Charitable institutions- not conducting affairs on commercial lines with motive to earn profit, and fulfilling objects of public utility can be allowed exemption even if profit is earned - CIT vs. Lucknow Development Authority

[CA DEV KUMAR KOTHARI]

Statutory provisions - Section 2(15), 11,12,13 12AA of the Income-tax Act, 1961.

Circular No. 11/2008, dated 19-12-2008

Case laws relied on by parties and referred by the Court:

P.C. Raja Ratnam v. Municipal Corpn. of Delhi 1989 (9) TMI 98 - SUPREME Court

Christian Children Fund v. Municipal Corpn. of Delhi 1994 (5) TMI 260 - SUPREME COURT OF INDIA

Addl. CIT v. Surat Art Silk Cloth Manufacturer Assocaition 1979 (11) TMI 1 - SUPREME Court

CIT v. Lucknow Industrial Development Authority 2011 (8) TMI 979 - ALLAHABAD HIGH COURT

CIT v. Krishi Utpadan Mandi Samiti 2009 (12) TMI 13 - HIGH COURT OF ALLAHABAD

Shri Sarafa Association v. CIT 2006 (11) TMI 93 - HIGH COURT, MADHYA PRADESH

Director of Income-tax (Exemption) v. Govindu Naicker Estate 2009 (1) TMI 114 - MADRAS HIGH COURT

CIT v. Gujarat Maritime Board 2007 (12) TMI 7 - SUPREME COURT OF INDIA

CIT v. Andhra Pradesh State Road Transport Corpn. 1986 (3) TMI 1 - SUPREME Court

Gestetner Duplicators (P.) Ltd. v. CIT 1978 (12) TMI 1 - SUPREME Court

CIT v. U.P. Forest Corpn. Ltd. 2010 (5) TMI 752 - ALLAHABAD HIGH COURT

The assessee was a 'Statutory Authority' duly established under the provisions of the Uttar Pradesh Planning and Development Act, 1973.The assessee carried activity of acquiring land, development of plots and construction residential as well as commercial places and sale thereof. Assessee claimed exemption under section 11 of entire income thus filed return showing the NIL income.

In view of the Assessing Officer the assessee was making huge profit, paying lower price to land owners , selling spaces at high price just like other colonizers, thus all activities of the assessee were beyond the purview of charitable purposes, the assessee was carrying business just like other property dealers, and the income earned by the assessee was not eligible for the benefits available under section 11.

The Commissioner of Income-tax (Appeals) / CIT(A) allowed appeal and exemption was allowed for entire income. The CIT(A), after examining the entire issue directed the AO to compute the income of the assessee in the manner specified under Section 11 of the Act, by observing that once registration under Section 12AA has been granted to the assessee, the AO is bound by such grant of registration and he has necessarily computed the income under Section 11 of the Act by taking the different report in Form-10B.

On appeal of the Department the Tribunal dismissed the appeals filed by the Department and confirmed order of CIT(A)/ Then the Department preferred the appeals before the High Court.

In appeal for different years the following substantial questions of law were framed:—

"Whether keeping the facts and circumstances of the case, the Tribunal had committed substantially illegal by holding that the income of the assessee is exempted under Section 11 of the Income Tax Act, though there is no condition that no profit should be earned by its activities and the profit earned will not be distributed amongst the stakeholders and the finding of the Tribunal with regard to exemption under Section 12 of the Act is also substantially illegal ?"

"Whether, by assuming registration under Section 12AA of the Income-tax Act and exempting income of the Assessee without considering the dispute in terms of Sections 11, 12 & 13 of the Income-tax Act coupled with nature of activities, the Tribunal has acted arbitrarily or substantially illegally ?"

"Whether the learned Income Tax Appellate Tribunal was correct in law in holding that without exhausting the provisions contained in section 143(2) of the Act the proceedings initiated by the Assessing Officer by issuing notice u/s 148 of the Act were not valid in the given facts and circumstances of the case".

