Gujarat High Court
Ahmedabad Urban Development Authority vs Assistant Commissioner Of Income Tax ... on 2 May, 2017
Bench: M.R. Shah, B.N. Karia
O/TAXAP/423/2016 CAV JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 423 of 2016
With
TAX APPEAL NO. 424 of 2016
TO
TAX APPEAL NO. 425 of 2016
With
CIVIL APPLICATION (OJ) NO. 211 of 2016
In
TAX APPEAL NO. 423 of 2016
TO
CIVIL APPLICATION (OJ) NO. 213 of 2016
In
TAX APPEAL NO. 425 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE M.R. SHAH sd/
and
HONOURABLE MR.JUSTICE B.N. KARIA sd/
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1 Whether Reporters of Local Papers may be allowed to see YES
the judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy of the NO
judgment ?
4 Whether this case involves a substantial question of law as NO
to the interpretation of the Constitution of India or any
order made thereunder ?
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AHMEDABAD URBAN DEVELOPMENT AUTHORITY....Appellant(s)
Versus
ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTION)....Opponent(s)
=============================================
Appearance:
MR. S.N. SOPARKAR, LD. SR ADV WITH MR B S SOPARKAR, ADVOCATE for
the Appellant(s) No. 1
Mr. MANSIH R BHATT LE SR ADV WITH MRS MAUNA M BHATT, ADVOCATE
for the Opponent(s) No. 1
=============================================
CORAM: HONOURABLE MR.JUSTICE M.R. SHAH
and
HONOURABLE MR.JUSTICE B.N. KARIA
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O/TAXAP/423/2016 CAV JUDGMENT
Date : 02/05/2017
CAV JUDGMENT
(PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.0. As common question of law and facts arise in this group of appeals and as such with respect to same assessee Ahmedabad Urban Development Authority (hereinafter referred to as "AUDA") and arising out of the impugned common judgment and order passed by the learned Income Tax Appellate Tribunal (hereinafter referred to as the "ITAT") with respect to different assessment years, all these appeals are decided and disposed of together by this common judgment and order.
2.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT passed in ITA No.712/AHD/2013 for AY 200910, by which, learned ITAT has held that the activities of appellant assessee cannot be said to be for"charitable purpose" within the definition of Section 2(15) of the Income Tax Act and therefore, not entitled to deduction claimed under Section 11 of the Income Tax Act, the assessee has preferred the present Tax Appeal No. 423 of 2016 to consider the following questions of law.
"(1)Whether the Incometax Appellate Tribunal has erred in law and on facts in holding that the activity of the appellant was in the nature of trade, commerce or business and hence it cannot be regarded as activity for charitable purpose in view of the proviso to section 2(15) of the Incometax Act, 1961?
(2) Whether the Incometax Appellate Tribunal has erred in law and on facts in disallowing the claim of exemption of Page 2 of 57 HC-NIC Page 2 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT the appellant under section 11 of the Incometax Act, 1961, and assessing the income of the appellant under sections 28 to 44 of the Incometax Act, 1961?"
2.1. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT passed in ITA No.647/AHD/2014 for AY 201011, by which, learned ITAT has held that the activities of the appellant assessee cannot be said to be for "charitable purpose" within the definition of Section 2(15) of the Income Tax Act and therefore, not entitled to deduction claimed under Section 11 of the Income Tax Act, the assessee has preferred the present Tax Appeal No. 424 of 2016 to consider the following question of law.
"(1)Whether the Incometax Appellate Tribunal has erred in law and on facts in holding that the activity of the appellant was in the nature of trade, commerce or business and hence it cannot be regarded as activity for charitable purpose in view of the proviso to section 2(15) of the Incometax Act, 1961?
(2) Whether the Incometax Appellate Tribunal has erred in law and on facts in disallowing the claim of exemption of the appellant under section 11 of the Incometax Act, 1961, and assessing the income of the appellant under sections 28 to 44 of the Incometax Act, 1961?"
2.2. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT passed in ITA No.2335/AHD/2015 for AY 201112, by which, learned ITAT has held that the activities of appellant assessee cannot be said to be Page 3 of 57 HC-NIC Page 3 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT for "charitable purpose" within the definition of Section 2(15) of the Income Tax Act and therefore, not entitled to deduction claimed under Section 11 of the Income Tax Act, the assessee has preferred the present Tax Appeal No. 425 of 2016 to consider the following question of law.
"(1)Whether the Incometax Appellate Tribunal has erred in law and on facts in holding that the activity of the appellant was in the nature of trade, commerce or business and hence it cannot be regarded as activity for charitable purpose in view of the proviso to section 2(15) of the Incometax Act, 1961?
(2) Whether the Incometax Appellate Tribunal has erred in law and on facts in disallowing the claim of exemption of the appellant under section 11 of the Incometax Act, 1961, and assessing the income of the appellant under sections 28 to 44 of the Incometax Act, 1961?"
3.0. The facts leading to the present appeals in nutshell are as under;
3.1. That the assessee AUDA is constituted as Urban Development Authority, constituted by the State Government in exercise of powers under Section 22 of the Gujarat Town Planning and Urban Development Act, 1976 (hereinafter referred to as the "Town Planning Act"). The powers and function of the AUDA as Urban Development Authority are as per Section 23 of the Town Planning Act. As per Section 23 of the Town Planning Act, the AUDA as a Urban Development Authority is required to undertake Page 4 of 57 HC-NIC Page 4 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT the development of the Urban Area having jurisdiction as per the Notification issued by the State Government. The function of the AUDA as Urban Development Authority are as under:
(i) To undertake the preparation of development plans under the provisions of this Act, for the urban development area;
(ii) To undertake the preparation 2 [and execution] of town planning schemes under the provisions of this Act, if so directed by the State Government;
(iii) To carry out surveys in the urban development area for the preparation of development plans or town planning schemes;
(iv) To guide, direct and assist the local authority or authorities and other statutory authorities functioning in the urban development area in matters pertaining to the planning, development and use of urban land;
(v) To control the development activities in accordance with the development plan in the urban development area; 3 [(va) to levy and collect such security fees for secrutiny of documents submitted to the appropriate authority for permission for development as may be prescribed by regulations;]
(vi) To execute works in connection with supply of water, disposal of sewerage and provision of other services and amenities; 4 [(via) to levy and collect such fees for the execution of works referred to in clause (vi) and for provision of other services and amenities as may be prescribed by regulations;]
(vii) To acquire, hold, manage and dispose of property, movable or immovable, as it may deem necessary;Page 5 of 57
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(viii) To enter into contracts, agreements or arrangements, with any local authority, person or organisation as the urban development authority may consider necessary for performing its functions;
(ix) To carry any development works in the urban development area as may be assigned to it by the State Government from time to time;
(x) To exercise such other powers and perform such other functions as are supplemental, incidental or consequential to any of the foregoing powers and functions or as may be directed by the State Government.
3.2. That prior to AY 200203 the assessee was enjoying the exemption under Section 10(20A) of the Income Tax Act. However, subsequently Section 10(20A) of the Act came to be deleted / omitted by the Finance Act, 2002 w.e.f. 1.4.2003. That simultaneously, exemption granted under Section 10(20A) of the Income Tax Act also came to be withdrawn by Finance Act, 2002.
Tax Appeal No. 423 of 2016 4.0. That the assessee filed return of income for the year 200910 declaring total income at Rs. NIL after claiming deduction under Section 11 r.w.s, 2(15) of the Income Tax Act. The case of the assessee was taken up for scrutiny assessment and the assessment order came to be passed under Section 143(3) of the Act. The AO determined the income of the assessee at Rs. 359,95,83,000/ by Page 6 of 57 HC-NIC Page 6 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT disallowing the deduction claimed under Section 11 of the Act. That the AO held that activities of the assessee cannot be said to be for "charitable purpose" as contained in Section 2(15) of the Act, in light of the proviso to Section 2(15) of the Act and therefore, the assessee is not entitled to deduction claimed under Section 11 of the Act.
4.1. Feeling aggrieved and dissatisfied with the order passed by the AO, the assessee preferred appeal before the learned CIT(A). That the learned CIT(A) confirmed the disallowance made under Section 11 A of the Act on the ground that the case of the assessee is covered by proviso to Section 2(15) of the Act. Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A) confirming the disallowance made under Section 11A of the Act, the assessee preferred appeal before the learned ITAT. By impugned judgment and order, the learned ITAT has dismissed the said appeal by observing that considering the proviso to Section 2(15) of the Act, the assessee shall not be entitled to deduction under Section 11 of the Act as the activities of assesee can be said to be in the nature of trade, commerce and business.
4.2. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT, the assessee has preferred the present Tax Appeal No. 423 of 2016 to consider the following question of law.
"(1)Whether the Incometax Appellate Tribunal has erred in Page 7 of 57 HC-NIC Page 7 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT law and on facts in holding that the activity of the appellant was in the nature of trade, commerce or business and hence it cannot be regarded as activity for charitable purpose in view of the proviso to section 2(15) of the Incometax Act, 1961?
(2) Whether the Incometax Appellate Tribunal has erred in law and on facts in disallowing the claim of exemption of the appellant under section 11 of the Incometax Act, 1961, and assessing the income of the appellant under sections 28 to 44 of the Incometax Act, 1961?"
