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TMI Blog2020 (7) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore hold that the Assessee is entitled to the benefits of Sec.11 of the Act. 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. We therefore hold that income of assessee will be eligible to claim exemption under section 11 - Decided in favour of assessee. Surplus arises due to interest income and other income in the nature of penalty and other charges, and not from activity of acquisition of land and providing infrastructure facilities for industrial development - HELD THAT:- As we note that Ld.AO has not verified whether, assessee satisfies provisions of section 11 so far as application of income is concerned, for availing exemption under section 11 of the Act. We accordingly, direct Ld.AO to verify the same and to consider claim in accordance with law. Depreciation on assets of trust - double deduction - HELD THAT:- B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for exemption under section 11 of the Income Tax Act, 1961. 3.1 The Hon'ble Commissioner of Income tax (Appeals) - 14, Bangalore has erred in (a) concluding that the activities carried on by the appellant are commercial in nature with an intention to make profits; (b) concluding that the appellant is hit by the proviso to section 2(15) read with section 13(8) of the Act. (c) not appreciating that performance audit report is not an appropriate basis to judge commercial nature or otherwise of the appellant's activities (d) not appreciating that the appellant, a statutory body of Government of Karnataka is a special entity to achieve the objectives set out in the KIAD Act and no activity is carried on with a view to earn profits. (e) Not appreciating that the surplus generated out of operations, if any, is ploughed back for further industrialization in the state. (f) ignoring, disregarding and not following the ITAT orders in appellant's own case for the earlier years on an identical issue. 3.2 On facts and in the circumstances of the case and law applicable, proviso to section 2(15) and section 13(8) are inapplicable and consequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 69A cannot be invoked if the nature of credits has been explained by the appellant; (ii) the amount of ₹ 26,06,141/- has been accounted as revenue items in the subsequent accounting period. 7.2 On facts and circumstances of the case, the addition of ₹ 26,06,141/- under section 69A is bad in law and should be deleted. If for any reason, the addition is sustained, the learned Assessing Officer should be directed to exclude the same from income / allow it as deduction in the year in which the same has been accounted as revenue item. 8. The learned Assessing Officer and the CIT(A) have erred in making addition of ₹ 9,50,93,431/- [₹ 35,61,782/- plus ₹ 9,15,31,649/-] under section 69A of Act holding that the appellant failed in explaining the nature and source of amounts credited in the bank accounts. 9. The learned Assessing Officer has erred in not appreciating that the appellant during the assessment proceedings has explained that the majority of the amounts are in the nature of consideration for allotment of land and hence constitute capital receipt in the hands of the appellant. The addition made under section 69A withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 12 A of the Act, and has been claiming exemption under Section 11 of the Act. Ld.AO treated ₹ 261,47,58,631/- as profits, in the hands of assessee, being excess of receipt over expenditure. Ld.AO also made further disallowances under various provisions of the Act. Assessment was completed at total income of ₹ 289,08,24,577/-, as against returned income at nil by considering assessee as AOP. 5. At the outset, Ld.AR Submitted that, this issue stands settled in favour of assessee by order of this Tribunal in assessee s own case for assessment year 2009-10 and 2010-11 by order dated 04/09/2015 and 20/04/2016 respectively, wherein this Tribunal after considering objects and functions of assessee, as well as, analysing applicability of proviso to section 2 (15) of the Act, held that proviso is not applicable in case of assessee. 6. Ld.AR submitted that, there is no change in facts and circumstances of the case, as it was for assessment year 2009-10 and 2010-11. 7. On the contrary, Ld.CIT DR submitted that, exemption under section 11 is to be examined for every year as per the terms and conditions under the act. She relied upon orders passed by authorities below. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the State Government by notification a Board by the name of the Karnataka Industrial Area Development Board. 20. Karnataka Industrial Areas Development Board (KIADB) is a wholly owned infrastructure agency of Government of Karnataka. set up under Karnataka Industrial Areas Development Act of 1966. It is established through a State Government notification. The assessee is a creation of law. The law was enacted with certain specific objectives. Thus, the objectives for which the assessee is constituted was laid out even prior to its incorporation. The assessee and its activities are therefore ring fenced to this special Act, namely KIAD Act, 21. The State Government can give directions to the assessee, as in its opinion, are necessary or expedient for carrying out the purposes of the Act and it is the duty of the assessee to comply with such directions [section 17 of KIAD Act]. 22. It was next highlighted that the assessee carries on its activities in accordance with the provisions of KIAD Act. It does not have the unfettered power to carry on its activities. It functions within the broad framework of the objectives laid down h the KIAD Act. 23. The websit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Restraint on expenditure from funds of the assessee 26. Section 23 stipulates that the assessee shall have the authority to spend such sums as it thinks fit for the purposes authorised under this Act from out of Board's funds, Every expense has to therefore pass the 'purpose test'. 27. It was argued by Id. counsel for the assessee that in the present case, the assessee is primarily engaged in 'promotion of industrial growth in Karnataka'. It is not covered within any of the specific categories enlisted in section 2(15). The question therefore is whether the assessee's objective is covered within the phrase 'advancement of any other object of general public utility'? 