Arguments of the counsels of revenue:

Before the High Court also, the counsel of revenue contended that the assessee is not on different footing from private colonizers and was making huge profits by giving compensation for land which is less than the market value of the actual landowners.

That in case of a trust, if there is income derived from property held under trust or from voluntary contributions and to ascertain whether in the case of the assessee the character of income falls under anyone of the two categories envisaged in Sections 11(1)(a), (b), (c), and (d), the factual activities being carried out by the assessee is to be examined.

The assessee is engaged in the activity of acquiring land, development of plots and construction residential as well as commercial places and sale thereof.

The sales are also undertaken through auction process and sold to the highest bidder to earn more and more profits.

The said activities are "trade" in nature and liable to tax.

Thus, the activities being in the nature of trade and as such the benefit which is extended to charitable activities are not available as per the ratio laid down in the cases of P.C. Raja Ratnam v. Municipal Corpn. of Delhi 1989 (9) TMI 98 - SUPREME Court; and Christian Children Fund Inc. v. Municipal Corporation of Delhi 1994 (5) TMI 260 - SUPREME COURT OF INDIA.

The assessee is not on different footing from private colonizers and was making huge profits by giving compensation for land which is less than the market value of the actual landowners.

As regards the claim of providing public amenities, private colonizers were also providing similar facilities. According to learned counsel, (i) assessee is a huge profit making agency for which it is taking money from general public;

(ii) assessee did not engage in any charitable and if assessee developed any institution of public importance, the cost was recouped from the public at large;

(iii) the objects/activities of the assessee were commercial in nature and they did not involve any charity;

(iv) assessee also auctions plots at market rate and this does not involve any charity; and

(v) in every activity of the assessee there was a scent of commercialization/profit motive and infrastructure/facilities provided by assessee are also provided by private builders also.

(vi) the Tribunal has grossly erred in holding that the assessee authority was not established for commercial purposes, but for charitable purposes.

(vii) that the impugned orders passed by the Tribunal may kindly be set aside and restore the order passed by the Assessing Officer.

Arguments of counsel of assessee:

That as per Section 4 of the Uttar Pradesh Planning and Development Act, 1973, the assessee's object is "an act to provide for the development of certain areas of Uttar Pradesh according to plan and for matters ancillary thereto".

The Act declared the assessee is an "Authority" under Section 7. The objects of the Authorities are as under:—

"7. Objects of the Authority.—The objects of the Authority shall be to promote and secure the development of the development area according to plan and for that purpose the Authority shall have the power to acquire, hold, manage and dispose of land and other property, to carry out building, engineering, mining and other operations, to execute works in connection with the supply of water and electricity, to dispose of sewage and to provide and maintain other services and amenities and generally to do anything necessary or expedient for purposes of such development and for purposes incidental thereto:

Provided that save as provided in this Act nothing contained in this Act shall be construed as authorizing the disregard by the authority of any law for the time being in force."

That as per Section 58 of the Act, in case of dissolution of the authority, the entire assets will be vested with the State Government.

So, no profit of interest is involved.

Up to the assessment year 2002-03, the assessee was also enjoying exemption from income tax, under Section 10(20A) of the Act.

On deletion of Section 10(20A) and insertion of Explanation in Section 10(20) by the Finance Act, 2002, applicable w.e.f. 01.04.2003, the assessee sought registration under Section 12A of the Act, which has been allowed as per order of the Tribunal.

That the income of assessee is for "charitable purposes" as defined in Section 2(15) of the Act, which cover the objects for "advancement of any other object for General Public Utility".

Section 2(15) of the

The term "objects of general public utility" had been extensively dealt with and defined, to meant that where the objects of an institution cover the public at large or a section of public the objects are to be held to the "objects of general public utility" as meant in Section 2(15) of the Act. For this purpose, he relied on the ratio laid down in the case of Additional CIT, v. Surat Art Silk Cloth Manufacturer Association, 1979 (11) TMI 1 - SUPREME Court

In the case of CIT v. Lucknow Industrial Development Authority 2011 (8) TMI 979 - ALLAHABAD HIGH COURT (copy of which is available on record), the Hon'ble High Court has held that the assessee being a "Statutory Authority" which was established under the Uttar Pradesh Industrial Area Development Act, 1976, is entitled to registration under Section 12AA of the Act.