4.3. Similar orders are passing in the case of very assessee for AY 201011 & 201112, which are the subject matter of Tax Appeal Nos. 424 of 2016 and 425 of 2016.
5.0. Therefore, the short question which is posed for the consideration of this Court is whether the activities of the assessee AUDA can be said to be in nature of trade, commerce and business and hence it cannot be regarded as activity for charitable purpose in view of the proviso to section 2(15) of the Incometax Act, 1961 ?
6.0. Shri S.N. Soparkar, learned Senior Advocate has appeared on behalf of the assessee and Shri Manish R Bhatt, learned Senior Advocate has appeared on behalf of the revenue in all these appeals.
7.0. Shri S.N. Soparkar, learned Senior Advocate for the assessee has vehemently submitted that in the facts and circumstances of the Page 8 of 57 HC-NIC Page 8 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT case, the learned Tribunal has materially erred in holding that the activities of the assessee is in the nature of trade, commerce and business and therefore, the case of the assessee would fall under the proviso to Section 2(15) of the Act so to as deny the deduction claimed under Section 11 of the Income Tax Act, as"Charitable Institute".
7.1. It is vehemently submitted by Shri Soparkar, learned Senior Advocate for the assessee that while holding that the activities of the assessee can be said to be in the nature of trade, commerce and business, the learned Tribunal has not properly appreciated the object and purpose for which, the AUDA as an Urban Development Authority has been constituted under the provisions of Town Planning Act. It is further submitted by Soparkar, learned Senior Advocate for the assessee that while holding the activities of the assessee can be said to be in the nature of trade, commerce or business, the learned Tribunal has not appreciated the object and purpose for which, the assessee has been constituted as an Urban Development Authority under Section 22 of the Town Planning Act and learned Tribunal has not properly appreciated and / or considered the activities and the services rendered by the assessee.
7.2. Shri Soparkar, learned Senior Advocate for the assessee has further submitted that learned Tribunal has not properly appreciated the fact that the assessee has been constituted as an Urban Development Authority under the provision of Section 22 of the Town Planning Act to carry out the development of the area included in the Urban Development Plan / Scheme. It is submitted Page 9 of 57 HC-NIC Page 9 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT that therefore, the assessee has been performing the statutory duty to carry out the development work in the urban area, for which, the Urban Development Authority has been constituted by the State Government.
7.3. Shri Soparkar, learned Senior Advocate for the assessee has taken us to various provisions of the Town Planning Act in support of his submissions that activities of the assessee AUDA is the statutory duty under the provision of Town Planning Act and therefore, activities carried out by the assessee AUDA cannot be said to be in the nature of trade, commerce or business. It is vehemently submitted that therefore, the activities of the assessee AUDA cannot be said to be in the nature of trade, commerce and business and therefore, the proviso to Section 2(15) shall not be applicable. It is submitted that it cannot be disputed that the services provided by the appellant assessee can be said to be providing public utility and therefore, the activities of the assessee AUDA can be said to be for "charitable purpose" within the definition of Section 2(15) of the Income Tax Act and therefore, the assessee AUDA is entitled to deduction under Section 11 of the Income Tax Act.
7.4. Shri Soparkar, learned Senior Advocate for the assessee has further submitted that the assessee is entitled to be regarded as charitable institution because the assessee is not a trading corporation and is established under a statute for carrying out the development work that too within four corners of the Town Planning Act.
Page 10 of 57HC-NIC Page 10 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT 7.5. Shri Soparkar, learned Senior Advocate for the assessee has further submitted that in the case of Commissioner of Income Tax vs. Gujarat Maritime Board reported in 295 ITR 561 (SC), the Hon'ble Supreme Court has held that Gujarat Maritime Board being a statutory authority established under the provisions of Gujarat Maritime Board Act, 1981 and has been constituted for predominant purpose of development of minor ports within the State of Gujarat and management and control of the Gujarat Maritime Board was essentially with the State Government having no profit motive, Gujarat Maritime Board is entitled to exemption under Section 11 in light of the definition of the words "charitable purposes" as defined under Section 2(15) of the Act. It is submitted that in the aforesaid decision, it is held that even if it had ceased to be a local authority under Section 10(20) of the Act, it is not precluded from claiming exemption under Section 11 (1) of the Act. It is submitted that in the aforesaid decision, it is held and observed that Section 10(20) and 11 of the Act operate in totally different spheres.
7.6. Shri Soparkar, learned Senior Advocate for the assessee has also heavily relied upon another decision of the Hon'ble Supreme Court in the case of Shri Ramtanu Cooperative Housing Society Ltd and Another vs. State of Maharastra and Another reported in 1970(3) SCC 323 in support of his above submission. It is submitted that in the case of Shri Ramtanu Cooperative Housing Society Ltd and Another (supra) the activities of the assessee, it was constituted under the provisions of Maharastra Industrial Development Act is held to be non profit making. It is submitted Page 11 of 57 HC-NIC Page 11 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT that in the aforesaid decisions, it is observed and held that merely because the assessee corporation is selling the plots, considering the underlying concept of a trading Corporation i.e. buying and selling , there is no aspect of buying or selling by the Corporation. That the Corporation carries out the purpose of the Act, namely development of Industry in the State.
7.7. It is further submitted by Shri Soparkar, learned Senior Advocate for the assessee that assessee cannot be denied the benefit of being a charitable institution on the ground of that its objects involve "the carrying on of an activity in the nature of trade, commerce or business. It is submitted that even the circular issued by the CBDT dated 19.12.2008 also clarifies that the amendment to Section 2(15) is meant to cover only those commercial establishments who hide their real identity as a "mask" of charity.
7.8. Shri Soparkar, learned Senior Advocate has heavily relied upon the decision of the Director of Income Tax (Exemption) vs. Sabarmati Ashram Gaushala trust reported in 362 Itr 539 (Guj), more particularly, para 5 to 9 and 12 and 13 as well as decision of the Delhi High Court in the case of Institute of Chartered Accountants of India vs. Direct General of Income Tax (Exemptions), Delhi reported in 347 ITR 99 (para 14 to 33) in support of his submissions that the activities carried on by the assessee cannot be said to be in the nature of trade, commerce or business.
7.9. It is further submitted by Shri Soparkar, learned Senior Page 12 of 57 HC-NIC Page 12 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Advocate for the assessee that by impugned judgment and order the learned ITAT has held that activities carried on by the assessee in the nature of trade, commerce or business on one of the ground that the assessee is collecting cess or fees. It is vehemently submitted by Shri Soparkar, learned Senior Advocate for the assessee that the assessee cannot be denied the status of a charitable institution on the ground that it is rendering any service in relation to any trade, commerce or business for a case or a fee or any other consideration because (1) the assessee collects regulatory fee for the objects of the act (2)there is no element of profiteering in the said collection (3) no services are rendered to any particular trade, commerce or business. In support of his above submissions, he has relied upon the following decisions of Delhi High Court. (1) GSI India vs. DGIT reported in (2014) 360 ITR 138 (Delhi) (2) Indian Trade Promotion Organization vs. Director of Income Tax (Exemption) reported in (2015) 371 ITR 333 (Delhi).
7.10. It is further submitted by Shri Soparkar, learned Senior Advocate for the assessee that one another reason assigned by the learned Tribunal while holding that activities carried out by the assessee is in the nature of trade, commerce or business is that the assessee is selling lands by public auction. It is submitted that while holding so, learned ITAT has not properly appreciated the fact that sale of land by the assessee is in the mode to recover the cost of the scheme and is expressly prescribed under Section 40(3)(jj)(a)(iv) r.w.s. 40(3)(jj)(b) of the Gujarat Town Planning Act. It is submitted that the lands are sold by public auction as mandated in catena of decisions of the Hon'ble Supreme Court as well as this Court and so Page 13 of 57 HC-NIC Page 13 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT as to avoid any allegation of favoritism and so as to get maximum amount, which is required to be used only to carry out the development in the Urban Development Area. It is submitted that while selling the lands by auction and that too as permitted under the provision of Town Planning Act there is no element of profitering but it is only for recovery of cost only. It is submitted that even the entire amount realized by selling the lands to the extent of 15% of the Urban Development Area, is required to be used by the assessee only to carry out the development work and other amenities / facilities to be provided like road, drainage, street light etc. It is submitted that therefore, the activities carried out by the assessee cannot be said to be profitering and / or in the nature of trade, commercial or business. In support of his above submission, he has relied upon the decision of the Division Bench of this Court in the case of Ahmedabad Green Belt Khedut Mandal vs. State of Gujarat through Secretary reported in 2001(1) GLR 888 (para 37 & 38(.
7.11. It is submitted by Shri Soparkar, learned Senior Advocate for the assessee that by permitting the AUDA to sell the plots that is on element of profiter has been negatived by the Hon'ble Supreme Court in the case of Ahmedabad Municipal Corporation and Another vs. Ahmedabad Green Belt Khedut Mandal reported in (2014) 7 SCC 357.
It is submitted that therefore, also the activities carried out by the assessee cannot be said to be in the nature of trade, commerce or business, which can take away the assessee from the purview of charitable institution / charitable purpose as per Section 2(15) of Page 14 of 57 HC-NIC Page 14 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT the Act.
