Development authority established with profit motive not entitled for registration u/s. 12A

IN THE ITAT AMRITSAR BENCH

Jammu Development Authority

V/s.

Commissioner of Income-tax, Jammu

IT APPEAL NO. 30 (ASR.) OF 2011

JUNE 14, 2012

ORDER

1. This appeal of the assessee arises from the order of the Commissioner of Income Tax, Jammu, dated 08.12.2010 passed under section 12AA(3) of the Income Tax Act, 1961 (In short ‘the Act’).

2. The assessee has raised following grounds of appeal:

“1.  That the impugned order of the learned Commissioner of Income Tax (CIT) is patently against law, erroneous and merits to be quashed.

 2.  That the invoking of the provisions of section 12AA (3) of the Income Tax Act, 1961 is invalid and the whole proceedings leading to the passing of the impugned order is void ab-initio.

 3.  The learned CIT has erred in withdrawing the registration u/s 12AA of the Income Tax Act, 1961 of the Appellant and has erred in :

(a)  Initiating proceedings under section 12AA (3) of the Income Tax Act, 1961 on the pretext of amendment in section 2 (15) of the Act by Finance Act, 2008 without appreciating that registration was originally granted to the appellant only in September, 2009 i.e. well after the amendment of 2008;

(b)  Ignoring the fact that this predecessor had already duly applied his mind to the amendment brought about in section 2(15) by the Finance Act, 2008 having specifically raised a query with respect to the same and the appellant having satisfactorily explained the inapplicability of the proviso to section 2 (15) to it;

(c)  Ignoring the specific finding recorded by his predecessor on the face of the registration certificate itself dated 30th September, 2009 u/s 12AA (1) (b) of the Act, after detailed examination of the case that the instrument does not exist for trade, commerce or business;

(d)  Not appreciating that the second proviso to section 2 (15) of the Act introduced by Finance Act, 2010 is a relaxation to the restriction placed vide the first proviso introduced by Finance Act, 2008 and hence, did not warrant a re-examination of the registration granted to the appellant;

(e)  Ignoring the fact that his predecessor had already examined the case of the appellant in light of the judgement rendered in the case of Jalandhar Development Authority before allowing the registration to the appellant.

(f)  Acting beyond his jurisdiction as there is no provision under the Act to reopen concluded proceedings or concluded issues because of change of opinion or incumbent;

(g)  Not appreciating that section 12AA (3) of the Act contemplates cancellation of the registration only if the objects of the appellant were subsequently found to be not genuine or the appellant was pursuing any object other than the one for which it was established, neither of which is true in the present case;

(h)  Not appreciating that the amendment brought about by Finance Act, 20008 by introducing a proviso to section 2 (15) was to restrict only those public utilities which were working under the garb of charity as also clarified by Circular No. 11 dated 19th December, 2008 of the CBDT and not to restrict state-owned genuine public utilities which were established by the State for meeting public purpose;

(i)  Arbitrarily holding that the appellant existed for profits while the predominant and the only objective of the appellant is the development of the city of Jammu and that the appellant works on a self-sustaining model so as to reduce its reliance on budgetary support, which is already under great strain, wherein the revenue and surplus generated in certain activities like allotment of land and properties for commerce and business compensate the subsidies and rebates allowed to economically weaker section and lower income group, institutions, etc. and for meeting expenditure on non-revenue generating activities like laying, flyovers, rehabilitations works, maintaining greens, maintaining public places, heritage sites, etc.

(j)  Not appreciating that the appellant is a city development agency and acquisition, development, construction and allotment of land and properties, providing infrastructural facilities, providing water, sewer, maintaining greens, at al are activities purely incidental and subservient to the main objective of city development;

(k)  In drawing a comparison between the appellant and a real estate developer without appreciating the fact that the real estate developer is the owner of the properties and assets which he deploys for private gains whereas the appellant is a Local Authority entrusted with public funds and properties with a legal obligation to apply the same for the public purpose for which it is established viz., the development of Jammu City;

(l)  Not appreciating that a private developer works for private gain and distributes his earnings by way of dividend and there is no obligation on him to plough back his earnings for the development of the city whereas the appellant has no capital or owner, its funds and properties are public funds and it cannot and has not since inception ever distributed even a single penny as dividend or returns to anybody and under section 19(2) of the Jammu and Kashmir Development Act, 1970, there is a restriction on the use of the funds for any object other than as specified in the Act i.e. for any purpose other than the development of Jammu City;

(m)  Making observations that under the garb of charitable purpose, trade, commerce and business is being carried on and has lost sight of the fact that the appellant is a government agency and the accusation is aimed at the policies of the Government since the appellant works under the aegis of the Government.

