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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER Assessment Year :2015-16 M/s. Zilla Nirmiti Kendra Vs. ACIT (Exemptions), Uttara Kannada, Circle – 1, 1st Floor, Uttara Kannada, Mangaluru. Karwar. PAN : AAAAZ 0436 G APPELLANT RESPONDENT Assessee by : Shri. V. Srinivasan, Advocate Revenue by : Shri. Sankar Ganesh K, JCIT(DR)(ITAT), Bengaluru. Date of hearing : 14.02.2022 Date of Pronouncement : 14.02.2022 O R D E R Per N. V. Vasudevan, Vice President :
This is an appeal by the assessee against the order dated 20.03.2018 of CIT(A), Mangaluru, relating to Assessment Year 2015-16.
The assessee is a society constituted by the deed dated 05.09.2009. Its main objectives are to serve as a Seminal Agency to generate and propagate innovative ideas on housing. The assessee was granted registration under section 12AA of the Income Tax Act, 1961 (hereinafter called ‘the Act’). In the return of income filed for Assessment Year 2015-16, the assessee declared Nil income.
The AO examined the question whether the assessee can claim the benefits under section 11 of the Act in the light of the provisions of section 13(8) of the Act which provides that if the proviso to section 2(15) of the Act applies to a case, then the benefits of sections 11 and 12 will not be available to such an assessee. The provisions to section 2(15) of the Act defines what are charitable purpose. The proviso to section 2(15) of the Act lays down that if the objects of society are advancement of any other general public utility and if the nature of the activity carried on by such society is in the nature of trade, commerce or business, then the same will not be regarded as charitable purpose.
The assessee submitted before the AO that the proviso to section 2(15) of the Act has to be applied on a case-to-case basis considering the facts and circumstances of each case. It was contended that the assessee’s activities are performed without any profit motive and that each and every activity is carried on with the motive to inculcate innovative housing techniques and low- cost housing techniques with utmost care by adopting cost effective techniques without compromising the quality of the work or activities undertaken or executed. The assessee submitted that they used recycled wood for doors and frames, exposed laterite, mud plastering, clay tiles etc. during the execution of these works. In this manner the assessee managed to accomplish the project within the allocated funds by saving a small amount to meet its administrative or other establishment charges. As the main object of the Nirmithi Kendra is to inculcate innovative housing techniques and low cost housing techniques while carrying out various activities, hence the assessee claimed that the activities performed are well within the objects of the trust and also incidental to carrying out the main objects. Further, if there is any surplus, the same will be utilized, for other objects of the trust such as conducting training program or providing of public amenities or facilities at the places designated by the governing body.
It was submitted that all the activities undertaken were allotted by either the State Government or by MP/MLA Funds set up by the State Government. The assessee has to perform the activities for the purpose for which they are sanctioned. Further while executing the activities the assessee has to adopt low cost and environment friendly techniques. After completion of the activity a performance report should be sent to the concerned department along with the specification reports. Hence entire work is undertaken under the control of the government department. Therefore the question of carrying on activities in the nature of trade, commerce or business will not arise. Accordingly there is no intention to earn profit by performance of these activities. Therefore taxing the surplus by applying the proviso to Sec 2(15) without appreciating the facts and circumstances will not be correct. Hence the assessee prayed not to tax the surplus as per provisions of section 13(8) r. w. proviso to Sec 2(15).”
The AO however did not accept the plea of the assessee. He examined the objects of the society as per its Memorandum of Association which were: "The Objectives of the Kendra are to :- I. Serve as a Seminal Agency to generate and propagate innovative ideas in housing. 2. A clearing house of information and data hank on housing which would bring the fruits of research from lab to land. a) A training house to impart skills to local workmen in innovative housing techniques and create a cadre of trained workers in all blocks in the district b) A nodal agency to serve as a catalyst in the field of housing ensuring horizontal co-ordination in implementation of housing' programme. c) An agency to arrange for financial assistance for house construction d) A forum to organize exhibitions, seminars, orientation programmes, demonstrations on housing and publish useful date and literature on housing and allied activities e) A Research and Development institution and consultant in the field of housing .......................
