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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member
This appeal by the assessee is directed against the order dated
16.02.2015 of the CIT(Appeals)-14, LTU, Bangalore relating to assessment
year 2011-12.
The assessee Board, Karnataka Urban Water Supply and Drainage
Board [KUWSD Board], for the AY 2011-12 filed a return of income
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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
utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business.
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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. The AO further noticed that the Assessee was a statutory corporation created to implement its public utility schemes in relation to water supply and underground drainage services. The establishment, administration and supervision charges and water charges are collected by the Assessee for the services provided by it. The Assessee receives ETP & supervision charges from the State Government, Central Government and Urban Local Bodies (ULBS) on the works executed by it.
For the AY 2011-12 the following activities constituted major portion of receipts:-
Particulars As on 31.3.2011 (in Rs.) Establishment, Administration & Supervision charges 52,75,55,713 Water charges 26,91,11,444 Interest 15,63,96,764 Rent 70,80,155 Other Income 3,33,10,495 Total 99,34,54,570
The AO noted that that the assessee has shown a total income of Rs. 99,34,54,570 for the current assessment year from Collection of establishment, administration and supervision charges, water charges, interest etc. The assessee has also shown income exclusively collected from the ULB’s and consumers in the form of establishment, supervision
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and water charges to the tune of Rs. 79 crores for AY 2011-2012. The assessee has shown an excess income over expenditure of Rs.
25,00,62,435 in the income and expenditure A/c after making all the adjustments.
The details of ‘other income’ earned by the assessee were as
follows:-
The submissions of the assessee were not accepted by the AO. He
noted that the assessee is directly involved in rendering services in the form of maintenance and supply of potable water as well as the sanitation
system for various facilities like the urban local bodies or the customers themselves on payment of certain ETP , Supervision charges and water
charges. As such, the assessee is hit by the newly introduced proviso to section 2(15) as it is directly engaged in the activities of trade, commerce or
business, and is also rendering service of maintenance of various facilities
on payment of certain charges. According to the AO, it is evident that the
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assessee has earned substantial amount of its Income by way of fees from the administrative, supervision and water charges. The assessee has
generated receipts in excess of Rs.25 lakhs for the current assessment year out of its commercial activities and hence the proviso to sec.2(15) is
attracted in its case. Therefore the AO was of the view that that the income
generated from the activities of assessee company clearly attracts the amended proviso to section 2(15) of the I.T. Act as amended by the
Finance Act, 2008. He held that the assessee is providing services on payment of certain amount of fees and therefore its income is liable to be
taxed, independent of cancellation of registration by the DIT(Exemption), Bangalore and assessee will not be entitled for exemption u/s 11.
As a consequence, the AO denied exemption u/s.11 of the Act. The
taxable income of the Assessee was arrived at an amount of Rs.34,82,50,137 and total demand of Rs.14,52,80,690 was raised inclusive
of interest u/s 234B and 234D.
