TaxTMI 
TaxTMI 
2019 (11) TMI 924
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.... -Do- -Do- 143(3) of the Act 2. The issue involved being common in all the four appeals filed by the Revenue, all such appeals were heard together and disposed of by the common order. 3. We shall adopt the facts concerning AY 2009-10 in ITA No. 2425/Ahd/2017 for the purposes of deliberation on the issues involved for convenience purposes. ITA No. 2425/Ahd/2017-AY-2009-10 4. The substantive grounds of appeal raised by the Revenue read as under: "1. The Ld. CITCA) has erred in the law and on facts in considering the activity of the assessee as engaged in the development of urban area of Jamnagar which is in the nature of advancement of general public utility not hit by the newly introduced first and second proviso to sec.2(15)of the Act. 2. The Ld CIT(A) has erred in the law and on facts in allowing the benefit of exemptions u/s.11 without considering the fact that the assessee is involved in widespread commercial activities in nature of business and the activity of the assessee is covered under first and second proviso to sec.2(15) of the Act. 3. The Ld. CIT(A) has erred in the law and on facts in deleting the addition of Rs. 64,99,534/-....
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....s well as other expenditure to implement its objects. 5.2 It was also stated that the authority has been granted registration u/s. 12A by the Commissioner of Income Tax, Jamnagar vide number CIT.J/Tech/12A(a)/66/2003-04/3484 on 17.03.2005. 5.3 The authority undertakes the following activities: * Preparation of development plans under the provisions of the Act for the development of area * Preparation and execution of town planning schemes under the provisions of the Act if so directed by the State Government * Carrying out surveys in the development area for the preparation of development plans or Town Planning Schemes * To levy and collect such fees for scrutiny of documents submitted to the appropriate authority for permission for development as may be prescribed by the Regulations. * To execute works in connection with supply of water, disposal of sewage and provision of other services and amenities * To levy and collect such fees for execution of works and for provision of other services and amenities as may be prescribed by regulation * To perform such other functions as are supplemental, incidental or conseq....
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....d question which is posed for the consideration of this Court is whether the activity of the assesses can be said to be activity of rendering any service in relation to any trade, commerce or business, for cess or fees or any other consideration, as the assessee is collecting / recovering fees by performing duty under the provision of Gujarat Town Planning Act and therefore, whether second part of the proviso to Section 2(15) of the Act shall be applicable so as to deny the exemption claimed by the assesses, claim under Section 11 of the Act? 11. While considering the aforesaid questions, the relevant provisions of the Gujarat Town Planning Act, under which, the Assessee has been constituted as Urban Development Authority and powers and functions of the Assesses as an Urban Development Authority are required to be considered, so as to appreciate whether the activities of the Assessed being Urban Development Authority can be said to be in the nature of trade, commerce or business ? The relevant provisions of the Gujarat Town Planning Act, under which, the Assesses AUDA has been constituted as Urban Development Authority are as under: Section 2(viii): "Deve....
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....be sued. (1) The urban development authority shall consist of the following members namely: (i) a Chairman to be appointed by the State Government; (ii) such persons, not exceeding 3 [four in number] who are members of the local authority or authorities functioning in the urban development area, as may be nominated by the State Government: (iii)4[Three officials] of the State Government, to be nominated by that Government, exofficio; (iv) the Presidents of the district panchayats functioning in the urban development area, or, as the case may be, part thereof, exofficio: (v) the Chief Town planner or his representative, exofficio: (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, exofficio: 5[(via) the Municipal Commissioner of the Municipal Corporation, if any, functioning in the urban development area, exofficio:] (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. (5) The provisions of subsections (5) to (12) of section 5 shall apply in relation to an u....
