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TMI Blog2015 (10) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... , sale of scrap, tender forms etc.). If interest, rent and other income are excluded and compared with the expenditure on operations incurred by the Assessee, it becomes clear that the Assessee does not have profit motive. The proviso to Sec.2(15) of the Act is therefore not applicable to the case of the Assessee. We therefore hold that the Assessee is entitled to the benefits of Sec.11 of the Act for the impugned assessment years. The AO has not disputed the conditions necessary for allowing exemption u/s.11 of the Act, except the applicability of proviso to Sec.2(15) of the Act. In view of our conclusions that the said proviso is not applicable to the case of the Assessee, we hold that the Assessee’s income is not includible in the total income and therefore the income returned by the Assessee is directed to be accepted. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by it. The Assessee receives ETP & supervision charges from the State Government, Central Government and Urban Local Bodies (ULBS) on the works executed by it. 7. For the AY 2011-12 the following activities constituted major portion of receipts:- Particulars As on 31.3.2011 (in Rs.) Establishment, Administration & Supervision charges 52,75,55,713 Water charges 26,91,11,444 Interest 15,63,96,764 Rent 70,80,155 Other Income 3,33,10,495 Total 99,34,54,570 8. The AO noted that that the assessee has shown a total income of ₹ 99,34,54,570 for the current assessment year from Collection of establishment, administration and supervision charges, water charges, interest etc. The assessee has also shown income exclusively collected from the ULB's and consumers in the form of establishment, supervision and water charges to the tune of ₹ 79 crores for AY 2011-2012. The assessee has shown an excess income over expenditure of ₹ 25,00,62,435 in the income and expenditure A/c after making all the adjustments. 9. The details of 'other income' earned by the assessee were as follows:- Particulars Amount In Rupees Fines 2982789 Sale of tender forms 9625779 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... storage and water power subject to the provisions of entry 56 of List II." Thus, it is the obligation of the state government to provide for water supplies, water storage and drainage facilities to the people of the state. To fulfill the above said obligation, the Government of Karnataka formed the KUWSD Board by an enactment called 'Karnataka Urban Water Supply & Drainage Board Act - 1973'. The preamble to this Act mentions the objects of enactment as follows:- "To undertake the investigation, preparation and execution of schemes for the regulation and development of drinking water and drainage facilities in the urban areas, it is considered necessary to have a statutory board at the State level which will help in bringing about co-ordination in the activities relating to the implementation of such schemes". Thus the formation of the KUWSD Board and the functions/activities of the assessee Board are only to fulfill the obligations thrust on the State Government by the Constitution of India. Neither the State Government nor the assessee has any intention to make any profit, which is an essential element to be considered as having engaged in the nature of trade, commerce or busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablishment, salaries and pension liabilities of the Board. Thus, the assessee has to act in strict adherence with the Government directions and regulations while executing the projects as also while recovering its cost as ETP charges, water charges etc. 16. The Assessee explained that its main source of income was from ETP charges and Water Charges. ETP Charges 17. During the year, the assessee has earned ETP charges of ₹ 52,75,55,712. The details of the same are as per Schedule 16 of the financial statements is reproduced below:- Sl. No. Particulars Credit Rs. 1 Establishment Charges 39,26,39,327 Tools & Plant Charges 4,79,41,726 Supervision Charges 89,58,854 Contingency 7,80,15,805 Total 52,75,55,712 Cl Balance 52,75,55,712 These charges have been collected strictly in accordance with Rule 4 (b) of Appendix III of Karnataka Public Works Accounts Code Volume II. Water Charges 18. During the year, the total water charges earned is ₹ 26,91,11,444 as per Schedule 17 of the financial statements which is reproduced below:- Sl.No. Particulars Credit (Rs.) 1 Water Charges ACTUALLY received 5,27,32,721 2 Water Charges receivable 21,63,78,723 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. Further, the Assessee drew attention to the speech of Finance Minister dated 29-2-2008 which clarifies that the proviso is not intended to be applicable to genuine charitable organizations which do not carry regular trade, commerce or business or rendering services in relation to such trade commerce or business. The memorandum explaining Finance Bill of 2008 reported in 298 ITR (Statue) 190, clarifies that only the entities operating in commercial lines and which are claiming exemption of their income either U/s 10(23) or sec. 11 of the Income-tax Act have been sought to be excluded from the definition of 'charitable purpose' and not 'genuine charitable institution' like the assessee. Since the term "trade, commerce and business" have been mentioned together in section 2(15) of the Act, it has to mean that the activity has to be systematic and organized activity carried out with the said purpose and objective of making profit. For this purpose, reliance was placed on the decisions of the Hon'ble Supreme Court in the case of Loka Shikshana Trust Vs. CIT reported in 101 ITR 234 (SC) and CIT (Addl) Vs. Surat Art Silk Cloth Manufacturers Association reported in 121 ITR 1 (SC). