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TMI Blog2023 (8) TMI 766X X X X Extracts X X X X X X X X Extracts X X X X ..... and neither is there anything in the language of the provision, or the decision in Ahmedabad Urban Development Authority [ 2022 (10) TMI 948 - SUPREME COURT] which is being sought to be scrupulously followed in deciding these appeals, for it being so read. The adopted business model, however, necessarily involves letting the said space to the industry for a consideration, and which is pegged at market rates. Any other basis, as we shall presently see, would be inconsistent with sound business practice and economic rationale. It is by and through the carrying on of this business of providing built-up space or making available vacant land, on leasehold basis, i.e., even if at a charge, that the assessee-society fulfills its object of promotion of IT/ITES industry in the State of Kerala. The same is thus incidental to its object/s. Whether the charges levied by it, including the lease rentals, are with a view to recover it s costs, or at best with a nominal margin, or this is not the case, with it, as alleged, operating on commercial basis, charging lease rentals at market rates? - Coming to the assessee s case, even as it s MoA lists a number of objects, all toward promoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the present, by the assessee-society. The same qualifies as an eligible business u/s. 11(4A), and it s income assessable as business income. The head of income under which the income of a charitable institution, where taxable, would stand to be assessed under the Act, cannot even otherwise be determinative of the matter. Vetting the financial summary provided by the assessee, reveals it to have excluded, in arriving at the surplus, the interest earned by it on it s capital/corpus parked with banks in the form of term deposits. The same may be as a matter of policy or, as it appears to us, the same being idle for the time being, i.e., till they are deployed toward further investment an ongoing process, for its activities. We see no reason for its exclusion, being as much a part of it s income as any other, being in fact duly reported to the Revenue per it s returns for the relevant years and, further, as subject to application u/s. 11(1)(a) . It may be stated that interest does not represent operational income, justifying it s exclusion on that basis. We can hardly agree. The reason is simple. The monies have not been provided for safe-keeping, but, representing property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance Act, 2010 w.r.e.f. 01.4.2009, which reads asunder: Definitions 2. In this Act, unless context otherwise requires, (15) Charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any services in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity; Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees (*) or less in the previous year; [(*)] enhanced to twenty-five lakh rupees from AY 2012-13 onwards] The proviso stands substituted by Finance Act, 2015, w.e.f. 01.4.2016, as under: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustrial area by GoK in April, 2010. The basis of the denial of it s claim for exemption by the Revenue is that the activity of letting built-up space and provision of amenities, the principal activity undertaken by the assessee in pursuance of it s objects, though otherwise qualifying as advancement of an object of general public utility and, thus, a charitable purpose, is no longer so in view of the proviso to sec.2(15). 3.2 The second issue arising in the instant appeals is if depreciation is to be deducted in computing income liable for application for charitable purpose inasmuch as the cost of the capital assets, on which the same stands claimed, had already been allowed in full by way of application of income on the deployment of funds on their acquisition. The same, though a part of the statute w.e.f. AY 2015-2016 [s.11(6)] inasmuch as it amounts to a double relief, stands disapproved by the Hon'ble Apex Court in CIT v. Rajasthan and Gujarathi Charitable Foundation [2018] 402 ITR 441 (SC), so that no disallowance thereof would obtain for years prior to AY 2015-2016. 4. We have heard the parties, and perused the material on record. 4.1 Taking the first iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 1(SC), placing a copy thereof on record. No assistance, however, from the parties, i.e., as to how the given activity/s and the assessee s modus operandi would stand to be considered, or require being understood, in light of the said decision, was forthcoming from the parties. This, despite this being precisely the reason the instant appeals, heard initially by the Tribunal on 31/01/2023, were released for hearing on the applicability of the said detailed judgment. The Hon ble Apex Court having however held, in relation to a class/category of assessees, that provision of goods or services at cost or on a nominal mark-up basis, would not ipso facto amount to a consideration within the meaning of proviso to sec.2(15), the assessee was called upon by the Bench to place on record the statement of its gross receipts and income from year to year, and which was accordingly done, and the hearing, accordingly, closed. 4.4 The Hon'ble Apex Court has in Ahmedabad Urban Development Authority (supra), upon analyzing the words cess, fee, or other consideration in proviso to sec.2(15), classified the assessees between those providing essential services, viz., providing wat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be discerned from the objects and policy of the enactment; or in terms of the controlling instrument, such as memorandum of association etc.), the purpose for which such public GPU charity, is set-up - whether for furthering the development or a charitable object or for carrying on trade, business or commerce or service in relation to such trade, etc.; (c) Rendition of service or providing any article or goods, by such boards, authority, corporation, etc., on cost or nominal mark-up basis would ipso facto not be activities in the nature of business, trade or commerce or service in relation to such business, trade or commerce; (d) where the controlling instrument, particularly a statute imposes certain responsibilities or duties upon the concerned body, such as fixation of rates on pre-determined statutory basis, or based on formulae regulated by law, or rules having the force of law, setting apart amenities for the purposes of development, charging fixed rates towards supply of water, providing sewage services, providing food-grains, medicines, and/or retaining monies in deposits or government securities and drawing interest therefrom or charging lease rent, ground rent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards trade, commerce or business, or service in relation thereto. However, amounts which are significantly higher than recovery of costs, have to be treated as receipts from trade, commerce