THE COMMISSIONER OF INCOME TAX vs. THE BAGALKOT TOWN DEVELOPMENT AUTHORITY

IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 15TH DAY OF DECEMBER 2015 PRESENT THE HON’BLE MR.JUSTICE S. ABDUL NAZEER AND THE HON’BLE MR.JUSTICE P.S.DINESH KUMAR ITA NO.100027/2014 Between: The Commissioner of Income Tax, Dr.B.R.Ambedkar Road, Belgaum.

…. Appellant (By Sri Y.V.Raviraj, Adv.,) And: Bagalkot Town Development Authority, Belgaum Road, Bagalkot-587 102. …. Respondent (By Sri Parthasarathi & Sri H.R. Kambiyavar, Advs.,) This ITA is filed under Section 260A of the Income Tax Act, 1961, praying to, set aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench-A, Bangalore, in ITA No.1151/Bang/2012 dated 22.1.2014, etc.

2 This ITA having been heard and reserved for Judgment, this day P.S.DINESH KUMAR.J., pronounced the following:- JUDGMENT The Revenue has preferred this appeal challenging the order dated 22.1.2014 in ITA No.1151/Bang/2012 raising following substantial questions of law:- 1. Whether, in law and on facts, the ITAT is correct in holding that the interest earned of Rs.3,10,85,586 has to be excluded from the gross receipts on the ground that the said interest was earned on funds parked in FDS for specific purposes pending utilisation ignoring the provisions of sections 11(1)(a) and 11(1)(b) read with section 11(2) of the I.T.Act, 1961, which are mandatory provisions as held by the Supreme Court in the case of CIT V. Nagpur Hotel Owner’s Association (247 ITR 201).

3 2. Whether, in law and on fact, the ITAT is correct in not appreciating the provisions of section 11(1)(a) and 11(1)(b) which clearly provides that income to be excluded to the extent to which the income so accumulated or set apart is not in excess of 15% of the income subject to option to be exercised in writing as provided in section 11(2) of the I.T.Act, 1961. 3. Whether, in law and on facts, the ITAT is correct in holding that the application in Form No.10 under Rule 17 of I.T.Rules, 1962, could be filed even after the assessment is completed ignoring the mandatory time limit provided in the said rule which is held to be mandatory and assessment for this reason cannot be reopened by the Assessing Authority as held by the Hon’ble Supreme Court in Nagpur Hotel’s case supra.

4 4. Whether, in law and on facts, the ITAT is correct in holding that the Form No.10 as required by Income Tax Rule 17 can be filed after completion of assessment during the pendency of appeal.” (sic) 2. Heard Sri Y.V. Raviraj, learned Counsel for the appellant and Sri Parthasarathi, learned Counsel for respondent-assessee. 3. Though the Revenue has raised aforementioned questions of law for consideration of this Court, learned Counsel for the Revenue has limited his argument focussing on the issue as to whether or not, the respondent being a Trust and not having submitted Form No.10 and not having applied 85% of income towards Charitable & Religious purposes is entitled for exemption under Section 11 of the Income Tax Act, 1961 (‘Act’ for short). At the outset, he adverted to the provisions

5 of Section 11 and Rule 17 of the Income Tax Rules, 1962 (‘Rules’ for short) and contended that there is no dispute with regard to the fact that the respondent was getting funds from the Government to carry out certain public works such as Rehabilitation & Resettlement of Persons Displaced during the construction of Almatti Dam. Respondent had applied and obtained registration under Section 12-AA of the Act and it was considered as an Institution for charitable purposes. Consequently, assessee income was exempt from Income Tax under Section 11 of the Act. 4. Commissioner of Income Tax exercising power under Section 263 of the Act had come to the conclusion that the order of the Assessing Officer for the year 2008-09 granting exemption to the

6 respondent under Section 11 of the Act was incorrect because the records had disclosed that assessee had not applied 85% of the income towards charitable or religious purposes during the previous years and had accumulated the income. Further, assessee had not submitted Form No.10 and not specified by notice to the assessing authority, the purpose for which the income was being accumulated. The Commissioner had also noticed the deposits to the tune of Rs.15,80,86,596/- were made in the Banks and it was claimed that the said deposit was meant for charitable purpose and whereas in the opinion of the Commissioner, the amount in deposit was not applied towards the objects. Accordingly, a show-cause notice was issued, which was duly replied. After considering the reply, the Commissioner of Income Tax held that the assessee

7 had shown an income of Rs.47,66,36,982/- and had applied a sum of Rs.31,85,50,386/- for charitable purposes. In terms of Section 11(2) of the Act, assessee was required to apply 85% of the income which shall be Rs.40,51,41,434/-. Thus, he held that the difference of Rs.40,51,41,434/- and Rs.31,85,50,386/- which works out to Rs.8,65,91,048/- should have been assessed as total income for the assessment year 2008-09 and accordingly directed the Assessing Officer to add the said income for the assessment year 2008-09. The said order was challenged before the Income Tax Appellate Tribunal, Bengaluru. The Tribunal following the Judgment in the case of CIT v. Karnataka Urban Infrastructure Development & Finance Corporation reported in 284 ITR 582 (Kar) held that the interest earned by parking the funds received from the Government also assumed the