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.... local authority or authorities functioning in the urban development area. (3) The urban development authority shall have its office at such place as the State Government may specify in this behalf. Section 40 Making And Contents Of A Town Planning Scheme : (1) Subject to the provision of this Act or any other law for the time being in force, the appropriate authority may make one or more town planning schemes for the development area or any part thereof, regard being had to the proposals in the final development plan,if any. (2) A town planning scheme may be made in accordance with the provisions of this Act in respect of any land which is(i) In the course of development; 1 [(ii) likely to be used for residential or commercial or industrial or for building purposes; or] (iii) Already built upon. Explanation: For the purpose of this subsection the expression "land likely to be used for building purposes" shall include any land likely to be used as, or for the purpose of providing, open spaces, roads, streets, parks, pleasure or recreation grounds, parking spaces or for the purpose of executing any work upon or under the land incidental to 3 town planning ....
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.... in regard to the open space to be maintained around buildings, the percentage of building area for a plot, the number, size, height and character of building allowed in specified areas, the purposes to which buildings or specified areas may or may not be appropriated. the subdivision of plots, the discontinuance of objectionable uses of lands in any area in specified periods, parkings space and loading and unloading space for any building and the sizes or locations of projections and advertisement signs; (I) the suspension, so far as may be necessary, for the proper carrying out of the scheme, of any rule, byelaw, regulation, notification or order mode or issued under any Act of the State Legislature or any of the Acts which the State Legislature is competent to amend: Provided that any suspension under this clause shall cease to operate in the event of the State Government refusing to sanction the preliminary scheme, or in the event of the withdrawal of the scheme under section 66, or on the coming into force of the final scheme; (m) such other matters not inconsistent with the objects of this Act as may be prescribed. Section 91: Fund Of The Appropriate Authority : ....
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....ority. (4) The accounts of an authority as certified by the Accountant General or any other person authorised by him in this behalf, together with the audit report thereon, shall be forwarded annually to the State Government. 12. From the aforesaid provisions of the Town Planning Act, it can be gathered that Assessee has been constituted as Urban Development Authority under the provisions of Section 22 of the Town Planning Act. The purpose and object of constitution of the Urban Development Authority is proper development or redevelopment of urban area. Even Urban Development Authority consists of (i) a Chairman to be appointed by the State Government; (ii) such persons, not exceeding [four in number] who are members of the local authority or authorities functioning in the urban development area, as may be nominated by the State Government; (iii) Three officials of the State Government, to be nominated by that Government, exofficio; (iv) the Presidents of the district panchayats functioning in the urban development area, or, as the case may be, part thereof, exofficio; (v) the Chief Town planner or his representative, exofficio; (vi) the Chief Engineer or Engineers (Public....
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....lands to the extent of 15% of the total area to meet with the expenditure towards drainage, roads, gardens, schools, markets, water supply etc. So that maximum price can be fetched and the same can be utilized for the development of the Urban Development Area and so as to avoid any allegation of favoritism and nepotism, the plots are sold by public auction it is required to be noted the entire amount realized by the assessee being Urban Development Authority either by selling plots or by recovery of some fees / charges, Urban Authority is required to use only for the purpose of development in the Urban Development Area and not for any other purpose. The learned Tribunal has observed and held that as the assessee is selling the plots, to the extent of 15% of total area, by public auction and gets maximum amount, it amounts to profiteering and therefore, the activities of the -Assesses 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 th....
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....d Others vs. State of Karnataka and others reported in (1995) 1 SCC 574, the Hon'ble Supreme Court had an occasion to consider the word "trade". In the said decision, the Hon'ble Supreme Court has held that "the primary meaning of the word "trade" is the exchange of goods for goods or goods for money". 12.4. In the case of State of Andhra Pradesh vs. Abdul Bakhi and Bros reported in 1964(5) STC 644 (SC) while considering the word "business", the Hon'ble Supreme Court has held that "the word "business" was of indefinite import and in a taxing statute, it is used in sense of an occupation, or profession which occupies time, attention or labour of a person, and is clearly associated with the object of marking profit". 12.5 In the case of Institute of Chartered Accountants of India (supra) while considering the whether activities of Indian Trade promotion organization can be said to be in the nature of "business", despite 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 consid....
