Varanasi Development Authority Vs ACIT (ITAT Varanasi)
Conclusion: In present facts of the case, the Hon’ble Tribunal held the assessee is a charitable entity u/s 2(15) of the 1961 Act, being engaged in the advancement of object of general public utility, with the predominant object of tackling problems of town planning and urban development in a planned manner, and shall be eligible for exemption u/s 11 of the 1961 Act. In other words, it means that carrying on the statutory functions or activities which is mandate of the law cannot be said to be trade, commerce or business.
Facts: The brief facts of the case are that the assessee filed return of income on 30.09.2011, declaring total income of Rs. Nil. The case of the assessee was selected by Revenue for framing scrutiny assessment u/s. 143(3) read with Section 143(2) of the 1961 Act. The assessee is registered under Section 12A of the 1961 Act. The assessee is a State Government body constituted by separate Act of State Government. The object of the assessee are of general public utilities for management, regulation and control of infrastructure falling within Varanasi. The assessee had claimed exemption under Sections 11, 12 and 13 of the 1961 Act. The assessee has filed Form-10B for seeking necessary exemptions u/s 11,12 and 13 of the 1961 Act.
The AO after perusal of the objects of the assessee, observed that nowhere in these objects, the charity or charitable, poor, economically weaker, subsidy/subsidized, assistance, uplift are mentioned and it was never intended by the State Government that the assessee be a charitable organization and the AO observed that the assessee was formed with the sole object of ensuring the development of Varanasi.
The AO observed by examining books of accounts that the assessee maintains only one set of books of accounts , which is in violation of Section 11(4) of the 1961 Act , and hence the AO denied the exemption to the assessee under Section 11 and 12 of the Act, for AY: 2011-12 , by holding that the assessee is not carrying on the charitable activities as per provisions of Section 2(15) of the 1961 Act, vide assessment order dated 28.02.2014 passed by AO u/s. 143(3) of the 1961 Act.
The Hon’ble Tribunal after taking submissions of both sides into consideration observed that much reliance is placed by Revenue on the betterment charges being levied by the Authority. Whereas, these charges are levied under the authority of Section 35 of the 1973 State Act. Then these betterment charges are levied where in the opinion of the Authority, as in consequence of any development scheme having been executed by the Authority in any development area the value of any property in that area which has been benefited by the development, has increased or will increase. Then, it is obvious that to carry out administration of the vast and onerous responsibilities cast upon the Authority by virtue of the 1973 State Act to have planned development of the development area and to provide various amenities , the authority has to raise funds from various sources to meet its costs to fulfill responsibilities under the 1973 State Act and to make it self sustainable , and merely because betterment charges are recovered it could not be said that the Authority is a commercial enterprise working with profit motive. Finally, if any development scheme is carried out by Authority in any development area which has led to increase in value of properties in that area, there are costs associated with implementation of that particular development scheme which is to be incurred by Authority, and if the said costs are recouped from the property owners of that area, will not make the Authority a commercial enterprises existing for profits, even if some surplus is generated on that count, as Section 20(2) of the 1973 State Act, mandates that the Authority is bound to apply its funds towards meeting the expenses incurred by Authority in the administration of this Act and for no other purpose.
On the contention raised by the Revenue that assessee is maximizing profits by selling the properties by auction, where the person offering maximum bid price is sold the property, and hence the assessee is a commercial enterprise existing solely for profits, and is not a charitable entity within the meaning of Section 2(15) of the 1961 Act. On this contention, the Hon’ble Tribunal held that the process of allocation by State (or State instrumentalities) of natural resources through process of public auction, brings in transparency and efficiency in the entire allocation process and is considered to be the most efficient and transparent process for allocation of natural resources. Thus, merely because the assessee had adopted a method of selling properties through public auction, it cannot be said that the assessee is profiteering and is a commercial enterprise, dehors the vast and onerous responsibilities cast upon the assessee under the 1973 State Act to have planned development of the development area falling under its jurisdiction. Thus, this contention of the Revenue was rejected.
Finally, while allowing appeal of the assessee, it was observed that on detailed analysis of the 1973 State Act , activities carried on by the assessee, the assessee is engaged in the advancement of object of general public utility, the predominant object being town planning and development of development area under its jurisdiction , in a planned manner, and not otherwise, with no profit motive , while sale of properties etc. being ancillary objects to its predominant object and the assessee is not engaged in any business , trade or commerce. The assessee authority predominant purpose is to tackle problems of town planning and urban development in a planned manner, and not otherwise, with no profit motive as its object, while sale of properties etc. are merely ancillary objects for attainment of main and predominant objects , and it could be said that the assessee is not engaged in any trade, commerce or business.
Thus, the assessee was held to be a charitable entity u/s 2(15) of the 1961 Act, being engaged in the advancement of object of general public utility, with the predominant object of tackling problems of town planning and urban development in a planned manner, and shall be eligible for exemption u/s 11 of the 1961 Act.
