2021 (1) TMI 680 - AT - Income Tax

Exemption u/s 11 - entitlement of the assessee for registration under section 12 AA - applicability of second proviso to section 2 (15) - assessee under appeal is a body corporate constituted under Uttar Pradesh Urban Planning Development Act 1973 was filing return of income in the status of Local Authority and claiming exemption u/s.10(20A) earlier - assessee (appellant) has been given registration u/s.12AA by the CIT-II Agra w.e.f. 01.04.2003 vide order dated 21.10.2010 under the status of a charitable institution and thereafter it has been filing its return of income claiming exemption u/s 11 and showing Rs. Nil income - HELD THAT - Development of land and building acquisition of land by the authority had consistently been considered to be falling within advancement of the general public purpose. The advancement of public purpose has been considered by the statute to be charitable purpose and is as provided in the last limb of the definition given in section 2 (15) Assessee is the extended arm of the UP state and is discharging it statutory functions within the four corners of the Act. The assessee is part of welfare state and is discharging its duties and function as has been empowered by the Act and also by the Constitution of India for the advancement and welfare of general public. Assessee cannot be equated by with the private entrepreneur or coloniser or club or Association as it is a state under Article 12 of the Constitution of India and has duties towards all the citizens and resident of the area irrespective of caste creed religion sex etc . The charging of cess or fees by the assessee is only an incidental activities to the main and primary activities of the assessee continues to be development etc for the benefit of general public . Moreover charging of fees cess etc by the assessee for its activities were duly authorised by the act regulation and rules framed under the law - Discharge of duties by the state or by the state functioning cannot be termed as an activity which is trade commercial or business. The said activities were essentially done by the assessee for the discharge of the statutory duties and therefore the same cannot be termed as either trade commerce or business. In our view any activity can be termed as trade commerce or business if it is done with the purpose of earning the income or profit or in other words the driving forces for doing such activities were to earn profit/ income . In the case of the assessee the activities were undertaken by the assessee not for the purpose of earning the profit but were done in discharge of its statutory duties for general welfare of public of developing land and building in a regulated structured and planned manner. The charging of fees is only a by-product or incidental to main activity. We are further of view that for the purpose of regulating the activities of development creation and maintenance of infrastructure providing affordable housing etcit is necessary to charge some fees or cess as said activities could not be discharged for free.Though there mayalways be an element of subsidy or cross subsidy in the functioning of state authorities to provide maximum benefit to the most deserving class or community . Admittedly the revenue is the foundation and basis of every state action. No state or authority can function without the availability or generation of revenue. Hence merely on account of charging of fee or cess would not irresistibly lead to the conclusion that the activities ceases to be charitable as it will fall in proviso to section 2(15) Activities of the assessee were driven by the its obligation under the Act which were not neither trade nor commerce nor business and the charging of fees et cetera is only an incidental element for fulfilment of its obligation under the Act. - advancement of any other object of general public utility is an expression of wide amplitude and there are many activities like the activities of the assessee authority created under the statute which are neither in the nature of trade nor commerce nor business but were done for the advancement of public utility or benefit . Purposes of bringing the activities of the assessee under the rigors of proviso to section 2(15) it is essential that such activity should be in the nature of trade commerce or business. However as mentioned hereinabove the activities for the advancement of any other object public utility is a bigger set and activities of trade commerce or business may be incidentally forming part of advancement of any other object public utility. The reliance on the objects of the assessee by AO cannot form basis of coming to the conclusion that the assessee was doing commercial activities. Therefore the finding of the assessing officer that the assessee was carrying out the commercial activities was without any basis. Interest income on the fixed deposit - The income even if any earned by way of the interest income on the fixed deposit is also required to be exempted under section 11 of the Act, as there is no other source of income of the assessee other than doing the charitable activities .For the purpose of exemption of interest income we may rely upon the full bench decision in the matter of Hewlett Packard Global Soft Ltd. 2017 (11) TMI 205 - KARNATAKA HIGH COURT which on examining the exempt income under section 10 had allowed the exemption even on interest income if there is no other source of income except the exempt income as in present case - Appeal of assessee allowed.

Summary

Issues Involved:
1. Status of the appellant as AOP/BOI.
2. Applicability of Section 2(15) of the Income Tax Act.
3. Completion of assessment under Chapter IV and invoking provisions of Section 145(3).
4. Additions made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].
5. Denial of exemption under Section 11 of the Income Tax Act.

Detailed Analysis:

1. Status of the Appellant as AOP/BOI:
The appellant argued that the CIT(A) erred in holding that the AO was justified in adopting the status of the appellant as an Association of Persons (AOP) or Body of Individuals (BOI). However, this ground was not pressed by the appellant during the hearing, and thus, it was dismissed as not pressed.

2. Applicability of Section 2(15) of the Income Tax Act:
The core issue revolved around whether the appellant's activities were in the nature of trade, commerce, or business, which would invoke the proviso to Section 2(15) and deny the appellant the status of a charitable institution. The appellant, a statutory body constituted under the Uttar Pradesh Urban Planning and Development Act, 1973, argued that its activities were for the advancement of general public utility and not commercial in nature. The Tribunal noted that the appellant’s activities, such as acquiring land, developing infrastructure, and selling plots, were mandated by the statute and aimed at public welfare, not profit. The Tribunal relied on various judicial precedents, including the Allahabad High Court’s decision in the case of Lucknow Development Authority, which held that similar activities were charitable in nature. Consequently, the Tribunal concluded that the appellant's activities did not fall within the proviso to Section 2(15), and thus, the appellant was entitled to exemption under Section 11.

3. Completion of Assessment under Chapter IV and Invoking Provisions of Section 145(3):
The appellant contended that the CIT(A) erred in confirming the AO's action of completing the assessment under Chapter IV of the Income Tax Act and invoking provisions of Section 145(3). The Tribunal found that since the appellant was entitled to exemption under Section 11, the completion of assessment under Chapter IV and the invocation of Section 145(3) were not justified.

4. Additions Made by the AO and Confirmed by the CIT(A):
The AO made several additions, including:
- Rs. 1,30,72,364 out of Rs. 20,28,52,965, recognizing income against receipts shown in the 'project development fund' account.
- Rs. 3,59,03,019 being receipts in the 'infrastructure development fund' account.
- Rs. 3,58,61,640 being the excess shown in the 'income and expenditure' account.
- Other smaller additions related to capital expenditure, prior period expenses, and surplus in specific accounts.

The Tribunal held that these additions were not justified as the appellant's activities were charitable, and the receipts were in furtherance of its statutory obligations. The Tribunal directed the deletion of these additions.

5. Denial of Exemption under Section 11:
The authorities below had denied the benefit of exemption under Section 11, arguing that the appellant was engaged in commercial activities. The Tribunal, however, concluded that the appellant's activities were charitable, aimed at public welfare, and not commercial. Consequently, the appellant was entitled to exemption under Section 11. The Tribunal also noted that the interest income earned by the appellant was incidental to its charitable activities and thus eligible for exemption.

Conclusion:
The Tribunal allowed the appeals filed by the appellant for all the assessment years under consideration, holding that the appellant was entitled to exemption under Section 11 of the Income Tax Act. The Tribunal dismissed the appeals filed by the revenue, reaffirming that the appellant's activities were charitable and not in the nature of trade, commerce, or business.