TaxTMI 
TaxTMI 
2019 (12) TMI 1256
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....393/Ahd/17 -Do- 2013-14 -Do- 28.03.16 143(3) of the Act 2394/Ahd/17 -Do- 2014-15 -Do- 27.12.16 143(3) of the Act 2. As claimed on behalf of the Revenue, the facts are similar and common issues are involved in all assessment years and therefore all six appeals were heard together and disposed of by common order. 3. We shall take Revenue's appeal in ITA No. 2389/Ahd/2017 concerning AY 2009-10 as a lead case for adjudication. ITA No. 2389/Ahd/2017 - AY- 2009-10 4. The substantive grounds of appeal raised by assessee 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 Rajkot 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 th....
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.... withdraw the claim of exemption by invoking proviso to section 2(15) r.w.s. 13(8) of the Act and the corollary is that the assessee cannot be assessed u/s. 28 to 44 of the Act. On these broad observation, the CIT(A) has allowed the exemption u/s. 11 & 12 of the Act. 7.2 Further, on the issue of source of funds such as grants received from the Government and application thereof under the head 'project fund', the CIT(A) held that as per sections 11(1)(a) and 11(1)(d) as well as 12(1) of the Act, the grants given for the specific purpose cannot be considered as income in the form of voluntary donation and are eligible for deduction u/s.11(1)(d) of the Act. If any voluntary contribution is made with a specific direction, it shall be treated as the capital of the trust for carrying on its charitable activities, and then such income is not liable to tax. As per AS-12, where the government grants 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 if grants related to depreciable fixed assets may be treated as diverted income which should be recognized in the P&L account ....
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.... of the proviso to Section 2(15) of the Act shall be applicable so as to deny the exempt/on claimed by the assessee, 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 Assessee as on Urban Development Authority ore required to be considered, so as to appreciate whether the activities of the Assessee 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 Assessee AUDA has been constituted as Urban Development Authority are as under: Section 2(viii): "Development", with all its grammatical variations and cognate expressions, means the carrying out of any building, engineering, mining, or other operations in, or over, or under land or the making of any material change in any building or land or in the use of any building or land, and includes layout and subdivision of any land; Section 2(xxviii):"Urban development authority" means an urban development aut....
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...., to be nominated by that Government, exofficio; (iv) the Presidents of the district panchayatsfunctioning 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 a/so 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 urban development authority as they apply in relation to an area development authority, with the modification that references to an area development authority in the said subsection shall be construed as references to an urban development authority. Section 23: Powers And Function Of Urban Development Authority: (1) [The powers and functions of] an urban develop....
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....thority 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 schema 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 a town planning scheme, whether in the nature of a building work or not. (3) A town planning scheme may make provision for any of the following matters, namely:(a) The laying out or relaying out of land, either vacant or already built upon: (b) The filling up or reclamation of low lying, swampy or unhealthy areas, or levelling up of land; (c) Layout of new streets or roads, constructi....
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....s, 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 made 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 : (1) An appropriate authority shall have and maintain its own fund to which shall be credited(a) All moneys received by the authority by way of grants, loans, 1 [advances, fees, development charges or otherwise;] (b) All moneys derived from its undertakings, projections and other sources; (c) Such amount of contributions from local authorities as the State government may....
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....t 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 IK: 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 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 C....
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.... 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 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 property 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 develop....
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.... 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 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....
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....itable 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 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 carry....
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....n of the petitioner that its activities are not fuelled by profit motive is incorrect. Absence of profit motive, though not conclusive, does indicate that the petitioner is not carrying on any business." 12.7. Identical question came to be considered by (he Delhi High Court in the case of Bureau of India Standard vs. Director General of Income Tax (Exemptions) reported in (2013) 212 Taxrnan 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 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 empowe....
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.... 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 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, econom....
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....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 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 relation to any trade, commerce or business, then it 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 chari....
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....ounts are also subjected to audit and there is no element of profiteering at all, the activities of the assessee 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 assessee 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 assesses is collecting cess or fees which is regulatory in nature, the proviso 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 b....
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.... 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 as advancement of any other object of genera! 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 19th December 2008 explaining the amendment as 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 sec....
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....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. Profit making was neither the aim nor object of the Trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19th ....
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....nt, 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(c) 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. 4.5 With reference to treatment of specific project grants, Hon'ble High Court of Delhi has held in the case of DIT vs Society for Development Alternatives 18 taxman.com 364 that grants with specific directions from the Govt. cannot be treated as income. These grants will have to be spent as per the conditions and purpose laid down by the donor. As per sec,12(1) any voluntary contribution received by a trust/institutions created fully for charitable or religious purpose shall for purposes....
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.... 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, if 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. 46 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 for preparation of the financial statements for two reasons. Firstly, if the Govt. Grant has been received an appropriate method of accounting therefore is necessary. Secondly, it is desirable to give an indication to the extent to which the enterprise has benefitted from such grant during the reporting period. Para-5 of AS-12 deals with the treatment of Gov....
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....atch 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 ascertainable and thus grants in recognition of specific expenses are taken to income in the same period as the relevant expenses. 5. Further para-8 deals with the presentation of grants related to specific fixed assets. The relevant paras i.e. para-8.1 to 8.3 are reproduced below for 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 condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire such assets. Other conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held. 8.2 Two methods of presentation in financial statements of grants (or the appropriate por....
