TaxTMI 
TaxTMI 
2018 (11) TMI 1121
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....appellant's income u/s.11 & 12 of the Income Tax Act, 1961 as claimed in the appellant's return, on the ground that the appellant's case attracted the First Proviso to Section 2(15) and in turn, sub-section(8) of Section 13 of the Act. 3. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding the learned Assessing Officer's action in denying the benefit of deduction as claimed by the appellant u/s.11 and 12 of the I.T. Act 1961. 4. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding the learned Assessing Officer's action in denying the benefit of deduction amounting to Rs. 4,93,37,661/- for accumulation at 15% of income u/s.11(1)(a) of the Act. 5. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding the learned Assessing Officer's action in denying the benefit of deduction amounting to Rs. 6,30,00,000/- for accumulation u/s.11(2) of the Act." 3. Briefly stated, the relevant material facts are like this. The assessee before us is a trust constituted, by Government of Gujarat, under the Gujarat Housing....
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.... or business, or any activity of rendering any service iin 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: [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 lakhs rupees] or less in the previous year;] Therefore, as discussed in preceding paras, the assessee is not carrying out any charitable activity and is squarely covered by the proviso 1 & 2 of the Section 2(15) of the I.T. Act." 4. The Assessing Officer thus disallowed exemption under section 11(1)(a) amounting to Rs. 4,93,37,661/- and exemption under section 11(2) amounting to Rs. 6,30,00,000/-. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) was, inter alia, of the view that the assessee was carrying on activities in the nature of trade, commerce or business. In support of this stand, his observations include the following:- "15.1 It can be seen from th....
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.... charitable activities or not. 16.3 Under rule-6 of GHB Rules 1977, GHB sets up tender committees. The process of tendering is the means of procuring goods or services in a transparent manner at lowest cost available. Section-25(3) empowers GHB to execute in all the matters provided u/s.25(l) (see para 12.3 above) through any independent agency. This section is directly linked with rules-6 which enables GHB to procure best services or goods at lowest cost. This itself reflects the nature of activities of GHB that are in the nature of trade, commerce and business. 16.4 The State Government wants GHB to function in a professional manner and through GHB Act it has supported GHB through various sections. For e.g. u/s.24A, even the areas other than urban areas in the scheme can be declared as the part of the scheme. U/s.25(1)(e) the adjoining of areas of the scheme can be part of the scheme for the purpose of the efficiency of the scheme. U/s.36 GHB is required to make compensatory payments in respect of land or building vested by a scheme in the Board either to the Municipality or to general public. U/s.49 GHB has been given power to dispose off land by retaining/leas....
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.... State Government and the GHB. 17. Thus it is a 'matter of fact' that the legal framework itself mandates, authorises and compels GHB to qualify for the first proviso to section 2(15) of the Act. If it is not followed by GHB then it would amount to violation of law by GHB." 5. Learned CIT(A) also referred to, and relied upon, various decisions of the co-ordinate benches in the cases of Jalandhar Development Authority (supra) and others. He also relied upon the findings in assessee's case for the assessment year 2011-12, and confirmed the action of the Assessing Officer. The assessee is not satisfied and is in further appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. 7. We find that the core issue that is really required to be adjudicated by us is whether construction and sale of dwelling units by the assessee, on the given facts, is an activity in the nature of trade, commerce or business or service thereto. As we have noted earlier, from the observations made by the Assessing Officer in the assessment order, the assessee has constructed ....
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....y profit motive in the activities of the assessee. What is important is the motive or the predominant object of the activities. The bids are invited by the assessee who allots the plots to the highest bidders. This, however, is because it is not desirable for the State to subsidise its businesses. A bidding process ensures transparency in the functioning of the trusts and therefore, it does not make the bidding process a commercial venture. Further the bids are invited only in the context of commercial units. Under the Rules there is a formula on the basis of which the price is worked out. The revenue did not deny the same but alleged that the profit motive is embedded in this formula as shown by the adjustments for various charges. 72. The Tribunal rightly rejected the contention that to fall within the ambit of the words "advancement of any other object of general public utility" the trust must necessarily be involved only in implementing poverty alleviation programs or doing other acts of charity. It is sufficient if it does precisely what the last category in Section 2(15) states namely being involved in activities for the advancement of an object of general public uti....