7.12. Shri Soparkar, learned Senior Advocate for the assessee has relied upon the decision of the Allahbad High Court in the case Commissioner of Income Tax, Luknow vs. Luknow Development Authority reported in (2013) 38 Taxmann. com 246 (All)and the decision of the Rajasthan High Court in the case of Commissioner of Income Tax I, Jodhpur vs. Jodhpur Development Authority, Jodhpure rendered in Tax Appeal No, 63 of 2012 by which, with respect to other development authorities, the Courts have held that activities carried out by such development authority cannot be said to be in the nature of trade, commerce or business and their activities is for charitable purpose is within the meaning of Section 2(15) and therefore, all such development authorities shall be entitled to exemption / deduction under Section 11 of the Income Tax Act.
7.13. It is submitted by Shri Soparkar, learned Senior Advocate for the assessee that that even otherwise the reasons assigned by the learned ITAT in the impugned judgment and order and while holding that the activities carried out by assessee can be said to be trade, commerce or business are not germane. It is submitted that, the considering the object and purpose for which AUDA has been constituted as Urban Development Authority and considering the activities carried out by the assessee which is statutory in nature and to carry out the development as per the Gujarat Town Planning Act, the activities carried out by the assessee cannot be said to be in the nature of trade, commerce or Page 15 of 57 HC-NIC Page 15 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT business and therefore, the proviso to Section 2(15) of the Act shall not be applicable and therefore, assessee AUDA shall be entitled to exemption/ deduction under Section 11 of the Act.
Making above submissions and relying upon above decisions, it is requested to allow the present Appeals and held that the activities carried out by the assessee cannot be said to be in the nature of trade, commerce or business and therefore, proviso to Section 2(15) of the Act shall not be applicable and activities of the assessee can be said to be in the nature of public utility services and therefore, can be said to be charitable purpose within the meaning of Section 2(15) of the Act and therefore, the assessee AUDA is entitled to exemption / deduction under Section 11 of the Act as claimed.
8.0. All these submissions are vehemently opposed by Shri Manish R Bhatt, learned Senior Advocate for the Revenue.
8.1. It is vehemently submitted by Shri Manish R Bhatt, learned Senior Advocate for the Revenue that in the facts and circumstances of the case learned Tribunal has rightly held that the activities of the appellant were in the nature of trade and commerce and therefore, the activities cannot be said to be for charitable purpose in view of proviso to Section 2(15) of the Act.
8.2. It is vehemently submitted by Shri Manish R Bhatt, learned Senior Advocate for the Revenue that the main object of the appellant assessee is contribution towards planned and controlled Page 16 of 57 HC-NIC Page 16 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT development for the entire urban development area and clearly such activity falls under the category 'advancement of general public utility'. It is submitted that however, when the activities of the assessee can be said to be in the nature of trade, commerce and business, considering the proviso to Section 2(15), the activities of the assessee cannot be said to be for charitable purpose and therefore, the assessee is not entitled to exemption as claimed.
8.3. It is vehemently submitted by Shri Manish R Bhatt, learned Senior Advocate for the Revenue that the Tribunal being a fact finding authority has given following findings on facts in its order. (1). The plots of land have been acquired by the Assessee at a very nominal price in the name of town planning scheme, but have been given lease at a very high premium by means of auction to the highest bidder.
(2). The land is given on lease not even at its jantri rate (stamp value), but at a commercial/ market rate. This virtue of the land transactions is very characteristic of commercial activity with a profit motive. The said activity of the Assessee can by no stretch of imagination be treated as charitable activity within the meaning of education, medical relief, relief of poor, and preservation of environment or reservation of monuments.
(3). The plots of land were acquired from the public at nominal rates and sold to various commercial entities at market rate, and this systematic, regular and organised activity indicates that AUDA is involved in carrying on the activity which is in the nature of trade, commerce or business.
Page 17 of 57HC-NIC Page 17 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT 8.4. It is submitted that since the assessee sold the plots of land at a premium and at market rates, to various commercial entities, with a motive to earn profit, the learned Tribunal has rightly held activities of the assessee as a business transaction. It is submitted that therefore, provisos to Sec 2(15) of the Act shall be squarely applicable to the facts of the case.
8.5. It is vehemently submitted by Shri Manish R Bhatt, learned Senior Advocate for the Revenue that two major characteristics of any business activity are profit motive and continuity. It is submitted that from the purchase and sale details pertaining to A.Y. 2007 08, 200809 and 200910, it is clear that the appellant assessee is engaged in the business of giving land on sale/ leasehold at a high premium on a continuous basis and on profit basis.
8.6. It is further submitted by Shri Bhatt, learned Senior Advocate for the appellantassessee that the decision of the Division Bench of this Court in the case of Sabarmati Ashram Gaushala Trust (supra) which has been heavily relied upon by the learned counsel for the assessee is distinguishable on facts and therefore, not applicable to the facts of the present case. It is submitted that in the case of Sabarmati Ashram Gaushala Trust (supra), the assessee trust was created with object to breed the cattles and to improve the quality of the cows and oxen. The income was generated by the assessee from the activity of milk production and sale thereof. The assessee was thus marketing products which were incidental to its main activity of improving breeding of milch cows, and therefore, it was Page 18 of 57 HC-NIC Page 18 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT held as noncommercial activity. It is submitted that therefore, in the aforesaid facts, the Division Bench has held that "merely because while carrying out activities for the purpose of achieving objects of trust, certain incidental surpluses were generated, would not render activity in nature of trade, commerce or business". It is submitted that in the aforesaid decision the Division Bench considered the CBDT circular of 11/2008 dated 19122008 in which, it has been clarified that the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of 'public utility'. It is submitted that thereafter after taking into account the object of the trust, which was admittedly charitable in nature, this Court has held that surplus generated was wholly secondary in the case of the assessee Sabarmati Ashram Gaushala Trust (supra) and that if there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity was trade, commerce or business particularly if generating 'surplus' is wholly incidental to the principal activities of the trust; which is otherwise for general public utility, and therefore, of charitable nature.
It is submitted that in the present case the principal source of receipts is akin to a real estate developer. It is submitted that learned Tribunal in the impugned judgment and order has discussed the above and brought out this fact in great detail that the assessee functions as an effective and efficient real estate development entity with a view to maximize profit. It is submitted that some of the activities of assessee may be those related to Governance, but a large number of activities and the receipts Page 19 of 57 HC-NIC Page 19 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT generated by them were from activities which were in the "nature of trade, commerce and business."
8.7. It is further submitted by Shri Bhatt, learned Senior Advocate for the revenue that even from the income expenditure account and Balance sheet it is founed that the appellant was engaged in the business of development, leasing out and sale of plots of land. It is submitted that the plots of land have been acquired by the appellant at a very nominal price and have been given on lease or sold at a very high premium. It is submitted that the sale of plots of land were also affected by conducting auction after fixing base price. That the assessee also charges for the services such as providing drainage, charges for FSI, charges for additional Height and charges for betterment.
8.8. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that the business model of the assessee has been aptly been discussed by the Tribunal. It is submitted that main excerpts are as under:
A. "Whenever a town planning scheme is conceived, the land belonging to various persons/entities are put into a common pool, and thereafter, the scheme in a planned way is drawn. B. 40% of the land is to be taken from the land owners and the same is to be used as (i) fifteen per cent for roads, (ii) five per cent for parks, play grounds, gardens and open space, (iii) five per cent for social infrastructure such as school, dispensary, fire brigade, public utility place as earmarked in the Draft Town Planning Scheme, and (iv) fifteen per cent for sale by appropriate authority Page 20 of 57 HC-NIC Page 20 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT for residential, commercial or industrial use depending upon the nature of development. 15% land would vest in the Assessee, i.e.AUDA.
C. However, such land of 15% of share retained out of 40% appropriated from the original land owners is not free of cost. The cost is incurrence of expenditure on the development of remaining 85% of the land. The land owners have sacrificed their 40% land, the potentiality of 60% would increase. In other words, relinquishment value, representing 40% of the land by the land owners, would be compensated by enhancing the value of balance 60% land being developed land in a township. D. As per Section 52(3) of the T.P. Act, the Town Planning Officer shall estimate the cost of this scheme (development) and the contribution to be levied on each owner of the plan is to be notified. It is wrong to suggest that the Assessee got the land free of cost. The cost of land is embedded in the expenditure required to be incurred on development of scheme.