(n)  Not appreciating that the Government’s policies cannot be said to be anti-public purpose since the same are framed in the larger interest of the public and the pricing policy framed by the Government is compensatory in nature where the surplus and revenues generated in certain activities are to compensate the rebates and subsidies allowed in other activities and for non-revenue generating activities;

(o)  Holding that the cases of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 and CIT v. Andhra Pradesh State Transport Corporation [1986] 159 ITR 1 (SC) are distinguishable without stating any precise distinguishing facts;

(p)  Placing reliance upon the decision in the case of Indian Chamber of Commerce v. CIT 101 ITR 796 (SC) which has already been overruled by a larger bench of the Apex Court in Surat Art Cloth Manufacturers Association [1980] 121 ITR 1 (SC);

(q)  Placing reliance upon the judgements rendered in the case of Punjab Regional Urban Development Authority and Jalandhar Development Authority while holding that res judicata is not applicable to judicial proceedings and ignoring the fact that the said cases had already been considered and distinguished by the respondent while allowing registration to the appellant;

(r)  Holding that the view taken by the Respondent’s predecessor in allowing registration was erroneous and that he is bound to correct the error committed by him while he has no power to reopen concluded proceedings just because his opinion is different from his predecessor;

(s)  Wrongly quoting and relying upon the decision in A. Distributors (Baroda) P. Ltd. v. Union of India and Ors. 155 ITR 120 (SC) that an error should be corrected and not allowed to be perpetuated without appreciating that the said case was not one of reversal of decision on change of opinion but was a case of erroneous interpretation of law which had been subsequently rectified by an amendment and even otherwise, was a overruling of decision of a three member bench by a five member bench;

(t)  Holding that allowing the continuance of registration is an error in law and hence, required to be withdrawn when there was neither any change in law or of facts since time of grant of registration to the appellant so as to require the reopening of the case u/s 12AA (3) of the Act.

(u)  Applying some so-called ‘Mischief Rule’ and holding that the deletion of section 10 (20A) by the Legislature was to remedy the mischief perpetrated by development authorities wrongly claiming exemption under section 10 (20A) and that the deletion of the section by Finance Act, 2002 was to check the enjoyment of such exemption by development authorities and therefore, the appellant was not entitled to take recourse to alternate provisions contained in section 11 of the Act.

(v)  Not appreciating that the provisions of section 10(20A) and section 11 are mutually exclusive and the deletion of section 10 (20A) does not affect the eligibility to benefit under section 11 of the Act; and

(w)  Ignoring the decisions in the case of Improvement Trust of Moga [2008] ITA No. 489 of 2007 (P&H) and Gujarat Maritime Board [2007] 295 ITR 561 (SC).

 4.  That the appellant craves leave to add, amend, delete or modify its grounds of appeal at the time of hearing.”

3. The brief facts in this case are that registration under section 12A read with section 12AA of the Act, was granted to the assessee on 30.09.2009 as per certain conditions as envisaged in the said order. A show cause notice was issued to the assessee under section 12AA(3) of the Act on 14.10.2010. For the sake of clarity the said show cause notice is reproduced as under:

“Please refer to this office order under section 12A read with section 12AA of the Income-tax Act, 1961 issued under No. CIT/J&K/2009-10/5211-13 dated 30.09.2009 under which registration was granted to Jammu Development Authority, Jammu w.e.f. 01.04.2008 subject to satisfaction of conditions enumerated below the said order and entered at serial No.56 of the register maintained in this office.

2.1 Your attention is invited to the provisions of sub-section (15) of Section – 2 of the Income tax Act, 1961 which defines charitable purpose to include relief of the poor, education, medical relief and advancement of any other object of general public utility. As per Finance Act, 2008 w.e.f. 01.04.2009, a following proviso has been added below the said section, which reads as under:

“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 service 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 rentention of the income from such activity”.

Further, as per the Finance Act, 2010 after the first proviso, proviso-2 has been inserted and shall be deemed to have been inserted with effect from the Ist day of April, 2009, namely:

“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.”

Prior to insertion of these proviso, certain bodies have been treated ‘charitable ‘ on the ground of advancement of object of general public utility. However, after the insertion of the above proviso, the advancement of any other object of general public utility shall not be a ‘charitable purposes’, if it involves the carrying on of:

(a)  Any activity in the nature of trade, commerce or business;

(b)  Any activity of rendering any services in relation to any trade, comer or business;

(c)  For cess or fee or any other consideration, irrespective of the nature of use or application of retention of income from such activity.

2.2 Thus, the newly inserted 2nd proviso to section 2(15) w.e.f. 01.04.2009 (assessment year 2009-10 and onwards) provides that the provisions of the Ist proviso to section 2(15) shall not apply if the aggregate value of the receipts from the activities referred to in the Ist proviso is Rs. 10,00,000/- or less in the previous year. However, after going through the returns of income filed by Jammu Development Authority, it is observed that the aggregate value of the receipts from the activities referred to in the Ist proviso is more than the prescribed limit, as such, it shall not be entitled to the benefit of exemption u/s 11 of the Income Tax Act, 1961. It has been noticed that Jammu Development Authority is operating on commercial lines and by taking recourse to the provisions of section 11 of the Act on the ground that it is charitable institution. This is based on the argument that Jammu Development Authority is engaged in the ‘advancement of an object of general public utility’ as is included in the fourth limb of the current definition of “charitable purpose”. Such a claim, when made in respect of an activity carried out on commercial lines is contrary to the intention of the provisions. With a view to limiting the scope of the phrase ” advancement of any other object of general public utility, sub section (15) of section 2 has been amended to provide 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 service 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.

