2019 (12) TMI 1256 - AT - Income Tax

Benefit of exemptions u/s.11 denied - charitable activity u/s 2(15) - assessee is registered u/s.12A - whether the assessee trust is entitled to exemption u/s 11 12 of the Act on surplus arising from carrying out planned development of areas as defined and designed by the Government of Gujarat and for carrying out infrastructural activities relating thereto such as construction of roads, bridges, drainage systems, water connection etc. for the benefit of public at large? - HELD THAT - The main object of the assessee is contribution towards planned and controlled development for the entire urban development area and such activity falls under the category of 'advancement of general public utility. When the activities of the assessee can be said to be in the nature of trade, commerce and business, considering the proviso to Section 2(15), the activities of the assessee cannot be said to be for charitable purpose. We find that the issue is no longer res integra. The Hon ble Gujarat High Court in the case of AUDA 2017 (5) TMI 1468 - GUJARAT HIGH COURT itself has adjudicated the issue in favour of the assessee. The CIT(A) has taken cognizance of the binding decision of the Hon ble Gujarat High Court in great length and has rightly reversed the action of the AO and held that the assessee is entitled to the relief claimed. We find no error in the order of the CIT(A) in view of the decision rendered in AUDA by the Hon ble Gujarat High Court. We therefore decline to interfere with the order of CIT(A). - Decided against revenue

Issues Involved:
1. Whether the activities of the assessee fall under the proviso to Section 2(15) of the Income Tax Act, thereby disqualifying it from being considered a charitable organization.
2. Whether the assessee is entitled to exemptions under Sections 11 and 12 of the Income Tax Act.
3. Treatment of specific project grants and their eligibility for deduction under Section 11(1)(d) of the Act.
4. Calculation and treatment of income, capital receipts, and application of income for the purposes of the Act.
5. Accumulation of income under Sections 11(1)(a) and 11(2) of the Act.

Detailed Analysis:

1. Applicability of Proviso to Section 2(15) of the Income Tax Act:
The primary issue was whether the activities of the assessee fall under the proviso to Section 2(15) of the Act, which excludes entities engaged in trade, commerce, or business from being considered charitable. The CIT(A) relied on the Hon'ble Gujarat High Court's decision in the case of AUDA vs ACIT, which held that activities of urban development authorities like the assessee do not fall under the proviso as they are mandated by statute to undertake urban development without a profit motive. The Tribunal upheld this view, confirming that the assessee's activities are not in the nature of trade, commerce, or business and thus do not attract the proviso to Section 2(15).

2. Entitlement to Exemptions under Sections 11 and 12:
The AO had denied the benefit of Sections 11 and 12, arguing that the assessee's activities were commercial in nature. However, the CIT(A) and subsequently the Tribunal found that the assessee's activities were for the advancement of general public utility without profit motive. Consequently, the assessee was entitled to exemptions under Sections 11 and 12. The Tribunal reiterated that the assessee, being a statutory body constituted under the Gujarat Town Planning and Urban Development Act, 1976, is not engaged in any commercial activities and thus qualifies for the exemptions.

3. Treatment of Specific Project Grants:
The CIT(A) held that grants received for specific purposes should not be treated as income but as capital receipts eligible for deduction under Section 11(1)(d). The Tribunal agreed, referencing various judicial precedents and accounting standards which support the view that such grants should be treated as capital receipts and not voluntary donations. The AO was directed to verify and compute the income accordingly, ensuring that specific project grants are not included as income but treated as capital receipts.

4. Calculation and Treatment of Income:
The CIT(A) provided detailed guidelines for the AO to follow in calculating the income of the assessee. This included:
- Treating non-specific grants as voluntary donations and allowing expenses from them as application of income.
- Treating specific project grants as capital receipts not eligible for accumulation under Section 11(1)(a).
- Ensuring that receipts categorized as capital in the balance sheet are treated as income from property held under trust.
- Allowing depreciation on fixed assets created from generic grants but not from specific project grants.

The Tribunal upheld these guidelines, ensuring that the AO correctly computes the income and application of income as per the Act.

5. Accumulation of Income:
The CIT(A) allowed the accumulation of income under Sections 11(1)(a) and 11(2), provided the conditions laid out in the guidelines were met. This included:
- Allowing accumulation only after applying the income towards the objects of the trust.
- Carrying forward any deficit to be set off against future income.
- Ensuring that expenditures from accumulated funds under Section 11(2) are not claimed as application of current year’s income.

The Tribunal found no error in these directions and upheld the CIT(A)’s order, ensuring proper accumulation and application of income as per statutory provisions.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)’s order which granted the assessee exemptions under Sections 11 and 12, and provided detailed guidelines for the treatment of grants, calculation of income, and accumulation of income. The decision was primarily based on the Hon'ble Gujarat High Court’s ruling in the case of AUDA, confirming that the assessee’s activities do not fall under the proviso to Section 2(15) and thus qualify for the claimed exemptions.

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