KARNATAKA HOUSING BOARD,BANGALORE vs. DDIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 394/Bang/2013 Assessment Year : 2009-10 M/s. Karnataka Housing The Additional Board, Director of Income III Floor, Cauvery Bhavan, tax (Exemptions), Kempegowda Road, Range – 17, Bangalore – 560009. Vs. Bangalore. PAN: AAAJK0398K APPELLANT RESPONDENT & ITA No. 806/Bang/2014 Assessment Year : 2010-11 M/s. Karnataka Housing The Additional Board, Director of Income III Floor, Cauvery Bhavan, tax (Exemptions), Kempegowda Road, Range – 17, Bangalore – 560009. Vs. Bangalore. PAN: AAAJK0398K APPELLANT RESPONDENT

Assessee by : Shri Padamchand Khincha, CA Revenue by : Shri Muzaffar Hussain, CIT (DR)

Date of Hearing : 16-07-2021 Date of Pronouncement : 11-10-2021

Page 2 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by assessee against orders 11/03/2013 and 24/02/2014 for assessment years 2009-10 & 2010-11 passed by the Ld.CIT(A) -5 Bangalore and Ld.CIT(A), Mysore respectively. Common issue raised by the assessee in these appeals are as under: 1. Whether the authorities below were right in holding that the assessee is to be assessed in status as AOP ? 2. Whether the authorities below erred in concluding that the activities carried on by the assessee are commercial in nature with the motive to earn profits ? 3. Whether the authorities below erred in not appreciating the fact that the assessee has been created with the object of general public utility which is a charitable object within the meaning of Section 2(15), and is eligible for exemption under section 11 of the Act ? 2. Assessee is a Board established under section 3 of Karnataka Housing Board Act,1962( hereinafter referred to as KHB Act) as a successor of Mysore Housing Board which was constituted in the year 1956. The said Act was amended from time to time. The State Government of Karnataka, passed the KHB Act, with a view to satisfy the need of housing accommodation in the state of Karnataka. The Ld.AO observed that as per the annual report for year 2008 and 2009, the primary objective of KHB is to make

Page 3 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 such schemes and to carry out such works as are necessary for the purpose of dealing with and satisfying the need of housing accommodation. The KHB Act also says that, it endeavors in providing housing to people of Karnataka at affordable cost. The KHB was availing benefit of Section 10(20A) of the Act from its inception upto financial year 2001-02. Section 10(20A) was omitted by Finance Act with effect from 1/04/2003. Thereafter the Board obtained registration under section 12A of the Act on 03/02/2004. 3. It is submitted by the Ld.AR that the Director of Income tax (Exemptions), Bangalore vide order dated 28/10/2011 cancelled the registration under section 12AA (3) of the Act. Against the said order, assessee filed appeal before this Tribunal. The said appeal was heard on 31/01/2013 by holding that withdrawal of registration under section 12AA (3) of the Act was not justified. The revenue against this order of the Tribunal, preferred appeal before Hon’ble Karnataka High Court in ITA number 259/2013. Hon’ble Court vide order dated 12/01/2015 upheld the view of the Tribunal. 4. It is thus submitted by the Ld.AR that, for years under consideration registration under section 12A of the Act granted to assessee is intact by virtue of order dated 12/01/2015 passed by Hon’ble Karnataka High Court. He submitted that the authorities below denied exemption under section 11 by treating assessee to be AOP. Brief facts of the case are as under:

Page 4 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 5. The assessee for years under consideration filed return of income that was selected for scrutiny. Various details were called for. The Ld.AO observed as under: Income & Expenditure account for assessment year 2009-10:

Particulars Schedule As on 31.3.2009 Income Rs. Sales 13 226,90,11,264 Interest income 14 4,98,34,617 Rent & lease rent 15 3,64,18,781 Other income from 16 9,24,72,950 schemes 244,77,37,612 Expenditure Financial charges 17 2,01,25,707 Cost of works sold (sales) 17A 204,59,06,033 Administration & other 18 15,67,71,939 expenses Depreciation 5 86,81,373 Sub total 223,14,85,052 Excess of income 21,62 52,560 over expenditure

Income & Expenditure account for assessment year 2010-11: Particulars Schedule As on 31.3.2010 Income Rs. Sales 13 174,80,22,502 Interest income 14 3,29,09,724 Rent & lease rent 15 4,43,40,223

Page 5 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 Other income from schemes 16 17,08,77,530 Profit on sale of fixed assets 63,000 199,62,12,979 Expenditure Financial charges 17 98,93,548 Cost of works sold (sales) 17A 161,87,55,286 Administration & other 18 11,47,83,323 expenses Depreciation 5 68,12,869 Sub total 175,02,45,026 Excess of income over 24,59,67,953 expenditure Less : Income related to prior 2,69,54,699 period (Net) Excess of Income over 27,29,22,652 Expenditure

Page 6 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 7. From the above the Ld.AO was the opinion that, assessee earned profit over a period of time in preceding years, ranging more than 10%, and that it was involved in the systematic commercial activity in the nature of seal of sites, apartments, houses, most of which is being through open auctions to the highest bidder. The Ld.AO thus held that, assessee was running its activities on commercial principles. He placed reliance on the decision of Hon’ble Uttarakhand High Court in case of Queens Education Society reported in 177 Taxman 326 and denied exemption under section 11 for years under consideration. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A). 8. The Ld.CIT(A) opined that, assessee is to be assessed with the status of AOP and no exemption under section 11 or 12 will be available. He thus held that assessee is to be assessed as per section 164 of the Act. The Ld.CIT(A) upheld the treatment of assessee as AOP by the Ld.AO. 9. On the issue denial of exemption under section 11, it was noted by Ld.CIT(A) that merely because the organization is set up by the State Govt., it cannot be said to be set up for “charitable purposes”. It was further noted that the objects of the assessee are similar to the objects of Punjab Urban Planning Development Authority whose issue is decided by coordinate bench reported in 103 TTJ 988. It was held therein that the activities and objects are more of commercialized nature and no charity involved in it. The Ld.CIT(A) relied on the decision of Hon’ble in case of Adityapur Industrial Area Development Authority vs UOI reported

Page 7 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 in 283 ITR 97 (2006), wherein in identical circumstances application under section 12A was rejected. 10. The Ld.CIT(A) relied on the CBDT Circular No. 11/2008 dated 19.12.2008 which explained the amendment made by the Finance Act 2008, wherein advancement of any other object of general public utility was further explained. The Ld.CIT(A) further held that the objects of the assessee are purely commercial in nature as it involved profit motive and that because the assessee acquires land, develops it and sales it at market rate and earns profit thereon. The Ld.CIT(A) observed that assessee sells property on auction, allots property at market rates and charges interest for belated payments of the installments by the buyers. 11. The Ld.CIT(A) thus held that assessee is squarely hit by the proviso to section 2 (15) and section 13(8) for assessment years under consideration. The Ld.CIT(A) held that assessee cannot claim exemption as envisaged under section 11 of the Act. Aggrieved by the order of the Ld.CIT(A), assessee preferred appeal before this Tribunal for both years under consideration. At the outset, the Ld.AR submitted that Ground no.1 is general in nature and therefore do not require adjudications. He also submitted that Ground number 2-2.1 the issue doesn’t arise as the registration under section 12A of the Act has been restored by the decision of Hon’able Karnataka High Court in assessee’s own case by order dated 12/01/2015. Accordingly, these ground are dismissed as infructuous.

Page 8 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 12. It is submitted that facts in respect of Ground Nos.3-4 in both the years under consideration are identical and the issue raised by assessee are same. Accordingly, these grounds in both the years under consideration are disposed of by way of a common order. The Ld.AR by way of written submission submitted as under:- Assessment order passed in the status of AOP(Trust) is bad in law [Ground No. 3] 1.1. The appellant is a Board established under the Karnataka Housing Board (KHB) Act, 1962. As per section 3(2) of the KHB Act, the Board constituted under such Act shall be a body corporate having perpetual succession and a common seal with power to acquire, hold and dispose of the property and may by its corporate name sue and be sued. The decision of the Supreme Court in Assistant Commissioner, Assessment II, Bangalore v Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC) supports the principle that a body corporate is a person. Once the Board is formed, it would become a juridical person as opposed to natural persons) The properties of the Appellant vest in the Appellant managed by the Board (section 51 of KHB Act). Therefore, the Appellant would be an 'artificial juridical person' rather than association of persons. 1.2. The PAN allotted by the IT department to the appellant is AAAJK 0398K. The 4th letter in PAN i.e., `J' in the present case confirms that the status of the appellant is 'Artificial Juridical Person'. 1.3. The Karnataka High Court in CIT v Children's Education Society [2013] 358 ITR 373 (Kar) held that the status of a society incorporated under the Societies Registration Act, 1860 is an 'Artificial Juridical Person' and not 'Association of Persons'. 1.4. In the following cases, it has been held that assessment made under a different status is bad in law.  CWT v Ridhkaran [1972] 84 ITR 705 (Raj)  CIT v Adinarayana Murthy K [1967] 65 ITR 607 (SC)  CIT v Associated Cement and Steel Agencies [1984] 147 ITR 776 (Boni)  CWT v Jagdish Puri [1987] 163 ITR 458 (Raj)  CIT v Sobhagmal Mishrilal Semlavada [1997] 223 ITR 554 (MP)  CWT v Srivastava (J.K.) and Sons [1983] 142 ITR 183 (All )  CIT v Suresh Chandra Gupta [1988] 173 ITR 407 (Raj)  Sri Nath Suresh Chand Ram Naresh v. CIT [2006] 280 ITR 396 (All)  CIT v Ram Das Deokinandan Prasad (HUF) [2005] 277 ITR 197 (All)  Karamshibhai M Thumar (HUF) v ITO 12 DTR 534 (Ahd 'Tri)  Suraj Mal (HUF) v ITO (2007) 110 TTJ 834 (Del TM) 1.5 In view of the above, the order passed under section 143(3) is bad in law and liable to be quashed. 2.Proviso to section 2(15) is not applicable:- [Ground No. 4, 4.1 & 4.21 2.1 Housing is a basic necessity for all human beings. It is the duty of the State to raise the level of nutrition, the standard of living and to improve public health. [Article 47 of Constitution of India] Housing is a subject of 'state list' under the Constitution of India.