In the case of CIT v. Krishi Utpadan Mandi Samiti, 2009 (12) TMI 13 - HIGH COURT OF ALLAHABAD ,where it was observed that the Samiti is entitled for the registration under Section 12AA of the Act.

Therefore the counsel of assessee made a request that the appeals filed by the department may kindly be dismissed.

Analysis of judgment:

It is undisputed fact that the assessee is a "Statutory Authority" which was established under the provisions of the Uttar Pradesh Planning and Development Act, 1973.

In the instant case, prior to 1^st April, 2003, the assessee were enjoying exemption under Section 10(20A) and Section 10(29).

When these provisions were amended w.e.f. 1st April, 2003, then the necessity arose to register these institutions under Section 12A.

In view of the objects, there is no good reason for holding that statutory bodies could not be treated as "charitable" within the meaning of Section 2(15).

The object of the "Authority" is to provide shelter to the homeless people, therefore, there is no objectionable material to treat these institutions as non-charitable.

The registration under Section 12A is mandatory to claim exemption under Sections 11 & 13, but registration alone cannot be treated as conclusive.

It is always open to Revenue Authorities, while processing return of income of these assessees, to examine the claim of the assessees under Sections 11 and 13 and give such treated to these institutions as is warranted by the facts of the case.

Revenue Authorities are always at liberty to cancel the registration under Section 12AA(3).

Moreover, it may be mentioned that the benefit of Sections 11 is not absolute or conclusive. It is subject to control of Sections 60 to 63.

If it is found by keeping in view the provisions of Sections 60 to 63 that it is not so includible then such income does not qualify for any relief.

The contention that the assessee are earning profit has no merit as per the ratio laid down in the case of Shri Sarafa Association v. CIT 2006 (11) TMI 93 - HIGH COURT, MADHYA PRADESH, where it was observed that "the promotion of commercial trade is a charitable purpose under Section 2(15) of the Act". In the case of Director of Income-tax (Exemption) v. Govindu Naicker Estate2009 (1) TMI 114 - MADRAS HIGH COURT, it was observed that the construction of commercial complex by charitable trust is eligible.

If the objects of the "Authority" is charitable as public utility then the benefit being a charitable trust is eligible as per the ratio laid down in the case of CIT v. Gujarat Maritime Board 2007 (12) TMI 7 - SUPREME COURT OF INDIA, where it was observed that:—

'... in Section 2(15), namely, "any other object of general public utility". From the said decisions it emerges that the said expression is of the widest connotation. The word "general" in the said expression means pertaining to a whole class. Therefore, advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose [CIT v. Ahmedabad Rana Caste Association 1981 (4) TMI 10 - SUPREME Court]. The said expression would prima facie include all objects which promote the welfare of the general public. It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be served. If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose. When an object is to promote or protect the interest of a particular trade or industry that object becomes an object of public utility, but not so, if it seeks to promote the interest of those who conduct the said trade or industry Commissioner Of Income-Tax, Madras Versus Andhra Chamber Of Commerce- 1964 (10) TMI 19 - SUPREME Court If the primary or predominant object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the institution from being a valid charity [Additional Commissioner of Income-Tax, Gujarat Versus Surat Art Silk Cloth Manufacturers Association- 1979 (11) TMI 1 - SUPREME Court].'

The High Court confirmed the order of Tribunal and held that the assessee is entitled to exemption considering important  facts including that no material was brought on record to suggest that    assessee was conducting its affairs on commercial lines with motive to earn and distribute profit

or

that assessee  had deviated from its objects as detailed in trust deed.

The activities of the trust should be carried out on commercial lines with intention to make profit if the proviso to section 2(15) is to be applied,

Where the trust is carrying out its activities on non-commercial lines with no motive to earn profits, for fulfillment of its aims and objectives, which are charitable in nature and in the process earn some profits, the same would not be hit by proviso to section 2(15).

