ITAT allows Section 11 Exemption on Interest Income of Charitable Trust

Jhansi Development Authority Commissionery Compus Vs DCIT (ITAT Agra)

As the assessee had derived all its income only on account of charitable activities undertaken by it pursuant to its object and for the welfare the general public, which were not in the nature of trade , commerce or business. The income even if any earned by way of the interest income on the fixed deposit is also required to be exempted under section 11 of the Act,as there is no other source of income of the assessee other than doing the charitable activities .For the purpose of exemption of interest income we may rely upon the full bench decision of Karnatka High Court in the matter of HewlettPackard Global Soft Ltd.*2017] 87 taxmann.com 182 (Karnataka) (FB), which on examining the exempt income under section 10, had allowed the exemption even on interest income , if there is no other source of income except the exempt income

FULL TEXT OF THE ORDER OF ITAT AGRA

These appeals are arising out of the orders passed by the Commissioner appeal for the assessment year 2010-11 to 2013-14 filed by the assessee as well as by the revenue. We are reproducing hereinbelow the grounds raised by the assessee/revenue for the each assessment year, which are as under:

2. The following grounds what raised by the assessee for the assessment year 2010 – 2011:

“1. Because the Ld. Commissioner of Income Tax (Appeals)-I, Agra, hereinafter referred to as ‘CIT(A)’ erred, both in law and on facts, in holding that the Assessing Officer was justified in adopting status of the appellant as AOP/BOI. The findings of Ld. CIT(A) are self contradictory.

2. Because the Ld. CIT(A) erred, both in law and on facts, in dismissing ground nos. 4,5,7,8,9,10 and 11 taken before him and holding that the appellant is engaged in commercial activities by virtue of section 2(15) of the I. T. Act, as amended from 01.04.2009. Ld. CIT(A) failed to appreciate that the appellant is carrying on non commercial activities and enjoying registration u/s 12A. The provisions of section 2(15) cannot, legally, be invoked during the subsistence of registration u/s 12A. Ld. CIT(A) has arbitrarily differentiated the authoritative judicial pronouncement in the case of Hira Lal Bhagwati vs. CIT [(2000) 246 ITR 188 (Guj)] and ACIT VS Surat City Gymkhana (2008) 170 Taxmann 612 (SC). The order of Ld. CIT(A) is erroneous and perverse.

3. Because the Ld. CIT(A) erred, both in law and on facts, in holding the activities of the appellant as commercial in utter disregard to the authoritative pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)]. Ld. CIT(A) failed to appreciate that the appellant is also a statutory body constituted by the same statute viz. Uttar Pradesh Urban Planning And Development Act 1976 with the sole object of planned development of Jhansi City.

4. Because the Ld. CIT(A) erred, both in law and on facts, in confirming the action of Assessing Officer in completing the assessment under Chapter IV of the Income tax Act and invoking provisions of section 145(3) in the absence of any income under the head “ Profit and Gains of business or Profession” or “ Income from other sources”. The completion of assessment under Chapter IV and invoking provisions of section 145(3) is wholly illegal in the case of the appellant which is enjoying registration u/s 12AA.

5. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 1,30,72,364/- out of addition of Rs 20,28,52,965/- made by the Assessing Officer. The Ld. CIT(A) erroneously held that income is recognizable against receipts shown in the ‘project development fund’ a/c which are in respect of allotment money received during the year. The Ld.CIT(A) has erroneously confirmed the addition of entire receipts as income of the appellant. The authorities below have arbitrarily rejected the system of accounting consistently followed by the appellant from the date of its inception. In the absence of any amount reserved by the appellant as profit, holding entire amount of allotment money as income is arbitrary and whimsical. The addition may kindly be directed to be deleted.

6. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 3,59,03,019/- being the receipts shown in the ‘infrastructure development fund’ account. Ld. CIT(A) failed to appreciate that the above statutory receipts are in the form of government grants and not against any of the alleged business activities. The same is again utter disregard to judicial pronouncement including authoritative judicial pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)].

7. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 3,58,61,640/- being the excess shown in the ‘income and expenditure’ account. The authorities below have erroneously disallowed the benefit of exemption u/s 11 claimed by the appellant. The authorities below further failed to appreciate that various receipts forming the above excess included interest from bank amounting to Rs 3,51,83,751/- which is not at all the receipt from the alleged commercial activities. The authorities below failed to appreciate various authoritative judicial pronouncements in this regard.

8. Because the Ld. CIT(A) erred, both in law and on facts, in holding the revenue expenditure of Rs 4,84,000/- as capital expenditure. The authorities below failed to appreciate the nature and expectancy of life of the equipments purchased including the expenditure made in cabling of the generator.

9. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 1,44,000/-, being the expenses made during the year by holding them of prior period. The authorities below failed to appreciate the accounting system consistently maintained by the appellant in respect of expenses made to the professionals.

10. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 29,63,000/- being the surplus appearing in the ‘ManyawarKashiramAwasYojna’. The authorities below failed to appreciate that the appellant, merely, functioned as nodal agency for completion of the work assigned by the State Government and that the unutilized amount was to be refunded to the State government. The addition is contrary to the facts available on record and is wholly illegal.

11. Because the appellant craves leave to alter/ modify grounds before or at the time of hearing of the appeal.”

ITA No. 355/Agra/2014

Following Grounds Were Raised by the revenue for the assessment year 2010 – 2011

“1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.18,97,80,601- out of total addition of Rs.20,28,52,965/- made by the AO on account of sale of shopping complexes, residential houses / commercial spaces etc. without appreciating the facts that the assessee never recognized revenue from the above sale in the past nor ever treated them as business receipts in his books of accounts.

2. The Id. CIT(A) has erred in law and on facts in deleting the addition on account of grant received from Govt. of Rs.1,30,55,310/-and in holding that the entire receipt was capital receipt This amount was given by the state government to the assessee for carrying out civil works which is in the nature of business activity. The assessee spent an amount of Rs.32,33,663/- on this works, therefore, proportionate part of the receipt amount should have been recognized as revenue in the books of accounts of the assessee.

3. The Ld. CIT(A) has erred in law and on facts in deleting the estimated addition of Rs.27,00,839/- on account of security deposit shown as liabilities. Since the assessee has failed to explain the nature and source of such liabilities appearing in his books of account and that such liabilities were still surviving the AO was justified in drawing a conclusion that 50% of outstanding liabilities has seized to survive.

4. The order of Ld. CIT(A) being erroneous in law and on facts deserves to be quashed and that of the A.O. deserves to be restored.

5. The appellant craves leave to add of alter any or more ground or grounds of appeal as may be deemed fit at the time of hearing of appeal.”

ITA No. 49/Agra/2017

The grounds of the assessee’s are as under:-

“1. Because the Ld. Commissioner of Income Tax (Appeals)-II, Agra, hereinafter referred to as ‘CIT(A)’ erred, both in law and on facts, in holding that the Assessing Officer was justified in adopting status of the appellant as AOP/BOI. .

2. Because the Ld. CIT(A) erred, both in law and on facts, in confirming the action of Assessing Officer in completing the assessment under Chapter IV of the Income tax Act and invoking provisions of section 145(3) in the absence of any income under the head “ Profit and Gains of business or Profession” or “ Income from other sources”. The completion of assessment under Chapter IV and invoking provisions of section 145(3) is wholly illegal in the case of the appellant which is enjoying registration u/s 12A.

3. Because the Ld. CIT(A) erred, both in law and on facts, holding that the appellant is engaged in commercial activities by virtue of section 2(15) of the I. T. Act, as amended from 01.04.2009. Ld. CIT(A) failed to appreciate that the appellant is carrying on non commercial activities for which registration u/s 12A had been granted. The authorities below could not legally hold the charitable objects as of commercial nature during the subsistence of registration u/s 12A in view of authoritative judicial pronouncements and as such, the order of Ld. CIT(A) is erroneous and perverse.

4. Because the Ld. CIT(A) erred, both in law and on facts, in holding the activities of the appellant as that of commercial nature and consequentially denying exemption u/s 11 of the I.T. Act. The same is again in utter disregard to the several judicial pronouncements including authoritative pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)J. Ld. CIT(A) failed to appreciate that the appellant is also a statutory body constituted by the same statute viz. Uttar Pradesh Urban Planning And Development Act 1976 with the sole object of planned development of Jhansi City.

5. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 3,26,00,848/- being the excess shown in the ‘income and expenditure’account. The authorities below have erroneously disallowed the benefit of exemption u/s 11 of the I.T. Act claimed by the appellant. The disallowance is again in utter disregard to the authoritative judicial pronouncements. The exemption u/s 11 of the I.T. Act, being in accordance with report in 10B, may kindly be directed to be granted.

6. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 6,31,13,830/- being the receipts shown in ‘infrastructure development fund ‘ account. Ld. CIT(A) failed to appreciate that the receipts are in terms of notification issued by Uttar Pradesh Government and has no correlation with the regular activities of the appellant. The same is again in utter disregard to various judicial pronouncement including authoritative judicial pronouncement of Hon ’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)J.

7. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 10,42,10,133/- out of addition of Rs 12,46,85,554/- made by the Assessing Officer against the receipts shown in ‘project development fund’account. The receipts are in respect of installments received against allotment of house / plot by the appellant. In the absence of any margin of profit kept by the appellant at the time of allotment of house / plot, holding entire allotment money as income is arbitrary and whimsical. The addition may kindly be directed to be deleted.

8. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 23,65,000/- being the surplus appearing in the ‘ManyawarKashiramAwasYojna’ account. The authorities below failed to appreciate that the appellant merely functioned as nodal agency for completion of the work assigned by the State Government. The surplus appearing is in respect of undergoing work and further the unutilized amount was to be refunded to the State government in terms of Govt. Notification. The addition is contrary to the facts available on record and is wholly illegal.

9. Because the Ld. CIT(A) erred, both in law and on facts, in holding the revenue expenditure of Rs 65,200/- as capital expenditure. The authorities below failed to appreciate that the equipments purchased had expectancy of life of less than a year and as such holding the expenditure of capital nature is wholly illegal.

10. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 38,586/-, being the expenses made during the year by holding them of prior period. The authorities below failed to appreciate the accounting system consistently maintained by the appellant in respect of expenses made to the professionals.

11. Because the appellant craves leave to alter/modify grounds before or at the time of hearing of the appeal.”

ITA No. 150/Agra/2017

The grounds of the assessee’s are as under:-

“1. Because the Ld. Commissioner of Income Tax (Appeals)-II, Agra, hereinafter referred to as ‘CIT(A)’ erred, both in law and on facts, in holding that the Assessing Officer was justified in adopting status of the appellant as Society.

2. Because the Ld. CIT(A) erred, both in law and on facts, holding that the appellant is engaged in commercial activities by virtue of section 2(15) of the I. T. Act, as amended from 01.04.2009. Ld. CIT(A) failed to appreciate that the appellant is carrying on non commercial activities for which registration u/s 12A had been granted. The authorities below could not legally hold the charitable objects as of commercial nature during the subsistence of registration u/s 12A in view of authoritative judicial pronouncements and as such, the order of Ld. CIT(A) is erroneous and perverse.

3. Because the Ld. CIT(A) erred, both in law and on facts, in holding the activities of the appellant as that of commercial nature and consequentially denying exemption u/s 11 of the I.T. Act. The same is again in utter disregard to the several judicial pronouncements including authoritative pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)J. Ld. CIT(A) failed to appreciate that the appellant is also a statutory body constituted by the same statute viz. Uttar Pradesh Urban Planning And Development Act 1976 with the sole object of planned development of Jhansi City.

4. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 4,17,18,254/- being the excess shown in the ‘income and expenditure’ account. The authorities below have erroneously disallowed the benefit of exemption u/s 11 of the I.T. Act claimed by the appellant. The disallowance is again in utter disregard to the authoritative judicial pronouncements. The exemption u/s 11 of the I.T. Act, being in accordance with report in 10B, may kindly be directed to be granted.

5. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 5,12,62,249/- being the receipts shown in ‘infrastructure development fund ‘ account. Ld. CIT(A) failed to appreciate that the above receipts are in terms of notification issued by Uttar Pradesh Government and has no correlation with the regular activities of the appellant. The same is again in utter disregard to various judicial pronouncement including authoritative judicial pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)].

6. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 4,40,01,735/- out of addition of Rs 4,91,33,396/- made by the Assessing Officer against the receipts shown in ‘project development fund’account. The receipts are in respect of installments received against allotment of house / plot by the appellant. In the absence of any margin of profit kept by the appellant at the time of allotment of house / plot, holding entire allotment money as income is arbitrary and whimsical. The addition may kindly be directed to be deleted.

7. Because the appellant craves leave to alter/ modify grounds before or at the time of hearing of the appeal.”

ITA No. 151/Agra/2017

The grounds of the assessee’s are as under:-

“1. Because the Ld. Commissioner of Income Tax (Appeals)-II, Agra, hereinafter referred to as ‘CIT(A)’ erred, both in law and on facts, in holding that the Assessing Officer was justified in adopting status of the appellant as Society.

2. Because the Ld. CIT(A) erred, both in law and on facts, holding that the appellant is engaged in commercial activities by virtue of section 2(15) of the I. T. Act, as amended from 01.04.2009. Ld. CIT(A) failed to appreciate that the appellant is carrying on non commercial activities for which registration u/s 12A had been granted. The authorities below could not legally hold the charitable objects as of commercial nature during the subsistence of registration u/s 12A in view of authoritative judicial pronouncements and as such, the order of Ld. CIT(A) is erroneous and perverse.

3. Because the Ld. CIT(A) erred, both in law and on facts, in holding the activities of the appellant as that of commercial nature and consequentially denying exemption u/s 11 of the I.T. Act. The same is again in utter disregard to the several judicial pronouncements including authoritative pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)J. Ld. CIT(A) failed to appreciate that the appellant is also a statutory body constituted by the same statute viz. Uttar Pradesh Urban Planning And Development Act 1976 with the sole object of planned development of Jhansi City.

4. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 7,54,48,269/- being the excess shown in the ‘income and expenditure’ account. The authorities below have erroneously disallowed the benefit of exemption u/s 11 claimed by the appellant. The disallowance is again in utter disregard to the authoritative judicial pronouncements. The exemption u/s 11, being in accordance with report in 10B, may kindly be directed to be granted.

5. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 5,47,56,721/- being the receipts shown in ‘infrastructure development fund ‘ account. Ld. CIT(A) failed to appreciate that the above receipts are in terms of notification issued by Uttar Pradesh Government and has no correlation with the regular activities of the appellant. The same is again in utter disregard to various judicial pronouncement including authoritative judicial pronouncement of Hon’ble Allahabad High Court in the case of Lucknow Development Authority [(2013) 38 taxmann.com 246 (All.)J.

6. Because the Ld. CIT(A) erred, both in law and on facts, in sustaining the addition of Rs 8,03,08,852/- out of addition of Rs 8,81,47,163/- made by the Assessing Officer against the receipts shown in ‘project development fund’account. The receipts are in respect of installments received against allotment of house / plot by the appellant. In the absence of any margin of profit kept by the appellant at the time of allotment of house / plot, holding entire allotment money as income is arbitrary and whimsical. The addition may kindly be directed to be deleted.

7. Because the appellant craves leave to alter/ modify grounds before or at the time of hearing of the appeal.”

3. At the outset both the parties have mentioned, that the appeal for the assessment year 2010-2011, be decided as a lead appeal and the decision in the said appeal be applied for the remaining assessment years pending before this tribunal.

APPEAL NO 256/ AGRA/ 2014

4. The Ld.AR for the assessee has submitted that appellant has raised 11 grounds in the present appeal out of which, the assesseeis not pressing down 1 ,2 and 4 of the grounds of appeal. As a assessee is not pressing these ground , therefore these grounds are dismissed as not pressed.

5. During the course of argument, both the parties, have agreed that the ground No. 3 is a basic and common ground in all the assessee appeal which is required to be decided first and the remaining ground are consequential in nature.

6. The facts are that the assessee under appeal is a body corporate constituted under Uttar Pradesh Urban Planning & Development Act, 1973. The assessee was filing return of income in the status of ‘Local Authority’ and claiming exemption u/s.10(20A) earlier. Later, vide Finance Act, 2002, section 10(20A) has been deleted and an explanation to section 10(20) has been added defining the term “Local Authority”. As per this definition, the assessee (appellant) in the present case has been excluded from being assessed as ‘Local Authority’ w.e.f. 01.04.2003.

7. Subsequently, the assessee (appellant) has been given registration u/s.12AA by the CIT-II, Agra w.e.f. 01.04.2003 vide order dated 21.10.2010 under the status of a charitable institution and thereafter, it has been filing its return of income claiming exemption u/s 11 and showing “Rs. Nil” income. In earlier years, while filing the return of income, the assessee has shown its surplus in “income and Expenditure Account” as income from business or profession and also paid taxes but later on due to registration u/s 12A has been provided by the Ld. CIT-II, Agra w.e.f. 01.04.2003, the assessee claimed exemption of its income u/s 11, particularly for A.Y. 2004-05 and 2005-06 in appeal against the assessment order passed for those assessment years considering the surplus earned by the assessee as its income under the head “Income from business.

8. The Ld CIT-II, Agra vide his order dated 25.10.2011 had withdrawn registration u/s 12A granted to the assessee, on the ground that its activities are not charitable as per the section 2(15) amended by Finance Act, 2008.

9. This order of withdrawal of registration u/s 12A was challenged by the assessee before the Hon’ble ITAT, Agra, which was allowed by the tribunal by order dated 30.3.2012.

10. For the assessment year under consideration, the assessee filed the return of income showing nil income. The case of the assessee was selected for scrutiny and the proceeding for assessment were initiated. During the course of the assessment proceedings, the assessee has brought to the notice of the assessing officer the order passed by the tribunal on 30.3.2012 however the assessing officer sadly mentioned in the order at page 2 that the tribunal had allowed the appeal on technical ground without going into the merits of the case.