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice of project supervision against the receipt of Establishment, Supervision and Administration charges (ETP charges) from ULBS and sale of water against a fee/cess and these factors clearly indicate that the Assessee's activities are in the nature of business/commerce. Though supply of water might be a constitutional duty of the Government, the fact that the Assessee facilitates performance of such duty will not render the Assessee's activity as one without any profit motive. The fact that the water charges are levied are low does not mean that there was lack of profit motive. Rather it indicates inefficient operation of the Assessee. The fact that the Assessee executes project on behalf of the ULBS and not for private parties cannot be the basis to hold that the Assessee's activities are not in the nature of trade or commerce. 27. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. 28. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assessee reiterated submissions as were made before CIT(A) on the applicability of the proviso to Sec.2(15) of the Act. He also drew our atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the provision of drinking water and drainage facilities; (ii) planning and preparing of schemes including schemes covering areas falling within the jurisdiction of more than one local authority for the purpose of providing the supply of drinking water or drainage facilities; (iii) executing such schemes under a phased programme for the provision of drinking water and drainage facilities within the areas of local authorities to which such schemes relate ; (iv) operation and maintenance of drinking water supply and drainage undertakings either wholly or in part and subject to such terms and conditions as the Government may specify; (v) levy and collection of water rates, fees, rentals and other charges in respect of such undertakings as the State Government may specify. (b) providing technical assistance or giving advice to local authorities in the execution and maintenance of urban water supply and drainage works; (c) establishing and maintaining schemes incidental to urban water supply and drainage such as testing of water, designing of plant for purification of water, conducting research relating to urban water supply and maintaining farm schemes; (d) any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any water supply or sewerage undertaking vesting in it, levy rates, fees, rentals and other charges and may vary such rates, fees, rentals and other charges from time to time in order to provide sufficient revenue,- (a) to cover operating expenses, taxes and interest payments and to provide for adequate maintenance and depreciation; (b) to meet repayment of loans and other borrowings; (c) to finance normal year to year improvements; and (d) to provide for such other purposes beneficial to the promotion of water supply and sewerage." 33. It can be seen from the powers of the Assessee to levy and collect water charges, fees etc., cannot have any element of profit and is based only on the requirements for fulfilment of the purposes set out in Sec.31A of KUWSB Act. In all other respects the Assessee only acts as a person who executes the scheme approved by the Government for ULBs. Prior to the introduction of the proviso to Section 2(15) of the Act, there was no dispute that the Assessee was established for charitable purposes. The income derived by the Assessee is in the form of collection of water and sewerage charges. The dominant and main object of the Assessee as we have alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of any other fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States, shall not form part of the total income under the Act. The prescribed authority withdrew the approval granted to the Assessee consequent to the insertion of the proviso to Sec.2(15) of the Act, on the ground that the Assessee was deriving rental income from letting out space for rent during trade fairs and exhibitions, was deriving income from sale of tickets and income from food and beverage outlets. The said withdrawal was challenged by the Assessee before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had to go into the question as to the scope of the proviso to Sec.2(15) of the Act. The Hon'ble Delhi High Court has laid down the following very important principles as to how the proviso to Sec.2(15) of the Act has to be interpreted. (i) The proviso to Sec.2(15) of the Act introduced by virtue of the Finance Act, 2008 with effect from 01.04.2009 has two parts. The first part has reference to the carrying on of any activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a character. (v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. If the driving force is not the desire to earn profits but to do charity, the exception carved out in the first proviso to Section 2(15) of the said Act would not apply. (vi) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above. (vii) Section 2(15) is only a definition clause. Section 2 begins with the words, _in this Act, unless the context otherwise requires‖. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent and other income (comprising of hire charges, fines, sale of scrap, tender forms etc.). If interest, rent and other income are excluded and compared with the expenditure on operations incurred by the Assessee, it becomes clear that the Assessee does not have profit motive. The proviso to Sec.2(15) of the Act is therefore not applicable to the case of the Assessee. We therefore hold that the Assessee is entitled to the benefits of Sec.11 of the Act for the impugned assessment years. The AO has not disputed the conditions necessary for allowing exemption u/s.11 of the Act, except the applicability of proviso to Sec.2(15) of the Act. In view of our conclusions that the said proviso is not applicable to the case of the Assessee, we hold that the Assessee's income is not includible in the total income and therefore the income returned by the Assessee is directed to be accepted. 37. Several other contentions regarding applicability of Sec.10(2) of the Act, Sec.10(46) of the Act and whether the levy of tax would be improper in view of Article 289(1) of the Constitution of India, were advanced before us. We have not dealt with those contentions, in view of our conclusion on the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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