DIRECTOR OF INCOME TAX (EXEMPTIONS) vs M/S. KARNATAKA INDUSTRIAL

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 30th DAY OF SEPTEMBER 2020

PRESENT

THE HON’BLE MR. JUSTICE ALOK ARADHE

AND

THE HON’BLE MR. JUSTICE M.I. ARUN

I.T.A. NO.205 OF 2016

BETWEEN:

M/S. KARNATAKA INDUSTRIAL AREA DEVELOPMENT BOARD, NO.14/3, 2ND FLOOR, R.P. BUILDING, NRUPATHUNGA ROAD, BENGALURU-560 001. PAN: AAATK 1350J.

... APPELLANT (BY SRI. SANMATHI E.I., ADVOCATE – APPEARED THROUGH PHYSICAL HEARING)

AND:

THE ADDITIONAL DIRECTOR OF INCOME TAX (EXEMPTIONS), RANGE 17, BENGALURU.

... RESPONDENT (BY SRI. CHYTHANYA K.K., ADVOCATE – APPEARED THROUGH PHYSICAL HEARING) - - -

THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961, ARISING OUT OF ORDER DATED 04.09.2015

PASSED IN ITA NO.378/BANG/2013 FOR THE ASSESSMENT YEAR 2009-2010, PRAYING TO 1. DECIDE THE FOREGOING QUESTION OF LAW AND OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT. 2. SET ASIDE THE APPELLATE ORDER DATED 04.09.2015 PASSED BY THE ITAT, ‘B’ BENCH, BENGALURU, IN APPEAL PROCEEDINGS IN ITA NO.378/BANG/2013 FOR ASSESSMENT YEAR 2009-2010, AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:

JUDGMENT

Mr.Sanmathi E.I, learned counsel for the appellant. Mr.Chythanya K.K., learned counsel for the respondent.

This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a Bench of this Court vide order dated 09.08.2017 on the following substantial question of law:

“Whether, on the facts of the case, the Tribunal is right in law in holding that the proviso to Section 2(15) of the Income Tax Act, 1961 is not applicable to assessee?”

The facts leading to filing of this appeal briefly stated are that the assessee, namely, Karnataka Industrial Area Development Board is a statutory body constituted under Section 5 of the Karnataka Industrial Area Development Act, 1966 (hereinafter referred to as ‘the KIAD Act’ for short). The assessee filed the returns of the income on 24.02.2010 for the assessment year 2009-10. The assessing officer by an order dated 23.11.2011, inter alia held that the assessee had earned a profit of Rs.155,76,64,004/- for the year ending 31.03.2009 and the aforesaid profit was 80% of the total income. It was held that the assessee has earned profits systematically over the last few years and the activity of the assessee amounts to commercial in nature as it is engaged in the sale of land and in

providing services. It was further held that the Director of Income Tax has cancelled the registration granted under Section 12A of the Act vide order dated 28.10.2011 and therefore, the income of the assessee can be computed under the normal provisions of the Act. The assessing officer denied the exemption to the assessee by invoking the provisions of Section 2(15) of the Act and concluded the assessment. Being aggrieved, the assessee has filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals), vide an order dated 16.02.2015 has dismissed the appeal preferred by the assessee. The assessee thereupon, approached the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’ for short) by filing an appeal. The Tribunal vide order dated 04.09.2015 allowed the appeal preferred by the assessee and inter alia held that the Proviso to Section 2(15) of the Act is not applicable to

the assessee. In the aforesaid factual background, the Revenue has filed this appeal.

Learned counsel for the revenue submitted that the Assessing Authority by detailed order had inter alia found that the assessee was systematically involved in the commercial activities by buying and selling of plots for industrial purpose, more over most of which was done through open auctions. It was also argued that the assessee has earned profit more than 18 crores from sale of land, which is significantly more than the prescribed limit of Rs.10 lakhs and therefore, the same is hit by Proviso to Section 2(15) of the Act. It is also argued that the Assessing Officer has rightly held that the net profit of the assessee was Rs.155,76,64,004/-, which works out to 80% of the turn over and which is more than even a private builder or developer could earn. It was further pointed out that the Assessing Officer held that the site/lands which were purchased at lower rates are developed and sold to private industries

at higher rate through auctions generating huge profits. Hence, assessee cannot claim deduction under Section 11 of the Act. It was also pointed out that the Assessing Authority has rightly held that the benefit of Section 10(20A) is not available to the assessee as the same has been deleted w.e.f. 01.04.2003.