Page 9 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 2.2 The Government of Karnataka has a separate Housing department headed by the Principal Secretary to Government. The State Government has given high priority to housing with its own housing programmes for the economically weaker sections in rural and urban areas from centrally sponsored schemes. Housing needs of low, middle and high income groups are also catered to, apart from housing for slum dwellers as a part of their rehabilitation and improvement of slums. 2.3 The Karnataka State Government has passed the Karnataka Housing Board Act, 1962 (KI-IB Act for short hereafter). The KHB Act was passed with a view to satisfy the need of housing accommodation in the state of Karnataka. The Act was passed by the State Government with a view to fulfil the constitutional requirement of providing housing facilities. The preamble to the Act states as under. “An Act to provide for measures to be taken to deal with and satisfy the need of housing accommodation. WHEREAS it is expedient to take such measures, to make such schemes and to carry out such works as are necessary for the purpose of dealing with and satisfying the need of housing accommodation and with that object in view it is necessary to establish a Board for the State of Karnataka and to make certain other provisions." 2.4 In pursuance of the power vested under section 3 of the KHB Act, the State Government has notified a Board called as the 'Karnataka Housing Board' (Board in short) to achieve the objectives of the KHB Act. As per section 3 of the KHB Act, the Board is a statutory corporation having separate legal existence. It has no shareholders, members, partners or owners. It has no capital. No person has any stake, financial or otherwise, in the Board. No person is entitled to any share in the surplus arising from operations. Surplus arising from its operation is required to be utilised for its objectives and cannot be paid to any person including the State Government. 2.5 The Board does not have the power to carry on activities according to its will and wish. The exercise of powers and performance of functions by the Chief engineer and Secretary are subject to general or special order of the State Government [section 10]. The execution of housing schemes, land development schemes and incurring of expenditure in relation thereto are subject to the control of the State Government and provisions of KHB Act [section 17]. The Board cannot enter into a contract involving an expenditure of Rs. 50 lakhs and more without the previous sanction of the State Government [section 15]. Approval by State Government is mandatory in respect of purchase of land worth more than Rs.10 lalchs or a lease of more than 5 years [section 33]. The sale of land, building or any property by the Board is subject to the rules made by the State Government under the KHB Act [section 38]. 2.6 As per section 24 of KHB Act, the State Government can acquire land for the purpose of development, and pay compensation for such compulsory acquisition. The Board cannot decide what land to acquire and how much to compensate the land owners. It is only when the housing programme sanctioned and published by the State Government under section 20 and 21 of KHB Act, the Board can execute the housing scheme or land development scheme included in the programme. As per section 19, the Board is required to submit annual housing programme, land development programme, budget and establishment schedule before the first day of December every year to the State Government [section 19(1)]. The housing programme and land development programme so submitted may, be sanctioned by the State Government [Section 20]. Such sanctioned programme shall be published in official Gazette [Section 21]. The sanction of the State Government is also required in respect of the supplementary programme and budget as may be submitted by the Board [Section 22]. The Board comes under the administrative control of the department of

Page 10 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 housing, Government of Karnataka. It is the duty of the Board to undertake labour housing schemes as approved by the State Government [section 58]. The Board is required to submit reports, statements, returns, statistics, particulars etc to the State Government [sections 69 and 70]. The State Government is empowered to order for valuation of assets and liabilities of the Board at any time as it may consider necessary [section 73]. The State Government has formulated Karnataka Housing Board rules in respect of various matters connected with carrying of activities by the Board. The State Government may give such directions to the Board as in its opinion are necessary or expedient for carrying out the purposes of the Act and it is the duty of the Board to comply with such directions [section 84]. If the State Government is satisfied that the Board has made default in performing any duty it may fix a period for performance of that duty; the State Government is empowered to supersede and reconstitute the Board in the prescribed manner in certain circumstances [section 86]. The State Government may, by notification, order for dissolution of the Board [section 87]. The State Government exercises general administrative control and supervision over all the activities and affairs of the Board [section 87A]. As per rule 20 of the KHB Rules, 1964, the appellant Board is required to submit quarterly and annual progress reports under the several housing schemes, demand, collection and balance of rent and loans, copies of minutes of the Board and Annual statement of receipts and expenditure. The appellant Board is thus a projection of the State Government. The State Government acts through the instrumentality or agency of the Board. 2.7 The Appellant is not engaged in buying and selling of goods or providing of services for profit. The activities of the Appellant are driven by commitment to public welfare. An activity' which generates surplus funds without any underlying profit motive cannot be termed as business, trade or commerce. As per section 32(2) of the Karnataka Housing Board Act, 1962, the appellant is not competent to carry on any trading or financing activity for profit, whether in the execution of any scheme undertaken by, or entrusted to it or otherwise. The characteristics of trade, commerce and business are not evident in the Appellant. The objects, structure, activities, functions, powers and conduct of the Appellant indicate that it is not involved in the activities of business, commerce or trade. The financial results of the appellant as depicted hereunder also demonstrates that it is not engaged in business. Total Sales for the year ending 31St March 2009 Rs. 226,90,11,264 Less:- Cost of works Sold Rs. 204,59,06,033 Rs. 22,31,05,231 Less:- Financial Charges Rs.2,01,25,707 Administration and other expenses Rs. 15,67,71,939 Depreciation Rs.86,81,373 Rs.18,55,79,019 Profit Rs.3,75,26,212 3,75,26,212 (Profit) ---------------x 100 = 1.65%. This is ignoring Rs.9.72 crores of administration 226,90,11,264 (Sales) expenses being capitalized. From the above, it would be evident that the net profit rate for the year under consideration was just 1.65%. The impugned finding of the learned AO that the profit rate was in the range of about 10% is therefore factually incorrect. ALTERNATIVE METHOD

Page 11 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 Net excess of income over expenditure Rs. 21,62,52,660 Less:- Interest income Rs. 4,98,34,617 Rent and Lease rent Rs. 3,64,18,781 Other income from schemes Rs.9,24,72,950 Rs. 17,87,26,348 Profit Rs. 3,75,26,312 3,75,26,212 (Profit) -----------------x 100 = 1.65%. This is ignoring Rs. 9.72 crores of administration 226,90,11,264 (Sales) expenses being capitalized. Note:- The interest income, rent, lease rent and other income are not operational income. The co-ordinate bench in Karnataka Industrial Areas Development Board v Ad. DIT — ITA No. 378/B/13 dt. 4.9.2015 at page 24 held that there can be no profit element in earning the interest income. 2.8.The appellant carries on various housing schemes as decided by the Karnataka State Government. For instance, the programme of '100 Housing Projects' was launched during 2002 to provide 15,000 sites and 13,500 houses as per the State Government order. Out of these 61 schemes at a project cost of Rs. 25,794.23 crores have been completed. For the year, 2445 houses, 11525 sites have been developed / constructed. Further 39 schemes at a project cost of Rs. 60,472.49 crores have been under various stages of completion/progress to develop 13,745 sites and construct 3,854 houses. 2.9. The appellant has taken up 50 housing schemes at various places under Suvarna Karnataka Programme at a cost of Rs. 1,406.48 crores. Apart from the projects sanctioned under 100 housing schemes and Suvarna Karnataka Programme, the appellant has also taken up housing schemes at various places in Karnataka for development of sites and houses. 2.10. The appellant undertakes rehabilitatation of slum dwellers and improve their quality of life by providing basic infrastructure like drinking water, roads, drains, sanitation, streetlights and houses under the State Government sponsored schemes including Nirmala Jyothi and Centrally sponsored Valmiki Ambedkar Awas Yojana, providing houses under the Nirmal Bharat Abhiyan and providing community sanitary complexes. 2.11. The appellant also undertakes construction of district office complexes, minividhana soudha, kandaya bhavan, quarters for revenue dept. of the Govt., construction of underground drainage system, construction of stadium, RCC Roads, Hotel building and beautification works at Jogfalls for Jog development authority, construction of Suvarna Ranga Mandira for Kannada and Culture dept., construction of new Horticulture University Campus and construction of Registrar / Sub-Registrar offices for department of Stamps and Registration Department. 2.12.The allotment of houses and sites are done as per the KHB Allotment Regulation 1983 Karnataka Gazette Notification No. 28 Volume No. 118 dated 14.7.1983. Statutory reservations for various categories are as under. (i) SC/ST/BT 18% (ii) Defence / Ex-Servicemen 5% (iii) Central Govt. employees 5% (iv) State Govt. employees 15% (v) Physically handicap 3% (vi) Senior Citizens 5% (vii) General 49% 2.13 Break up of allotment of houses, flats and sites to Economically Weaker Section (EWS), Low income group (LIG), Middle income group (MIG) and High income group (HIG) during the year was as under.

Page 12 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 2.14 Break up of allotment of old stock during 2008-09

HOUSES & FLAT TOTAL HOUSES EWS LIG MIG HIG 19 62 85 8 174 SITES TOTAL SITES EWS LIG MIG HIG 4 137 325 71 537 2.15 Break up of allotment of 100 HP during 2008-09

HOUSES & FLAT TOTAL HOUSES LIG MIG HIG 254 452 67 773 SITES LIG MIG HIG 2259 1837 978 5038 2.16 The allotment to Economically Weaker Sections (EWS) of the society is made at half of allotment rate to other sections. For instance, if rate per square feet for the other categories is Rs. 400, the allotment rate for EWS category would be Rs. 200 per sq.ft. As per rule 2 of the Karnataka Housing Board Regulations, 1983, income limits of economically weaker section group and low income group, middle income group and higher income group is as under. Sl. No Group Income limit Class of persons whose annual Economically weaker income 1 section does not exceed Rs.7,200 or such group and low income group annual income as may be fixed by the Government from time to time. Class of persons whose annual income exceed Rs. 7,200 but does not 2 Middle income group exceed Rs. 18,000 or such annual income as may be fixed by the Government from time to time. Class of persons whose annual income exceed Rs. 18,000 but does 3 High income group not exceed Rs. 50,000 or such annual income as may be fixed by the Government from time to time. 2.17 The above facts and figures have been taken from the Annual report of the appellant for the year ending 31st March 2009 and the same is already on record before the Hon'ble Bench. (FOLLOWING DETAILS ARE REPRODUCED FROM WRITTEN SUBMISSION FOR ASSESSMENT YEAR 2010-11)

Page 13 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 The financial results of the appellant as depicted hereunder also demonstrates that it is not engaged in business. Total Sales for the year ending 31St March 2010 Rs. 174,80,22,502 Less:- Cost of works Sold Rs. 161,87,55,286 Rs 12,92,67,216 Less:- Financial Charges Rs. 98,93,548 Administration and other expenses Rs. 11,47,83,323 Depreciation Rs. 68,12,869 Rs. 13,14,89,740 Loss Rs. (22,22,524 ) 22,22,524 (Loss) ----------x 100 = -0.13%. This is ignoring Rs. 11.09 crores of administration 174,80,22,502 (Sales) expenses being capitalized. ALTERNATIVE METHOD Net excess of income over expenditure Rs 24,59,67,953 Less:- Interest income Rs. 3,29,09,724 Rent and Lease rent Rs.4,43,40,223 Profit on sale of Fixed Assets Rs. 63,000 Other income from schemes Rs.17,08,77,530 Rs.24,81,90,477 Loss Rs. (22,22,524) 22,22,524 (Loss) --------- x 100 = -0.13%. This is ignoring Rs. 11.09 crores of administration 174,80,22,502 (Sales) expenses being capitalized. The appellant carries on various housing schemes as decided by the Karnataka State Government like 100 Housing Projects, Suvarna Karnataka Housing Projects and Other Housing Projects of the Board. The allotment process in 20 places ready for allotment has been completed at a cost of 234.06 Crores. 67 schemes approved by the Government, at the cost of Rs. 888.77 Crores are under implementation to develop 23204 sites and construct 2340 houses. 16 projects are in the different stages of tender at the estimated cost of Rs.709.55 Crores. The other 12 projects are under formulation. Throughout the State, the Construction of District office Complex at the cost of Rs 82.25 Crores was completed and handed over to revenue department. The Construction of District Office complex at Davangere at the cost of Rs. 18 Crores and at Udupi at the cost of Rs 19.90 Crores was under progress. The tenders for the Construction of District Office Complex at Madakeri at the cost of Rs. 9 Crores, Construction of District Office Complex at Bellary for Rs. 30 Crores, Construction of District Office Complex of Rs. 20 Crores were submitted to Revenue Secretary for Approval, Revenue Officers. Quarters at Chikkaballapur at the cost ofRs.25.00 Crores was approved and the tender was invited. Construction of 30 Mini Vidhana Soudha at the cost of Rs. 68.60 Crores are completed and handed over to revenue department. Construction of Mini Vidhana Soudha at Surapura, Athani, Rona, Devadurga, Raichur, Siraguppa, Naragunda and Hosanagar at the cost of Rs. 17 Crores was under progress. Construction of AC Staff quarters at Sagar at the cost of Rs. 2 crores was under progress. The Tender to take up the construction of Mini Vidhana Soudha and AC Office at Chikkaballapura at the cost of Rs. 4.75 Crores and at Gudibande - Chikkaballapura at a cost of Rs. 2 Crores were being finalized and was to be submitted to Government for approval during the year under consideration. The work of construction of Kandaya Bhavan in Bangalore at the cost of 31 Crores was under progress. Construction of Belgaum City Corporation Building at