E. Supposing, after notification of the scheme, the law had stipulated and the government had decided to outsource the development work to a third party (a infrastructure company with similar rights and entitlement as given to AUDA), could it be urged that infrastructure development company doing similar work, as AUDA was not engaged in the activity in the nature of trade? F. The most crucial factor which proves that the Assessee has been working with profit motive is that the Town Planning Officer is well aware about the cost of development. In spite of that the Assessee has never sold the 15% of the land on cost basis. For example, the Assessee has developed 1500 sq.yards of land in a Page 21 of 57 HC-NIC Page 21 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT scheme, the cost to develop a scheme is Rs.60000/. The Assessee should have allotted 15% of 1500 sq.yards of land at the rate of 400 per sq.yards to the needy persons/institutions by draw of lots. Instead of this, the Assessee has fixed a base price, and thereafter, put the land on auction. It allotted the land to the highest bidder. It has sold the land keeping in view the profit in mind. G. It may be noted that huge profits have been made by the Assessee in these years out of the abovesaid real estate development activity. If that be so, where is the element of charity? The activity of developing roads, park or laying of sewerage land are not to be seen representing a charitable act as the assessee levies charges for their use from the plot owners. Moreover, it has claimed depreciation on these assets on business lines, and if an independent infrastructure company would be given such rights, it could not be held that the same is for charitable purposes. These are just to demonstrate that the Assessee shall perform the activity of advancement of any other objects of general public utility. But auction of land to the highest bidder is an activity, which is specifically, keeping in view, the profit in mind and the levy of cess/charges/fees are designed in lines of an professional and business oriented infrastructure development real estate entity. H. It may be noted that there are surplus and reserves which are continuously swelling. These are generated by the Assessee by way of this activity sale/lease of land and charging fees. The Assessee has not been charging nominal fees or selling the land at a nominal rate. It has been making money by putting the land on auction after taking a reserve price. This activity cannot be said to be a charitable activity.Page 22 of 57
HC-NIC Page 22 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT 8.9. It is submitted that having noted the above facts and activities of the assessee which is in the nature of trade or business, the learned Tribunal has rightly applied proviso to Section 2(15) of the Act and has rightly held that the activities of the assessee cannot be said to be "charitable purpose".
8.10. It is further submitted that by Shri Bhatt, learned Senior Advocate for the Revenue that it is true that the assessee has helped in planned development in vicinity of Ahmedabad. It is submitted that however if a private developer would have been given the same mandate by the government, it would have done equally better. It is submitted that the assessee is also required to make a planned development of the city under a scheme approved by the State Government. It is creating a number of infrastructure facilities and public utility services are being rendered. It is submitted that these services are also being provided for a fee or consideration. It is submitted that in the final scheme of things, the Authority does incur a cost for such land which may be adjusted against the recoveries due to the assessee or against the amount payable for the area by way of compensation. It is submitted that the mode of payment of cost of acquisition whether by cash or by way of adjustment against the value of final plot to be allotted to the original owners will not alter the fact that the land is acquired for a cost. It is submitted that by virtue of the provisions of the Town Planning Act, 15% of the total notified area is sold by the appellant and from such sale huge profits are derived. It is submitted that the acquisition and sale of the landa is in the nature Page 23 of 57 HC-NIC Page 23 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT of a trade or business and the activity is not different from a normal purchase or sale activity by a real estate developer.
8.11. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that as can be seen from the financial of the assessee, the cost for the land has been incurred and has been capitalized as cost of acquisition. That the said practice is followed from year to year. That the assessee has become entitled to sell 15% of the land by virtue of the provisions of the Town Planning Scheme. That the said entitlement comes for a cost and has resulted in huge profits. That therefore, the activity in respect of 15% of the land sold by the assessee, thus, is in the nature of trade or business and therefore, the first limb of proviso to Section 2(15) of the Act is satisfied. It is submitted that every part of the cost of development is recovered from the owners of the plots of land.
That the amount of final compensation is determined after making adjustment of the development cost. That all kinds of civic amenities/services that are being provided are not free but for a cost. It is submitted that therefore, even second limb of the proviso to section 2(15) is also satisfied..
8.12. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that suppose, after notification of the scheme, the law had stipulated and the government had decided to outsource the development work to a third party infrastructure company with similar rights and the entitlements as given to AUDA, could it be urged that the Infrastructure Development Company doing the same work as AUDA is not engaged in activity in the nature of Page 24 of 57 HC-NIC Page 24 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT trade or business? It is submitted that it would have been definitely constituted as its business income. It is submitted that therefore, it is then, not possible to urge otherwise to suggest that the activity is not in the nature of trade or business. It is submitted that nature of the activities of the assessee are no different from that of a developer of a real estate. It is submitted that difference in the scale of operation or the mode of recovery or degree of profits or how such profits are utilised would not alter the nature of the activity.
8.13. t is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that the object of the proper development or redevelopment of any urban area is of the state government and the choice of either constituting an authority for the development or entrusting it to a third party is of the Government. It is submitted that the object of the urban development is of the State Government. It is submitted that the Authority is only carrying out and executing the state's object. It is submitted that there are many activities in the nature of infrastructure development like roads, power, housing, etc where the government, instead of constituting an authority, enters into agreement with Infrastructure Development companies. It is submitted that these private companies are allowed to recover their cost and earn profits as a concessionaires or the Govt. may also make direct payments. It is submitted that the income in all such cases would undoubtedly be assessed on profits from business. It is submitted that the mere fact that the same activity is done by an instrumentality of the state will not alter the character of the activity. It is submitted that the Page 25 of 57 HC-NIC Page 25 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT activity will still be in the nature of business or trade.
8.14. It is further submitted that the requirement of the provisions is not that there should be a business per se, but the only requirement is that the activity is in the nature of business or trade. The word "Business" as defined in section 2(13) is of wide import and would cover the activities of the appellant. It is submitted that besides, the condition stipulated in the Proviso to section 2(15) is not the carrying of business per se, but only the activity being in the nature of trade or business which further widens the width and amplitude of the proviso.
It is submitted that the learned Tribunal in the impugned judgment and order which discussing at length that an activity in nature of "Trade, Commerce or Business" has observed following attributes and that the activities of appellant does squarely satisfies each of the same:
(i). It should be a continuous and systematic exercise of activity of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce.
(ii). Business vocation connotes some real, substantive and systematic course of activity or conduct with a set purpose. The second essential characteristic is profit motive or capable of producing profit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure (Bharat Development P. Ltd. v. CIT [1982] 133 ITR 470 (Delhi)).Page 26 of 57
HC-NIC Page 26 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT
(iii). The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons.
(iv) And, lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction.
8.15. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that even the learned Tribunal has taken into consideration and analyzed the background and framework of the law governing taxability of charitable institution.
8.16. It is submitted that definition of "charitable purpose" as contained in Section 2(15) originally enacted was circumscribed by the expression 'any other object of general public utility not involving carrying on any activity for profit." It is submitted that this expression had created various difficulties to certain institutions. The restrictions provided in the phrase "not involving carrying on any activity for profit' was omitted by the Finance Act, 1983 w.e.f. 01.04.1984, but another restrictions was imposed on the business activities carried out by any "charitable institution". It is submitted that these restrictions were introduced by way of sub section (4A) of section 11 of the Act. That the assessee, who was in the business also is required to keep separate books of account for business activities under subsection(4) of Section 11 of the Act. That certain instrumentalities of the State like local authorities, housing boards, urban development authorities, various boards like tea board, coffee board, rubber board etc. were enjoying blanket Page 27 of 57 HC-NIC Page 27 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT exemption from tax under section 10 of the Act and their incomes did not form part of the taxable income. It is submitted that these entities were not regarded as charitable institutions subject to regime of section 11 of the Act, but were given complete exemption under section 10 on their own right. That the present Assessee was enjoying this exemption under section 10(20A), as the said section allowed the exemption to any authority constituted by or under any law enacted for the purpose of planning and development or improvement of cities, town or villages. It is submitted that Section Section 10(20A) of the Act came to be omitted by the Finance Act, 2002 w.e.f. 1.4.2013. Therefore, the exemption enjoyed by the housing board was taken away. It is submitted that similar exemption enjoyed by sports bodies like cricket, hockey, football etc. under section 10(23), the authority for marketing commodities under section 10(29) was also withdrawn under section 10(29) by Finance Act, 2002. Similarly, the scope of local authority enjoying exemption under section 10(20) was limited to only Panchayat, Municipality, Municipal committee and Cantonment board by introducing an exhaustive definition of local authorities, which was hitherto not there, thereby denying any room for broader interpretation of the term. It is submitted that the principle that such authorities should enjoy exemption merely because these were created as an instrument of the State or these were engaged in public good was derecognized by the Parliament. It is submitted that the legislative intent was explicit that these were not to get indirect support of the government through tax exemption route. It is submitted that therefore, the parliament intervened again and introduced proviso to section 2(15) of the Finance Act, 2008 w.e.f.
Page 28 of 57HC-NIC Page 28 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT 1.4.2009. It is submitted that this proviso provides that "advancement of any other object of general public utility" shall not be a charitable purpose, if it involves the carrying on any activity in the nature, trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess, fee or any other consideration, irrespective of the nature or application of such income. It is submitted that therefore, amendment in Section 2(15) of the Act, the omission of Sections 10(20A), 10(29) and 10(23) is also required to be considered. It is submitted that therefore, even proviso to Section 2(15) of the Act is not read as the revenue suggest and / or as the learned Tribunal has read, intention of the Parliament to omit Section 10(20A), Section 10(23) and 10(29) of the Act will be frustrated.
