2019 (2) TMI 1749 - HC - Income Tax

Exemption u/s 11 - entitled for registration under section 12AA - charitable activity u/s 2(15) - HELD THAT - Nature of activity of the respondent-assessee must be considered. As already noted, the assessee is a statutory authority constituted under the provisions of the Karnataka Urban Development Authorities Act, 1987. Despite the insertion of the proviso, the assessee was entitled to continue the certificate of registration under section 12A of the Act, as even though the objects of the assessee fall within the limit of any other object of general public utility, but, having regard to the aforesaid dicta, it is held that its activity is not of a commercial nature for the purpose of earning profit, but being statutory body its objects are to ensure orderly development of urban areas of Hubli-Dharwad. In the circumstances, substantial question of law No.1 is answered against the Revenue. Whether Tribunal was right in following the judgment of KIADB 2015 (7) TMI 169 - KARNATAKA HIGH COURT wherein it is held that the two conditions stipulated under section 12AA(3), which empowers the registering authority to cancel registration, do not exist in the case of the asses see? - HELD THAT - It is only if the activities of such trusts or institutions are not genuine or are not being carried out in accordance with the objects of the trust or institution, on being satisfied about the same the registration under section 12A(1)(aa) of the Act could be cancelled and not in any other circumstances. In the instant case, the registration of the respondent-entity was sought to be cancelled on the basis of the insertion of the proviso to clause (15) of section 2 of the Act on the premise that the activity carried out by the respondent was purely trade and commerce and for a profit motive. But in the instant case of Karnataka Industrial Areas Development Board, it has been explained that the statutory authority therein was involved in the orderly development of industrial areas and hence, its activity was for the purpose of and in the nature of public utility service. The nature of the respondent-entity has been already discussed. Neither of the circumstances stated above apply in so far as the respondent-assessee is concerned. Thus the Commissioner could not have cancelled the registration certificate vide order dated November 28, 2011. Substantial question of law No. 2 is also answered against the Revenue and in favour of the assessee by holding that the Tribunal was right in following the judgment of this court in the case of Karnataka Industrial Areas Development Board, wherein it has been held that if either of the two conditions stipulated under section 12AA(3) exist then the registering authority is empowered to cancel the registration and not otherwise.

Summary

Issues Involved:
1. Entitlement for registration under section 12AA of the Income-tax Act, 1961.
2. Applicability of the proviso to section 2(15) of the Income-tax Act, 1961.
3. Conditions for cancellation of registration under section 12AA(3) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement for Registration under Section 12AA of the Income-tax Act, 1961:
The primary issue was whether the assessee, a statutory body constituted under the Karnataka Urban Development Authorities Act, 1987, was entitled to registration under section 12AA of the Income-tax Act, 1961. The Tribunal had previously held that the assessee was entitled to such registration. The Revenue contended that the assessee's activities fell under "any other object of general public utility" as defined in section 2(15) of the Act and that these activities were commercial in nature, thus disqualifying the assessee from being considered for charitable purposes. However, the court noted that the assessee was established for the planned development of urban areas, which is a public utility service. The court referred to precedents, including CIT v. Bagalkot Town Development Authority and Ahmedabad Urban Development Authority v. Asst. CIT (Exemption), which held that similar statutory authorities were entitled to registration under section 12AA. The court concluded that the assessee's activities did not involve trade, commerce, or business with a profit motive, and thus, the assessee was entitled to registration under section 12AA.

2. Applicability of the Proviso to Section 2(15) of the Income-tax Act, 1961:
The Revenue argued that the proviso to section 2(15) of the Act, which excludes certain activities from being considered charitable if they involve trade, commerce, or business, applied to the assessee. The court examined the nature of the assessee's activities and concluded that they were not commercial but aimed at public utility. The court cited judgments including CIT v. Lucknow Development Authority and Gujarat Maritime Board, which supported the view that statutory authorities engaged in public utility services were not engaged in trade, commerce, or business. Thus, the proviso to section 2(15) did not apply to the assessee, and its activities were considered charitable.

3. Conditions for Cancellation of Registration under Section 12AA(3) of the Income-tax Act, 1961:
The court examined whether the conditions for cancellation of registration under section 12AA(3) were met. The Revenue had cancelled the assessee's registration based on the proviso to section 2(15). However, the court referred to the judgment in Karnataka Industrial Areas Development Board, which stipulated that registration could only be cancelled if the activities were not genuine or not carried out in accordance with the trust's objects. The court found that the assessee's activities were genuine and aligned with its statutory objectives. Consequently, the cancellation of registration was unjustified, and the Tribunal's decision to restore the registration was upheld.

Conclusion:
The court affirmed the Tribunal's order dated May 15, 2015, and dismissed the Revenue's appeal. The assessee's activities were deemed charitable, and the registration under section 12AA was justified. The proviso to section 2(15) did not apply, and the conditions for cancellation under section 12AA(3) were not met.