The AO was of the view that the activities of the assessee trust are clearly hit by the First proviso to clause (15) of Section 2 for the reasons enumerated hereunder:-
a) The main object of the assessee was assimilation and dissemination of information pertaining to innovative ideas in housing. b) From the above, it can beyond a shadow of doubt be stated that the objects of assessee fall under the limb "advancement of any other object of General Public Utility". c) Thus the 1stProviso to Sec. 2(15) of the I.T. Act as amended w.e.f. 01.04.2009 would be applicable in the case of theassesse. It is an undisputed fact that innovative, environmental friendly housing was for the benefit of all sections of Society and the assessee is not catering solely to the poor and needy. Hence, the objects of assessee cannot be brought under the limb "relief of the poor" u/s 2(15) of the I.T. Act, 1961. d) Now let us analyze the actual work carried out by assessee, during the current year. It can be seen from the details submitted that the following works have been undertaken during the year. (a) Concretization of Roads. (b) Road repairs (c) Building Repairs (d) White Washing & Color Painting (e) Construction of Compound Wall (f) Construction of Commercial Buildings (Schools, Library, Commercial Complex, etc)
All of these activities/ functions are akin to the activities carried out by a private contractor / developer on a commercial basis. e) Further assessee is involved in normal commercial contractual activity is apparent from the fact that the said activities were liable to VAT.During the year an amount of Rs. 68,48,464/- is claimed as an expense on account of VAT Payment. f) However, the main and most crucial aspect is that 100% of the activities carried out by the assesse are not within the OBJECTS as enumerated in its MOA and detailed in Para 6.7 above. On a plain reading of the objects of the Assessee Trust it would be apparent that at no stave does it envisage the assesse trust itself carrying out any construction activity. g) As per the Objects of the Trust/Society, it is required to act as an Seminal Agent. As per the English Dictionary, the word Seminal means "influential", "Formative", "Inspirational", "Creative" or "Ground Breaking". Thus the Objects of the Trust/Society required it to act as an Agency to Promote Formative, Creative, Ground Breaking techniques in "HOUSING CONSTRUCTION". As per its objects, the assesse Trust / Society is only to gather such ideas / information / techniques and in turn disseminate the same to actual constructors. The Assessee Trust / Society was required to act as a "DATA BANK" for such ideas/information/techniques. h) As per the objects of the trust, no commercial activity is authorized to he carried out. i) Further as an agency promoting innovation in housing, the Objects ofthe Assessee Trust/Society required it to undertake the following (a) Run a training house to train workers — Clause 3, (b) Arrangement for financial assistance — Clause 5, (c) Organise Seminars, Exhibitions, Demonstration — Clause 6. As can be seen from the activities carried out by the Assessee Trust/Society, it can be categorically stated that none of these activities have been carried out during the year. j) The assesse has not furnished any evidence in respect of any innovation/ new techniques developed / propagated by it for the construction of residential houses. k) Even the Work Flow clearly shows that it is functioning in the same way as an ordinary business entity engaged in the business of undertaking Government Contracts for construction of roads, nallas etc. The only difference being that the assesse is entitled to 10% of the total work being carried out in a year without getting into the Tendering Process which is normally followed. All the other procedures / steps are followed by every Contractor undertaking Government Contracts.
The AO held that the actual activities carried out by the assessee are in the nature of pure commercial activity carried out by any Contractor. The work/activity carried out by the assessee during the entire year can only be described as carrying out Civil Construction Work. There exist no distinction between the 10% work carried out by the assessee Trust and 90% of the balance work tendered to Civil Contractors by the district authorities. If the assessee's contention of carrying on Charitable Activity on accounting of having built roads, nallas, commercial/School buildings is accepted then every Civil Work Contractor for the Government would be entitled to claim that they are carrying out Charitable activities.
The AO also examined the major receipts of the assessee and found that 94% of income was from civil works undertaken / contract receipts. For all the above reasons, the AO came to conclusion that the assessee is not entitled to the benefits of exemption under section 11 of the Act and brought to tax the profit as per the Profit and Loss A/c.
One of the arguments which was advanced by the assessee before the AO and which was rejected was as follows:
“6.8 One of the arguments put forth by the assessee, is that it is operating without any profit motive. This argument is not supported by facts. It can be seen from the Balance Sheet submitted by the assessee that the assessee trust has accumulated an amount of Rs. 2.45 Crores from the excess of income over expenditure till date. As the assessee Trust has only been established in Oct., 2009, in 5 years an amount of Rs. 2.45 Crores has been accumulated. This fact is also evident from the fact, that the assessee has earned a profit of Rs.17 Crores in the current year on a Turnover of Rs. 13.67 Crores i.e. 8.5%. The income tax norms for a labour contractor also stipulate an estimated income of 8% of total turnover (Sec 44AD). This once again goes to prove that the assesse is carrying out its activity on a commercial basis and is not engaged in any charitable activity.”
