2014 (11) TMI 882 - AT - Income Tax

Denial of exemption u/s 11 Scope of term charitable purpose u/s 2(15) - Assessee was constituted under the Act of the Government for making better planning and regulating development and use of land in planning areas delineated for the purpose, preparation of regional plans/master plans and implementation thereof and also for guiding and directing the planning and development process in the State - Held that - No activity can be carried on efficiently, properly unless and until it is carried out on business principle but it does not mean that the provision is misused in any manner under the garb of charity and any institution be allowed to become richer and richer under the garb of charity by making it a non-tax payable organization in Additional Commissioner of Income-Tax, Gujarat Versus Surat Art Silk Cloth Manufacturers Association (And Other References) 1979 (11) TMI 1 - SUPREME Court it was held that what is predominant object of the activity- whether, it is to carry out a charitable purpose and not to earn profit-the purpose should be that it should not lose its charitable character - the similar activities are performed by big colonizers/developers who are earning a huge profit - If this income is exempted u/s. 11, then we will open a pandora box and anybody will claim the exemption from tax - If the activities of the assessee are analysed, it has turned into a huge profit-making agency for which it is taking money from the general public - no charity is involved and if any institution of public importance like schools, community centers are created/developed, the assessee is charging the cost of it from the public at large and the money is coming from the coffer of the Government - at best, the assessee can be said to be an authority created to help it to achieve certain objects. The assessee acquires land at nominal rates and after developing the same, the same land (is sold) on high profit which cannot be said to be a charitable activity - even just for argument sake, if registration is granted, then every private colonizer will claim charity - The facilities which are provided to the plot holders are incidental to the commercial activity carried out by the commercial developers/builders and if certain facilities like parks, community center, school are provided is not only basic requirement, rather a tool of attracting the investors wherein the hidden cost of these facilities is already included - In the absence of these facilities, normally the purchaser may not invest and the prices may be less - the claim of the assessee has been rightly rejected by the CIT(A) the order of the CIT(A) is upheld Decided against assessee.

Issues Involved:
1. Denial of exemption under section 11 of the Income Tax Act, 1961.
2. Interpretation of amended provisions of section 2(15) of the Income Tax Act, 1961.
3. Characterization of activities as trade, commerce, or business.
4. Application of judicial precedents and circulars.
5. Allowability of depreciation.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue raised by the assessee was the denial of exemption under section 11 of the Income Tax Act, 1961. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the activities of the assessee, a trust registered under the Income Tax Act and constituted by the Government of Kerala for planning and development of the Greater Cochin Area, were in the nature of trade, commerce, and business. Consequently, the exemption under section 11 was denied.

2. Interpretation of Amended Provisions of Section 2(15):
The AO and CIT(A) relied on the amended provisions of section 2(15) of the Income Tax Act, effective from 01-04-2009, which state that "the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce, or business or any activity of rendering any services in relation to any trade, commerce, or business, for a cess or fee or any other consideration." The CIT(A) found that the assessee's activities, including charging fees for various services and renting out commercial spaces, were commercial in nature and thus not eligible for exemption under section 11.

3. Characterization of Activities as Trade, Commerce, or Business:
The AO and CIT(A) concluded that the assessee's activities, such as letting out property, charging fees for supervision, and auctioning commercial spaces, constituted activities in the nature of trade, commerce, and business. The CIT(A) observed that the assessee acted like a real estate giant, engaging in land deals, construction, and sales of commercial and residential complexes, which resulted in commercial profits. The CIT(A) held that the profit motive was not relevant; what mattered was that the activities were in the nature of trade, commerce, and business.

4. Application of Judicial Precedents and Circulars:
The assessee relied on various judicial precedents and circulars to argue that its activities were charitable in nature. The CIT(A) distinguished these cases, stating that the facts of the present case were different. The CIT(A) relied on decisions in the cases of J&K Development Authority and Ghaziabad Development Authority, where similar activities were held to be in the nature of trade, commerce, and business. The CIT(A) also referred to the CBDT Circular No. 11/2008, which clarified that entities engaged in trade, commerce, or business could not claim charitable status merely by masking their activities as charitable.

5. Allowability of Depreciation:
The assessee's claim for depreciation was disallowed on the grounds that it amounted to double deduction. The CIT(A) upheld the AO's decision, stating that the depreciation claimed was on assets acquired prior to 2002, the year when the assessee came under the purview of the Income Tax Act.

Conclusion:
The Tribunal upheld the findings of the AO and CIT(A), concluding that the assessee's activities were in the nature of trade, commerce, and business, and thus, the exemption under section 11 was rightly denied. The Tribunal also upheld the disallowance of depreciation. The appeals of the assessee were dismissed.

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