11. Despite passing of the order by the tribunal, cancelling the withdrawal of 12AA order of the CIT, the assessing officer had examined the activities of the assessee in detail, and had that the activities of the assessee was the nature of trade, commerce or business and has the assessee is not entitled to the exemption under the Act. For the ready purposes we are reproducing herein below the finding recorded by the assessing officer at page 6 and 7 of the assessment orders to the following effect:

“2. In order to consider the issue, I have carefully perused the provisions of Uttar Pradesh Urban Planning and Development Act, 1973 (UPUPD Act, 1973) along with various sources of income of the assessee, as given in income and expenditure statement, from which following facts emerge out, each indicating that the activities of the assessee are hit by newly introduced first proviso to section 2(15) :-

a. The assessee is engaged in acquiring land from the farmers, converting the land use, plotting the land and selling it at higher price thereby making a profit. The assessee also sells such land to colonizers and builders for further development and constructions.. These activities are clearly in the nature of trade and commerce and therefore the same attracts proviso to section 2(15) of I.T.Act.

b. The assessee converts a lease hold land to Free Hold Land thereby increasing its value and rendering it useful for further sale and development by builders and colonizers and common people. The assessee earned Rs 2,11,24,087/- (Part of schedule 8 of Annual Statement) during the relevant Assessment Year from such activities. This activity clearly attracts the new proviso as it is an activity of rendering service in relation to a trade, commerce or business.

c. The assessee sold master plan book and tender forms and earned a income of Rs 3,59,600/-. It has earned an amount of Rs 19,20,460/- as development charge and Rs 52,71,369/- as supervision charges. Misc. income of the assessee itself is Rs 89,703/-. These all activities are in the nature of commerce or business or they are rendering any service for trade or commerce and attract proviso to section 2(15) as such.

d. The assessee allots plots/houses to allottees and fixes a schedule of installments for payment. These installments include principal plus interest. The assessee also charges penal interest for any default. The assessee earned approximately Rs 12 crores (schedule 6 of Balance Sheet) during A.Y. 2010-11 by doing such activities. This activity is clearly commercial in nature.

g. Section 2(ddd) of UPUDP Act, 1973 defines ‘city development charge’ as the charge levied on private developer U/s 38A for the development of land. Section 38A says that the Authority shall levy and collect city development charge from a private developer who has been given a license to develop land in a development area. This charge is collected from a private developer who in turns develops and profits from such business. This activity clearly attracts the new proviso as it is an activity of rendering service in relation to a trade or business.

h. Section 38A of UPUPD Act, 1973 provides for land use conversion charge for the change of land use in the MASTER PLAN. This section enables the authority to charge money when non-agricultural land is converted to residential or commercial land or Residential land is converted to commercial land thereby increasing its valuation. This charge is paid by general public including the colonizers and builders who acquire agriculture land and later on use it for developing residential or commercial property for sale. This activity clearly attracts the new proviso as it is an activity of rendering service in relation to a trade or business.

i. Section 39B of UPUPD Act, 1973 provides for imposition of license fee, on a private developer who has been authorized for assembly and development of land in the development area.

j. Section 15 of UPUPD Act, 1973 provides for imposition of stacking fees from the general
public who use authorities land for keeping buildingmaterial. This activity is in the nature of trade as Authority gives the right to use of its land in consideration of a fee thereby attracting provisions of proviso to section 15.

k. The assessee invests the surplus money in FDRs and other deposits like any regular businessman and earned Rs 3,51,83,751/- as interest income. This is a commercial activity which attracts the proviso to section 2(15).

So, from the discussion above it is clearly established that above activities of the assessee are in the nature of trade, commerce or business or they are rendering service in relation to trade, business or commerce. The perusal of balance sheet, Profit and loss account, Income and Expenditure account and report in form 103 along with UP Urban Planning and Development Act, 1973, leads to inescapable conclusion that the activities of the assessee were hit by newly introduced first proviso to section 2(15). The activities of the assessee are also aimed at earning profit, which is neither incidental nor by-product of assessee and the activities of purchase and sale of assessee makes it to be a commercial organization.”

12. During the course of assessment proceedings, the assessee was asked by the assessing officer as to the applicability of the proviso to section 12A and disallowance of the exemption claimed under section 11 and 13 of the Act as the activities of the assessee was in the nature of trade, commerce or business in nature. In response to that the assessee filed the reply of 7th August 2013 and in the reply it was mentioned as under.

“ Before replying to specific queries, the assessee w ould like to bring fundamental objections to the proposed presumption of your honour that the activities of the assessee are. commercial within the meaning of amended provisions of section 2(15j and as such, irrespective of registration u/s 12A the claim deduction u/s 11 can not be given. The objection goes to the root of the matter and as such the same should be decided before proceeding further on the merits of the case.

Fundamental Objections:

The facts in brief for kind consideration are as under:-

1. That the applicant is an authority constituted by Uttar Pradesh Urban Planning and Development Act 1973 for the purposes of carrying out activities contained in section 7 of the Act. Section 5 of the Act is reproduced as under.-

“ Objects of the Authority : – The objects of the Authority shall be to promote and secure the development of the development area according to plan and for that pm pose 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 purposes of such development and for purpose incidental thereto :

2. That after the amendment in section 10(20) of the I.T Act. the assessee applied for registration u/s 12A. The registration was granted w.e. f 01.04.2003 by the Ld. Commissioner of Income Tax-II, Agra vide order dated 24 09.2003.

3. That the returns were filed from A. Y. 2003-04 and declared results were accepted upto A.Y. 2007-08. The assessment for A. Y. 2007-08 was completed after allowing benefit u/s 11. The proceedings for A.Y. 2008-09 are still pending.

4. That the proceedings for A.Y. 2010 the where you play -1I were started from 2″.09.2011. During the course of proceedings, the Assessing Officer issued various notices on the predetermined presumptions that the assessee is involved in commercial activities by virtue of amendment in section 2(15) w.e.f. 01.04.2009. A proposal for cancellation of registration ws 12A was also sent to Ld. Commissioner of Income Tax-II, Agra who, after considering the proposal cancelled the registration u/s 12A. However, the order of Ld. Commissioner of Income Tax was cancelled by Hon’ble ITAT vide its order dated 11.01.2013 Thereafter, proposal on the identical lines was sent to the Ld. Chief Commissioner of Income Tax, Kanpur for getting Special Audit u/s 142A. The special audit was conducted and report of the Special auditor is on record. The Special auditor too, beyond his authority, has made comments on the nature of activities.

5. The fundamental issue to be considered, in the light of facts and circumstances above, is whether, the assessing officer can legally examine the objects or the activities ignoring registration granted u/s 12A. It has been held by the apex court in Asstt. CIT Vs Surat City Gymkhana ((2008) 170 Taxmann 612 (SC)], the Hon ’ble High Court in Iiira Lai Bhagwati Vs CIT ((2000) 246 ITR 188 (Guj.) (HC)/ and by the Hon’ble ITAT in Mumbai Metropolitan Region Development Authority vs DDIT (ITA No. 5584 and 5062 /Mum /2009 dated 29.06.2012] that the Assessing Officer has no authority to examine the objects or the nature of activities, once the registration is available us 12A. The low laid down by the Apex court reads as under:

” The registration of a trust once done is a fait acomplie and the assessing officer cannot thereafter made further probe into the objects of the trust. “

6. Section 2(15) describes the object as per its head note. Thus, the authority of the A O is legally restricted to examine the conditions for claim u/s 11 during the course of assessment. The scope to examine objects or the activities or the application of section 2(15) is exclusively with the Ld. Commissioner of Income lax. The grunt of registration is not a empty formality, as has been observed in the judicial pronouncement referred to above. In view of the above, it is requested that the assessment be. fairly, completed on the identical lines of A.Y. 2007-08 keeping in view authoritative judicial pronouncements referred to above. “

(Page 11 and 12 of AO order)

13. The assessing officer had examined the reply and after examining the reply had passed the impugned assessment order. In the concluding para internal page 19 of the assessment order it was mentioned as under:

6. During the course of assessment proceedings assessee has quoted recent decision of the Hon’ble ITAT, Agra Bench. Agra in his case for withdrawing exemption U/s 12AA(3) of the Act. In this regard assessee’s submission is considered. After perusal of order of the Hon’ble ITAT, Agra Bench. Agra dated 30.03.2012 , it is found that Hon’ble ITAT has limited itself about power of the CIT u/s 12AA(3) in withdrawing exemption and has not given any finding in respect of the proviso of section 2(15) and section 13(8) of the I.T.Act, 1961. The Hon’ble Bench has also not given any finding whether assessee is a charitable entity as per section 2(15) of the Act or not. In such a scenario judgment of Hon’ble ITAT, Amritsar and Hon’ble ITAT. Indore in the case of Jammu Development Authority and Indore Development Authority (cited supra) are directly applicable in the case of the assessee.

14. Feeling aggrieved by the order passed by the assessing officer, the assessee filed the appeal before the Commissioner. The CIT appeal had also dismissed the appeal filed by the assessee. We’re reproducing hereinbelow the relevant portion of the finding recorded by the learned CIT appeal which were to the following effect:

“7.5.1 After considering the discussion made by the AO in the assessment order and the written submission of the Ld. AR, I find that the dispute about the nature of activities of the assessee (appellant) Authority has arisen because of the amendment in section 2(15) inserting a proviso w.e.f. 01.04.2009 and further bringing an amendment w.r.e.f. 01.04.2009 inserting a sub-section (8) in section 13. On the basis of these new provisions, the AO has held the activity of the assessee (appellant) as being in the nature or in relation to trade, commerce or business and taxing the income from such activity under the head “Income from Business or Profession”. However, as per the argument put up by the Ld. AR, once the registration u/s 12A is in force in respect of a trust/institution, the AO is bound to complete the assessment after allowing exemption under section 11 and it has been forcefully argued by him that the AO has illegally assumed the power of CIT provided in section 12AA for examining the nature and activities of the assessee (appellant) Authority. In his view, the power of the AO are restricted in this regard, considering the judgment of Hon ’ble Supreme Court in ACIT vs. Surat City Gymkhana (2008) 170 Taxman 612 (SC), UP Forest Corporation vs. Dy.ClT(2008) 297 ITR 1 (SC), Hon’ble High Court in Hira Lai Bhagwati vs. CIT (2000) 246 ITR 188 (Guj.) and IT AT in Mumbai Metropolitan Region Development Authority vs. DDIT (ITA No.5584 & 5062/Mum/2009 dated 29.06.2012. By referring these decisions, the Ld. AR pointed out that the Hon ’ble Courts have held that the registration of a trust once done is a fait accompli and the AO cannot thereafter, make further probe into the objects of the trust. As per the Ld. AR, once registration u/s 12A is granted, the AO is left with no alternative choice but to allow exemption as per the section 11 of the Act. In this respect, the Ld. AR has also cited a recent judgment of Hon’ble Allahabad High Court, Lucknow Bench in the case of Commissioner of Income-tax-1, Lucknow vs. Lucknow Development Authority, Gomti Nagar reported in [2013] 219 Taxman 162 (Allahabad).

With regard to proviso to section 2(15), the Id. AR has again explained that this proviso clearly specifies that the activities must be for cess, fee or other consideration. In business, as is commonly known, the sale consideration includes cost, the profit and user of the profit. As long as the profit does not reaches to private hands, the provision to charge income tax does not apply. As per the Id. AR, the appellant being a publically owned institution and statutory body, no parts of its receipt, of whatever nature, goes to the public during its subsistence and after its dissolution.

7.5.2 Against the above contention of the Ld. AR of non applicability of proviso to section 2(15) for computation of income of the assessee, if the registration u/s 12A is in force, the view of the AO as discussed in the assessment order, is that the registration u/s 12A / 12AA is only a necessary but not sufficient condition for claiming exemption u/s 11. As per the AO, the sufficient condition is satisfied when the assessee fulfills the condition as laid down in section 11 and section 13. The examination of applicability of section 11 has to be done by the AO separately before allowing the assessee the benefit of exemption, even if the assessee has got registration u/s 12A. As per the finding of the AO, discussed in the assessment order, since the assessee does not fulfill the criteria for charitable purpose, it has been held by him that the assessee cannot be allowed exemption u/s 11 after invoking the newly inserted provision of section 13(8) w.r.e.f. 01.04.2009 as I have already discussed in para 7.1. As regards to the contention of the Ld. AR about the assessee(appellant)being a publically owned institution and statutory body and no parts of its receipt of whatever nature going to the public during its subsistence and after its dissolution also, no part of its profit going to private hand, the AO has relied upon the decisions in respect of certain other Development Authorities i.e. Jammu Development Authority and Jalandhar Development Authority for whom cancellation of registration u/s 12A and denying exemption of income u/s 11 was confirmed by the Hon ’ble ITAT Amritsar and similarly in respect of Indore Development Authority also, cancellation of registration u/s 12A was confirmed by the Hon ’ble ITAT Indore. As regards to nontaxability of a publically owned institution and statutory body of a State Govt., the AO has specifically referred to a decision of Hon ’ble Supreme Court in case of Adityapur Industrial Area Development Authority vs. Union of India &Ors(supra) in which , it has been held that “thus, even the income of the State within the meaning of cl. (1) of Art. 289 may be taxed by law made by the Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. ” and as regards to taxability of such authorities which are constituted under an Act of the State Govt., the Hon ’ble Supreme Court in this decision, has further held that ‘Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly s. 17 thereof, there is no manner of doubt that the income of the appellant/Authority constituted under the said Act is its own income and that the appellant/Authority manages its own funds. It has its own assets and liabilities. It can sue or be sued in its own name. Even though, it does not carry on any trade or business within the contemplation of cl. (2) of Art. 289, it still is an Authority constituted under an Act of the legislature of the State having a distinct legal personality, being a body corporate, as distinct from the State. Sec. 17 of the Act further clarifies that only upon its dissolution its assets, funds and liabilities devolve upon the State Government. Necessarily therefore, before its dissolution, its assets, funds and liabilities are its own. It is, therefore, futile to contend that the income of the appellant/Authority is the income of State Government, even though the Authority is constituted under an Act enacted by the State legislature by issuance of a Notification by the Government there under. The High Court was therefore right in concluding that the appellant/Authority could not claim exemption from Union taxation under Art. 289(1) of the Constitution of India.” In view of the above decision of the Hon ’ble Supreme Court, the question arises that if a Development Authority like Adityapur Industrial Area Development Authority constituted under “Bihar Industrial Areas Development Authority Act, 1974” for development of industries in Bihar by the State Govt, is taxable under the Income-tax Act, why the assessee(appellant) being similar type of Development Authority constituted under “Uttar Pradesh Urban Planning & Development Act, 1973” for development of city of Agra should not be taxable , if it is found that it is engaged in the activities of trade & business and for this purpose , profit to go in private hand is not an important criterion as in the case of Adityapur Industrial Area Development Authority also, the profit did not go to private hand but it has been held as liable to be taxed because of its nature of activities. Therefore, the AO has heavily relied upon this decision along with the decisions in case of Jammu Development Authority, Jalandhar Development Authority and Indore Development Authority.

7.5.3 Since in case of the present assessee , it is registered as charitable institution u/s 12A, the basic question to be decided is whether granting of registration u/s.12A /12AA to a trust/institution will take away the powers of the AO to determine the nature of the income earned by it, specifically of the trust or institution that is provided registration for charitable purposes for advancement of object of public utility, but during the course of assessment proceedings, the AO finds that the activities of such trust/institution are in the nature of or for providing service in relation to trade, business or commerce and their gross receipts from such activities are more than Rs.10 lacs or Rs.25 lacs depending on the year of assessment.

Keeping in view the new provisions inserted in the Income Tax Act as section 13(8) for computation of income of those trusts / institutions whose activities are hit by the proviso to section 2(15) and because of similar provision has also been brought for those trusts / institutions that are registered u/s 10(23C) by inserting a proviso no. (8) in section 10(23C), the issue under dispute to determine the nature of activities of the assessee (appellant) Authority during the year under consideration, has been examined along with the Ld. AR and it has been decided that the following two changes in the provisions of the Income-Tax Act should be dealt upon before finally deciding the issue raised in Grounds 4, 5, 7, 8, 9 & 10.

(i) Effect of amendment in section 2(15) of the Income Tax Act, w.e.f. 01.04.2009.

(ii) Effect of insertion of section 13(8) of the Income Tax Act, w.r.e.f. 01.04.2009.

8.1 In order to resolve the issue before me as raised in ground nos. 4,5,7,8,9 & 10, I have decided to examine both the provisions in the light of the Memorandum of Finance Bill, 2012 explaining these provisions and also certain recent judgments on these new provisions. In this regard, first both the provisions i.e. section 2(15) and section 13(8) are reproduced as under: –

“Sec. 2(15)”charitable purpose”includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] 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 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:]

[Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is [twenty-five lakh rupees] or less in the previous year;]

“Sec. 13(8) Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year.

8.2 Explanatory note given in the Memorandum of Finance Bill 2012 for inserting a new proviso in section 10(23C) and bringing a new sub-section (8) in section 13 is as under: –

“Explanatorv Note to amendment

Assessment of charitable organization in case commercial receipts exceed the specified threshold

Sections 11 and 12 of the Act exempt income of any charitable trust or institution, if such income is applied for charitable purposes in India and such institution is registered under section 12AA of the Act. Section 10(23C) of Income Tax Act also provides exemption in respect of approved charitable funds or institutions.

Section 2(15) of the Act provides definition of charitable purpose. It includes “advancement of any other object of general public utility” as charitable purpose provided that it does not involve carrying on of any activity in the nature of trade, commerce or business.

The 2nd proviso to said section provides that in case where the activity of any trust or institution is of the nature of advancement of any other object of general public utility, and it involves carrying on of any activity in the nature of trade, commerce or business; but the aggregate value of receipts from the commercial activities does not exceed Rs. 25,00,000/-in the previous year, then the purpose of such institution shall be considered as charitable, and accordingly, the benefits of exemption shall be available to it.

Thus, a charitable trust or institution pursuing advancement of object of general public utility may be a charitable trust in one year and not a charitable trust in another year depending on the aggregate value of receipts from commercial activities.

There is, therefore, need to expressly provide in law that no exemption would be available for a previous year, to a trust or institution to which first proviso of sub-section 2(15) become applicable for that particular previous year.

However, this temporary excess in one year may not be treated as altering the very nature of the trust or institution so as to lead to cancellation of registration or withdrawal of approval or rescinding of notification issued in respect of trust or institution.

Therefore, there is need to ensure that if the purpose of a trust or institution does not remain charitable due to application of first proviso on account of commercial receipt threshold provided in second proviso in a previous year. Then, such trust or institution would not be entitled to get benefit of exemption in respect of its income for that previous year for which such proviso is applicable. Such denial of exemption shall be mandatory by operation of law and would not be dependent on any withdrawal of approval or cancellation of registration or a notification being rescinded.

