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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI B. R. BASKARAN
Per Bench : These are cross appeals by the Revenue and the Assessee against two orders dated 23.12.2017 AND three orders dated 31.3.2018 of CIT(A)-13, Bengaluru, relating to AY 2010-11 to 2014-15 respectively.
All these appeals involve common issues and were heard together. We deem it convenient to pass a common order.
The issue which requires to be considered for decision as a preliminary issue in the appeals by the revenue is as to whether the CIT(A) was justified in coming to the conclusion that the assessee’s activities do not fall within the ambit of the proviso to section 2(15) of the Income-tax Act,1961 ['the Act' for short] and therefore, the assessee is entitled to benefit of exemption u/s 11 of the Act. The
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facts and circumstances under which the aforesaid issue has to be adjudicated are that the Mysore State Road Transport Corporation, being the predecessor of all road transport corporations in the State of Karnataka, was constituted in the year 1961 under the Road Transport Corporation Act, 1950 (RTC Act, 1950 in short) for providing safe, progressive and economical transport services to the general public in the State of Karnataka. Subsequently, the same was renamed as 'Karnataka State Road Transport Corporation' (`KSRTC' in short). Subsequently, on 20.08.1992, it was incorporated as a company within the meaning of Section 25 of the Companies Act, 1956. The assessee was granted registration u/s 12A(a) by the CIT Karnataka vide Order in ACCTS/718/10A/VOL.A-II/K-528 w.e.f. 20.08.1992.
The assessee claimed the benefits of exemption under Sec.11 of the Act on the ground that it was existing for charitable purpose as defined in Sec.2(15) of the Act. Section 2(15) of the Act has been amended by Finance Act, 2010 w.e.f. 01.04.2009 (i.e., w.e.f. Assessment Year 2009-10). As stated earlier, the definition of “Charitable Purpose” as given in Sec.2(15) of the Act was amended by the Finance Act, 2010, w.e.f. 1.4.2009. By the aforesaid Amendment, a proviso has been inserted to the definition of “Charitable Purpose” in Sec.2(15) of the Act, which reads as follows:- “2(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,
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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”]
The Director of Income (Exemption) Bangalore vide his order No. DIT(E)/KSRTC/AAACV6497R/ITO(E)-1/2011-12 dated 25/11/2011 had passed an order U/s 12AA(3) of the Income-tax Act 1961, cancelled the registration granted to the Assessee. The assessee preferred an appeal before the Horible ITAT, Bengaluru Bench `A’ Bengaluru and the Hon’ble ITAT vide its Order in ITA No. 74/Bang/2012/ dated 20.02.2015 canceled the order of DIT (Exemption), Bangalore. Thereafter the department preferred appeal before the Hon'ble Karnataka High Court and the High Court vide its order in ITA No. 302 of 2015 dated 12.02.2016 dismissed the appeal by the department holding that there is no merit in appeal and answering the substantial question of law in favour of the assessee. In the circumstances and on the merit of the above judgments passed by the Hon'ble ITAT, Bangalore "A" Bench, Bangalore and The Hon’ble Karnataka High Court, the registration granted u/s 12AA vide Order No. Accts/718/10A/Vol-II/K-528 dated 20/08/1992 was restored.
In the assessment proceedings for assessment year 2010-10, AO firstly referred to the fact of cancellation of registration u/s 12AA of the Act and also came to conclusion that the assessee was involved in activities in the nature of business and was, therefore, not existing for charitable purposes as per proviso to section 2(15) of the Act for the following reasons: i) Revenue from operations and miscellaneous income was Rs.1515,06,05,000 and Rs. 150,92,67,000/- respectively and these incomes included income from streams which were commercial in nature. ii) It was providing buses on hire for excursion, wedding, pilgrimage etc., to general public and charges for such letting are collected on commercial basis.
