The Commissioner of Income Tax (Central) vs. Sri.G.Sanjay Chowdary

3 12AA of the Act, even when the objects of assessee fall under the limb “any other object of General Public Utility” under Section 2(15) of the IT Act and the activities of assessee under this limb will be hit by the proviso to section 2(15) of IT Act amended w.e.f. 1.4.2009 as the services are provided to all sections of the society on commercial basis and major receipts of the assessee are from services i.e. consideration received which is obviously in the nature of commercial activities akin to the activities of private parties and no charitable purpose is involved and charging fee for all services are involved?

4 as the ‘KUDA, 1987’, for the sake of convenience). The assessee being a statutory body constituted under KUDA, 1987, is for the purpose of carrying out the object of the said Act, which is to provide for the establishment of Urban Development Authorities for the planned development of major and important urban areas in the State. The assessee is constituted for the urban areas of Hubli- Dharwad as a planning authority. Assessee applied for registration under Section 12A(1)(aa) of the Act and it was granted the said registration. Pursuant to the Finance Act 2008 with effect from 01.04.2009, proviso was added to sub-section (15) of Section 2 of the Act which defines the expression “charitable purpose”. Consequently, show cause notice was issued to the assessee on 20.4.2010 as to why the registration granted to it on 06.03.2008 under Section 12A(1)(aa) of the Act should not be cancelled. Reply was given to the said show cause notice. However, the Commissioner of Income Tax, by his order dated 28.11.2011, cancelled the certificate issued to the assessee under Section 12A(1)(aa) of the Act. Being

5 aggrieved by the said order, the respondent-assessee preferred an appeal before the Tribunal. The Tribunal by its order dated 15.05.2015 allowed the appeal and restored the certificate issued to the assessee. Being aggrieved by the said order, the revenue has preferred this appeal on the aforesaid substantial questions of law.

6 any services in relation to any trade, commerce or business, for a cess or fee or any other consideration irrespective of the nature of use or application, or retention of the income from such activity unless (1) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from the activity or activities of the previous year do not exceed 20% of the receipts of the trust or institution undertaking such activity or activities of the previous order. He contended that the respondent-assesses may be carrying out an object of general public utility but the carrying on its activity is in the nature of trade, commerce or business and does not come within the exception (1) or (2) above and therefore, in view of the amendment made to sub-Section (15) of Section 2 of the Act by inclusion of the aforesaid proviso, the Commissioner of income tax was justified in canceling the certificate of registration issued under Section 12A(1)(aa) of the Act. Learned Counsel for the Revenue contended that substantial questions of law may be

7 answered in favour of the Revenue as the activity by the assessee is hit by the proviso to sub-section (15) of Section 2 of the Act and is not for a charitable purpose.

8 be answered in favour of the Revenue and the order of the Tribunal may be set aside.

9 immoveable property, whether it is within or outside the urban area under its jurisdiction, to carryout buildings, engineering and other operations and generally to do all things necessary or expedient for the purpose of such development and for purposes incidental thereto. Drawing our attention to various provisions of KUDA 1987 and the scheme under the Act, learned counsel for the assessee contended that despite the proviso being inserted to sub-section (15) of the Section 2 of the Act, the nature of activity carried on by the assessee would not come within the mischief of the proviso. That the Commissioner for Income Tax could not have cancelled the certificate issued in favour of the assessee by exercising power under Section 12AA(3) of the Act. Therefore, the order of the Tribunal on that aspect is just and proper.

10 conditions for exercise of power under Section 12AA(3) of the Act and those conditions are mandatory. Hence, the Commissioner could not have cancelled the certificate of registration issued in favour of the assesee in the instant case. Hence, the substantial question of law No.2 may also be answered against the appellant-Revenue and in favour of the assesee.

11 The said Section was amended by insertion of new proviso with effect from 01.04.2009. The sub-section and proviso, after its insertion, read as under: 2(15) charitable purpose includes relief of the poor, education, yoga, 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 of any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity unless – (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility, and

12 (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

With regard to the aspect of advancement of any other object of general public utility, the proviso states that the same shall not be a charitable purpose, if it involves the carrying out of any activity in the nature of trade, commerce or business, for a cess or other consideration, irrespective of the nature of use or application, or retention, of the income from such activity subject to exceptions which are stated therein.