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....g the first proviso is to exclude organizations which are carrying on regular business from the scope of charitable purpose. The purpose of introducing the proviso to Section 2(15) of the Act can be understood from the Budget Speech of the Finance Minister while introducing the Finance Bill 2008. The relevant extract to the Speech is as under: Charitable purpose includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under charitable purpose. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected.' The expressions business, trade 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 o....
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....ession which occupies the time, attention and labour of a person, normally with the object of making profit To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. (Underlining added) 72. There is nothing on record to indicate the assertion of the petitioner that its activities are not fuelled by profit motive is incorrect. Absence of profit motive, though not conclusive, docs indicate that the petitioner is not carrying on any business " 12.7. Identical question came to be considered by the Delhi High Court, in the case of Bureau of India Standard vs. Director General of Income Tax (Exemptions) reported in (2013) 212 Taxman 210 (Delhi). In the said decision, the Delhi High Court was considering whether the activities of the Bureau of Indian Standards (supra) in granting licenses and trading certificates and charging amounted to carrying on business, trade or commerce and while considering the said question, it is observed as under: " In these circumstances, rendering any service in relation to trade, commerce or business cannot, in....
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....usiness entities, and to expose their true identities. In the case of M/s G.S. 1 India (Supra), in para 21, 22 and 27, the Delhi High Court has observed and held as under "21. ... As observed above, legal terms, trade, commerce or business in Section 2(15), mean activity undertaken with a view to make or earn profit. Profit motive is determinative and. a critical factor to discern whether an activity is business, trade or commerce. The court further held:- 22. Business activity has an important pervading element of self interest, though fair dealing should and can be present, whilst charity or charitable activity is antithesis of activity undertaken with profit motive or activity undertaken on sound or recognized business principles. Charity is driven by altruism and desire to serve others, though element of self preservation may be present For charity, benevolence should be omnipresent and demonstrable but it is not equivalent to self sacrifice and abnegation. The antiquated definition of charity, which entails giving and receiving nothing in return is outdated. A mandatory feature would be; charitable activity should be devoid of selfishness or illibera....
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....ined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. 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 purposes 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 WP(C) 1872/13 Page 54 of 55 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 indirectly in the rendering of any service in r....
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....lots (to the extent of 15% of the total area covered under the Town Planning Scheme) is required to be used only for the purpose to carry out the object and purpose of Town Planning Act and to meet with expenditure while providing general utility service to the public such as electricity, road, drainage, water etc. and even the entire control is with State Government and even accounts are also subjected to audit and there is no element of profiteering at all, the activities of the assesses cannot be said to be in the nature of trade, commerce and business and therefore, proviso to Section 2(15)of the Act shall not be applicable so far as assessee is concerned and therefore, the assesses is entitled to exemption under Section 11 of the Income Tax Act. Therefore, the question no.1 is to be held in favour of the assessee and against the revenue. 15. Now, so far as another question which is posed for the consideration of this Court i.e. whether while collecting the cess or fees, activities of the assessee can be said to be rendering any services in relation to any trade, commerce or business is concerned, for the reasons stated above, merely because the assessee is collecting ....
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.... trade, commerce or business or any activities of rendering service in relation to any trade, commerce or business, for a cess or fee or any other consideration. Such statutory amendment was explained by the Finance Ministers speech in the Parliament. Relevant portion of which reads as under: I once again assure the House that genuine charitable organizations will not in any way be affected. The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether any entity is carrying on 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. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded us advancement of any other object of general public utility. 7. In consonance with such assurance given by the Finance Minister on the floor of the House, CBDT issued a Circular No. 11 of 2008 dated 1....
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....or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business. 8. What thus emerges from the statutory provisions, as explained in the speech of Finance Minister and the CBDT Circular, is that the activity of a trust would be excluded from the term charitable purpose if it is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess, fee and/or any other consideration. It is not aimed at excluding the genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce or business which are masked as charitable purpose. 12. All these were the objects of the general public utility and would squarely fall under section 2 (15) of the Act. Prof....
