2025 (1) TMI 1541 - AT - Income Tax

Eligibility of exemption u/s 11 - assessee formed for the development of the twin cities of Ayodhya and Faizabad by the Government of Uttar Pradesh under the provisions of the Uttar Pradesh Urban Planning and Development Act 1973 - AO observed that in the Uttar Pradesh Urban Planning Development Act 1973 words like charity or charitable poor economically weaker subsidy / subsidized assistance upliftment were not mentioned - AO observed that the activities of the assessee were in the nature of real estate business and the provisions of the first proviso to section 2(15) were applicable to its case Whether the assessee is justified in not including funds collected and grants received on account of infrastructure activities in its income and expenditure account but carrying it directly to the balance-sheet on account of the plea that such income stood diverted by overriding title and could not be included in its own income? - HELD THAT - The question of whether a development authority can be regarded as a body indulged in objects of general public utility is no longer res integra after the decision of the Hon ble Supreme Court in the case of ACIT (Exemption) vs. Ahmedabad Development Authority 2022 (10) TMI 948 - SUPREME COURT wherein the Court held that bodies which carry out statutory functions and whose income was eligible to be considered for exemption u/s 10(20A) prior to 1.04.2003 but thereafter ceased to enjoy that benefit after deletion of that provision are not ipso facto precluded from claiming benefit as a GPU category charity under section 11 r.w.s. 2(15) of the Act. Statutory corporations Boards authorities commissions etc. by whatever named called in the fields of housing development town planning industrial development sector etc. were involved in the objects of general public utility and therefore were entitled to be considered as charities in the GPU categories. First issue raised viz that the activities of the appellate authority carried on as per its objects as laid down in section 7 of U.P.U.P.D.A. 1973 were not charitable activities do not hold any water after this decision of Hon ble Supreme Court which categorically states that statutory bodies engaged in Housing Development Term Planning etc. are involved in objects of general public utility and therefore are entitled to be considered as charities in the GPU category. It is observed that the Hon ble Allahabad High Court in the case of CIT vs. Lucknow Development Authority others (including the assessee authority) 2013 (9) TMI 570 - ALLAHABAD HIGH COURT has already held that the Development Authorities in appeal before it were carrying out their activities on non-commercial lines with no motive to earn profits and therefore would not be hit by section 2(15) of the Act as the aims and objects of the said authorities were admittedly charitable in nature. Therefore once the finding has been rendered by the Hon ble Supreme Court that the statutory bodies involved in Housing Development Town Planning etc. are involved in the objects of general public utility and the earlier finding of the Hon ble Allahabad High Court after examination of the objects of the authorities set up under the U.P.U.P.D.A. 1973 that their activities are charitable activities not hit by section 2(15) of the Act the orders of the ITAT Amritsar Bench in the case of Jammu Development Authority and Jalandhar Development Authority will have no application to the facts of the assessee s case or be a justification for the denial of exemption to it under sections 11 and 12 of the Income Tax Act 1961. The fact that the appellant authority has been constituted for the specific purpose of planned development and not for profit is evidenced both from the provisions of the Act under which it is constituted as also from the fact that the funds of the authority may not be utilized for any purpose other than the expenses incurred by the authority in the administration of the U.P.U.P.D.A. 1973. Furthermore as per section 58 of the Act upon dissolution of the authority such funds as are left over with the authority would be transferred to the State Government for the specific purpose of carrying out development which has not been fully carried out by the Authority. Thus the authority seems to satisfy the test laid down by the Hon ble Supreme Court in AUDA that it is a general public utility charity and there is no merit in the observation of the ld. Assessing Officer or the ld. CIT(A) that the sale and purchase of land renders it a commercial organization because the same are seen to be done for furtherance of its objectives of ensuring planned development of its development area and neither the ld. Assessing Officer nor the ld. CIT(A) have brought on record any facts that would suggest that these sales and purchases take place with a huge markup or at rates other than what have been prescribed under the UPUPDA 1973 or the Govt Orders issued under that Act that may render it ineligible for being regarded as a GPU charity that is eligible for exemption under section 11. AO or the CIT(A) or the Ld CIT(DR) have not till now brought on record any single instance of profiteering activity or pricing outside the ambit of the statute or the Govt orders issued thereunder while we have seen that almost all the valuation and pricing has been done on the basis of Govt Orders and instances of cross subsidization as envisaged of the AUDA order have been brought on record. Thus denial of exemption under section 11 is not justified and the additions made by the AO on account of the surplus in the income and expenditure account are hereby deleted. Addition on the issue of Infrastructure Development Reserve Fund (IDRF) - After analysis of the various legal pronouncements the provisions of the U.P.U.P.D.A. 1973 and the O.M. dated 15.01.1998 the plea that the assessee did not have any right title or interest over the said infrastructure fund and that it was merely a Nodal agency for implementing the projects of the State Government is fit to be rejected. The Learned AR has pointed to some inconsistencies