Aggrieved by the order of the AO, the Assessee filed appeal before CIT(A). Before CIT(A), the Assessee contended that under clause 3 of
Article 246 of the Constitution of India the State is empowered to make laws in respect of any matters enumerated in List II of Seventh Schedule to
the Constitution of India [“herein after referred to the “State List”]. Item no
17 of the State List, reads thus:-
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“17. Water, that is to say, water supplies, irrigation and canals, drainage and embankments, water storage and water power subject to the provisions of entry 56 of List II.” Thus, it is the obligation of the state government to provide for water
supplies, water storage and drainage facilities to the people of the state. To fulfill the above said obligation, the Government of Karnataka formed
the KUWSD Board by an enactment called ‘Karnataka Urban Water Supply & Drainage Board Act – 1973’. The preamble to this Act mentions the
objects of enactment as follows:-
“To undertake the investigation, preparation and execution of schemes for the regulation and development of drinking water and drainage facilities in the urban areas, it is considered necessary to have a statutory board at the State level which will help in bringing about co-ordination in the activities relating to the implementation of such schemes”. Thus the formation of the KUWSD Board and the functions/activities of the assessee Board are only to fulfill the obligations thrust on the State
Government by the Constitution of India. Neither the State Government nor
the assessee has any intention to make any profit, which is an essential element to be considered as having engaged in the nature of trade,
commerce or business. Thus, neither the State Government nor the assessee engaged in fulfilling the obligations of the State Government
under the Constitution of India can be said to be involved in carrying on any activity in the nature of trade commerce or business as envisaged in the
proviso to section 2 (15) of the Act. Similarly, under Article 243W of the
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Constitution of India, state legislature has empowered and authorized the urban local bodies namely municipalities and corporations by way of
enactment of Karnataka Municipalities Act, 1964( Chapter V) to carry out the obligations of Water Supply and Drainage facilities in their respective
areas. Thus the urban local bodies carry out the activities of provisions of
water supply and drainage facilities in fulfillment of the obligations under the Constitution of India. Thus the urban local bodies (Municipalities and
Corporations) in carrying out the obligations and functions prescribed under the Constitution of India cannot be said to carrying on any activity in the
nature of trade, commerce or business as envisaged in proviso to section 2(15) of the Act.
The assessee at the instance of the State Government or the Urban
Local Bodies carries out the activities of investigation, preparation of schemes for regulation and development of drinking water and drainage
facilities. These activities are carried out strictly in accordance with
directions rules and regulations framed by Government.
While the assessee’s major task is to take up capital works (98.60%
of expenditure for Assessment year is on capital works as against 1.40% on maintenance works). The assessee is engaged in bulk water supply to
the Urban Local Bodies (ULBs) in 4 local areas under State Government.
Only in two local areas, namely, Kushal Nagar and Kolar, water is being supplied directly by the assessee to the consumers on behalf of respective
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local bodies. These schemes were transferred from the erstwhile Public Health Engineering Department. The assessee collects water charges from
the consumers on behalf of local bodies, uses it for maintenance expenses of the scheme like power, maintenance of pumping machinery, chlorination
etc.
The Government of Karnataka authorizes the assessee to debit as a percentage of the capital project costs from the funds released by
Government of Karnataka as ETP (Establishment Tools & Plant) charges to meet the establishment, salaries and pension liabilities of the Board. Thus,
the assessee has to act in strict adherence with the Government directions
and regulations while executing the projects as also while recovering its cost as ETP charges, water charges etc.
The Assessee explained that its main source of income was from
ETP charges and Water Charges.
ETP Charges
During the year, the assessee has earned ETP charges of Rs.
52,75,55,712. The details of the same are as per Schedule 16 of the financial statements is reproduced below:-
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These charges have been collected strictly in accordance with Rule 4 (b) of Appendix III of Karnataka Public Works Accounts Code Volume II.
Water Charges
During the year, the total water charges earned is Rs.26,91,11,444 as per Schedule 17 of the financial statements which is reproduced below:-
Sl.No. Particulars Credit (Rs.) 1 Water Charges ACTUALLY received 5,27,32,721 2 Water Charges receivable 21,63,78,723 Total 26,91,11,444 Cl Balance 26,91,11,444
The actual water charges received is only Rs. 5, 27, 32,721. The sum of Rs.21,63, 78,723/-, represents interest accrued on the amounts
receivable from urban local bodies is Rs. 18,11,72,905. This interest charged has not been received from urban local bodies for more than a
decade. However, the assessee has no option, but to charge interest as per Water Supply Regulations, 1985 approved in the Government Order
No. HUD 16 UMS 83 Bangalore dated 14.06.1985.