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iii) The assessee was providing advertisements on buses and charging substantial fees. iv) Assessee carries on activities which are akin to business venture rather than charitable organization. 7. These are the primary reasons assigned by the AO for coming to the conclusion that the assessee was not existing for charitable purpose and therefore was not entitled to the benefit of deduction u/s 11 of the Act. The AO thereafter proceeded to compute the total income of the assessee by treating the excess of income over expenditure as chargeable to tax besides making certain additions also. The computation of total income in each of the AYs was as follows: AY 2010-11: (In Rs.) Computation of Total Income Net Profit as per Income & Expenditure account 48,84,68,000 ADD: Provision for Bad and Doubtful Debts disallowed 45,90,000 ADD: Addition on account of welfare fund 46,16,000 ADD: Depreciation disallowed (depcn claimed-depcn allowed= 176 ,81,85,000-67,51,09,753) 109,30,75,247 Income from Profits and gains of business or profession 159,07,49,247 Total Income 159,07,49,247 Tax on Business Income 47,72,24,774 Add: Surcharge @ 7.5`)/0 3,57,91,858 Total 51,30,16,632 Add: Education cess @ 3% 1,53,90,498 Total 52,84,07,130 Less: TDS 35,22,347 Balance Tax 52,48,84,783 Add: Int u/s 234B 25,19,44,695 Int u/s 234C 2,65,06,679 Total 80,33,36,117
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AY 2011-12: (In Rs.) Computation of Total Income 62,05,26,000/- Net Profit as per Income & Expenditure account Less: Profit on sale of land (Considered separately) 74,29,12,000/- Loss from Profits and gains of business or profession (-)12,23,86,000/- Add: 1. Addition on account of Property Insurance Fund (Refer to Para No. 8) 5,94,68,000/- 2. Gratuity disallowed(Refer to Para No. 9) 65,93,01,048/- 3. Deferred Revenue Expenditure disallowed(Refer to Para No. 3,08,07,908/- 10) 4. Bad and Doubtful Debts disallowed(Refer to Para No. 11) 70,57,000/- 5. Bonus disallowed(Refer to Para No. 12) 86,39,000/- 6, Addition on account of welfare fund(Refer to Para No. 13) 1,40,54,000/- 7. Addition u/s 40A(9) (Refer to Para No. 14) 18,79,680/- 8. Prior period expenses disallowed (Refer to Para No. 15) 1,37,88,000/- 9. Depreciation disallowed (190,94,20,000 — 116,62,96,286) (Refer 74,31,23,714/- to para No. 17) Income from Profits and gains of business or profession 141,57,32,350/- Add: Income under Long Term Capital Gains 74,29,12,000/- Total Income 215,86,44,350/-
AY 2012-13: (In Rs.) Computation of Total Income 19,41,41,000/- Net Profit as per Income & Expenditure account Less: Profit on sale of land (Considered separately) 7,34,45,000/- Balance income 12,06,96,000/- Add: 1. Property Insurance Fund 4,26,24,000/- Deferred Revenue Expenditure disallowed 1,27,77,651/- Welfare fund 28,40,000/- Addition u/s 40 A(9) 25,71,899/- Prior period expenditure 32,65,000/- Depreciation disallowed 39,71,47,986/- Income from Profits and gains of business or profession 58,19,22,536/- Less: Gratuity paid during the year 13,53,01,048/- Balance Income 44,66,21,488/- Add: Income under Long Term Capital Gains 7,34,45,000/-
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Total Income 52,00,66,488/- Less: Sale of scrap as the same is reduced from the block of assets as per Sec.50(i) 11,15,79,048/- Balance taxable income 40,84,87,440
AY 2013-14: Net Profit as per Income & Expenditure account 1,74,20,000 Add: 1. Property Insurance Fund 6,39,40,000 2. Deferred Revenue Expenditure disallowed 55,67,287 3 Addition u/s 40A(9) 23,68,694 Prior period expenditure 32,30,000 5 Bad and doubtful debts 5,25,000 Depreciation disallowed 17,85,61,293 254192274 Income from Profits & gains of business or profession 271612274 Less: Income treated separately Sale of scrap as the same is reduced from the block of assets 13,17,26,016 Total Income 13,98,86,258 Tax thereon 4,19,65,877 Add: Surcharge @ 5% 20,98,294 Total 44,064171 Add: EC & SHEC @ 3% 13,21,925 Tax Payable 4,53,86,096 Less: TDS 1,48,24,874 Add: Interest u/s 234B (From 01/04/2013 to 11,00,204 31/03/2016) Total Tax and Interest Payable 4,15,63,262
AY 2014-15: (In Rs.) Computation of Total Income Net Loss as per Income & Expenditure account 755579000 AD Property Insurance Fund 3851000 Deferred Revenue Expenditure disallowed 119528000 Prior period expenditure . 3610883 Depreciation disallowed 15705100
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Total LOSS from Profits and gains of business or 612884017 profession Tax thereon Nil
The CIT(A) concurred with the stand of the Assessee that its activities were charitiable in nature. Hence, appeals by the Revenue. In so far as the other additions made to the total income of each of the aforesaid five assessment years, the CIT(A) did not adjudicate the same on merits as in her view the other issues become academic in view of the decision that the Assessee was carrying on charitiable activities and was therefore entitled to the benefit of sec.11 of the Act. Hence, the appeals by the assessee before the Tribunal.
