CENTRE FOR E-GOVERNANCE ,BANGALORE vs. DCIT, EXEMPTION, CIRCLE-1 , BANGALORE

6.1 It was explained that the Government appointed the Chief Secretary as the head and Secretary of all government departments concerned. Since the Government itself cannot undertake implementation work directly, a separate organization was required. This resulted in the formation of a centre for e-Governance under the Societies Registration Act. The centre was intended to act as an implementing agency for e-Governance, knee-cap projects and other Government projects.

6.2 The assessee further submitted that the interest earned on fixed deposits was also subject to Government directions. As per the order of the Government of Karnataka, the interest portion was required to be utilized only for the purpose of the Government projects. The interest amount could not be used for any other activity, nor could it be transferred elsewhere. Since the grants allocated for the projects were reduced by the Government, the interest portion was mandated to be .

Page 4 of 30 used only for the advancement of such projects. Therefore, the assessee contended that the interest income was directly linked with the charitable objects of the society, which involved advancement of general public utility within the meaning of section 2(15) of the Act.

7.1 The AO held that tender processing fees amounting to ₹36,13,89,940/- (net amount shown at Rs. 15,08,03,638/- after deducting share of private partner for Rs. 21,05,86,302/-) formed the major revenue from e-procurement collections. Further, many services for which the assessee charged fees, were related to activities that are commercial in nature and linked to business operations of suppliers and private bidders. These services are not limited only to Government departments but also extended to private institutions, boards, corporations and other separate legal entities. Therefore, the AO concluded that the assessee is rendering services that are inherently .

Page 5 of 30 commercial and fall squarely within the mischief of the proviso to section 2(15) of the Act. 7.2 The AO examined the nature of activities undertaken and noted that the assessee incurred expenses on salaries, consultancy, digital certificates, communication and accounting charges. These are administrative and operational expenditures which, in isolation, cannot constitute charitable activities. Even though the assessee described itself as a nodal agency for e-governance, the AO viewed the real nature of receipts as business-linked fees charged for providing an electronic platform to bidders and suppliers. Since the receipts were linked to trade, commerce and business for a fee, the AO held that the activities cannot be treated as “advancement of any other object of general public utility”.

7.3 Referring to the proviso to section 2(15) of the Act, the AO stated that any activity rendered in relation to trade, commerce or business for a fee or consideration, irrespective of the nature or application of income, shall not be considered charitable unless the two statutory conditions are satisfied. The AO emphasised that the assessee’s receipts from such commercial activities far exceeded the permissible threshold of 20% of total receipts. The aggregate receipts from commercial activities, including EMD and e-procurement receipts, amounted to ₹31,96,26,45,102/- and represented around 70% of the total receipts of the assessee. Even when only the Income & Expenditure Account is considered, the commercial receipts (tender process fee of ₹36,13,89,940/-) constituted more than 30% of total income of ₹ 116,20,04,892/- only. Hence, the assessee failed to comply the .

Page 6 of 30 monetary threshold under the second limb of the proviso to section 2(15) of the Act. 7.4 Consequently, the AO held that the assessee’s activities squarely fall within the proviso, and therefore the assessee is not eligible for exemption under section 11 or section 12 of the Act. The AO further invoked section 13(8) of the Act, which provides that once the proviso to section 2(15) is attracted, the exemption under sections 11 and 12 of the Act automatically stands denied for that year.

7.5 The AO also examined the assessee’s claim of accumulation of income under section 11(2) of the Act. The AO held that the purpose mentioned in Form No. 10—“For application for e-governance purposes”—was vague, general in nature and lacked the specificity required under section 11(2) of the Act. The AO found that the assessee routinely accumulated funds in a mechanical manner without earmarking them for a specific project involving heavy outlay, and without demonstrating concrete objectives for such accumulation. The AO observed that the accumulated funds had been kept in bank accounts and fixed deposits and were not earmarked for any definite purpose, defeating the legislative intent of section 11(2) of the Act. On this reasoning, the AO held that both the accumulations under section 11(1)(a) and under section 11(2) amounting to ₹20,39,64,223/- and ₹1,16,20,04,892/- respectively were liable to be disallowed.

7.6 The AO also referred to judicial precedents including the rulings of the Hon’ble Calcutta High Court in Trustees of Singhania Charitable Trust reported in 199 ITR 819 and Hon’ble Madras High Court in M.C. Muthiah .

Page 7 of 30 Chettiar Family Trust reported in 245 ITR 400 to emphasise that the purpose of accumulation must be specific and cannot be general or routine. Since, the assessee failed to specify a clear purpose and merely stated broad objects of e-governance, the AO concluded that the assessee does not satisfy the conditions of section 11(2) of the Act.

7.7 Based on the above findings, the AO held that the exemption claimed under sections 11 and 12 of the Act is not allowable. The AO computed income by applying the normal provisions of the Income-tax Act after allowing revenue expenditure of ₹17,04,58,643/- only. Thus, the AO assessed the income of the assessee at ₹1,19,55,10,472/- only. The aggrieved assessee preferred an appeal before the learned CIT(A).

Page 8 of 30 collection of Earnest Money Deposits (EMD) are all functions carried out only for Government departments. The EMD amounts are kept in fixed deposits only till the process of selection of suitable suppliers is completed, after which the amounts are promptly returned to the bidders without interest. Any unselected bidders also receive their EMD back. Therefore, no part of the tender process is commercial, nor does it involve profit-making.

9.1 The assessee emphasized that the employees working with the society are deputed from various Government departments and their salaries are financed entirely by the State Government. In case of any shortfall in funds for meeting expenditure, the same is also met by the State Government. Thus, the society has no independent commercial motive and is merely acting as an arm of the Government. The assessee further argued that any surplus arising in the form of interest, grants or application fees is earmarked for specific Government projects. To ensure this, Form No. 10 is regularly filed to allocate funds to particular projects as per Government directions.

