MAHARASHTRA HOUSING & AREA DEVELOPMENT AUTHORITY,MUMBAI vs. DDIT (E) 1(1), MUMBAI

Fact in brief is that return of income declaring nil income was filed on 26.09.2011. The case was subject to scrutiny assessment and notice u/s 143(2) and 142(1) was issued. The assessee is a registered charitable organization with DIT(Exemption), Mumbai, u/s 12A and claimed exemption u/s 11 of the Act. During the course of assessment the AO held that the assessee is not a valid trust as per the detailed discussion made in the assessment year 2010-11 and therefore not eligible for exemption u/s 11 of the Act. During the course assessment the A.O also noticed that assessee trust cannot be construed as charitable within the meaning of charitable purpose as defined u/s 2(15) of the I.T. Act as amended w.e.f 01.04.2009. The Assessing Officer was of the view that assessee was engaged in various commercial activities which is in the nature of business, therefore, assessee was issued show cause notice for denial of exemption u/s 11 of the Act on the ground that assessee cannot be construed as a charitable within the meaning of charitable purpose as defined u/s 2(15) of the I.T. Act as amended w.e.f 01.04.2009 and from the return of income filed by the assessee it is seen that the assessee was engaged in various commercial activities which prima facie were in the nature of business. In response, the assessee explained that it provides comfortable housing to the poor economically weaker sections, low income groups and middle income groups and these activities qualified as relief of the poor which were one of the categories of charitable activities described in Sec. 2(15) of the Act and therefore, proviso 2 to Sec. 2(15) does not apply. It is also claimed that assessee was not engaged in business or trade therefore, it was not covered by proviso 2 of 4 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1)

Aggrieved, the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

During the course of appellate proceedings the ld. Counsel at the outset contended that similar issue on identical facts in the case of the assessee itself has been adjudicated by the coordinate bench of the ITAT 5 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1) in favour of the assessee vide dated 04.06.2019 for A.Y.2010-11. On the other hand, the ld. D.R supported the order of the lower authorities.

Heard both the sides and perused the material on record. The assessee (MHADA) Maharashtra Housing & Area Development Authority is a local authority created by the Government of Maharashtra, it was registered u/s 12AA with the DIT(Exemption), Mumbai and claimed exemption u/s 11 of the Act. As per object it was engaged in construing and providing housing to economical weaker sections all over Maharashtra to repair and construct old and dilapidated buildings and other object pertaining to development and rehabilitation of the slum area in the Mumbai city. The Assessing Officer was of the view that it was engaged in providing various commercial/business services as supported by the service tax registration certificate and concluded that MHADA activities were commercial in nature. The assessing officer has not allowed the exemption claimed by the assessee u/s 11 of the Act stating that assessee was not a valid trust, therefore, not eligible for exemption u/s 11 of the Act. The A.O has also stated that assessee trust cannot be construed as charitable within the meaning of charitable purpose as defined u/s 2(15) of the I.T. Act as amended from 01.04.2019 and he also of the view that assessee was engaged in various commercial activities which prima facie were in the nature of business. However, with the assistance of ld. Representative we have gone through the decision of coordinate bench of the ITAT vide dated 04.06.2019 for A.Y.2010-11 wherein on identical issue and similar facts the issue has been decided in favour of the assessee. It is also 6 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1) noticed that the Ld. CIT has passed order on 31.03.2014 and the ITAT has adjudicated this case on 04.06.2009 which indicate that at the time of passing the order by the ld. CIT(A) the issue was not adjudicated by the ITAT. The relevant operating part of this order is reproduced as under: para 41 page (80-105) of ITAT order.