3. In view of the above, I am satisfied that Jammu Development Authority is a Authority established with the motive of profit constituted under the Jammu & Kashmir Development Act, 1970 and that the activities of such Authority are hit by sub-section 15 of section 2 of the Income Tax Act, 1961, therefore, I am satisfied that the applicant Authority is not entitled to registration in terms of provisions of section 12AA(1)(1)(ii) of the Income Tax Act, 1961. Therefore, in terms of the provisions of section 12AA(3) which provides that where a Trust has been granted registration u/s 12AA(1)(b) and subsequently the Commissioner of Income Tax is satisfied that the activities of such trust are not genuine or are not being carried out in accordance with the objects of the Trust, he shall after affording reasonable opportunity of being heard to it, cancel the registration by passing an order in writing.

4. You are hereby requested to appear before the undersigned at Ayakar Bhawan, Railhead Complex, Panama Chowk, Jammu on 29.10.2010 at 11.30AM/PM and show cause why an order canceling the registration granted to Jammu Development Authority should not be made u/s 12AA(3) of the Income Tax Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through an authorized representative, you may show cause in writing on or before the said date which will be considered before any such order made u/s 12AA(3) of the Income tax Act, 1961.”

4. The assessee vide letter dated 10.11.2010 submitted that the above subject show cause notice is not tenable, which is reproduced by the ld. CIT vide para 2 at pages 4 to 15 of his order. The Ld. CIT before cancelling the registration of the assessee reproduced the provisions and conditions in section 12AA(3) of the Act and then the proviso introduced by Finance Act, 2008 w.e.f. 01.04.2009 in section 2(15) of the Act along with 2nd proviso to section 2(15) by the Finance Act, 2010 w.e.f. I.4.2009. It was observed by the Ld. CIT that prior to insertion of these provisos certain bodies were treated ‘charitable’ on the ground of advancement of object of general public utility. However, after the insertion of the above provisos ‘the advancement of other object of general public utility shall not be a ‘charitable purpose’, if it involves the carrying on of :

(a)  Any activity in the nature of trade, commerce or business;

(b)  Any activity of rendering any service in relation to any trade, commerce or business.

(c)  For a cess or fee or any other consideration, irrespective of the nature of use or application or retention of income from such activity.

4.1 Therefore, before insertion of the above proviso, the Institutions/Trusts/Societies which were given registration u/s 12A of the Act considering them under the head ‘advancement of any other object of general public utility, were eligible for exemption from tax u/s 11 of the Act, if they were not involved in any such commercial activities as brought out in (a) (b) and (c). However, in case, they are involved in such commercial activities and if the aggregate value of the receipt from the activities referred to in the Ist proviso is more than rupees ten lakhs in the previous year, they shall not be eligible to continue with registration u/s 12A and the same is required to be withdrawn. It was observed by the Ld. CIT that if any institution is carrying on any activity in the nature of trade, commerce or business for a cess or fee or any other consideration, it would loose the status of charitable organization irrespective of the nature of use, or application or retention of income from such activity.

4.2 The fact of the present case as observed by the Ld. CIT in para 4.1. are that Jammu Development Authority was established vide Jammu & Kashmir Development Act, 1970 and it came into effect from 31.10.1970. As per the said Act, the object of the Authority is to promote and secure the development of the local area for which it is constituted according to plan and for that purpose the Authority shall have the power to acquire hold, manage and dispose off land and other property, to carrying out building, engineering and other operations, to execute works in connection with supply of water and electricity, disposal of sewerage and other services and amenities and generally to do anything necessary or expedient for purposes such development and for the purposes incidental thereto. The Authority is a body corporate having perpetual succession and a common seal with power to acquire, hold and dispose of properties, both movable and immovable to contract, and by the said name sue or to be sued. The Authority consists of a Chairman, Vice Chairman and seven other members appointed by the State Government. The Authority is responsible for the planned development of the city including preparation of the Master Plan of the area. The State Government is authorized to entrust the Authority from time to time with any work connected with planned development and matters connected thereto. Section 19 (Chapter-VII) of the Jammu & Kashmir Development Act, 1970 obliges the Authority to maintain its own fund to which shall be credited moneys received by the Authority from the Central or State Government by way of grants, loans, advances or otherwise, all fees, rents, charges, levies and fines received by the authority under the Act, all moneys received by the Authority from disposal of its movable and immovable assets and all moneys received by the Authority by way of loan from financial and other institutions and debentures floated for the execution of a scheme or schemes of the Authority duly approved by the State Government. Unless the State Government otherwise, directs all moneys received by the Authority shall be credited to its funds which shall be kept with the Jammu& Kashmir Bank or any other bank approved by the State Government.

4.3 The Ld. CIT in para 4.2 of his order observed that till the financial year 2002-03, the income of such Authorities were exempt u/s 10(20A) of the Act. However, in view of omission of section 10(20A) of the Act an Explanation was added to section 10(20), which is reproduced as under:

“Explanation: For the purpose of this clause, the expression ‘Local Authority’ means –

 (i)  Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii)  Municipality as referred to in clause (3) of article 243P of the Constitution; or

(iii)  Municipal committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; of

(iv)  Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924)”.