Page 14 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 Belgaum was completed and handed over to Corporation at the cost of Rs. 5.50 crores. The construction of Administrative building and other related buildings for Basava Kalyana Development Board at Basavakalyana at a cost of Rs.4.59 crores was completed, and handed over to the Board. The additional works at the cost of Rs. 4.50 crores for Basavakalyana Development Board at Basavakalyana had been taken up by the Board. The additional works at the cost of Rs. 4 Crores for Sannati development board at Sannathi of Gulbarga had been taken up by the Board. Construction of 6 (Six) Deputy Sub-Register Office Buildings at the cost of Rs. 1.5 Crores had been completed and handed over to Sub-Registrar Department. The UGD works Shikaripur at Shimoga district at the cost of Rs.21.42 crores and Jog Falls development works at the cost of Rs. 4.99 crores was under progress. The rehabilitation Project for land loosers to the Shivamogga Airport at Shivamogga was approved by the Government, and the tender invited by the Board. The Infrastructure department had entrusted to develop the Airstrips in 12 places in the State vide its letter dated 18.12.2008. The detailed project report of the construction of Air strip at Raichur & Chickmagalur had been submitted to Government for the approval. The preparations of the scheme for other Airstrips were under progress. The development works at the cost of Rs. 54 crores, to develop 32 acres of land near Devanahalli Air Port at Gangamuthanahalli for the construction of residential quarters to different Government departments had been taken up by the Board. The proposed Construction of Engineering Colleges in 2 places at the cost of Rs.35.00 crores (@ Rs.17.50 crores for each) and construction of polytechnic buildings in 6 places at the cost of Rs 48.00 crores (each polytechnic at Rs.8.00 crores), for technical education department of Higher education department, had been approved by the Government. These works were under progress. The proposed Construction of Government first grade college building in 27 places at the cost of 26.80 Crores, for collegiate education department of Higher education department had been approved by the Government. Except Shiralkoppa, Chitaguppa, Ainahalli & Kyathanahalli - Mandya in other places the construction work was under progress. Construction of Administrative office building and staff quarters for Administrative Training Institute in Gulbarga, Bidar, Bellary and Chikkamagaluru at the cost of 5 Crores had been entrusted to Board and the works were under progress. The Construction of Indoor stadium at the cost of Rs.2.15 crores and Construction of Yatri Nivas Building at the cost of Rs.1.07 crores at Udupi were nearing completion. The allotment of houses and sites are done as per the KHB Allotment Regulation 1983 Karnataka Gazette Notification No. 28 Volume No. 118 dated 14.7.1983. Statutory reservations for various categories are as under. (i) SC/ST/BT 18% (ii) Defence / Ex-Servicemen 5% (iii)Central Govt. employees 5% (iv) State Govt. employees 15% (v) Physically handicap 3% (vi)Senior Citizens 5% (vii) General 49% Break up of allotment of houses, flats and sites to Economically Weaker Section (EWS), Low income group (LIG), Middle income group (MIG) and High income group (HIG) during the year was as under. Break up of allotment of Properties :

Page 15 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014

HOUSES & FLAT TOTAL HOUSES EWS LIG MIG HIG 54 330 218 8 610 SITES TOTAL SITES EWS LIG MIG HIG 14 1492 1153 714 3373 SHOPS TOTAL SHOPS EWS LIG MIG HIG 4 137 325 71 537 GRAND TOTAL 72 1959 1696 793 4520 The allotment to Economically Weaker Sections (EWS) of the society is made at half of allotment rate to other sections. For instance, if rate per square feet for the other categories is Rs. 400, the allotment rate for EWS category would be Rs. 200 per sq.ft. As per rule 2 of the Karnataka Housing Board Regulations, 1983, income limits of economically weaker section group and low income group, middle income group and higher income group is as under. SI. No Group Income limit Class of persons whose annual Economically weaker income does not exceed Rs.7,200 or 1 section group and low such income group annual income as may be fixed by the Government from time to time. Class of persons whose annual income exceed Rs. 7,200 but does not 2 Middle income group exceed Rs. 18,000 or such annual income as may be fixed by the Government from time to time. Class of persons whose annual income exceed Rs. 18,000 but does 3 High income group not exceed Rs. 50,000 or such annual income as may be fixed by the Government from time to time. Explaining the reason for introduction of the proviso to section 2(15), the Finance Minister in his budget speech dated 29.02.2008 [298 ITR (St.) 33] [Page 89, 90 of case law compilation] stated that the proviso to section 2(15) will only be applicable to entities carrying on regular trade, commerce or business and genuine charitable organizations will not in any way be affected. That state housing boards and development boards established by a state exist for public purpose and not for private profit is acknowledged by the CBDT in Circular No. 45 dated 02.09.1970. [Page 195- 196 of case law compilation] Relevant extracts of the circular are as follows. "Several states have set up statutory housing boards for the framing and execution ofhousing and other development schemes. These boards are autonomous organizations and they play an important role in implementing the housing programs of Govt. for the common good. As these boards are serving an important public purpose and do not exist for private profit, the Finance Act, 1970 has made a specific provision in a new clause (20A) of section 10

Page 16 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 exempting the income of such boards from tax altogether. This provision, exempts from tax any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both." (emphasis supplied) 2.19 The Apex Court in Queen's Educational Society v CIT [2015] 55 taxmann.com 255 (SC) held that mere surplus does not mean institution is existing for making profit. The predominant object test must be applied. The AO must verify the activities of the institution from year to year. It was observed: "Where profit making is the predominant object ofthe activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character ofa charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit." 2.20 The Delhi High Court in ICAI v DGIT(E) [2013] 358 ITR 91 held that functions performed which are in the genre of public welfare and not for any private gain or profit cannot be said to be involved in carrying on any business, trade or commerce. 2.21 The appellant Board was established under the Karnataka Housing Board Act, 1962 for carrying out the state functions and fulfilling the housing needs. The activities of the appellant Board are carried on as per the KHB Act, Rules and Regulations. Various schemes of housing are carried on as per the mandate of the State Govt. There is no profit motive as the activities are carried on as per the mandate of the State Govt. and as per the KHB Act, Rules and Regulations. There is a difference between 'activity of profit' and 'activity for profit'. An activity carried on for profit has the profit motive. On the other hand, an activity of public welfare resulting in profit has no profit motive. [Goa, Daman & Diu Industrial Development Corpn. v First ITO [1986] 15 ITD 447 (Pune ITAT)] [Page 52, 53 of paper book, Para 4.62] 2.22 The Supreme Court in Ad. CIT v Surat Art Silk Manufacturers Association [1979] 2 Taxman 502 (SC) [Page 203 to 239 of case law compilation] at para 17 of the decision held that where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. The activities carried on by the appellant Board, even if it is regarded as an activity of profit, is thus bereft of profit motive and hence proviso to section 2(15) will not be applicable. 2.23 The exemption under section 11 is envisaged on account of 'Profits'. The question of claiming exemption does not arise in the absence of 'profits'. Thus, it cannot be contended that a charitable entity should not make any profits at all. As held by the Madras High Court in the case of DIT (E) v RJBV Vasudevan Educational & Charitable Trust [2015] 370 ITR 517, a Trust is not measured by its financial clout but by its philanthropic disposition. Further, eleemosynary is not an essential element of charity. [Page 240 of case law compilation] The five Judge bench of the Supreme Court in the case of Sri Ramtanu Co-operative Housing Society Ltd v State of Maharashtra 1970 AIR 1771 [Page 559 to 568 of case law compilation] held that features of transfer of land, or borrowing of moneys or receipt of rents and profits will by themselves neither be the indicia nor the decisive attributes of the trading character of a Corporation. It was held that if in the ultimate analysis there is excess of income over expenditure that will not establish the trading character of the corporation. It was held that there are various departments of the Govt. which may have excess of income over expenditure.

Page 17 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 2.24 In CIT v Gujarat Industrial Development Corporation [2017] 83 taxmann.com 366 (Gujarat), it was held that assessee corporation having been constituted under Gujarat Industrial Development Act, 1962, for purpose of securing and assisting rapid and orderly establishment and organization of industrial areas and industrial estates in State of Gujarat, and for purpose of establishing commercial centers in connection with establishment and organization of such industries, entitled to exemption under section 11. It was held that considering the object and purpose for which the assessee has been established under the provisions of the Act and the activities carried out by the assessee, it cannot be said that the activities carried out by the assessee can be said to be either in the nature of trade, commerce or business, or rendering any services in relation to any trade, commerce or business for a Cess or Fee or any other consideration so as to attract proviso to Section 2 (15) of the IT Act. 2.25 Similarly, the Gujarat High Court in Ahmedabad Urban Development Authority v ACIT (Exemptions) [2017] 83 taxmann.com 78 (Gujarat) [Page 530 to 558 of case law compilation] held that the proviso to section 2(15) would not be applicable so far as assessee- AUDA is concerned and as the activities of the assessee can be said to be providing general public utility services, the assessee is entitled to exemption under section 11. It was observed by the High Court that merely because sale of plots and lands are done by public auction, it cannot be said that the assessee is engaged in doing business. It was held that the public auction was made so that price fetched can be utilized for the development of the Urban Development Area, to achieve transparency and to avoid any allegation of favoritism and nepotism. 2.26 The High Court of Allahabad in CIT v Lucknow Development Authority [2013] 38 taxmann.com 246 (Allahabad) held that activities of the authority which were similar to the appellant cannot be said to be in the nature of trade, commerce or business and/or profiteering and therefore, proviso to Section 2(15) of the Act shall not be applicable. 2.27 Similar view has been expressed by the Rajasthan High Court in the case of CIT v Jodhpur Development Authority [2016] 287 CTR 473. In the case of CIT v Improvement Trust ITA No. 147 of 2016 dt. 23.12.2106 [reported as Tribune Trust v CIT [2016] 76 taxmann.com 363 (Punjab & Haryana)] [page 569 to 614 of case law compilation] it was held that selling of plots and premises by the trust is only incidental and ancillary to its main purpose which at the cost of repetition is "town improvement" in almost every respect. It was held that even where the plots are developed and premises are constructed and sold at the market price, the activity is not commercial or business venture per se but one necessitated on account of the implementation of the provisions of the trust through statutory schemes. It was held that the main purpose of such schemes is driven by public requirements and not as a commercial venture per se and they are incidental to the main object of the trust. 2.28 The ITAT, Hyderabad Bench in the case of Institute for Development and research in Banking Technology v ADIT(E) [2015] 63 taxmann.com 297 (Hyd) [Page 506 to 529 of case law compilation] after considering the legislative intention, CBDT Circular and various case laws in the context of proviso to section 2(15) held that the activities of the appellant society are charitable, it is needless to say that the activities of the appellant society are not in the nature of commercial, or business. When the main objects of the appellant society are not business, the incidental activity, which is pursued for attainment of the main objects, cannot be called "business", merely because the appellant society renders services against payment as fees or cess, even if resulting in profit. [Para 15] 2.29 Where assessee institution, established under control of Irrigation Department of State Government, was imparting training to Government officials in field of water

