2022 (3) TMI 886 - AT - Income Tax

Exemption u/s 11 - activities of the assessee are charitable in nature or not? - AO Compare the assessee with a private colonizer - HELD THAT - The main objective of the assessee authority is to develop houses at affordable cost for the public and to develop public utilities. The assessee Authority was created by enactment of Uttar Pradesh Urban Development and Planning Act, 1973 by Notification No. 1892/XXXVI- 2-21(DA)-72 dated 13.09.1974. In Uttar Pradesh Urban Development and Planning Act, it is mentioned that this Act is being enacted to tackle the problems of town planning and urban development. The assessee Authority has been constituted by the State Government and assessee Authority has no power to take decision on application of funds in contravention to the provisions of the UPUPD Act. The Authority thus cannot be said to be running for profit motive. If any income is earned over and above expenditure, it is used for development work in the city of Lucknow. Authority is just assisting State Government in development of towns which is for the welfare of the public. From the development undertaken by the appellant Authority, public is benefited at large. It is clear that the benefits of development undertaken by the appellant Authority is not restricted to an individual or particular group of individuals for which its objects should be considered charitable under forth limb of section 2(15) of Income-tax Act. Words other objects of general public utility have been decided in catena of decisions. The said expression is widest of connotation. Words general in the said expression is pertaining to a whole class. If the primary purpose and the predominant object are to promote the welfare of the general public, the purpose would be charitable purpose. Lucknow Development Authority is not engaged in carrying on any activity in the nature of trade, commerce or business or any activity in the nature of rendering any service in relation to any trade, commerce or business for a fee or any other consideration. The nature of activities of the assessee Authority, the purpose and manner of its formation and the objects for which it has been created goes to show that it is not engaged in carrying on any activity in the nature of trade, commerce or business. The objects of the assessee Authority do not, expressly or impliedly, provide for carrying on of trade, commerce or business. The L.D.A. is only rendering/ providing service to the general public on behalf of the Government without any profit motive or without earning profit. Lands, plots etc. acquired by the L.D.A. and allotted by it are allotted without earning profit after taking into account the direct and indirect expenses. Further, the L.D.A. is registered u/s 12AA of the Income-tax Act, as per the order of the Hon ble ITAT 2005 (7) TMI 668 - ITAT LUCKNOW and in pursuance of such order, registration has been granted by the Ld. Commissioner of Income Tax-I u/s 12AA of the Income Tax Act 1961, with effect from 01.04.2003 vide order dated 17.01.2006. Further, the registration u/s 12AA has never been revoked till date. We hold that the assessee had not violated the provisions of section 13(3) of the Act. In view of the above facts and circumstances and judicial precedents, we hold that the assessee is eligible for exemption u/s 11 of the Act and Assessing Officer is directed to allow the benefit of Section 11. Transferring certain amounts to IDRF account - HELD THAT - We find that this issue has already been dealt by the Hon'ble Allahabad High Court in the case of assessee itself whereby vide order 2013 (9) TMI 570 - ALLAHABAD HIGH COURT has held that the money transferred to this fund is to be utilized for the purpose of project as specified by the committee having constituted by the Government and the same could not be treated to be belonging to the authority or the receipt is taxable in its hand. Therefore, ground of the appeals are allowed.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act.
2. Alleged profit-making activities not falling under charitable purposes as envisaged under Section 2(15) of the Income-tax Act.
3. Application of provisions of Section 13(1)(c) read with Section 13(3) of the Income-tax Act.
4. Treatment of the appellant as a charitable institution.
5. Disallowance of various expenses and additions to income.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue is the denial of exemption under Section 11 of the Income-tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the exemption on the grounds that the appellant's activities were profit-making and not charitable. The Tribunal, however, noted that the appellant is a statutory authority established under the Uttar Pradesh Urban Planning and Development Act, 1973, with the objective of developing affordable housing and public utilities. The Tribunal emphasized that the appellant's activities had not changed since its inception and had been previously adjudged charitable by the Tribunal and the Allahabad High Court. The Tribunal held that the appellant's activities are not commercial in nature and are aimed at public welfare, thus qualifying for exemption under Section 11.

2. Alleged Profit-Making Activities:
The AO and CIT(A) argued that the appellant's activities, such as selling properties, charging interest, and collecting fees, were commercial and profit-oriented. The Tribunal, however, distinguished the appellant from private real estate developers, noting that the appellant is a government body with no profit motive. The Tribunal highlighted that any surplus income is plowed back for development purposes and not distributed as profits. The Tribunal referred to several judicial precedents, including the Supreme Court's judgment in Surat Art Silk Cloth Manufacturers Association, to support its view that incidental profits do not negate the charitable nature of an organization.

3. Application of Provisions of Section 13(1)(c) read with Section 13(3):
The AO and CIT(A) also invoked Section 13(1)(c) read with Section 13(3), arguing that the appellant provided benefits to its employees, which violated the provisions. The Tribunal rejected this argument, citing the Patna High Court's judgment in Tata Steel Charitable Trust, which held that employees do not fall under the specified persons in Section 13(3). The Tribunal concluded that providing benefits to employees does not disqualify the appellant from claiming exemption under Section 11.

4. Treatment of the Appellant as a Charitable Institution:
The Tribunal noted that the appellant had been granted registration under Section 12AA of the Income-tax Act, which had never been revoked. The Tribunal emphasized that the appellant's objectives and activities had been consistently recognized as charitable by various judicial authorities, including the Allahabad High Court. The Tribunal referred to the Allahabad High Court's judgment in the appellant's own case, which held that the appellant's activities are charitable and not hit by the proviso to Section 2(15).

5. Disallowance of Various Expenses and Additions to Income:
The AO had made several disallowances and additions to the appellant's income, including amounts transferred to the Infrastructure Development Reserve Fund (IDRF) and various expenses. The Tribunal held that these disallowances and additions become academic in light of the appellant's eligibility for exemption under Section 11. The Tribunal referred to the Allahabad High Court's judgment, which held that amounts transferred to the IDRF are not taxable as they are to be utilized for specified projects and do not belong to the appellant.

Conclusion:
The Tribunal allowed the appellant's appeals, holding that the appellant is eligible for exemption under Section 11 of the Income-tax Act. The Tribunal directed the AO to allow the benefit of Section 11 and dismissed the disallowances and additions as infructuous. The Tribunal's decision was based on the consistent judicial recognition of the appellant's activities as charitable and not commercial, and the appellant's compliance with the conditions for exemption under the Income-tax Act.