It is, therefore, proposed to amend section 10(23C), section 13 and section 143 of the Act to ensure that such organization does not get benefit of tax exemption in the year in which it’s receipts from commercial activities exceed the threshold whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded.

This amendment will take effect retrospectively from 1st April, 2009 and will, accordingly, apply in relation to the assessment year 2009-10 and subsequent assessment years. [Clauses 5, 6, 58].”

8.3 In the above Explanatory Note, it has been clarified that if the purpose of a trust or institution does not remain charitable due to application of first proviso on account of exceeding commercial receipts threshold provided in second proviso in a previous year, then such trust ! institution would not be entitled to get benefit of exemption in respect of its income for that previous year for which such proviso is applicable. Such denial of exemption shall be mandatory by operation of law and would not be dependent on any withdrawal of approval or cancellation of registration or a notification being rescinded. Keeping in view this objective, amendment has been done in section 10(23C), section 13 and section 143 of the Act to ensure that such organization does not get benefit of tax exemption in the year in which it’s receipt from commercial activities exceeds the threshold whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded. In view of the above explanatory note, I find that the view of the AO that the registration u!s.12A is necessary but not essential condition for providing exemption u!s. 11 is correct because such exemption u!s. 11 is to be governed by the provision of sec. 11 and 13. Now, because of the newly inserted provision of section 13(8), the AO can examine whether during the year under consideration, any of the activities of such trust ! institution is in the nature of or for providing service in relation to trade, commerce or business or not and whether the gross receipts from such activity has exceeded Rs.25 lac or not and then, accordingly compute the income of such trust ! institution. In order to explain the proviso to section 2(15), the CBDT has also issued a circular no.11!2008 dated 19.12.2008 and the same is reproduced as under:-

“CIRCULAR NO. 11/2008. DATED 19-12-2008

1. Section 2(15) of the Income-tax Act, 1961 (‘Act’) defines “charitable purpose” to include the following:—

(i) Relief of the poor

(ii) Education

(Hi) Medical relief, and

(iv) The advancement of any other object of general public utility.

An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of‘charitable purpose’. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the ‘advancement of any 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; or

(b) 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.

2. The following implications arise from this amendment.

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.

2.2 ‘Relief of the poor’ encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11 (4A) or the seventh proviso to section 10(23C) which are that:—

(i) the business should be incidental to the attainment of the objectives of the entity, and

(ii) separate books of account should be maintained in respect of such business.

Similarly, entities whose object is ‘education’ or ‘medical relief’ would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e., the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitablepurpose as these are covered under ‘any other object of general public utility’. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).

3.1 In the final analysis, however, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of ‘general public utility’ will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is ‘charitable purpose’ within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.”

8.3 In the above circular, it has been made clear by the CBDT that proviso to section 2(15) will apply to entities whose purpose is ‘advancement of any object of public utility’ i.e. fourth limb of the definition of the ‘charitable purpose’ contained in section 2(15) and it is further clarified that such entities will not be eligible for exemption u/s.11 or u/s.10(23C) of the Act, if they carry on the commercial activities. However, it has been mentioned that whether any entity is carrying on any activity in the nature of trade, commerce or business is a question of fact which will be decided based on nature, scope, extent and frequency of the activity and therefore, each case would be decided on its own facts and no generalization is possible.”

15. The feeling aggrieved by the order passed by the lower authorities is before us on the grounds mentioned hereinabove. At the outset both the parties have submitted that the tribunal by the to various orders have given quietus to the to the dispute with respect to entitlement of the assessee for registration under section 12 AA of the act. For that purposes of attention were drawn to various decision passed by the tribunal cancelling the order passed by the CIT denying the exemption and upholding that the assessee is entitled to registration under section 12 AA of the act. Further our attention was drawn to the High Court in one of appeal preferred by the revenue whereby the order of the tribunal was challenged by the revenue however the order of the tribunal was upheld by the Hon’ble High Court.

16. It was submitted that ,If the tribunal comes to the conclusion that second proviso to section 2 (15) is applicable then assessee would be entitled to the exemption under section 11 of the Act .

17. During the course of argument we have directed both the parties to file the list of the activities , which had resulted in receipt of revenue by the assessee ,both the parties have filed their respective synopsis which were taken on record .

Submission of parties on the aspect of applicability of second proviso to section 2 (15)( Ground no 3)

18. It was submitted that appellant is constituted by legislation to carry out the work independently, on the basis of authorization provided by the statute. The appellant is bound to execute certain works on the basis of directions issued by the State Government from time to time. In fact, only permission is taken from the State Government to acquire particular piece of land for which funds are given by the appellant itself. All the transactions in respect of every activity have been recorded in the books of accounts of the appellant since its incorporation. All the assets are the property held under the Trust within the meaning of Section 11 of the I.T. Act.

19. It was submitted that the development fee was levied on the constructions going on in the city by virtue of statute. It is not correct that the development fee is in lieu of services rendered to a person by the appellant who choose to deal with the appellant, as noted by the AO in the order. The acquisition of land, development of infrastructure facilities in planned manner is a part of the object as well as the provisions contained in Uttar Pradesh Urban Planning and Development Act.

20. The appellant is neither carrying out any business on behalf of Government nor on the orders of Government. The buildings or the land developed by the appellant are sold without keeping any margin of profit. There is no motive a profit earning in either developing the land or selling the land or building developed by the assessee and therefore there is no ingredient of the business in the activities carried out by the appellant. The business is defined on several occasions by judicial authorities. The activities of the appellant does not fall under the category of business.

21. The activities of the appellant are incidental to the achievements of the objects and as such does not falls under the fourth limb of section 2(15) i.e. advancement of any other object of general public utility. The appellant is not carrying out activities in nature of trade, commerce or business for the reasons stated above. Further, the activities from which surplus is generated falls under the head “OTHER SOURCES” and as such no specified books of accounts are required to be maintained and consequentially provisions of section 11(4A) are not attracted. No business activities nor any objects of making profit being carried out by the appellant. It was submitted that Toll, fees and charges are collected under the provisions of statute. There is no business contract with the persons paying toll etc.

22. The appellant has no where disputed that the claim u/s 11 cannot be examined during the subsistence of registration u/s 12A. Only the objects cannot be examined by the Assessing Officer during the subsistence of registration u/s 12A as the same is not within his domain. Entire receipts are in accordance with the provisions of which exemption under section 11 is allowable.

23. The application of fourth limb of section 2(15) as a whole is denied. The appellant does not carry on any business, trade or commerce and as such the limitation of threshold receipts as provided in section 2(15) is not relevant. Further there is no profit motive. In order to explain the nature of receipts, the appellant is only required to prove that the receipts are not from business activities. It is not disputed that exemption under section 11 may be evaluated each year.The application of funds is strictly in accordance with the provisions contained in I.T. Act.

24. Lastly it was submitted that Provisions of section 10(46) and 2(15) read with section 11 and 12 are independent provisions comprised in the I.T. Act. Infact, Central government notifies certain institutions u/s 10(46), whose income from all sources shall remain exempt. While in case of provisions of section 2(15), 11 and 12, the income / receipts are exempt only if they relates to charitable objects and or to any activity incidental in the nature of objects of the trust. It was submitted that the applicant had applied for its notification under section 10(46) of the Act, on 11.2.2019. Further Greater NOIDA Industrial Development authority had beennotified10(46) of the Central Government act for the activities which are similar in nature that of assessee vide notification dated 23.6. 2020. The ld AR prayed that suitable direction be issued by the tribunal for issuance of notification under section 10 (46) of the act to the central board of direct taxes, in the case of Assessee as well.

25. The assessee had also filled the written submissions to the following effect

“ SUBMISSIONS IN ITA NOS. 256/Agr/2014 & 356/Agr/2014(Deptt. Appeal)

The appellant is in appeal against the order of Ld. CIT(A).

The appellant has submitted number of synopsis during the course of hearing on different dates. The assessee begs to file summarized synopsis which is as under:-

The appellant is a development authority and enjoying registration u/s 12A in terms of order of Hon’ble ITAT placed at (Page 144-156 of the PB No. 1). The return declaring NIL income was filed alongwith statutory Form 10B, claiming exemption u/s 11 of the I.T. Act. Form 10B is placed at (page 65 of the PB No. 1). While completing the assessment, exemption u/s 11 has been denied and other additions have been made by the Assessing Officer. The Ld. CIT(A) has allowed partial relief against which the appellant is in appeal. The appellant has taken following grounds of appeal:-

………………………………………………..

Ground wise submissions in brief, are as under:

1. Ground no. 1 is not pressed

2. Ground no. 2 is not pressed

3. Ground no. 4 is not pressed

4. Vide Ground nos. 3 &7, the appellant has challenged the legallity of findings of authorities below in holding the activities of the appellant as of commercial nature within the meaning of proviso to section 2(15) of the I.T. Act and after denial of exemption u/s 11 of the I.T. Act, an addition of Rs. 3,58,61,640/- has been made. Section 2(15) is reproduced as under:-

2(15) “charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, 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 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 appli-cation, 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 twenty-five lakh rupees or less in the previous year.

The relevant pages of findings of authorities below are as under:

1. Findings of AO are at Page no.6-19 & 47-48

2. Findings of Ld. CIT(A) are at Page No’s 11-139

The main challenge is on allowability of exemption u/s 11 amounting to Rs. 3,58,61,640/-, being the surplus shown in the receipt and expenditure account. In this connection, it is respectfully submitted that appellant has never been engaged in commercial activities.

The appellant came into existence on 15.10.1984 by virtue of U.P.Urban Planning & Development Act, hereinafter referred to as ‘the Act’. Copy of bare act is on the record. Copy of the same is again enclosed. The appellant is established for carrying out planned development of the City as per objects contained in section 7 of ‘the Act’.

Relevent provisions of U.P. Urban Planning and Development Act 1973 are as under:

1 the U.P. Urban Planning and Development Act 1973 empowers the State Government to declare any area within the state as development area by issuing a notification under section 3 of the UPUPD Act in Gazette. Section 3 of the UPUPD Act reads as under:-

3. Declaration of development, areas.-

If in the opinion of the State Government any-area within the State requires to be developed according to plan it may, by notification in the Gazette. declare the area to be a development area.

2 After declaration u/s 3 of the UPUPD Act, the State Government under section 4 of the UPUPD Act, may constitute Development Authority for the purposes of the Act to promote and secure the development of the development area according to the Plan. Copy of notification with regard to the area for the development of Jhansi City is on record.

3 Section 8 of the UPUPD Act provides for preparation of Master Plan and Zonal Development plan.

4 Sub section (2) of section 10 of the UPUPD Act requires that after preparation of Master Plan, the same shall be submitted to the State Government for its approval and the State Government may either approve the plan without modification or with such modification as it may consider necessary or reject the plan with the direction to the authority to prepare a fresh plan according to such direction.

5 The procedure for preparation and approval of plan has been mentioned in section 11 of the UPUPD Act.

6 Section 12 of the UPUPD Act provides that the Master Plan having been approved by the State Government shall be published and it shall come into operation from the date of the first publication.

7 Section 13 of the UPUPD Act (Chapter IV) provides for the amendment of the plan.

8 Section 14 of the UPUPD Act provides that after the declaration of any area as development area under section 3, no development of land shall be undertaken or carried out or continued in that area by any person or body unless permission for such development has been obtained in writing in accordance with the provisions of the UPUPD Act. It also provides that no development shall be undertaken, or carried out or continued in that area unless the same is also in accordance with such plan.

9 Section 15 of the UPUPD Act deals with the application for permission referred to in section 14 of the UPUPD Act. It contemplates making of the requisite enquiry of any land or building in contravention of the plans.

10 Section 16 of the UPUPD Act prohibits use of any land or building in contravention of the plans.

11 Chapter VII deals in finance, accounts and audit of the authority as per the norms issued by the State Government. I may be allowed to read the whole chapter:-

12 Section 29 provides conferment of other powers on the authority after a master plan or zonal development plan has come into operation u/s 12 of the UPUPD Act.

13 Section 41 deals with control of State Government on the authority.

14 Section 55, 56 and 57 deals with the power of the State Government to make rules, regulation and bye laws.

15 And finally, the dissolution clause, where the State Government is satisfied that the purpose for which the authority was established under the UPUPD Act has been substantially achieved, than the State Government, may by notification in the Gazette declare that authority to be dissolved u/s 58 of the UPUPD Act with effect from such date as may be specified in the notification.

Further in order to achieve objects, the land is acquired solely with the approval of State Government and thereafter schemes are developed for plots / flats over the said land.

Your honour will kindly appreciate that no margin of profit is kept while working out cost of the project. Copy of few schemes are placed at page no. 74 – 88 of PB No. 1

The special audit in this case was also conducted u/s 142(2A) vide authorization letter No. DCIT-1/Agra/JDA/2012-13 dated 22.03.2013. The report in this case was submitted on 22.06.2013. The report is placed at page 1 – 123 of the paper book-I. The special auditor examined the books of accounts and had given findings on the books of accounts on various pages. At page 51 of the Paper book, the special auditor has commented on whether the income of the assessee falls within scope of section 2(15) and in continuation at page 54 of the Paper book has observed that the activities are in the nature of business activities and the same cannot be said to be for ‘charitable purposes’ within the meaning of section 2(15) of the Income Tax Act, 1961.

In this connection, it is respectfully submitted that the special auditor has no authority to examine the applicability of section 2(15) for holding the activities of the appellant as business activities. The responsibility of the auditor was limited to the examination of books of accounts as envisaged in section 142(2A). The observations on the activities are irrelevant and unreliable. The authorities below have relied upon his observations which is not permitted in law. The applicability of section 2(15) can only be verified independently, if at all required, by the Income Tax Authorities. The Income Tax Authorities have not applied there independent mind on this issue.

Without prejudice to the above, the special auditor has observed that the income under various heads (Page 53 of the Paper Book) are in the nature of trade, commerce or business. The income shown and considered by the special auditor are independent of any activity in the nature of trade, commerce or business. The receipts are in terms of statutory orders. In respect of trade, commerce or business, there should be a seller and buyer which is absent in all the receipts observed by the special auditor. Thus these receipts cannot be out of any trade, commerce or business.

Likewise, the observation of the special auditor that the assessee is engaged in the business of construction or real estate development projects is again beyond his authority. While giving his observation the auditor failed to appreciate that these constructions were in accordance with the objects for which the authority is constituted. The development activities carried out by the appellant under the statutory powers conferred by state government are not business activities. The activities are part of charitable activities for which the appellant has been granted registration u/s 12AA. In these circumstances, section 2(15) or section 13(8) are not at all applicable in the nature of receipts shown by the appellant.

Ld. CIT(A) at page 83 of the appellate order has summarized various sources of fund of the authority in clause (a) to (e) and has found that the receipts under clause (c),(d) and (e) are directly related to the trade, commerce or business. The special auditor has simply observed that the receipts are in the nature of commercial activities at Page 54 of the Paper book. Ld CIT(A) has endorsed the finding at Page 83 of the appellate order relying on the case of Moradabad Development Authority 15 taxmann.com 389. Ld. CIT(A) failed to appreciate that above order related to the A.Y. 2007-08 when provisions of section 2(15) were not existing. It is however submitted that in the subsequent decision in the same assessee, Moradabad Development Authority relevant for the period under consideration, Hon’ble ITAT has categorically held that provisions of section 2(15) in so far as the nature of the activities are not applicable and as such exemption u/s 11 should be allowed. The order is placed at Page 1 – 3 of Judicial Index Paper Book dated 23.02.2018 (Relevant Para 3,4,5,&6).

The Ld CIT(A) has again relied upon the comments of special auditor on Point no. 3 at page 51 of the Paper Book. Despite the objections by the assessee that the special auditor has no legal authority to decide the application of section 2(15) of the Act and the Ld. CIT(A) having admitted that it is his (special auditor) opinion over the issue, has decided to adjudicate after examining the Act and various decision as discussed by the Ld. CIT(A). It is again submitted that neither the statute nor the decisions relied upon by Ld CIT(A), no where states that collection of fees, toll and various charges are in relation to any trade, commerce or business. The finding of Ld. CIT(A) that these income are earned from purchase and sale of land and construction of flat and selling them at profit are in the nature of trade, commerce or business are wholly imaginary as well as contrary to the facts of the case.

Ld. CIT(A) at page 83 of his order has given much stress on the nature of activities in respect of (c) all fees, tolls and charges received by the Authority under this Act; (d) all moneys received by the Authority from the disposal of lands, buildings and other properties, movable and immovable and (e) all moneys received by the Authority by way of rents and profits or in any other manner or from any other source,and has relied upon the report of special auditor whereby it has been observed that the activities are not in accordance with the objects of the appellant and are certainly relating to rendering of services in relation to trade, commerce or business. It has further been observed that apart from these activities, the appellant is earning profit on construction of sale of flat like other builder. Ld. CIT(A) failed to appreciate that all the above activities are part of the objects and are in accordance with statutory objectives. Further the observation of Ld CIT(A) that the appellant is earning profit on construction of sale of flat just like other builder is contrary to the facts of the case as the appellant has repeatedly intimated, duly supported by documents, that no margin of profit is kept while constructing and sale of flats.

Ld. CIT(A) further failed to appreciate that the appellant is mainly providing services to the common man who are homeless. The flats / commercial complex are sometime allotted at below the cost as is evident from the costing sheet placed at Page 85 of the Paper book.

It is therefore again submitted that the receipts are out of statutory obligations and not from any trade, commerce or business.