Page 18 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 and land management, since said activity had direct connection with preservation of environment, it was held by the High Court of Judicature at Hyderabad in the case of CIT(E) v Water and Land Management Training and Research Institute [2017] 83 taxmann.com 234 (Hyderabad) that it was not a fit case for invoking first proviso to section 2(15), even though assessee was providing guidance to farmers and rendering consultancy services to various other organizations as well by charging certain fee. 2.30 Following are the list of other decisions wherein it was held that proviso to section 2(15) would not be applicable and consequently exemption under section 11 cannot be denied in the case of Authorities, Boards etc. engaged in achievement of object of general public utility or a public cause. (i) Hoshiarpur Improvement Trust v ITO [2015] 61 taxmann.com 162 (Amritsar -Trib.) (ii) ITO v Moradabad Development Authority [2016] 71 taxmann.com 339 (Delhi Trib) (iii) Jaipur Development Authority v CIT [2014] 52 taxmann.com 25 (Jaipur Trib) (iv) Haridwar Development Authority v CIT [2015] 57 taxmann.com 6 (Delhi - Trib.) (v) Society of Indian Automobile Manufacturers v ITO(E) [2016] 71 taxmann.com 138 (Delhi- Trib.) (vi) DCIT v Semi Conductor Laboratory, Deptt. of Space, Govt. of India [2016] 70 taxmann.com 223 (Chandigarh - Trib.) (vii) Tamil Nadu Cricket Association v DCIT(E) [2015] 60 taxmann.com 287 (Chennai-Trib.) (viii) ADIT (E) v Indian Medical Association [2015] 56 taxmann.com 271 (Delhi Trib) 2.31 The decision in the case of Mussoorie Dehradun Development Authority v CIT ITA No. 180/Del/2013 dt. 2.1.2017 relied on by the learned DR is distinguishable for the following reasons. (i) The said decision was in the context of rejection of registration under section 12A(a) of the IT Act. However, in the present case, the registration under section 12A is intact and is in force. The issue is the present case is whether exemption claimed u/s 11 can be denied relying on first proviso to section 2(15). (ii) The fact sale of projects at market rates to the bidders in auction proceedings was considered by the Hon'ble Bench in deciding the issue against the assessee in the above decision. However, the Gujarat High Court in Ahmedabad Urban Development Authority v ACIT (Exemptions) [2017] 83 taxmann.com 78 (Gujarat) (a superior forum to the Tribunal) has held that sale of properties at market rates in public auction cannot be considered as doing business, trade or commerce. (iii) In Mussoorie Dehradun Development Authority's case, the assessee had admitted the income under the head 'Income from business' and got its accounts audited under section 44AB. However, in the present case, the appellant had claimed exemption under section 11 by admitting the income under the head 'Income from other sources'. Further no tax audit was done u/s 44AB. (iv) In Mussoorie Dehradun Development Authority's case, the Hon'ble Bench relied on the decision of the High Court of Jammu & Kashmir in the case of Jammu Development Authority v CIT ITA No. 164/2012 dt. 7.11.2013.

Page 19 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 However, the aforesaid decision of the High Court of Jammu & Kashmir has been distinguished in the following cases. (a) CIT v Jodhpur Development Authority [2017] 79 taxmann.com 361 (Rajasthan)/[2016] 287 CTR 473 (Rajasthan) (b) Tribune Trust v CIT [2016] 76 taxmann.com 363 (Punjab & Haryana)/[2017] 247 Taxman 36 (Punjab & Haryana)/[2017] 390 ITR 547 (Punjab & Haryana)/[2017] 291 CTR 352 (Punjab & Haryana) (c) Jaipur Development Authority v CIT [2014] 52 taxmann.com 25 (Jaipur - Trib.)/[2015] 67 SOT 1 (Jaipur - Trib.) (d) Vanita Samaj v DIT(E) [2014] 45 taxmann.com 303 (Mumbai - Trib.)/[2014] 63 SOT 267 (Mumbai - Trib.) (e) Rajasthan Cricket Association v Ad.CIT [2017] 79 taxmann.com 464 (Jaipur -Trib.)/[2017] 164 ITD 212 (Jaipur - Trib.) (f) ITO v Moradabad Development Authority [2016] 71 taxmann.com 339 (Delhi -Trib.)/[2016] 49 ITR(T) 270 (Delhi - Trib.)/[2016] 159 ITD 971 (Delhi -Trib.)/[2017] 183 TTJ 278 (Delhi - Trib.) 2.32 Relevant extracts from the above decisions are separately enclosed as Annexure. 2.33 The High Court of Jammu & Kashmir in the case of Jammu Development Authority v CIT ITA No. 164/2012 dt. 7.11.2013 did not outline any law. The High Court only upheld the factual finding of the ITAT. 2.34 The learned DR has relied on the decisions in the case of Ahmedabad Urban Development Authority v ACIT [2016] 69 taxmann.com 381 (Ahmedabad Trib). The said decision has been overruled by the Gujarat High Court in Ahmedabad Urban Development Authority v ACIT (Exemptions) [2017] 83 taxmann.com 78 (Gujarat). Hence, the ITAT decision in the case of Ahmedabad Urban Development Authority v ACIT [2016] 69 taxmann.com 381 is not applicable. 2.35 The learned DR has also relied on the decisions in the case of Punjab Urban Planning & Development Authority v CIT [2006] 156 Taxman 37 (Chd) (Mag), Jalandhar Development Authority v CIT [2010] 35 SOT 15 (Amritsar) (URO) and Greater Ludhiana Area Development Authority v CIT ITA No. 1036/Chandi/2008. These decisions are in the context of registration under section 12A. However, as detailed earlier, the registration u/s 12A in the present case is intact and is in force. Secondly, these decisions have considered the factum of sale of properties at market rates in public auction as a factor against the assessee. However, as explained earlier, the Gujarat High Court in Ahmedabad Urban Development Authority v ACIT (Exemptions) [2017] 83 taxmann.com 78 (Gujarat) has held that sale of properties at market rates in public auction cannot be considered as doing business, trade or commerce. Thirdly, subsequent to these three decisions, many other decisions (both High Courts and Tribunals) have been rendered explaining as to why and how first proviso to section 2(15) will not be applicable. Thus, the aforesaid three decisions relied on by the learned DR are distinguishable on facts and law. Even otherwise, in view of inconsistent/contra decisions, that which favour the assessee to be adopted. 2.36 On facts and circumstances of the case and law applicable, proviso to section 2(15) was not applicable and consequently, exemption under section 11 should be allowed as claimed by the appellant. In response the Ld.CIT.DR defended the order of Ld.CIT(A) and submitted as under:- I. DENIAL OF EXEMPTION u/s 11 OF THE ACT

Page 20 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 The Assessee's contention is that it is not carrying on any activities for making profit and therefore, its income is eligible for exemption u/s 11 of the I.T. Act. For this purpose the assessee is relying on the fact that it is established by a State Legislation with the State Government and therefore, the assessee is totally accountable to the State Government and there are no Members, share holders or Partners etc. However, it is to be noted that KHB is a separate Board by Legislative House, it is not a Government and it is having an independent body to control its affairs. A perusal of the Profit & Lose Account shows that the assessee is mainly dealing in lands and is making huge profits on sale of lands. This aspect has been brought in very clearly in the assessment order. Various Courts have held that the charitable organisations can have incidental profit, but in this case, looking at the sale value of the land, which is at the prevalent market rate and looking at the surplus earned by the assessee it can be never said that the assessee id doing any charitable activities. Therefore, the A.O. had correctly denied benefit of Section 11 of the I.T. Act to the assessee. II. THE CASE OF APPELLANT IS COVERED BY THE PROVISO TO SECTION 2(15) The case of the assessee is clearly covered by the proviso to section 2(15) of the I.T. Act, 1961. The assessee's activities are totally in the nature of trade, business and commercial. The contention of the assessee that the KHB operates for no profit no loss basis is not true as can be seen from the Profit & Loss Account. It is true that the assessee does not have any private profit, but proviso to Section 2(15) of the Act does not speak of no private Profit. Proviso is very clear that if the charitable trust do any activities in the nature of trade or business, then the proviso will be clearly applicable and the A.O. is very clearly brought out in assessment order that the assessee is involved in pure business activities. Also, it can be seen that the assessee is charging fees and other charges apart from charging profit on sale of land and flats. This clearly shows that the assessee is involved' in business activities. Several case laws relied upon by the assessee are totally different on facts and materials and not applicable to the facts of the assessee's case. III APPELLANT ITSELF HAD FILED RETURNS OF INCOME IN THE STATUS OF AOP(TRUST) With regard to the contention of the assessee that the Assessing Officer has changed the status in the assessment order and therefore, the order is NULL AND VOID. As verified from the records and seen that the following are the status in which the assessee has filed its returns of income and status in which the Assessing officer has passed assessment order u/s 143(3) of the I.T. Act. From the details below it is noted that for A.Ys 2011-12, and 2013-14 to 2017-18 appellant SUO-MOTO filed returns in the status of AOP (TRUST). So, appellant cannot challenge this ground before the Hon'ble ITAT.