Aggrieved by the order of the AO, assessee preferred appeal before CIT(A). The CIT(A) upheld the order of the AO for the following reasons:
“5.5 The AR's only contention is that it receives contracts directly from Government agencies without participating in any tenders and it has no profit motive. The appellant Trust was established in Oct., 2009 and in 5 years' time an amount of Rs. 2.45 Crores has been accumulated. Further, the assessee earned a profit of Rs. 1.17 Crores in the current year on a turnover of Rs.13.67 Crores i.e., 8.5%. All this data goes to prove that the contention of the AR is wrong. The AR before me also not produced an iota of evidence in support of its contention that it worked for attaining any of its objectives including to act as seminal agent. The appellant before me also not furnished any evidence in respect of any innovation / new techniques developed / propagated by it for the construction of residential houses. The AR has not pointed out the amounts spent for attaining its objects. 5.6 The AO listed out the works actually carried out by the appellant which are only in the nature of commercial contract works. I fully agree with the AO's view that if the assessee's contention of carrying on charitable activity on account of having built roads, nallas, commercial buildings is accepted, then every Civil Work Contractor would be entitled to claim that they are carrying out Charitable activities. I have carefully considered the activities performed and objectives of the trust. There is no link between them. Therefore, I am of the considered view that the activities of the trust are clearly hit by the proviso to 2(15) of the Act. There is no reason to interfere with the assessment order. The action of 5he AO is hereby confirmed. The grounds on the issue are rejected.”
Aggrieved by the order of CIT(A), assessee has preferred present appeal before the Tribunal. Before the Tribunal, learned Counsel for the assessee reiterated the plea as was put forth before the Revenue authorities. Learned DR on the other hand brought to our notice the decision of the ITAT Cochin Bench in the case of Nirmithi Kendra Vs. DCIT 174 ITD 177 (Cochin – Tribunal).
The facts of the case which were identical to the facts of the assessee’s case, the Tribunal had to examine claim for exemption under section 11 of the Act. The facts of the case were that the assessee received funds for undertaking construction projects of the State Government and these projects were undertaken by the assessee in a very systematic and organized manner. The nature of activities carried on by the assessee was carrying on 'advancement of any other object of general public utility'. The Tribunal held that when that is the case, the assessee is hit by the proviso to section 2(15). The proviso reads that 'advancement of any other object of general public utility' shall not be a charitable purpose, if its involving carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service relating to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the application of money. Therefore, the case of the assessee is hit by the proviso to section 2(15) and the assessee is not entitled for the benefit of section 11 on the income generated from such activities. The tribunal also held that alternatively, section 11(4A) is to be looked into. Sub-section (4A) provides that exemption shall not be applied in relation to any income of any trust or institution, being profits and gains of business, unless the business is incidental to attaining of the objectives of the assessee or as the case may be, institution, and books of account are maintained by such Trust or institution in respect of such business. The Tribunal found that during the assessment year under consideration, the assessee had undertaken construction activities as well as sale of material to the public out of the funds provided by MPs, MLAs and local bodies and maintained separate accounts for the above business activities. Now the question is whether carrying on of such activities is a business incidental to the advancement of any of the objects of the assessee or not. By any stretch of imagination, it is not possible to hold that the business carried on by the assessee is incidental to the objects mentioned in the Memorandum of Association. On the other hand, it is a pre-dominant activity carried on by the assessee. In other words, 'incidental' is an offshoot of the 'main activities', inherent bye-product of pre-dominant activities. The activities complementing the main activities are not in the nature of incidental to the business. It is incidental if it is supporting the activities to the main activities. The Tribunal held that the activities carried on by the assessee is itself principal activities and not incidental activities. Hence, it is not possible to hold that the construction activities carried out by the assessee is not protected by the provisions of section 11(4A), there is no merit in the argument of the assessee. The Tribunal held that the activities carried on by the assessee were not incidental to the attainment of the objects of the Trust. There is no connection between the activities relating to construction business and the attainment of the objects of the trust. The mere fact that whole or some part of the income from running of the construction business is used for charitable purposes would not render the business itself being considered as incidental to the attainment of the objects. The application of income generated by the business is not relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives. It was contended by the assessee that the surplus funds generated from the construction business was spent towards charitable activities and therefore, the assessee is entitled for exemption under section 11(4). This contention is not acceptable. Initially, the assessee carried on the business itself which is not at all property held under trust. This activity is a business activity and the provisions of section 11(4A) is applicable. The tribunal held that there is no nexus between the activities carried on and the objects of the assessee that can constitute an activity incidental to the attainment of the objects, namely, to promote cause of charity, mission activities, welfare, employment, diffusion of useful knowledge, upliftment and education and to create an awareness of self- reliance among the members of the public etc. Being so, the assessee is not entitled for any exemption under section 11.
We have examined the facts of the assessee’s case and find that the same is identical to the case decided by the ITAT, Cochin Bench. The ratio laid down in the aforesaid case therefore is squarely applicable to the facts of the assessee’s case. Respectfully following the aforesaid decision, we uphold the order of the CIT(A) and find no grounds to interfere in the order of CIT(A).
In the result, appeal by the assessee is dismissed.