On the basis of findings in the audit report, the Assessing Officer too has held the activities of the appellant as of commercial nature (Page 8 to 48 of Asstt order) and after invoking provisions of Sec. 2(15) of the I. T. Act, has denied exemption u/s 11 of the I.T. Act. The Assessing Officer has also relied upon following judicial orders:-

• • Jammu Development Authority [2012] 23 Taxmann.com 343 [ Page No. 8 of JOPB No. 1 ]
  • Indore Development Authority ITA No.366/Ind/2008 dt.06.07.2010 [ Page No. 17 of JOPB No.1 ]

In appeal, Ld. CIT(A) has confirmed the findings of the AO (Page 11 – 91 of his order. Ld. CIT(A) has relied upon following judicial orders:-

• • Infoparksvs.Dy.CIT(TDS)[2010] 329 ITR 404 Kerala HC [ Page No. 48 ]
  • Andhra Pradesh State Seed Certification Agency vs CCIT[2012]28 Taxmann.com 288(AP) [ Page No. 50 ]
  • Himachal Pradesh Environment Protection &Pollution Control Board Vs CIT[2010] 42 SOT 343(Chd) [ Page No. 57 ]
  • Entertainment Society of Goa vs CIT [2013] 34 Taxman.com 210 (Panji) [ Page No. 61 ]
  • M/s VanitaSamaj Vs DIT(E) ITA No.1034/Mum/2012 ITAT Mumbai dt. 26.02.2014 [ Page No. 71 ]
  • Rajasthan Housing Board vs. CIT [2012] 21 taxman.com 77 (ITAT Jaipur) [ Page No. 72 ]
  • Adityapur Industrial Area Development Authority vs.Union of India [2006] 283 ITR 97 SC [ Page No.72 ]

The nature of activities of development authorities constituted by “the Act” have been examined by Hon’ble jurisdictional High Court as well as various benches of Hon’ble ITAT. It has been consistently held that the activities of the appellant are not of commercial nature. The appellant relies upon the following judgments :

(i) Lucknow Development Authority [(2013) 38 Taxmann.com 246All.)] (Relevant Para 27-28) (JOPB No. 1)

(ii) Moradabad Development Authority [(2016) 71 Taxmann.com 339 (ITAT, Delhi)] (Relevant para 6,7 & , 8 page 14)

(iii) Jaipur Development Authority ITA No. 427/JP/2013 ( ITAT, Jaipur) Dt. 04.01.2016 (Relevant para 6, page 12)

(iv) New Okhla Industrial Development Authority Vs CIT [2016] 72 Taxmann.com 151 (Delhi – Trib)] (Relevant Para 40 & 41)

(v) Moradabad Development Authority Vs ACIT [(2018) 89 Taxmann.com 263 (ITAT Delhi)

(vii)CIT (Exemption) Vs M/s Moradabad Development Authority [ ITA No. 3 of 2017 dt. 03.05.2017 (High Court, Lucknow Bench))

(viii) Ahmedabad Urban Development Authority Vs ACIT (E) [(2017) 83 Taxmann.com 78 ( High Court of Gujarat)

(ix) Bangalore Development Authority ITAT Bang. ITA no. 1104 / Bang / 2017 & 1087 / Bang / 2017 (Relevant page 23 onwards)

(x) Greater Noida Industrial Development Authority Vs CIT (Delhi High Court ) . (placed in PB XIII-B filed by revenue)

(xi) Gujarat Housing Board (GHB) Vs DCIT (Ahemedabad ITAT, ITA No. 3297/Ahd/2016 dt. 16.11.2018) (JOPB No. VI)

All the development authorities in Uttar Pradesh are constituted by ‘The Act’ and are functioning for the development of their respective cities. A list of all the development authorities functioning in Uttar Pradesh has been placed at (Page No. 33 of JOPB No. IV). Gujarat Housing Board (GHB) is also an authority functioning in Gujarat on the same pettern of the assessee. Hon’ble ITAT Ahmedabad bench passed in the case of Gujarat Housing Board (GHB) wherein Hon’ble Tribunal has held that the activities of the above authority are not hit by proviso to section 2(15) and as such the authorities below were in error in invoking proviso to Section 2(15) and declining the benefit of Section 11 to the assessee (Page 14 to 17).

The department has mainly relied upon the judgment of Hon’ble Supreme Court and J&K High Court in the case of Jammu Development Authority in order to hold that the activities of the assessee authority are of commercial nature and as such, the benefit of section 11 cannot be allowed. It is respectfully submitted that in the above case, the dispute was whether registration U/s 12A can be granted to the authority. The registration u/s 12A has been denied in the above case. It is respectfully submitted that the facts of the assessee/authority are different. The assessee/authority enjoys registration u/s 12A from 01.04.2009 (Copy at Page 144 to 156 of the Paper Book No. 1). Hon’ble ITAT in Moradabad

Development Authority, Jaipur Development Authority, Bangalore Development Authority (Supra) have analyzed applicability of judicial pronouncement of Hon’ble Supreme Court and Hon’ble J & K High Court and have found that above judicial pronouncement is not applicable to the development authorities having registration u/s 12A. The objects and activities of the appellant, are identical with those of the authorities referred above . The issue being covered, the exemption u/s 11 may kindly be directed to be allowed.

Submissions of Revenue

26. On behalf of the revenue ld CIT DR had made elaborate submissions supporting the case of the assessing officer as well as of the Commissioner appeal. The first argument raised by the revenue that the case of the assessee falls within the provision to section 2{15} of the income tax act. Our attention was drawn to the provision of the said section and the emphasis was drawn that the activities of the assessee are in the nature of trade commercial business and the other activities rendered by the assessee were for fee or cess . Further it was submitted, that the application of the amount received by the assessee and use of the said amount will not make any difference if the aggregate receipt of the activities during the previous year exceed threshold limit provided by the act.

27. He had drawn our attention to the decision of the Coordinate Bench in the matter of Chandigarh Lawn Tennis Association[2018] 95 taxmann.com 308 (Chandigarh – Trib.), To bolster his argument the provisions of section 2 are applicable and activities of the assessee are not charitable nature and would fall in last limb of the definition “ for advancement of any other purpose beneficial for to the public in general “ where in it was held as under :

“35.However vide Finance Act, 2008 w.e.f. 1.4.2009, a new proviso (i.e. fist proviso) was added to this provision, carving out an exception in the cases of ‘advancement of any other object of general utility:

‘2 (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 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;’

(Emphasis supplied by us)

36. There are two limbs of the above proviso to section 2(15) of the Act, introduced w.e.f. 1.4.2009, i.e. the advancement of any 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, or any activity of rendering any service in relation to any trade, commerce or business,

(b) irrespective of the nature of use or application, or retention, of the income from such activity;’

37. The above amendment was carried in section seeks to overcome the decisions of the hon’ble Supreme Court in the cases of ‘Surat Art Silk Cloth Mfg.’ (supra) and ‘Thanthi Trust’ (supra) as relevant to the period post substitution of the section 11(4A) of the Act. Firstly, the position that the carrying of business incidental to the attainment of the objectives of the trust as was allowable to the intuitions u/s 11(4A) carrying the activity under the all the limbs of section 2(15) of the Act is no more available to the institutions carrying on the advancement of object of public utility. The institutions carrying out the object of public utility have been barred from doing any activity in the nature of trade, commerce or business for claiming their activity for “charitable Purposes”. Secondly this bar is irrespective of application of income from such commercial activity. That it will be immaterial whether the income from the commercial activity is utilized or ploughed back to such activity serving object of public utility. However, the restriction imposed by the above amendment is/was applicable only in respect of fourth limb of section 2(15) of the Act i.e. for the institutions or trusts carrying out the activity of advancement of any other object of general public utility. Hence, the restriction put by section 11(4A) was still applicable to the other limbs in the definition of charitable purposes u/s 2(15) of the Act.

38…………………..

39. The CBDT issued a circular dated 19.12.2008, paragraph-3 whereof reads as under:—

“3. The newly amended s. 2(15) will apply only to the entities whose purpose is ‘advancement of any other object of general public utility’ i.e., the fourth limb of definition of ‘charitable purpose’ contained in s. 2(15). Hence, such entities will not be eligible for exemption under s. 11 or under s. 10(23C) of the Act, if they carry on commercial activities.

Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of activity.

3.1 There are industry and trade associations who claim exemption from tax under s. 11 or on the ground that their objects are for charitable purposes as these are covered under the ‘any other object of public utility’. Under the principle of mutuality, if trading takes place between the persons who are associated together and contribute to a common fund for the financing of some venture or object, and in this respect have no dealings or relations with any outside body, then the surplus returned to such persons is not chargeable to tax.

Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual members, these would not fall under the purview of s. 2(15) owing to the principle of mutuality. However, if such organizations have dealings with the non-members, their claim for charitable institution would now be governed by the additional conditions stipulated in proviso to s. 2(15).

3.2 In the final analysis, whether the assessee has for its object ‘the advancement of any other object of general public utility’ is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in connection to trade, commerce or business, it would not be entitled to claim that its object is for charitable purposes. In such a case, the object of ‘general public utility’ will only be a mask or a device to hide the true purpose which is trade, commerce, or business or rendering of any service in relation to trade, commerce or business. Each case would, therefore, have to be decided on its own facts, and generalizations are not possible. An assessee who claims that their object is ‘charitable purpose’ within the meaning of s. 2(15) would be well advised to eschew any activity which is in the nature of trade, commerce or business or rendering of any service in relation to any trade, commerce or business.”

(emphasis supplied by us)

40. The above explanation given by the CBDT that the newly amended s. 2(15) will apply only to the entities whose purpose is ‘advancement of any other object of general public utility’ and that such entities will not be eligible for exemption under s. 11 or under s. 10(23C) of the Act, if they carry on commercial activities irrespective of application of income from such activity has not gone well with the interpretation given by the High Courts. The Jurisdictional Punjab & Haryana High Court has discussed at length the effect of newly inserted proviso to section 2(15) of the 1961 Act w.e.f. 1.4.2009 while referring to several case laws of other High Courts of the country and held that by the insertion of the proviso, the position has restored/reverted to legal position as declared by the Hon’ble Supreme court in ‘Surat Art Silk Cloth Mfgr. Assn ‘ Case (supra) while interpreting the unamended provisions of 1961 Act. The Hon’ble High Court has observed that the crucial words “not involving the carrying on of any activity for profit” as were mentioned originally in the section 2(15) of the 1961 Act, were akin to the wording introduced vide Finance Act 2008 w.e.f. Ist April 2009 i.e. “”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.” The Hon’ble High court has observed that while the legislature in the 1984 amendment which continued up to the year 2009 altered the position by deleting the words “not involving the carrying on of any activity for profit”, it reintroduced an exclusionary clause albeit in different and wider terms in the 2009 amendment. The exclusionary clause related to the object of general public utility and not the advancement thereof. The Hon’ble High Court thereafter referring to the words “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” as mentioned in the proviso to section 2(15), as amended in 2009, observed that such activities are carried for profit only. The Hon’ble High Court rejected the contention of the revenue that the meaning of the above words “nature of trade, commerce or business” was of wider import and that even if the advancement of object of general public utility involves 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, it will be out of the definition of the word “charitable purposes”. The Hon’ble high court held that a wider meaning ought not to be given to these words especially in a taxing statute. The Hon’ble High Court observed that if a trade or business for a commercial activity did not result in profit, it would not be necessary to deal with the same in the Income Tax Act. The hon’ble High Court observed that there was nothing in the Act and particular in section 2 (15) thereof that indicated that the Legislature contemplated a trade or a business or a commercial activity other than for profit. The Hon’ble High Court in this respect referred to the several judgments of the Delhi High Court including in the case of Bureau of Indian Standards v. DGIT(Exemptions) [2013) 358 ITR 78/212 Taxman 210/[2012) 27 taxmann.com 127, The Institute of Chartered Accountants of India v. DGIT (Exemptions), [2013) 358 ITR 91/217 Taxman 152/35 taxmann.com 140 (Delhi) wherein it has been held that while construing the term business for the purpose of Section 2(15) of the Act the object and purpose of the Section must be kept in mind and a broad and extended definition of business would not be applicable for the purpose of interpreting and applying the first proviso to Section 2(15) of the Act. The object of introducing the first proviso is to exclude organizations which are carrying on regular business from the scope of “charitable purpose. The expressions “business”, “trade” or “commerce” as used in the first proviso must, thus, be interpreted restrictively and where the dominant object of an organisation is charitable, any incidental activity for furtherance of the object would not fall within the expressions “business”, “trade” or “commerce”. Although, it is not essential that an activity be carried on for profit motive in order to be considered as business, but existence of profit motive would be a vital indicator in determining whether an organisation is carrying on business or not. The Hon’ble High Court also referred to the decision of the Delhi High Court in the case of India Trade Promotion Organization v. DGIT (Exemptions) [2015) 371 ITR 333/229 Taxman 347/53 taxmann.com 404 wherein it was held as under:—

“An activity would be considered ‘business’ if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case activity may be regarded as a business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business.

58. In conclusion, we may say that the expression “charitable purpose”, as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the said Act, then the proviso would be at risk of running foul of the principle of equality enshrined in Article 14 of the Constitution of India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted in the context of Section 10(23C)(iv) because, in our view, the context requires such an interpretation. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities 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. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes.”

(emphasis supplied by us)

41. The crucial point for the entire discussion in the above case of ‘India Trade Promotion Organization (supra)’ was relating to the interpretation of section 2(15) r.w.s. 10(23C) (iv) of the Income Tax Act. The Hon’ble High Court has observed that the expression “charitable purposes” in context of section10 (23C) (iv) has a reference to income. It is only when an institute has an income that it will claim exemption from its inclusion in the total income. The Hon’ble Delhi High Court therefore held that merely because an institution which otherwise was established for a charitable purpose, receives income would not make it any less a charitable institution. That it is not the income but the objects of the institution that have to be looked into. The Hon’ble Delhi High Court observed that it was undisputed that the institute (India Trade Promotion Organization) had been established for charitable purpose. The Hon’ble High Court took the notice that prior to the amendment introduced w.e.fIstApril, 2009 the institute had been recognized as an institution established for charitable purposes and that this had been done having regard to the objects of the institution and its importance throughout India. The Hon’ble High Court further observed that if a meaning is given to the expression ‘charitable purpose’ so as to suggest that in case an institution, having an objective of advancement of general public utility, derives an income, it would be falling within the exception carved out in the first proviso to Section 2(15) of the said Act, then there would be no institution whatsoever which would qualify for the exemption under Section 10(23C)(iv) of the said Act and the said provision would be rendered redundant.

42. The Hon’ble Punjab & Haryana High court in the case of ‘The Tribune Trust’ (supra) following the decision of the Hon’ble Supreme Court in ‘Surat Art Silk Cloth Mfgr. Assn’ (supra) and in the light of the several decisions of the Hon’ble Delhi Court has held that the predominant object of the trust or institution is the deciding factor , if the profit is the pre-dominant motive, purpose and object of the assessee Trust then its activities cannot be considered for charitable purposes as per the definition of charitable purposes in the light of newly inserted proviso w.e.f. 1.4.2009. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.

43. From the above discussion and in the light of decisions rendered by the Delhi High Court in the cases as discussed above and of the Jurisdictional Pb. &Hry. High court in the case of ‘The Tribune Trust’ (supra) the position that has emerged is that as if the new proviso to section 2(15) has never been brought in and has been rendered redundant or otiose. The theory of predominant object or activity and incidental income therefrom can well be applied as per the provisions of section 11(4A) of the Act and as interpreted by the Supreme Court in the case of ‘Thanthi Trust’ (supra) and several High Court decisions thereafter. Even with all due respect, in our humble opinion, the restriction put by newly inserted proviso was applicable only to the activity of ‘any other object of general public utility’ but not to the other limbs of the definition as provided u/s 2(15) of the Act. Hence, to say that the newly inserted proviso would make for all purposes the section 2(23)(iv) or section 11(4) of the Act redundant or otiose, in our humble view, may not be correct. Even the crucial words in the second limb of the proviso ‘irrespective of the nature of use or application, or retention, of the income from such activity’ are also required to be considered and the same, in our view, cannot be ignored. By the insertion of these words, intention of the government is to overcome the ‘ultimate or end object or to say predominant object theory’ as was laid down by the Hon’ble Supreme Court in the cases of ‘Surat Art Silk Cloth Mfgr. Assn’ (supra) and ‘Thanthi Trust’ (supra). To be more precise, the effect of the above introduced words is that it will be immaterial if the funds or the profits from business activity are ploughed back to subserve the main or the predominant object of the trust. Again, even at the cost of repetition, it is to be mentioned here that this restriction is applicable only to the activity of advancement of any other object of general public utility but not to the other limbs of the activity as included in the definition provided u/s 2(15) of the Act.

We may further add here that the prohibition put by the above proviso is not applicable in respect of non-business income of the institution or the trusts carrying on the advancement of other objects of general public utility but only in respect of income earned from the activity in the nature of trade, commerce or business. In other words, this exclusionary provision will not exclude the institutions having income other than the business income.

44. It is pertinent to mention here that Parliament also realized that the absolute restriction on any receipt of commercial nature imposed by the proviso inserted w.e.f. 1.4.2009 to section 2(15) may create hardship to the organizations which receive sundry or incidental considerations from such activities. Therefore by the Finance Act 2010, there was yet another proviso (i.e. second proviso) inserted with retrospective effect from 1.4.2009; now the section read as under:

‘2 (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 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;

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is 10 lakh rupees or less in the previous year.’

(emphasis supplied by us)

45. to 51 ……………………………..

52. A corresponding amendment has also been brought in section 10(23C) of the Act inserted by the Finance Act, 2012, w.r.e.f. 1-4-2009 adding the following proviso added:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— (23C) any income received by any person on behalf of—

** ** **

(iv) any other fund or institution established for charitable purposes which may be approved by the prescribed authority , having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States; or

(v) any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be approved by the prescribed authority , having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof;…………..

Provided also that the income of a trust or institution referred to in sub-clause (iv) or sub-clause (v) shall be included in its total income of the previous year if the provisions of the first proviso to clause (15) of section 2 become applicable to such trust or institution in the said previous year, whether or not any approval granted or notification issued in respect of such trust or institution has been withdrawn or rescinded;”

53. A corresponding amendment has also been brought to section 143(3) of the Act inserted by the Finance Act, 2012, w.r.e.f. 1-4-2009 which deals with the assessment, adding third proviso thereto:

“Assessment :

143. (1)** ** **

(3) On the day specified in the notice,—

** ** **

Provided also that notwithstanding anything contained in the first and the second proviso, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.”