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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. The Assessee pointed out that the following table would show that the Assessee has actually incurred a loss on its operations
and is operating on a no profit basis:-
Amount in Rs.(Cr.) Particulars 31/3/11 ETP Charges 52.75 Water Charges 5.27 Other Income 3.33 TOTAL (A) 61.35 Less: Expenses on employee’s remuneration 28.07 Operation and maintenance expenses 18.05 Administrative Expenses 17.20 Depreciation 1.18 TOTAL (B) 64.5 NET LOSS (3.15)
Accordingly, even in complying with the constitutional obligations,
the assessee has been carrying on its activities in a real charitable manner and by no stretch of imagination could it be considered as carrying on
activity in the nature of trade, commerce or business or providing services in relation thereto. The assessee is engaged only in those activities that are
authorized or approved by the Government. It is pertinent to note here that
the assessee does not deal with any private individuals/organisations at all. It deals only with State Government and Urban Local Bodies. Thus it can
be seen that the State Government, the assessee and Urban local bodies are all acting under an obligation prescribed by the Constitution of India.
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Accordingly, none of these authorities could be said to be involved in carrying on any activity in the nature of trade, commerce and business.
The assessee, in serving either the state Government or urban local
bodies, cannot also be said to be involved in rendering services in relation to trade, commerce or business. Accordingly, proviso to section 2(15) of
the Act does not apply to the assessee’s case. Consequently, the exemption under section 11 cannot be denied to the assessee.
Further, the Assessee drew attention to the speech of Finance
Minister dated 29-2-2008 which clarifies that the proviso is not intended to be applicable to genuine charitable organizations which do not carry
regular trade, commerce or business or rendering services in relation to such trade commerce or business. The memorandum explaining Finance
Bill of 2008 reported in 298 ITR (Statue) 190, clarifies that only the entities
operating in commercial lines and which are claiming exemption of their income either U/s 10(23) or sec. 11 of the Income-tax Act have been
sought to be excluded from the definition of ‘charitable purpose’ and not ‘genuine charitable institution’ like the assessee. Since the term “trade,
commerce and business” have been mentioned together in section 2(15) of the Act, it has to mean that the activity has to be systematic and organized
activity carried out with the said purpose and objective of making profit. For
this purpose, reliance was placed on the decisions of the Hon’ble Supreme Court in the case of Loka Shikshana Trust Vs. CIT reported in 101 ITR 234
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(SC) and CIT (Addl) Vs. Surat Art Silk Cloth Manufacturers Association reported in 121 ITR 1 (SC). It was submitted that having regard to the fact
that the Assessee serves only the State Government and local area bodies only to comply with the obligations thrust on it by the Constitution of India;
further, the assessee is actually incurring losses on its operations. It was
also submitted that the assessee has to follow the directions, rules and regulations formulated by the State Government without any discretion of
its own. Accordingly, it was argued that the assessee is a genuine charitable institution, to which the legislature does not intend to deny
exemption. Thus, the proviso to section 2(15) of the Act does not apply to the assessee.
The Assessee also explained as to how the rates for supply of
water are fixed. The estimates for Water Supply and Underground Drainage projects are prepared adopting the current schedule of rates
approved by the Assessee and Public Works Department. After estimates
are sanctioned, the recognized systems to carry the work is by contract work. The contractor is selected by inviting tenders in accordance with
procedures prescribed in Karnataka Transparency Act in Public Procurement Act, 1999 [KTPP Act]. The tenders received are compared
with the estimated rates. The tenderer whose tender is lowest and fulfils all the prescribed financial and technical eligibility criteria is selected. Thus,
rates are fixed by following the procedures prescribed in KTPP Act.
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In view of the above, it was prayed that the assessee has to be granted exemption u/s. 11 of the Act.