The said proviso has come up for interpretation before the Hon’ble Supreme Court, this Court as well as before other High Courts.

(a) A Co-ordinate Bench of this Court in the case of Commissioner of Income Tax vs. Bagalkot Town Development Authority reported in [(2015) SCC

13 Online Kar. 6951], considered the appeal filed by the department against the grant of registration under Section 12A(1)(aa). After noting that the respondent therein had applied and obtained registration under Section 12A(1)(aa) of the Act it was considered as an institution of charitable purpose. Consequently the assessee’s income therein was exempted from tax under section 11 of the Act. The Co- ordinate Bench considered the expression ‘any other object of general public utility’ under Section 2(15) of the Act and interpreted it by saying that the said expression must have a widest connotation with the advancement of any object or benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose. The said expression would prima facie include all objects which would promote the welfare of the general public. That if the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose. If the primary or predominant object of an institution is charitable, any

14 other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the institution from being a valid charity. Referring to CIT vs. APSRTC reported in [(1986) 2 SCC 391] in which, it had been held that APSRTC was established for the purpose of providing efficient transport system, having no profit motive and therefore, the income earned was not liable to Income Tax. The Co-ordinate Bench held that Hubli Dharwad Development Authority was a statutory authority created under KUDA 1987 to carry out public purpose and therefore, the assessee was entitled to exemption of tax and dismissed the appeal filed by the department.

(b) Ahmedabad Urban Development authority vs. Assistant Commissioner of Income Tax reported in [(2017) 396 ITR 0322 (Gujarat)], the Gujarat High Court held that the Tribunal had committed a grave error in holding the activities of the assessee therein namely the Ahmedabad Urban Development Authority, which is similar

15 to the appellant herein, was in the nature of trade, commerce or business and therefore, the proviso to section 2 (15) of the Act was applicable and the assessee was not entitled to exemption under Section 11 of the Act. It was further held that the proviso to Section 2(15) of the Act was not applicable as far as the Ahmedabad Urban Development Authority was concerned as the activity of the said authority was in the nature of providing general public utility services and therefore, was entitled for exemption under Section 11 of the Act.

(c) Further, in Commissioner, Income Tax vs. Lucknow Development Authority reported in (2014) 98 DTR 0183 (All.), the Allahabad High Court considered a similar question and observed that it is an undisputed fact that the assessee therein namely, Lucknow Development Authority, being a statutory authority, established under the provisions of the Uttar Pradesh Planning and Development Authority, 1973, was constituted with the object of providing shelter to the

16 homeless people. That registration under Section 12(a) being mandatory to claim exemption under Sections 11 and 13 of the Act, it is necessary to consider if the object and purpose of charitable as a public utility and then to grant the benefit as a charitable institution. After referring various judgments of the Hon’ble Supreme Court in the case of CIT vs. Gujarat Maritime Board reported in (2007) ITR 561 (SC) and CIT vs. APSRTC reported in (1986) 159 ITR (SC), it is held that there was no material or evidence to suggest that Luknow Development Authority, the assessee therein, was conducting its affairs on commercial lines with a motive to earn profit or it deviated from its objects and that therefore, the proviso to Section 2(15) was not applicable to the facts and circumstances of the case. Consequently, it was held that the assessee therein was entitled to exemption provided under Section 11 for the relevant assessment year.

(d) From the aforesaid judgments what emerges is that in respect of two similar authorities namely Bagalkot

17 Town Development Authority and Luknow Development Authority which are similar to the appellant authority, it has been held that they are entitled to registration under Section 12 (A)(1)(aa) of the Act and to the benefit under Sections 11 and 12 of the Act. As already submitted by learned counsel for the appellant, the appellant authority is a statutory body constituted under Section 3 of the KUDA 1987, the object of the appellant authority is planning and promoting and securing the development of Hubli Dharwad Urban area and for that purpose to acquire, hold, manage and dispose off movable and immovable property and to carry out building and engineering operations and to take all steps for the purpose of development of the Belagavi urban area.