On the issue that MHADA has accumulated huge reserves and has huge surplus as raised by Mr. Dave, who had also filed a chart showing profit margin over the period of time right from the A.Y. 2006-07 to 2010-11, Mr. Dastur pointed out that this surplus are by and large notional, because of the fact that the Income and Expenditure A/c is debited with the historical cost of land which is largely of very low cost and if present day value is taken into consideration MHADA will incur a huge loss. Mr. Dastur submitted a working showing how much fund MHADA will require if it had to replenish land used for thousands of tenements constructed during the relevant year. We find substance in the contention of Mr. Dastur that the surpluses are required and justified in the case of MHADA, because the land has to be replaced/ replenished for carrying out its activities and in fact it was pointed out before us that the surplus generated are not even sufficient to replace the land utilised during the year. Accordingly, no adverse inference can be drawn on the point that the assessee had and reserves in its accounts. Further on a perusal of the find that the working of surplus given 7 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1)

Another very important decision which explains the scope of newly inserted proviso to section 2(15) is that of Hon’ble Delhi High Court in the case of India Trade Promotion organization Vs. DGIT(E) (supra), wherein in this case, the Hon'ble High Court had referred to entire background of insertion of the proviso to Finance Bill; debate in the Parliament and reply of Finance Minister; the judicial pronouncements on the point; and after considering the entire gamut of judicial precedents and legal implications, their Lordships have observed and held as under: - 53. From the said decision, it is apparent that merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. It is also important to note that we must examine as to what is the prominant activity of the institution in question. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. It is clear from the facts of the present case that the driving force is nor the desire to earn profits but, the object of promoting trade and commerce not for itself but for the nation both within India and outside India. Clearly, this is a charitable purpose, which has as its motive the advancement of an object of general public utility to which the exception carved out in the first proviso to Section 2(15) of the said Act would not apply. We say so, because, if a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 the equality clause enshrined in Article 14 of the Constitution) it is well settled that the courts should always endeavour to uphold the Constitutional validity of o provision and, in doing so, the provision in question may have to he read down, as pointed out above, in Arun Kumar (supra).

It would be pertinent to reiterate that Section 2(15) is only a definition clause. Section 2 begins with the words, in this Act, unless the context otherwise required. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression "charitable purpose", as defined in Section 2(15) of the said Act, is read m the context of Section 10(23C)(iv) of the staid Act, we would have to give up the strict arid literal interpretation sought to be given to the expression "charitable purpose"

It would be appropriate to also examine the observations of another Division Bench of this court in G.S. 1 (supra). While considering Circular No. 27 of 2008 issued by the CBDT to which a reference has been made earlier in this judgment, the Division Bench held that it was evident from the said circular that the new. proviso to Section 2(15) of the said Act was ''applicable to assesses, u/ho are engaged in commercial activities, i.e. carrying on business, trade or commerce, in the garb of 'public utilities' to avoid tax to ability as it was noticed that the object 'general utility' was sometimes used as a mask or device to hide the true purpose which was trade, commerce or business. From this, it is evident that the introduction of the proviso to Section 2(15) by virtue of finance Act, 2008 was directed to prevent the unholy practice of trade, commerce and business entities from masking their activities and portraying them in the garb of an nativity with the object of a public utility. It was not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts and were charity institutions. The attempt was to remove the masks from the entities, which were purely trade, commerce or business entities and to expose their true identities. The object was not to hurt genuine charitable organizations. And. this way also the assurance given by the Finance Minister while introducing the finance Bill 2008. In G.S.I (supra) it was contended by the revenue that GSI (India had acquired intellectual property rights from GSI (Belgium/ and thereafter received registration fees from third parties in India. This was sought to be equated to royalty payments. It was also contended that GSI (India) had huge surpluses of receipts over expenditure and that payments were made to GS1 (Belgium), According to the revenue, all this entailed that GSI (India) was engaged in business, trade or commerce. The petitioner herein refuted this. In this backdrop, this court asked the question - can it be said that the petitioners engaged m activities which constitute business, commerce or trade? While answering the said question, the court held as under:- “21 ……. As observed above, legal terms, trade commercial 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 anti- thesis of activity undertaken with, profit motive or activity undertaken on sound or recognized business principles, Charity 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 and receiving nothing the 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 should be to serve and benefit others. A small contribution by way of fee that the beneficiary pays would not concert charitable activity into business, commerce or trade m the absence of contrary evidence Quantum of fee charged, economic status of the beneficiaries who pay, commercial value of benefits the comparison to the fee, purpose and object behind the fee etc are several factors which will decide the seminal question, is it business?"