Status as per Status as per return of SI.No. A.Y. Assessment income order Artificial Juridical 1. 2005-06 AOP Person No Scrutiny 2. 2006-07 -DO- assessment 3. 2007-08 - AOP(Trust)

Page 21 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014

No Scrutiny 4. 2008-09 Trust assessment 5. 2009-10 Trust AOP (Trust) 6. 2010-11 Trust AOP (Trust) 7. 2011-12 AOP(Trust) AOP 8. 2012-13 Trust AOP 9. 2013-14 AOP (Trust) AOP 10. 2014-15 AOP (Trust) NA 11. 2015-16 AOP (Trust) NA 12. 2016-17 AOP (Trust) NA 13. 2017-18 AOP(Trust) NA III. DECISION OF HON'BLE ITAT OF HYDERABAD IN THE CASE OF IDRBT Vs ADIT(E) NOT APPLICABLE TO THE CASE OF APPELLANT With regard to the judgement of Hyderabad ITAT Bench, the facts were that the assessee was established by the Reserve Bank of India to promote the State Government and dissemination of the knowledge and conducting of research in the area of information technology with respect to finance sectors. In the course of activities the assessee render consultancy services and generate surplus. In this circumstances, the Tribunal held that the assessee's activities were not carried on with any profit motive and that the surplus was incidental. The Tribunal clearly found out that the activities of the assessee were not in the nature of commerce or business in nature. It was also held that the consultancy services was only incidental activities and not the main activity of the assessee. The main activity of the assessee was only charitable and therefore, the Tribunal allowed exemption u/s 11 to the assessee. In the case of KHB, it can be seen that the main activity of the assessee is to make profit in land and flat dealings. The statistics provided to show that no charitable activities is undertaken by the assessee by allowing land at a lower or free of cost to the major portion of the society. The land/flat is sold at the current prevailing market price and huge profit is made. Therefore, the decision of the Hyderabad Tribunal will not be applicable to the present case in hand. IV. CASE LAWS IN SUPPORT OF CONTENTION THAT ACTIVITIES OF THE APPELLANT ARE THE DETERMINING FACTOR Sl. Name of Case & No. Remarks No. Punjab Urban Planning & Development 1 Authority Vs CIT [2006] 156 Taxmann Is in favour of revenue 37(Chd) (MAG) Jalandhar Development Authority Vs 2 - Do - CIT [2010] 35 SOT 15 (Amritsar) (URO) Greater Ludhiana Area Development 3 Authority Vs CIT ITA No. - Do - 1036/B/Chandi/2008 In this case the Hon'ble Supreme Court held that 4 P. Krishna Mohan Vs CIT 35 ITR 48 (SC) while carrying on trade it is not essential that the entity should make profit

Page 22 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 or that the there should be a desire or wish to make profit. Rather, the question to be looked into is whether the activity has actually produced an income. Bharat Development Pvt. Ltd. Vs CIT 4 The Hon'ble Apex Court Taxman 58 (Delhi) clarified that by use of the expression `profit motive'. It is not intended that profit must, in fact, 5 be earned. It predicates a motivewhich pervades the whole series of transactions effected by a person in the course of the activity. Adityapur Industrial Area Development wherein the Hon'ble Authority Vs Union of India & Ors 153 Supreme Court held that taxman 107 (SC) by virtue of deletion of section 10(20A) and insertion of meaning of local authority by way of explanation below section 10(20) by the Finance Act 2002 w.e.f 6 01.04.2003 i.e A.Y.2003- 04 onwards, the income of the assesse i.e. Adityapur Industrial Area Development Authority was not exempt from taxation and also the provisions of article 289(1) are not attracted. ITO(E), Madurai Vs Kalanjiam Development Financial Services 62 7 Is in favour of revenue taxmann.com 278 (Chennai-Trib.) [2015] In light of the facts narrated above and the various judicial rulings mentioned above, it is evident that the appellant cannot claim that its activities are not in the nature of trade, commerce or business on the ground that there is no profit motive in conducting its activities. We have perused submissions advanced by both sides in light of records placed before us.

Page 23 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 12.1 The assessee was treated as AOP u/s.164 of the Act and exemption under section 11 was denied to assessee. The Ld.CIT(A) held that assessee has lost its charitable character and the income has been rightly taxed in the status of an AOP as per law. 12.2 There is no dispute that the assessee was granted registration under section 12A(a) vide registration vide letter dated 02.05.2005 w.e.f. 01.04.2003. Prior to 01.04.2003, the assessee was enjoying exemption under section 10(20A) of the Act. Since the assessee was granted registration under section 12A, the income of assessee will be exempt under section 11, subject to fulfillment of other conditions specified in the sections 11 and 13 of the Act. 12.3 In the case before us, the contention of the Ld.AO is that, the activities of assessee in so far as they relate to purchase, development and sale of plots/shops, houses, could not be treated for charitable purposes and, therefore, assessee was not entitled for exemption u/s 11 of the Act. He is of the opinion that provisions of section 11 were applicable in the case of charitable institutions. 12.4 In the case before us, the activities of assessee are charitable in nature. The assessee has been constituted for providing cheaper residential and commercial properties to the public. The management of the Board are officers and employees appointed by the State Government. In case of dissolution, the surplus after meeting the liabilities will go to the State Government. Therefore, the charitable activities are not in doubt.

Page 24 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 In fact, the assessee has been granted registration u/s 12A. Therefore, in our considered view, the Ld.AO was not justified to deny the exemption under section 11 of the Act on the basis of activities by holding that the purchase, development and sale of properties were not charitable activities. 12.5 Registration under section 12A has been granted w.e.f. 01.04.2003. In other words, the registration is effective for this year. The grant of registration is not an empty formality as it has to be granted after satisfying that the objects are charitable in nature. Since the registration has effect for this year also, the object of the assessee will have to be taken as charitable in nature. Therefore, it follows that the assessee will be entitled to deduction u/s 11 subject to fulfillment of necessary conditions mentioned in this provision. The submission of the revenue is that the activities carried out by the assessee are in no way different from the activities carried out by a builder developing a large colony. The submission of the Ld.AR is that there is no profit motive and the activities were carried out in pursuance of the objects of assessee. 12.6 In this connection, the provision contained in section 11(4A) assumes importance, which is to the effect that the provisions contained in sub-section (1), sub-section (2), subsection (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution being profits and gains of business, unless the business is incidental to attainment of objective of the trust, or, as the case may be, institution, and separate books of

Page 25 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 account are maintained by such trust or institution in respect of such business. This provision was discussed in the course of proceedings before us and we have summarized the rival submissions. 12.7 With effect from A.Y.2009-10, section 2(15) provided as under: (15)"Charitable purpose includes relief of the poor, education, medical relief, preservation of environment including watersheds, 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; Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is Rs.10 lakh or less in the previous year." Circular No.11/2008, F. No.134/34//2008-TPL, dated 19-12-2008 explains the above amendment w.e.f. 1-4-2009 as under :- An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of 'charitable purpose'. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the 'advancement of any other object of general public utility' shall not be a charitable purpose if it involves (ho carrying on of- (a) any activity in the nature of trade, commerce or business: or (b) 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 01 application, or retention of the income from such activity. 12.8 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. It would also imply that, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose’,

Page 26 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 even if it incidentally involves the carrying on of commercial activities. 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. 12.9 Similarly, entities whose objects continue to be eligible for exemption as charitable institutions, even if they incidentally carry on a commercial activity , subject to following conditions stipulated under section 11(4A) or the seventh proviso to section 10(23) as under: (i) the business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business. 12.10 The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' i.e. the fourth limb of the definition of 'charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Thus in our opinion, whether an entity is carrying on activity is in the nature of trade, commerce or business is a question of fact, which is to be decided based on the nature, scope, extent and frequency of the activity.

Page 27 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 12.11 If any assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business with a desire to earn profits, it would, not be entitled to claim that its object is for charitable purpose. In such a case, the object of 'general public utility' will be only a mask or a device to hide the true purpose. In our view, each case would, therefore, have to be decided on its own facts and no generalization is possible. 12.12 In this very connection, the definition of the term "business" furnished in section 2(13) was also discussed. The word "business" has been defined in an inclusive manner to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. 12.13 Therefore, the question before us is-whether, the activity of construction and sale of immovable property constitutes "business"? The only objection of the assessee in regard to the first mentioned question is that there is no profit motive. In other words, there is no doubt that the activity has been carried on continuously in an organized manner with a set purpose. The question is only regarding the profit motive. It is clear from the accounts that this activity has been undertaken with a view to earning profit so as to use the profit for the object of the authority. 12.14 The Ld.AR at the outset relied on decision of Hon’ble Karnataka High Court in case of PCIT vs. Karnataka industrial area development Board reported in (2021) 130 taxman.com 407.

Page 28 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 He submitted that the said decision stands upheld by Hon’ble Supreme Court in 130 taxman.com 408. The Ld.AR also relied on the decision of Hon’ble Allahabad High Court in the case of CIT Vs. Lucknow Development Authority and CIT Vs. UP Housing & Development Board reported in (2013) 219 Taxman 162 wherein it is held that the activities of such authorities as charitable in nature. The authorities in question before Hon’ble Allahabad High Court were established in the State of UP under the provisions of the Uttar Pradesh Urban Planning & Development Act, 1973. 12.15 In the present facts, the test which has to be applied is whether the object which is said to be non-charitable is the main or primary object of the trust or institution or it ancillary or incidental to the dominant or primary object which is charitable. It is therefore to be seen whether the purpose of the trust or institution in present facts involves carrying on of an activity for ‘profit’, or in other words, whether an activity for profit is actually carried on as an integral part of the purpose "as a matter of advancement of the purpose". 12.16 The activity must be for profit in order to attract the exclusionary clause. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be collect to describe it as an activity for profit. But where an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution.

Page 29 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 12.17 The test that also needs to be applied is, whether the predominant object of the activity involved is of general public utility, to sub serve the charitable purpose or to earn profit. Where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such manner that it does not result in any profit. The restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit making is not the real object. 12.18 Plethora of decisions have been cited and relied on by both sides. Before us, the plea of assessee is that, the activities of assessee involves carrying out charitable purpose which is not motivated to earn profit but is undertaken for the purpose of advancement or carrying out of the charitable purpose are correct. 12.19 Whereas Revenue alleges that, the predominant purpose of the assessee is driven towards earning of profits and that assessee during the rears have not carried out any activity that could be catagorised for advancement of general public utility. 12.20 It is not necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on a "no profit no loss" basis or that the profit shall proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on,

Page 30 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out charitable purpose. 13. The Ld.AR placed before us the KHB Act. As per section 3 of the said Act, the assessee is a body corporate having perpetual succession and a common seal and to sue and be sued in its corporate name. Further as per section 3 of the said Act, the assessee is competent to acquire, hold and dispose of property movable and immovable and to contract and to do all things necessary for the purpose of this Act. Chapter III of the Act deals with Housing Schemes and Land Development Schemes. Sections 17 to 32-A are found in Chapter-III. The relevant sections Sections 17, 18, 18-A, 19, 20, 21, 22, 23, 24 and 32, which are extracted as under: Section 17 of the KHB Act reads as follows: 17. Duty of the world to undertake housing schemes and land development schemes- subject to the provisions of this act and subject to the control of the State Government, the board may incur expenditure and undertake works in any area for the framing an executive of such housing schemes and land development schemes as it may consider necessary from time to time as may be entrusted to it by the State Government. Section 18 of the KHB Act reads as follows: 18. Matter to be provided for by housing schemes.- Notwithstanding anything contained in any other law for the time being in force, a housing scheme may provide for all or any of the following matters, namely.- (a) the acquisition by purchase, exchange or otherwise of any property necessary for or affected by the execution of the scheme; (b) the laying or relaying out of any land comprised in the scheme; (c) the distribution or redistribution of sites belonging to owners of property comprised in the scheme;