It would thus be seen that the income of a local Authority chargeable under the head “income from house property”, “Capital gains” or “Income from other sources” or from a trade or business carried on by it was earlier excluded in computing the total income of the Authority of a previous year. However, in view of the amendment with effect from April 1, 2003, the Explanation “Local Authority” was defined to include only the Authorities enumerated in the Explanation, which does not include an Authority such as the Jammu Development Authority. At the same time section 10(20A) which related to income of an Authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, which before the amendment was not included in computing the total income, was omitted. Consequently, the benefit conferred by clause (20A) on such an Authority was taken away. Thus, in view of the fact that section 10(20A) was omitted and an Explanation was added to section 10(20)A) of the Act, enumerating the “Local Authorities” contemplated by section 10(20), the assessee i.e. Jammu Development Authority could not claim any benefit under those provisions after April 1, 2003. The benefit conferred by section 10(20)A) of the Act on the assessee upto the A.Y. 2002-03 has been expressly taken away and the explanation added to section 10(20) enumerates the “Local Authority” which do not cover the Authority. The assessee i.e. Jammu Development Authority subsequently claimed that its objects falls under the provisions of section 2(15) of the Act and has complied with all the eligibility criteria for grant of registration u/s 12A of the Act, which was allowed vide order dated 30.09.2009 subject to fulfilment of certain conditions. On examination of the facts as enumerated above with reference to the amendment made to the provisions of sub section (15) of section 2 of the Act which defines ‘Charitable purposes’ to include relief of the poor, education, medical relief and advancement of any other object of general public utility.

4.4 Referring to insertion of the Ist and 2nd proviso to section 2(15) of the Act, the Ld. CIT after going through the objects of the Authority as envisaged u/s 6, it was observed that the object of the Authority is to promote and secure the development of the local area. The assessee has generated income by way of disposing off the developed lands and the lands are sold with definite motive of profit and there is no charitable purpose or any activity for public utility, which is the primary requirement of section 2(15) of the Act. The activities of the assessee are aimed at earning profit as it is carrying on activity in the nature of trade, commerce or business. Further profit making by the assessee is not mere incidental or by product of the activity of the assessee. The main pre-dominant purpose of assessee is making profit, it is real object of the assessee and also there is no spending of the income exclusively for the purpose of charitable activities and profits of the assessee not used for charitable purpose under the terms of the object and there is no obligation on the part of the assessee to spent on ‘charitable purpose’ only. The Ld. CIT referred to clause 53 of the Jammu & Kashmir Development Act relating to dissolution of the Authority. The said clause is reproduced in para 4.4 of CIT’s order at page-21 where it has been declared that such authority shall be dissolved w.e.f. such date as may be specified in the notification and tall the properties, funds and dues etc. shall vest in the Government and for the purpose of realizing the properties, funds and dues, functions of the Authority shall be discharged b the Government. It was interpreted by the Ld. CIT that all assets and liabilities as per clause 53 of Jammu & Kashmir Development Act, will be transferred to the Government and there is no restriction as to how the same are utilized by the Government. On perusal of the objects as per clause 6 it reveals that objects with which the Authority was set up may appear to be of general public utility for development of the area but then there are other objects like sale and purchase of land and property which make the Authority a commercial organization. Therefore, the objects pursued by the Authority cannot be said to be charitable in view of the fact that the authority being a commercial organization with no restriction as to the application of the assets on dissolution or winding up of for charitable purposes. In order to find out whether n organization is a charitable one, tests have been laid down by the Hon’ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1/[1979] 2 Taxman 501 and CIT v. Andhra Pradesh State Road Transport Corpn. [1986] 159 ITR 1. In the case of Surat Art Silk Cloth Mfrs. Association (supra), it was held as under:

“Since the income and property of the assessee were liable to be applied solely and exclusively for the promotion of the objects set out in the Memorandum and no part of such income or property could be distributed amongst the Members in any form or utilized for their benefit either during its operational existence or on its winding up or dissolution as such the object was a charitable one”.

4.5 Therefore, vide para 4.6, the Ld. CIT observed that on being dissolved or wound up, the Government which has set up the Authority, by virtue of provisions of section 53 of the Jammu & Kashmir Development Act, 1970, has the exclusive right over the properties left over thereof with no restriction as regards the utilization of the left over properties for charitable purposes. Thus, the authority failed the test laid down by the Hon’ble Supreme Court in the above case and therefore, cannot be termed as a charitable organization within the meaning of section 2(15) of the Act. Similarly, in the case of Andhra Pradesh State Road Transport Corpn. (supra), it was held by the Hon’ble Supreme Court as under:

“The activity of assessee was not carried on with the object of making profit… and the amount left over after utilization for the purpose set out in section 13 of the R.T.C. Act as amended was to be made over the State Government for the purpose of Road Development and the amounts handed over to the State Government did not become part of the general revenue of the State but was impressed with an obligation that it should be utilized only for the purpose for which it was entrusted, namely Road Development, which was an object of public utility.”

4.6 The assessee does not qualify by the test laid down by the Hon’ble Supreme Court in view of the fact that properties left over to the Government as per the provisions of section 53 of the J & K Development Act, 1970 will become a part of general revenue of the State and the State Government is not under any obligation to utilize the same for the purpose for which the Authority was set up. Therefore, the assessee does not fulfil the conditions required for claiming the status of charitable organization as envisaged under the fourth limb of the definition of charitable purposes contained in section 2(15) or in other words the objects cannot be termed as charitable although they appear to be of a general public utility but were put to test as per the conditions laid down by the Hon’ble Supreme Court in the cases mentioned hereinabove, they fail to qualify the same.

