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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI S. RIFAUR RAHMAN
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No.378/Bang/2013 Assessment year : 2009-10
M/s. Karnataka Industrial Vs. The Additional Director of Area Development Board, Income Tax (Exemptions), No.14/3, 2nd Floor, Range 17, R.P. Building, Bangalore. Nrupathunga Road, Bangalore – 560 001. PAN: AAATK 1350J APPELLANT RESPONDENT
Appellant by : Shri Padamchand Khincha, CA Respondent by : Smt. Neera Malhotra, CIT(DR)
Date of hearing : 25.08.2015 Date of Pronouncement : 04.09.2015
O R D E R Per N.V. Vasudevan, Judicial Member
This appeal by the assessee is directed against the order dated 16.02.2015 of the CIT(Appeals)-V, Bangalore relating to assessment year 2011-12.
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The assessee for the AY 2009-10 filed a return .of income declaring NIL income after claiming exemption u/s 11 of Income Tax Act, 1961 [“the
Act”].
The AO examined the claim of the Assessee for exemption u/s.11 of the Act, in the light of the proviso to Sec.2(15) of the Act. u/s 2(15) of
the Act, which defines the expression “Charitable purpose” for the purpose of the Act had undergone an amendment by the Finance Act, 2008 with
effect from 01-04-2009. The expression of charitable purpose, prior to the aforesaid amendment read as follows;
“(15) “Charitable purpose” includes relief to the poor, education, medical relief and the advancement of any other object of general public utility”
The definition after the amendment reads as follows;
“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”.
It can be seen from the proviso to Sec.2(15) which came into effect from 01-04-2009 that advancement of any other object of general public
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utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business.
According to the AO, the Assessee was carrying on any other object of general public utility and therefore the proviso to Sec.2(15) of the Act would apply to the case of the Assessee. In the order of assessment, the Assessing Officer has concluded that:-
(a) The assessee is not a charitable organization as per the definition of ‘charitable purpose’ u/s. 2(15) read with provisos thereunder; (b) The assessee is not eligible for exemption u/s. 11 / 12 of the Act.
The aforesaid conclusions were drawn for the following reasons:-
(i) The assessee has earned a profit of Rs.155,76,64,004 for the year ending 31.3.2009; (ii) The said profit was around 80% of total income. The same was much more than any private builder’s profit engaged in similar kind of business. (iii) The assessee has been earning profits systematically over last few years; (iv) These profits have been earned by systematic commercial activity in the nature of sale of land and providing of services; (v) The assessee is running purely on commercial principles; and (vi) The competent authority i.e.. Director of Income tax (Exemptions). Bangalore has cancelled the registration granted under section l2A vide order dated 28.10.2011 and hence, the Assessee’s income can only be computed under normal provisions of the Act in the status of an Association of’Persons (AOP).
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On the basis of the aforesaid conclusions / reasons, the AO assessed to tax the excess of income over expenditure amounting to Rs.
156.39.68,078/- under normal provisions of the Act and exemption under section 11 of the Act was denied. The AO assessed the assessee in the
status of Association of Persons (AOP) and levied tax at 30% of the
assessed income.
The CIT(Appeals) confirmed the order of the Assessing Officer.
In respect of the order passed under section 12AA(3) cancelling
registration granted u/s. 12AA(3), the assessee had filed an appeal before the Tribunal. The said appeal was allowed by the Tribunal vide order dated
31.1.2013. The Revenue challenged the order of the Tribunal before the Hon’ble High Court of Karnataka. Pending admission of the Revenue’s
appeal, the Hon’ble High Court vide order dated 14.8.2013 has stayed the
operation of the order dated 31.1.2013. It is in this background that the Assessee has preferred the present appeal before the Tribunal.
We have heard the submissions of the learned counsel for the Assessee and the learned DR.
The learned counsel for the Assessee submitted that the AO had no
jurisdiction to assess the Assessee after cancellation of the registration by the DIT (Exemptions). Notification No.880(E) dated 14.9.2001 granted
jurisdiction to the Director of Income-tax (E) in case of assessees claiming
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exemption under section11 (being headquartered in Bangalore). A Deputy Director of’ Income-tax (Exemptions) cannot assume jurisdiction unless so
authorised. The assessment made and the order passed under section 143(3) by the learned Additional Director of Income tax (Exemptions) -
Range 17, Bangalore in the case of’ a non-charitable organization [as per
the order passed under section I2AA(3)], is therefore bad in law and liable to be quashed.