Page 31 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 (d) the closure or demolition of dwellings unfit for human habitation; (e) the demolition of obstructive buildings or portions of buildings; (f) the construction and reconstruction of buildings, their maintenance and preservation; (g) the sale, letting or exchange of any property comprised in the scheme; (h) the construction and alteration of streets and back lanes; (i) provision for the draining, water-supply and lighting of the area included in the scheme and carrying out by the Board in such area, drainage, sewerage and water supply works; (j) the provision of parks, playing-fields and open spaces for the benefit of any area comprised in the scheme and the enlargement of existing parks, playing fields, open spaces and approaches; (k) the provision of sanitary arrangements required for the area comprised in the scheme, including the conservation and prevention of any injury or contamination to rivers or other sources and means of water-supply; (l) the provision of accommodation for any class of inhabitants; (m) the advance of money for the purposes of the scheme; (n) the provision of facilities for communication and transport; (o) the collection of such information and statistics as may be necessary for the purposes of this Act; (p) any other matter for which, in the opinion of the State Government, it is expedient to make provision with a view to provide housing accommodation and to the improvement or development of any area comprised in the scheme or the general efficiency of the scheme. Section 18A of the KHB Act reads as follows: 18-A Matters to be provided for by Land Development Schemes.- Notwithstanding anything contained in any other law for the time being in force, a land development scheme may within the limits of the area comprised in the scheme, provide for all or any of the following matters, namely:-- (a) the acquisition by purchase, exchange or otherwise, of any land which in the opinion of the Board will be necessary for or affected by the execution of scheme; (b) laying or re-laying of all or any land comprised in the scheme and formation and alteration of streets; (c) drainage, water supply and electricity and carrying out by the Board in the area included in the scheme, drainage sewerage and water supply works; (d) the distribution or redistribution of sites comprised in the scheme; (e) raising the level of any land which the Board may consider expedient to raise to facilitate better drainage;

Page 32 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 (f) forming open space for the better ventilation of the area comprised in the scheme or any adjoining area; (g) sanitary arrangements required; (h) sites for Parks, Playgrounds, Stadium, recreation grounds, School buildings, Markets, Motor Vehicle Stands, Theatres, Police Stations, Post Offices, Co-operative Societies, Public Urinals and Latrines, Petrol Service Stations, Hospitals, Dispensaries, Banks, Burial and Cremation Grounds and Sites for public purposes of other kinds. Section 19 of the KHB Act reads as follows: 19. Preparation and submission of annual housing programme and land development programme budget and establishment schedule- (1) Before the first day of December in each year, the Board shall prepare and forward,-- (i) a programme, (ii) a budget for the next year, (iii) a schedule of the staff of Officers and servants already employed and to be employed during the next year; to the State Government in such form as may be prescribed. (2) The programme shall contain.-- (a) such particulars of housing schemes, land development schemes and labour housing schemes which the Board proposes to execute whether in part or whole during the next year as may be prescribed; (b) the particulars of any undertaking which the Board proposes to organise or execute during the next year for the purpose of the production of building materials; and (c) such other particulars as may be prescribed. (3) The budget shall contain a statement showing the estimated receipts and expenditure on capital and revenue accounts for the next year. Section 20 of the KHB Act reads as follows: 20. Sanctioned program, budget and establishment schedule- The State government may sanction the program, the budget and the schedule of the staff of officers and servants forwarded to it with such modification as it deems fit. Section 21 of the KHB Act reads as follows: 21. Publication of sanctioned program- The State government shall publish the program sanctioned bite under section 20 in official Gazette. Section 22 of the KHB Act reads as follows: 22. Supplementary programme and budget.— The Board may, at any time,during the year, in respect of which a programme has been sanctioned under section 20 submit a supplementary programme and budget and the additional schedule of the staff, if any, to the State Government and the

Page 33 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 provisions of sections 20 and 21 shall apply to such supplementary programme. Section 23 of the KHB Act reads as follows: 23. Variation of programme by Board after it is sanctioned.- The Board may, at any time, vary any programme or any part thereof included in the programme sanctioned by the State Government: Provided that no such variation shall be made if it involves an expenditure in excess of twenty per cent of the amount as originally sanctioned for the execution of any housing scheme or land development scheme included in such programme or affects its scope or purpose. Section 24 of the KHB Act reads as follows: 24. Sanctioned housing schemes and land development schemes to be executed- (1) after the program has been sanctioned and published by the state government under section 20 and 21, the board shall, subject to the provisions of section 23, proceeded to executive the housing scheme, the land development scheme or labour housing scheme included in the program. (2) the board shall not execute any housing scheme, land development scheme or labour housing scheme unless the same has been sanctioned by the state government. Section 32 of the KHB Act reads as follows: 32. Schemes entrusted to Board by Government, etc.- (1) The provisions of sections 18 to 24 (both inclusive) shall not be applicable to any housing scheme, land development scheme or labour housing scheme entrusted to the Board by the State Government except to such extent and subject to such modifications as may be specified in any general or special order made by the State Government, and every such order shall be published in the Official Gazette. (2) Notwithstanding anything contained in this Act, the Board shall not be competent to carry on any trading or financing activity for profit, whether in the execution of any scheme undertaken by, or entrusted to it, or otherwise." Section 33 of the KHB Act reads as follows: Chapter-IV of the Act deals with acquisition and disposal of land. Section 33 of the Act reads as under: 33. Power to purchase or lease by agreement.- (1) The Board may enter into an agreement with any person for the acquisition form him by purchase, lease or exchange, or any land which is needed for the purposes of a housing scheme or land development scheme or any interest in such land or for compensating the owners of any such right in respect of any deprivation thereof or interference therewith:

Page 34 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 Provided that the previous approval of the State Government shall be obtained in case of purchase or exchange involving land worth more than rupees ten lakhs or lease for more than five years. (2) The Board may also take steps for the compulsory acquisition of any land or any interest therein required for the execution of a housing scheme or land development scheme in the manner provided in the Land Acquisition Act, 1894, as modified by this Act and the acquisition of any land or any interest therein for the purposes of this Act shall be deemed to be acquisition for a public purpose within the meaning of the Land Acquisition Act,1894." 13.1 A cumulative reading of the aforesaid provisions would indicate that it is the duty of the Housing Board to undertake housing schemes and land development schemes, as it may consider necessary from time to time and as may be entrusted to it by the State Government. What has to be provided for in a housing scheme is stated in Sections 18 and 18-A of the Act which would include, inter alia, the acquisition of property by purchase, exchange or otherwise i.e., by way of acquisition of any property necessary for or affected by the execution of the scheme. Under Section 19 of the Act before the first day of December in each year, the Board has to prepare and forward, inter alia, a programme and a budget for the next year and the programme shall contain the particulars of the housing schemes, land developments schemes and labour housing schemes which the Board proposes to execute, whether in part or whole, during the next year as may be prescribed, and such other particulars as may be prescribed. The State Government may sanction the programme, the budget and the schedule of the staff of officers and servants forwarded to it with such modifications as it deems fit.

Page 35 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 13.2 The State Government has to then publish the programmes sanctioned by it under Section 20 in the Official Gazette. A supplementary programme and budget may also be sought by the Board and the State Government may sanction such a supplementary programme. The Board can vary any programme or any part of it, even after the sanction made by the State Government, provided that no such variation shall be made if it involves an expenditure in excess of 20% of the amount as originally sanctioned for execution of any housing scheme or land development scheme included in such programme or affects its scope or purpose. 13.3 After the programme has been sanctioned and published by the State Government under Sections 20 and 21, the Board, subject to any variation to be made under Section 23 of the Act can proceed to execute the housing schemes, land development schemes or labour housing schemes included in the programme. This is as per sub-section (1) of Section 24. Therefore, this sub- section states that the Board can proceed to execute the scheme included in the programme after it has been sanctioned and published by the State Government. But sub-section (2) of Section 24 of the Act assumes significance, inasmuch as it states that the Board shall not execute any housing scheme, land development scheme or labour housing scheme, unless the same has been sanctioned by the State Government. 13.4 Sub-section (2) to Section 24 was inserted by Act No.10 of 1974 and is deemed to have come into force on 03.11.1973. What is the object and purpose of insertion of sub-section (2) to Section

Page 36 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 24 of the Act has to be unraveled. It is noted that the Act is of the year 1962 and it came into effect from the day it was notified in the Official Gazette on 27.01.1965, but with effect from 03.11.1973, sub-section (2) of Section 24 has been inserted, which creates an embargo on the Board to execute any housing scheme, land development scheme and labour housing scheme, unless the same has been sanctioned by the State Government. 13.5 In this regard, it is necessary to emphasize the expressions 'the Board shall not execute' and 'unless the same has been sanctioned by the State Government' which mean that no housing scheme, land development scheme and labour housing scheme can be executed, unless it has received the sanction of the State Government. The object and purpose of insertion of sub-section (2) to Section 24 are not for to seek, the same being to ensure that the State Government is made aware of which one of the housing schemes, land development schemes or labour housing schemes, included in the programme, which has been sanctioned under Section 20 of the Act would be executed and further, where such a scheme involves acquisition of land, the State Government is appraised of the said fact also, as it has to make available the budget for the purpose of paying compensation to the land owners, where the land is sought to be acquired for execution of the housing schemes, land development schemes or labour housing schemes. 13.6 This aspect becomes clearer when sub-section (2) of Section 24 of the Act is juxtaposed with Section 32 of the Act. The latter Section states that the provisions of Sections 18 to 24 (both

Page 37 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 inclusive) shall not be applicable to any housing schemes, land development schemes or labour housing schemes, entrusted to the Board by the State. This is because such a scheme would emanate from the State Government and it being aware that such a scheme would entail acquisition of land, it is not necessary for the very State Government to once again sanction such a scheme, which in the first place has emanated from the State Government itself. On the other hand, when such a scheme is initiated from the Housing Board, it is necessary that not only Sections 18 to 23, but also Section 24 is complied with. 13.7 The reason being, that the Board, which intends to execute a scheme must keep the State Government informed about the programme to execute such a scheme in terms of Sections 18 to 23 and further under Section 24 of the Act. On such schemes being sanctioned by the State Government, it is necessary that the State Government also sanctions housing scheme, land development scheme or labour housing scheme. The reason as already noted being that there may be several schemes incorporated in the programme submitted to the State Government by the Housing Board under Section 19(1)(i) of the Act containing particulars as per sub-Section (2) of Section 19 of the Act. Even on the sanction of such schemes, and it is published in accordance with Section 20 of the Act by the State Government, it is just and necessary that there is application of mind to a particular housing scheme, land development scheme or labour housing scheme intended to be executed by the Board. This is because though several schemes may be incorporated in

Page 38 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 the programme submitted before the first day of December in each year by the Board to the State Government, it is left to the Board to execute a particular housing scheme. 13.8 The decision of the Board to execute a particular housing scheme, land development scheme or labour housing scheme must therefore be brought to the knowledge of the State Government particularly when it entails acquisition of land. This is because the State Government has to make budgetary allocation and find source of funds to pay compensation to the land losers, if the Housing Board intends to execute any such scheme on the land belonging to private land owners. Therefore, the use of the words "shall not execute" and the words "unless the same has been sanctioned by the State Government" have been intentionally used by the State Legislature so as to make it a mandatory requirement. 14 From the above, it is clear that the schemes undertaken by assessee (on its own) must be with the sanction of the State government. Further, it is also clear that assessee is independently allowed to implement schemes on its own by private negotiations. This is clear from the Karnataka Housing Board allotment regulations 1983, forming part of the KHB act. We note that Rule 15A is inserted with effect from 22/08/2002 by the amendment regulations 2002 reads as under: 15A. Nothing contained in these regulations shall apply to joint-venture projects executive by Karnataka Housing Board’s or any form, company Corporation et cetera promoted by the Karnataka Housing Board in association with