Before us, learned counsel for the assessee placed reliance on several decisions of the Tribunal wherein on identical facts, the Tribunal came to the conclusion that similar activities will not render the assessee as not existing for charitable purposes. The main decisions cited were the following: (i) Karnataka Industrial Area Devt.Board Vs. DIT€ ITA No.661/Bang/2014 order dated 20.4.2016. (ii) Bangalore Development Authority Vs. Addl.CIT ITA No.1104/Bang/2017 order dated 22.3.2019. (iii) Hon’ble Delhi High Court in the case of India Trade Promotion Organization vs. DGIT(Exemption) (371 ITR 333)(Del).
Ld. DR, however, submitted that profit motive is irrelevant and what has to be seen is the actual nature of activities carried on by the Assessee and referred to the decision of the Hon’ble Supreme Court in the case of P.Krishna Menon Vs. CIT 35 ITR 48(SC). He reiterated the stand of the AO that the Assessee as carrying on activities which is in the nature of trade. His next submission was
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that the learned CIT(A) in coming to the conclusion that the Assessee is not hit by the proviso to Sec.2(15) of the Act, wrongly placed reliance on a decision of the ITAT, Hyderabad in the case of Institute for Development & Research in Banking Technology ITA No.1712/Hyd/2014 dated 30.6.2015. It was submitted by him that the Assessee in that case was a society established by Reserve Bank of India (RBI) and since RBI Act does not empower it to carry on any activity with profit motive, the case was decided in favour of the Assessee. He pointed out that in the case of the Assessee the RTC Act, 1950 does not prohibit the Assessee from engaging in any activity which might include profit motive. He pointed out that the Assessing Officer (AO) has in paragraph 7.6 of his order referred to objects, functions and activities of the Assessee which do not prohibit the Assessee from earning profit. It was submitted that the CIT(A) has not discussed the facts which were brought out by the AO based on the income and expenditure account of the Assessee. His submission was that the decisions relied upon by the CIT(A) cannot be applied to the facts of the present case of the Assessee. He submitted that the decision of the Hon’ble Supreme Court rendered in the case of CIT Vs. APSRTC 1986 1054 (SC) was a case where the proviso to Sec.2(15) of the Act was not considered and it was a case where the entire share capital was held by the State Government and therefore there was no profit motive. His next submission was that u/s.28 of the RTC Act, 1950, the Assessee has to pay interest on capital and dividend on capital provided by the State and Central Government and the same can be claimed as expenditure. Therefore relying on sec.30 of the RTC Act, 1950 ignoring the provisions of Sec.28 of the Act was erroneous.
We have given careful consideration to the rival submissions. As we have already seen, the assessee is formed under the RTC Act, 1950 to provide
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economic and efficient transport system to the public. It cannot be denied that this purpose is charitable in nature i.e., “advancement of any other object of public utility”. The only ground on which the revenue authorities came to the conclusion that the assessee was not existing for charitable purpose is on the basis of source of revenue derived from renting of space and advertisements and giving on hire buses for excursion etc. besides existence of non-operational revenue. It is not the case of the revenue that there has been any private profit earned from the activities carried out by the assessee. The Bengaluru Bench of Tribunal in the case of Bangalore Industrial Area Devl.Corpn.(supra), has taken the view that the predominant object of charitable organization has to be examined before coming to a conclusion regarding application of the proviso to section 2(15) of the Act. This aspect has been highlighted by the Hon’ble Delhi High Court in the case of India Trade Promotion Organization vs. DGIT(Exemption) (371 ITR 333)(Del). The facts of the case before the Hon’ble Delhi High Court in the case of India Trade Promotion Organization (supra) were that the Assessee in that case enjoyed the benefit of exemption u/s.10(23C)(iv) of the Act. Sec.10(23C)(iv) provides any income received by any person on behalf of any other fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States, shall not form part of the total income under the Act. The prescribed authority withdrew the approval granted to the Assessee consequent to the insertion of the proviso to Sec.2(15) of the Act, on the ground that the Assessee was deriving rental income from letting out space for rent during trade fairs and exhibitions, was deriving income from sale of tickets and income from food and beverage outlets. The said withdrawal was challenged by the Assessee before the Hon’ble Delhi High Court. The Hon’ble Delhi High Court had to go into the question as to the scope of the proviso to Sec.2(15) of the Act. The Hon’ble Delhi High Court has laid down the
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following very important principles as to how the proviso to Sec.2(15) of the Act has to be interpreted:
(i) The proviso to Sec.2(15) of the Act introduced by virtue of the Finance Act, 2008 with effect from 01.04.2009 has two parts. The first part has reference to the carrying on of any activity in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service ―in relation to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess or ‘fee‘ or any other consideration, income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retention of such income is irrelevant for the purposes of construing the activities as charitable or not. (ii) If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. If a literal interpretation is to be given to the proviso, then it may be concluded that this fact would have no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important. (iii) The meaning of the expression "charitable purposes" has to be examined in the context of “income”, because, it is only when there is income the question of not including that income in the total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable
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purpose, receives income would not make it any less a charitable institution. Whether that institution, which is established for charitable purposes, will get the exemption would have to be determined having regard to the objects of the institution and its importance throughout India or throughout any State or States. (iv) Merely, because an institution derives income out of activities which may be commercial, that does, in any way, affect the nature of the Institution as a charitable institution if it otherwise qualifies for such a character. (v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. If the driving force is not the desire to earn profits but to do charity, the exception carved out in the first proviso to Section 2(15) of the said Act would not apply. (vi) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above. (vii) Section 2(15) is only a definition clause. Section 2 begins with the words, ―in this Act, unless the context otherwise requires. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression "charitable purpose", as defined in Section 2(15) of the said Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression "charitable purpose" by the revenue. (viii) The expression "charitable purpose", as defined in Section 2(15)
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cannot be construed literally and in absolute terms. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. (emphasis supplied).