8.17. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that Parliament has subsequently revisited the issue, and a complete exemption of their income has again been provided to them under section 10 by introduction of clause (46) by Finance Act, 2011 w.e.f. 1.6.2016. It is submitted that said section provides that the specified income to a board, authority, body or trust, established/constituted by the Central/State Government for the benefit of general public will be exempt from tax, subject to its nonengagement in any commercial activity, and also subject to its being notified by the Central Government for the purpose. It is submitted that therefore, assessee could apply for exemption under section 10 after 1.6.2016. It is submitted that however for the earlier years, the preamended Page 29 of 57 HC-NIC Page 29 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT provisions will apply and the Assessee will have to pass the test of proviso to section 2(15). It is submitted that therefore, with respect to past years, as the activities of the assessee is found to be in the nature of trade, commerce or business, proviso to Section 2(15) of the Act shall be applicable and therefore, activities of the assessee cannot be said to be for charitable purpose and therefore, the assessee is not entitled to exemption as claimed under Section 11 of the Act.
8.18. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that the proviso to Section 2(15) only needs an assessee to carry on activities in the nature of business, commerce or trade irrespective of whether the assessee generates profits from such activities or not and irrespective of whether profit making is prime motive or not. Section 2(15) has defined charitable purpose to include (i) relief of the poor, (ii) education,
(iii) medical relief, (iv)preservation of monuments or places or objects of artistic or historic interest and (v) the advancement of any other "object of general public utility".
It is submitted that the proviso (i) and (ii) to Section 2(15) would apply if the activity of the trust is deemed to be that of "advancement of any other object of general public utility" The proviso further provides that such activities will not be charitable 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 consideration, irrespective of the nature of use or application, or retention, of the income from such activity .
Page 30 of 57HC-NIC Page 30 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT It is submitted that neither the provision of Section 2(15) nor the proviso thereto differentiate the Assessee trust as a trust enacted under any Government legislature or gazette or Act. Nor these provisions specify that they will not be applicable to any authority carrying on the activities of development of any industrial area or a town/city.
8.19. It is further submitted by Shri Bhatt, learned Senior Advocate for the Revenue that the appellant has not claimed itself to be carrying on of any activity in the nature of (i) relief of the poor, (ii) education, (iii) medical relief, (iv) preservation of monuments or places or objects of artistic or historic interest. The Appellate authorities have all agreed that the authorities like AUDA are all carrying on activities which are those of "advancement of any other object of general public utility". It is therefore succinct that the authorities like the appellant will have to fulfill the conditions laid down in the proviso in order to claim the activities to be charitable in the nature. It is submitted that the proviso do not specify that the activities carried on by the appellant need to be with profit motive to be not deemed to be charitable. It is submitted that all it states is that the activities should be in the 'nature of trade, commerce or business'.
8.20. Shri Bhatt, learned Senior Advocate for the Revenue has relied upon the decision of the Delhi High Court in the case of Indian Trade Promotion Organization vs. Director of Income Tax (Exemption) reported in (2015) 371 ITR 333 (Delhi)(para 45 to
48) and decision of the Punjab & Hariyana High Court in the case Page 31 of 57 HC-NIC Page 31 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT of Tribune v. Commissioner of Income Tax, Chandigarh, 390 ITR 547 (Punjab and Haryana) (para 48 to 61), in support of his submissions that considering the definition of "business" contained in Section 2(13) of the Act even the activities of the assessee can be said to be business activities.
Making above submissions and relying upon the following decisions, it is requested to dismiss the present appeals and answer the question of law in favour of revenue and against the assessee.
1. Indian Trade Promotion Organization vs. Director of Income Tax (Exemption) reported in (2015) 371 ITR 333 (Delhi).
2. Tribune v. Commissioner of Income Tax, Chandigarh, 390 ITR 547 (Punjab and Haryana).
3. Jammu Development Authority vs. Union of India and ors in ITA No. 164 of 2014 dated 7.11.2013 rendered by the Jammu and Kashmir High Court.
4. Raja Rameshwar Rao Vs._Commissioner of Income Tax reported in 42 ITR 179 (SC).
5. Jalandhar Development Authority vs. CIT reported in (2010) 35 SOT 15 (ARS) (URO) of ITAT Amristar Bench.
6. 9.0. Heard the learned advocates for the respective parties at length.
10. The short but interesting question of law posed for the consideration of this Court in the present appeal is whether the activities of the of the Assessee AUDA can be said to be in the nature of trade, commerce or business so as to deny the status of the assessee as a charitable institution within the definition of Section 2(15) of the Act ?
Page 32 of 57HC-NIC Page 32 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT The second question which is posed for the consideration of this Court is whether the the activity of the assessee can be said to be activity of rendering any service in relation to any trade, commerce or business, for cess or fees or any other consideration, as the assessee is collecting / recovering fees by performing duty under the provision of Gujarat Town Planning Act and therefore, whether second part of the proviso to Section 2(15) of the Act shall be applicable so as to deny the exemption claimed by the assessee, claim under Section 11 of the Act?
11. While considering the aforesaid questions, the relevant provisions of the Gujarat Town Planning Act, under which, the Assessee has been constituted as Urban Development Authority and powers and functions of the Assessee as an Urban Development Authority are required to be considered, so as to appreciate whether the activities of the Assessee being Urban Development Authority can be said to be in the nature of trade, commerce or business ?
The relevant provisions of the Gujarat Town Planning Act, under which, the Assessee AUDA has been constituted as Urban Development Authority are as under:
Section 2(viii): "Development", with all its grammatical variations and cognate expressions, means the carrying out of any building, engineering, mining, or other operations in, or over, or under land or the making of any material change in any building or land or in the use of any building or land, and includes layout and sub division of any land;
Section 2(xxviii):"Urban development authority" means an urban development authority constituted under section 22;Page 33 of 57
HC-NIC Page 33 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Section 2(xxix):"Urban development area" means an area declared to be an urban development area under section 22.
Section 22: Declaration Of Urban Development Area And Constitution Of Urban Development Authority : (1) Where the State Government is of opinion that the object of proper development or redevelopment of any urban area or group of urban areas in the State together with such adjacent areas as may be considered necessary, whether covered under a development area already declared as such under section 3 or not, will be best served by entrusting the work of development or redevelopment thereof to a special authority, instead of to an area development authority, the State Government may, by notification, declare such area to be an urban development area and constitute an authority for such area to be called the urban development authority of that area, and thereupon all the powers and functions of an area development authority relating to the development or redevelopment of a development area under this Act shall, in relation to such urban development area, be exercised and performed by such urban development authority1*** (2) Every notification issued under subsection (1) shall define the limits of the area to which it relates. 2[(2A) The State Government may, by notification in the Official Gazette, include in or exclude any area from an urban development area, amalgamate two or more urban development areas into one urban development area, sub divide any urban development area into different urban development areas and include such subdivided urban development area in any other urban development area.] (3) Every urban development authority constituted under subsection (1) shall be a body corporate by the name aforesaid, having perpetual succession and a common seal, with power to acquire, hold and dispose of property, both movable and immovable, and to contract, and by the said name sue and be sued.
(4) The urban development authority shall consist of the following members namely: (i) a Chairman to be appointed by the State Government; (ii) such persons, not exceeding3[four in number] who are members of the local authority or authorities functioning in the urban development area, as may be nominated by the State Government; (iii)4[Three officials] of the State Government, to be nominated by that Government, ex officio; (iv) the Presidents of the district panchayats Page 34 of 57 HC-NIC Page 34 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT functioning in the urban development area, or, as the case may be, part thereof, exofficio; (v) the Chief Town planner or his representative, exofficio; (vi) the Chief Engineer or Engineers (Public Health) of the local authority or authorities functioning in the urban development area or his or their nominee or nominees, ex officio; 5[(via) the Municipal Commissioner of the Municipal Corporation, if any, functioning in the urban development area, exofficio;] (vii) a member secretary to be appointed by the State Government who shall also be designated as the Chief Executive Authority of the Urban Development Authority.
(5) The provisions of subsections (5) to (12) of section 5 shall apply in relation to an urban development authority as they apply in relation to an area development authority, with the modification that references to an area development authority in the said subsection shall be construed as references to an urban development authority.
Section 23: Powers And Function Of Urban Development Authority : (1) [The powers and functions of] an urban development authority shall be: (i) To undertake the preparation of development plans under the provisions of this Act, for the urban development area; (ii) To undertake the preparation [and execution] of town planning schemes under the provisions of this Act, if so directed by the State Government; (iii) To carry out surveys in the urban development area for the preparation of development plans or town planning schemes; (iv) To guide, direct and assist the local authority or authorities and other statutory authorities functioning in the urban development area in matters pertaining to the planning, development and use of urban land; (v) To control the development activities in accordance with the development plan in the urban development area; 3 [(va) to levy and collect such security fees for secrutiny of documents submitted to the appropriate authority for permission for development as may be prescribed by regulations;] (vi) To execute works in connection with supply of water, disposal of sewerage and provision of other services and amenities; 4 [(via) to levy and collect such fees for the execution of works referred to in clause (vi) and for provision of other services and amenities as may be prescribed by regulations;] (vii) To acquire, hold, manage and dispose of property, movable or immovable, as it may deem necessary; (viii) To enter into contracts, agreements or Page 35 of 57 HC-NIC Page 35 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT arrangements, with any local authority, person or organisation as the urban development authority may consider necessary for performing its functions; (ix) To carry any development works in the urban development area as may be assigned to it by the State Government from time to time; (x) To exercise such other powers and perform such other functions as are supplemental, incidental or consequential to any of the foregoing powers and functions or as may be directed by the State Government.