or business. It is for those amounts, that the quantitative limit in proviso (ii) to section 2(15) applies, and for which separate books of account will have to be maintained under other provisions of the IT Act . ( emphasis, supplied ) 4.5 The assessee s a self-governing body, case, quite clearly, falls under the latter category of cases, i.e., of entities engaged in providing other than essential services. The assessee s sole activity, and inspite lapse of a number of years, continues to be restricted to provision, in a systematic and organized manner though being in fact not feasible otherwise , i.e., on the scale and in the manner it is to be pursued, of builtup space for housing IT/ITES units at the park developed (or being developed) by it, including provision for incidental services, viz., water, electricity, etc. - the consumption cost of which though is met by the unit concerned, air conditioning, parking space, etc., all at a cost. Not only does the same qualify to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Ahmedabad Urban Development Authority (supra) including some similar cases, which we reproduce as under: 253 ..D. Trade promotion bodies Bodies involved in trade promotion (such as AEPC), or set up with the objects of purely advocating for, coordinating and assisting trading organisations, can be said to be involved in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature. In that event, the claim for tax exemption would have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act. E. Non-statutory bodies E.1. In the present batch of cases, non-statutory bodies performing public functions, such as ERNET and NIXI are engaged in important public purposes. The materials on record show that fees or consideration charged by them for the purposes provided are nominal. In the circumstances, it is held that the said two assessees are driven by charitable purposes. However, the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Surplus/(Deficit) including interest % to turnover Cash surplus % to turnover 2008-09 2009-10 8,91,68,222 9,76,547 9,01,44,769 5,25,76,865 79,14,551 8.88 6,04,91,416 67.10 2009-10 2010-11 9,86,57,022 17,80,875 10,04,37,897 5,02,78,032 1,48,39,831 15.0 6,51,17,863 64.83 2010-11 2011-12 11,32,29,712 25,68,017 11,57,97,729 4,91,85,724 1,79,63,217 15.8 6,71,48,941 57.98 2011-12 2012-13 20,26,25,731 22,00,466 20,48,26,197 11,98,34,273 45,73,086 2.26 12,44,07,359 60.73 2012-13 2013-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94 64,17,29,210 25,41,88,335 1,01,21,226 1.83 26,43,09,561 41.18 It is clear that there is no uniformity in the profit percentage from year to year.Two inferences, equally plausible, arise from the said data. One, notwithstanding that the assessee has, finding it s cost to be below the revenue, adjusted the latter downward for the later years. This is in fact impractical as the lease rent would be fixed for the period of the lease term, if not providing for a nominal increase over the said term. It is even otherwise, i.e., qua the new leases, impractical, as a rent cannot be revised downwards, implying different units being charged differently for the same services. Further, the charges would have to be again increased on the nearly inevitable increase in cost over time, which would give incoherent and unhealthy signal to the industry, besides speaking poorly of the organization a quasi Government body, and it s management. Why, the profit rate climbs again. A stable base rate is crucial, which could at best exhibit a secular, albeit marginal, increase with time. This rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis. The same, though relevant, may thus not furnish a conclusive basis or guidepost. This explains a proper examination, even as held by the Apex Court. When it, in Ahmedabad UDA (supra), states of reimbursement of cost or, at best, with a nominal mark-up, it means just that, i.e., an organization not operating on commercial basis, but the charge for it s goods or services being aimed at reimbursement of the cost of providing the same. The issue, thus, is principally factual. We have already explained, in some detail, the practical aspects impinging on operating on that basis, which has in any case not been demonstrated, with, on the contrary, there being no effective contradiction of the charge of lease rent at market rate, buttressed by the fact of lease of parking space; interest for delayed payment, etc. all borne out by it s balance-sheets on record, which also bears civic and campus maintenance charge at Rs. 65.83 lakhs (for f.y.2008-2009),which is besides the other income at Rs. 18.25 lakhs. In fact, it is on account of it, given the ground reality of uncertainty of cost, besides its irrelevance in the market place, impractical to state a precise figure that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, out of the total expense of Rs. 822.30 lakh, depreciation is at Rs. 525.77 lakh, i.e., at 64% of the total cost and 58% of the turnover (gross receipt), with the balance aggregate cost being at a much lower figure in comparison, 33% of the turnover. True, depreciation is an actual cost. The same, however, being charged on WDV basis, at the rates specified under the Companies Act, 1956, is highly skewed in favour of recovery of capital at the earliest. Depreciation charge is thus not evenly spread over the useful life of the asset, depressing income for the initial years. A uniform charge, as against an accelerated one, would present a much healthier state of affairs, particularly in the instant case of it constituting a significant expense. In fact, the charge of depreciation thus itself demonstrates the assessee as being run as a commercial organization, driven by profit. Infact, all other indica, i.e., of it being managed by a Chief Executive Officer (CEO); having an independent finance department headed by a senior executive; enjoining private participation, are toward the same. There is no restrictive element in the scope of the term business to exclude an activity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eployed toward further investment an ongoing process, for its activities. We see no reason for its exclusion, being as much a part of it s income as any other, being in fact duly reported to the Revenue per it s returns for the relevant years and, further, as subject to application u/s. 11(1)(a) . The surplus for the relevant years, which thus stands revised upwards, both in absolute terms and in ratio to the turnover, is presented below: TABLE-B (Amt. in Rs. lakhs) Particulars/AY 2009-2010 2010-2011 2011-12 Remarks Surplus 86.09 (1) 148.40 179.63 Interest on fixed deposits with banks credited directly to the corpus fund, duly reported to the Revenue per the returns of income (PB pages 47, 65, 85) Interest 760.32 738.81 523.33 Total surplus (2) 846.41 887.21 702.96 Stated turnover 901.45 1004.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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