The aims and objects of the assessee-trust are admittedly charitable in nature, the Registration u/s 12A continues.

The intention of the trustees and the manner in which the activities of the charitable institution are undertaken are highly relevant to decide the issue of applicability of proviso to section 2(15).

The Assessing Officer has not pointed out any defect in computation of income as per section 11 as submitted in Form-XB, but merely observed that the activities of the assessee are not charitable.

The activities of the assessee are genuine. So, then it is so, then there is no reason to interfere with impugned orders passed by the Tribunal. The same are hereby sustained along with reasons mentioned therein.

The assessee is an "Autonomous Authority" which is established for the purpose of predominant of development the area and provide to shelter to the homeless people within the State of U.P. The management and control of the Authority is essentially with the State Government and there is no profit motive as the income earned by the Authority is deployed for the development of the State. The ratio laid down in the case of CIT v. Andhra Pradesh State Road Transport Corpn. 1986 (3) TMI 1 - SUPREME Court were applicable and applied.

Section 12AA of the Act lays down the procedure for registration in relation to the conditions for applicability of Sections 11 & 12 as provided in Section 12A. Therefore, once the procedure is complete as provided in sub-section (1) of Section 12AA and a certificate is issued granting registration to the trust or institution the certificate is a document evidencing satisfaction about (i) the genuineness of the activities of the trust or institution, and (ii) about the objects of the trust or institution. Section 12A stipulates that the provisions of Sections 11 & 12 shall not apply in relation to income of a trust or an institution unless the conditions stipulated therein are fulfilled. Thus, granting of registration under Section 12AA denotes that the conditions laid down in Section 12A stand fulfilled. The effect of such a certificate of registration under Section 12AA, (and also continuation of such registration added by author) cannot be ignored or wished away by the Assessing Officer by adopting a stand that the trust or institution is not fulfilling the conditions for applicability of Sections 11 & 12.

The Court also referred to C.B.D.T. Circular No. 11/2008 dated 19.12.2008, and meaning of 'Relief of the poor' which encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid.

As per Circular also the rntities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under Section 11(4A) or the seventh proviso to Section 10(23C).

Court held that mere selling some product at a profit will not ipso facto hit assessee by applying proviso to Section 2(15) and deny exemption available under Section 11. The intention of the trustees and the manner in which the activities of the charitable trust institution are undertaken are highly relevant to decide the issue of applicability of proviso to Section 2(15).

The Court noted that there is no material/evidence brought on record by the revenue which may suggest that the assessee was conducting its affairs on commercial lines with motive to earn profit or has deviated from its objects as detailed in the trust deed of the assessee. In these facts and circumstances of the case, the proviso to Section 2(15) is not applicable to the facts and circumstances of the case, and the assessee was entitled to exemption provided under Section 11 for the relevant assessment year.

The Court also noted finding that the "Authority" had been maintaining infrastructure, development and reserve fund IDRF as per the notification dated 15.01.1998, the money transferred to this funds is to be utilized for the purpose of project as specified by the committed having constituted by the State Government under the said notification and the same could not be treated to be belonging to the "Authority" or the receipt is taxable nature in its hands. For this reason also, it appears that the funds are utilized for general utility.

The Assessing Officer has not given any defective in computation of income as per Section 11 as submitted in Form-XB, but observed that the activities of the assessee are not charitable. The activities of the assessees are genuine. So, then it is so, then we find no reason to interfere with impugned orders passed by the Tribunal. The same are hereby sustained along with reasons mentioned therein.

In the case of CIT v. U.P. Forest Corpn. Ltd. 2010 (5) TMI 752 - ALLAHABAD HIGH COURT., observed that the Forest Corporation being an statutory entity is entitled for the registration under Section 12A of the Act. The said observations was upheld by the Hon'ble Apex Court vide its order dated 12.05.2011 in Special Leave Petition No. (Civil) No. 2590/2011.

In view of the above the High Court answered the substantial questions of law in favour of the assessee and against the department and the appeals filed by the department was dismissed, as stated above.