2015 (10) TMI 480 - AT - Income Tax

Entitlement to exemption u/s 11 - assessee is a Karnataka Urban Water Supply and Drainage Board - Assessee explained that its main source of income was from ETP charges and Water Charges - Held that - The principle laid down in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others 2015 (1) TMI 928 - DELHI HIGH COURT if applied to the facts of the present case, will clearly show that the Assessee does not driven primarily by desire or motive to earn profits but to do charity through advancement of an object of general public utility. The assessee is operating on no profit basis. This is substantiated by the actual income received on operations of the Assessee and the expenditure incurred set out in para-14 of this order. The income of the Assessee is primarily consists of Establishment, Administration and Supervision Charges, Water charges, interest, rent and other income (comprising of hire charges, fines, sale of scrap, tender forms etc.). If interest, rent and other income are excluded and compared with the expenditure on operations incurred by the Assessee, it becomes clear that the Assessee does not have profit motive. The proviso to Sec.2(15) of the Act is therefore not applicable to the case of the Assessee. We therefore hold that the Assessee is entitled to the benefits of Sec.11 of the Act for the impugned assessment years. The AO has not disputed the conditions necessary for allowing exemption u/s.11 of the Act, except the applicability of proviso to Sec.2(15) of the Act. In view of our conclusions that the said proviso is not applicable to the case of the Assessee, we hold that the Assessee s income is not includible in the total income and therefore the income returned by the Assessee is directed to be accepted. - Decided in favour of assessee.

Summary

Issues Involved:

1. Applicability of the proviso to Section 2(15) of the Income Tax Act, 1961.
2. Eligibility for exemption under Section 11 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of the Proviso to Section 2(15) of the Income Tax Act, 1961:

The Assessing Officer (AO) denied the exemption under Section 11 of the Income Tax Act, 1961, to the assessee, Karnataka Urban Water Supply and Drainage Board (KUWSD Board), for the Assessment Year (AY) 2011-12, on the grounds that the assessee was engaged in activities in the nature of trade, commerce, or business as per the proviso to Section 2(15) of the Act. The AO noted that the assessee's activities, such as collecting establishment, administration, supervision charges, and water charges, constituted commercial activities. The AO observed that the assessee generated receipts in excess of Rs. 25 lakhs and thus attracted the proviso to Section 2(15), which disqualifies entities engaged in commercial activities from being considered for charitable purposes.

The assessee contended that its activities were purely to fulfill the constitutional obligation of the State Government to provide water supply and drainage facilities, and it operated on a no-profit basis. The assessee argued that the proviso to Section 2(15) was not applicable as it did not have any profit motive and was not engaged in any trade, commerce, or business.

The CIT(A) upheld the AO's decision, stating that the preamble to the Karnataka Urban Water Supply and Drainage Board Act, 1973 (KUWSDB Act), did not specify that the assessee's activities had to be carried out without any profit motive. The CIT(A) noted that the assessee generated surplus from its operations and provided services for a fee, indicating commercial activities.

Upon appeal, the Tribunal analyzed the applicability of the proviso to Section 2(15) in light of the decision of the Hon'ble Delhi High Court in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others. The Tribunal highlighted that the proviso to Section 2(15) should be interpreted by examining whether there is an element of profit-making in the activities. If the dominant objective is not profit-making but to do charity, the proviso would not apply. The Tribunal concluded that the assessee was not driven by a profit motive but aimed to fulfill its charitable purpose of providing water supply and drainage facilities. Therefore, the proviso to Section 2(15) was not applicable to the assessee.

2. Eligibility for Exemption under Section 11 of the Income Tax Act, 1961:

Since the proviso to Section 2(15) was found inapplicable, the Tribunal examined the eligibility of the assessee for exemption under Section 11 of the Act. The AO had not disputed the conditions necessary for allowing exemption under Section 11, except for the applicability of the proviso to Section 2(15). Given the Tribunal's conclusion that the proviso was not applicable, the assessee was entitled to the benefits of Section 11. The Tribunal directed that the income returned by the assessee should be accepted, thereby allowing the exemption under Section 11.

Conclusion:

The Tribunal allowed the appeal by the assessee, concluding that the proviso to Section 2(15) of the Income Tax Act, 1961, was not applicable to the assessee, and therefore, the assessee was entitled to exemption under Section 11 of the Act. The Tribunal did not address other contentions regarding the applicability of Sections 10(2) and 10(46) of the Act or Article 289(1) of the Constitution of India, as the primary issue regarding the proviso to Section 2(15) was resolved in favor of the assessee.