9.2 The assessee strongly contended that the AO ignored these vital aspects and wrongly treated the entire operation of the society as a commercial business activity. The assessee relied on the law laid down by the Hon’ble Supreme Court in the case of ACIT(E) vs. Ahmedabad Urban Development Authority reported in [2022] 143 taxmann.com 278. In that case, the Hon’ble Apex Court, while interpreting the proviso to section 2(15) of the Act, clarified that only those entities whose purpose is “advancement of any other object of general public utility” will be .

Page 9 of 30 subject to the commercial activity test. According to the assessee, the State Government’s circulars dated 27.03.2009 and 19.12.2008 clearly state that the proviso applies only when the entity is carrying out activities in the nature of trade, commerce or business. Whether an entity is engaged in commercial activity is a mixed question of fact and law, depending on the nature, scope, extent and frequency of its activities.

9.3 The assessee argued that in its case, all activities—such as calling for tenders, processing bids, collecting EMDs, and coordinating with suppliers—are entirely linked to Government functions and are carried out exclusively for Government departments. No private entity is permitted to carry out these functions. The assessee does not compete in the market, nor does it provide tender-related services to any private organisation for profit. The Society’s role is simply to act as a nodal agency on behalf of the Government of Karnataka. Therefore, it is neither a commercial activity nor an activity that can be equated with trade or business.

9.4 It was also argued that the AO failed to appreciate that the Government alone is entitled to conduct tender-related work. The Government, for administrative efficiency, transferred this responsibility to the assessee-Society. This arrangement does not alter the character of the activity, which remains a sovereign and governmental function. The assessee emphasised that a monopoly has been granted by the State to perform these duties, and therefore the receipts cannot be treated as business income or commercial fees. The assessee also relied .

Page 10 of 30 upon paragraphs 176 and 177 of the judgment in ACIT(E) v. Ahmedabad Urban Development Authority (supra), wherein the Hon’ble Supreme Court clarified that revenue earned in connection with statutory or Governmental functions cannot be considered commercial simply because some fee or charge is collected.

9.5 In conclusion, the assessee submitted that the AO was not justified in applying the proviso to section 2(15) of the Act or denying exemption under sections 11 and 12 of the Act. The assessee requested that the learned CIT(A) should recognize that the society exists solely for Governmental purposes, that all receipts are tied to official functions, and that any surplus is mandatorily earmarked for Government projects. Therefore, the assessee pleaded that exemption under the Act must be allowed in full.

Page 11 of 30 claim of the appellant is without merits as the legal question has already been settled by the decision of Hon'ble Supreme Court of India in the case of Commissioner of Income-Tax Andhra Vs. Andhra Pradesh State Road Transport [1986 AIR 1054, 1986 SCR (1) 570] dated 7 March, 1986 wherein the identical issue has been comprehensively deliberated and settled by Hon'ble Apex Court. The Hon'ble Supreme Court, in the case of Andhra Pradesh State Road Transport Corporation, had held that the income derived by Andhra Pradesh State Road Transport Corporation (constituted by a notification issued by the Andhra Pradesh Government) from its activities could not be said to be income of State of Andhra Pradesh, as the corporation had a "Separate Personality" of its own. The trading activities and the profits and loss arising therefrom are that of the corporation. Even if it is required to hand over its surplus to the state, it does not become state within meaning of Article 289 of the Constitution of India. The relevant portion of the decision of Hon'ble Apex Court is produced as under: *********************************************** 6.12 The Hon'ble Apex Court was again confronted with this issue in the case of Adityapur Industrial Area Development Vs. Union Of India & Ors [AIR 2006 SUPREME COURT 2375, 2006(5)] dated 03 May, 2006. Adityapur Industrial Area Development Authority was a body corporate, constituted under the Bihar Industrial Areas Development Authority Act, 1974, to provide for planned development of industrial area and promotion of industries. It had perpetual succession, a common seal, power to acquire, hold and dispose off properties, to contract, to sue or be sued and maintained its own fund. When specific exemption to such authorities under the Income-tax Act, 1961, was withdrawn, it sought relief under Article 289. The Hon'ble Supreme Court denied recourse to Article 289 as due to its enacting statue, it has a legal personality distinct from the state and its income is its own. The Hon'ble Apex Court further observed that the fact that authority in this case may not be strictly transacting trade and business or upon dissolution its assets, funds and liabilities would devolve upon the state government would make no difference. 6.1.3. Thus, the appellant in the present appeal has wrongly claimed to be the State, and thus, cannot claim immunity from taxation under Article 289 of The Constitution of India. The existence of deep pervasive state control may give an indication it is an extended limb of the government, a state agency or an instrumentality of the state government but it cannot be equated with the State. Accordingly, based on the above, it has to be stated that recourse to Article 289 of The Constitution of India is not available to such entities. As these entities fall within the definition of "person" under the Act, and they can claim exemption from taxation only if there is a special provision to that effect in the Act itself. Therefore, in view of above discussions, the additional ground of appeal is dismissed as not maintainable.

10.1 Thereafter, the learned CIT(A) also dismissed the assessee’s ground of appeal on merits by observing as under: 6.2.1.4 On examination of the records and the Assessment Order it is observed that the total receipts of the appellant included elements such as i. Tender processing fees .