(2) The urban development authority may, with the approval of the State Government, delegate 5 [any of its powers and functions] to the local authority or authorities functioning in the urban development area.
(3) The urban development authority shall have its office at such place as the State Government may specify in this behalf.
Section 40. Making And Contents Of A Town Planning Scheme : (1) Subject to the provision of this Act or any other law for the time being in force, the appropriate authority may make one or more town planning schemes for the development area or any part thereof, regard being had to the proposals in the final development plan, if any. (2) A town planning scheme may be made in accordance with the provisions of this Act in respect of any land which is (i) In the course of development; 1 [(ii) likely to be used for residential or commercial or industrial or for building purposes; or] (iii) Already built upon. Explanation: For the purpose of this subsection the expression "land likely to be used for building purposes"
shall include any land likely to be used as, or for the purpose of providing, open spaces, roads, streets, parks, pleasure or recreation grounds, parking spaces or for the purpose of executing any work upon or under the land incidental to a town planning scheme, whether in the nature of a building work or not.
(3) A town planning scheme may make provision for any of the following matters, namely: (a) The laying out or relaying out of land, either vacant or already built upon;
(b) The filling up or reclamation of lowlying, swampy or unhealthy areas, or levelling up of land; (c) Layout of new streets or roads, construction, diversion, extension, alteration, improvement and closing up of streets and roads and discontinuance of communications; (d) The construction, alteration and removal of buildings, bridges and other structures; (e) The allotment or reservation of Page 36 of 57 HC-NIC Page 36 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT land for roads, open spaces, gardens, recreation grounds, schools, markets, greenbelts, dairies, transport facilities, public purposes of all kinds; (f) Drainage, inclusive of sewerage, surface or subsoil drainage and sewage disposal; (g) Lighting; (h) Water supply; (i) The preservation of objects of historical or national interest or natural beauty, and of buildings actually used for religious purposes; (j) The reservation of land to the extent of ten per cent. or such percentage as near thereto as possible of the total area covered under the scheme, for the purpose of providing housing accommodation to the members of socially and economically backward classes of people; 2 [3 [(jj) (a) the allotment of land from the total area covered under the scheme, to the extent of. (i) Fifteen per cent. for roads, (ii) five per cent. for parks, play grounds, gardens and open space, (iii) five per cent.
for social infrastructure such as school, dispensary, fire brigade, public utility place as earmarked in the Draft Town Planning Scheme, and (iv) fifteen per cent. for sale by appropriate authority for residential, commercial or industrial use depending upon the nature of development:
Provided that the percentage of the allotment of land specified in paragraphs (i) to (iii) may be altered depending upon the nature of development and for the reasons to be recorded in writing; (b) the proceeds from the sale of land referred to in para (iv) of subclause (a) shall be used for the purpose of providing infrastructural facilities; (c) the land allotted for the purposes referred to in paragraphs (ii) and (iii) of subclause (a) shall not be changed by variation of schemes for the purposes other than public purpose;]] (k) the imposition of conditions and restrictions in regard to the open space to be maintained around buildings, the percentage of building area for a plot, the number, size, height and character of building allowed in specifiedares, the purposes to which buildings or specified areas may or may not be appropriated, the subdivision of plots, the discontinuance of objectionable uses of lands in any area in specified periods, parkings space and loading and unloading space for any building and the sizes or locations of projections and advertisement signs; (l) the suspension, so far as may be necessary, for the proper carrying out of the scheme, of any rule, byelaw, regulation, notification or order made or issued under any Act of the State Legislature or any of the Acts which the State Legislature is competent to amend: Provided that any suspension under this clause shall cease to operate in the event of the State Page 37 of 57 HC-NIC Page 37 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Government refusing to sanction the preliminary scheme, or in the event of the withdrawal of the scheme under section 66, or on the coming into force of the final scheme; (m) such other matters not inconsistent with the objects of this Act as may be prescribed.
Section 91: Fund Of The Appropriate Authority : (1) An appropriate authority shall have and maintain its own fund to which shall be credited (a) All moneys received by the authority by way of grants, loans,1[advances, fees, development charges or otherwise;] (b) All moneys derived from its undertakings, projections and other sources; (c) Such amount of contributions from local authorities as the State government may specify from time to time to be credited to the fund of the authority. (2) The fund of an appropriate authority shall be applied towards meeting
(a) Expenditure incurred in the administration of this Act; (b) Cost of acquisition of land for the purposes of this Act; (c) Expenditure for any development of land in the development area; (d) Expenditure for such other purposes as the State Government may direct. (3) An appropriate authority may keep in current account with the State Bank" of India or any other bank approved by the State Government in this behalf, such sums of money out of its fund as may be prescribed and any money in excess of the said sum shall be invested in such manner as may be approved by the State Government. (4) The State Government may, make such grants, advances and loans to an appropriate authority as the State Government may deem necessary for the performance of its functions under this Act and all grants, loans and advances so made shall be made on such terms and conditions as the State Government may determine.
Section 95:Accounts And Audit : (1) An appropriate authority shall maintain proper accounts and other relevant records and prepare an annual statement of accounts including the balance sheet in such form as the State Government may prescribe. (2) The accounts of an appropriate authority shall be subject to audit annually by the Accountant General of the State and any expenditure incurred by him in connection with such audit shall be payable by the authority to the Accountant General. (3) The Accountant General or any person appointed by him in connection with the audit of accounts of an appropriate authority shall have the same rights, privileges and authority in connection with such audit as the Accountant General has in connection with Page 38 of 57 HC-NIC Page 38 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Government accounts and in particular shall have the right to demand the production of books, accounts, connected vouchers and other documents and papers and to inspect the office of the appropriate authority. (4) The accounts of an authority as certified by the Accountant General or any other person authorised by him in this behalf, together with the audit report thereon, shall be forwarded annually to the State Government.
12. From the aforesaid provisions of the Town Planning Act, it can be gathered that Assessee has been constituted as Urban Development Authority under the provisions of Section 22 of the Town Planning Act. The purpose and object of constitution of the Urban Development Authority is proper development or re development of urban area. Even Urban Development Authority consists of (i) a Chairman to be appointed by the State Government; (ii) such persons, not exceeding [four in number] who are members of the local authority or authorities functioning in the urban development area, as may be nominated by the State Government; (iii) Three officials of the State Government, to be nominated by that Government, exofficio; (iv) the Presidents of the district panchayats functioning in the urban development area, or, as the case may be, part thereof, exofficio; (v) the Chief Town planner or his representative, exofficio; (vi) the Chief Engineer or Engineers (Public Health) of the local authority or authorities functioning in the urban development area or his or their nominee or nominees, exofficio; 5[(via) the Municipal Commissioner of the Municipal Corporation, if any, functioning in the urban development area, exofficio;] (vii) a member secretary to be appointed by the State Government who shall also be designated as the Chief Executive Authority of the Urban Development Authority.
Page 39 of 57HC-NIC Page 39 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Thus, the constitution of the Urban Development Authority is subject to the control of the State Government. The powers and functions of the Urban Development Authority as contained in Section 23 are reproduced herein above. Considering Section 40 of the Town Planning Act, the Town Planning Scheme prepared by the Urban Development Authority which has been prepared subject to sanction by the State Government for development of the Urban Development Area, also provide for roads, open spaces, gardens, recreation grounds, schools, markets, greenbelts, dairies, transport facilities, public purposes of all kinds; drainage, inclusive of sewerage, surface or subsoil drainage and sewage disposal; Lighting; Water supply etc. The Town Planning Scheme also provide for historical or national interest or natural beauty, and of buildings actually used for religious purposes. The Scheme are also provide for reservation of land to the extent of ten percent, or such percentage as near thereto as possible of the total area covered under the scheme, for the purpose of providing housing accommodation to the members of socially and economically backward classes of people. As per Section 40(i)(jj) for the aforesaid purposes certain percentage of total area covered under the scheme are allotted earmarked. Fifteen percent of total area is allotted for the purpose of roads, five percent for parks, play grounds, gardens and open space, five percent for social infrastructure such as school, dispensary, fire brigade, public utility place as earmarked in the Draft Town Planning Scheme and Fifteen percent for sale by appropriate authority for residential, commercial or industrial use depending upon the nature of development. Last Fifteen percent is earmarked under the Town Page 40 of 57 HC-NIC Page 40 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Planning Scheme for sale, by appropriate authority for residential, commercial or industrial use. The appropriate authority / Urban Development Authority is permitted to sale the said plots / lands to the extent of 15% of the total area to meet with the expenditure towards drainage, roads, gardens, schools, markets, water supply etc. So that maximum price can be fetched and the same can be utilized for the development of the Urban Development Area and so as to avoid any allegation of favoritism and nepotism, the plots are sold by public auction. It is required to be noted the entire amount realized by the assessee being Urban Development Authority either by selling plots or by recovery of some fees / charges, Urban Authority is required to use only for the purpose of development in the Urban Development Area and not for any other purpose. The learned Tribunal has observed and held that as the assessee is selling the plots, to the extent of 15% of total area, by public auction and gets maximum amount, it amounts to profitering and therefore, the activities of the Assessee can be said to be in the nature of business. However, while holding so, learned Tribunal has not properly appreciated the object and purpose of permitting the Urban Development Authority to sale the plots, maximum to the extent of 15% of the total area i.e. to meet with the expenditure for providing them infrastructural facilities like gardens, roads, lighting, water supply, drainage system etc. The learned Tribunal has also not properly appreciated the reasons for selling the plot by holding public auction i.e.; (1) to avoid any further allegation of favoritism and nepotism and (2) so that maximum market price can be fetched, which can be used for the development of the Urban Development Area.
