Gujarat High Court
Commissioner Of Income Tax vs Gujarat Industrial Development ... on 28 June, 2017
Bench: M.R. Shah, B.N. Karia
O/TAXAP/380/2017 ORDER
IN THE HIGH COURT OF GUJARAT AT
AHMEDABAD
TAX APPEAL No. 380 of 2017
With
TAX APPEAL No. 381 of 2017
To
TAX APPEAL No. 382 of 2017
=============================================================
COMMISSIONER OF INCOME TAX....Appellant(s) Versus GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION....Opponent(s) ============================================================= Appearance :
Mr M.R BHATT, Sr Advocate with Mrs MAUNA BHATT, Advocate for the Appellant ============================================================= CORAM: HONOURABLE Mr. JUSTICE M.R. SHAH and HONOURABLE Mr. JUSTICE B.N. KARIA 28th June 2017 COMMON ORDER (PER : HONOURABLE Mr. JUSTICE M.R. SHAH)
1. As common question of law and facts arise in this group of Appeals and as such arising out of impugned common judgment and order dated 10th January 2017 passed by the Income Tax Appellate Tribunal, Ahmedabad "D" Bench ["Tribunal" for short], but with respect to different Assessment Years, all these Tax Page 1 of 40 HC-NIC Page 1 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER Appeals are decided and disposed of by this common order.
2. Feeling aggrieved and dissatisfied with the impugned common judgment and order passed by the learned Tribunal in ITA No. 278/AHD/2013, 498 & 2346/AHD/2014 [for Assessment Years 2009-2010 to 2011-2012], the Revenue has preferred the present Tax Appeals with the following proposed questions of law :
[A] "Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in allowing the assessee's appeal, negating the finding of the CIT [A] as well as the Assessing Officer denying the benefits of Section 11 and 12 of the Income Tax Act ?"
[B] "Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in giving the benefit of Section 11 and 12 which the Assessing Officer disallowed by invoking the provision of Section 2 [15] r.w.s 13 [8] of the Act ?"
3. Facts leading to the present Tax Appeal in nutshell are as under :-Page 2 of 40
HC-NIC Page 2 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 3.1 That the respondent-assessee viz., Gujarat Industrial Development Corporation ["the Corporation" for brevity] is constituted under the provisions of the Gujarat Industrial Development Act, 1962 ["the Act" for short]. That, the assessee has been established under Section 3 of the Act for the purpose of securing and assisting rapid and orderly establishment and organization of industrial areas and industrial estates in the State of Gujarat, and for the purpose of establishing commercial centers in connection with establishment and organization of such industries. That, the Corporation shall consist of twelve Directors, out of which, three official Directors nominated by the State Government; one Director nominated by the State Electricity Board constituted under the Electricity [Supply] Act, 1948; one Director nominated by the Gujarat Housing Board constituted under the Gujarat Housing Board Act, 1961; and six Directors nominated by the State Government. That, the functions and powers of the assessee-Corporation Page 3 of 40 HC-NIC Page 3 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER are as per Section 13 of the Act, which shall be referred to hereinbelow.
3.2 The Corporation shall have powers; subject to the provisions of the Act, as mentioned in Section 14 of the Act, which shall also be dealt with and referred to hereinbelow.