The learned counsel for the Assessee further submitted that the order passed in the status of AOP (Trust) is bad in law. It was submitted by
him that section 2(31) of the Act defines “person in an inclusive manner.
Being inclusive in nature. It has to be given a broad meaning. Seven categories of persons are mentioned in section 2(31). These are natural
persons as well as juristic persons. Clause (vii) therein clarifies that every artificial juridical person, not falling within clauses (i) to (vi) of section 2(31)
is also a ‘person’ for the purpose of the Act. By the Finance Act, 2002, with
effect from April 1, 2003, an Explanation was inserted to section 2(31) which makes it clear that, inter alia, an artificial juridical person shall be
deemed to be a person whether or not it is established or incorporated with the object of deriving income, profits or gains.
As per section 5(2) of The Karnataka Industrial Areas Development
Act, 1966 (hereinafter referred to as KIAD or KIAD Act), the Board constituted under such Act (which is the Assessee in the present appeal)
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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. A body corporate is a person. He referred to the decision of the Supreme Court in Assistant Commissioner, Assessment II,. Bangalore v. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC) in support of the above stand that a body corporate is a person. Once the Board is formed, it would become a juridical person as opposed to natural persons. Activities and functions of the Appellant are carried on in the name of the assessee Board and not in the name of the persons who form the said Board. The properties of the assessee vest in the name of the assessee managed by the Board (section 18 of KIAD Act). Therefore the assessee is an ‘artificial juridical person’ rather than association of persons. Therefore the status of the assessee is ’AJP’.
It was submitted that in the order passed under section 143(3), the AO has assessed the assessee in the status of ‘Association of Persons’. In the following decisions, it has been held that when return of income is filed in one status and assessment is made under a different status, without initiation of proceedings against the Assessee in a status in which assessment is intended to be framed, is bad in law.
• CWT v Ribkarai, [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 (Bom) • CWT v Jagdish Puri [1987] 163 ITR 458 (Raj)
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• 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)
It was submitted that in view of the above, the order passed u/s. 143(3) is bad in law and liable to be quashed.
The next submission of the learned counsel for the Assessee was on the applicability of the proviso to Sec.2(15) of the Act to the Assessee. It was submitted that the development of industries is the duty of the State Government. Industries, trade and commerce, production and supply of goods, land and matters connected thereto are the domain of the State Government under List II - State list - Seventh schedule of the Constitution of India. The constitution of corporations, trusts, boards, etc for the purposes of local government is also within the powers of a state legislature under entry no. 5 of the State list. It is a bounden duty of the State Government to contribute towards the growth and development of’ industries.
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The development of industries has many benefits such as generation of employment, provision of goods and services, growth of cities/towns in a phased manner, growth of activities complementing and supplementing the various requirements of industries, growth of housing, increase in per capita income, increase in standard of living, increase in income/wealth generation etc. Industrial development leads to overall economic development of the state and the nation.
Our attention was drawn to the preamble of The Karnataka Industrial Areas Development Act, 1966 (hereinafter referred to as KIAD) under which the Assessee was established as a body corporate, which reads thus:
“An Act to make special provisions for securing the establishment of industrial areas in the State of Karnataka and generally to promote the establishment and orderly development of industries therein, and for that purpose to establish an Industrial Areas Development Board and for purposes connected with the matters aforesaid. WHEREAS it is expedient to make special provisions for securing the establishment of industrial areas in the State of Karnataka and generally to promote the establishment and the orderly development of industries in such industrial areas, and for that purpose to establish an Industrial Areas Development Board and for purposes connected with the matters aforesaid;”
He brought to our notice that in pursuance of the power vested under section 5 of the KIAD Act, the State Government has notified a Board called as the ‘Karnataka industrial Area Development Board (Board
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in short) to achieve the objectives of the KIAD Act. The purpose of establishing the Board is provided under section 5(1) of the KIAD Act, which provides:
“Establishment and incorporation.’ — For the purposes of securing the establishment of industrial areas in the State of Karnataka and generally for promoting the rapid and orderly establishment and development of industries and for providing industrial infrastructural facilities and amenity in industrial areas in the State of Karnataka, there shall be established by the State Government by notification a Board by the name of the Karnataka Industrial Area Development Board.”