Page 39 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 corporate awards in society, Corporation, company Association union, private interpreter or a private firm where projects are developed on lands belonging to joint-venture partner or where Karnataka Housing Board and the joint- venture partner or partners contribute to the investment of capital in a joint-venture project approved by the government. 14.1 The above regulation is inserted keeping in view the projects entered into by assessee privately. Further, we also observed that assessee has to prepare and submit the annual Housing program, housing scheme, budget and establishment schedule to the State government in Form 1. On perusal of Form 1, we note that the projects undertaken by assessee are bifurcated into 2 parts. In the 1st part, assessee has to give details of projects undertaken on behalf of State government and in part be the details of such projects undertaken by itself. It is clear from the above that assessee undertakes projects/schemes on behalf of the State government and also through private negotiations. 14.2 Post 01/04/2009, the Courts have held that the predominant intention of assessee needs to be established before invoking the proviso to section 2 (15) of the Act. If the predominant object of the activity was the promotion of commerce and trade in those commodities which was clearly an object of general public utility and profit was merely a by-product which resulted incidentally in the process of carrying out charitable purpose, then the charitable character of the purpose would not be lost. Under such circumstance, the dominant and

Page 40 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 real object of the activity being the advancement of the charitable purpose the mere fact, that the activity yielded profit will not alter the charitable character of the assessee 14.3 The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility', i.e., the fourth limb of the definition of 'charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 14.4 It therefore needs to be analysed based on the provisions of KHB Act, whether the assessee has for its object 'the advancement of any other object of general public utility'. If assessee for years under consideration has been engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim exemption u/s. 11 of the Act. It also cannot be held that the primary object of assessee is for charitable purposes. In the above context we analyse the actual affairs of assessee as demonstrated in its annual accounts submitted before us and the paper book.

Page 41 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 14.5 For assessment years under consideration on perusal of schedule 1 & 3 to the balance sheet, it is noted that assessee had following funds: Schedule No. 1 Housing Fund HEAD OF As on A/C Code ACCOUNT 31.3.2010 1 CAPITAL FUND 1193816623 TOTAL 1,193,816,623

Schedule 4 gives the breakup of deposits available with assessee:

Page 42 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014

14.6 On perusal of KHB Act, section 50 under Chapter VII, provides regarding the funds of the board and section 51 provides for application of fund as under: Section 50: Board’s Fund (1) the board shall have a fund because the Housing Board funds. (2) the board may accept grants, subventions, donations and gifts from the central government and state government or local authority or any individual or body, whether Incorporated does not warrant any or all of the purposes of this act. (3) xxxx (4) all monies received by all on behalf of the board by virtue of this act, all proceeds of land or any other kind of property sold by the board, all drenched and all interests, profits and any other monies accruing to the board, shall constitute the Housing Board fund. (5) except as otherwise directed by the state government, all monies and receipts specified in the foregoing provision and forming part of the fund of the board shall be deposited in reserve Bank of India remain a scheduled banger invested in such securities as may be approved by the state government. 14.7 From the above it is clear that the state government do not have any control over the funds of assessee. Further from income and expenditure account it is clear that assessee had income

Page 43 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 from sales, interest income, rent and lease rent and income from other schemes as enumerated under schedule 15 &16.

14.8 For assessment years under consideration on perusal of schedule 13 the income and expenditure account it is noted that assessee generated income from following seals:

Page 44 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014

Schedule SALES Amount in Rs. No.13

As on As on A/C code Head of account 31.3.2009 31.3.2008

Sale of houses slum 4803 0 0 housing scheme 5000 Sale of house sites 74,796,041 53,835,771 5001 Auction sale of sites 375,788,231 125,164,741 5002 Sale of Imarginal land 13,852,306 16,468,423 Auction sale of houses & 5003 0 109,234,969 shops 5005 ORS other sites 579,626,926 54,597,065

5010 Out right sale - houses 1,128,150,538 2,087,046,260

5100 LCS sales 79,099,569 22,922,646 Diff. between prov. 5101 17,697,653 22,969,365 Cost & final cost

Total 2,269,011,264 2,492,239,240

14.9 It is also observed that the number of units allotted by assessee for years under consideration are summarised as under:

SI. No. of units allotted Particulars No. Accounting years 2007-8 2008-09 2009-10

Page 45 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014

EWS (economically 01. 10 23 72 weaker sections )

LIG (Low income 02. 2473 2712 1959 group)

MIG (Middle income 03. 2142 2699 1696 group)

HIG (High Income 04. 818 1124 793 group) Total 5443 6558 4520

ORS houses LCS sites Total Sales Cost Sales Cost Sales Cost 47080000 43521608 12980000 11998948 60060000 55520556

Page 46 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 15.1 As such all receipts exceeding the threshold limit of ₹ 10 lakhs as stipulated by the amended provision of section 2 (15) would be relevant to consider whether the activities of assessee can be considered to be eligible for deduction under section 11 or not. The KHB Act is very clear in respect of the funds to constitute the boards fund. Further the other income under schedule 15 and 16 enumerate that the development activities carried on by assessee cannot be construed to be purely charitable in nature. The EMD/Registration fee forefited under schedule 16 cannot be in respect of a housing scheme floated for general public utility/interest. 15.2 The decisions relied by the Ld.AR does not come to rescue as they do not deal with the amended provisions of section 2 (15) of the Act which came into effect from 01/04/2009. The period which was considered by the Hon’ble High Court’s in those cases were prior to the insertion of amended section. The subsequent decisions by coordinate benches of this Tribunal also are distinguishable on facts, as those were rendered by relying on the decisions of Hon’ble High Court’s for such period during which the provision of section 2 (15) of the act were not on statute. We refer to the decision of Hon’ble Karnataka High Court in case of DCIT Vs. KIADB (supra), wherein identical situation arose for consideration. Hon’ble High Court returned a fact KIADB functions under all pervasive control of the State Government. Hon’ble High Court also noted that Income and Expenditure account of KIADB showed the main component of income was in the form of interest of Fixed deposits. As we have already

Page 47 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 observed that in the facts of present assessee before us, the main component of income is out of Outright sale of houses, Auction sale of sites, lease cum sale and Outright sale of other sites. 15.3 At this juncture, we refer to the decisions relied by the Ld.DR vide written submissions dated 26/02/2018, reproduced hereunder: “4.25 It is well settled legal position that, the requirement of profit motive is not essential n, conduct the activities which are in the nature of trade, commerce or business. Further, it is not correct to assess the nature of the activities carried on by the assessee solely on the basis of earning profit or loss. As such, the nature of the activities of the assessee should be judged purely on the basis of activities carried on by the assessee rather than on the basis of earning profit or not. This particular view point has been upheld by the Hon'ble Supreme court in various decisions. For example, the gist of some of the decisions is given below for ready reference: (i) The Hon'ble Supreme Court in the case of P Krishna Menon Vs. CIT (35 ITR 48) has held that it is not essential to the carrying on of trade that the people carrying it on should make a profit, nor is it even necessary to the carrying on of trade that the people carrying it on should desire or wish to make a profit. It is further observed by the Hon'ble Supreme Court that the question to be looked into is, whether the activity has actually produced an income and it does not matter whether that activity is called by the name of business, profession, vocation or by any other name and it is also immaterial with what intension it was carried out. (ii) It is also held by the Hon'ble Supreme Court in the case of State of Gujarat Vs Raipur Manufacturing Co. Ltd., (19 STC 1) and also by the Hon'ble Delhi High Court in the case of Bharath Development Pvt. Ltd., Vs CIT (133 ITR 470) that to regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure. It is also made it clear by the Hon'ble Supreme Court that by the use of the expression `profit motive' it is not intended that profit must, in fact, be earned. It predicates a motive which pervades the whole series of transactions effected by a person in the course of his activity. (iii) Similarly, the Hon'ble Supreme Court in the case of Laxminarayan Ramgopal and Sons Ltd., Vs. Government of Hyderabad (24 ITR 449) observed that the activities which constitutes carrying on of business need not necessarily consists of activities by way of trade, commerce or manufacture or activities in the exercise of

Page 48 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 a profession or vocation. They may even consists of rendering services to others which services may he or a variegated character like agency business consisting of numerous and continuous operations. 4.26 Further, one more question would arise. with regard to exemption of income of the assessee being an organ of government by virtue of the article 289(1) of the Constitution of India. This issue was adjudicated by the Hon'ble Supreme Court in the case of Aditvaour Industrial Area Development Authority Vs. Union of India and others ([2006] 153 TAXMAN 107 (SC) wherein it was held by the Hon'ble Supreme Court that by virtue of deletion of section 10(20A) and insertion of meaning of local authority by way of explanation below section 10(20) by the Finance Act, 2002 w.e.f. 01.04.2003 i.e. A.Y. 2003-04 onwards, the income of the assessee i.e., Adityapur Industrial Area Development Authority was not exempt from taxation and also the provisions of article 289(1) are not attracted. The facts of the case and the gist of the decision of the Hon'ble Supreme Court in this regard are reproduced below for ready reference: FACTS The assessee an Industrial Area Development Authority was a body corporate constituted under the Bihar Industrial Area Development Authority Act. 1974 to provide .for planned development of industrial area, for promotion of industries and matters appurtenant thereto. By the Finance Act, 2002, section 10(20,4) was omitted and an Explanation was added to section 10(20) with effect from 1-4-2003. In view of the amendment, a notice was issued by the Commissioner to the Manager of the Bank to deduct income-tax at source from the interest accrued on fixed deposit receipts of the assessee-authority. The assessee-authority filed a writ petition challenging the notice of the Commissioner on the ground that its income was not liable to be assessed under Act, in view of article 289(1). The High Court held that in view of the fact that section 10(20A) was omitted and an Explanation was added to section 10(20) enumerating the 'Local Authorities' contemplated by section 10(20), the assessee-authority could not claim any benefit under those provisions after 1-4-2003 and that the exemption under article 289(1) was also not available to the assessee - authority as it was a distinct legal entity and its income could not be said to be the income of the State so as to be exempt from Union taxation. HELD The income of a local authority chargeable under the head 'Income from house property', 'Capital gains' or 'Income from other sources' or from a trade or business carried on by it was earlier excluded in computing the total income of the authority of a previous year. However, in view of the amendment, with effect from 1-4-2003, in the Explanation 'local authority' was defined to include only the