3.3 That, as per sub-section [3] of Section 23 of the Act, the Corporation shall not utilized the funds as mentioned in sub-section [1] of Section 23 for any purpose other than that for which it was constituted, without previous approval of the State Government. As per Section 24 of the Act, the Corporation shall have authority to spend such sums as it thinks fit for the purposes authorized under the Act. As per Section 26 of the Act, the accounts of the Corporation shall be audited by an auditor appointed by the State Government, in consultation with the Comptroller & Auditor General of India. As per sub-section [4] of Section 26, the State Government shall cause the accounts of the Corporation together with the audit Page 4 of 40 HC-NIC Page 4 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER report thereon forwarded to it under sub-section [3] to be laid annually before the State Legislature. As per Section 30 of the Act, whenever any land is required by the Corporation for any purpose in furtherance of the objects of the Act, but the Corporation is unable to acquire it by agreement, the State Government may, upon an application of the Corporation in that behalf, order proceedings to be taken under the relevant land acquisition land for acquiring the same on behalf of the Corporation as it such lands were needed for a public purpose within the meaning of the relevant land acquisition law. As per Section 48 of the Act, if the State Government is satisfied that the purposes for which the Corporation was established under the Act have been substantially achieved so as to render its continuance unnecessary, it may by a notification in the Official Gazette declare that the Corporation shall be dissolved with effect from such date as may be specified in the said notification, and thereupon the Corporation shall stand dissolved accordingly.Page 5 of 40
HC-NIC Page 5 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 3.4 That, the assessee-Corporation filed return of income for Assessment Years 2009-2010 to 2011-2012 by claiming itself as a "Charitable Institution" as per Section 2 [15] of the Income-tax Act, 1961 ["the IT Act" for short]. At this stage, it is required to be noted that the assessee has been recognized and granted Certificate under Section 12 [a] of the IT Act. That, the assessee was called upon to show cause as to why its income should not be assessed under Section 11 [4] of the IT Act. That, considering proviso to Section 2 [15] of the IT Act and after observing that the assessee is involved in commercial activities, and it also maintains its accounts in the spirit of a commercial organization and as the assessee is enjoying income from business of developing land for industrial purposes and allotting land to industrialists on lease and is also charging consideration for land transferred to them, the Assessing Officer held that the assessee cannot be said to be a "charitable institution" and/or its activities cannot be said to be for charitable purposes, as per Page 6 of 40 HC-NIC Page 6 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER Section 2 [15] of the I.T Act.
4. Feeling aggrieved and dissatisfied with the order passed by the Assessing Officer denying the exemption claimed by the assessee under Section 11 of the Act and in not treating the activities of the assessee for charitable purpose, as contained in Section 2 [15]of the I.T Act, the assessee preferred appeals before the Commissioner of Income-tax [Appeals]. The learned CIT [A] dismissed the appeals preferred by the assessee and confirmed the orders passed by the Assessing Officer.
5. Feeling aggrieved and dissatisfied with the orders passed by the learned CIT [A], the assessee preferred appeals before the Income Tax Appellate Tribunal, Ahmedabad being ITA No. 278/AHD/2013, 498 & 2346/AHD/2014 [for Assessment Years 2009-2010 to 2011-2012].
6. By the impugned common judgment and order dated 10th January 2017, the learned Tribunal allowed Page 7 of 40 HC-NIC Page 7 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER the said Appeals and has held that proviso to Section 2 [15] of the I.T Act shall not be applicable, as the activities of the assessee can be said to be for charitable purposes, and therefore, the assessee is entitled to exemption under Section 11 of the I.T Act, the learned Tribunal has allowed the said appeals.
7. Feeling aggrieved and dissatisfied with the common judgment and order dated 10th January 2017 passed by the learned ITAT, the Revenue has preferred these Tax Appeals with the aforesaid proposed questions of law.
8. Shri Manish R Bhatt, learned senior advocate has appearing on behalf of the Revenue.
9. Shri Manish Bhatt, learned counsel for the Revenue has vehemently submitted that in the facts and circumstances and looking to the activities carried out by the assessee, proviso to Section 2 [15] of the I.T Act shall be applicable, and therefore, the activities of the assessee cannot be said to be "for charitable purposes". It is submitted that the second limb of Page 8 of 40 HC-NIC Page 8 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER proviso to Section 2 [15] of the Act shall be applicable, and therefore, the assessee is not entitled to exemption; as claimed under Section 11 of the IT Act.
10. It is further submitted by learned Sr. Advocate Shri Bhatt appearing on behalf of the Revenue that the learned Tribunal has materially erred in placing reliance upon the Speech of Hon'ble the Finance Minister and the subsequent clarification issued by the Central Board of Direct Taxes [CBDT]. It is submitted that the learned Tribunal has ignored the fact that the activities of the assessee could not be called as activities towards relief of the poor, education, medical relief, preservation of environment [including watersheds, forests and wildlife] and preservation of monuments or places or objects of artistic or historic interest. It is submitted that the activities of the assessee are clearly defined in the Act.
It is submitted that with these activities that the assessee had been recognized and granted registration under Section 12AA of the I.T Act. It is submitted that such registration was granted prior to the introduction Page 9 of 40 HC-NIC Page 9 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER of proviso to Section 2 [15] of the IT Act. It is submitted that considering the amended provisions, "advancement of any other object of general public utility" shall not be a charitable purpose; if, [a] it involves carrying on of any activity in the nature of trade, commerce or business; or [b] rendering any services in relation to any trade, commerce, or business for a Cess, or fee or any other consideration irrespective of the nature of use or application or retention of the income from such activities.