4.7 Vide para 4.9 of the Ld. CIT’s order, it was observed that the ITAT, Amritsar Bench, Amritsar, in the case of Jalandhar Development Authority v. CIT-2, Jalandhar, had rejected the application filed by the assessee holding that the object of Jalandhar Development Authority is profit making and as such s not entitled for registration u/s 12AA of the Act and upheld the decision of the ld. CIT-2, Jalandhar. The ITAT, Amritsar Bench, in the said case of Jalandhar Development Authority has also considered the cases of Surat Art Silk Cloth Mfrs. Association (supra), while deciding the case in favour of the Revenue. The Ld. CIT, referred to the decision of the Hon’ble Supreme Court in the case of Indian Chamber of Commerce v. CIT [1976] 101 ITR 796 wherein it has been held as under:

“that the activities of the chamber being activities carried on for profit, in the absence of any restriction in its memorandum and articles of association against the making of profit from those activities, the income of chamber from those activities was liable to income tax.

Section 2(15) must be interpreted according to the language used therein and against the background of India Life. By definition in section 2(15) the benefit of exclusion from total income is taken away when in accomplishing a charitable purpose the institution engages itself in activities for profit”.

4.8 The ITAT, Amritsar Bench, in the case of M/s. Jalandhar Development Authority relied upon the decision of the ITAT Chandigarh Bench, in the case of Punjab Urban Planning & Development Authority v. CIT. The ITAT in the case of Jalandhar Development Authority (supra) further held as under:

“It is a well known fact that in some of the situations the provisions of law are misused in the names of charities. If an expanded/broader latitude is extended to the word charity, then there are so many institutions/departments who will try to come under the umbrella of this provision to misuse the provision. Therefore, for the broad development of the nation/society, a strict and positive vigil is required so that the provision can be saved from its misuse in any manner. No activity can be carried on efficiently, properly unless and until it is carried out on business principle but it does not mean that the provision is misused in any manner under the grab of charity and any institution be allowed to become richer and richer under the grab of charity by making it a non-tax payable organization. A charitable institution provides services for charitable purposes free of cost and not for a gain. In the present scenario, similar activities are performed by big colonizers/developers who are earning a huge profit. If this registration is granted, then anybody will claim the exemption from tax. If the accounts of the assessee are analysed, it has turned into a huge profit-making agency for which it is taking money from the general public. If any institution of public importance like schools, community centers are created/developed, the assessee is charging the cost of it from the public at large and the money is coming from the coffer of the Government. It can be said that objects/activities of the assessee are more of commercialized nature and no charity is involved in it. At the time, if these facilities are not provided, then nobody will purchase a plot. It can be said that it is a means of attracting the people so that maximum people may apply for the same and the hidden cost is already added, so no charity is involved. At best, the assessee can be said to be an authority created to help it to achieve certain objects. It can be said that it is the duty of the Government to create/provide all these facilities to public large, which is being done through is agency in a particular area. At the same time, the funds which are provided to the assessee by the Government is again a public money or generated from public itself. The objects of the assessee, though claimed to be charitable, but actually are of purely commercial nature where profit motive is involved. It is a known fact that the assessee is acquiring the land at very low prices and selling the same land on very higher rates and is earning as profit therefrom. A new trend has also emerged that the assessee has started auctioning the plots by way of bidding at the market rate and sometimes more than that and charging interest on belated payments In such a situation, no charity is involved. Rather the assessee has converted itself into a big businessman. Similar development/infrastructure/facilities are also provided by private developers these days, then they will also claim the status of a charitable institution. The facilities which are provided to the plot holders are incidental to the commercial activity carried out by the assessee and if certain facilities like parks, community center, school are provided, it is not only basic requirement, rather a tool attracting the investors wherein the hidden cost of these facilities is already included. In the absence of these facilities, normally the purchaser may not invest and the prices may be less. In view of these facts, the assessee’s activities not being of charitable nature, the application of registration under s. 12A has been rightly rejected by CIT, – Asstt. CIT v. Thanthi Trust [2001], 165 CTR (SC) 681: [2001] 247 ITR 785 (SC) and Bihar State Forest Development Corporation v. CIT [1997] 224 ITR 757 (Pat.) reline on : Addl. CIT v. Surat Silk Cloth Manufacturers Association [1979] 13 CTR (SC) 378: [1980] 121 ITR 1 (SC), CIT v. Andhra Pradesh State Road Transport Corporation [1986] 52 CTR (SC) 75: [1986] 159 ITR 1 (SC) and New Life in Christ Evangelistic Association (NLC) v. CIT [2001] 165 CTR (Mad.) 446: [2000] 246 ITR 532 (Mad.) distinguished .”