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....up in two words "town improvement" in the title "Punjab Town Improvement Act, 1922". The preamble is titled "An Act for the improvement of Certain Areas". The preamble states "whereas it is expedient to make provision for the improvement and expansion of towns in Punjab". The Act in general and Chapter-IV thereof in particular indicates the reason for and the basis of the establishment of the trust. Almost every section in the Chapter indicates clearly that the trust is established for the purpose of "advancement of the object of general public utility". This is the predominant purpose of the trust. 78. The language of the provisions of the Act are self-explanatory in this regard. The trust must deal with the buildings unfit for human habitation, the danger caused or likely to be caused to the health of the inhabitants of the area on account of the congested conditions of streets or buildings or want of light, air, ventilation or proper conveniences in an area and sanitary defects. The trust is required to frame the street schemes to lay out new streets, thoroughfares and open spaces or alter existing streets whenever it appears to the trust that it is necessary to do so f....
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....s "charitable purpose" in Section 2(15). 82. Whether the mandate of the Act is followed by such a trust is a different matter. The facts in that regard are relevant in examining whether the activities of the trust of a given year entitled it to the benefit of the Income Tax Act. Mere profit making on account of certain incidental or ancillary activities of the trust do not disentitle it to the exemptions. The Trust constituted under the PTI Act is likely to make profit on account of its commercial or business activities such as when it acts pursuant to the power under section 28(2)(iii) by disposing off its lands. That, however, does not take it out of the definition of 'charitable purpose' in Section 2(15). As we held earlier, trade, commerce and business in Section 2(15) must be such as to involve an element of profit. Profit, however, is not the predominant motive of such trusts. In our view considering the nature of the Act, selling of plots and premises by the trust is only incidental and ancillary to its main purpose which at the cost of repetition is "town improvement" in almost every respect. Even where the plots are developed and premises are constructed a....
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....als of the State Government, to be nominated by that Government, ex-officio; (iv) the Presidents of the district panchayats functioning in the urban development area, or, as the case may be, part thereof, ex-officio; (v) the Chief Town planner or his representative, ex-officio; (vi) the Chief Engineer or Engineers (Public Health) of the local authority or authorities functioning in the urban development area or his or their nominee or nominees, ex-officio; 5[(vi-a) the Municipal Commissioner of the Municipal Corporation, if any, functioning in the urban development area, ex-officio;] (vii) a member secretary to be appointed by the State Government who shall also be designated as the Chief Executive Authority of the Urban Development Authority. Thus, the constitution of the Urban Development Authority is subject to the control of the State Government. The powers and functions of the Urban Development Authority as contained in Section 23 are reproduced herein above. Considering Section 40 of the Town Planning Act, the Town Planning Scheme prepared by the Urban Development Authority which has been prepared subject to sanction by the State Government for development of the Urban Develo....
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....e Assessee can be said to be in the nature of business. However, while holding so, learned Tribunal has not properly appreciated the object and purpose of permitting the Urban Development Authority to sale the plots, maximum to the extent of 15% of the total area i.e. to meet with the expenditure for providing them infrastructural facilities like gardens, roads, lighting, water supply, drainage system etc. The learned Tribunal has also not properly appreciated the reasons for selling the plot by holding public auction i.e.; (1) to avoid any further allegation of favoritism and nepotism and (2) so that maximum market price can be fetched, which can be used for the development of the Urban Development Area. 12.1 At this stage decision of the Hon'ble Supreme Court in the case of Ahmedabad Green Belt Khedut Mandal (supra) is required to be referred to. Before the Hon'ble Supreme Court, it was contended on behalf of original land owners whose lands were included in the TP Scheme that by permitting the Area Development Authority/Urban Development Authority to sell 15% of the total area, by that the Urban Development Authority will be making profit, the Hon'ble Suprem....