Page 12 of 30 ii. E-auction Fee iii. Supplier registration fees iv. Supplier registration renewal fee v. Catalogue PO fees vi. Contract Management fees vii. Security fee from private institution and viii. Transaction fee from private institutions

Whereas the expenditure side largely include charges such as 1. salaries 2. consultancy 3. digital certificate 4. communication and accounting charges 6.2.1.6 The nature and kind of all these receipts and expenses clearly shows that in normal course they cannot be termed as constituting charitable activity as it purely constitutes carrying on an activity of business and/or carrying on an activity of rendering any service in relation to trade, commerce or business. Further, as per the Receipts and Payments Account, the total receipts of the appellant for the year under consideration was at Rs. 54,91,17,93,439/- out of which the EMD received and E-Procurement receipts is Rs.31,96,26,45,102/-, and thus, the percentage of these receipts to the total receipts works out to 70% which is greater than the threshold prescribed i.e. 20%. Even if the Income as per the Income & Expenditure Account were to be considered, the total income from E-Procurement Collections is Rs. 36,13,89,940/- and the total income is Rs.1,16,20,04,892/- and the percentage of receipts from commercial activities works out to 30% which is greater than the 20% of the threshold prescribed. During, the present appellate proceedings the appellant has not furnished any documentary evidence that can prove otherwise, therefore the Assessing Officer was justified to Assess the income of the Appellant under the provisions of under Section 13 (8) of Act, and therefore, the Ground No-1 of the Appeal is hereby dismissed. 6.2.2. Vide Ground No-2 of the appeal the appellant claimed that Assessing Officer has erred, in law and in facts, by not allowing deduction under section 11 in respect of Capital Expenditure incurred, Income accumulated or set apart for e-Governance project under section 11(1)(2) and deduction under section 11(1)(a) for accumulation of 15 percentage of Gross Revenue as per provisions of the Act. Ground No-3 and Ground No-4 are complementary to the Ground No-2 wherein, Vide Ground No-3 the appellant has disputed that Assessing Officer was wrong to consider the activity of the Appellant Society is in the nature of business activity as the Appellant charges tender processing fee, supply registration fee, renewal fee and Vide Ground No-4 the Appellant claimed that Assessing Officer was wrong to consider the activity of Appellant Society is in the nature of trade, commerce or business as the Appellant collects penalties and recoveries from the defaulted suppliers. 6.2.2.1 These grounds of the appeal raised and the submissions made by the appellant were duly considered vis-à-vis the facts of the case involved. Since .

Page 13 of 30 the functions of the Appellant i.e. e-governance are very specific in nature and the receipts such as i. Tender processing fees ii. E-auction Fee iii. Supplier registration fees iv. Supplier registration renewal fee v. Catalogue PO fees vi. Contract Management fees vii. Security fee from private institution and viii. Transaction fee from private institutions are definitely in the nature of business activity. In this regard, provisions of section 2(15) of the Act are considered along-with landmark judgment of Hon’ble Supreme Court of India in case of ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) VERSUS AHMEDABAD URBAN DEVELOPMENT AUTHORITY and others in CIVIL APPEAL NO. 21762 OF 2017. In the judgment of Ahmedabad Urban Development Authority, the Hon’ble SC has decided a batch of appeals related to: A. Authorities, corporations, or bodies established by statute B. Statutory regulators C. Trade promotion bodies D. Non-statutory bodies E. Sports associations F. Private Trusts.

6.2.2.2 Analysis and reasoning by Hon’ble SC in the case of Ahmedabad Urban Development Authority on the issue under consideration is highlighted in the following part of the judgment rendered by the Apex Court. ********************************************** 6.2.2.3 The Hon’ble Supreme Court, in the judgment rendered in case of Ahmedabad Urban Development Authority, had further examined various kinds of activities to determine whether they are charitable in nature and relatable to trusts or societies with general public utility objectives. The Hon’ble Court then recorded its findings, regarding the true interpretation of “charitable objects” under Section 2(15) and summarized the findings. The findings w.r.t. statutory authorities/corporations are as follows: (i) The fact that bodies which carry on statutory functions whose income was eligible to be considered for exemption under Section 10(20A) ceased to enjoy that benefit after deletion of that provision w.e.f. 01.04.2003, does not ipso facto preclude their claim for consideration for benefit as GPU category charities, under Section 11 read with Section 2(15) of the Act. (ii) Statutory Corporations, Boards, Authorities, Commissions, etc. (by whatsoever names called) in the housing development, town planning, industrial development sectors are involved in the advancement of objects of general public utility, therefore are entitled to be considered as charities in the GPU categories. (iii) Such statutory corporations, boards, trusts authorities, etc. may be involved in promoting public objects and also in the course of their pursuing their objects, involved or engaged in activities in the nature of trade, commerce or business. (iv) The determinative tests to consider when determining whether such statutory bodies, boards, authorities, corporations, autonomous or self-governing government sponsored bodies, are GPU category charities:

Page 15 of 30 of such receipts are within the prescribed limit (20% as mandated by the second proviso to Section 2(15)) – the concerned statutory or government organisations can be characterized as GPU charities. It goes without saying that the other conditions imposed by the seventh proviso to Section 10(23C) and by Section 11 have to necessarily be fulfilled. (v) As a consequence, it is necessary in each case, having regard to the first proviso and seventeenth proviso (the latter introduced in 2012, with retrospective effect from 1-4-2009) to section 10(23C), that the authority considering granting exemption, takes into account the objects of the enactment or instrument concerned, its underlying policy, and the nature of the functions, and activities, of the entity claiming to be a GPU charity. If in the course of its functioning it collects fees, or any consideration that merely cover its expenditure (including administrative and other costs plus a small proportion for provision) - such amounts are not consideration towards trade, commerce or business, or service in relation thereto. However, amounts which are significantly higher than recovery of costs, have to be treated as receipts from trade, commerce or business. It is for those amounts, that the quantitative limit in proviso (ii) to section 2(15) applies, and for which separate books of account will have to be maintained under other provisions of the IT Act. [Para 190] A. General test under section 2(15) A.1 It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”); A.2 However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected (“actual carrying out…” inserted with effect from 1- 4-2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, of 20 per cent of total receipts of the precious year; A.3 Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment. A.4 Section 11(4A) must be interpreted harmoniously with section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, .