Karnataka Industrial Areas Development Board (KIADB) is a wholly owned infrastructure agency of Government of Karnataka. set up under Karnataka Industrial Areas Development Act of 1966. It is established through a State Government notification. The assessee is a creation of law. The law was enacted with certain specific objectives. Thus, the objectives for which the assessee is constituted was laid out even prior to its incorporation. The assessee and its activities are therefore ring fenced to this special Act, namely KIAD Act.
The State Government can give directions to the assessee, as in its opinion, are necessary or expedient for carrying out the purposes of the Act and it is the duty of the assessee to comply with such directions [section 17 of KIAD Act].
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It was next highlighted that the assessee carries on its activities in accordance with the provisions of KIAD Act. It does not have the unfettered power to carry on its activities. It functions within the broad framework of the objectives laid down h the KIAD Act.
The website of the assessee which outlines its Aims and objectives and ‘Functions. It states:
“Aims & Objectives: (a) Promote rapid and orderly development of industries in the stale. (b) Assist in implementation of policies of Government within the purview of KIAD Act. (c) Facilitate in establishing infrastructure projects. (d) Function on “No Profit - No Loss” basis. Functions: (a) Acquire land and form industrial areas in the state. (b) Provide basic infrastructure in the industrial areas. (ç) Acquire land for Single Unit Complexes. (d) Acquire land for Government agencies for their schemes and infrastructure projects.
Application of Appellant’s funds & property 24. The funds of the assessee can only be used as per the provisions and for the purposes of the KIAD Act. Section 8 of the Act provides that all property and all other assets vesting in the assessee shall be held and
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applied by it, subject to the provisions and for the purposes of this Act. The purpose of application is outlined. The funds cannot be distributed or
appropriated to any person unless the same is in accordance with the assessee’s objectives. The employment utilization and channelizing of
funds can be done within the broad framework of the assessee’s
objectives.
Acquisition and development of lands
The Acquisition section (one of the wings of the assessee) conducts
the proceedings for acquisition of land as per KIAD Act and hands these lands to KIADB. Special Deputy Commissioner heads acquisition wing. He
is assisted by Special Land Acquisition officers at zonal level. The Board does not have the power to acquire land of its choice; develop it and then
sell it: Under section 3 of KlAD Act, it is only the State Government which
can declare any area as an Industrial area by a notification, and specify the limits of such area. Thus, the Board’s acquisition powers are ring fenced by
the State Government’s authority. As per section 28 of KIAD 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 an area is declared as an industrial area and the land is
acquired under section 28 of KIAD Act or transferred by the Government under section 32 of the KIAD Act, that the role of the Board begins.
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Restraint on expenditure from funds of the assessee
Section 23 stipulates that the assessee shall have the authority to
spend such sums as it thinks fit for the purposes authorised under this Act
from out of Board’s funds. Every expense has to therefore pass the ‘purpose test’.
It was argued by ld. counsel for the assessee that in the present case, the assessee is primarily engaged in ‘promotion of industrial growth
in Karnataka’. It is not covered within any of the specific categories enlisted
in section 2(15). The question therefore is whether the assessee’s objective is covered within the phrase ‘advancement of any other object of general
public utility’?
The objectives of the assessee are explicit and cannot he circumvented. The assessee is a creation of law, It is not formed or set-up
by any person(s) for any pecuniary benefit or commercial motive. The assessee owes its genesis to KIAD Act, a State Government legislation.
The assessee’s incorporation. Functioning, powers and scope are set out in the KIAD Act. Being a creation of a special law, compliance with the
provisions therein is mandatory. The statute repeatedly emphasizes the
need to carry on activities having regard to the objects of the Act. The object is promotion of Industries. It assists in implementation of polices of
Government within the purview of KIAD Act. There is establishment of
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Infrastructure projects. Above all, it is under direct surveillance of State Government.