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....e the fact that the said organization was collecting rent for providing the space at trade, fair and exhibitions and though was receiving income by way of sale of tickets and income from tickets and sale in Pragati Maidan etc., after considering the various decisions of the Hon'ble Supreme Court as well as decisions of the other High Courts, it is held that activities of the said organization cannot be considered as "business". While holding so, Delhi High Court has observed and held as under: "An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case activity may be regarded as a business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business." 12.6 In the aforesaid decision, after considering the ....
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....e or commerce as used in the first proviso must, thus, be interpreted restrictively and where the dominant object of an organisation is charitable any incidental activity for furtherance of the object would not fall within the expressions business, trade or commerce. 69. In the case of Addl. Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers Association: [1980] 121 ITR 1 (SC), the Supreme Court held as under:-The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to any out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely be cause some profit arises from the activity.' 70. Although in that case the statutory provisions being considered by the Supreme Court were different and the utilisation of income earned is,....
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....nsidering the said question, it is observed as under: "In these circumstances,rendering any service in relation to trade, commerce or business cannot, in the opinion of the Court, receive such a wide construction as to enfold regulatory and sovereign authorities, set up under statutory enactments, and tasked to act as agencies of the State in public duties which cannot be discharged by private bodies. Often, apart from the controlling or parent statutes, like the BIS Act, these statutory bodies (including BIS) are empowered to frame rules or regulations, exercise coercive powers, including inspection, raids; they possess search and seizure powers and are invariably subjected to Parliamentary or legislative oversight. The primary object for setting up such regulatory bodies would be to ensure general public utility. The prescribing of standards, and enforcing those standards, through accreditation and continuing supervision through inspection etc., cannot be considered as trade, business or commercial activity, merely because the testing procedures, or accreditation involves charging of such fees. It cannot be said that the public utility activity of evolving, prescribing a....
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....devoid of selfishness or illiberal spirit. Enrichment of oneself or self-gain should be missing and the predominant purpose of the activity WP(C) 1872/13 Page 52 of 55 should be to serve and benefit others. A small contribution by way of fee that the beneficiary pays would not convert charitable activity into business, commerce or trade in the absence of contrary evidence. Quantum of fee charged, economic status of the beneficiaries who pay, commercial value of benefits in comparison to the fee, purpose and object behind the fee etc. are several factors which will decide the seminal question, is it business? 27. As observed above, fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long-term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under WP(C) 1872/13 Pages 53 o....
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....t would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes." 13. Applying the aforesaid decisions to the facts of the case on hand and with respect to the activities of the AUDA - Ahmedabad Urban Development Authority under the provisions of the Gujarat Town Planning Act by no stretch of imagination, it can be said that the activities of the assessee (AUDA) can be said to be in the nature of trade, commerce or business and/or its object and purpose is profiteering. Merely because under the statutory provisions and to meet with the expenditure of Town Planning Scheme and/or providing various services under the Town Planning Scheme, such as road, drainage, electricity, water supply etc. if the assessee is permitted to sale the plots (land) to the extent of 15% of the total area under the Town Planning Scheme and while selling the said plots they are sold by holding the public auction, it canno....
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....iso to Section 2(15)of the Act shall not be applicable. As observed herein above neither there is element of profiteering nor the same can be said to be in the nature of trade, commerce or business. At this stage, decision of the Division Bench of this Court in the case of Sabarmati Ashram Gaushala Trust (supra) is required to be referred to. In the case before the Division Bench, the assessee Trust-Sabarmati Ashram Gaushala Trust was engaged in the activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. The Assessing Officer denied the exemption to the trust under Section 11 of the Act on the ground that considerable income was generated from the activities of milk production and sale and therefore, considering the proviso to Section 2(15) of the Act, the said Trust- assessee was denied the exemption under Section 11 of the Act. While holding that the activities of the assessee trust still can be said to be for charitable purpose within the meaning of Section 2(15) of the Act and same cannot be said to be in the nature of trade, commerce or business for which proviso to Section 2(15) of the Act is required to be applied. In paras 6, ....
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....under :- 3. The newly inserted proviso to section 2 (15) will apply only to entities whose purpose is advancement of any other object of general public utility ie., the fourth limb of the definition of charitable purpose contained in section 2 (15). Hence, such entities will not be eligible for exemption under section 11 or under section 10 (23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on any activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cas....