Page 16 of 30 profit or surplus or gains must, therefore, be incidental. The requirement in section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to section 2(15), has not been breached. Similarly, the insertion of section 13(8), seventeenth proviso to section 10(23C) and third proviso to section 143(3) (all with retrospective effect from 1-4-2009), reaffirm this interpretation and bring uniformity across the statutory provisions. B. Authorities, corporations, or bodies established by statute B.1 The amounts or any money whatsoever charged by a statutory corporation, board or any other body set-up by the state government or central governments, for achieving what are essentially ‘public functions/services’ (such as housing, industrial development, supply of water, sewage management, supply of food grain, development and town planning, etc.) may resemble trade, commercial, or business activities. However, since their objects are essential for advancement of public purposes/functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of business or commercial receipts. This is in line with the larger bench judgments of this court in Shri Ramtanu Co-operative Housing Society Ltd. v. State of Maharashtra [1970] 3 SCC 323 and New Delhi Municipal Council v. State of Punjab [1977] 7 SCC 399 (supra). B.2 However, at the same time, in every case, the Assessing Officer would have to apply their minds and scrutinize the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up. If such is the case, then the receipts would indicate that the activities are in fact in the nature of “trade, commerce or business” and as a result, would have to comply with the quantified limit (as amended from time-to-time) in the proviso to section 2(15). B.3 In clause (b) of section 10(46) “commercial” has the same meaning as “trade, commerce, business” in section 2(15). Therefore, sums charged by such notified body, authority, Board, Trust or Commission (by whatever name called) will require similar consideration - i.e., whether it is at cost with a nominal mark-up or significantly higher, to determine if it falls within the mischief of “commercial activity”. However, in the case of such notified bodies, there is no quantified limit in section 10(46). Therefore, the Central Government would have to decide on a case-by-case basis whether and to what extent, exemption can be awarded to bodies that are notified under section 10(46). B.4 For the period 1-4-2003 to 1-4-2011, a statutory corporation could claim the benefit of section 2(15) having regard to the judgment of this Court in the CIT v. Gujarat Maritime Board [2008] 166 Taxman 58/[2007] 295 ITR 561/214 CTR 81 (SC)/[2007] 12 SCR 962/[2007] 14 SCC 704. Likewise, the denial of benefit under section 10(46) after 1-4-2011 does not preclude a statutory corporation, board, or whatever such body may be called, from claiming that it is set-up for a charitable purpose and seeking exemption under section 10(23C) or other provisions of the Act. H. Application of interpretation .

At the cost of repetition, it may be noted that the conclusions arrived at by way of this judgment, neither precludes any of the assessees (whether statutory, or non-statutory) advancing objects of general public utility, from claiming exemption, nor the taxing authorities from denying exemption, in the future, if the receipts of the relevant year exceed the quantitative limit. The assessing authorities must on a yearly basis, scrutinize the record to discern whether the nature of the assessee’s activities amount to “trade, commerce or business” based on its receipts and income (i.e., whether the amounts charged are on cost-basis, or significantly higher). If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption.” [Para 253] 6.2.2.4 In the present case, the appellant is a society established by the enactment by state governments. Therefore, the decision of Hon’ble Supreme Court in case of “Ahmedabad Urban Development Authority and others” would be squarely applicable. In the case of Ahmedabad Urban Development Authority (AUDA), the Hon’ble Supreme Court has held that statutory corporations/boards, by whatever names called, in different sectors are involved in the advancement of the objects of general public utility and therefore they are entitled to be considered charities in the GPU (general public utility) categories. From the combined reading of the observations/findings of the Hon’ble Supreme Court the following actions are required to be carried out before deciding the issue: 1. The assessing authorities must, on yearly basis, scrutinize the accounts.

2. It should be seen that the receipts and income are on cost basis or significantly higher.

3. If the amounts charged are on cost and a nominal mark-up basis, the concerned statutory or government organization can be characterized as GPU charity.

4. However, if the amounts charged are significantly higher, in such case the limit prescribed in section 2(15) should be applied and it should be seen whether the quantified limit, as amended from time to time, in proviso to section 2(15), has been breached or not.

5. If it is found that the quantified limit, as amended from time to time, in proviso to section 2(15) has been breached then the assessee will be disentitled from the Exemption.

6.2.2.5 In the present case on examination of the case records it is observed that, as per the Receipts and Payments Account total receipts was at Rs. 54,91,17,93,439/- out of which the EMD received and E-Procurement receipts is Rs.31,96,26,45,102/-, and thus, the percentage of these receipts to the total receipts works out to 70% which is greater than the threshold prescribed i.e. 20%. Even if the Income as per the Income & Expenditure Account were to be .

Page 18 of 30 considered, the total income from E-Procurement Collections is Rs. 36,13,89,940/- and the total income is Rs.1,16,20,04,892/- and the percentage of receipts from commercial activities works out to 30% which is greater than the 20% of the threshold prescribed. Further receipts of the appellant included elements such as i. Tender processing fees ii. E-auction Fee iii. Supplier registration fees iv. Supplier registration renewal fee v. Catalogue PO fees vi. Contract Management fees vii. Security fee from private institution and viii. Transaction fee from private institutions whereas the expenditure side largely include charges such as i. salaries ii. consultancy iii. digital certificate iv. communication and accounting charges which in normal course cannot be termed as charitable activity and it is also evident that the amounts charged are significantly higher than the cost. As per the Hon’ble Supreme Court judgment in the case of Ahmedabad Urban Development Authority and others (Supra), if there is nominal profit from the activities, the same should not be a bar for treating the appellant as charity under GPU category. However, if the amount charged is significantly higher than the cost then the activities should be held as “in the nature of trade, commerce or business”. After scrutinizing the records, it is held that the appellant has charged amounts which were significantly high, therefore it is further held that the nature of the appellant’s activities amounts to “trade, commerce or business”. Once it is found that the activities are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached or not. The limit prescribed as per proviso to sec 2(15) of 20% or more receipts from the activities as referred above. It is seen that the percentage of receipts from E-Procurement Collections out of total receipts is much higher than the limit as per proviso to section 2(15) at 20%. After scrutinizing the records, it is held that the nature of the appellant’s activities amount to “trade, commerce or business” as the amounts charged are significantly higher than the cost (based on its receipts and income account). It is also found that the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached. This makes the appellant disentitled to claim of exemption as per Hon’ble Supreme Court decision in Ahmedabad Urban Development Authority and others. In view of above, the Assessing Officer was justified to treat the activity of the appellant as “trade, commerce or business” and thus rightly denied the exemptions claimed. Therefore, Ground Numbers 2, 3 and 4 are hereby dismissed.