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....o section 2(15) of the Act. Thus AO cannot withdraw the claim of exemption by invoking proviso to section 2(15) r w.s. 13(8) of the Act. The corollary is that the appellant cannot be assessed u/s 28 to 44 of the Act. 5.4 Although hon'ble High Court of Gujarat has denied applicability of provisions of proviso to section 2(15) r.w.s. 13(8) to the appellant, the AO needs to be careful while computing the income of the appellant. There are issues with regard to maintenance of accounts and the appellant has treated the various grants received by it. There are issues with regard (a) to claim of accumulation@ 15% u/s 11(1)(a) of the Act; (b) to claim u/s 11(1)(d) of the act; (c) to claim of correct rate of depreciation; (d) to claim of income receipts being reflected in the balance sheet; (e) to claim of application of income from project specific grants, (f) to claim of capital expenses as application of income etc. As certain grounds of appeal pertain to these issues, the relevant discussion in subsequent paras has been made. 5.5 With reference to treatment of specific project grants, Hon'ble High Court of Delhi has held in the case of DIT vs Society for Develo....
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....d not be treated as income of assessee trust. It further held that on the plain reading of sec.12, any voluntary contribution made with a specific direction would not be deemed to be income derived from property held under trust wholly for charitable or religious purpose. In the case of DIT vs Sri Ramakrishna Seva Ashram 18 Taxman.com 37 (Kar.) it was held that donation for specific project shall be treated as corpus donation and the 85% application condition shall not apply. It was held that the word 'corpus' is used in the context of the Act. Therefore, it any voluntary contribution is made with a specific direction, it shall be treated as the capital of the trust for carrying on its charitable or religious activities, then such an income falls u/s.11(1)(d) and is not liable to tax. In many other cases various High Courts have held that any receipt of capital nature cannot be treated as income and hence it was outside the purview of sec 12. 5.6 It would be pertinent here to refer to Accounting Standard (AS) 12 that deals with the accounting for Govt. Grants. According to the clause-4 AS-12 the receipt of Govt. Grants by an enterprise is significant tor preparatio....
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.... of promoters' contribution should be treated as part of shareholders' funds. Income approach may be more appropriate in the case of other grants. 5.5 It is fundamental to the 'income approach' that government grants be recognised in the profit and loss statement on a systematic and rational basis over the periods necessary to match them with the related costs. Income recognition of government grants on a receipts basis is not in accordance with the accrual accounting assumption (see Accounting Standard (AS) 1, Disclosure of Accounting Policies). 5.6 In most cases, the periods over which an enterprise recognises the costs or expenses related to a government grant are readily ascertain able and thus grants in recognition of specific expenses are taken to income in the same period as the relevant expenses. 6. Further para-8 deals with the presentation of grants related to specific fixed assets The rnlnvnnt pnrnr, i.e. pnra 8.1 to 8.3 are reproduced below fui the sake of convenience :- "8. Presentation of Grants Related to Specific Fixed Assets 8.1 Grants related to specific fixed assets are government grants whose primary c....
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....osed in the financial statements. 15. Government grants related to revenue should be recognised on a systematic basis in the profit and loss statement over the periods necessary to match them with the related costs which they are intended to compensate. Such grants should either be shown separately under 'other income' or deducted in reporting the related expense" 8. Thus, it is seen from the AS-12 as quoted above that as per AS-12 the grants received with specific direction especially for specified fixed assets which is applicable to the appellant can be accounted for in two ways in the books of the appellant. Where the grant leads to creation of fixed assets equals the whole or virtually the whole of the cost of the asset, the asset should be shown in the balance sheet at nominal value. Or alternatively govt grants related to depreciable fixed assets may be treated as diverted income which should be recognized in the P & L A/c. on a systematic and rational basis over the useful life of the asset. 9. Based on above referred discussion, the AO is directed to verify and compute the income of appellant as per the following guidelines: (i) A....