in the order of the Delhi Bench and also pointed out that the Adityapur Development Authority ( whose case was followed by the Hon High Court) was seeking exemption under another section as also the fact that one of the items of receipt ie stamp duty was collected by the state Govt but to our mind those arguments are not material because the specific provision of the U.P.U.P.D.A. 1973 render diversion of income to the state prior to the dissolution of the authority as an impossibility and the Govt Order dated 15.01.1998 could not be read as being issued for a purpose that was vires of the Act. It could only be read as issued under section 41 of the U.P.U.P.D.A. 1973 for better administration of the Act by channelizing some portion of the funds to certain preferential areas of the assessee s objects and nothing more. Therefore following the Judgment of Mussoorie Dehradun Development Authority 2022 (5) TMI 1389 - UTTARAKHAND HIGH COURT we hold that the Infrastructure Development and Reserve Fund is also the fund of the Assessee authority and liable to be considered in its hands. Alternative argument against routing this amount through the income and expenditure account pointing out that because of the effect of the OM the receipts to the fund were capital receipts and were therefore to be considered as accretion to the corpus of the Authority rather than its income - We observe that the receipts listed the OM dated 15.01.1998 are not voluntary contributions with specific directions within the meaning of section 11 (1)(d) of the Act but it is also noted that the OM dated 15.01.1998 issued under section 41 of the UPUPDA 1973 earmarks certain portion of receipts to the infrastructure fund for capital expenditure and the Hon. Supreme Court has held in the case of Padmaraje. R. Kadambande 1992 (4) TMI 215 - SUPREME COURT that it is settled law that in order to find out whether a receipt is a capital receipt or a revenue receipt one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. The nature of the receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Therefore we deem it appropriate to restore this matter back to the file of the assessing officer to analyze the nature of the receipts with reference to the OM dated 15.01.1998 and thereafter take an appropriate decision. Addition on account of receipts shown in the Tourism Development Grant UP - Since the authority is an independent entity having its own funds and further that as per the provisions of section 20 of the U.P.U.P.D.A. 1973 all Grants received by the authority also constitute its funds and the power to divert the funds to the state Govt only arises upon dissolution of the authority under Section 58 of U.P.U.P.D.A. 1973 we hold that the funds received by way of tourism grant are the funds of the authority and not the state Govt. However we agree with the assessee that before any portion of the same could be held to be its income and added to surplus the expenditures incurred against the same have to be have to be allowed as application against that receipt. However we also note the assessee s submissions that the grants were received from the state Govt for setting up certain specific tourism projects in Ayodhya Faizabad. If true that would make them capital receipts which are not income as per section 2(24) and therefore the funds would form part of the corpus whether specifically mentioned or not. Since the grants have been received for execution of certain specific projects and creation of facilities for development of tourism. Therefore they cannot be added back to the assessees income and must be held to be part of the corpus. Claim of prior period expenditures - As observed after consideration of arguments of both Parties that the issue is linked to the allowance of exemption under section 11. Since the exemption under section 11 has been held to be allowable amounts expended during the year towards the objectives of the Authority have to be held as application in the present year no matter that they pertained to earlier years especially because the authority maintains its accounts on cash basis and has not claimed them as application in a previous year. The Addition made in this regard is deleted. Depreciation which pertain to assessment years 2017-18 2018 -19 - CIT(A) had granted the assessee relief on this account as its income had been assessed under the provisions of income from Business or profession . However now that the Authority is to be assessed as per the provisions of section 11 depreciation would clearly be disallowable in its hands under section 11(6) unless the authority could show that it had not claimed expenditure on acquiring the asset as application of income. To enable the assessee to present the necessary evidences in this regard we restore the matter to the file of the assessing officer for this purpose.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the activities of the appellant authority constitute activities for the advancement of objects of "general public utility" under section 2(15) of the Income Tax Act, thereby making it eligible for exemption under sections 11 and 12 of the Act.
• Whether the funds collected and grants received on account of infrastructure activities should be included in the income and expenditure account or be considered as diverted by overriding title.
• Whether the appellant authority's activities are in the nature of trade, commerce, or business, thereby disqualifying it from exemption under section 11 due to the proviso to section 2(15).
• Whether the appellant authority violated section 13 of the Income Tax Act by providing benefits to its employees, thereby affecting its eligibility for exemption under section 11.
• Whether the Infrastructure Development Reserve Fund (IDRF) and Tourism Development Grant should be considered as part of the appellant's income.
• Whether the prior period expenses claimed by the appellant should be allowed as deductions.
• Whether depreciation should be allowed under section 11(6) of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility for Exemption under Sections 11 and 12