10.1 It is submitted that the learned appellate tribunal has ignored that the activities carried out by the assessee are in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trader, commerce or business for Cess or fee or any other consideration, and therefore, proviso to Section 2 [15] of the I.T Act shall be applicable. It is submitted that the activities carried out by the assessee can be said to be akin to trade, commerce or business. It is submitted that therefore, Page 10 of 40 HC-NIC Page 10 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER the learned Tribunal has materially erred in allowing the appeals and in holding that proviso to Section 2 [15] shall not be applicable. It is submitted that by holding so, the learned Tribunal has materially erred in relying upon a decision of the Hon'ble Supreme Court in assessee's own case viz., GIDC & Ors. v. CIT, reported in [227] ITR 414 [SC] ignoring the fact that the said judgment was given in the context of applicability of Section 10 [20A] of the Income-tax Act. It is submitted that the learned Tribunal has also materially erred in relying upon decisions of Delhi High Court, and of this Court in the case of Sabarmati Ashram Gaushala Trust, reported in 44 Taxmann.com 141, which was relied upon by the assessee. It is further submitted that as such the learned CIT [A] has passed a speaking and reasoned order which ought not to have been interfered with by the Tribunal. Making above submissions, it is requested to admit/allow the present Tax Appeals.
11. Heard Shri Manish R Bhatt, learned Sr. Advocate Page 11 of 40 HC-NIC Page 11 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER appearing on behalf of the appellant-Revenue.
12. A short question which is posed for consideration of this Court is whether the activities carried out by the assessee can be said to be in the nature of trade, commerce or business for a Cess or fee, or for any other consideration and/or carrying on any activities in the nature of trade, commerce or business so as to attract proviso to Section 2 [15] of the Act and to deny the exemption claimed under Section 11 of the I.T Act ?
13. At the outset, it is required to be noted that while considering the aforesaid question, the relevant provisions of the Gujarat Industrial Development Act, 1962 under which the assessee has been established and constituted, which as such are referred to and considered by the learned Tribunal while passing the impugned common judgment and order, are required to be referred to. They are as under :
"3. (1) For the purposes of securing and assisting in the rapid and orderly establishment, and organization of industries in industrial areas and industrial estates in the State of Gujarat 4[and for the purpose of establishing commercial Page 12 of 40 HC-NIC Page 12 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER centers in connection with the establishment and organization of such industries], there shall be established by the State Government by notification in the Official Gazette, a Corporation by the name of the Gujarat Industrial Development Corporation.
(2) The Corporation shall be a body corporate with perpetual succession and a common seal, and may sue and be sued in its corporate name, and shall be competent to acquire, hold and dispose of property, both movable and immovable, and to contract, and do all things necessary, for the purposes of this Act.
13. The functions of the Corporation shall be--
(i) generally to promote and assist in the rapid and orderly establishment, growth and development of Industries in the State of Gujarat, and
(ii) in particular and without prejudice to the generality of clause (i) to-
(a) establish and manage industrial estates at place selected by the State Government;
(b) develop industrial area selected by the State Government for the purpose and make them available for undertakings to establish themselves;
(c) develop land on its own account of for the State Government for the purpose of facilitating the location of industries 33[and commercial centers] thereon;
(d) assist financially by loans industries to move their factories into such estates or Page 13 of 40 HC-NIC Page 13 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER areas;
[(da) undertake schemes for providing industrial units and commercial establishments with such structures and facilities as may be necessary for their orderly establishment, growth and development;]
(e) [promote, organize, sponsor or undertake schemes] or works, either jointly with other corporate bodies or institutions, or with Government or local authorities, or on an agency basis, in furtherance of the purposes for which the Corporation is established and all matters connected therewith.
18. All property funds and other assets vesting in the Corporation shall be held and applied by it, subject to the provisions of and for the purposes of this Act.
21. (1) The Corporation may, subject to such conditions as may be prescribed in this behalf, borrow money in the open market or otherwise with a view to providing itself with adequate resources.
(2) All moneys borrowed under sub-section (1) may be guaranteed by the State Government as to the repayment of principal and the payment of interest at such rates and such conditions as the State Government may determine at the time the moneys are borrowed, [Explanation.--The expression "to borrow money" with all its grammatical variations and cognate expressions includes, acceptance of deposits (not being deposits accepted under section 22) from the public for a specified period and on Page 14 of 40 HC-NIC Page 14 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER payment of interest thereon to the depositors at specified rates].