4.9 The Ld. CIT, vide para 5.1 of his order observed that there is no evidence to suggest that the assessee is not engaged in the activity of the profits and as such the assessee is not engaged in the activity of the profits and the registration granted u/s 12A of the Act is required to be cancelled within the meaning of section 12AA(3) of the Act, as the findings show that the activities of the assessee are aimed at earning profit as it is carrying on activity in the nature of trade, commerce and business. Further, for profit making by the assessee is not mere incidental or by product of the activity of the assessee. The main pre-dominant purpose of assessee’s is making profit and it is the real object of the assessee and also there is no spending of the income exclusively for the purpose of charitable activities and profit of the assessee not used for charitable purposes only under the terms of the object clause of notification under which it was formed and there is no obligation on the part of the assessee to spend on ‘charitable purpose’ and accordingly, the Ld. CIT cancelled the registration so granted u/s 12A of the Act within the meaning of section 12AA(3) of the Act.

4.10 The Ld. CIT has also dealt with the arguments of the ld. counsel made before him that registration to the assessee was granted on 30.09.2009 i.e. well after the amendment of section 2(15) of the Act by Finance Act, 2008. It was observed by the Ld. CIT in this regard and invited our attention to the decision of five Member Bench of Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 wherein while reversing the order of the three Member Bench, the Hon’ble Court ruled as under:

“We have given our most anxious consideration to this question, particularly since one of us, namely, P.N. Bhagwati J, was a party to the decision in Cloth Traders’ case………….. we are compelled to reach the conclusion that Cloth Traders case must be regarded as wrongly decided. The view taken in that case…………must be held to be erroneous and it must be corrected.. To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience. In this, we derived comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. Delameter (A.M.Y at page 18) “a judge ought o be wise enough to know that he is fallible and therefore, ever ready to learn: great and honest enough to discard all mere pride of opinion and follow wherever it may lead ” and courageous enough to acknowledge his errors”.

4.11 On the issue of principle of consistency, as argued by the Ld. counsel for the assessee before the Ld. CIT, it was observed by the Ld. CIT vide para 6.2 of his order and referred to the decision of ITAT, Amritsar Bench, in the case of ITO v. Goverdhan Dass & Sons [1987] 20 ITD 681 that ‘an erroneous view in law could not be allowed to be perpetuated on the ground of consistency. This order of the ITAT, has been upheld by the Hon’ble Punjab & Haryana High Court in Gowardhan Das & Sons v. CIT [2007] 288 ITR 481/158 Taxman 465. Therefore, the ld. CIT observed that it is to be appreciated that an error in law cannot be allowed to be perpetuated on the ground of principle of consistency. The Ld. counsel for the assessee also relied upon the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248. With regard to the said decision, the Hon’ble Supreme Court observed that the facts of this case being very special, nothing should be said in a manner which would have general application and would like to state in clear terms that the decision is confined to the facts of the case and may not be treated as an authority on aspects which have been decided for general application. Similarly, the Ld. CIT distinguished the other case relied upon in the case of H.A. Shah & Co. v. CIT [1956] 30 ITR 618 (Bom.).

4.12 Referring to various courts of law, the Ld. CIT finally while canceling the registration observed as under:

“Thus from the above discussion it is clear that if a decision or order is contrary to law or not warranted in the facts and circumstances of the case or runs contrary to the reasoning and result reached, or a mistaken view of statutory provisions has been taken or the order is contrary to the law pronounced by the Hon’ble Supreme Court or jurisdictional High Court or Tribunal, then the rule of consistency has no application and merely because an illegal unwarranted for erroneous view in law has been taken by an authority, such illegality or erroneous view cannot be allowed to be repeated or perpetuated. Such illegal/erroneous view must be corrected, if it can be done according to law. An erroneous view in law cannot be allowed to be perpetuated on the ground of consistency.

On a cursory look at the Memorandum explaining the provisions in the Finance Bill under which the provisions of section 10(20A) were omitted and the definition of the term ‘Charitable purposes’ amended, it becomes abundantly clear that the Legislature clarified its intention. At this stage, it would not be out of place to consider the Hydron’s Rule also known as the “Mischief Rule’ which deals with ascertaining the correct intention of the legislature by looking into the mischief that was sought to be remedied by the legislature. This rule of consistency comprises four things to be considered;

 (a)  What was the common law before the making of the Act;

 (b)  What was the mischief and defect for which the common law did not provide;

 (c)  What remedy the Parliament has appointed to cure the defect; and

 (d)  The true reasons of the remedy.

This rule contemplates n considering the position prevailing anterior to the amendment, which was intended to be rectified by way of amendment or insertion of a section and then considering the amendment as overruling the hitherto legal position. If a particular provision is enacted for getting rid of the existing law, as it is or as interpreted by the Courts, the new amendment would be construed as superseding the earlier prevalent view which was considered by the legislature as mischievous. The Mischief rule has been repeatedly approved by several courts in the country including the Hon’ble Apex court in the case of CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC). Coming back to our case and applying the Mischief rule, we observed that through Finance Act, 2002 clause (20A) of section 10 has been deleted so as to withdraw exemption available to the Development Authorities so as to clarify the intention of the Legislature that their income becomes taxable. It has been deleted so as to withdraw exemption available to the Development Authorities so as to clarify the intention of the Legislature that their income becomes taxable. It has been noticed that entities operating on commercial lines are now claiming exemption on their income by taking recourse to the provisions of section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the ‘advancement of an object of general public utility” as is included in the fourth limb of the current definition of ‘charitable purpose. Such a claim, when made in respect of an activity carried out on commercial lines is contrary to the intention of the provisions. With a view to limiting the scope of the phrase “advancement of any other object of general public utility, sub section (15) of section 2 has been amended to provide 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 service 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.