54. Therefore, with the introduction of second proviso to section 2(15) there is a paradigm shift from the earlier position. Though, some of the decisions of the Delhi High Court as referred to above and that of the Pb. &Hry. High Court in the case of The Tribune Trust (supra) have been delivered subsequent to the introduction of the second proviso to section 2(15) of the Act, however in none of the above referred to decisions there is any discussion about the effect of the introduction of second proviso to section 2(15) of the act and subsequent amendments thereto, amendments brought in section 10(23C), section 13 and section 143 of the Act. Though the courts of law have interpreted the first proviso to section 2(15) taking not consideration the hardships faced by the institutions genuinely involved in carrying out the charitable activities and thereby did not go by the literal meaning of the words of the provisions and interpreted the provision to mitigate the hardship to such institutes and to bring rational to the definition of charitable purposes and thereby holding that the crucial words ” in the nature of trade, commerce or business” find mentioned in the second proviso have the same meaning as was ascribed to the words ” not for making profits’ as were there in the originally introduced provisions of section 2(15) in the 1961 Act. However, in our view, that was perhaps never the intention of the parliament to restore the position to that was operative or as interpreted by the courts of law from the year 1961 to the year1983. That is why immediately in the next financial year vide Finance Act 2010 with retrospective effect from 1.4.2009, the date with effect from which the first proviso to section 2(15) was introduced, the second proviso was brought in with the sole purpose of diluting the rigours of the first proviso and to mitigate the hardship created to the institutes genuinely carrying out the object of general public utility. Since with the introduction of second proviso, the rigour of the first proviso was diluted to ensure appropriate balance being drawn between the object of preventing business activity in the garb of charity and at the same time protecting the activities undertaken by the genuine organization, hence the interpretation given by the courts taking into consideration the hardship caused by the first proviso , in our view, can not be applied as such at this stage, but the same is required to be looked into in the light of the second proviso and the amendments brought in other related sections also, as discussed above. In our view, it will not be proper to just ignore the second proviso brought in by the parliament on the statute by following the interpretation given by the courts of the first proviso which was to mitigate the hardship created by the first proviso to the institutions genuinely carrying on the activity of general public utility. Since the interpretation adopted by the courts was not the literal interpretation of the proviso, but there was departure from the literal meaning because of the hardships which may be faced by the trusts carrying genuine charitable activities in giving literal and plain meaning to first proviso, hence under the circumstances, when the Parliament itself has introduced the second proviso to remove the rigour of the first proviso and to mitigate the hardships created by the first proviso, hence the interpretation of the section 2(15) in the changed scenario is to be given by taking into consideration the section in its entirety and also in the light of consequential amendments carried out in sections 10(23C), 13, and 143 of the Act and thereby making the newly inserted second proviso and amendments thereto and other amended section meaningful and workable so as to achieve and serve the intended purposes for which they have been introduced by the legislature in the statute.

55. It is to be noted that the section 2(15) as it stood post insertion of the first proviso w.e.f.1.4.2009, the charitable purposes included relief to the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest and advancement of any other object of general public utility. The first proviso does not control or restrict the definition of ‘charitable purposes’ in respect of trust carrying out the activity such as relief to poor, education, medical relief, preservation of monuments etc. as specifically mentioned. However section 11(4A) do put restriction on business activity of such institutions and provides that the same should be incidental to their main objects. Sub-section 4A of section 11 neither makes inoperative or redundant the provisions of section 2(15) nor of sub-section 4 of section 11. On the other hand the provisos to section 2(15) only put restrictions on the benefits available to the trusts carrying on the advancement of any other object of general public utility which also involves the incidental activity in the nature of trade, commerce or business. Newly inserted proviso to section 10(23C) also controls or restricts the benefit available to the institutions claiming benefit thereunder, however none of the provisions, in our view, in any manner, makes the other section inoperative, otiose or redundant. On the other hand, in our view, adopting the interpretation as given by the courts to the first proviso to section 2(15) bereft of second proviso and ignoring section 13(8) of the Act and other related amendments brought into section 10(23C) and section 143(3) of the Act with retrospective effect from 1.4.2009, would make these provisions redundant, otiose and inoperative.

56. It is pertinent to point here that the hon’ble supreme court in the case of “Thanthi Trust” (supra) while interpreting the relevant provisions as they stood for the period from AY 1984-85 to AY 1991-92, denied the benefits of exemption to the assessee trust applying and adopting the literal interpretation of the more stringent provisions of section 11(4A) of the act as were there in the statute for the aforesaid period. Though, the provisions of Sub-section (4) of section 11 remained on the statute book which defines the words ‘property held under trust’ for the purposes of section 11 to include ‘a business held under trust’, yet, the supreme court observed that Sub-section (4A) restricts the benefit under section 11 so that it is not available for income derived from business unless the business is carried on by a trust only for public religious purposes and it is of printing and publishing books or any other notified kind. The court held that the newspaper business that was carried on by the trust did not fall within sub-section (4A). This finding of the Hon’ble Supreme Court is in departure from the earlier interpretation made by it in the case of “Surat Art silk Cloth Manufactures Association”(supra) wherein it was held that the literal and plain meaning of the provisions of section 2(15) in context of the words “not for making profit” would render the provisions of section 11 (4) wholly superfluous and meaningless, despite the fact that these words barring the activity of the making of profit were applicable only in respect of institutions carrying on the activity in respect of advancement of other objects of public utility, whereas, the provisions of section 11(4) still holding good for the institutions carrying in the activity in respect of first three limbs i.e. relief to poor, education and medical relief. However in the subsequent decision in the case of Thanthi Trust (supra) , the supreme court applied the plain literal meaning to the more stringent provisions of sub-section 4A of section 11 as these stood during the period from AY 1984-85 to AY1991-92 and held that sub-section 4A restricts the benefits under section 11, despite noticing the existence of the provisions of sub-section 4 of section 11 on the statute. The latter decision of the Supreme Court in the case of Thanthi Trust (supra), in our view, cannot be ignored or overlooked, while interpreting the newly amended provisions of section 2(15) of the Act, especially the second proviso, which also strives to control the benefit available to the institutions involved in the activity of advancement of any other object of general public utility and not of the institutions carrying out the activity in respect of other limbs, to which the provisions of amended sub­section 4A to section 11 continue to apply.

57. Another crucial phrase brought in the first proviso are “irrespective of the nature of use or application, or retention, of income from such activity”. The addition of the above crucial words obviously is to overcome the decision of the Hon’ble Supreme court in the case of Surat Art Silk Cloth Mfgr. Assn (supra) as well in the case of Thanthi Trust’ (supra) wherein it was held that if all the surplus or profit from the business activity is invested or ploughed back into the assets of the assessee or applied to the main activity, the business will be a business incidental to the attainment of the objects of the trust. However, this proposition has been made inapplicable or to say bygone by the Legislature for the institutions carrying on object of general public utility by way inserting the crucial words ” irrespective of the nature of use or application, or retention, of the income from such activity” in the first proviso to section 2(15) of the Act.

58. The Government realized need to curb the practice of business houses to claim exemption on the ground that they were carrying out of objects of general public utility and thereby making the benefit of exemption in respect of business carried out by them in the mask of charity and that is why they introduced first proviso to section 2(15) thereby excluding the institutions carrying on the object of the general public utility if their activities involves carrying on the activity of business trade or commerce or the services in relation to business trade or commerce for a cess or fee and even it was also clarified that application or the retention of such income from such activity will be immaterial.

The High Courts of Delhi and Pb. &Hry. in the cases as referred to above , however, held that the above provision was a harsh provision and the consequences of the same could be like as it were that the introduction of words “not for making profits” in section which operated from 1961 to 1983. Even the Courts of law also following the proposition laid down by the Hon’ble Supreme Court in the case of ‘Surat Art Silk Cloth Mfgr. Assn’ (supra) held that the literal and plain meaning cannot be given to the said first proviso to section 2(15) of the Act and therefore, propounded the ‘pre-dominant object theory’ or ‘the ultimate fulfilment of object theory’ on the same lines as was given in the case of ‘Surat Art Silk Cloth Mfgr. Assn’ (supra) by the Hon’ble Supreme Court. The Hon’ble Supreme Court in the case of ‘Surat Art Silk Cloth Mfgr. Assn’ (supra) in para 11 of the decision has held that in the ordinary course, the different interpretation should not be done if the words of the statute taken could not alter the meaning of a statutory provision where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. The Hon’ble Supreme Court thereafter discussed as to what would be the consequence of the construction of the provisions contained for on behalf of the Revenue and held that in such an event no trust or institution whose purpose is promotion of object to general public utility would be able to carry on any business, even though such business is held under trust or legal obligation to apply its income wholly to the charitable purpose carried on by the trust or institution. However, the Hon’ble Supreme Court held that in such an event the provisions of section 11 (4) would be rendered wholly superfluous and meaningless. The High Courts of Delhi and Pb. &Hry. followed the obove construction made by the Supreme Court in the caae of ‘Surat Art Silk Cloth Manufacturers Assn.’ (supra)

59. However, the Govt. very soon, even before the coming of above interpretations by the High Courts, realized the consequence that were likely to arise from the above amendment. Therefore, taking into consideration the harsh and strict meaning of the first proviso, it was felt that the plain and literal meaning to the first proviso would be of great hardship to the trust or institution which were genuinely carrying out the object of general public utility and that in the course of which it also generates some incidental or ancillary income. It was under such circumstances that the second proviso was brought in the next financial year itself with retrospective effect so as to make the first proviso to section 2(15) workable and to remove the ambiguity in the provisions of section 2(15) of the Act. Now with the insertion of second proviso, meaning and interpretation which is more rational has to be arrived at.

However, if the interpretation of section (2(15) as per the decision of the Hon’ble Pb. &Hry. High court in the case of “Tribune Trust'(supra) and in other decisions of the Delhi High court as discussed above considering the first proviso to section 2(15) alone and ignoring the subsequent amendments, is applied to the amended section 2(15), then it will not only make the second proviso to section 2(15) but also section 13(8) and corresponding amendments to section 10(23C) and section 143(3) redundant, meaningless and inoperative and the situation will be as if the second proviso was never inserted or existed in the Act, what to say its subsequent amendment by way of increasing the limit of Rs. 25 lacs and then to the 20% of the total receipts and other corresponding amendments to section 10, section 13, and section 143. In our view, sticking to the interpretation which was given by the Courts before introduction or bereft of second proviso to section 2(15) of the Act, would lead to unintended construction, which will be against the spirit of statutory provisions. The subsequent amendments, as discussed above, in our view, definitely have a bearing on the interpretation which was done by the Courts of law taking into consideration the harshness of the first proviso to section 2(15) alone. However, the leverage provided to the institution by way of insertion of second proviso would prompt us re­think and re appraise about the literal interpretation of the section. The subsequent amendments brought in section 10(23C), section 13 and section 143 of the act with retrospective effect from 1.4.2009, the date on which the first proviso comes in effect, also cannot be ignored or rendered redundant. As it stands, post insertion of second proviso, allows the institutions to carry on the incidental activity in the nature of trade, commerce or business while pursuing objects of general public utility of the trust or institution, but restricts the receipts to a specified limit. The said limit perhaps was made so as to allow only genuine institutions to claim exemptions who were carrying out the activity of charitable purposes and their motive is not to earn huge profits.

60. Now, let us, assume that the interpretation that the income derived by the Trust from ancillary commercial activity while carrying out the pre-dominant object of general public utility is totally exempt as stood canvassed by the Ld. Counsel for the assessee in the light of the various case laws including the decision of the Hon’ble Jurisdictional High Court of Punjab & Haryana in the case of ‘ Tribune Trust’ (supra) . In that event the argument that can be reasonably put is that the second proviso inserted by Finance Act 2010 with retrospective effect from 1.4.2009 allowing the carrying out of the business activity up to the prescribed limit of receipts from such activity would be applicable in those cases where an institution or trust is carrying out the activity of advancement of general public utility but at the same time its object is also to make profits as observed by the hon’ble Supreme Court in the case of ‘Surat Art Silk Cloth Mfg. Association’ (supra) in respect of the privy Council decision in the case of “Trustees of the Tribune” (supra) and then by the Hon’ble Pb. &Hry. High court in respect of activities carried out by the Tribune Press Trust in the case of “Tribune of the Trust” (supra), in that event such institutions would also be eligible to claim exemption u/s 2(15) subject to the condition that their total receipts would not exceed the prescribed limit of Rs. 10 lacs or Rs. 25 lacs or 20% of the total receipts as applicable from time to time. In that scenario, each and every trust or institution indulged into business activity involving the providing of some sort of public utility services will claim exemption if total receipt of such institution does not exceed the prescribed limit. As held by the Hon’ble Supreme Court in the case of ‘CIT v. Gujarat Maritime Board’ [2007] 295 ITR 561/[2008] 166 Taxman 58, that he expression ‘any other object of general public utility’ is of the widest connotation. The expression would prima facie include all objects which promote the welfare of the general public.

61. A company or trust involved in the insurance business for profit will claim that the object, purpose and activity of the insurance activity is towards the advancement of object of general public utility as it provides security against unforeseen events to the insured . An industrialist will also claim exemption on the ground that by way of establishing industry, it has contributed towards the advancement of object of general public utility as with the establishment of industry, it generated employment and that it has also contributed towards infrastructure development and boosting the economy of the country. A manufacturer of medicine will also so claim that medicines are made by him with the object of providing people of country the essential and useful drugs for fighting dreaded disease and sickness and even lifesaving drugs and also contributing towards improvement of health of the people for advancement of object of general public utility. A road contractor will also claim that the road maintained or constructed by it, though with profit motive are for the advancement of object of general public utility as it ease mode of transport not only of the people but also of the goods and other material. Even a general merchant, opening shop in a rural area or village may claim that though it is doing the retail business with the motive of profit, however, it is also doing the activity of general public unity by way of making available different goods on day to day need and necessity of the people of the village who otherwise would have to travel large distances to get the same. The taxation limits fixed by the Department will fail and the taxation in respect of such persons doing different business will start only if their receipts during the year would cross the limit as prescribed from time to time.

Even big institutions or companies will divide themselves into subsidiaries or smaller units ensuring that income of each of such taxable unit or entity should not increase the prescribed monetary limit of the receipts. Such an interpretation of the second proviso to section 2(15) would lead to absolute absurdity, confusion and unwanted and uncalled for consequences. Even it will be also an issue in dispute as which of the activity/activities of an assessee is/are towards the advancement of object of General Public Utility though may be with profit making object also and which of these is/are of a pure commercial venture. Thus. in our view, the different but related provisos of the Act are to be read in harmony with each other. The interpretation as canvassed for the period prior to the introduction of the second proviso, if adopted now, will render the newly inserted amended provisions of the Act as infructuous and redundant.

62. The issue relating to the effect of insertion of first and second provisos to section 2(15) of the Act vide Finance Acts 2008 and 2009 respectively came into consideration in the case of ‘Jammu Development Authority (supra) wherein, it has been held that if activities of any Institution/Trust/Society under the fourth limb i.e. `the advancement of any other object of general public utility’ are in the nature of trade, commerce or business for cess or fee and the receipts therefrom crosses the prescribed limit then they are not eligible to continue with registration u/s 12A and the same is required to be withdrawn. However, subsequently the impact of these provisions was also considered by the Coordinate Mumbai Benches of the Tribunal in the cases of “Ghatkopar Jolly Gymkhana v. DIT [2013) 40 taxmann.com 207/[2014) 147 ITD 112 (Mum. – Trib.) and “Cotton Textiles Exports Promotion Council v. DIT (Exemption), Mumbai [2014) 44 taxmann.com 168/64 SOT 167 (URO) (Mum. – Trib.) [Judicial Member of this Bench being party to the said decisions also) wherein it has been held that the first proviso to section 2(15) is a very rigorous provision which excludes the institution or trust from the definition of charitable trust, if such trust carries activities in the nature of trade, commerce or business….irrespective of the nature of use or application or retention of the income from such activity. That, however, by the insertion of the second proviso w.e.f. 01.04.2009 the rigour of the first proviso has been diluted and that the first proviso will not apply even if the trust carrying on business activities in the course of its dominant activities for the purpose of advancement of any other objects of general public utility and the gross receipts from such activities is Rs.10.00 lacs or less in the previous year. However where the gross receipts of a charitable institution, from its business activities exceeds limit of Rs. 10 lakhs, assessee will not be entitled for exemption or other admissible tax benefits for that relevant year but it does not result in cancellation of its registration as charitable institution. The above view, now has been affirmed by the Hon’ble Bombay High Court in the case of DIT (Exemption) v. North Indian Association [2017) 79 taxmann.com 410/246 Taxman 318/393 ITR 206 wherein the Hon’ble High court while further relying upon its another decision in the case of “DIT (Exemption) v. Khar Gymkhana [2016) 385 ITR 162/240 Taxman 407/70 taxmann.com 181 (Bom.) has duly taken note of the provisions of section 13(8) of the Act inserted vide Finance Act 2012 w.r.e.f. 1.4.2009 as well as the CBDT Circular No.21 of 2016 and though, held that merely because in one year income of assessee-trust exceeded prescribed limit provided under second proviso to section 2(15), that by itself, could not warrant cancellation of registration of trust, however, where the receipts are hit by the proviso to Section 2(15) of the Act, the benefit of exemption to its income for the previous year relevant to the subject assessment year will not be available. However it has been further held that if this happens on continuous/regular basis, it could justify further probe/inquiry before concluding that the trust is not genuine.

63. Though in the above referred to decisions of Mumbai Bench of the Tribunal and that of the Hon’ble Bombay High Court (supra), the question was whether the registration granted u/s 12 to the charitable institution can be cancelled if the monetary receipts from its business activity crosses the limit prescribed as per the second proviso to section 2(15) of the Income Tax Act and it was held that the registration on this ground granted to a charitable institution cannot be cancelled. However, it is to be noted that it was also held that in the previous year during which such income from business activity of the trust or institution crosses the prescribed limit, benefit of exemption u/s 11 for that year will not be available to such trust or institution. It is, therefore, to be noted that not only second proviso to section 2(15) of the Income Tax Act but also insertion of corresponding provisions of section 13(8) of the Act have been duly noted and their effect discussed. What we want to convey is that existence and effect of the amended provisions of sections 2(15), section 13, section 23 and section 143 of the Act cannot be just ignored or negated rather the same are to be read along with other relating provisions of the Act such as sections 11(4) and 11 (4A) of the Act and a harmonious construction is to be arrived at.

64. to 68…………………………………………….

