2015 (9) TMI 902 - AT - Income Tax

Charitable activity to qualify for exemption under section 11 - CIT(A) upholding the addition made by the AO, by treating the surplus as profit at par with a normal builder - whether profit earning was never the motive of the assessee trust? - retrospectivity of amendment - Held that - On the admitted facts of this case, so far period prior to 1st April 2009 is concerned and for the reasons set out above, the benefit of Section 11 read with Section 2(15) could not have been declined at all. The law is well settled by a five judge bench of Hon ble Supreme Court, in the case of Vatika Township Pvt Ltd. (2014 (9) TMI 576 - SUPREME COURT), that, following the maxim lex prospicit non respici, the law, particularly with respect to a requirement which is more onerous on the assessee, cannot be treated as retrospective in effect unless it is specifically legislated to be so. In our considered view, therefore, this amendment cannot be treated as clarificatory or retrospective in effect. In view of these discussions, even post insertion of proviso to Section 2(15) but before 1st April 2016, when business activities are carried by the assessee trust in the course of actual carrying out of such advancement of any other object of general public utility , the benefit of Section 11 read with Section 2 (15) cannot be declined. Nothing, therefore, turns on the assessee carrying out, even if that be actually so, activities in the nature of trade, commerce or business etc as long as these activities are carried out in the course of actual carrying out of advancement of any other object of general public utility. The planned development of cities and towns is an object of general public utility, and that is an object consistently followed by the assessee in all its activities. For this short reason alone, the stand of the authorities below must be held to be unsustainable in law. A lot of emphasis has been made by the learned Departmental Representative on the fact that nothing, or very little, has been done by the trusts for the poor people but what this argument overlooks is that the assessee trust is not granted registration under section 2 (15) for implementing poverty alleviation programs or doing other acts of charity but it is granted registration because what it is pursuing, by following the State Government policies for planned development of city, is advancement of an object of general public utility. Pursuing an object of general public utility does not necessarily involve more noticeable direct acts of charity driven by compassion and benevolence. There is so much to be done by the Government agencies, as these assessee trusts are perceived to be, that no matter what these agencies do, there is still lot left to be done. Just because these agencies could have done more, such expectations, no matter how legitimate, do not obliterate the work done by these agencies and the role played by these agencies for public good in furtherance of advancement of objects of general public utility. The inclusion for provision for unforeseen charges, in our understanding, is a fair and conservative approach to ensure that the costs incurred by the assessee trust are recovered from the end buyers of the residential units or land. The element of charity is not in giving away the residential units at subsidized or low prices but in pursing the object of advancement of object of general public utility in planned development of the are in accordance with the policies of the State Government. For the reasons set out above, we are of the considered view that the authorities below were not justified in declining the benefit of section 11 read with section 2(15) to the assessee, and in holding that the assessee trust was not covered by advancement of any object of general public utility. We, therefore, direct the Assessing Officer to delete the disallowance of exemption - Decided in favour of assessee.

Issues Involved:
1. Whether the activities of the assessees, improvement trusts set up under the Punjab Towns Improvement Trusts Act, 1922, qualify as "general public utility" under Section 2(15) of the Income Tax Act, 1961.
2. Whether the activities of the assessees are in the nature of trade, commerce, or business, and thus not for "charitable purposes" due to the first proviso to Section 2(15).
3. Whether the assessees are entitled to exemption under Section 11 of the Income Tax Act, 1961.
4. The impact of the amendments to Section 2(15) and their applicability to the assessment years in question.

Detailed Analysis:

1. Nature of Activities and General Public Utility:
The primary issue is whether the activities of the assessees, improvement trusts, qualify as "general public utility" under Section 2(15) of the Income Tax Act, 1961. The Tribunal noted that these trusts are set up under the Punjab Towns Improvement Trusts Act, 1922, with the objective of planned development of towns and cities. The activities include acquiring land, developing it, and selling plots and buildings. The Tribunal emphasized that the planned development of cities and towns is an object of general public utility, and this objective has been consistently followed by the assessees in all their activities.

2. Activities in the Nature of Trade, Commerce, or Business:
The Tribunal examined whether the activities of the assessees are in the nature of trade, commerce, or business, which would disqualify them from being considered as "charitable purposes" under the first proviso to Section 2(15). The Tribunal highlighted that the mere presence of profit in the activities does not necessarily imply a profit motive. The predominant motivation for the activities is crucial. The Tribunal referred to the CBDT Circular No. 11, which clarifies that activities in the nature of trade, commerce, or business should not be considered charitable if they are undertaken with a profit motive. However, the Tribunal found that the activities of the assessees are carried out with the larger and predominant objective of general public utility, and not with a profit motive.

3. Entitlement to Exemption under Section 11:
The Tribunal addressed whether the assessees are entitled to exemption under Section 11 of the Income Tax Act, 1961. The Tribunal noted that the assessees were granted registration as charitable trusts under Section 12AA, and the activities were considered to be for "general public utility." The Tribunal found that the activities of the assessees, including the sale of plots and buildings, are carried out in furtherance of the objective of planned development, which qualifies as an object of general public utility. Therefore, the assessees are entitled to exemption under Section 11.

4. Impact of Amendments to Section 2(15):
The Tribunal discussed the amendments to Section 2(15) and their applicability to the assessment years in question. The Tribunal noted that the amendments brought by the Finance Act, 2015, which introduced a new proviso to Section 2(15), are effective from 1st April 2016 and are not retrospective. The new proviso excludes activities in the nature of trade, commerce, or business from being considered as charitable purposes if the aggregate receipts from such activities exceed twenty percent of the total receipts. The Tribunal concluded that the amendments do not apply to the assessment years under consideration, and the benefit of Section 11 read with Section 2(15) cannot be denied for the periods prior to 1st April 2016.

Conclusion:
The Tribunal concluded that the activities of the assessees qualify as "general public utility" under Section 2(15) and are not in the nature of trade, commerce, or business with a profit motive. Consequently, the assessees are entitled to exemption under Section 11 of the Income Tax Act, 1961. The amendments to Section 2(15) introduced by the Finance Act, 2015, are not applicable to the assessment years in question. The Tribunal allowed the appeals of the assessees and dismissed the appeals of the Assessing Officer.

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