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....he related expense" 7. 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. 8. Based on above referred discussion, the AO is directed to verify and compute the income of appellant as per the following guidelines: (i) Appellant might have shown certain grants which are not projects specific grants or the grants given for generic purpose. The donor allows appellant to apply these funds for any of its objects. If such grants are received by the appellant which does not have any specific direction for the purpose, then it will have to be considered as voluntary donation ....
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....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 TSI 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 is a matter of fact that Appellant has received these funds as per the provisions of GTPUD Act. The GTPUD Act authorizes the appellant to receive funds under various categories such as Development Charges, Betterment charges, Impact fees, Amenities fees, Scrutiny fees, Zoning fees etc. These fees/funds or the sources of receipts have been received by ....
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....ver 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)(a).) In an immediate subsequent year, AO will allow, firstly, the set off of the deficit carried forward from earlier year. Then, AO shall reduce the amount applied during the year. If, after the adjustments of carried forward deficit and application of income, the appellant has any surplus of income over the expenditure then t....
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....at the rate of 15% u/s.11(1)(a) and u/s.11(2). The appellant would be eligible to claim the benefit u/s.11 of the Act. A.O is directed' to allow the accumulations u/s.11(1)(a) and 11(2) of the Act. However, during the appellate proceedings and as per the discussions with the A.R, the appellant has filed the revised computation of income. The A.O is directed to follow the directions given at para-8(i) to para-8(viii) and accordingly allow the quantum of accumulation u/s.11(1)(a) and 11(2) of the Act. The appellant has been claiming the various operational receipts as capital receipts in the balance sheet. However, as mentioned at para-8(iii), I am of the considered opinion that these cannot be the capital receipt but will have to be considered as income from the property held by the trust. The A.O is directed to compute the income and allow the accumulations u/s.11(1)(a) of the Act and u/s.11(2) of the Act accordingly. Subject to these remarks the ground of appeal no.9 is allowed for statistical purpose. 9.4 Vide ground of appeal No.10, the appellant has raised the issue of denial of expenditure incurred on addition to fixed assets and on project expenditure by the A.O.....
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....irst and second provisos to Section 2(15) inserted by Finance Act, 2010 and are effective from 01.04.2009. Prior to insertion of these provisions certain bodies have been treated as 'Charitable' on the ground of advancement of object of general public utility. However, after the insertion of the above provisos, the advancement of any other object of general public utility shall not be a charitable purpose, if it involves carrying on of. a) Any activity in the nature of trade, commerce or business; b) Any activity of rendering any service in relation to any trade, commerce or business; c) For a cases or a fees or any other consideration, irrespective of the nature of use or application of retention of income from such activity. Second proviso provides that provisions of first proviso shall not apply if the aggregated value of receipts from the activities referred to in 1st proviso is Rs. 25,00,000/- or less in the previous year. 10.3 It was contended that in the instant case, assesses is engaged, in urban development and town planning. As per the amended definition, the activity of the advancement of general public utility shall not be charit....
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....ices rendered by it. The beneficiary on payment of the said fee gets certain amenities, regularization of certain infirmities in land/ plan, increase in FSI/additional FSI. NOC certificate for certain other amenities/privileges etc These are receipts from the beneficiaries for the services rendered by the assessee in its capacity as an urban development authority. These receipts are not in the nature of capital, just because it is not recurring in nature. The nature of the receipt cannot be changed just because it is not recurring or just because it is categorized as "capital receipt" by the assessee, in its books. These are receipts which are received by the assessee for the service rendered by the assessee to the general public/beneficiaries. Therefore, the same have to be considered as business income of the assessee. (d) It was also important to note that the plots of land have been acquired by the Assessee at a very nominal price in the name of town planning scheme but have been given lease at a very high premium by means of auction to the highest bidder. The land was given on lease not even at its Jantri rate (stamp value), but at a commercial/ market rate. This virtue ....
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....lves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any consideration, irrespective of the nature of use or application, or retention, of the income from such activity. In this regard, it was submitted that neither the provision of Section 2(15) nor the proviso there to differentiate the Assessee trust as a trust enacted under any Government legislature or gazette or Act. Nor these provisions specify that they will not be applicable to any authority carrying on the activities of development of any industrial area or a town/ city. (h) The object of the proper development or redevelopment of any urban area is of the state government and the choice of either constituting an authority for the development or entrusting it to a third party is of the Government. It was submitted that the object of the urban development is of the State Government. It was submitted that the Authority is only carrying out and executing the state's object, it was submitted that there are many activities in the nature of infrastructure development like roads, power....
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....Authority Vs. CIT, 156 Taxmann 37 (Chd), Hon'le ITAT and has held as under: "No activity can be carried on efficiently, properly unless and until it is carried out on business principle but it does not mean that the provision is misused in any manner under the garb of charity and any institution be allowed to become richer and richer under the garb of charity by making it a non-tax payable organisation. (b) Similarly. Hon'ble 1TAT. Cochin Bench in the case of Greater Cochin Development Authority Vs. Joint Director of IT(E) I.T.A. Nos. 792&793/Coch/2013 has held as under : "In such a situation, we are of the view that no charity is involved and if any institution of public importance like schools, community centers are created/developed, the assessee is charging the cost of it from the public at large and the money is coming from the coffer of the Government. It can be said that objects/acf/w'tfes of the assessee are more of commercialized nature and we do not find any charity in it. At the same time, if these facilities are not provided, then nobody will purchase a plot It can be said that it is a means of attracting the people so that maximum peopl....