68. The provisions of different sections as enumerated above, in our view, are to be read to be in harmony with each other so that each and every section should aid and supplement to the meaning and construction of other, so as to arrive at the correct interpretation rather than to read any or each of them in contradiction of each other making the other provision/s redundant and inoperative leading to confusion, anomaly and absurdity. Therefore, these provisions are to be read as each provision of the section supplement to other and not supplant the other and so that a reasonable construction may be arrived at and applied as may be intended by the Parliament while introducing the above provisions in the Statute.

69. In our view, when we read the aforesaid relevant provisions of the different but related sections in harmony to each other, a valid and proper construction can be arrived giving a meaning interpretation.

69 (1). The introduction of second proviso to section 2(15) of the Act, as discussed above, has removed the anomalies which have occurred due to the aforesaid different provisions present in the statute. The proposition that if any surplus is generated from business activity which is again ploughed back for the activities of the trust exemption u/s 11 is to be allowed has been done away with by the crucial words “irrespective of the nature of use or application, or retention, of the income from such activity” introduced in the first proviso of section 2(15) of the Act.

69 (2). Now, coming to the provisions of section 10(23C)(iv) of the Act, the income received by any person, on behalf of any fund or institution established for charitable purposes which may be approved by the prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States exempt from taxation. Now for approval to claim exemption u/s 10(23C)(iv), the institute for the fund must fall in the definition of ‘charitable purposes’ which includes activity under all or any limb as discussed above and can not be said to be applicable solely for activity of General Public Utility. So far institutes established for the objects of relief to the poor, education yoga, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest, their income may be claimed as exempt u/s 10(23C) (iv) if they otherwise fulfill the conditions as enumerated u/s 10(23C)(iv) of the Act. So far as the institute carrying on the advancement of any other object of general public utility, as noted above, their commercial income has also not been excluded in the light of second provision to section 2(15) of the Act but subject to the limit prescribed of the quantum of receipts. In respect of the question that if an institute or a trust will not be engaged in the commercial activity, it will not have any income and where is the question of claiming exemption is cornered, we may point out here that the income of a charitable institution cannot be only from commercial activity, but there are other modes of income also as per the provisions of section 2(24)(iia) of the Act. Voluntary contributions received by the trust created wholly or partly for charitable or religious purposes and included in the definition of income apart from voluntary contribution, such charitable trust or institution may receive grants from other modes or activity which may not in strict term to be said to be the activities in the nature of trade, commerce or business. Suppose, a trust or institutions engaged in the activity of imparting training in sports receives a nominal registration fee from the trainees. Can it be said to be an activity in the nature of trade, commerce or business? The answer will be in negative. Whether a particular activity is in the nature of trade, commerce or business is to be examined taking into consideration the nature of activity, the object and purpose of such activity, the volume of such activity and the nature and volume of the receipts and further the application thereof also. Every receipt of income, in our view, cannot be termed as activity in the nature of trade, commerce or business.

69(3).Moreover the restriction placed in the first proviso is only in respect of the institutions or trusts carrying out the activity for the advancement of any other object of Public Utility, and not in respect of activity for the other limbs of section 2(15). Hence, it cannot be said that the first proviso controls, restricts or bars any institution established for charitable purposes for carrying out the objects or activities in respect of other limbs and generating incidental income also therefrom.

69(4). Moreover, the anomaly, if any, has been removed with the introduction of second proviso to section 2(15) of the Act wherein the income from incidental or ancillary commercial activity has also been allowed and included while carrying out the advancement of object of general public utility also subject to the limit prescribed of the receipts. The second proviso of the section is in consonance of the provisions of section 11(4) & (4A) of the Income Tax Act.

69(5). We may point out here that the provisions of sections 11(4) and 11 (4A) of the Act are general provisions and are applicable to all the institutions claiming exemption u/s 11 of the Act carrying out activity for charitable purposes. Definition of the ‘Charitable purposes’ as provided u/s 2(15) of the Income Tax Act includes relief to the poor, education yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. Sub-section 4A do not bar the carrying on of business activity , however, puts restriction that such business should be incidental to the attainment of the objectives of the trust or institution and separate books of account are maintained. The restriction put by earlier section 13(1)(bb) and after its omission and by the subsequently inserted section 11(4A) have been well considered, interpreted and applied by the Hon’ble Supreme Court in the case of “Thanthi Trust” (supra) and thus it can not be said to be said there is any anomaly created by the above provisions .

69(6). Then there is sub-section (8) to section 13 of the Income Tax Act which states that nothing contained in sections 11 or 12 shall operate so as to exclude any income from total income of the previous years if the provisions of first proviso to clause (15) of section 2 becomes applicable. So the construction that any type of receipt which is incidental or ancillary to the carrying out of the advancement of objects of general public utility will be considered as income from charitable purposes if applied, such construction would not only render the first and second proviso to section 2(15) as amended from time to time and but also section 13(8) of the statute redundant and inoperative defeating the purpose for which they were brought into statute by Parliament will be defeated. At the same time, when we read the provisions of section 13(8) in isolation, it will make the provisions of sections 11 (4) and 11 (4A) of the Act inoperative for the institution carrying of object of advancement of general public utility, which also involves the activity of carrying of business, trade or commerce generating ancillary or incidental income. However, by the insertion of second proviso to section 2(15) as amended from time to time, the anomaly, if any, has been removed.

70. A harmonious construction of these amended provisions will lead to the conclusion that each of the provisions are in aid to and supplement each other. In our view, a reasonable and meaningful construction that may be arrived now is that as per the provisions of section 2(15) of the Act, ‘charitable purposes’ on the first part will include relief to the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest and advancement of any other object of general public utility and further as per the provisions of section 11(4) of the Act, such trust or institution can hold business assets also. However, as per the provisions of section (4A), such business for profit should be incidental to the attainment of the objectives of such trust or institution and separate books of account are to be maintained. Further, to claim exemption u/s 10(23C)(iv) of the Act, the fund or institutes must be established for charitable purpose and is approved/registered by the prescribed authority having regard to their objects and importance throughout India and otherwise fulfill the other conditions as enumerated u/s 10(23C) of the Income Tax Act. Here we may point out the restriction put by section 11(4A) or section 13(8) do not in any manner comes into play or otherwise restrict the business activity of the fund or institutions established for charitable purposes and claiming exemption u/s 10( 23C)(iv) of the Act. But the restriction inter alia created by the provisos to section 2(15) read with the newly inserted 18th proviso to section 10( 23C) (as reproduced above) and newly inserted proviso to section 143 (as inserted by Finance Act 2012 w.e.f. 1.4.2009) will apply that too only to the Institutions carrying on the activity of advancement of any other object of General public utility and not to the institutions established under other limbs of the definition of “Charitable Purposes”. Thus the provisos to section 2(15) or to section 10(23C) or to section 143 do not make the provisions of section 10(23C)(iv) redundant or inoperative, but only put some restrictions on the institutions carrying on the object of General Public Utility in respect of their business activity.

71. As per the second proviso to section 2(15) of the Act, income from incidental business activity should not cross the limit as prescribed from time to time as per the amendments carried out in second proviso of the Income tax act and the provisions of sections 11(4) & (4A) and section 10(23C)(iv) can be applied accordingly and such a construction will not make any provision contrary or in contradiction to the other, rather will supplement each other. Even the section 13(8) of the Act can also be meaningfully applied which will be required to read in the light of the second proviso to section 2(15) of the Act and thus harmonious construction of the related provisions will give a meaningful and workable interpretation as intended by the Parliament.

Hence, in the light of discussion made above of the relevant provisions of the Act, the interpretation that may be arrived is that for the trusts or the institutions carrying on the activity included in the first part of definition of ‘charitable purposes’ as defined u/s 2(15) of the Act viz. for the objects of relief to the poor, education yoga, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest and are also carrying on the business activity which is incidental to the attainment of objective of such trust or institution [as provided u/s 11(4A)], they are entitled to claim exemption of their income including the income from incidental business activity under section 11 of the Act subject to compliance or fulfilment of the otherwise required conditions including inter alia registration of such trust or institution u/s 12 A of the Act or maintaining of separate books of account regarding business activity as per the provisions of section 11(4A) of the Act etc. and subject to the applicability of the relevant provisions of section 11, 12 and 13 of the Act, irrespective of the quantum of income earned from such incidental business activity. In other words, there is no cap or limit prescribed for such receipts to be eligible for claiming exemption from taxation u/s 11 of the Act.

As discussed in the paras above of this order, any income received by a person on behalf of any fund or institutions established for charitable purposes as included in the first part of the definition as defined u/s 2(15) of the Act i.e. for the objects of relief to the poor, education yoga, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest can be claimed as exempt from levy of tax u/s 10(23C)(iv) of the Act irrespective of the quantum of such income i.e without any cap or limit on such income subject to fulfilling the other conditions as prescribed therein such as approval of such fund or institution by the prescribed authority, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States.

However, the trusts or institutions carrying on such activity or established to carry on such activity, as the case may be, that is falling in the last limb of the definition of charitable purposes as defined u/s 2(15) of the Act i.e. for the advancement of any other object of public utility which also involves the carrying of incidental 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, the restrictions inter alia put by the provisos to section 2(15) such as that the incidental business activity should be in the course of actual carrying out of the main object and the receipts therefrom should not cross the limit or cap (as applicable from time to time) and further that it will be immaterial that the funds or the profits from business activity are ploughed back to sub serve the main or the predominant object of the trust. In this respect the words “irrespective of the nature of use or application, or retention, of the income from such activity” finding place in the first proviso to section 2(15) of the Act would come into play. However, the other restrictions as provided under section 11(4A), 13(8) and 143(3) as discussed above, would accordingly apply for claiming exemption u/s 11 of the Act; However, the restriction inter alia put under the provisos to section 10(23C)(iv) and section 143(3) along with restrictions put by the provisos to section 2(15), as discussed above, will apply for claiming exemption u/s10(23) (iv). These restriction put under the provisos to section 2(15) are applicable only to the activity of advancement of any other object of general public utility.

72. However, even after holding that the harmonious reading of the related provisions of the Act, as discussed above, will lead to the conclusion that it cannot be said that any of the related section is in contradiction to the other or in any manner making inoperative or redundant the other, we still are of the view, that there remains still an anomaly which has not been addressed by the Parliament till date by way of introduction of the suitable provision. Suppose the income from incidental and ancillary activity of an institution in the course of carrying out of activity for advancement of object of general public utility crosses the limit, as prescribed for different assessment years as per the provisos to section 2(15), can it be said that such an institution will not be an institution carrying out the objects for ‘charitable purposes’. For example for the assessment year 2009-10, the total receipts of an institution from the ancillary activity in the shape of trade and commerce or business are Rs. 9.95 lacs, the institution will be treated as an institution for charitable purposes and its entire income exempt from taxation either u/s 11 or 10(23C) as the case may be, whereas, if there is a slight increase of Rs. six thousands only in such business income, say it crosses the limit of Rs. 10 lacs, i.e say at Rs. 10.01 lacs, then such trust or institution will be out of purview of the ‘charitable purpose’ and its entire income will be included in the total income, including the receipts which are not directly connected with the carrying of the incidental activity in the nature of trade, commerce or business. Such an anomaly will create utter confusion and will operate as restriction on the institution genuinely involved in carrying out the objects of general public utility. The Institutes which are rather carrying of the activity of general public utility on large scale will not be entitled to claim the benefit under the provisions of sections 11 & 12 of the Income Tax Act. Even the non-business income in the form of voluntary contribution and donations or directly relating to charitable activities (as discussed in para 61 (2) above) and not relating to the activity in the nature of trade, commerce or business would also become taxable. The moment the receipts from the commercial activity crosses the stipulated limit, the provisions of section 13(8) of the Act and provisos to section 10(23C) and section 143 , as the case may be, will come into play. It will mean that the entire income of an institution carrying on the object of general public utility on a small scale involving incidental commercial activity will be treated as exempt as it will not cross the prescribed limit of Rs. 10 lacs or Rs. 25 lacs or 20% of the total receipt as applicable for the different assessment years, however, the income of an institution carrying on the activity of general public utility on large scale will become taxable if the receipts from the incidental commercial activity crosses the limits as prescribed for different assessment years as noted above. Though by way of amendment to second proviso vide Finance Act 2015 w.e.f. 1.4.2016, the government has tried to remove the anomaly by substituting fixed limit of receipts of Rs. 25 lacs with the 20% of the total receipts, however, the question is that the receipts from the incidental or ancillary commercial activity cannot, in our view, be controlled or restricted by way of measuring or controlling the activities with golden scale or to say to check the same on day to day basis and the stop carrying out the incidental activity, which otherwise may be necessary to achieve the main object of general public utility, the moment the receipts touch the threshold. The Hon’ble Supreme Court in the case of ” Surat Art Silk Cloth Manf. Assn.” (supra) has held, “It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management.” The same analogy can well be applied in the facts and circumstances as discussed above.”

28. Ld DR relied upon the decision of jurisdictional High Court in the matter of Agra Development authority [2018] 90 taxmann.com 282 (Allahabad) wherein paragraph 65 to 70 , to buttress his argument that once the receipt from the activities were found to be more than prescribed limits , assessee is not entitled to exemption under section 11 of the Act. In that case it was held as under

“65. Upon a co-joint reading of both the provisos to Section 2(15) of the Act, the legislative intent appears not to allow exemption to an assessee who may engage in an activity mentioned in the first proviso to Section 2(15) of the Act, if his receipts for a previous year exceed Rs. 10,00,000/-. At the same time that benefit is not to be denied to such an assessee it his receipts in the previous year do not exceed Rs. 10,00,000/-.

66. The activities of any assessee are conducted on a day- to-day basis and accounts are made up at the year end. Therefore, at the relevant time i.e. during the previous year relevant to an assessment year, it may not always be predicted or determined or be known whether the receipts (from activities have been specified in the first proviso to Section 2(15) of the Act) exceed the statutory limit of Rs. 10,00,000/- set in the second proviso to Section 2(15) of the Act.

67. Then Section 13(8) of the Act had also been incorporated with retrospective effect from 1.4.2009 i.e. the date of introduction of the first proviso to Section 2(15) of the Act. Thus notwithstanding a pre-existing registration certificate under Section 12A of the Act, if as a fact, it were found during the assessment proceedings of an assessee (holding registration under Section 12A or Section 12AA of the Act), that it’s receipts arising from the activity (falling under the first proviso to Section 2(15) of the Act), exceeded the limit of Rs. 10 lacs in the relevant previous year, such receipts would not be eligible for exclusion from the total income of that assessee under Section 11 or 12 of the Act.

67.1 The scheme of the Act has to be understood that the benefit of exemption otherwise available under sections 11 and 12 of the Act has to be denied to the assessee in question if his receipts arising from activities falling under the first proviso to Section 2(15) exceed Rs. 10 lacs, but not otherwise.

68. Determination or quantification of receipts is therefore a sine qua non for application of the first proviso to Section 2 (15) of the Act. Such determination or quantification, by very nature, is an intrinsic part of the assessment procedure. That exercise is to be done by the assessing authority of the assessee (and not by the Commissioner), in accordance with Chapter XIV of the Act, within limitation prescribed thereunder. Those powers and procedure are clearly inapplicable to proceedings conducted by the Commissioner under Chapter III of the Act.

69. Thus Section 13(8) of the Act creates an exception to the scheme for exemption contained in sections 11 and 12 of the Act. It applies on a year to yearbasis depending on quantification of the receipts from the activity falling under the first proviso to Section 2(15) of the Act. On the other hand Section 12AA(3) of the Act if invoked in the case of an assessee would disentitle an assessee to claim the exemption irrespective of the quantum of his receipts from any activity.

70. The Act therefore neither contemplates an inviolable right to claim exemption solely on the strength of a registration certificate nor does the Act appear to contemplate that in case of an opinion being formed by the Commissioner that an assessee is engaged in an activity specified in the first proviso to section 2(15) of the Act, he must necessarily seek to cancel the registration granted by him earlier. In fact, the Act carves out a middle path by allowing the registration to stand but it’s benefit to be deprived in assessment proceedings in certain specified circumstances.”

29. The Ld.AR had also drawn our attention to the order passed by the assessing officer wherein the assessing officer has captured the various activities carried out by the assessee which, in the opinion of the assessing officer as well as of the Ld. DR were not perse charitable in nature , as t falls under last limb of definition given in section 2 (15) of the Income Tax Act. The Ld. DR had also drawn our attention to the special audit report done by the auditor to point out that the activities of the assessee are in the nature of trade commerce or business. It was submitted though the assessee may be exercising its jurisdiction and functions under the act it was constituted. It was submitted merely because the assessee was discharging its functions as per local/ state Act would not a reason to treat the assessee as charitable . The criteria to determine the activities of the assessee a charitable nature are provided under the Income Tax Act, therefore the activities of the assessee should meet the requirement of IT Act . Therefore it was submitted that the assessee is not entitled to benefit of the exemption under section 11 as the Threshold Limit Provided by the Act were breached, as the total receipt for the assessment year under consideration was more than 25 lakhs . He relied upon the above said provisions and also on the decisions mentioned hereinabove and also the decision mentioned in the order of the lower authorities .

Rebuttal by AR for the assessee

30. Ar for the assessee had filled the following written submissions to the submissions foDR

“The assessee is a development authority constituted under Uttar Pradesh Urban & Planning Development Act for achieving the objects contained in section 7 of the above Act. The revenue has referred the order of Hon’ble ITAT, Chandigarh bench, passed in the case of Chandigarh Lawn Tennis Association whereby the activities of the above assessee has been held as hit by Proviso to Section 2(15) of the I.T. Act. The revelvent provisions are reproduced as under:-

2(15) “charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, 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 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 appli-cation, 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 twenty-five lakh rupees or less in the previous year.

The assessee is filing another order of Hon’ble ITAT Ahmedabad bench passed in the case of Gujarat Housing Board (GHB) wherein Hon’ble Tribunal has held that the activities of the above authority is not hit by proviso to section 2(15) and as such the authorities below were in error in invoking proviso to Section 2(15) and declining the benefit of Section 11 to the assessee (Page 14 to 17).

There is basic difference in case referred to by the revenue and the case referred to by the assessee. The institution is not a government organization while the assessee is constituted by the Uttar Pradesh Government.

It is therefore prayed that order passed by Hon’ble ITAT, Ahmedabad bench, being the latest order, the same may kindly be followed.