Page 49 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 authorities enumerated in the Explanation. which does not include an authority such as the assessee. At the same time section .10(20A) which related to income of an authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, which before the amendment was not included in computing the total income, was omitted. Consequently, the benefit conferred by section 10(20A) on such an authority was taken away. [Para 4] A mere perusal of article 289(1) discloses that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise as to whether it is still taxable in view of the provision of clause (2) of article 289 which dominantly is in the nature of a proviso. The income of the State within the meaning of clause (1) of article 289 may be taxed by law made' by the Parliament, if such income is derived .from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. Clause (1) of article 289, therefore, empowers Parliament to frame law imposing a tax on income of a State which is earned by means of trade or business of any kind carried by or on behalf of the Stale Government. [Para 8] Clause (2) of article 289 presupposes that the income sought to be taxed by the Union is the income of the State, but the question to be answered at the threshold is whether in terms of clause I) of article 289, the income of the assessee was the income of the State. Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly section 17 thereof, the income of the assessee constituted under the said Act was its own income and that the assessee used to manage its own finds. It had its own assets and liabilities. It could sue or be sued in its own name. Even though, it did not carry on any trade or business within the contemplation of clause (2) of article 289, it still was an Authority constituted under an Act of the Legislature of the State having a distinct legal personality, being a body corporate, as distinct .from the State. Section 17 further clarifies that only upon its dissolution its assets, funds and liabilities devolve upon the State Government. Necessarily, therefore, before its dissolution, its assets, funds and liabilities were its own. It was, therefore, ,futile to contend that the income of the assessee was the income of State Government even though the Authority was constituted under an Act enacted by the State Legislature by issuance of a Notification by the Government thereunder. [Para 9] According to Basu's Commentary on the Constitution of India articles 28 5 and 289 are analogous to each other inasmuch as while article

Page 50 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 285 exempts Union property from State taxation, article 289 exempts the State property from taxation. While clause (1) of article 289 exempts from Union taxation any income of a State, derived from Governmental or non-Governmental activities, clause (2) provides an exception, namely, that income derived by a State from trade or business will be taxable, provided a law is made by Parliament in that behalf. Clause (3) of 289 is an exception of the exception prescribed by clause (2) of article 289 and it provides that income derived from particular trade or business may be made immune from Union taxation if Parliament declares such trade or business as incidental to the ordinary functions of Government. The reason is obvious. Under the Constitution, the State has no power to tax any income other than agricultural income. Under the Constitution, power to tax ‘income’ is vested only in the Union. Therefore, while any property of the Union is immune from State taxation under article 285(1), income derived by the State from business, as distinguished from Governmental purposes, shall not have exemption from Union taxation unless the Parliament declares such trade or business as incidental to the ordinary functions of Government of the State. [Para 10] Applying the above test to the facts of the instant case, it was clear that the benefit, conferred by section 10(20A) on the assessee had been expressly taken away. Moreover, the Explanation added to section 10(2) enumerates the 'local authorities' which do not cover the assessee. [Para 11] The High Court was right in concluding that the authority could not claim exemption from Union taxation under article 289(1). The impugned notice issued by the Income-tax Authorities was, therefore, valid and legal and could not be successfully challenged in the writ petition. Accordingly, the appeal was to be dismissed. [Para 20] 4.27 In the light of various judicial rulings mentioned above, it is amply clear that the assessee cannot claim that its activities are not in the nature of trade, commerce or business on the ground that there is no profit motive in conducting its activities and therefore, its income is not subject to income tax. 4.28 For augment sake, if it is considered but not admitted that there is no profit motive in executing the activities of the assessee, but, it is an undisputed fact that ultimately the activities of the assessee has resulted in generation of huge amount of profits year after year for a considerable period of time. Further, the assessee has carried out the activities/ rendered the services to the industrialists/ entrepreneurs in lieu of which collected/ received consideration towards sale of industrial sites and fee for various services rendered thereof.

Page 51 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 4.29 Further, the provisions of article 289(1) of the Constitution of India are also not applicable to keep the income of the assessee outside the purview of the income tax inasmuch as the assessee, though a body corporate constituted under 10-113 Act, 1962, is a distinct legal entity and its income could not be said to be income of the state so as to exempt from union taxation. Accordingly, the activities of the assessee would squarely fall under the ambit of (1) activities in the nature of trade, commerce or business and (2) rendering any services in relation to any trade, commerce or business as envisaged u/s 2(15). 4.30 In this connection, reliance is placed on various decisions of ITAT and Hon'ble Court wherein it was held that the activities of various statutory bodies such as Jammu Development Authority, Punjab Urban Planning and Development Authority, Indore Development Authority etc., are in the nature of trade, commerce or business as envisaged under amended provisions of section 2(15). The relevant case laws are discussed below: 1. The decision of Hon'ble High Court of Jammu & Kashmir in the case of Jammu Development Authority vs. Union of India dated .12.11.2013 (ITA No.164/2012, CMA2/2012): In this case, the Hon'ble High Court has concurred with the view point of ITAT with regard to upholding the order of CIT withdrawing the status of charitable institution given to the assessee u/s 12AA(1)(b)(i) of the I.T. Act. The relevant portion of the order of the ITAT, Amritsar Bench (Jammu Development Authority vs. CIT, Jammu 30 (Asr)/2011) dated 14.6.2012 is reproduced below:- "As per objects of the assessee, it is observed that the main object of the assessee is to promote and secure the development of local area and there is no charitable purpose or any activity for general public utility. The activities of the assessee are aimed at earning profit as it is carrying on activity in the nature of trade, commerce or business. Further, profit making by the assessee is not mere incidental or by product of the assessee. There is no real object of the assessee and there is no spending of the income exclusively for the purpose of charitable activities and profits of the assessee are not used for charitable purpose under the terms of the object and there is no oblgation on the part of the assessee to spend on charitable purpose' only. Also as per clause 53 of the Jammu & Kashmir Development Act, on dissolution of all properties and funds to vest in the Government and for the purpose of realizing properties, the 'Unction of the Authority shall be discharged by .the Government. We concur with the views of the Ld. CIT on transfer of the properties, funds and dues and liabilities etc. will vest in the Govt. There is no restriction how the same are to be utilized by the Government. There are other

Page 52 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 objects like sale and purchase. which makes the Authority a commercial organization. Therefore, in the facts and circumstances of the case, even on dissolution or winding up by not having any restriction on application of asset for charitable purpose, the objects pursued by the assessee cannot be said to be a charitable in nature. As regards the reliance on the decisions of various courts of law by the Ld.CIT, most of the decisions have been dealt by the Tribunal in the case of M/s. Jalandhar Development Authority vs. ITO (supra). In the facts and circumstances of the present case, we concur with the views of the Ld. CIT that Jammu Development Authority is an Authority established with the motive of profit constituted under the Jammu 7 Kashmir Development Act, 1970 and that the activities of such Authority are hit by section 2(15) of the Act read with first and second proviso and are not in line with the objects of the Authority/Trust so far as the activities relating to purchase and sale of properties, as mentioned hereinabove. Hence, the activities are not genuine to the extent, mentioned hereinabove and the Ld. CIT, Jammu, has rightly being satisfied held that the Jammu Development Authority is not entitled to registration and accordingly cancelled the registration so granted." 2. Further, the relevant portion of the Hon'ble High Court of Jammu and Kashmir confirming the above order of the ITAT is reproduced below for ready reference:- "The Tribunal has reached a categorical conclusion that the assessee - Jammu Development Authority cannot be regarded as an institution or trust which may have been set up to achieve the objects enumerated under Section 2 of the Act particularly in view of the addition of first and second proviso made by the Finance Act, 2008 w.e.f. 1.4.2009 to Section 12AA of the Act. There are findings of fact that the assessee- appellant has not been acting to advance any of the object concerning general public utility. Even otherwise the proviso which has been added by the Finance Act, 2008 wef. 1.4.2009 stipulates that the advancement of any other object of the general public utility shall not be a charitable purpose, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relating to any trade, commerce or business or a cess or fee or any other consideration. We find that no question of law much less a substantial question of law would emerge from the impugned order of the Income Tax Appellate Tribunal warranting admission of the appeal. The appeal is wholly without merit and is thus liable to be dismissed.” As the facts of the case involved in the case of the assessee are similar to that of Jammu Development Authority, the decision of the Hon'ble

Page 53 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 ITAT and Hon'ble High Court is squarely applicable to the case of the assessee. 3. The decision of the ITAT, Chandigarh-B Bench in the case of Punjab Urban Planning And Development Authority (103 TTJ 988), wherein it was held that — "We agree with the conclusion of the learned CIT, as contended by learned CIT-Departmental Representative, that a charitable institution provides services for chairtable purposes free of cost and for no gain and are for the benefit of public at large. As we have discussed in the preceding para, the assessee acquires land at nominal rates and after developing the same, the same land (is sold) on high profit which cannot be said to be charitable activity. Even just for argument sake, under the present facts, if registration is granted, then every private colonizer will claim charity. The facilities which are provided to the plot holders are incidental to the commercial activity carried out by the PUDA and if certain facilities like parks, community center, school are provided is not only basic requirement, rather a tool of attracting the investing wherein the hidden cost of these facilities is already included. In the absence of these facilities, normally the purchaser may not invest and the prices may be less. In view of these facts and judicial pronouncements; we are of the view that the application of the assessee has been rightly rejected by learned CIT. The stand of the learned CIT is upheld. Appeal of the assessee is therefore, dismissed". 4. The decision of the Indore bench of ITAT in the case of Indore Development Authority reported in ITA No:366 Ind.2008(2010) dated 6th July 2010, wherein the Hon’ble ITAT has up-held the order of the CIT rejecting the application for registration u/s.12A of I.T. Act by relying on various decisions mentioned therein.” 16. Activity of assessee was to construct housing projects on land provided by State Government or acquired by it and sell it to people belonging to different income groups. Thus, the assessee has consistently earned substantial profit in this activity. Therefore, the activity has been carried on with profit motive in the same manner in which a private builder would conduct his business. It can’t be said that such activities are incidental to the main object of the trust. 16.1 Apart from this, the activity of construction and sale of immovable property cannot be the object but only a mean to

Page 54 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 achieve the object of development of area in accordance with the plan. Therefore, while the object in a given case may be a charitable purpose, not involving profit, the activities undertaken by assessee in pursuance of the object, attained the colour of business. 16.2 We are also of the view that each individual receipt from disposal of the property cannot be said to be income of the assessee available for charitable purpose because expenditure has to be incurred and has been incurred in acquiring land and construction thereon. Therefore, only the surplus from this activity can be said to be the income derived from property held under trust. There is yet another angle, namely, that some meaning has to be placed on the content of sub-section (4A) of section 11 and especially on the words "unless the business is incidental to attainment of the objective of the trust". The legislature postulates that a charitable institution may have to carry on incidental business for attainment of objective. If the argument of the Ld.AR is that, there is no profit motive in so far as the development authority is concerned and, therefore, there is no question of carrying on any business, then no meaning can be placed on the contents of this provision. 16.3 It has been mentioned earlier that the assessee has carried on systematic activities in a regular manner for construction of Building as per plan, which have led to profit, and such activity is not incidental to the main object of town planning, therefore, it is clear that the assessee has carried on a business which is not incidental to attainment of objects of the authority. Subsection

Page 55 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 (4A) provides that no deduction shall be allowed under subsections (1), (2), (3) or (3A) from such profit. However, the incidence of taxation is lifted provided that-(i) the business is incidental to the attainment of the objective, and (ii) separate books of account are maintained in respect of such business. It is not the case of assessee that assessee maintained separate books of accounts as per section 11(4A). Being so, assessee can’t be granted exemption under sec. 11 of the Act for both the assessment years. Accordingly, the grounds raised by assessee stands allowed for statistical purposes. In the result, the appeal filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 11th October, 2021.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 11th October, 2021. /MS/

Page 56 of 56 ITA Nos. 394/Bang/2013 & 806/Bang/2014 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.