6.2.3 Vide Ground No-5 of the Appeal the appellant claimed that the Assessing Officer was wrong to consider that the intention of generation of income is not for application of funds for a charitable purpose. The contention of the appellant was duly considered and found not tenable since it is important to decide that in what charitable activity the appellant trust is actually indulged in before coming to the conclusion. It is observed that the expenditure side largely include charges such as salaries, consultancy, digital certificate, communication and accounting charges which in normal course cannot be termed as charitable activity. However, considering the fact that the centre is functioning as nodal agency for e-governance projects, the charitable activity is examined in the light of Proviso to Section 2(15) of the Income Tax Act. E-governance squarely falls within the meaning of “advancement of any .

Page 19 of 30 other object of general public utility”. The proviso to Section 2(15) excludes 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 other consideration irrespective or nature of use or application or retention of income such activity. The Centre for E-governance charges tender processing fee, supply registration fee, renewal fee which are all in the nature of fees for the purpose of a business activity of certain specified business. The suppliers are largely private entities which are provided the platform to bid for contracts of supply or service through the electronic platform raised by the assessee. The services are evidently not limited to the Government institutions or Government Departments as it had collected fees from private institutions, boards and corporations which are separate legal entities. Therefore, it becomes evident that the activities of the assessee though in the nature of advancement of an object of general public utility, there is an element of commerce and business involved for a fee which is stipulated by it. Therefore, the Assessing Officer rightly concluded that the there is an element of commerce and business involved in the activities of appellant trust. Therefore, Ground No-5 is dismissed as not maintainable on merits.

6.2.4 Vide Ground No- 6 of the appeal the appellant disputed that the Assessing Officer erred, in considering the excess depreciation withdrawn by crediting to the Income and Expenditure account to be excluded from gross revenue. However, the appellant did not furnish any detail to corroborate the claim. The Gross Receipt was at 1,36,59,69,115/- as per Income and Expenditure Account and the appellant has not disputed the same during the Assessment Proceedings. Even during the present proceedings the appellant has not provided any specific details corroborating the ground. Therefore, this ground is devoid of genuine merits and hereby dismissed. 6.2.5 Vide Ground No.-7 of the appeal the appellant claimed that the Assessing Officer was wrong in not reducing revenue expenses incurred by the appellant, while allowing suo-motto other revenue expenses picked up from Receipts and Payment account. As observed from the Assessment Order the Assessing Officer has allowed the amount of Rs.17,04,58,643/- as Revenue expenses. The appellant has not provided any details as to which revenue expenses were not allowed and just mechanically added the ground without corroborating the same with merits or requisite details. Thus the Ground No.-7 is devoid of merits and therefore dismissed.

The learned AR before us filed a written note dated 31st October 12. 2025 which reads as follows: Sub: Regarding grounds related to the status of the Appellant as “State”.

In the appeal for the relevant year, the Appellant has challenged the order of the learned CIT(A) wherein the claim of the Appellant that it falls in the category of “State” and is accordingly exempt from taxation under Article 289(1) of the Constitution of India, 1949 (“COI”) was rejected. The Appellant has raised the additional ground in the appeal as follows: 6.1 “Under Additional Grounds of Appeal on 09.08.2023 vide Ack.No.172724981090823, for the Asst. Year 2021-22, which is required to be considered along with the other issues taken up in the Appeal filed for Asst. Year 2021-22. As stated earlier in this submission, the Society is entirely set up by Government of Karnataka for the purpose of carrying out certain e- Governance transactions for and on behalf of Government of Karnataka and this Society may be considered, as per Article 289 in the Constitution of India, 1949, a wing of Government of Karnataka, wherein the entire income belongs to the State Government and therefore it is exempt from Union Taxation.” Article 289 of the Constitution of India “Exemption of property and income of a State from Union taxation”

1. The property and income of a State shall be exempt from Union taxation.

2. Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State.

3. Nothing in clause (2) shall apply to any trade or business, or any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government. Findings of the CIT(A) While adjudicating the above ground, the learned CIT(A) referred to the following two judgments of the Hon’ble Supreme Court to hold that the Appellant is not “State” and consequently that Article 289 of the COI has no application:

1. Andhra Pradesh State Road Transport Corporation v. ITO, B-I, B-Ward, Hyderabad & Another (52 ITR 524, SC)

2. Adityapur Industrial Area Development Authority v. Union of India & Others (283 ITR 97, SC) The learned CIT(A) has extracted the relevant portions of APSRTC at para 6.1.1 of his order (Pages 16–22) and followed Adityapur to conclude that the Appellant cannot be treated as “State” under Article 289.

Distinction Between APSRTC / Adityapur and Centre for e- Governance (CeG) It is respectfully submitted that the reliance placed by the learned CIT(A) on APSRTC and Adityapur is wholly misplaced. The ratio of both these judgments turns on facts fundamentally different from those of the Appellant.

1. Nature of activities: APSRTC was engaged in operating bus transport services for hire and fare — a trading activity carried out in competition with private operators. Adityapur was involved in development, allotment, and lease of industrial plots — again, a .

Page 21 of 30 business and entrepreneurial function. In both cases, income was derived from commercial operations. CeG, in contrast, is not engaged in any trading or commercial activity. It was constituted exclusively for implementing e-Governance and administrative- reform initiatives of the Government of Karnataka — activities integral to the discharge of sovereign and regulatory functions of the State. All receipts are in the form of Government grants or reimbursements for service rendered to Government departments.