(e) The activity of the respondent is thus a charitable activity as defined under the expression ‘charitable trust’ is defined under section 2(15) of the Act. The activity of the respondent comes within the scope and ambit of the expression “the advancement of any other

18 object of general public utility”. The activity carried on by the respondent does not involve an activity which is in the nature of trade, commerce or business so as to come within the mischief of proviso to Section 2(15). As already noted, the respondent is a statutory authority constituted under the provisions of KUDA, 1987 whose object is to establish and develop urban areas in an orderly fashion. Even though the respondent - development authority may be involved in developing various residential or commercial areas and thereby preparing house sites or commercial sites and even alienating such sites through auction or through allotting to eligible persons. The said activity cannot be held to be profit motive so as to come within the mischief of the expression trade, commerce or business. The upshot of the aforesaid discussion is that the respondent – assessee is a statutory authority created under the Karnataka Urban Development Authorities Act, 1987. The purpose and intent of creation of the respondent – authority is to establish urban areas in Hubli Dharwad in a planned manner. The respondent – assessee

19 being a statutory authority is under the control of the State Government, which has the power to issue directions to the authority as per Section 65 of the Act. The said directions are those, which are necessary or expedient for carrying out the purposes of the Act and it shall be the duty of the assessee to comply with such directions. Even the utilization of funds by the assessee is fully controlled by periodical instructions issued by the Government. The funds standing in the name of the assessee is under the absolute control of the Government as the assessee functions in a fiduciary capacity. Therefore, following the judgment of Bagalkot Town Development Authority, which has inturn followed the judgment of the Hon’ble Supreme Court in the case of Gujarat Maritime Board, it is held that the assessee, being a statutory authority, created under the Karnataka Urban Development Authority Act, 1987 has to carryout its activity towards public purposes. Therefore, the argument advanced on behalf of the revenue that the assessee was not entitled for exception under Section 11 of the Act, is untenable and is

20 rejected. In the circumstances, substantial question of law No.1 is answered in favour of the assessee and against the revenue.

21 13. As far as substantial question of law No.2 is concerned, the same has been considered by a coordinate bench of this Court in the case of KIADB, wherein after referring to Section 12AA(3) of the Act, this Court has considered as to the circumstances under which the registration of an entity could be cancelled. In Paragraph 8, it has been held as under: “8. A reading of the aforesaid provision makes it very clear, a registration granted earlier under Section 12A of the Act can be cancelled under two circumstances; (a) If the activities of such trust or institution are not genuine, (b) The activities of trust or institution not being carried out in accordance with the object of the trust or institution. Only on those two conditions being satisfied, the registration granted under Section 12A of the Act could be cancelled by the authorities.”

Therefore, it is only if the activities of such trusts or institutions are not genuine or are not being carried out in accordance with the objects of the trust or institution, on being satisfied about the same the registration under

22 Section 12A(1)(aa) of the Act could be cancelled and not in any other circumstances. In the instant case, the registration of the respondent-entity was sought to be cancelled on the basis of the insertion of the proviso to sub-section (15) of Section 2 of the Act on the premise that the activity carried out by the respondent was purely trade and commerce and for a profit motive. But in the instant case of KIADB, it has been explained that the statutory authority therein was involved in the orderly development of industrial areas and hence, its activity was for the purpose of and in the nature of public utility service. The nature of the respondent-entity has been already discussed. Neither of the circumstances stated above apply insofar as the respondent-assessee is concerned. Thus the Commissioner could not have cancelled the Registration Certificate vide order dated 28.11.2011. The Tribunal was therefore justified in setting aside the said order and by allowing assessee’s appeal by placing reliance on the judgment of this Court in the case of KIADB referred to above. In the circumstances,

23 substantial question of law No.2 is also answered against the Revenue and in favour of the assessee by holding that the Tribunal was right in following the judgment of this Court in the case of KIADB, wherein it has been held that if either of the two conditions stipulated under Section 12AA(3) exist then the registering authority is empowered to cancel the registration and not otherwise.

Sd/- JUDGE

Sd/- JUDGE

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