In vies of the above, I am satisfied that Jammu Dev Development is an Authority established with the motive of profit constituted under the Jammu & Kashmir Development Act, 1970 and that the activities of such Authority are hit by sub section 15 of section 2 of the Act, therefore, I am satisfied that the Jammu Development Authority is not entitled to registration in terms of provisions of section 12AA(1)(a)(ii) of the Act. Therefore, in terms of the provisions of section 12AA(3) which provides that where a Trust has been granted registration u/s 12AA(1)(b) and subsequently the C.I.T. is satisfied that the activities of such trust are not genuine or are not being carried out in accordance with the objects of the Trust, he shall after affording reasonable opportunity of being heard to it, cancel the registration by passing an order in writing. Accordingly, I am satisfied that Jammu Development Authority is an Authority established with the motive of profit constituted under the Jammu & Kashmir Development Act, 1970 and that the activities of such Authority are hit by sub-section 15 of section 2 of the Act and are not in line with the objects of the trust so far as the activities relating to purchase and sale of properties as discussed above. Hence, the activities are not genuine to the extent discussed above, therefore, I am satisfied that the Jammu Development Authority is not entitled to registration and accordingly the registration granted is hereby cancelled in terms of provisions of section 12AA(3) of the Income tax Ac, 1961.”

5. The Ld. counsel for the assessee argued on similar lines as argued before the Ld. CIT. In addition, it was argued that the decision in the case of Jalandhar Development Authority v. ITO [ITA No. 562(Asr.)/2008 dated 12th June, 2009], is not applicable in the present facts and circumstances of the case, since in that case registration of the Institution was not granted. Whereas in the present case registration having been granted, the Ld. CIT does not have any right to withdraw/cancel the said registration since the Ld. CIT while granting registration to the assessee had considered the introduction of Ist proviso and 2nd proviso to section 2(15) of the Act. The Ld. counsel for the assessee relied upon the submissions made before the ld. CIT(A) in this regard.

6. The Ld. DR, on the other hand, relied upon the decision of the ld. CIT and decision of ITAT Amritsar Bench in the case of Jalandhar Development Authority (supra).

7. We have heard the rival contentions and perused the facts of the case, including section 12AA(3) of the Act, where Trust or Institution has been granted registration and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution of such trust or institution, as the case may be , he shall, pass an order in writing canceling the registration of such trust or institution. Section 2(15) of the Act defines “charitable purpose” to include the advancement of any other object of general public utility. It is also not disputed that the Ld. CIT while granting registration u/s 12AA(3) of the act to the assessee had observed that he is satisfied that instrument does not exist in any trade, commerce or business. The order is dated 30.09.2009 whereas the amendment by Finance Act, 2008 is w.e.f. 01.04.2009, where as per Finance Act, 2008, following proviso had been added w.e.f. 01.04.2009:

“Provided that the advancement of any other object of generally 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 service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use of application, or retention, of the income from such activity.”

7.1 Further, as per Finance Act, 2010, after first proviso, second proviso has been added w.e.f. 01.04.2009, which is read as under:

“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”.

7.2 As a matter of fact from the perusal of the order of the Ld. CIT, it appears that first proviso so inserted by the Finance Act, 2008 w.e.f. 01.04.2009 was not taken into consideration while granting registration vide order dated 30.09.2009. Therefore, in the facts and circumstances of the case, we concur with the views of the Ld. CIT, who had placed reliance on the decision of five Member Bench of Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra), wherein it has been held to perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience. In this, we derived comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. Delameter (A.M.Y at page 18). Therefore, the Ld. CIT in view of the decision of the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) is within his power to decide the issue as per insertion of the first proviso by the Finance Act, 2008 w.e.f. 01.04.2009 and also the second proviso inserted by the Finance Act, 2010 w.e.f. 01.04.2009 whereas the aggregate value of the receipts in the present assessee are Rs. 10 lakhs. Also on the principle of consistency, we concur with the views of the ld. CIT relying upon the decisions of various courts of law that an erroneous view in law could not be allowed to be perpetuated on the ground of consistency. Therefore, in the facts and circumstances of the present case, the Ld. counsel for the assessee was put a question by the Bench how the facts in the present case are different from the facts in the case of Jalandhar Development Authority (supra). The ld. counsel for the assessee argued and replied that the difference in the facts and circumstances of the present case with Jalandhar Development Authority (supra) is not there except that the registration had been granted in the case of Jalandhar Development Authority (supra) whereas in the present case, registration having been granted cannot be cancelled. Since the order of the CIT dated 30.09.2009 in the present case is after amendment to section 2(15) i.e. introduction of the first proviso was well before the Ld. CIT.

7.3 Considering the arguments of the ld. counsel for the assessee and on perusal of the facts of the present case with the facts in Jalandhar Development Authority’s case (supra), we are of the view that facts in the present case are identical to the facts as in the case of Jalandhar Development Authority (supra). As regards the first proviso inserted in section 2(15) of the Act, we have given our views hereinabove that the Ld. CIT had not considered the first proviso to section 2(15) as well as the second proviso to section 2(15) while making the order for grant of registration on 30.09.2009. Therefore, the Ld. CIT is well within his power to decide the issue by his order in view of the decision of the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra). Therefore, in the facts and circumstances of the present case and following our order in the case of Jalandhar Development Authority (supra) being on identical facts, the registration u/s 12AA cannot be granted to the assessee and the Ld. CIT has rightly cancelled the registration so granted.