Ultimately, in the context of the factual matrix of that case, this court held that "charging a nominal fee to use the coding system and to avail the advantages arid benefits therein is neither reflective of the business aptitude nor indicative of the profit oriented intent". The court further observed:- "Thus the contention of the revenue that the petitioner charges fee and, therefore, is carrying on business, hits to be rejected. The intention behind the entire activity is philanthropic and not to recoup or reimburse in monetary terms what is given to the beneficiaries. Element of give and take is missing but decisive element of bequeathing is present. In the absence of profit motive and charity being the primary and sole purpose behind the activities of the petitioner is perspicuously discernible and 'perceptible. The court also held:- "27 As absented above, fee charged arid quantum of income earned can be indicative of 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 the residuary clause general public utility. The Impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, substantially or in part must be funded by voluntary contributions. No such requirement has been painted out or argued, A practical and pragmatic view is required when we examine the data, which should be analyzed objectively and a narrow and coloured view will be counter-productive and contrary to the language of Section 2(15) of the Act."

In conclusion, we may say that the expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso be at risk of running fowl of the principle of equality enshrined 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 Section 2(15) of the said Act would be that it carves out an exception 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 bath 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 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 rotation 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 public utility, it cannot but be regarded as an institution established for charitable purposes.” 44. The aforesaid decision clearly clinches the entire issue not only o the nature and scope of definition of 'charitable purposes" in section 2(15) but also 10 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1) the scope of restriction provided in proviso to section 2(15). If the principle said down by Hon’ble High Court is applied here in this case, then ostensibly under the facts and circumstances of the case the assessee as discussed above, would not only be held as an institution carrying out 'charitable purposes but its activities clearly are beyond the scope of restrictive provisions of the proviso. The most crucial test and the findings which needs to be seen specifically if the proviso to section 2(15) is to be applied in the cases like assessee is to see, whether their activities can be reckoned as m die nature of trade, commerce and business. Some of the tests of applicability of proviso in cases like that of assessee which are statutory bodies providing housing needs to the needy and poor people can be short listed in following manner: (i) Is the Institution supported/promoted by the state? (ii) Is it constituted under an Act of the Legislature? (iii) Has the Institution been incorporated for implementing principles enunciated in the Constitution of India ? (iv) Are the activities of the institution closely regulated and controlled by the state? : II (iv) Has the institution been conferred with powers which a businessman would never enjoy, say, eviction of a tenants or closure of roads etc.? (v) Is the institution required to carry but activities like repairs to building, demolition of dangerous structures etc, which would not be the duties of a businessman carrying on building activities? ; (vii) Does the institution look after the elementary needs of a citizen by providing basic housing? (viii) Does the state subsidize the activities of the Institution? (ix) Is the Institution managed by Government servants or private businessmen? (x) Is there a restriction placed on who can purchase the properties? That is, income criteria has to be met applicant or his family member should not already be in possession of a housing unit? (xi) Are the prices at which the Institution is to sell its properties closely regulated and monitored? (xii) Does the Institution sell properties at below the market price? If it sells the property at below the market price, is it substantially below the market price? (xiii) In implementation of its objects and purpose does the Institution sell its properties at a low price and consciously and deliberately forgoes the profit which it could easily have made. (xiv) Does the Institution stick to its resolve to sell properties at pre-determined rates even though the demand supply position for housing is such that it could have sold the properties at a much higher rate?

