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2020 (9) TMI 247 - HC - Income TaxExemption u/s 11 - Whether the activities of the appellant AUDA can be said to be in the nature of trade, commerce or business as occurring in the first proviso to Section 2(15) ? - HELD THAT - The object and purpose for which the assessee is established/constituted under the provisions of the Gujarat Town Planning Act and collection of fees and cess is incidental to the object and purpose of the Act, even the case would not fall under second part of proviso to Section 2(15). We are of opinion that the Tribunal has committed a grave error in holding the activities of the assessee in the nature of trade, commerce or business and consequently holding that the proviso to Section 2(15) of the Act shall be applicable and therefore, the assessee is not entitled to exemption under Section 11. For the reasons stated above, it is held that the proviso to Section 2(15) of the Act shall not be applicable so far as assessee-AUDA is concerned and as the activities of the assessee can be said to be providing general public utility services, the assessee is entitled to exemption under Section 11 of the Act. Both the questions are therefore, answered in favour of the assessee and against the revenue.
Issues Involved:
1. Whether the Tribunal committed a substantial error of law in canceling the order of the Director of Income Tax (Exemption) passed under Section 12-AA(3) of the Income Tax Act, by overlooking the amendment to the first proviso to Section 2(15) of the Act, effective from April 01, 2009. Issue-wise Detailed Analysis: 1. Tribunal's Error in Canceling the Order of Director of Income Tax (Exemption) under Section 12-AA(3): The core issue revolves around whether the Tribunal erred in law by canceling the Director of Income Tax (Exemption)'s order under Section 12-AA(3) of the Income Tax Act, 1961, without considering the amendment to the first proviso to Section 2(15) of the Act, effective from April 01, 2009. The High Court referenced a previous judgment involving the same assessee, where it was established that the activities of the assessee could not be considered as trade, commerce, or business, despite the amendment. 2. Interpretation of "Trade, Commerce, or Business" in the Context of Charitable Purpose: The judgment extensively discusses the interpretation of "trade," "commerce," and "business" in the context of charitable purposes. It cites various Supreme Court and High Court decisions to elucidate that activities aimed at profit-making do not inherently qualify as charitable. For instance, the Supreme Court in Khoday Distilleries Ltd. v. State of Karnataka defined "trade" as the exchange of goods for money, while in State of Andhra Pradesh v. Abdul Bakhi & Bros., "business" was defined as an occupation aimed at profit. 3. Dominant Object Test: The judgment emphasizes the "dominant object test," which assesses whether the primary purpose of an entity's activities is charitable or profit-making. The Delhi High Court in Institute of Chartered Accountants of India held that an activity could be considered "business" if undertaken with a profit motive, but this is not always determinative. The dominant object of the activity must be charitable, and any incidental profit does not negate its charitable nature. 4. Case References Supporting the Assessee's Position: The Court referenced several cases supporting the assessee's position, including the Ahmedabad Urban Development Authority (AUDA) case, where it was held that AUDA's activities under the Gujarat Town Planning Act were not in the nature of trade, commerce, or business. Similarly, in the case of Lucknow Development Authority and Jodhpur Development Authority, the courts held that their activities were not aimed at profiteering and thus did not fall under the proviso to Section 2(15). 5. Application of the Proviso to Section 2(15): The judgment clarifies that the proviso to Section 2(15) aims to exclude entities engaged in trade, commerce, or business from claiming charitable status. However, genuine charitable activities that incidentally generate income do not fall under this proviso. The Court noted that the assessee's activities were statutory and aimed at public utility, not profit-making, thus not triggering the proviso. 6. CBDT Circular and Finance Minister's Speech: The Court considered the CBDT Circular No. 11/2008 and the Finance Minister's speech, which clarified that the proviso to Section 2(15) targets entities masking trade, commerce, or business activities as charitable purposes. Genuine charitable organizations should not be affected by this amendment. 7. Conclusion and Judgment: The Court concluded that the Tribunal erred in its interpretation and application of the proviso to Section 2(15). The assessee's activities were statutory and aimed at public utility, not profit-making. Therefore, the assessee was entitled to exemption under Section 11 of the Income Tax Act. The substantial question of law was answered in favor of the assessee and against the Revenue, leading to the dismissal of the appeal. Judgment: The appeal was dismissed, and the substantial question of law was answered in favor of the assessee and against the Revenue.
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