The CIT(A) did not agree with the submission made on behalf of the Assessee for the following reasons:-
The preamble to THE KARNATAKA URBAN WATER SUPPLY AND DRAINAGE BOARD ACT, 1973, (KUWSDB Act) under which the Assessee was created, did not specify that the Assessee’s activities have to be carried out without any profit motive. There is also no prohibition through any government order that prevents the Assessee from making profits or generating surplus. 2. The activities of the Assessee showed components of systematic business activity employing human and technical resources, and consciously conducted for healthy surplus generation. The Assessee had to support its expenditure through its own revenue inflows without any government grants or subsidy. The Assessee did generate surplus from operations during the previous year. 3. The Assessee provides service of project supervision against the receipt of Establishment, Supervision and Administration charges (ETP charges) from ULBS and sale of water against a fee/cess and these factors clearly indicate that the Assessee’s activities are in the nature of business/commerce. Though supply of water might be a constitutional duty of the Government, the fact that the Assessee facilitates performance of such duty will not render the Assessee’s activity as one without any profit motive. The fact that the water charges are levied are low does not mean that there was lack of profit motive. Rather it indicates inefficient operation of the Assessee. The fact that the Assessee executes project on behalf of the ULBS and not for private parties cannot be the basis to hold that
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the Assessee’s activities are not in the nature of trade or commerce.
Aggrieved by the order of the CIT(A), the Assessee is in 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 reiterated submissions as were made before CIT(A) on the applicability of the proviso to Sec.2(15) of the Act. He also drew our attention to the various provisions of the KUWSDB Act and relied on certain judicial pronouncements, in this regard. The learned DR relied on the order of the CIT(A). We will first deal with the applicability of the proviso to Sec.2(15) of the Act to the Assessee.
The Assessee was established as a corporation under KARNATAKA ACT No. 25 OF 1974 (First published in the Karnataka Gazette Extraordinary on the Twenty-first day of August, 1974). THE KARNATAKA URBAN WATER SUPPLY AND DRAINAGE BOARD ACT, 1973. The preamble to the Act gives the objects and reasons which reads thus:
“An Act to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban areas of the State of Karnataka. WHEREAS it is expedient to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban
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areas of the State of Karnataka and for matters connected therewith;”
By Sec.3 of the KUWSDB Act, the Assessee was created as a body corporate. The said provision reads as follows:
“Sec.3. Creation and incorporation of the Board.- The duty of carrying out the provisions of this Act shall, subject to the restrictions, conditions and limitations therein contained be vested in a Board to be called the Karnataka Urban Water Supply and Drainage Board and such Board shall be a body corporate and have perpetual succession and a common seal and shall by the said name sue and be sued.”
The functions and powers of the Assessee are set out in Sec.16, 17 & 18 of the KUBWSDB Act, which reads as follows:
“POWERS AND FUNCTIONS OF THE BOARD 16. Functions of the Board.- (1) The Board shall be charged with the functions of providing financial assistance by way of loans and advances to the local authority in the State for assisting in providing for the following amenities, namely:- (i) water supply and drainage for urban areas; and (ii) other activities which are entrusted to the Board from time to time by the Government.
Other functions of the Board.- (1)The Board shall perform all or any of the following functions, namely:- (a) at the instance of the Government or a local authority or suo motu,- (i) investigating the nature and type of schemes that can be implemented in the area of any local authority for the provision of drinking water and drainage facilities; (ii) planning and preparing of schemes including schemes covering areas falling within the jurisdiction of more than one local authority for the purpose of providing the supply of drinking water or drainage facilities;
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(iii) executing such schemes under a phased programme for the provision of drinking water and drainage facilities within the areas of local authorities to which such schemes relate ; (iv) operation and maintenance of drinking water supply and drainage undertakings either wholly or in part and subject to such terms and conditions as the Government may specify; (v) levy and collection of water rates, fees, rentals and other charges in respect of such undertakings as the State Government may specify. (b) providing technical assistance or giving advice to local authorities in the execution and maintenance of urban water supply and drainage works; (c) establishing and maintaining schemes incidental to urban water supply and drainage such as testing of water, designing of plant for purification of water, conducting research relating to urban water supply and maintaining farm schemes; (d) any other matter which is supplemental, incidental or consequential to any of the above functions; and (e) such other functions as may be prescribed.