We have by and large made our sincere endeavor to address the rival contentions and objections raised by the revenue's ld. counsel as well as the Id. counsel for the assessee on merits before us, Now, we would like to deal upon the various judgments which have been relied on by Mr. Dave, the Ld. Special Counsel for the revenue during the course of hearing to demonstrate that the ratio and the principle laid down on various decisions as relied upon by the id. Counsel of the assessee arc not applicable in the cage of the assesses or will not have any impact on our conclusion arrived by us. The brief discussions of these judgments are dealt herewith:- (a) On the issue of MHADA's unique status qualifying it to be regarded as a charitable organisation de hors the definition in S.2(15), Ld. Special Counsel has placed reliance on various other case laws viz. SMN Chettiar Vs. CIT (AIR 1966 Mad 103], The Trustees of the Tribune (66 SCC 241), Som Prakash Reki (1 SCC 449), Rajasthan State Electricity (AIR 1967 SC 1857) and Pradeep Kumar Biswas (5 SCC 111) and Arnold Rodricks (AIR 1966 SC 1788). In our view these decisions have no bearing on the issue that arises on the facts of the present case. Insofar as the decision in the case of Apar Pvt. Ltd. & Anr. Vs. UOI (1986) 1 Bom CR 196 (FB) is concerned, we agree with the submission of Mr. Dastur that the decision is wholly distinguishable on facts inasmuch as in that case the Revenue contention was to read down a legislatively widened definition of the word India to include territorial waters, this argument was rejected by the Hon’ble High Court; which is not the submission before us. Insofar as the decision in the case of Chamber of Commerce (4 ITR 397) is concerned we are unable to accept the submission of the Ld. Sp. Counsel that the High Court's findings should read as holding that the definition of the words "charitable purpose" is to be read strictly/narrowly as contended. (b) On the issue whether MHADA's activities whether relief to the poor, Ld. Special Counsel has placed reliance on the decision in the case of Ketan Tirodkar vs. Office of the Hon’ble Chief Minister of Maharashtra, to submit that the reserved quotas are not subjected to income criteria. We have perused the judgment of the Hon’ble High Court and find that the allegations are against the State Government, for allegedly inappropriately utilizing the government 12 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1)

Finallly, we find considerable force in the submission of Mr. Dastur that the decision of the Hon'ble High Court in MHADA’s own case in of 2013 dated April 18, 2016 is of vital importance. Having perused the questions raised before the Hon’ble High Court and in that light considering the observations of the Hon’ble High Court particularly contained in para 6 we find that the observation of the Handle High Court quite support the conclusion arrived by us hereinabove. We are unable to agree with the proposition of Mr. Dave that the decision of the Hon’ble High Court should not be taken into consideration merely because it was concerned with the issue of cancellation of registration. The findings of the Hon’ble High Court contained in para 6 of its judgment are on the manner and nature in which activities are conducted by MHADA, which aspect is absolutely relevant for deciding the issue at hand.

We have endeavored to deal with most of the decisions relied upon by the Ld. Special Counsel for the revenue which in our opinion required specific mentioning, However, if there are any decisions which have not been referred to by us here in this order, it is only for the reason that we do not find those decisions to have any material relevance to the issue before us.

In view of our aforesaid finding, we do not deem it fit to enter into the semantics of other arguments as raised by the Ld. Sr. Counsel like assessee being a unique organization therefore, it is to be treated as existing for charitable purpose; or on the issue that it is existing for giving relief to the poor". Our finding is mostly confined to Proviso to section 2(15), that is, the assessee is not covered by the restriction as envisaged therein and its activities fall within advancement of objects of general public utility, hence existing for “charitable purposes”.

Further, the issues raised in ground no. 3 will become purely academic in view of our finding given above that the assessee is entitled for benefit u/s. 11 and accordingly, its income and expenditure have to be computed of section 11 to section 13.

With these observations the assessee’s appeal is treated as allowed.