FULL TEXT OF THE ORDER OF ITAT VARANASI
These four appeals, all filed by assessee, being ITA Nos. 264, 265, 266 & 267/Alld./2017 for assessment year(s)(ay’s) 2011-12 to 2014-15 respectively, are directed against separate appellate order(s) dated 05.09.2017, 07.09.2017, 08.09.2017 and 08.09.2017 respectively passed by ld. Commissioner of Income Tax (Appeal), Varanasi (hereinafter called “the CIT(A)”) in Appeal Nos. 27/ACIT/Circle-3/VNS/13-14, ITA no. 3/DCIT(Exemption)/LKW/2015-16 , 25/ACIT(Exemption)/ LKW/2015-16 and CIT(A)/10429/2016-17 , for assessment year’s 2011-12 to 2014-15 respectively , the appellate proceedings had arisen before Learned CIT(A) from separate assessment order(s), assessment order dated 28.02.2014 passed by learned Assessing Officer (hereinafter called “the AO”) under Section 143(3)of the Income-tax Act, 1961 (hereinafter called “the Act”) for ay: 2011-12, assessment order dated 30.03.2015 passed by AO under Section 143(3)of the 1961 Act for ay: 2012-13, assessment order dated 29.02.2016 passed by AO under Section 143(3)of the 1961 Act for ay: 2013-14 and assessment order dated 27.12.2016 passed by AO under Section 143(3)of the 1961 Act for ay: 2014-15. These four appeals were heard in Open Court through Physical hearing mode.
2. Since, all these four appeals involve common issues, these four appeals were heard together and are disposed off by this common order. With the consent of both the parties, appeal for ay: 2011-12 is taken as a lead case and our decision in ay: 2011-12 shall apply mutatis mutandis to all the remaining three appeals for ay: 2012-13 to 2014-15. This is the second round of litigation before the tribunal.
3. The grounds of appeals raised by assesseein memo of appeal filed with Income Tax Appellate Tribunal, Varanasi (hereinafter called “the tribunal”) for ay: 2011-12 , reads as under:
“1. Because the appellate order dated 05.09.2017 which has been impugned in this appeal, is vitiated as the same has not been decided in pursuance of the guidelines/directors given by earlier by ITAT in ITA No. 380/LKW/2015 in the case of Dy. CIT, Lucknow vs. Varanasi Development Authority vide judgment and order dated 28.08.2015 with which the “CIT(A)” got seized in the 2nd round of hearing of appeal (against the assessment order dated 28.02.2014).
WITHOUT PREJUDICE TO THE AFORESAID
2. Because during the course of appellate proceedings in the 2nd round wherein the matter was decided afresh as per the direction contained in the ITAT order date 28.08.2015 (supra), it had been fully demonstrated that the activities carried on by the VDA/appellant could not have been said to be involving “ carrying on of any activity in the nature of trade, commerce or business of any activity of rendering any service in relation any trade, commerce or business, for acess or fee or any other consideration” and accordingly the appellant’s claim for exemption was not hit by the proviso to Section 2(15) of the Act.
3. Because the CIT(A) has erroneously held by referring to “realization from allotment of properties’, “ interest from bank”, “interest from allottes”, interest on scheme loans “ & “ other receipts” that
(a) “the assessee is carrying on its activity in the nature of trade, commerce and business: and
(b) its affairs are hit by proviso to section 2(15) of the Act. and on that basis, in upholding the denial of appellant’s claim for exemption under Section 11 read with Section 12 of the Act.
4. BECAUSE reliance on the decisions of (i) Lucknow Bench of ITAT in the case of Kanpur Development Authority vs. Asstt. CIT-1, Kanpur, (ITA No. 332 & 333/LKW/2013; and
(ii) Allahabad Bench of ITAT in the case of Allahabad Development Authority vs. Asstt. CIT, Range-3, Allahabad (ITA No. 346/Alld/2015)
In arriving at the conclusion that activities carried on by VDA/appellant is hit by the proviso to section 2(15) of the Act, is wholly misplaced and denial of claim for exemption under Section 11 of the Act, even though VDA/appellant stood registered under Section 12AA of the Act, is wholly erroneous being inconsistent with the facts of the case and law applicable thereto.
5. BECAUSE on a due consideration of the “aims and objects” and other provisions of Uttar Pradesh (Planning and Development) Act, 1973 under which the VDA/appellant had been constituted as an “Authority” for development of the ‘Specified Development Area’ as assigned to it and the provisions, as referred to in brief in Annexure-1 to the rounds of appeal, the CIT(A) was obliged to hold that the activities carried on by VDA/appellant, even if consideration, were not hit by the proviso to Section 2(15) of the Act and accordingly it was entitled to exemption under section 211 of the Act.