22. The Corporation may accept deposits on such conditions as it deems fit from persons, authorities or institutions to whom allotment or sale of land, buildings or sheds is made or is likely to be made in furtherance of the objects of this Act.
23. (1) The Corporation shall make provision for such reserve and other specially denominated funds and in such manner and to such extent as the State Government may, from time to time, direct.
(2) The management of the funds referred to in-sub-section (1), the sums to be transferred from time to time to the credit thereof and the application of money comprised therein, shall be determined by the Corporation.
(3) None of the funds referred to in sub-section (1) shall be utilized for any purpose other than that for which it was constituted, without the previous approval of the State Government.
24. (1) The Corporation shall have the authority to spend such sums as it thinks fit for the purposes authorized under this Act from out of the general fund of the Corporation referred to in section 19 or from the reserve and other funds referred to in section 23, as the case may be.
(2) Without prejudice to the generality of the power conferred by sub-section (1), the Corporation may contribute such sums as it thinks fit towards expenditure incurred or to be incurred by any local authority or statutory public undertaking in the performance, in Page 15 of 40 HC-NIC Page 15 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER relation to any of its industrial estates or industrial areas, of any of the statutory functions of such authority or undertaking, including expenditure incurred in the acquisition of land.
(3) No expenditure other than capital expenditure shall be incurred by the Corporation out of moneys borrowed or received by way of deposits.
26. (1) The Corporation shall maintain books of account and other books in relation to its business and transactions in such form and in such manner, as may be prescribed.
(2) The accounts of the Corporation shall be audited by an auditor appointed by the State Government, in consultation with the Comptroller and Auditor General of India.
(3) As soon as the accounts of the Corporation are audited, the Corporation shall send a copy thereof together with the copy of the report of the auditor thereon to the State Government.
(4) The State Government shall cause the accounts of the Corporation together with the audit report thereon forwarded to it under sub- section (3) to be laid annually before the State Legislature.
30. (1) Whenever any land is required by the Corporation for any purpose in furtherance of the objects of the Act, but the Corporation is unable to acquire it by agreement, the State Government may, upon an application of the Corporation in that behalf, order proceedings to be taken under the relevant land acquisition law for acquiring the same on behalf of the Corporation as if such lands were needed for a Page 16 of 40 HC-NIC Page 16 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER public Purpose within the meaning of the relevant land acquisition law.
(2) The amount of compensation awarded and all other charges incurred in the acquisition of any such land shall be forthwith paid by the Corporation and thereupon the land shall vest in the Corporation.
32 (1) For the furtherance of the objects of this Act, the State Government may, upon such conditions as may be agreed upon between it and the Corporation, place at the disposal of the Corporation any lands vested in the State Government.
(2) After any such land has been developed by, or under the control and supervision of the Corporation, it shall be dealt with by the Corporation in accordance, with the regulations made, and directions given by the State Government in this behalf.
(3) If any land placed at the disposal of the Corporation under sub-section (1) is required at any time thereafter by the State Government, the Corporation shall replace it at the disposal of the State Government upon such terms and conditions as the State Government may after consultation with the Corporation determine.
48. (1) The State Government if satisfied that the purposes for which the Corporation was established under this Act have been substantially achieved so as to render its continuance unnecessary, it may by notification in the Official Gazette declare that the Corporation shall be dissolved with effect from such date as may be specified in the notification, and thereupon the Corporation shall stand dissolved accordingly.
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O/TAXAP/380/2017 ORDER
(2) From the said date-
(a) all properties, funds and dues which are vested in, or realisable by, the Corporation shall vest in, or be realisable by, the State Government; and
(b) all liabilities which are enforceable against the Corporation shall be enforceable against the State Government
14. As per the statement and object of GIDC Act, 1962, it has been enacted for securing the orderly establishment and organization of industries in industrial areas and industrial estates in the State of Gujarat and for the purpose of establishing commercial centres in connection with the establishment and organization of such industries and for that purpose, to establish an Industrial Development Corporation, and for purposes connected with the aforesaid matters.
15. It cannot be said that the activities carried out by the assessee can be said to be for "advancement of any other object of general public utility". Considering the object and purpose for which the assessee has been established under the provisions of the Act and the activities carried out by the assessee, it cannot be Page 18 of 40 HC-NIC Page 18 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER said that the activities carried out by the assessee can be said to be either in the nature of trade, commerce or business, or rendering any services in relation to any trade, commerce or business for a Cess or Fee or any other consideration so as to attract proviso to Section 2 [15] of the IT Act.