Clarification on the “Autonomous Body” Clause in the MOA The MOA states that CeG shall act as an “independent and autonomous body” for implementing e-Governance initiatives. However, this terminology denotes only functional flexibility, not constitutional or managerial independence. All members of the Governing Council are State officers; and all decisions require Government approval. Upon dissolution, all assets revert to the Government. Thus, “autonomy” here is purely operational, unlike the financial and managerial independence found in APSRTC or Adityapur.

4. Judicial hierarchy: The judgments relied upon by the CIT(A) were delivered by smaller Benches — APSRTC (5 Judges) and Adityapur (2 Judges). Neither of them examined Article 12. Conversely, Pradeep Kumar Biswas v. Indian Institute of Chemical Biology (2002 5 SCC 111) was rendered by a seven-Judge Constitution Bench, which expressly reconsidered and superseded earlier decisions.

5. Distinction in light of the ITAT Cuttack decision: The Hon’ble ITAT, Cuttack Bench, in State Pollution Control Board, Odisha v. ITO (ITA No. 301/CTK/2024, order dated 24.10.2024), while referring to Adityapur, distinguished it on the ground that the Authority there was engaged .

Page 22 of 30 in commercial development of property, whereas the Pollution Control Board discharged statutory regulatory functions. Applying the same reasoning, CeG performs purely governmental duties in implementing e-Governance projects, with no commercial or profit motive. Hence, Adityapur, even as cited by the Cuttack Tribunal, supports rather than weakens CeG’s position. The relevant order is enclosed as ANNEXURE-‘C’.

Article 12 Analysis and Constitutional Tests The decisive tests for determining whether an entity qualifies as “State” under Article 12 were set out by the Hon’ble Supreme Court in Ajay Hasia v. Khalid Mujib Sehravardi and emphatically reaffirmed by the seven-Judge Bench in Pradeep Kumar Biswas v. Indian Institute of Chemical Biology. These require examining: (i) whether the entity was created for a governmental purpose; (ii) whether it is financially supported by the Government; (iii) whether the Government exercises deep and pervasive control; (iv) whether the governing body is dominated by Government officials; and (v) whether its functions are essentially governmental. On the facts, CeG satisfies every one of these tests — it is wholly financed by the State, controlled by Government officers, and performs purely governmental functions. It is further submitted that APSRTC (5 Judges) and Adityapur (2 Judges) did not consider Article 12 at all, while Pradeep Kumar Biswas was decided by a larger Bench of seven Judges (5 concurring, 2 dissenting), and therefore supersedes those earlier rulings. The larger Bench held that even a society registered under the Societies Registration Act can be treated as “State” if it is financially, functionally, and administratively dominated by Government. Accordingly, the ratio of Pradeep Kumar Biswas squarely applies to CeG. The relevant paragraphs dealing with the reasons for the conclusion drawn by the Hon’ble Supreme Court are at para 40 to 60 of said judgment. The relevant judgment has already been enclosed. The judgment of Pradeep Kumar Biswas (supra) was clearly overruled by Sabhajit Tewary case.

Factual Background of the Appellant The Appellant, Centre for e-Governance (CeG), is a Society registered under the Karnataka Societies Registration Act, 1960 during 2005. Karnataka Government had announced the ‘Mahiti Scheme’ in the year 2000. As per the terms of the Mahiti Scheme, the Government of Karnataka had to create a shelter for e-Governance to provide support for all the Government Departments in their IT projects. The Centre has to play a vital role in coordinating with all Government Departments in the matter of collecting information and providing the same to different departments. Since the Government cannot directly undertake the implementation of Wide Area Network (WAN), it was felt necessary to set up a Centre for e-Governance as a Society registered under the Karnataka Societies Registration Act, 1960. This Centre would work as the implementing agency for various knee cap projects and also State Government Projects. Based on the above understanding, Government Order No. DEAR18EGV 2005, Bangalore dated 26.09.2005, was issued establishing Centre for e-Governance .

Page 23 of 30 under the e-Governance Secretariat, Department of Personnel & Administrative Reforms, the Government had established entre for e-Governance under e- Governance Secretariat, Dept. of Personnel & Administration Reforms. It was set up to facilitate rapid and effective use of Information Technology for the benefit of the common man. All the office bearers of the Society are filled by deputation basis from Government of Karnataka at the Secretariat level. As per the Memorandum of Association, the Governing Council consists of the Chief Secretary to Government of Karnataka as Ex-officio President, Additional Chief Secretary of Government of Karnataka as Vice President Ex-officio, Principal Secretary-Finance Department and other members from different Government Departments. One of them will be named as Chief Executive Officer as the Secretary. The members of the appellant society have been appointed by the Government and they have not voluntarily become the members to constitute the society nor did they contribute towards the formation of the society. Even the winding up of the society would be only on completion of the project for which it is established and in accordance with the discretion of the Government and all the assets and liabilities as it stood at the time of such winding up would revert back to the Government to be applied has to be decided by the Government at the appropriate time and none of the so called members as appointed by the Government will be entitled to any benefit therefrom. The Appellant, Centre for e-Governance (CeG), was registered under the Karnataka Societies Registration Act, 1960, vide Government Order No. DEAR18EGV 2005 dated 26.09.2005 under the Department of Personnel & Administrative Reforms. Copy of the proceedings of Government and the said order is at Pg.6 of Paper book. It was created to act as the nodal agency for implementing State IT and e-Governance projects. The Governing Council comprises the Chief Secretary, Additional Chief Secretary, Principal Secretary (Finance), and other senior officers of the Government. The Society made an application for registration under section 12AA of the Income-tax Act, 1961, and the Hon’ble Director of Income Tax (Exemptions) granted registration vide order No. DIT(E)/12A/Vol-I/668/W-1/2006-07 dated 23.02.2007, recognizing it as a “Wholly Charitable Society.” (Refer Paper Book Pg. 30). Accordingly, the entity was formed by the State Government and is governed by a Steering Committee constituted by the Government of Karnataka, comprising senior officers of the State. The activities of the Society are monitored by the State Government and its overall functioning is subject to Government policy direction and administrative supervision. The Government Order No. DPAR26 EGV 2003 Bangalore dated 03/06.2003 is enclosed at Page 1, 2 and 3 of the Paper Book wherein the responsibility of the Steering Committee has been provided at Page 2. Also enclosed is the Government Notification dated 09.10.2012 listing the various Departments to whom the Appellant has to render services. (Refer PB Pg. 8). Upon perusal of the Memorandum of Association enclosed in our paper book at Pg. no.18, Clause 6 and 7 read as follows:

“Clause 6. Property and assets. The income and property of the society howsoever derived, shall be applied towards promotion of the objects thereof as set forth in this Memorandum of .