Analysis and Decision

31. We have considered the rival contention of the parties and perused the material available on record, including the judgments cited at bar during the course of hearing by both the parties. Section 2(15) has been reproduced herein above while recording the submissions of the assessee as well as the revenue. From the perusal of the section 2(15) it is amply clear that the charitable purpose includes

• relief of the poor, education, Yoga, medical relief
• preservation of environment (including water-Sheds, forests and wildlife)
• preservation of monuments or places or objects of artistic or historic interest and
• advancement of any other object of general public utility

32. Undoubtedly, the activities of the appellant, if at all, would fall in the last limb of the definition, of charitable Purpose. Therefore it is necessary to examine the objects for which the assessee was constituted by the state government . It is undisputed fact that the assessee came into existence on 15.10.1984 by virtue of U.P.Urban Planning & Development Act, hereinafter referred to as ‘the Act’ . the objects of assessee authority as per section 7 of the U.P.Urban Planning & Development Act 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 and 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 purposes of such development and for purposes incidental thereto;”

33. The objects and activities of the assessee, were earlier considered by the ITAT as well as Hon’ble High Court at the time of considering the validation of the Commissioner action for cancelling the registration. The first decision rendered by the tribunal was in the appeal No. 459/Agra/2007 wherein the tribunal vide decision dated 5thDecember 2008 had directed the Commissioner to grant registration to the present appellant forthwith .Inparagraph 4.2 the said judgement had held as under :

4.2 The law in the matter being abundantly clear apart from assessee case being also covered by the referred decision by the tribunal, there is no denying that the assessee activities are charitable in nature and it is a fun entitled to seek registration under section 12 AA of the act. That it did not do so earlier on account of its being income tax exempt under section 10 (20 A) is no ground for rejecting its application, rather by itself constitutes a reasonable cause for having not sought the said registration earlier. The referenced to or the support as sought to be drawn from the provision of section 11 (4A) is, to our mind, also misplaced, in as much as it is patently clear that development involves the acquisition and dispose of land, transaction in the nature of business so that it supports the appellant case, the same being incidental to the attainment of primary objective,i.e, development of township, even as it may involve in Main acquisition and disposal of land and its development.”

34. The decision of the tribunal dated 5th December 2008 was challenged by the revenue before the Hon’ble High Court and the Hon’ble High Court violets order dated 29 August 2016 after relying upon the decision on the Lucknow development Authority had dismissed the appeal of the revenue. The important observation of the Hon’ble High Court mentioned in paragraph 15 ,19 and 20 were as under :

15. “Advancement of any other object of general public utility” is a term of very wide connotation. There is no requirement for the purpose of Section 12 that Institution must be registered under Act, 1882 or Act, 1860. CIT added this condition on his own though we do not find any such condition provided under Section 12A or 12AA of Act, 1961. In order to consider whether creation of HPDA is for advancement of general public utility. Tribunal has looked into objects and purposes of U.P. Act, 1973 and also the purpose of acquisition of land by HPDA, which is only for public purpose and not personal one.

19. The findings and observations in the aforesaid judgment are squarely applicable in the case in hand also.

20. We also find that another statutory body, namely, Krishi Utpadan Mandi Samiti constituted under U.P. Krishi Utpadan Mandi Adhiniyam, 1964 (hereinafter referred to as “Act, 1964”) was also registered under Section 12AA of Act, 1961 and the question whether amount transferred to Mandi Parishad would constitute application of income for ‘charitable purpose’ under Section 11(1)(a) of Act, 1961 has been decided against Revenue by Supreme Court in Commissioner of Income Tax Vs. Krishi Utpadan Mandi Samiti 2012 (12) SCC 267 wherein Court has also confirmed this Court’s judgment dated 04.12.2009 passed by this Court at Lucknow in I.T.A. No. 102 of 2009.

35. Thereafter the tribunal while considering the orderdated 15 September 2014 of the CIT rejecting the registration in appeal no 316/Agra/2014 had once again directed the Commissioner to grant registration forthwith. The observation of the Hon’ble tribunal were mentioned paragraph 13 and 14 to the following effect :

13. The case laws relied upon by the Ld. DR have no relevance since they are distinguishable on facts. In the case of Jammu Development Authority [2012] 23 taxmann.com 343 (Amritsar), and Jammu Development Vs. UOI &anr. (ITA No. 164 of 2012 dated 07.11.2013) (HC of J&K) relied upon by the Ld. DR the facts were that registration u/s 12AA was granted without taking into consideration the proviso to section 2(15) which was very much there on the statute while granting registration. The Hon’ble High Court upheld the view of the Tribunal that by not taking into consideration the first proviso to section 2(15) while granting registration, an error in law had occurred which could not be allowed to be perpetuated and hence the registration was cancelled. In the present case the facts are totally distinguishable since, when registration under section 12AA was granted in the impugned case the provision to section 2(15)was not on the statute and the Hon’ble Madras High Court in the case of Tamil Nadu Cricket Association (supra) has categorically held that power regarding cancellation has to be seen with reference to the registration and the objects satisfying the definition of “charitable purpose” as it stood at the time of registration and not by subsequent amendment to section 2(15) of the Act. The decision in the case of Jalandhar Development Authority (supra), Punjab Urban Planning & Development Authority (supra), Improvement Trust Vs. CIT (Bhatinda)(supra)& Haryana Urban Development, Panchkula Vs. CIT relied upon 13 by the Ld. DR have been rendered in the context of grant of registration u/s 12AA which stands on a slightly different footing as compared to cancellation of registration u/s 12AA(3). The grant of registration u/s 12AA(1)(b) requires satisfaction about the objects of the trust as well as genuineness of the activities, while for cancellation u/s 12AA(3) all that is insisted upon is the satisfaction as to whether the activities of the trust or institution are genuine or not and whether the activities are being carried on in accordance with the objects of the trust. Further we find that on the issue under adjudication in the present case, there are decisions of the Hon’ble Tribunal in favour of the assessee as pointed out by the Ld. AR and in such a situation it is settled law that the view favourable to the assessee has to be taken. Moreover the decision of the Hon’ble Madras High Court has precedence on the decisions of the Hon’ble Tribunal on this issue following the principles of judicial precedence.

14. In view of the above discussion, in our considered view, the action of the Ld. Commissioner in canceling registration under section 12AA(3) is wholly devoid of any legally sustainable merit

36. From theconjoint reading of the above decisions of the tribunal as well as of the Hon’ble High Court, it is abundantly clear that development of land and building , acquisition of land by the authority had consistently been considered to be falling within advancement of the general public purpose. The advancement of public purpose has been considered by the statute to be charitable purpose and is as provided in the last limb of the definition given in section 2 (15) of the Act .

37. Having held undisputedly that the activities of the assessee are for the advancement of public purpose. It is now , necessary to deal with Provision to section 2(15), which provide as under

2[Provided that the advancement of any other object of general public utility69 shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business73, or any activity of rendering any service in relation to any trade, commerce or business73, for a cess or fee or any other consi-deration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility73; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;]]

38. From the reading of the proviso, it is clear the advancement of any other object of general public utility shall not be charitable

• if the assessee is involved in 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 of business
• the assessee is carrying the activities of services for cess or fee or for any other consideration
• the nature of use or application or retention of the income from such activities are not relevant unless such activities are undertaken in the course of actual carrying out of such advancement of any object of general public utility.

39. To attract the proviso to section 2(15) it is essential that the activities of the assessee should be in nature of trade, commerce or business or assessee is into rendering of services for trade , commerce or business . The assessing officer had examined the activities of the assessee in paragraph 2 at page 6 of the assessment order reproduced herein above ( para 8) and thereafter held that the activities of the assessee are in the nature of trade, commerce or business.

40. On the closer look of the activities of the assessee and reasoning of AO , it is clear that primarily the activities of the Assessee consist of acquiring the land from the farmers, converting the land use, plotting the land selling the land to coloniser and developer for construction activities. The assessee is discharging all these functions within the four corners of the Parent Act under which it was created, which ,in our view are statutory functions . The assessee is under an obligation to do all these activities as per the mandate given in section 9A of the act. Section 9A of UP act provides as under

9. Zonal Development plans.-

(1) Simultaneously with the preparation of the master plan or as soon as may be thereafter, the Authority shall proceed with the preparation of a zonal development” plan for each of the zones into which the development area may be divided. (2) A zonal development plan maycontain a site-plan and use-plan for the development of the zone and show the approximate locations and extents of land uses proposed in the zone for such things as public buildings and other public works and utilities, roads, housing, recreation, industry, business, markets, schools, hospitals and public and private open spaces and other categories of public and private uses; specify the standards of population density and building density; show every area in the zone which may, in the opinion of the Authority, be required or declared for development or re-development; and 9.A In particular, contain, provisions regarding all or any of the following matters, namely-

(i) the division of any site Into plots for the erection of buildings; (ii) the allotment or reservation of land for roads, open spaces, gardens, recreation-grounds, schools, markets and other public purposes: (iii)the development of any area Into a township or colony and the restrictions and conditions subject to which such development may be undertaken or carried out, (iv) the erection of buildings on any site and the restrictions and conditions in regard to the open spaces to be maintained in or around buildings and height and character of buildings: (v) the alignment of buildings of any site; (vi) the architectural features of the elevation or frontage of any building to be erected on any site, (vii)the number of residential buildings which may be erected on plot or site; (viii) the amenities to be provided in relation to any site or buildings on such site whether before or after the erection of buildings and the person or authority by whom or at whose expense such amenities are to be provided: (ix)the prohibitions or restrictions regarding erection of shops. work-shops, warehouses of factories or buildings of a specified architectural feature or buildings designed for particular purposes in the locality, the maintenance of walls, fences, hedges or any other structural or architectural construction and the height at which they shall be maintained: the restrictions regarding the use of any site for purposes other than erection of buildings; any other matter which is necessary for the proper development of the zone or any area thereof according to plan and for presenting buildings being erected haphazardly, in such zone or area.

41. All the activities mentioned by the assessing officer in paragraph 2 at page 6 of the order, were done by the assessee pursuant to the fulfilment of its primary objects of its creation under state act and for the purposes of advancement public benefit. Similar view was taken by the Hon’ble High Court in the matter of Yamuna Expressway Industrial Development Authority*[2017] 81 taxmann.com 208 (Allahabad) , wherein it was held as under :

“71. Entire discussion, if we summarize, can be placed in a small arena of judicial analysis, that is, a body or institution which is functioning for advancement of objects of general public utility and its activities are not in the nature of trade, business or commerce and also not a sheer profit making, such institution is entitled to claim itself to be constituted for “charitable purposes” and seek registration under Section 12A(1) of Act, 1961.”

42. We are also of considered view ,the assessee is the extended arm of the UP state and is discharging it statutory functions within the four corners of the Act. The assessee is part of welfare state and is discharging its duties and function as has been empowered by the Act and also by the Constitution of India for the advancement and welfare of general public.

43. We are of the opinion that assessee cannot be equated by with the private entrepreneur or coloniser or club or Association, as it is a state under Article 12 of the Constitution of India and has duties, towards all the citizens and resident of the area irrespective of caste, creed, religion, sex etc . The charging of cess or fees by the assessee is only an incidental activities to the main and primary activities of the assessee ,continues to be development etc for the benefit of general public . Moreover charging of fees ,cessetc by the assessee for its activities were duly authorised by the act, regulation and rules framed under the law. In our considered opinion the discharge of duties by the state or by the state functioning cannot be termed as an activity which is trade, commercial or business. The said activities were essentially done by the assessee for the discharge of the statutory duties and therefore the same cannot be termed as eithertrade commerce or business.

44. There is a distinction between an assessee registered charitable institution doing activities for profit to achieve charitable object And assessee doing activities in furtherance of its charitable purposes and on account of said activities assessee receive some income.

45. In our view any activity can be termed as trade, commerce or business if it is done with the purpose of earning the income or profit or in other words the driving forces for doing such activities, were to earn profit/ income . The Courts have dealt with the issue, as to what would constitute trade, commerce or business, elobrately in many judgments, for the better understanding we may rely on the following paragraphs , in the matter of Greater Noida Industrial Development Authority2018] 91 taxmann.com 352 (Delhi), whereinof Delhi high Court had summarized the meaning to Trade, commerce and business used in 2(15) in the following manner :

“16. Way back in 1970, a Constitution Bench of five Judges in Shri Ramtanu Co-operative Housing Society Ltd. v. State of Maharashtra [1970] 3 SCC 323, had examined validity of Maharashtra Industrial Development Act, 1961 (3 of 1962) and in that context had referred to the functions performed by Maharashtra Development Corporation, which was to establish and manage industrial estate on selected basis and to develop industrial area selected by the State Government and for this purpose acquire and transfer land by way of sale, lease, etc. Contention of the petitioner therein that the Corporation established would be a trading one or a commercial corporation was rejected in the following words:—

“16. The petitioners contended that the Corporation was a trading one. The reasons given were that the Corporation could sell property, namely, transfer land; that the Corporation had borrowing powers; and that the Corporation was entitled to moneys by way of rents and profits. Reliance was placed on the report of the Corporation and in particular on the income and expenditure of the Corporation to show that it was making profits. These features of transfer of land, or borrowing of moneys or receipt of rents and profits will by themselves neither be the indicia nor the decisive attributes of the trading character of the Corporation. Ordinarily, a Corporation is established by shareholders with their capital. The shareholders have their Directors for the regulation and management of the Corporation Such a Corporation set up by the shareholders carries on business and is intended for making profits. When profits are earned by such a Corporation they are distributed to shareholders by way of dividends or kept in reserve funds. In the present case, these attributes of a trading Corporation are absent. The Corporation is established by the Act for carrying out the purposes of the Act. The purposes of the Act are development of industries in the State. The Corporation consists of nominees of the State Government, State Electricity Board and the Housing Board.The functions and powers of the Corporation indicate that the Corporation is acting as a wing of the State Government in establishing industrial estates and developing industrial areas, acquiring property for those purposes, constructing buildings, allotting buildings, factory sheds to industrialists or industrial undertakings. It is obvious that the Corporation will receive moneys for disposal of land, buildings and other properties and also that the Corporation would receive rents and profits in appropriate cases. Receipts of these moneys arise not out of any business or trade but out of sole purpose of establishment, growth and development of industries.

** ** **

19. There are two provisions of the Act which are not to be found in any trading Corporation. In the first place, the sums payable by any person to the Corporation are recoverable by it under this Act as an arrear of land revenue on the application of the Corporation. Secondly, on dissolution of the Corporation the assets vest in and the liabilities become enforceable against the State Government.

20. The underlying concept of a trading Corporation is buying and selling. There is no aspect of buying or selling by the Corporation in the present case. The Corporation carries out the purposes of the Act, namely, development of industries in this State. The construction of buildings, the establishment of industries by letting buildings on hire or sale, the acquisition and transfer of land in relation to establishment of industrial estate or development of industrial areas and of setting up of industries cannot be said to be dealing in land or buildings for the obvious reason that the State is carrying out the objects of the Act with the Corporation as an agent in setting up industries in the State. The Act aims at building an industrial town and the Corporation carries out the objects of the Act. The hard core of a trading Corporation is its commercial character. Commerce connotes transactions of purchase and sale of commodities, dealing in goods. The forms of business transactions may be varied but the real character is buying and selling. The true character of the Corporation in the present case is to act as an architectural agent of the development and growth of industrial towns by establishing and developing industrial estates and industrial areas. We are of opinion that the Corporation is not a trading one.”

17. There are a number of decisions of the Delhi High Court on interpretation of the expression “in the nature of trade, commerce or business” in the proviso to Section 2(15) of the Act, for an institution carrying on the aforesaid activities is not a charitable institution under the residual category of advancement of any other object of general public utility. In Institute of Chartered Accountants of India v. DGIT (Exemptions) [2011] 13 taxmann.com 175/202 Taxman 1/[2012] 347 ITR 99 (Delhi) referring to the meaning of the terms “commerce” and “business”, it was held as under:—

“33. Section 2(15) defines the term ‘charitable purpose’. Therefore, while construing the term ‘business’ for the said Section, the object and purpose of the Section has to be kept in mind. We do not think that a very broad and extended definition of the term ‘business’ is intended for the purpose of interpreting and applying the first proviso to Section 2(15) of the Act to include any transaction for a fee or money. An activity would be considered “business” if it is undertaken with a profit motive, but in some cases this may not be determinative. Normally the profit motive test should be satisfied but in a given case activity may be regarded as business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is infactin the nature of business. The test as prescribe (sic) in Raipur Manufacturing Company (supra) and Sai Publications Fund (supra) can be applied. The six indicia stipulated in Lord Fisher (supra) are also relevant. Each case, therefore, has to be examined on its own facts.

34. In view of the aforesaid enunciation, the real issue and question is that whether the petitioner-institute pursues the activity of business, trade or commerce. To our mind, the respondent while dealing with the said question has not applied their mind to the legal principles enunciated above and have taken a rather narrow and myopic view by holding that the petitioner institute is holding coaching classes and that this amounts to business..

18. Six tests enunciated by Lord Fisher in Customs & Excise Commissioners v. Lord Fisher [1981] 2 All ER 147 are;—

“(a) a serious undertaking earnestly pursued; (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognized business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; (f) such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them.”

” 46. In the case of the assessee, the activities were undertaken by the assessee, not for the purpose of earning the profit but, were done in discharge of its statutory duties for general welfare of public of developing land and building in a regulated, structured and planned manner. The charging of fees is only a by-product or incidental to main activity. We are further of view that for the purpose of regulating the activities of development, creation and maintenance of infrastructure , providing affordable housing etcit is necessary to charge some fees or cess , as said activities could not be discharged for free.Though there mayalways be an element of subsidy or cross subsidy in the functioning of state authorities to provide maximum benefit to the most deserving class or community . Admittedly the revenue is the foundation and basis of every state action. No state or authority can function without the availability or generation of revenue. Hence merely on account of charging of fee or cess would not irresistibly lead to the conclusion that the activities ceases to be charitable ,as it will fall in proviso to section 2(15) . In any caseearning of profit is not the intention of the assessee or by the state. Further narrow approach is not required to be taken for interpreting the “advancement of any other object of general public utility” rather “creative interpretation” is required to be adopted, while interpreting this proviso to section 2(15). The Hon’ble Supreme Court had laid down the broad guidelines for adopting Principle of creative interpretation in the matter of Eera through Manjula vs Govy of Delhi Criminal appeal no 1217/2016 (2017) 15 SCC 133 wherein it was held as under:

21. Instances of creative interpretation are when the Court looks at both the literal language as well as the purpose or object of the statute in order to better determine what the words used by the draftsman of legislation mean. In D.R.

