2021 (11) TMI 307 - AT - Income Tax

Denial of exemption u/s 11 - treatment of assessee as AO - proof of profit motive - CIT(A) held that assessee has lost its charitable character and the income has been rightly taxed in the status of an AOP as per law - Whether the activities carried on by the assessee are commercial in nature with the motive to earn profits? - as argued assessee has been created with the object of general public utility which is a charitable object within the meaning of Section 2(15), and is eligible for exemption under section 11 - whether, the activity of construction and sale of immovable property constitutes business ? - HELD THAT - Assessee undertakes projects/schemes on behalf of the State government and also through private negotiations. Activity of assessee was to construct housing projects on land provided by State Government or acquired by it and sell it to people belonging to different income groups. Thus, the assessee has consistently earned substantial profit in this activity. Therefore, the activity has been carried on with profit motive in the same manner in which a private builder would conduct his business. It can t be said that such activities are incidental to the main object of the trust. The activity of construction and sale of immovable property cannot be the object but only a mean to achieve the object of development of area in accordance with the plan. Therefore, while the object in a given case may be a charitable purpose, not involving profit, the activities undertaken by assessee in pursuance of the object, attained the colour of business. Each individual receipt from disposal of the property cannot be said to be income of the assessee available for charitable purpose because expenditure has to be incurred and has been incurred in acquiring land and construction thereon - only the surplus from this activity can be said to be the income derived from property held under trust. There is yet another angle, namely, that some meaning has to be placed on the content of sub-section (4A) of section 11 and especially on the words unless the business is incidental to attainment of the objective of the trust . The legislature postulates that a charitable institution may have to carry on incidental business for attainment of objective. If the argument of the Ld.AR is that, there is no profit motive in so far as the development authority is concerned and, therefore, there is no question of carrying on any business, then no meaning can be placed on the contents of this provision. As mentioned earlier that the assessee has carried on systematic activities in a regular manner for construction of Building as per plan, which have led to profit, and such activity is not incidental to the main object of town planning, therefore, it is clear that the assessee has carried on a business which is not incidental to attainment of objects of the authority. Subsection (4A) provides that no deduction shall be allowed under subsections (1), (2), (3) or (3A) from such profit. However, the incidence of taxation is lifted provided that-(i) the business is incidental to the attainment of the objective, and (ii) separate books of account are maintained in respect of such business. It is not the case of assessee that assessee maintained separate books of accounts as per section 11(4A). Being so, assessee can t be granted exemption under sec. 11 of the Act for both the assessment years. Grounds raised by assessee stands allowed for statistical purposes.

Issues Involved:

1. Whether the assessee should be assessed as an Association of Persons (AOP).
2. Whether the activities carried on by the assessee are commercial in nature with the motive to earn profits.
3. Whether the assessee, created with the object of general public utility, is eligible for exemption under section 11 of the Income Tax Act.

Detailed Analysis:

1. Assessment as Association of Persons (AOP):

The Tribunal analyzed the status of the assessee and concluded that the assessee should not be assessed as an AOP. The Karnataka Housing Board (KHB) is a statutory body established under the Karnataka Housing Board Act, 1962, and is a body corporate with perpetual succession. The Tribunal noted that the PAN allotted to the assessee confirms its status as an 'Artificial Juridical Person.' The Tribunal cited various cases, including CIT v. Children’s Education Society, to support the view that the assessment under a different status is bad in law. Therefore, the order passed under section 143(3) in the status of AOP was deemed incorrect and liable to be quashed.

2. Commercial Nature of Activities:

The Tribunal examined whether the activities of the assessee were commercial in nature. The assessee argued that its activities were driven by public welfare without a profit motive. The Tribunal noted that the primary objective of KHB, as per its annual reports, was to provide housing at affordable costs. However, the Assessing Officer (AO) observed that the assessee earned substantial profits from the sale of sites, apartments, and houses, often through open auctions to the highest bidder. The AO concluded that the activities were systematically commercial, citing the Uttarakhand High Court's decision in Queens Education Society. The Tribunal highlighted that the KHB Act restricts the Board from carrying on any trading or financing activity for profit. The Tribunal also noted that the profit rates for the relevant assessment years were 10% and 14.06%, respectively, indicating commercial activities.

3. Eligibility for Exemption under Section 11:

The Tribunal considered whether the assessee is eligible for exemption under section 11 of the Income Tax Act. The assessee contended that it was created with the object of general public utility and should be eligible for exemption. The AO and CIT(A) denied the exemption, arguing that the activities were commercial in nature and not charitable. The Tribunal referred to the Karnataka Housing Board Act, which mandates that the Board's activities be controlled and sanctioned by the State Government. The Tribunal observed that the assessee's activities, including the sale of houses and sites, were conducted with a profit motive, similar to private builders. The Tribunal emphasized that the predominant object of the activities was to earn profit, which disqualified the assessee from claiming exemption under section 11. The Tribunal cited various judicial rulings, including the Supreme Court's decision in Adityapur Industrial Area Development Authority, to support the view that the activities were in the nature of trade, commerce, or business.

Conclusion:

The Tribunal concluded that the assessee's activities were predominantly commercial and profit-oriented, disqualifying it from claiming exemption under section 11. The Tribunal upheld the AO's decision to assess the assessee as an AOP and deny the exemption. The appeal filed by the assessee was allowed for statistical purposes, indicating that the matter requires further examination or procedural compliance. The order was pronounced in the open court on 11th October 2021.

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