6. Because the case of VDA/appellant is frequently covered by the decision of Hon’ble Jurisdictional High Court in the case of CIT (Exemption), Lucknow vs. Moradabad Development Authority, Moradabad in ITA No. 3 of 2017, dated 05.05.2017 which in turn was based on the earlier decision of the Hon’ble Jurisdictional High Court in the case of CIT(Exemption), Lucknow vs. Yamuna Express Industrial Development Authority and others, and the CIT(A) has erred in not following the said judgment, while dismissing the appeal.
7. Because the order appealed against is contrary to the facts, law and principles of natural justice.”
4(i). The brief facts of the case (ay: 2011-12) arethat the assesseefiled return of income on 30.09.2011, declaring total income of Rs. Nil. The case of the assessee was selected by Revenue for framing scrutiny assessment u/s. 143(3) read with Section 143(2) of the 1961 Act. Statutory notices under Sections 143(2)/142(1) of the 1961 Act were issued by AO from time to time. During course of assessment proceedings, the assessee appeared before AO and filed replies and details, produced books of accounts, bills andvouchers, which were test checked by AO. The solitary question which has arisen in this appeals is with regard to claim of the assessee for grant of exemption under Sections 11, 12 and 13 of the 1961 Act, which stood disallowed by the authorities below. The assessee is registered under Section 12A of the 1961 Act. Theassessee is a State Government body constituted by separate Act of State Government. The object of the assessee areof general public utilities for management, regulation and control of infrastructure falling within Varanasi. The assessee had claimed exemption under Sections 11, 12 and 13 of the 1961 Act . The assesseehas filed Form-10B for seeking necessary exemptions u/s 11,12 and 13 of the 1961 Act. The audit report under Section 44AB was also filed by the assessee in prescribed form No. 3CB and 3CD. The AO observed that the object of the assessee-authority as defined under Section 7 of the Uttar Pradesh Urban Planning and Development Act, 1973 and as submitted by the assessee in written reply before AO, are as under:
“The objects of the Authority shall be to promote and secure the development of the development area according to plan and for that purpose the Authority shall have the power to acquire, hold, manage and dispose of land and other property, to carry out building, engineering, mining and other operations to execute works in connection with the supply of water and electricity, to dispose of sewage and to provide and maintain other services and amenities and generally to do anything necessary or expedient for purpose of such development and for purpose incidental thereto.”
4(ii) The AO after perusal of the objects of the assessee, observed that nowhere in these objects , the charity or charitable, poor, economically weaker, subsidy/subsidized, assistance, uplift are mentioned. The AO observed on perusal of the 1973 State Act, that it was never intended by the State Government that the assessee be a charitable organization and the AO observed that the assessee was formed with the sole object of ensuring the development of Varanasi. The AO observed that on dissolution of the assessee-authority, the assets of the assesseewill revert back to State, which is duly mentioned in Section 58 of the 1973 State Act, which reads as under:
(1) “Where the State government is satisfied that the purpose for which the authority was established under this Act has been substantially achieved so as to render the continued existence of the Authority in the opinion of the State Government unnecessary, that Government may by notification in the Gazette declare that the authority shall be dissolved with effect from such date as may be specified in the notification, and the Authority shall be deemed to be disallowed accordingly.”
(2) From the said date-
a. all properties, funds and dues which are vested in, or realizable by, the Authority shall vest in or be realizable by, the State Government;
b. all nazul lands placed at the disposal of the Authority shall revert to the State Government;
c. all liabilities which are enforceable against the Authority shall be enforceable against the State Government; and
d. for the purpose of carrying out any development which has not been fully carried out by the Authority and for the purpose of realizing properties, funds and due referred to in clause, (a) the functions of the Authority shall be discharged by the State Government.”
Thus, the AO observed that on dissolution of the assessee, all the properties, funds and dues which are vested in or realizable by the assessee-authority , shall vest in or be realizable by the State Government , and it is the discretion of the State Government to apply for any purpose it deems fit. The AO observed that the funds generated during the so called charitable period may be utilized by the State Government for the purposes of business ,and hence the transfer is not an irrevocable transfer which is meant exclusively for charitable purposes. The AO observed that transfer of assets are revocable and Sections 11 and 12 of the 1961 Act will have no application. The AO referred to provisions of Section 11(1) of the 1961 Act and observed that it is subject to provisions of Section 60 to 63 of the 1961 Act. The AO observed that Section 60 to 63 of the 1961 Act deals with revocable transfer of assets, and for creation of valid trust, transfer of the assets for charitable purposes should be irrevocable, which as per AO is not fulfilled in the case of the assessee. The AO observed that the assessee is neither in the field of education , nor in the field of medical relief of poor and at the most the assessee’s objects and activities could be said to be falling within the scope of ‘general public utilities’ u/s 2(15) of the 1961 Act.
4(iii) The AO observed that the assessee has received income from the following sources :-