The learned counsel for the revenue has also invited the attention of this Court to the Circular No.11 of 2008 dated 19.12.2008, which came into force w.e.f., 01.04.2009 and in particular has invited our attention to paragraph 3.2 of the aforesaid Circular to point out that the assessee, who claim that their object is ‘charitable purpose’ within the meaning of Section 2(15), would be advised to eschew any activity, which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business. It is further submitted that the Tribunal by misinterpreting the ratio of the decision rendered by the Honb’le High Court of Delhi in ‘India Trade Promotion

Organization vs. Director General of Income-tax (Exemptions)’,(2015) 371 ITR 333, has wrongly held that the activities of the assessee are charitable in nature and the Proviso to Section 2(15) of the Act is not applicable in the case of the assessee. It is also urged that while passing the impugned order, the Tribunal has misinterpreted the ratio of the decision rendered by the Hon’ble High Court of Delhi in the aforesaid decision and has not met with the findings recorded by the Assessing Officer and therefore, the matter in any case deserves to be remitted for consideration afresh before the Income Tax Appellate Tribunal. In support of the submissions, learned counsel for the revenue has placed reliance on the decisions of the Hon’ble Apex Court in the cases of ‘Aditanar Educational Institution etc., vs. Additional Commissioner of Income Tax’, (1997) 224 ITR 0310 and ‘Indian Chamber of Commerce vs. Commissioner of Income Tax’, (1975) 101 ITR 0796.

On the other hand, learned counsel for the assessee, at the outset submitted that no substantial question of law is involved in the appeal. In this connection, learned counsel for the assessee has invited the attention of this Court to two circulars No.11 of 2008 dated 19.02.2008 of the Board and has submitted that whether an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which has to be decided on the nature, scope, extent and frequency of the activity. It is further submitted that the aforesaid question has to be decided in the facts of each case and the Tribunal on the basis of the meticulous appreciation of the materials placed before it, has recorded a finding that the activities of the appellant are charitable in nature and the assessee is not engaged in profit making. The aforesaid finding is a pure finding of fact which has not even been stated to be perverse on behalf of the revenue. Our attention is also been invited to paragraph Nos.44 to 49 of the order of the Tribunal

and has submitted that the Tribunal on the basis of the meticulous appreciation of the material on record has recorded a finding and has held that the Proviso to Section 2(15) of the Act is not applicable to the case of the assessee. The contention that the Tribunal has misinterpreted the ratio of the decision of the Hon’ble High Court of Delhi in the case of India Trade Promotion Organization (Supra) is misconceived. It is also submitted that the substantial question of law involved in this appeal is no longer res integra and is squarely covered by the decisions of the various High Courts. In this connection, learned counsel for the assessee has invited our attention to the following decisions rendered by the different High Courts: (a) ‘Commissioner of Income Tax vs. Gujarat Industrial Development Corporation, (2017) 83 taxmann.com 366 (Gujarat);

(b) ‘Greater Noida Industrial Development Authority vs. Union of India’, (2018) 406 ITR 418 (Delhi);

(c) ‘Commissioner of Income-tax-I, Luknow vs. Lucknow Development Authority, Gomti Nagar’, (2014) 265 CTR 433 (Allahabad);

(d) ‘Commissioner of Income-tax-I, Jodhpur vs. Jodhpur Development Authority’, (2016) 287 CTR 473 (Rajasthan);

(e) ‘Commissioner of Income-tax, (Exemption), Lucknow vs. Yamuna Expressway Industrial Development Authority’, (2017) 81 taxmann.com 208 (Allahabad);

(f) ‘Director of Income Tax, Exemption vs. Ahmedabad Urban Development Authority’, 2017-TIOL-1036-HC-AHM- IT.