7.4 Also, we concur with the views of the Ld. CIT(A) vide para 3.2 to 6.2 of his order that prior to insertion of these provisos i.e. first and second proviso to section 2(15) of the Act, certain bodies were treated as ‘charitable’ on the ground of advancement of object of general public utility. However, after the insertion of the above proviso, the advancement of any other object of general public utility shall not be a ‘charitable purposes’ if it involves the carrying on of :-

(a)  Any activity in the nature of trade, commerce or business;

(b)  Any activity of rendering any service in relation to any trade, commerce or business.

(c)  For a cess or fee or any other consideration, irrespective of the nature of use or application or retention of income from such activity.

7.4.1 Therefore, the Institutions/Trusts/Societies which are involved in the activities in (a) (b) & (c) mentioned hereinabove and aggregate value of the receipt of the activities referred to in the first and second proviso is more than Rs. ten lakhs in the previous year, they shall not be eligible to continue with registration u/s 12A and the same is required to be withdrawn.

7.5 The main objects of the assessee’s institution has been mentioned in Para 4.1. of Ld. CIT’s order, as mentioned hereinabove. It has rightly been mentioned by the Ld. CIT in para 4.2 mentioned hereinabove that till the financial year 2002-03, the income of such Authorities were exempt u/s 10(20A) of the Act. However, in view of omission of section 10(20A) of the Act, an Explanation was added to section 10(20), which has been mentioned hereinabove. The income of Local Authority is chargeable under the head ‘Income from House property’, ‘Capital gains’ or “Income from other sources” or from a trade or business carried on by it was earlier excluded in computing the total income of the Authority of a previous year. However, in view of the amendment, with effect from 01.04.2003, the Explanation “Local Authority” was defined to include only the Authorities enumerated in the Explanation to include Panchayat, Municipal Committee and District Board and Cantonment Board as referred in the said Explanation.

7.6 Also, at the same time, section 10(20A) which related to income of and Authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages which before the amendment was not included in computing the total income, was omitted. Consequently, the benefit conferred by clause (20A) on such an Authority was taken away. Thus, in view of the fact that section 10(20A) was omitted and an Explanation was added to section 10(20) of the Act, enumerating the “Local Authorities” contemplated by section 10(20), the assessee could not claim any benefit under those provisions after April 1, 2003. The assessee subsequently claimed that its objects falls under the provisions of section 2(15) of the Act and has complied with all the eligibility criteria for grant of registration under section 12A of the Act, which was allowed vide order dated 30.09.2009. It is at this juncture that the first proviso and second proviso were added by the Finance Act, 2008 w.e.f. 01.04.2009, as mentioned hereinabove. Therefore, after insertion of the said proviso, any institution carrying on of any activity in the nature of trade, commerce or business etc. as mentioned hereinabove, shall not be a charitable purpose. As per objects of the assessee, it is observed that the main object of the assessee is to promote and secure the development of local area and there is no charitable purpose or any activity for general public utility. The activities of the assessee are aimed at earning profit as it is carrying on activity in the nature of trade, commerce or business. Further profit making by the assessee is not mere incidental or by product of the assessee. There is no real object of the assessee and there is no spending of the income exclusively for the purpose of charitable activities and profits of the assessee are not used for charitable purpose under the terms of the object and there is no obligation on the part of the assessee to spend on ‘charitable purpose’ only. Also as per clause 53 of the Jammu & Kashmir Development Act, on dissolution of all properties and funds to vest in the Government and for the purpose of realizing properties, the function of the Authority shall be discharged by the Government. We concur with the views of the Ld. CIT on transfer of the properties, funds and dues and liabilities etc. will vest in the Govt. There is no restriction, how the same are to be utilized by the Government. There are other objects like sale and purchase, which makes the Authority a commercial organization. Therefore, in the facts and circumstances of the case, even on dissolution or winding up by not having any restriction on application of asset for charitable purpose, the objects pursued by the assessee cannot be said to be a charitable in nature.

7.7 As regards the reliance on the decisions of various courts of law by the Ld. CIT, most of the decisions have been dealt by the Tribunal in the case of Jalandhar Development Authority (supra). In the facts and circumstances of the present case, we concur with the views of the ld. CIT that Jammu Development Authority is an Authority established with the motive of profit constituted under the Jammu & Kashmir Development Act, 1970 and that the activities of such Authority are hit by section 2(15) of the Act read with first and second proviso and are not in line with the objects of the Authority/Trust so far as the activities relating to purchase and sale of properties, as mentioned hereinabove. Hence, the activities are not genuine to the extent, mentioned hereinabove and the Ld. CIT, Jammu, has rightly being satisfied held that the Jammu Development Authority is not entitled to registration and accordingly cancelled the registration so granted. We find no infirmity in the order of the Ld. CIT, Jammu and the same is upheld. Thus, all the grounds of the assessee are dismissed.

8. In the result, the appeal filed by the assessee in ITA No. 30(Asr.)/2011 is dismissed.