade, commerce or business or render....
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....of course, the activity level remains within the threshold limit, i.e., receipts from such activities are less than twenty per cent. of total receipts of that year. As the above provisions, which, in our humble understanding, seeks to restrict the scope of section 2(15) is effective from the assessment year 2016-17, in our considered view, these provisions are only prospective in effect. As a corollary to this legal position, in our considered view, even if the activities in the nature of trade, commerce or business, etc., are undertaken in the course of actual carrying out of advancement of any object of general public utility, till the end of the previous year relevant to the assessment year 2016-17, the activities will continue to be covered by the scope of section 2(15). As we hold so, we may only refer to the observations of a Five Member Bench of the honourable Supreme Court, in the case of CIT v. Vatika Township Pvt. Ltd. [2014] 367 ITR 466 (SC), as follows (page 486) : 'Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, legislation is presumed not to be intended to hav....
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....e" 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, Loka 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 [1975] 101 ITR 796 (SC), etc., observed (page 803) : "Notwithstanding the possibility of obscurity and of dual meanings when the emphasis is shifted from 'advancement' to 'object' used in section 2(15), we are clear in our minds that by the new definition the benefit of exclusion from total income is taken away where in accomplishing a charitable purpose the institution engages itself in activities for profit." The Supreme Court emphasised that if in the advancement of the objects of general public utility a trust resorts to carrying on of any activity for profit, then necessarily section 2(15) cannot confer exemption. In Sole Trustee, Loka Shikshana Trust [1975] 101 ITR 234 (SC), their Lordships Khanna ....
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.... and that arises out of certain observations made by this court in Sole Trustee, Loka Shikshana Trust's case [1975] 101 ITR 234 (SC) as well as Indian Chamber of Commerce's case [1975] 101 ITR 796 (SC). It was said by Khanna J. in Sole Trustee, Loka Shikshana Trust's case [1975] 101 ITR 234 (SC) : ". . . 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". (page 243 of 101 ITR) And to the same effect, observed Krishna Iyer J. in Indian Chamber of Commerce's case [1975] 101 ITR 796, 804 (SC) when he said : "An undertaking by a business organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by eloquent surrounding circumstances the making of profit stands loudly negatived . . . a pragmatic condition, written or unwritten, proved by a proscription of profits or by long years of invariable practice or spelt from some strong surrounding circumstances indicative of a....
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....ere given does no longer exist on the statute, and the judicial precedent, which the Central Board of Direct Taxes instruction has interpreted, has already faded into oblivion. It is, however, important to bear in mind the fact that, going by the Circular No. 372 dated December 8, 1983 ([1984] 146 ITR (St.) 9 ) 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 (page 17) : '(i) Amendment of the definition of "charitable purpose"-Section 2(15) 8. Under section 2(15) of the Income-tax Act, "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. Section 3(a) of the Finance Act has omitted the words "not involving the carrying on of any activity ....
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.... will apply irrespective of whether the profits and gains 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-section (4A) of section 11, clause (bb) of section 13(1) of the Income-tax Act (which restricted the exemption of business income in the case of charitable trusts and institu....
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....in law, the Central Board of Direct Taxes Circular No. 621 dated December 19, 1991 ([1992] 195 ITR (St.) 154 ), read with Circular No. 642 dated December 15, 1992 ([1993] 199 ITR (St.) 7 ) stated as follows : 'Central Board of Direct Taxes Circular No. 621, dated December 19, 1991 ([1992] 195 ITR (St.) 154 at page 165) 15.8 In order to bring exemption of charitable or religious trusts in line with the corresponding provisions in section 10(23C)(iv) or (v) 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. Central Board of Direct Taxes Circular No. 642 dated December 15, 1992 [1993] 199 ITR (St.) 7 at page 7 In partial modification to paragraph 15.8 (as extracted above) of the Circular No. 621, dated 19th December, 1991 issued from F. No. 133/389/91-TPL, it is clarified that according to the provisions of section 11(4A) of the Income....
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.... of a trust falling under any of the first three heads of charity, viz., "relief of the poor", "education" and "medical relief" it may engage in any activity for profit, and the profits would not be taxable if they were utilised for the primary object of the trust. In other words, the business carried on by them is incidental or ancillary to the primary object, viz., relief of the poor, education and medical relief. To illustrate, a charitable hospital holding buildings on trust may run a nursing home. The profits of the nursing home owned and run by the trust will be exempt under section 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,....
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....g activities' a little later, but, suffice to say, that on the admitted facts of this case, so far period prior to April 1, 2009, is concerned and for the reasons set out above, the benefit of section 11 read with section 2(15) could not have been declined at all. Turning once again to the amendments brought on the statue with effect from April 1, 2009, we have to understand that there are two mutually exclusive situations in which business activities are carried out by the assessee-trust-one, in which "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, etc." (referred to in the Central Board of Direct Taxes Circular No. 11, dated December 19, 2008, issued at the point of time when the 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 April 1, 2016, i.e., the assessment year 2016-....
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....n alone, the stand of the authorities below must be held to be unsustainable in law. We must, however, also deal with the fundamental allegation of the Revenue authorities that the assessee has sold residential and commercial units and residential and commercial lands 'just to earn profit'. This profiteering, as the learned Departmental representative puts it, is the core issue in these appeals. As we deal with this aspect of the matter, we may reproduce the following written submissions filed by the learned Departmental representatives : A : In all improvement trust cases It is submitted that the learned counsel namely Shri Y. K. Sood, chartered accountant and Shri J. S. Bhasin, 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 o....