Industrialization is an initiation of social reform and economic development. It boosts the production and manufacturing segments. Employment would scale up; efficiencies stand enhanced and standardization becomes achievable. All these transformations translate into overall amelioration of the society and country as a whole. An institution with such a far sighted and development oriented objective is certainly one which benefits the public at large. The assessee serves the cause of general public utility and is therefore covered within the gamut of “Charitable purpose” as defined by section 2(15) of the I.T. Act.
In the course of carrying on its activities, the benefit arising from such promotion may be shared by those engaged in the industrial sector. The benefit to these cannot deter the claim of the assessee to be a ‘Charitable institution’. In the words of the Apex Court in the case of CIT v Andhra Chamber of Commerce (1965) 55 ITR 722 (SC):
“The principal objects of the assessee are to protect, trade, commerce and industries and to aid, stimulate and promote the development of trade, commerce and industries in India or any part thereof. By the achievement of these objects, it is not intended to serve merely the interests of the members of the assessee. Advancement or promotion of trade, commerce and industry leading to economic prosperity ensures the benefit of the entire community. That prosperity would be shared also by those: who engage in trade, commerce and industry but on that account the purpose is not rendered any the less an object of general
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public utility. It may be remembered that promotion and protection of trade, commerce and industry cannot be equated with promotion and protection of activities and interests merely of persons engaged in trade, commerce and industry.”
It was submitted that the AO in his order has observed that the assessee has carried out the activities/rendered services to industrialists/ entrepreneurs in lieu of which it collected/received consideration towards sale of industrial sites and fees for various services rendered thereof. These are not services rendered to specific industrialists/entrepreneurs. The objective is not ‘service of individual industrial houses’ but promotion of overall industrialization of Karnataka. An incidental benefit to some industrialists/entrepreneurs would not dilute the progressive and charitable objective of the assessee.
To summarize, the ld. counsel submitted that the assessee plays a vital role in supplementing the governmental efforts in boosting industrialization. The assessee is a creation of law constituted for the purpose of development of industries and exists for public good. Its control and management is vested with the State Government. The benefit arising from its activities may be shared by persons engaged in the industrial sector. This however does not detract from its charitable character. The object of the assessee is clear; the functions are ring fenced and powers are frame all with a view to achieve industrial development in Karnataka. Development of industries has been construed to be ‘advancement of
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general public utility’ by the Apex Court. Activities of the assessee are therefore to be regarded as covered within the operative provisions of
section 2(15).
It was also submitted that assessee has continuously devoted itself to the promotion of industries in the State of Karnataka. It has not been
formed and is not carrying on activities with a motive to distribute its surplus. There is no intention to make profits. The objects are to carry out
Industrial and infrastructure promotion. The surplus, if any, arising from the activities are solely utilized for the achievement of its objects and no portion
is utilized for distribution of any income or profits. In substance, the
assessee neither earns any profits nor is it involved in the activities of trade, commerce or business. The activities of assessee are therefore
charitable in nature.
As already mentioned, assessee operates on a no profit or no loss basis. This is evident from their pricing mechanism. The assessee acquires
agricultural land from the farmers by paying compensation to the farmers. Such compensation is determined by Deputy Commissioner of District.
Such land would be developed into plots for the purposes of projects approved by State High level Clearance Committee (headed by Chief
Minister). State Level Single Window Clearance Committee is headed by
Chief Secretary. Govt. of Karnataka and District Level Single Window
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Clearance Committee is headed by the Deputy Commissioners of the Districts.
The assessee prepares a budget for compensation payable for land
acquisition and development expenditure thereon. Total pricing of land would primarily include cost of land acquisition and total development cost
and 12.75% interest for one year along with Establishment & Board Service Charges towards maintenance of the Board. The computation of total cost
of acquisition and development is tabulated below:-
Once the total cost is so computed, it is allocated to the allotable
extent of the land (generally around 65 to 70% of land). Thereafter allotment of plots is carried on to the entrepreneurs for the State / District
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approved projects at the same price. There is no margin included. The objective is not to earn profits on allotment of such plot of land. The excess
of income over expenditure or the surplus remaining in the financial statements of the Board primarily arises on account of bank interests.