Page 41 of 57HC-NIC Page 41 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT 12.1. At this stage decision of the Hon'ble Supreme Court in the case of Ahmedabad Green Belt Khedut Mandal (supra) ((2014) 7 SCC 357) is required to be referred to. Before the Hon'ble Supreme Court, it was contended on behalf of original land owners whose lands were included in the TP Scheme that by permitting the Area Development Authority / Urban Development Authority to sell 15% of the total area, by that the Urban Development Authority will be making profit, the Hon'ble Supreme Court has negatived the aforesaid and has observed that the activities of the Urban Development Authority / Area Development Authority while selling the land to the extent of 15% to the total area covered under the scheme cannot be said to be profitering. It is observed and held that sale upto 15% is from total area covered under the scheme and not in respect of every plot of land. In order to generate financial resources for the development of infrastructure, the salable plot for residential, commercial and industrial use are allotted by the appropriate authority. It is further observed that the provision of the Act have to be read as a whole and therefore, the provision of Section 40(3)(jj)(a)(iv) for sale is to be in consonance / conjointly with other statutory provisions and not in isolation.Under the circumstances, the learned Tribunal has committed gross error in considering the activities of the appellant Urban Development Authority for profiter by selling 15% of the total area and thereby has committed gross error in holding the activities of the assessee in the nature of trade, commerce or business.
Page 42 of 57HC-NIC Page 42 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT 12.2. Whether the activities of the appellant AUDA can be said to be in the nature of trade, commerce or business as occurring in the first proviso to Section 2(15) of the Act, few decisions of the Hon'ble Supreme Court as well as other High Courts are required to be referred to at this stage.
12.3. In the case of Khoday Distilleries Ltd and Others vs. State of Karnataka and others reported in (1995) 1 SCC 574, the Hon'ble Supreme Court had an occasion to consider the word "trade". In the said decision, the Hon'ble Supreme Court has held that "the primary meaning of the word "trade" is the exchange of goods for goods or goods for money".
12.4. In the case of State of Andhra Pradesh vs. Abdul Bakhi and Bros reported in 1964(5) STC 644 (SC) while considering the word "business", the Hon'ble Supreme Court has held that "the word "business" was of indefinite import and in a taxing statute, it is used in sense of an occupation, or profession which occupies time, attention or labour of a person, and is clearly associated with the object of marking profit".
12.5 In the case of Institute of Chartered Accountants of India (supra) while considering the whether activities of Indian Trade promotion organization can be said to be in the nature of "business", despite the fact that the said organization was collecting rent for providing the space at trade, fair and exhibitions and though was receiving income by way of sale of tickets and income from tickets and sale in Pragati Maidan etc., after considering the various decisions of the Hon'ble Supreme Court as well as decisions Page 43 of 57 HC-NIC Page 43 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT of the other High Courts, it is held that activities of the said organization cannot be considered as "business". While holding so, Delhi High Court has observed and held as under:
"An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case activity may be regarded as a business even when profit motive cannot be established / proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business."
12.6. In the aforesaid decision, after considering the decision of the Hon'ble Supreme Court in the case of Commissioner of Sales Tax vs. Sai Publication Fund reported in (2002) 258 ITR 70(SC), it is held by the Delhi High Court that "thus, if the dominant activity of the assessee was not business, then any incidental or ancillary activity would also not fall within the definition of business." In para 64, 67, 69, 70, 71 and 72 the Delhi High Court has observed and held as under:
"64. It is not necessary that a person should give something for free or at a concessional rate to qualify as being established for a charitable purpose. If the object and purpose of the institution is charitable, the fact that the institution collects certain charges, does not alter the character of the institution.
67.The expressions trade, commerce and ―business as occurring in the first proviso to section 2(15) of the Act must be read in the context of the intent and purport of section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an organised manner. The purpose and the dominant object for which an institution carries on Page 44 of 57 HC-NIC Page 44 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT its activities is material to determine whether the same is business or not. The purport of the first proviso to section 2(15) of the Act is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. The object of introducing the first proviso is to exclude organizations which are carrying on regular business from the scope of charitable purpose. The purpose of introducing the proviso to Section 2(15) of the Act can be understood from the Budget Speech of the Finance Minister while introducing the Finance Bill 2008. The relevant extract to the Speech is as under: Charitable purpose includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under charitable purpose. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected.' The expressions business, trade or commerce as used in the first proviso must, thus, be interpreted restrictively and where the dominant object of an organisation is charitable any incidental activity for furtherance of the object would not fall within the expressions business, trade or commerce.
69. In the case of Addl. Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers Association: [1980] 121 ITR 1 (SC), the Supreme Court held as under: The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profitmaking is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose.Page 45 of 57
HC-NIC Page 45 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT But where the predominant object of the activity is to any out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely be cause some profit arises from the activity.'
70. Although in that case the statutory provisions being considered by the Supreme Court were different and the utilisation of income earned is, now, not a relevant consideration in view of the express words of the first proviso to section 2(15) of the Act, nonetheless the test of dominant object of an entity would be relevant to determine whether the entity is carrying on business or not. In the present case, there is little doubt that the objects of the activities of the petitioner are entirely for charitable purposes. WP(C) 1872/13 Page 48 of 55 Finally in ICAI(II) (supra), this court, with reference to H. Abdul Bakhi and Bros (supra) observed as under:
71. Although, it is not essential that an activity be carried on for profit motive in order to be considered as business, but existence of profit motive would be a vital indicator in determining whether an organisation is carrying on business or not. In the present case, the petitioner has submitted figures to indicate that expenditure on salaries and depreciation exceeds the surplus as generated from holding coaching classes. In addition, the petitioner institute provides study material and other academic support such as facilities of a library without any material additional costs. The Supreme Court in the case of State of Andhra Pradesh v. H. Abdul Bakhi and Bros. (supra) held as under:
The expression "business" though extensively used a word of indefinite import, in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. (Underlining added) Page 46 of 57 HC-NIC Page 46 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT
72. There is nothing on record to indicate the assertion of the petitioner that its activities are not fuelled by profit motive is incorrect. Absence of profit motive, though not conclusive, does indicate that the petitioner is not carrying on any business."
12.7. Identical question came to be considered by the Delhi High Court in the case of Bureau of India Standard vs. Director General of Income Tax (Exemptions) reported in (2013) 212 Taxman 210 (Delhi). In the said decision, the Delhi High Court was considering whether the activities of the Bureau of Indian Standards (supra) in granting licenses and trading certificates and charging amounted to carrying on business, trade or commerce and while considering the said question, it is observed as under:
" In these circumstances,rendering any service in relation to trade, commerce or business cannot, in the opinion of the Court, receive such a wide construction as to enfold regulatory and sovereign authorities, set up under statutory enactments, and tasked to act as agencies of the State in public duties which cannot be discharged by private bodies. Often, apart from the controlling or parent statutes, like the BIS Act, these statutory bodies (including BIS) are empowered to frame rules or regulations, exercise coercive powers, including inspection, raids; they possess search and seizure powers and are invariably subjected to Parliamentary or legislative oversight. The primary object for setting up such regulatory bodies would be to ensure general public utility. The prescribing of standards, and enforcing those standards, through accreditation and continuing supervision through inspection etc., cannot be considered as trade, business or commercial activity, merely because the testing procedures, or accreditation involves charging of such fees. It cannot be said that the public utility activity of evolving, prescribing and enforcing standards, involves the carrying on of trade or commercial Page 47 of 57 HC-NIC Page 47 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT activity."
12.8. Circular No.11 of 2008 issued by the CBDT fell for consideration by the Delhi High Court in the case of M/s G.S. 1 India v. Director General of Incometax (Exemption) and Another :
WP(C) 7797/2009, decided on 26.09.2013 (2013) 219 Taxman
205. It is held that even as per the said circular, proviso to Section 2(15) of the Act is applicable to assessee, who are engaged in commercial activities i.e. carrying on business, trade or commerce, in the garb of 'public utilities' to avoid tax liability as it was noticed that the object 'general public utility' was sometimes used as a mask or device to hide the true purpose, which was 'trade, commerce or business'. Thus, it is evident that introduction of proviso to Section 2(15) by virtue of the Finance Act, 2008 was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of a general public utility. It is not designed to hit at those institutions, which had the advancement of the objects of general public utility at their hearts and were charity institutions. The attempt was to remove the masks from the entities, which were purely trade, commerce or business entities, and to expose their true identities.