Before parting, it would be pertinent to state reasons for delay in passing of the order. Here in this case, effective hearing by this constitution took place from 11th May, 2015 and thereafter marathon arguments from both the sides took place which spilled over more than 50 hearings as per the record, including the dates of effective hearings followed by detail written submissions, which were as follows: - 11th May 2015, 14th May 2015, 1st June 2015, 2nd June 2015, 1st September 2015, 8th September 2015, 8th October 201, 14th October 2015, 26th November 2015, 30th November 2015, 21st December 2015, 22nd December 2015, 5th January 2016, 6th January 2016, 3rd February 2016, 8th February 2016, 9th February 2016, 17 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1)

The hearing was thus finally concluded on 1.8.2016. Thereafter, draft order was proposed on which there was discussion on several issues amongst us. However, after discussion it had transpired that certain clarification was required from the side of the appellant's counsel, specifically with regard to price mechanism and sale price of the units determined by the appellant MHADA for the sale price of the unit i.e. LIG, MIG and HIG; and secondly, the status of claim made u/s 11 and 12 for the assessment year 2009-10. Thereafter, the case was re-fixed for limited clarification on these two points from the appellant's counsel and accordingly, the case was refixed for hearing on 15.03.2017 in order to give opportunity to the department also, even though on this point detail counter from side of revenue was made before us. The matter was then again adjourned. Thereafter, a letter dated 4th April, 2017 was filed by CIT (Exemption) stating that the Special Counsel representing the case of the Department. Shri Girish Dave had returned his brief and the case file to the department, and therefore, the point on which clarification has been sought by bench may kindly be communicated so that same can be also provided to the A.O for his response. Thereafter, the query letter was sent through registry to the CIT (Exemption) and to appellant vide letter dated 9.5.2017. The matter was posted for hearing once again on 11.05.2017. On that date also, adjournment was sought on behalf of the department. In the meantime, the appellant's counsel has submitted his reply dated 7th June, 2017 which has been taken into consideration by us in our order, which is reproduced here under: "At the outset we wish to apologies for the delay in responding to the queries/ clarifications sought by the Hon'ble Bench. We wish to submit that the concerned Counsels appointed in the matter were not available during the month of May due to court vacations and hence there has been a delay in filing, the response. With reference to the queries raised our point wise responses are as under: Query I: “The Authorized Representative to clarify whether the sale price of the units is computed for the whole project in one go or phase units with reference to Pages to Annexure 3 (Sale price Booklet)” Appellants Response: The Appellant wishes to submit that the sale price of the units are computed phase wise. This is established by Page, 30 of the Sale Price Booklet. In addition to the aforementioned the Letter dated 29 November, 2011 filed by the ld. Departmental Representative pertaining to grant of Environment Clearance for the Proposed Mass Housing Project ("MHP III”) for redevelopment with EWS type tenements at Survey No. 563 of village Malvani Malad (W) also evidences the fact that the sale price is computed phase wise. Query 2: “Authorized Representative is requested to state the status of the claim made u/s. 11 & 12 for A.Y. 2009-10. Appellants Response:

Thereafter, the date of hearing was fixed from time to time (as per record) and on each time on behalf of the department either adjournment was sought for or none appeared on behalf of the department. Since, we had heard the parties at length which lasted for several hearing as per details incorporated above and detailed draft order was prepared which but for the above clarification, was agreed upon, therefore, we did not deem fit to release the matter again for fresh hearing as it would have caused great hardship to the parties after great effort was put from both the sides and also there was no such request by any party to release the matter. Finally, the case was heard on 26th October, 2018. Thereafter, final draft order was proposed for pronouncement, but, as one of us (Judicial Member), is posted in Delhi, therefore, pronouncement of the order could not be made within 90 days. Further, since the appeal for the AY 2011-12 (ITA 5071/M/14) was also clubbed together, on which we had not heard any arguments from the parties, though it was stated that issues involved were similar, therefore, it was thought fit to re-fix the matters for passing necessary 19 Maharashtra Housing & Area Development Authority Vs. Dy. DIT (Exemption)-1(1) orders delinking the appeal for AY 2011-12 (ITA 5071/M/14) from the captioned appeal and pronounce the order in the appeal heard by us. Hence, the matter was posted today for this limited purpose, after intimating to the parties. Thus, the delay in pronouncing the order was only due to the aforesaid reasons.” Respectfully, following the decision of ITAT as supra the grounds of appeal of the assessee are allowed.

In the result, the appeal of the assessee is partly allowed.