16. Identical question came to be considered by Division Bench of this Court in the case of Ahmedabad Urban Development Authority vs. Assistant Commissioner of Income Tax [Exemption] rendered in Tax Appeal No. 423 of 2016 and other allied Tax Appeals, by which with respect to the Urban Development Authority established and constituted under the provisions of the Gujarat Town Planning & Urban Development Act, 1976, it is held that the activities carried out by the Ahmedabad Urban Development Authority can not be said to be for commercial purpose and proviso to Section 2 [15] of the IT Act shall not be applicable and that the said Ahmedabad Urban Development Authority shall be Page 19 of 40 HC-NIC Page 19 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER entitled to exemption under Section 11 of the Act.
Division Bench of this Court also observed and held that merely because AUDA is charging fees and/or cess, the activities cannot be said to be in the nature of trade, commerce or business and consequently held that the proviso to Section 2 [15] of the Act shall not be applicable, and therefore, the assessee is entitled to exemption under Section 11 of the Act.
16.1 In para 12.2 to 15.1 of the said decision, the Division Bench of this Court has observed and held as under :-
"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 & Ors. vs. State of Karnataka & Ors., 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 Page 20 of 40 HC-NIC Page 20 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 & 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 of the other High Courts, it is held that activities of the said organization cannot be Page 21 of 40 HC-NIC Page 21 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 Page 22 of 40 HC-NIC Page 22 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 organized manner. The purpose and the dominant object for which an institution carries on 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 Page 23 of 40 HC-NIC Page 23 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER organization 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 : [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 sub-serve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose.
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 utilization 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 :
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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)
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 Page 25 of 40 HC-NIC Page 25 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 activity."
12.8.Circular No.11 of 2008 issued by the CBDT fell for consideration by the Delhi High Court in Page 26 of 40 HC-NIC Page 26 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER the case of M/s G.S. 1 India v. Director General of Income-tax (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 Page 27 of 40 HC-NIC Page 27 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 :
22. Business activity has an important pervading element of self interest, 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 self preservation may be present.
For charity, benevolence should be omnipresent and demonstrable but it is not equivalent to self-sacrifice 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 self-gain 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 Page 28 of 40 HC-NIC Page 28 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 long term 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. 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 Page 29 of 40 HC-NIC Page 29 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 Town Planning Act by no stretch of imagination, it can be said that the activities of Page 30 of 40 HC-NIC Page 30 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 Tax-I, Jodhpur vs. Jodhpur Development Authority, Jodhpur Tax Page 31 of 40 HC-NIC Page 31 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 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 Page 32 of 40 HC-NIC Page 32 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 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 Page 33 of 40 HC-NIC Page 33 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 Page 34 of 40 HC-NIC Page 34 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 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 Page 35 of 40 HC-NIC Page 35 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 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 Page 36 of 40 HC-NIC Page 36 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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.
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 Page 37 of 40 HC-NIC Page 37 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER 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 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 Page 38 of 40 HC-NIC Page 38 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER to exemption under Section 11 of the Act. Both the questions are therefore, answered in favour of the assessee and against the revenue."
17. Applying the aforesaid decision to the facts of the case on hand and the objects and purpose for which the assessee-Corporation is established and constituted under the provisions of the Gujarat Industrial Development Act, 1962 and collection of fees or cess is incidental to the object and purpose of the Act, and even the case would not fall under the second part of proviso to Section 2 [15] of the IT Act. As the activities of the assessee is for advancement of any other object of general public utility, the same can be for "charitable purpose" and therefore, the assessee Corporation shall be entitled to exemption under Section 11 of the Act.
No error has been committed by the learned Tribunal in holding so. We are in complete agreement with the view taken by the learned Tribunal.
18. In view of the above and for the reasons Page 39 of 40 HC-NIC Page 39 of 40 Created On Sun Aug 20 07:52:33 IST 2017 O/TAXAP/380/2017 ORDER aforestated, no substantial question of law arises. All these Tax Appeals deserves to be dismissed and are accordingly dismissed.
[M.R Shah, J.] [B.N Karia, J.] Prakash Page 40 of 40 HC-NIC Page 40 of 40 Created On Sun Aug 20 07:52:33 IST 2017