These are excess funds available with the Board which are housed with the
banks to generate passive interest income. Thus, the core activity of industrialization of lands (the alleged business activity) does not fetch
profits; the source of income which generates surplus is from bank interests and thereby not generated on account of Board’s normal course of
activities.
In view of all the above, it was submitted by the ld. counsel for the assessee that the action of the AO affirmed by CIT(A) that the activities of
the assessee are commercial in nature thereby attracting the proviso to section 2(15) is incorrect, contrary to facts, bad in law and liable to be
quashed.
Without prejudice, the assessee submits that eleemosynary element is not essential element of charity. It is also not a necessary
element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price. The surplus
generated. if it is held and applied for charitable purpose, the assessee has
to be considered as existing for a charitable purpose. The decisions in Krupanidhi Educational Trust v DIT(E), ITA No. 86/2012 dt. 14.9.2012 -
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Bangalore ITAT; Loka Shikshana Trust v ClT [1975] 101 ITR 234 (SC), Cricket Association of Bengal v CIT [1959] 37 ITR 277 (Cal), CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Born), The Trustees of the Tribune, In re (1939) 7 ITR 423 (PC) and para No. 19 Page No. 528 — Volume I of The Law and Practice of Income tax by Kanga, Palkhivala and Vyas was relied upon in support of the above principle.
Difference between ‘business activity’ and ‘activity with business principles’
There is a subtle difference between the phrase ‘carrying on activities in the nature of business’ and ‘carrying on activities on business principles’. The former refers to activity itself assuming the character of business and the latter refers to activity carried on for a different purpose but with the acumen of business world. The latter indicates the import of business kind efficiency in carrying out activities. It is an evidence of being organized and carrying on activities in a structured and efficient manner.
Mere adoption of ‘business principles’ does not transform a charitable institution into a business entity. The Apex Court has echoed similar view in the case of CIT v Andhra Pradesh State Road Transport (1986) 159 ITR I (SC) wherein he Court observed as under:-
“No activity can be carried on efficiently, properly, adequately or economically unless it is carried on business principles. If an activity is carried on business principles, it would usually result in profit, but, as pointed out by this court in Surat Art Silk Cloth Manufacturers Associations case [1980] 120 ITR (‘SC’), it is not possible so to carry on a charitable activity in such a way that the
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expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation but would reflect unsound principles of management.” (emphasis supplied)
In the present case, the assessee has carried on its activities on business principles and sound principles of management. As a result, the assessee has been able to repeatedly generate surplus funds. This fact by itself does not render the assessee a ‘non-charitable entity; but only is an execution of sound management principles by a charitable organisation. The assessee undertakes development of industries and infrastructure in the state of Karnataka. It is not carrying on business; but executing the tasks assigned by the State Government under the KIAD legislation. There is no occasion for the office bearers to take the ‘profit making’ route as the funds and their deployment is under the surveillance of the State Government (through its office bearers/public servants). To conclude, the activities of the assessee do not constitute business.
The learned counsel for the Assessee referred to several judicial pronouncements. We will make a reference to those decisions at the appropriate place, to the extent it is necessary to dispose this appeal.
The learned DR placed strong reliance on the findings of the AO in the order of assessment and the order of the CIT(A).
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We have given a very careful consideration to the rival submissions. The purpose for which the Assessee exists is for the ‘advancement of any
other object of general public utility”. The fact that the Assessee enjoyed registration u/s.12AA of the Act in the past is itself sufficient to come to this
conclusion. The withdrawn of registration u/s.12AA of the Act was only
consequent to the introduction of the proviso to Sec.2(15) of the Act by the Finance Act, 2008. Therefore the question that we need to be answered is
as to whether the proviso to Sec.2(15) of the Act would be applicable to the case of the Assessee.