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.... to be read down but such reading has been contemplated in the context of section 10(23C)(iv) of the Income-tax Act, 1961 and when read in its totality, the judgment support the case of the Revenue as it squarely supports a case where the intention is to do charity by activities which may embark upon any trade, commerce or business or rendering any service in the nature of trade, commerce or business and not that income accrues due to the exigency of undertaking general public utility activities. It is further submitted the judgment in the case of City and Industrial Development Corporation of Maharashtra Ltd. v. Asst. CIT [2012] 343 ITR 102 (Bom) reported at S. No. 2 is project specific and further it has been held by the honourable Tribunal Mumbai "C" Bench that the assessee is an agent of the Government and does not hold any independent entity whereas the trusts are a corporate body and have perpetual succession and common seal and can sue and be sued in its name as per section 3 of the Punjab Towns Improvement Trusts 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 ....
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....and sale of landed property like a builder and after earning a huge profit as possible, i.e., by putting the reserve price at a high pitched figure and also putting the commercial plots and commercial building on auction, it spends on such public utility services which is eminently hit by the proviso to section 2(15) of the Income-tax Act, 1961. It clearly falsifies the claim of Mr. Bhasin that trusts have income from other sources as contemplated in section 68 of the Act. This shows that the Government does not give to trusts what it itself has assured the trusts in the Act. It may further be mentioned that trusts are not agent of the State as if it were so, there would not have been any provision as section 70 in the Act which empowers the State Government to attach the rents and other income of the trust. As it is submitted that the factum of the trusts making exorbitant profit is best elucidated from the way the Improvement Trust Pathankot has sold a plot of land to Income-tax Department. The price it had informed to the Department in 2011 was 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 and a hal....
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....fixed reserve price and tries to get as much as profit as is possible and if the bidders do raise the bid beyond the reserve price, the auction is cancelled. Thus, it is clear that in this activity also no charity is involved. Reliance in this regard is placed on the judgment of the honour able Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency v. Chief CIT reported in [2013] 356 ITR 360 (AP) ; [2013] 83 DTR 23 (AP) (Copy enclosed for kind perusal). In this judgment, the honourable court has held : 'that the petitioner was engaged in certifying the varieties of seeds grown by the clients who finally carry out trade or commerce in certified seeds. Thus, petitioner had rendered its services not directly to farmers but was rendering its services directly to its clients/agents who are engaged in trading of the certified seeds with profit motive. Activities of the petitioner had not indicted involvement of any charitable activity or advance of any other object of general public utility. Functioning of the petitioner was akin to a corporate profit earning service provider.' The trust also sells plots and building for....
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....by the Bench. The High Court clearly did not hold that once the registration is granted, exemption under section 11 cannot be denied to the assessee on the ground that it was not a charitable institution. If this decision of the Tribunal is to prevail then restoration of the issue to the Tribunal by the High Court would become redundant. It is submitted that submissions made in the case of Jalandhar Improvement Trust and other trust during the course of hearing of trusts' cases are also pressed into service in these appeals. In view of the above submissions, it is prayed that the issue may kindly be decided in favour of the Revenue.' While dealing with the profit motive allegation of the Revenue authorities, it is essential to appreciate the difference that profit on sale does not essentially and necessarily imply profit motive in activities of the assessee-trust. What is important is the motive or predominant object of the activities. As we do so, we may only make a note of the following observations made by a co-ordinate Bench decision in the case of Devki Devi Foundation v. DIT (Exemptions) [2015] 40 ITR (Trib) 1 (Delhi) ; [2015] 56 taxmann.com 56 (Delh....
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.... public, to the business entities buying the commercial areas, in our considered view, does not amount to defeating an object of general public utility. In this context, it is important to understand the benefit from developing commercial areas, which is for public good, and benefit to the business persons in buying these units from the assessee-trust, which can only be for the good of benefit of these entrepreneurs. As for the sale of residential units, it is an admitted position that in terms of the Punjab Town Improvement (Utilisation of Land and Allotment of Plots) Rules, 1983, there is a formulae on the basis of which the price is worked out. The learned Departmental representative does not dispute that aspect but he alleges profit motive embedded in this formula as shown by adjustments for (a) conservancy changes for five years at 10 per cent. per month per acre; and (b) provision for unforeseen charges at 15 per cent. of the total reserve price. Firstly, even if this allegation about presence of the two elements only to maximise the profit be taken as correct, it is important to bear in mind the fact that this is not the presence of profit element in the activities which vit....
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....ork done by these agencies and the role played by these agencies for public good in furtherance of advancement of objects of general public utility. The learned Departmental representative has also pointed out that the assessee-trusts do not get any grant from the State Government which shows that first they make profits from land deals and then use the income so earned for the public causes stated. It is for this reason, according to the learned Departmental representative, that the asses see-trust cannot be said to be anything other than a business simpliciter. On the contrary, according to the learned Departmental representative, it is like robbing Peter to pay Paul. We are unable to share these perceptions of the learned Departmental representative. An object of general public utility does not necessarily require that the activities or the beneficiaries must be funded or subsidised by the State. As long as broader public cause is served, whether by the State funding or by efficient regulation of the affairs, it is an object of general public utility. It is also important to bear in mind that costs of proper development of area are also costs incidental to the ....