We have considered the submissions made by learned counsel for the parties and have perused the records. Admittedly, the assessee is a statutory body, which is established and incorporated under Section 5 of the KIAD Act. The assessee has been constituted to make provision for orderly establishment and development of Industries in suitable areas in the State of Karnataka. Section 6 of the KIAD Act deals with the constitution of the Board of the Assessee, which provides that the officers of the State Government, namely, the Secretary to the Government of Karnataka, Commerce and Industries, Department who shall ex- officio be the Chairman of the Board, the Secretary to the Government of Karnataka, Finance Department, the Secretary to Government, Housing and Urban Development Department, the Commissioner for Industrial Development and Director of Industries and Commerce, the Chairman and Managing Director, Karnataka State Industrial Investment and Development

Corporation Limited, the Chairman, Karnataka State Pollution Control Board, the Director of Town Planning, the Managing Director, Karnataka State Small Industries Development Corporation Limited, the Managing Director, Karnataka State Financial Corporation, the Executive Member of the Board and two nominees of the Industrial Development Bank of India shall be the members of the Board of the assessee. Thus, the assessee is virtually controlled by the State Government. From perusal of Section 13 of the Act, it is evident that the function of the Board is to promote and assist in the rapid and orderly establishment, growth and development of Industries and to provide industrial infrastructural facilities and amenity in the industrial areas. The Board of the assessee is also under the obligation to undertake schemes or programmes jointly with the Government or local or statutory authorities or on an agency basis as it considers necessary. Section 17 of the KIAD Act empowers the State Government to

issue directions to the Board for carrying out the purposes of the Act which are binding on the Board. Section 18 of the Act mandates that all property, fund and other assets vesting in the Board shall be held and applied by it, subject to provisions and for the purpose of the Act. Thus, from the provisions of the Act, it is axiomatic that the Board of the assessee functions under all pervasive control of the State Government. The Board has been constituted to carry out the activities towards public purpose, namely, orderly establishment and development of Industries in suitable areas in the State.

The Tribunal, inter alia by taking into account the provisions of the Act, has held that the primary and dominant object of the assessee is not profit making. It has further been held that income side of income and expenditure account shows that the main component of income of the assessee is derived in the form of interest of Rs.131.17 crores and the interest of fixed deposits is

Rs.120.90 crores. Therefore, there is no profit element in earning income as interest. It has also been noticed that the income of the assessee comprises of repairs and maintenance, administrative expenses, water and electricity charges, special and other charges, depreciation. It has also been held by the Tribunal that the assessee has been established to promote rapid and orderly development of industries in the State and to assist in implementation of the policy of the Government within the purview of the KIAD Act, to facilitate in establishing infrastructure projects and to function on ‘No Profit-No Loss’ basis. It has also been held that the State Government acquires the land for the scheme of the assessee and hand over the same to the assessee after the acquisition for the development of the industrial area. The Tribunal has further held that the profit making is not the driving force or objective of the assessee. The Tribunal has therefore, recorded the conclusion that the assessee is engaged in the charitable

activity through advancement of an object of general public utility and therefore, has concluded that the Proviso to Section 2(15) of the Act is not applicable to the case of the assessee and has further held that the assessee is entitled to benefit of Section 11 of the Act. It has also been noticed that the Assessing officer has not disputed that the assessee fulfills the conditions, which is necessary for allowing the exemption of the deductions applicable under the Act except Proviso to Section 2(15) of the Act. Thus, the Tribunal has held that the Proviso to Section 2(15) of the Act is not applicable to the case of the assessee.

The order passed by the Tribunal, in our considered opinion, is based on the meticulous appreciation of materials on record and by no stretch of imagination can be said to be perverse. The issue with regard to the perversity is not raised on behalf of the revenue. Besides that, in case of various statutory bodies, the different High Courts have taken a similar

view, namely, in the cases (a) to (f) stated (supra) that which we respectfully agree. In view of the said enunciation of law, substantial question of law, which has been framed by this Court, is answered in the negative and against the revenue.

In the result, we do not find any merit in this appeal. The same fails and is hereby dismissed.

Sd/- JUDGE

Mds/-

DIRECTOR OF INCOME TAX (EXEMPTIONS) vs. M/S. KARNATAKA INDUSTRIAL