Association, subject nevertheless, in respect of the expenditure of grants made by the Government of Karnataka or Government of India, to such limitations as these Governments may from time to time, impose. No portion of the income and property of the society shall be paid or transferred directly or indirectly, by way of dividend, bonus or otherwise howsoever by way of profit, to the persons who at any time have been members of the society or to any of them or to any person claiming through them provided that nothing herein contained shall prevent the payment in good faith for remuneration to any member thereof or otherwise persons in return for any service rendered to the society for consultancy, travelling allowance, halting or other similar charges which stood approved by the Government from time to time. Clause 7. Dissolution: If on winding up or dissolution of the society, there shall remain, after the satisfaction of all its departments and liabilities, any assets and property whatsoever the same shall not be paid to or distributed among the members of the society or any of them but shall be dealt within such manner as the State Government may determine.” Under the Rules of the Appellant Society, Rule 42 provides for funds of the Society. Rules 51 and 52 establish the conclusion of State control. The relevant Rules read as under: “Rule 51 – If, on the winding up or dissolution of the society, there shall remain, after the satisfaction of all debts and liabilities, any property whatsoever, the same shall not be paid to, or distributed amongst the members of the society or anyone of them but shall accrue to the State Government which will decide about its utilisation or otherwise.” “Rule 52 – Once in every year a list of members of the Governing Body shall be filed with the Registrar of Societies.” By considering the Memorandum of Association and Rules of the Appellant Society, it is evident that the Society was constituted entirely by the State Government and functions as its extended administrative arm. The Society does not have any shareholders or ownership interests of private individuals. No part of its surplus in any year is distributable to its members. All funds, assets, and income are applied solely towards the objectives approved by the Government. The instructions and directions of the State Government are binding in every respect, and all decisions—administrative, financial, and operational—are taken only with the approval of the Government. The Steering Committee comprises exclusively senior Government officials who report directly to the State Government of Karnataka. Thus, both in its constitution and functioning, the Appellant is under the deep and pervasive control of the Government, and its funds and activities are inseparable from those of the State itself. Accordingly, the Appellant squarely falls within the definition of “State” under Article 12 of the Constitution of India. The constitution and functionality of the appellant are similar to the case of Pradeep Kumar Biswas vs. Indian Institute of Chemical Biology referred to supra. In view of the above, the Appellant is entitled to constitutional immunity under Article 289(1) of the Constitution, and consequently, the entire surplus for the relevant assessment year is exempt from taxation.

The learned AR before us filed further written note dated 4th 13. November 2025 which reads as follows: In furtherance to the note dt.31.10.2025 and also without prejudice to the submissions made, even on merits the denial of exemption under section 11 by distinguishing the judgment of the Apex Court case in the case of ACT(E) vs. Ahmedabad Urban Development Authority reported in 449 ITR 1 was unsustainable. It is respectfully submitted that the judgment of the Supreme Court referred to above would squarely apply to the case of the appellant. In the assessment order, the assessing authority has observed that the appellant is functioning as nodal agency for e-governance projects and e- Governance squarely falls within the meaning of advancement of any other object of general public utility and accordingly the proviso to Sec.2(15) of the Act is required to be considered. The assessing authority has observed that on perusal of income and expenditure account revealed that the nature of receipts included 1. Tender Processing Fees 2. E-auction fee 3. Supplier Registration fees 4. Supplier registration renewal fee 5. Catalog PO fees 6. Contract Management fees 7. Security fee from private institution 8. Transaction fee from private institutions and observed that tender processing fees formed the major revenue for e- procurement collection. It was also observed that the appellant derived substantial interest on various deposits which is clearly surplus funds and not applied for any charitable purposes. Also it was found by the assessing authority that in the expenditure side it largely included charges such as salaries, consultancy, digital certificate, communication and accounting charges which in the normal course cannot be termed as charitable activity. However, having observed that the appellant is a nodal agency of the e-Government projects, the assessing authority proceeded to examine the proviso to Sec.2(15) of the Act and held that the appellant’s activities, though the nature of advancement of object of general public utility falls squarely within the proviso as there was an element of commerce and business involved for a fee which was stipulated and the appellant having engaged in the commercial activity and earned profit, the benefit of sec.11 is required to be denied. The assessing authority proceeded to hold that the aggregate receipts from the activities during the relevant year exceeded 20% of the total receipts of the appellant. Furthermore it was held that the EMD receipt was for commercial purposes and it was very substantial and proviso to sec.2(15) did not .