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....ceedings it is seen from the Balance Sheet and Income and Expenditure Account of the appellant that certain receipts have been taken by the appellant directly to the Balance Sheet, The AG. Audit had been raising audit objection for treating them as revenue receipts and hence the said receipts have been considered as capital receipts. According to these audit objections for e.g. receipt from 'Betterment Charges' are required to be shown as liabilities in Balance sheet because they should be adjusted against the net amount to be paid by the owners. Similarly as per the Form Q under GTPUD Rules, 1979, 'Development Charges' are required to be shown in the Balance Sheet under the head of 'Capital Receipts'. Audit department also wants the Part Plan Fees, Additional FSI charges etc. to be reflected as 'capital receipts' as per the requirement of Format of Annual Accounts. There are many other issues on which 'Audit' wing had been raising audit objection with regard to classification of receipts. Be as it may, as far as Audit objections are concerned. Here, we are concerned with computation of income under the Income Tax Act. b) It....
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....636, Hon'ble Allahabad High Court in the case of CIT vs Moolchand Sharbati Devi Hospital Trust 190 Taxman 338). (vi) After the calculation of expenses or amount applied for the objects of the appellant, A.O. will allow the accumulation u/s 11(1)(a)of the Act to the extent of 15% of income. If the excess of income over the expenditure is less than 15% of the income, then A.O. shall allow accumulation to the extent of 15% u/s.11(1)(a) of the Act. (For example: If appellant earns Rs. 100 and applies Rs. 90 then only Rs. 10 would be allowed to be accumulated u/s 11(1)(a) of the Act.) (vii) If the appellant has applied more than the income during the year then A.O. is directed to allow carry forward of deficit of that year to be set off against future income of the appellant (Reliance placed on the judgment of Hon'ble Gujarat High Court in the case of CIT vs Sri Plot Swetamber Murtipujak Jain Mandal 211 ITR 293). In that year, the AO shall not allow any accumulation u/s.11(1)(a) of the Act @ 15%. (For example; If appellant earns Rs. 100 and applies Rs. 110 then Rs. 10 would be allowed to be carried forward as deficit and there will be no accumulation u/s.11(1)(....
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....pts from generic grants, project specific grants and operational and recurring income has been discussed at these paras and A.O has been given specific directions for computing the income of appellant. The A.O is directed to verify and recomputed the income accordingly. This ground is allowed subject to these directions. 10.2 Vide ground of appeal Nos.5 & 8, the appellant has raised the issue of denial of expenditure incurred on addition to fixed assets and on capital expenditure by the A.O. At para-9(i), 9(ii) and 9(v) have already given directions to the A.O to allow such expenses subject to certain conditions. If the addition to fixed assets has been made from the project specified grants then that expenditure will not be allowable to the appellant as application of income or if the project expenses have been incurred from the project specific grant, again the similar treatment will follow. If the expenses on addition to fixed assets and on capital expenses have been incurred from the operational income or the generic grants received by the appellant, then only A.O is directed to allow the expenditure on addition to fixed assets and project expenses as application of in....
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....round No.5 is consequential once the activity of the assessee is considered to be charitable in nature for availing benefit of exemption under s.11 of the Act. As regards Ground Nos. 3 & 4 of the Revenue's appeal, the learned AR for the assessee submitted that it is incorrect to say that the CIT(A) has deleted the additions per se but has directed the AO to make suitable verifications and ascertain the issues in the light of facts that may emerge. The learned AR thus submitted that the Revenue ought not to be aggrieved for such observations raised in Ground Nos. 2 & 3 of the Revenue's appeal. In the rejoinder, the learned DR for the Revenue did not offer any comment in rebuttal. 10. We have carefully considered the rival submissions. 10.1 Ground Nos. 1 & 2 concern as to whether the activity of the assessee company is in the nature of 'advancement of any other object of general public utility' and whether the nature of activity is commercial and akin to 'trade, commerce or business' etc. The first issue that the object of the assessee authority is to engage in advancing of objects of public utility is not in dispute. The dispute relates to the second limb i.e. whether such obj....