. In the case of M/s G.S. 1 India (Supra), in para 21, 22 and 27, the Delhi High Court has observed and held as under:
"21. ... As observed above, legal terms, trade, commerce or business in Section 2(15), mean activity undertaken with a view to make or earn profit. Profit motive is determinative and a critical factor to discern whether an activity is business, trade or commerce. The court further held: Page 48 of 57 HC-NIC Page 48 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT
22. Business activity has an important pervading element of selfinterest, though fair dealing should and can be present, whilst charity or charitable activity is antithesis of activity undertaken with profit motive or activity undertaken on sound or recognized business principles. Charity is driven by altruism and desire to serve others, though element of selfpreservation may be present. For charity, benevolence should be omnipresent and demonstrable but it is not equivalent to selfsacrifice and abnegation. The antiquated definition of charity, which entails giving and receiving nothing in return is outdated. A mandatory feature would be; charitable activity should be devoid of selfishness or illiberal spirit. Enrichment of oneself or selfgain should be missing and the predominant purpose of the activity WP(C) 1872/13 Page 52 of 55 should be to serve and benefit others. A small contribution by way of fee that the beneficiary pays would not convert charitable activity into business, commerce or trade in the absence of contrary evidence. Quantum of fee charged, economic status of the beneficiaries who pay, commercial value of benefits in comparison to the fee, purpose and object behind the fee etc. are several factors which will decide the seminal question, is it business?
27. As observed above, fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self sustaining in longterm and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under WP(C) 1872/13 Page 53 of 55 the residuary clause general public utility. The impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, substantially or in part must be funded by voluntary contributions. No such requirement has been pointed out or argued. A practical and pragmatic view is required when we examine the data, which should be analyzed objectively and a narrow and coloured view will be counter productive and contrary to the language of Section 2(15) of the Act."
12.9. While upholding the constitutional validity of the proviso to Section 2(15) of the Act, the Division Bench of the Delhi High Court in the case of Indian Trade Promotion Organization vs. Page 49 of 57 HC-NIC Page 49 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Director of Income Tax (Exemption) in WP(C) No.1872 of 2013 decided on 22.01.2015 has observed in para 58 as under:
"As defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. 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 WP(C) 1872/13 Page 54 of 55 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.
13. Applying the aforesaid decisions to the facts of the case on hand and with respect to the activities of the AUDA Ahmedabad Urban Development Authority under the provisions of the Gujarat Page 50 of 57 HC-NIC Page 50 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT Town Planning Act by no stretch of imagination, it can be said that the activities of the assessee (AUDA) can be said to be in the nature of trade, commerce or business and / or its object and purpose is profiteering. Merely because under the statutory provisions and to meet with the expenditure of Town Planning Scheme and / or providing various services under the Town Planning Scheme, such as road, drainage, electricity, water supply etc. if the assessee is permitted to sale the plots (land) to the extent of 15% of the total area under the Town Planning Scheme and while selling the said plots they are sold by holding the public auction, it cannot be said that activities of the assessee is profiteering, to be in the nature of trade, commerce and business.
13.1. In the case of Lucknow Development Authority, Gomti Nagar (supra), it is held by the Allahabad High Court that the activities of the authority cannot be said to be in the nature of trade, commerce or business and / or profiteering and therefore, proviso to Section 2(15) of the Act shall not be applicable.
13.2. Similar, view has been expressed by the Rajasthan High Court in the case of Commissioner of Income TaxI, Jodhpur vs. Jodhpur Development Authority, Jodhpur Tax Appeal No. 63 of 2012 decided on 5.7.2016.
14. Considering the aforesaid facts and circumstances and more particularly, considering the fact that the assessee is a statutory body Urban Development Authority constituted under the provisions of the Act, constituted to carry out the object and purpose of Town Planning Act and collects regulatory fees for the Page 51 of 57 HC-NIC Page 51 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT object of the Acts; no services are rendered to any particular trade, commerce or business; whatever the income is earned / received by the assessee even while selling the plots (to the extent of 15% of the total area covered under the Town Planning Scheme) is required to be used only for the purpose to carry out the object and purpose of Town Planning Act and to meet with expenditure while providing general utility service to the public such as electricity, road, drainage, water etc. and even the entire control is with State Government and even accounts are also subjected to audit and there is no element of profiteering at all, the activities of the assessee cannot be said to be in the nature of trade, commerce and business and therefore, proviso to Section 2(15)of the Act shall not be applicable so far as assessee is concerned and therefore, the assessee is entitled to exemption under Section 11 of the Income Tax Act. Therefore, the question no.1 is to be held in favour of the assessee and against the revenue.
15. Now, so far as another question which is posed for the consideration of this Court i.e. whether while collecting the cess or fees, activities of the assessee can be said to be rendering any services in relation to any trade, commerce or business is concerned, for the reasons stated above, merely because the assessee is collecting cess or fees which is regulatory in nature, the proviso to Section 2(15)of the Act shall not be applicable. As observed herein above neither there is element of profiteering nor the same can be said to be in the nature of trade, commerce or business. At this stage, decision of the Division Bench of this Court in the case of Sabarmati Ashram Gaushala Trust (supra) is required Page 52 of 57 HC-NIC Page 52 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT to be referred to. In the case before the Division Bench, the assessee Trust Sabarmati Ashram Gaushala Trust was engaged in the activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. The Assessing Officer denied the exemption to the trust under Section 11 of the Act on the ground that considerable income was generated from the activities of milk production and sale and therefore, considering the proviso to Section 2(15) of the Act, the said Trust assessee was denied the exemption under Section 11 of the Act. While holding that the activities of the assessee trust still can be said to be for charitable purpose within the meaning of Section 2(15) of the Act and same cannot be said to be in the nature of trade, commerce or business for which proviso to Section 2(15) of the Act is required to be applied. In para 6, 7, 8 and 12, it is observed and held as under:
6.The legal controversy in the present Tax Appeal centers around the first proviso. In the plain terms, the proviso provides for exclusion from the main object of the definition of the term Charitable purposes and applies only to cases of advancement of any other of general general public utility. If the conditions provided under the proviso are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue to proviso, would be excluded from the definition of charitable trust. However, for the application of the proviso, what is necessary is that the entity should be involved in carrying on activities in the nature of trade, commerce or business, or any activity of rendering services in relation to any trade, commerce or business, for a cess or fee or any other consideration. In such a situation, the nature, use or application, or retention of income from such activities would not be relevant. Under the circumstances, the important elements of application of proviso are that the entity should be involved in carrying on the activities of any trade, commerce or business or any activities of rendering service in relation to any trade, commerce or business, for a cess or fee or Page 53 of 57 HC-NIC Page 53 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT any other consideration. Such statutory amendment was explained by the Finance Ministers speech in the Parliament. Relevant portion of which reads as under :
I once again assure the House that genuine charitable organizations will not in any way be affected. The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether any entity is carrying on 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. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case.
Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as advancement of any other object of general public utility.
7.In consonance with such assurance given by the Finance Minister on the floor of the House, CBDT issued a Circular No. 11 of 2008 dated 19th December 2008 explaining the amendment as under :
3. The newly inserted proviso to section 2 (15) will apply only to entities whose purpose is advancement of any other object of general public utility ie., the fourth limb of the definition of charitable purpose contained in section 2 (15). Hence, such entities will not be eligible for exemption under section 11 or under section 10 (23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on any activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.
3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of Page 54 of 57 HC-NIC Page 54 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2 (15) owing to the principle of mutuality. However, if such organizations have dealings with non members, their claim to be chargeable organizations would now be governed by the additional conditions stipulated in the proviso to section 2 (15).
3.2 In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.
Page 55 of 57HC-NIC Page 55 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT
8.What thus emerges from the statutory provisions, as explained in the speech of Finance Minister and the CBDT Circular, is that the activity of a trust would be excluded from the term charitable purpose if it is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess, fee and/or any other consideration. It is not aimed at excluding the genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce or business which are masked as charitable purpose.
12.All these were the objects of the general public utility and would squarely fall under section 2 (15) of the Act. Profit making was neither the aim nor object of the Trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19th December 2008 the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of public utility.
15.1. Applying the aforesaid decision to the facts of the case on hand and the object and purpose for which the assessee is established / constituted under the provisions of the Gujarat Town Planning Act and collection of fees and cess is incidental to the object and purpose of the Act, even the case would not fall under second part of proviso to Section 2(15) of the Act.
15.2. Considering the aforesaid facts and circumstances of the case, we are of opinion that the learned Tribunal has committed a grave error in holding the activities of the assessee in the nature of trade, commerce or business and consequently holding that the proviso to Section 2(15) of the Act shall be applicable and therefore, the Page 56 of 57 HC-NIC Page 56 of 57 Created On Wed Aug 16 05:49:41 IST 2017 O/TAXAP/423/2016 CAV JUDGMENT assessee is not entitled to exemption under Section 11 of the Act. For the reasons stated above, it is held that the proviso to Section 2(15) of the Act shall not be applicable so far as assessee AUDA is concerned and as the activities of the assessee can be said to be providing general public utility services, the assessee is entitled to exemption under Section 11 of the Act. Both the questions are therefore, answered in favour of the assessee and against the revenue.
16. In view of the above and for the reasons stated above, the impugned order passed order passed by the learned Tribunal in respective appeals for different assessment year are hereby quashed and set aside. Accordingly, all these appeals are allowed and answered both the questions in favour of assessee and against the revenue. No costs.
sd/ (M.R. SHAH, J.) sd/ (B.N. KARIA, J.) Kaushik Page 57 of 57 HC-NIC Page 57 of 57 Created On Wed Aug 16 05:49:41 IST 2017