(2) No scheme estimated to cost more than ten lakhs of rupees shall be carried out by the Board except with the previous approval of the State Government. 18. General powers of the Board.- The Board shall for the purpose of carrying out its functions under this Act. have the following powers, namely:- (i) to acquire and hold such movable and immovable property as it deems necessary and to lease, sell or otherwise transfer any such property subject to such conditions as may be prescribed; (ii) to acquire under the Land Acquisition Act, 1894 (Central Act I of 1894) any land or any interest therein required by the Board for implementing any schemes; (iii) to incur expenditure and undertake any work in any area in the State for the preparation and execution of such schemes as it may consider necessary for the purpose of carrying out the provisions of this Act, or as the case may be, the functions entrusted to it by the Government ; (iv) to enter into any contract; and (v) to do all things necessary for the purpose of carrying out the provisions of this Act.”
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Chapter VI containing Secs.19 to 28 H of the KUWSDB Act provides as to how the Assessee has to investigate, prepare and execute, maintain
Schemes by the Assessee. The cost of any scheme has to be borne only by the ULBs. It is clear from these provisions that any scheme has to be
approved by the Government. Sec.28A of the KUWSDB Act provides that
the operation and maintenance of scheme can be directed by the State Government to be carried out by the Assessee. Otherwise the schemes
when completed are handed over to the Urban Local Bodies (ULBs). When a scheme is directed to be maintained and operated by the
Assessee, the all reservoirs, tanks, cisterns, fountains, wells, pumps, conduits and other works and water scheme and the sewers etc., as the
case may be, shall vest with the Assessee. It is only in respect of schemes
which vest with the Assessee pursuant to direction of the Government that the Assessee has the power to levy rates, fees, rental and other charges in
respect of water supply or sewerage. In this regard, the provisions of Sec.31A of the KUWSDB Act, which reads thus:
“31A. Board’s power to levy rates etc.- The Board may, in respect of any water supply or sewerage undertaking vesting in it, levy rates, fees, rentals and other charges and may vary such rates, fees, rentals and other charges from time to time in order to provide sufficient revenue,- (a) to cover operating expenses, taxes and interest payments and to provide for adequate maintenance and depreciation; (b) to meet repayment of loans and other borrowings; (c) to finance normal year to year improvements; and (d) to provide for such other purposes beneficial to the promotion of water supply and sewerage.”
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It can be seen from the powers of the Assessee to levy and collect water charges, fees etc., cannot have any element of profit and is based
only on the requirements for fulfilment of the purposes set out in Sec.31A of KUWSB Act. In all other respects the Assessee only acts as a person
who executes the scheme approved by the Government for ULBs. 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
income derived by the Assessee is in the form of collection of water and sewerage charges. The dominant and main object of the Assessee as we
have already seen is to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water
and drainage facilities in the urban areas of the State of Karnataka. The
source of income of the Assessee as can be seen from the income side of the Income and expenditure account is from (a) establishment,
administration & supervision charges it receives from ULBs, water charges levied by it, interest on funds kept with the bank on deposits. The funds
that are not immediately required for execution of schemes are parked in
deposits. The Assessee also is in receipt of rental income. The other income of the Assessee is from fines, sale of tender forms,
registration/renewal fees, sale of scrap, cost of SR book, other receipts, P & L contribution of board, Vendor assessment charges.
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
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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.
Keeping in mind the above factual aspects and the provisions of the
KUWSDB Act, 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 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
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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 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
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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)
The principle laid down in the aforesaid decision, in our view, if applied to the facts of the present case, 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 para-14 of this order. The income of the Assessee is primarily
consists of Establishment, Administration and Supervision Charges, Water charges, interest, rent and other income (comprising of hire charges, fines,
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sale of scrap, tender forms etc.). If interest, rent and other income are excluded and compared with the expenditure on operations incurred by the Assessee, it becomes clear that the Assessee does not have profit motive. 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 for the impugned assessment years. 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(2) 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.
In the result, the appeal by the Assessee is allowed.
Pronounced in the open court on this 4th day of September, 2015.
Sd/- Sd/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member Bangalore, Dated, the 4th September, 2015. /D S/
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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.