Keeping in mind the principles laid down as above, let us examine the case of the Assessee. The Assessee is a statutory corporation established under the RTC Act, 1950. It is not driven b profit motive but is for providing transportation facilities to members of the public. The State Government fixes fares for travel by public. Buses ply in areas even where it is not economically viable. Sec.18 of the RTC Act, 1950 lays down duties of the corporation which is to provide, secure and promote efficient, adequate, economical and properly coordinated system of road transport services in the State of Karnataka. Sec.22 of the RTC Act, 1950 lays down that the corporation should act on business principles in the sense it has to recover the cost of services rendered to the public which means that it cannot provide service free of cost. Sec.30 of the RTC Act, 1950 provides
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how profits of the corporation shall be disposed and it lays down that the same shall be used only for road development.
It can be seen from the various provisions of the RTC Act, 1950 which we have set out in the earlier part of the order that the dominant and prime objective of the Assessee is not profit making. Prior to the introduction of the proviso to Section 2(15) of the Act, there was no dispute that the Assessee was established for charitable purposes. The stream of traffic revenue and non traffic revenue by itself would demonstrate that the Assessee does not exist for profit.
Keeping in mind the above factual aspects and the provisions of the RTC, Act, 1950 and principle laid down in the aforesaid decision of the Hon'ble Delhi High Court in the case of India Promotion Organization (supra), in our view, will clearly show that the Assessee does not driven primarily by desire or motive to earn profits but to do charity through advancement of an object of general public utility. The proviso to Sec.2(15) of the Act is therefore not applicable to the case of the Assessee. We therefore concur with the view of the CIT(A) and hold that the Assessee is entitled to the benefits of Sec.11 of the Act. The AO has not disputed the conditions necessary for allowing exemption u/s.11 of the Act, except the applicability of proviso to Sec.2(15) of the Act. In view of our conclusions that the said proviso is not applicable to the case of the Assessee, we hold that the Assessee's income is entitled to the benefits of Sec.11 of the Act.
With regard to the arguments of the learned DR, we are of the view that the same are without any merit. The proviso to Sec.2(15) of the Act has been discussed by the Hon’ble Delhi High Court in the case of India Trade Promotion
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Organization vs. DGIT(Exemption) (supra) and the dominant motive is the criteria as laid down therein. Therefore the answer to the arguments put forth by the learned DR are found in the aforesaid decision. As we have already seen, the profit of the Assessee have to be used only for road development, as in the case of the decision in the case of APSRTC (supra) where the revenues have to be utilized only for the purpose of road development.
We however find that the other issues raised by the Assessee in its appeal will survive for consideration and the CIT(A) has by inadvertence held that in view of the conclusion on the preliminary issue that the Assessee is entitled to the benefits of Sec.11 of the Act, the other grounds of appeal become academic and require no consideration. In our view the grounds raised by the Assessee with regard to the other additions other than denial of applicability of benefit of Sec.11 of the Act, survives and would require consideration. We therefore remand those issues to the CIT(A) for consideration on merits after affording Assessee opportunity of being heard.
The appeals of the revenue are accordingly dismissed while the appeals by the Assessee are treated as partly allowed for statistical purpose to the extent of grounds raised by the Assessee before CIT(A) with regard to the other additions made in the assessments other than denial of applicability of benefit of Sec.11 of the Act.
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In the result, appeals by the Assessee are partly allowed for statistical purpose while the appeals by the revenue are dismissed. Order pronounced in the open court on 28th September, 2021.
Sd/- Sd/- (B.R.BASKARAN) (N.V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Place : Bengaluru Dated : 28/09/2021 /NS/* Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.