28. The objectives of the assessee are explicit and cannot he circumvented. The assessee is a creation of law, It is not formed or set-up by any person(s) for any pecuniary benefit or commercial motive. The assessee owes its genesis to KIAD Act, a State Government legislation. The assessee's incorporation. Functioning, powers and scope are set out in the KIAD Act. Being a creation of a special law, compliance with the provisions therein is mandatory. The st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration towards sale of industrial sites and fees for various services rendered thereof. These are not services rendered to specific industrialists/entrepreneurs. The objective is not 'service of individual industrial houses' but promotion of overall industrialization of Karnataka. An incidental benefit to some industrialists/entrepreneurs would not dilute the progressive and charitable objective of the assessee. 32. To summarize, the ld. counsel submitted that the assessee plays a vital role in supplementing the governmental efforts in boosting industrialization. The assessee is a creation of law constituted for the purpose of development of industries and exists for public good. Its control and management is vested with the State Government. The benefit arising from its activities may be shared by persons engaged in the industrial sector. This however does not detract from its charitable character. The object of the assessee is clear; the functions are ring fenced and powers are frame all with a view to achieve industrial development in Karnataka. Development of industries has been construed to be 'advancement of general public utility' by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (E) Total cost of acquisition (A+B+C+D) (F) Development cost for formation of layout (road, drainage, water supply, parks etc) (G) Board service charges at 10% on (F) (I) Interest charged by the Board at 12.75% p.a on (F) (J) Total cost of development (F+G+I) (K) Total cost of acquisition and development [(E)+(J)] 36. Once the total cost is so computed, it is allocated to the allotable extent of the land (generally around 65 to 70% of land). Thereafter allotment of plots is carried on to the entrepreneurs for the State / District approved projects at the same price. There is no margin included. The objective is not to earn profits on allotment of such plot of land. The excess of income over expenditure or the surplus remaining in the financial statements of the Board primarily arises on account of bank interests. These are excess funds available with the Board which are housed with the banks to generate passive int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: No activity can be carried on efficiently, properly, adequately or economically unless it is carried on business principles. If an activity is carried on business principles, it would usually result in profit, but, as pointed out by this court in Surat Art Silk Cloth Manufacturers Associations case (1980) 120 ITR ('SC'), it is not possible so to carry on a charitable activity in such a way that the expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation but would reflect unsound principles of management. (emphasis supplied) 41 In the present case, the assessee has carried on its activities on business principles and sound principles of management. As a result, the assessee has been able to repeatedly generate surplus funds. This fact by itself does not render the assessee a 'non-charitable entity; but only is an execution of sound management principles by a charitable organisation. The assessee undertakes development of industries and infrastructure in the state of Karnataka. It is not carrying on business; but executing the tasks assigned by the State Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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'hle 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 in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service '-in relation to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, trade or commerce, then any such in dental 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 Section 10(23C)(iv). When the expression charitable purpose, as defined in Section 2(15) of the said Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st income. Therefore there can be no profit element in earning this interest income. Besides the above, the other components of interest are interest from Allottees, penal interest from Allottees, interest on staff loan, interest from SB and others, interest on seed money, dividend received and interest on income tax refund. The other component of income is gain on disposal of land, sale of application forms, recoveries of fines and penalties, interest, other receipts, rent, forfeiture of deposits, water supply charges. The income from sale of land is ₹ 18.69 Crores. The expenditure incurred by the Assessee comprises of repairs and maintenance, administrative expenses, water and electricity charges, special and other charges, Depreciation. If the gain on disposal of land of ₹ 18.69 Crores which is the primarily object of the Assessee and expenditure in the form of administrative expenses of ₹ 15.42 Crores and 10.61 Crores which are fixed expenses and necessary to carry on the primary object alone are considered than there would be loss. This by itself would demonstrate that the Assessee does not exist for profit. 47. The main aim and object for which the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, 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. 10. We find from the submissions of assessee recorded by Ld.CIT(A) in impugned order that, facts for year under consideration as well as preceding and succeeding assessment years are same and therefore respectively following the reasoning of this Tribunal in asst. year 2009-10, we are of the opinion that, provisions of section 2 (15) of the Act are not applicable in the case before us. We therefore hold that income of assesseee will be eligible to claim exemption under section 11. Accordingly Ground 2-3 stands allowed. Ground 4-9: 11. Admittedly, surplus arises due to interest income and other income in the nature of penalty and other charges, and not from activity of acquisition of land and providing infrastructure facilities for industrial development. However, we note that Ld.AO has not verified whether, assessee satisfies provisions of section 11 so far as application of income is concerned, for availing exemption under section 11 of the Act. We accordingly, direct Ld.AO to verify the same and to conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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