Page 26 of 30 distinguish between revenue and capital receipt and the section deals with total receipt during the relevant year and accordingly the aggregate receipts exceeded 70% of the total receipt and even as per income and expenditure account, the E-procurement collection exceeded 30% of the total income and accordingly the appellant is not entitled to the exemption u/s.11 of the Act. Consequently, he had considered the fact that the appellant was registered under sec 12A of the Act and also has applied for accumulation of surplus u/s.11(2) of the Act. On appeal before CIT(A) the appellant has made a detailed submission which is enclosed at pages 66 to 74 of the paper book. The appellant also supported its case with the judgment of the Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority reported in 449 ITR 1. The learned CIT(A), however, held that though the appellant is endorsed the observations of the assessing authority to hold that the aggregate receipts on the activities of the appellant exceeds 20% of the total receipts to deny the benefit of exemption u/s.11 of the Act even when the Supreme Court judgment referred to supra is applied. While concurring with the assessing authority the learned CIT(A) failed to consider the fact that the aggregate receipt from the activity did not exceed the parameters provided in the judgment of the Hon’ble Apex Court and there was no violation to apply the proviso to the appellant’s case. Undisputedly, the authorities below accept that the appellant is a nodal agency for the e- governance. The appellant was established by the government to provide support for all government departments in their income-tax projects and the appellant has to play a vital role for coordinating with all Government Departments in the matter of collecting information and providing the same to different departments. Since the Government cannot directly undertake the implementation of Wide Area Network, it was felt necessary to set up the appellant institutions and appellant would work as implementing agency for various knee cap projects and also State Government projects. A suitable notification for constitution was issued and Rules and Regulations have also been framed. Thus, the whole activities of the appellant are for the benefit of public which otherwise required to be performed by the government. Accordingly, as held by the Hon’ble Supreme Court in the case referred to supra that the activities of the appellant cannot be held to be commercial or business as contemplated under the proviso to sec.2(15) of the Act. The jurisdictional High Court also in the case of CIT vs. Hubli Dharwad Urban Development Authority reported in 419 ITR 29 (please see pages 75-83 of the paper book). The activities of the Appellant cannot be held to be in the nature of business or commerce in light of the above submissions and further it is supported also by the order of the ITAT, Chandigarh ‘A’ Bench, in the case of Improvement Trust –Vs.- Assistant Commissioner of Income Tax (Exemption) in Assessment Year 2016-17 dated 25th May, 2023 wherein very detailed order is given to consider what was business or commerce after referring to various Supreme Court judgements. The copy of the order is enclosed. Accordingly, the appellant is entitled to the exemption under sec 11 of the Act. However, the authorities below alleged that the aggregate receipts of the appellant exceed 20% of the total receipt to deny the benefit under sec 11 by .

Page 27 of 30 applying the proviso to Sec.2(15) of the Act. The proviso to Section 2(15) of the Act reads as follows:- “charitable purpose includes relief of the poor, education, [yoga,] medical relief, [preservation of environment (including water-sheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves 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 other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless- (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities of that previous year;]]” In the case of the Appellant, the Receipts derived out of the activities of the Appellant alone can be considered for the determination of percentage as provided and also as explained in the Hon’ble Supreme Court in the case of Ahmedabad Urban Development Authority reported in 449 ITR 1. The Authorities below, however, while doing so, they have taken the gross receipts as well as aggregate receipts inclusive of other income like EMD, interest receipts etc., which cannot be held to be the receipts out of the e-governance activities of the appellant. If these receipts are excluded, the appellant did not exceed the margin of 20% as suggested to infer the activities as commercial or business. This is demonstrated by chart provided at page 65 of the paper book and for the assessment year in question the financial year was 2020-21. The figures are taken from the income and expenditure account. It may be noticed that the aggregate collection on e-governance activity during the relevant year was Rs.36,34,74,940 as against the total receipt of Rs.54,91,17,93,439. Even if we consider the income and expenditure account, the e-procurement collection is Rs.15,28,91,638 as against the total receipt of Rs.136,59,69,115 which is well below he prescribed limit of 20% as contemplated (please see page 50 of the paper book). Thus, there was no excess collection as contemplated by the authorities below to suggest the appellant was carrying on commercial and business activity. In the circumstances, the ratio of the Hon’ble Supreme Court and also the jurisdictional High Court judgments referred to supra would apply and surplus of the appellant is exempted under sec 11 read with sec 11(2) of the Act for which necessary application has already been filed in Form 10 of the Act. Accordingly, the impugned addition as made in the assessment may require to be deleted. Further, both the authorities below failed to consider that to ascertain the percentage of the income as contemplated under the proviso to sec.2(15) of the Act the receipts derived out of the activities are required to be considered. In the case of the appellant the interest receipts cannot be held to be the .

Page 28 of 30 income derived out of the activity. The assessing authority himself has accepted that the interest earned were out of the surplus and not out of the activity of the appellant and accordingly not includible in the aggregate receipt. Similarly the EMD is not the receipt to be considered, it is refundable deposit and not receipt of the appellant. The assessing authority tried to observe that EMD will form part of the total receipt even if it is not revenue receipt and was a capital receipt. It is submitted that the EMD is not the receipt of the appellant which is refundable and if the tender is accepted, to that extent the amount would become part of project receipt. The EMD as on the end of the year outstanding is accordingly cannot be held to be the receipt of the appellant to decide the percentage as contemplated under the proviso to sec.2(15) of the Act.

Page 29 of 30 16.1 The decision on the said application goes to the root of the matter. If the issue is decided at this stage, without waiting for the outcome of the application, there is a possibility of two different findings—one by the Tribunal and another by the competent authority dealing with the application under section 10(46) of the Act. Such a situation is undesirable and should be avoided in the interest of judicial consistency and administration of justice.

16.2 In our view, deciding the issue at this stage may also cause prejudice to the assessee. The principles of natural justice require that the matter be examined in its proper sequence. Fairness demands that the assessee should not be denied the benefit of a statutory recognition which is still pending consideration.

16.3 Therefore, we consider it appropriate and prudent to await the final disposal of the application for recognition under section 10(46) of the Act. This approach would avoid conflicting conclusions and unnecessary litigation.

16.4 If the application is decided in favour of the assessee, the issue raised in the present appeal would not survive for separate adjudication. However, if the decision is not favourable to the assessee, the Assessing Officer shall decide the issue afresh in accordance with law, after considering the written submissions filed by the assessee and after providing due opportunity of being heard. In view of the above, the ground of appeal raised by the assessee is allowed for statistical purposes.

Order pronounced in court on 31st day of December, 2025