8 character of funds provided by the Government and cannot be brought to tax as Income from other sources. The Tribunal remanded the matter back to the assessing officer with a direction to re-do the assessment and while doing so to call upon the assessee to file Form No.10. 5. Sri Raviraj, learned Counsel for the appellant strenuously contended that the above facts being incontrovertible, the impugned order passed by the Tribunal is unsustainable in law because the assessee having obtained a registration under Section 12-AA of the Act was not entitled for exemption under Section 11 without complying the statutory requirement. Records being conspicuous to the effect that the assessee had disclosed an income of Rs.47,66,36,982/- and deployed only Rs.31,85,50,386/- was liable to pay tax on the

9 difference income of Rs.8,65,91,048/-. Accordingly, he prayed for allowing this appeal. 6. Per contra, learned Counsel appearing for the respondent/assessee supporting the order of the Tribunal prayed for dismissal of the appeal. 7. Careful consideration of the rival contentions and perusal of material papers lead us to following irrefutable inferences:- (i) Respondent/assessee is a statutory authority created under Karnataka Improvement Boards Act,1976; (ii) The purpose and intent of creation of respondent/authority is to carry out Rehabilitation & Resettlement of Displaced Persons due to construction of Almatti Dam; (iii) Assessee has placed deposits in the Banks as per the directions of Government of Karnataka

10 vide communication No.HRD 26/REH/2006 dated 25.2.2006 and No.HRD 100/REH/2010 dated 21.06.2010; (iv) Assessee acts as an agent of the Government to give effect to the Rehabilitation & Resettlement policies; (v) Assessee has no discretion in mode of deployment or utilisation of funds and fully controlled by periodical instructions issued by the Government; and (vi) Funds belonging to the Government placed in deposits in the Banks by the assessee and the interest accruing thereon shall continue to remain under the absolute control of the Government and the respondent functioned in a fiduciary capacity.

11 8. We may usefully refer to the judgement of the Hon’ble Supreme Court in the case of CIT v. Gujarat Maritime Board, reported in (2007) 14 SCC 704 at page 709 wherein it is held as follows: “11. One of the objections raised on behalf of the Department was that Gujarat Maritime Board is not entitled to the benefit of Section 11 of the 1961 Act as the said Board was not a trust under the Public Trusts Act and, therefore, it was not entitled to claim registration under Section 12-A of the 1961 Act. The Department's case was that the Maritime Board was a statutory authority. It was not a trust. Its business was not held under a trust. Its property was not held under trust. Therefore, the Board was not entitled to be registered as a charitable institution. It was the case of the Department that the Board was performing statutory functions. Development of minor ports in the State of Gujarat cannot be termed as the work undertaken for charitable purposes and in the circumstances the Commissioner rejected the

12 Board's application under Section 12-A of the 1961 Act. In the light of the above case of the Department, we are required to consider the expression “any other object of general public utility” in Section 2(15) of the 1961 Act. 12. At the outset, we may point out that Section 10(20) and Section 11 of the 1961 Act operate in totally different spheres. Even if the Board has ceased to be a “local authority”, it is not precluded from claiming exemption under Section 11(1) of the 1961 Act. Therefore we have to read Section 11(1) in the light of the definition of the words “charitable purposes” as defined under Section 2(15) of the 1961 Act. 13. We have perused number of decisions of this Court which have interpreted the words in Section 2(15), namely, “any other object of general public utility”. From the said decisions it emerges that the said expression is of the widest connotation. The word “general” in the said expression means pertaining to a whole class. Therefore, advancement of any object of benefit to the

13 public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose (CIT v. Ahmedabad Rana Caste Assn. [(1982) 2 SCC 542 : 1982 SCC (Tax) 151 : (1983) 140 ITR 1]). The said expression would prima facie include all objects which promote the welfare of the general public. It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be served. If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose. When an object is to promote or protect the interest of a particular trade or industry that object becomes an object of public utility, but not so if it seeks to promote the interest of those who conduct the said trade or industry (CIT v.Andhra Chamber of Commerce [(1965) 55 ITR 722]). If the primary or predominant object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the

14 institution from being a valid charity (CIT v. Surat Art Silk Cloth Manufacturers' Assn3 ). 14. The present case in our view is squarely covered by the judgment of this Court in CIT v. A.P. SRTC [(1986) 2 SCC 391: 1986 SCC (Tax) 393 : (1986) 159 ITR 1] in which it has been held that since the Corporation was established for the purpose of providing efficient transport system, having no profit motive, though it earns income in the process, it is not liable to income tax”. 9. In instant case also assessee is a statutory authority created under the Karnataka Improvement Boards Act to carry out public purposes. Therefore, ratio of above judgement is applicable to the facts of this case. Consequently, assessee shall entitle for exemption of tax. 10. In the premise, we are of the considered view that the argument advanced on behalf of the Revenue that assessee was not entitled for

15 exemption under Section 11 of the Act for the reasons recorded by the Commissioner of Income Tax, is untenable and deserves to be rejected and accordingly rejected. 11. Resultantly, we hold that the questions of law raised by the Revenue are devoid of merits. Appeal fails and accordingly stands dismissed. No costs.

Sd/- JUDGE

Sd/-

JUDGE cp*