• Relevant Legal Framework and Precedents: The judgment considers the applicability of section 2(15) of the Income Tax Act, which defines "charitable purpose" and includes the advancement of any other object of general public utility. The judgment also references the Supreme Court's decision in ACIT vs. Ahmedabad Urban Development Authority, which held that statutory bodies involved in housing development, town planning, and industrial development are considered charities in the GPU category.
• Court's Interpretation and Reasoning: The court held that the appellant authority's activities fall under "general public utility" as they are involved in town planning and development, which are considered charitable activities under section 2(15).
• Application of Law to Facts: The court found that the appellant authority's activities are not commercial in nature, as they are conducted for the purpose of planned development and not for profit.
• Conclusions: The court concluded that the appellant authority is eligible for exemption under sections 11 and 12 of the Income Tax Act.

Issue 2: Infrastructure Development Reserve Fund (IDRF) and Tourism Development Grant

• Relevant Legal Framework and Precedents: The court considered the provisions of the Uttar Pradesh Urban Planning and Development Act, 1973, and the Office Memorandum dated 15.01.1998, which directed the creation of the IDRF.
• Court's Interpretation and Reasoning: The court held that the IDRF and Tourism Development Grant are part of the appellant authority's funds and should be included in its income and expenditure account. The court rejected the argument that these funds were diverted by overriding title to the State Government.
• Conclusions: The court directed the assessing officer to analyze the nature of the receipts with reference to the Office Memorandum and take an appropriate decision on the quantum to be routed through the income and expenditure account.

Issue 3: Violation of Section 13

• Relevant Legal Framework and Precedents: Section 13 of the Income Tax Act disallows exemption under section 11 if the income of the trust is used for the benefit of specified persons.
• Court's Interpretation and Reasoning: The court held that the employees of the appellant authority do not fall under the specified category of persons in section 13(3) and that the concessions provided to them were part of a government policy.
• Conclusions: The court concluded that there was no violation of section 13, and the appellant authority is entitled to exemption under section 11.

Issue 4: Prior Period Expenses and Depreciation

• Relevant Legal Framework and Precedents: The court considered the provisions of section 11 of the Income Tax Act, which allows deductions for application of income.
• Court's Interpretation and Reasoning: The court held that prior period expenses paid during the year should be allowed as application of income, as the appellant maintains its accounts on a cash basis.
• Conclusions: The court allowed the deduction of prior period expenses and directed the assessing officer to verify the depreciation claim.

3. SIGNIFICANT HOLDINGS

• The court held that the appellant authority's activities are charitable in nature, falling under "general public utility," and are eligible for exemption under sections 11 and 12 of the Income Tax Act.
• The court rejected the argument that the IDRF and Tourism Development Grant were diverted by overriding title and directed their inclusion in the income and expenditure account.
• The court found no violation of section 13, as the benefits provided to employees were part of a government policy and not for the benefit of specified persons.
• The court allowed the deduction of prior period expenses and directed the verification of the depreciation claim.