We shall now understand the approach to be adopted in coming to
the conclusion as to whether the proviso to Sec.2(15) of the Act will be applicable to the Assessee in the light of the decision of the Hon’ble Delhi
High Court in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others 371 ITR 333 (Delhi). The learned counsel for
the Assessee has placed strong reliance on this decision to support his
plea that the proviso to Sec.2(15) of the Act is not applicable to Assessee. The facts of the case before the Hon’ble Delhi High Court in the case of
India Trade Promotion Organization (supra) was 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
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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 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
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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 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
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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) 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)
It can be seen from the various provisions of the KIAD Act 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
ITA No.378/Bang/2013 Page 24 of 27
Assessee was established for charitable purposes. We shall now take a look at the Income and Expenditure Account for the year ended 31.3.2009
of the Assessee. The income side of the Account shows that the main component of income of the Assessee is derived in the form of interest of
Rs.131.17 crores. Schedule “P” to the Income and Expenditure Account
shows the break-up of the interest receipt by the Assessee. The interest on Fixed deposits is Rs.120.90 Crores. The Earnest Money Deposit given
by the allottees are parked by the Assessee in fixed deposit and those deposits has earned the aforesaid interest income. Therefore there can be
no profit element in earning this interest income. Besides the above, the other components of interest are interest from Allottees, penal interest from
Allottees, interest on staff loan, interest from SB and others, interest on
seed money, dividend received and interest on income tax refund. The other component of income is gain on disposal of land, sale of application
forms, recoveries of fines and penalties, interest, other receipts, rent, forfeiture of deposits, water supply charges. The income from sale of land
is Rs.18.69 Crores. The expenditure incurred by the Assessee comprises
of repairs and maintenance, administrative expenses, water and electricity charges, special and other charges, Depreciation. If the gain on disposal of
land of Rs.18.69 Crores which is the primarily object of the Assessee and expenditure in the form of administrative expenses of Rs.15.42 Crores and
10.61 Crores which are fixed expenses and necessary to carry on the
ITA No.378/Bang/2013 Page 25 of 27
primary object alone are considered than there would be loss. This by itself would demonstrate that the Assessee does not exist for profit.
The main aim and object for which the Assessee was established is
to (a) Promote rapid and orderly development of industries in the stale. (b)Assist in implementation of policies of Government within the purview of
KIAD Act. (c) Facilitate in establishing infrastructure projects.(d)Function on “No Profit - No Loss” basis. For the above purpose, the Assessee
(a)Acquire land and form industrial areas in the state.(b)Provide basic infrastructure in the industrial areas.(ç) Acquire land for Single Unit
Complexes.(d)Acquire land for Government agencies for their schemes
and infrastructure projects. The dominant and main object of the Assessee is charitable and not for making profits.
A look at the income stream of the Assessee clearly reveals that all
the activities from which the Assessee derives income are an inherent part of the main object of the Assessee. It is clear from the facts of the case that
profit making is not the driving force or objective of the Assessee. Rather the purpose for which the Assessee was created is to regulate and develop
drinking water and drainage facilities in the urban areas of the State of Karnataka and for matters connected therewith. This makes it clear that
any income generated by the Assessee does not find its way into the
pockets of any individuals or entities. It is to be utilized fully for the purposes of the objects of the petitioner.
ITA No.378/Bang/2013 Page 26 of 27
Keeping in mind the above factual aspects and the provisions of the KIDA Act, 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 assessee is operating on no profit basis. This is substantiated by the actual income received on operations of
the Assessee and the expenditure incurred set out in the earlier paragraphs of this order. The proviso to Sec.2(15) of the Act is therefore not applicable
to the case of the Assessee. We therefore 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 not includible in the total income and therefore the income returned by the Assessee is directed to be accepted.
Several other contentions regarding applicability of Sec.10(20) of the
Act, Sec.10(46) of the Act and whether the levy of tax would be improper in view of Article 289(1) of the Constitution of India, were advanced before us.
We have not dealt with those contentions, in view of our conclusion on the applicability of the proviso to Sec.2(15) of the Act to the Assessee.
ITA No.378/Bang/2013 Page 27 of 27
In the result, the appeal by the Assessee is allowed. 51.
Pronounced in the open court on this 4th day of September, 2015.
Sd/- Sd/-
( S. RIFAUR RAHMAN ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member Bangalore, Dated, the 4th September, 2015.
/D S/ Copy to: 1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.