Venkatachalam v. Deputy Transport Commissioner, (1977) 2 SCC 273, an early instance of this is found in the concurring judgment of Beg, J. The learned Judge put it rather well when he said:

“It is, however, becoming increasingly fashionable to start with some theory of what is basic to a provision or a chapter or in a statute or even to our Constitution in order to interpret and determine the meaning of a particular provision or rule made to subserve an assumed “basic” requirement. I think that this novel method of construction puts, if I may say so, the cart before the horse. It is apt to seriously mislead us unless the tendency to use such a mode of construction is checked or corrected by this Court. What is basic for a section or a chapter in a statute is provided: firstly, by the words used in the statute itself; secondly, by the context in which a provision occurs, or, in other words, by reading the statute as a whole; thirdly, by the preamble which could supply the “key” to the meaning of the statute in cases of uncertainty or doubt; and, fourthly, where some further aid to construction may still be needed to resolve an uncertainty, by the legislative history which discloses the wider context or perspective in which a provision was made to meet a particular need or to satisfy a particular purpose. The last mentioned method consists of an application of the Mischief Rule laid down in Heydon’s case long ago.” [para 28]

22. In the celebrated judgment of Reserve Bank of India v. Peerless General Finance & Investment Co. Ltd. and Others, (1987) 1 SCC 424, O. Chinnappa Reddy, J. stated:-

“Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the Court construed the expression “Prize Chit” in Srinivasa [(1980) 4 SCC 507 : (1981) 1 SCR 801 : 51 Com Cas 464] and we find no reason to depart from the Court’s construction.” [para 33]

23. Indeed, the modern trend in other Commonwealth countries, including the U.K. and Australia, is to examine text as well as context, and object or purpose as well as literal meaning. Thus, in Oliver Ashworth Ltd. V. Ballard Ltd., [1999] 2 All ER 791, Laws L.J. stated the modern rule as follows:

“By way of introduction to the issue of statutory construction I should say that in my judgment it is nowadays misleading — and perhaps it always was — to seek to draw a rigid distinction between literal and purposive approaches to the interpretation of Acts of Parliament. The difference between purposive and literal construction is in truth one of degree only. On received doctrine we spend our professional lives construing legislation purposively, inasmuch as we are enjoined at every turn to ascertain the intention of Parliament. The real distinction lies in the balance to be struck, in the particular case, between the literal meaning of the words on the one hand and the context and purpose of the measure in which they appear on the other. Frequently there will be no opposition between the two, and then no difficulty arises. Where there is a potential clash, the conventional English approach has been to give at least very great and often decisive weight to the literal meaning of the enacting words.

This is a tradition which I think is weakening, in face of the more purposive approach enjoined for the interpretation of legislative measures of the European Union and in light of the House of Lords’ decision in Pepper (Inspector of Taxes) v. Hart [1993] 1 All E. R. 42, [1993] A.C 593. I will not here go into the details or merits of this shift of emphasis; save broadly to recognise its virtue and its vice. Its virtue is that the legislator’s true purpose may be more accurately ascertained. Its vice is that the certainty and accessibility of the law may be reduced or compromised. The common law, which regulates the interpretation of legislation, has to balance these considerations.” And in R. (Quintavalle) v. Secretary of State for Health, [2003] 2 All E.R.113, Lord Steyn put it thus:

“On the other hand, the adoption of a purposive approach to construction of statutes generally, and the 1990 Act in particular, is amply justified on wider grounds. In Cabell v Markham (1945) 148 F 2d 737 at 739 Learned Hand J explained the merits of purposive interpretation:

‘Of course it is true that the words used, even in their literal sense, are the primary, and ordinarily the most reliable, source of interpreting the meaning of any writing: be it a statute, a contract, or anything else. But it is one of the surest indexes of a mature developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.’ The pendulum has swung towards purposive methods of construction. This change was not initiated by the teleological approach of European Community jurisprudence, and the influence of European legal culture generally, but it has been accelerated by European ideas: see, however, a classic early statement of the purposive approach by Lord Blackburn in River Wear Comrs v Adamson (1877) 2 App Cas 743 at 763, [1874-80] All ER Rep 1 at 11. In any event, nowadays the shift towards purposive interpretation is not in doubt. The qualification is that the degree of liberality permitted is influenced by the context, e.g. social welfare legislation and tax statutes may have to be approached somewhat differently. For these slightly different reasons I agree with the conclusion of the Court of Appeal that s 1(1) of the 1990 Act must be construed in a purposive way.” (at 122, 123)66 We find the same modern view of the law in CIC Insurance Limited v. Bankstown Football Club Limited, F.C. (1997) 187 CLR 384, where the High Court of Australia put it thus:

In a recent judgment by a 7 Judge Bench of this Court , the majority, speaking through Lokur, J., referred to the aforesaid judgment with approval. See Abhiram Singh v. C.D. Commachen – 2017 (2) SCC 629 at Para 37.

“It is well settled that at common law, apart from any reliance upon 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. [Black-Clawson International Ltd v PapierwerkeWaldhof-Aschaffenburg [1975] UKHL 2; [1975] AC 591 at 614, 629, 638; Wacando v The Commonwealth [1981] HCA 60; (1981) 148 CLR 1 at 25-26; Pepper v Hart [1992] UKHL 3; [1993] AC 593 at

630.]. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses “context” in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy [Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 at 461, cited in K & S Lake City Freighters Pty Ltd v Gordon &Gotch Ltd [1985] HCA 48; (1985) 157 CLR 309 at 312, 315.]. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd. [(1986) 6 NSWLR 363 at 388.], if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent. [Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 320-321].”

24. It is thus clear on a reading of English, U.S., Australian and our own Supreme Court judgments that the ‘Lakshman Rekha’ has in fact been extended to move away from the strictly literal rule of interpretation back to the rule of the old English case of Heydon, where the Court must have recourse to the purpose, object, text, and context of a particular provision before arriving at a judicial result. In fact, the wheel has turned full circle. It started out by the rule as stated in 1584 in Heydon’s case, which was then waylaid by the literal interpretation rule laid down by the Privy Council and the House of Lords in the mid 1800s, and has come back to restate the rule somewhat in terms of what was most felicitously put over 400 years ago in Heydon’s case.”

47. Similarly the Hon’ble Supreme Court in the matter ofMacquarie Bank Limited vs Shilpi cable civil appeal no 15135 of 2017 held as under

23. Equally, Dr. Singhvi’s argument that the Code leads to very drastic action being taken once an application for insolvency is filed and admitted and that, therefore, all conditions precedent must be strictly construed is also not in sync with the recent trend of authorities as has been noticed by a concurring judgment in Ms. Eera through Dr. Manjula Krippendorf v. State (Govt. of NCT of Delhi) &Anr, Criminal Appeal Nos. 1217-1219 of 2017 decided on July 21, 2017. In this judgment, the correct interpretation of Section 2(1)(d) of the Protection of Children from Sexual Offences Act, 2012 arose. After referring to the celebrated Heydon’s case, 76 E.R. 637 [1584] and to the judgments in which the golden rule of interpretation of statutes was set out, the concurring judgment of R.F. Nariman, J., after an exhaustive survey of the relevant case law, came to the conclusion that the modern trend of case law is that creative interpretation is within the Lakshman Rekha of the Judiciary. Creative interpretation is when the Court looks at both the literal language as well as the purpose or object of the statute, in order to better determine what the words used by the draftsman of the legislation mean. The concurring judgment then concluded:

( emphasis supplied by us)

“It is thus clear on a reading of English, U.S., Australian and our own Supreme Court judgments that the ‘Lakshman Rekha’ has in fact been extended to move away from the strictly literal rule of interpretation back to the rule of the old English case of Heydon, where the Court must have recourse to the purpose, object, text, and context of a particular provision before arriving at a judicial result. In fact, the wheel has turned full circle. It started out by the rule as stated in 1584 in Heydon’s case, which was then waylaid by the literal interpretation rule laid down by the Privy Council and the House of Lords in the mid 1800s, and has come back to restate the rule somewhat in terms of what was most felicitously put over 400 years ago in Heydon’s case.”

In dealing with penal statutes, the Court was confronted with a body of case law which stated that as penal consequences ensue, the provisions of such statutes should be strictly construed. Here again, the modern trend in construing penal statutes has moved away from a mechanical incantation of strict construction. Several judgments were referred to and it was held that a purposive interpretation of such statutes is not ruled out. Ultimately, it was held that a fair construction of penal statutes based on purposive as well as literal interpretation is the correct modern day approach.

48. We are duty bound to the adopt the creative interpretation while interpreting“the advancement of any other object of general public utility” and scope of proviso to section 2(15)keep in mind the purpose of section 2(15) of the Act . In our view, legislature never thought of bringing the activities of statutory bodies like the assessee outside the scope of charitable activities, as bodies like assessee are discharging their statutory functions as per mandate of law ,as an extended arm of welfare state for the benefit of citizens in discharge of statutory duties , like in the present case as per section section 9A of UP development Act.These statutory bodies were created by the statute of the state government or by the central government for the welfare and benefit of the common citizens. There is a inbuilt philosophy of charity in the activities of these bodies and therefore to say that these bodies loses their character of the charitable on account of the receipt, in our view would be contrary to the spirit and purpose of providing exemption to the charitable institution and creation of these bodies.

49. In this context, if look into the activities of appellant then we would come to the conclusion that the activities of the assessee are not having the texture or colour of trade, commerce of business, but were in discharge of public duty and service with no motive of profit earning or economic activities yield, which require taxation by the respondent .

50. At this stage we may mention that the judgements relied upon by the revenue Chandigarh Lawn Tennis Association [2018] 95 taxmann.com 308 (Chandigarh – Trib.) is not applicable to the present case,asan authority created by the statute, cannot be equated with the private club or institution fulfilling its object. The objects of the state authority (appellant ) are ofdevelopment of landetc( section 7) whereas that of Tennis association etc are to organize tournaments on commercial lines and earn revenue . Both are having different set of responsibilities,obligation, regulatory regime and purpose of discharging their duties .

51. Similarly the judgment in the matter of Agra Development (supra), relied upon by the revenue is also not applicable , as there was no finding of fact by the Court in this case rather , court in para 63 had recorded as under;

“63. In our view, the Tribunal should have considered whether the registration could have been cancelled because the assessee was not pursuing a “charitable purpose”. If the Tribunal found that the registration granted to the assessee was liable to be cancelled because it had not engaged in any activity in pursuance of “charitable purpose”, then, the date from which such registration could be cancelled, would become relevant and be given effect to. At present, there is no finding of the Tribunal as to the merits of the matter.”

( emhasis supplied by us )

There is no cavil, for the applicability to proviso to section 2 of the Act ,in case the revenue receipt from the such activities exceeded the threshold limit provided by the Act for the relevant assessment year, however, as mentioned herein above , the proviso is only applicable if the assessee is involved into trade, commerce or business not in any other case.

52. In our view the activities of the assessee were driven by the its obligation under the Act, which were not neither trade nor commerce nor businessand the charging of fees et cetera is only an incidental element for fulfilment of its obligation under the Act.. We may mention, that the advancement of any other object of general public utility, is an expression of wide amplitude and there are many activities, like the activities of the assesseeauthority created under the statute, which are neither in the nature of trade, nor commerce nor business , but were done for the advancement of public utility or benefit .

53. Further for the purposes of bringing the activities of the assessee under the rigors of proviso to section 2(15) it is essential that such activity should be in the nature of trade, commerce or business. However as mentioned hereinabove the activities for the advancement of any other object public utility is a bigger set and activities of trade, commerce or business, may be incidentally forming part of advancement of any other object public utility. The reliance on the objects of the assessee by AO, cannot form basis of coming to the conclusion that the assessee was doing commercial activities. If the activities of the assessee per se were commercial, than High court or Tribunal would not have granted the registration . Quite contrary high court after examining the same clause 7 came to the conclusion that the activities of the assessee are charitable in nature. Therefore the finding of the assessing officer that the assessee was carrying out the commercial activities was without any basis.

54. We may also draw strength from the decision of the in the case of Surat Urban Development Authority (SUDA) by the Gujrat High Court. The High court vide Judgment dated 21.9.2020 had dismissed the appeal of revenue with the following finding :

“ 2. By this appeal under section 260-A of the Income-tax Act, 1961 (hereinafter referred to as the “Act” for the sake of brevity) the appellant – Revenue has challenged the order dated 16-1-2020 passed by the Income-tax Appellate Tribunal, D Bench, Ahmedabad in ITA No. 2431/AHD/2017 for AY 2011-12.

6.1 The Division Bench after considering the catena of decisions on the subject, has further observed thus:

14. Considering the aforesaid facts and circumstances and more particularly, considering the fact that the assessee is a statutory body Urban Development Authority constituted under the provisions of the Act, constituted to carry out the object and purpose of Town Planning Act and collects regulatory fees for the object of the Acts; no services are rendered to any particular trade, commerce or business; whatever the income is earned/received by the assessee even while selling the plots (to the extent of 15% of the total area covered under the Town Planning Scheme) is required to be used only for the purpose to carry out the object and purpose of Town Planning Act and to meet with expenditure while providing general utility service to the public such as electricity, road, drainage, water etc. and even the entire control is with State Government and even accounts are also subjected to audit and there is no element of profiteering at all, the activities of the assessee cannot be said to be in the nature of trade, commerce and business and therefore, proviso to section 2(15) of the Act shall not be applicable so far as assessee is concerned and therefore, the assessee is entitled to exemption under section 11 of the Income-tax Act. Therefore, the question no. 1 is to be held in favour of the assessee and against the revenue.

15. Now, so far as another question which is posed for the consideration of this Court i.e. whether while collecting the cess or fees, activities of the assessee can be said to be rendering any services in relation to any trade, commerce or business is concerned, for the reasons stated above, merely because the assessee is collecting cess or fees which is regulatory in nature, the proviso to section 2(15) of the Act shall not be applicable. As observed herein above neither there is element of profiteering nor the same can be said to be in the nature of trade, commerce or business. At this stage, decision of the Division Bench of this Court in the case of Sabarmati Ashram Gaushala Trust (supra) is required to be referred to. In the case before the Division Bench, the assessee Trust Sabarmati Ashram Gaushala Trust was engaged in the activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. The Assessing Officer denied the exemption to the trust under section 11 of the Act on the ground that considerable income was generated from the activities of milk production and sale and therefore, considering the proviso to section 2(15) of the Act, the said Trust assessee was denied the exemption under section 11 of the Act. While holding that the activities of the assessee trust still can be said to be for charitable purpose within the meaning of section 2(15) of the Act and same cannot be said to be in the nature of trade, commerce or business for which proviso to section 2(15) of the Act is required to be applied. In para 6, 7, 8 and 12, it is observed and held as under:

6. The legal controversy in the present Tax Appeal centers around the first proviso. In the plain terms, the proviso provides for exclusion from the main object of the definition of the term Charitable purposes and applies only to cases of advancement of any other of general general public utility. If the conditions provided under the proviso are satisfied, any entity, even if involved in advancement of any other object of general public utility by virtue to proviso, would be excluded from the definition of charitable trust. However, for the application of the proviso, what is necessary is that the entity should be involved in carrying on activities in the nature of trade, commerce or business, or any activity of rendering services in relation to any trade, commerce or business, for a cess or fee or any other consideration. In such a situation, the nature, use or application, or retention of income from such activities would not be relevant. Under the circumstances, the important elements of application of proviso are that the entity should be involved in carrying on the activities of any trade, commerce or business or any activities of rendering service in relation to any trade, commerce or business, for a cess or fee or any other consideration. Such statutory amendment was explained by the Finance Ministers speech in the Parliament. Relevant portion of which reads as under :

I once again assure the House that genuine charitable organizations will not in any way be affected. The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for determining whether any entity is carrying on 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. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily, Chambers of Commerce and similar organizations rendering services to their members would not be affected by the amendment and their activities would continue to be regarded as advancement of any other object of general public utility.

7. In consonance with such assurance given by the Finance Minister on the floor of the House, CBDT issued a Circular No. 11 of 2008 dated 19th December 2008 explaining the amendment as under :

3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is advancement of any other object of general public utility ie., the fourth limb of the definition of charitable purpose contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on any activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with nonmembers, their claim to be chargeable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15).

3.2 In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object is charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

8. What thus emerges from the statutory provisions, as explained in the speech of Finance Minister and the CBDT Circular, is that the activity of a trust would be excluded from the term charitable purpose if it is engaged in any activity in the nature of trade, commerce or business or renders any service in relation to trade, commerce or business for a cess, fee and/or any other consideration. It is not aimed at excluding the genuine charitable trusts of general public utility but is aimed at excluding activities in the nature of trade, commerce or business which are masked as charitable purpose.

12. All these were the objects of the general public utility and would squarely fall under section 2(15) of the Act. Profit making was neither the aim nor object of the Trust. It was not the principal activity. Merely because while carrying out the activities for the purpose of achieving the objects of the Trust, certain incidental surpluses were generated, would not render the activity in the nature of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19th December 2008 the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of public utility.

15.1 Applying the aforesaid decision to the facts of the case on hand and the object and purpose for which the assessee is established/constituted under the provisions of the Gujarat Town Planning Act and collection of fees and cess is incidental to the object and purpose of the Act, even the case would not fall under second part of proviso to section 2(15) of the Act.

15.2 Considering the aforesaid facts and circumstances of the case, we are of opinion that the learned Tribunal has committed a grave error in holding the activities of the assessee in the nature of trade, commerce or business and consequently holding that the proviso to section 2(15) of the Act shall be applicable and therefore, the assessee is not entitled to exemption under section 11 of the Act. For the reasons stated above, it is held that the proviso to section 2(15) of the Act shall not be applicable so far as assessee AUDA is concerned and as the activities of the assessee can be said to be providing general public utility services, the assessee is entitled to exemption under section 11 of the Act. Both the questions are therefore, answered in favour of the assessee and against the revenue.

After considering the aforesaid decision, the Division Bench was pleased to allow the appeal filed by the respondent-assessee.

7. Thus, the functions of the respondent assessee are for charitable purposes and for general public utility and therefore, the respondent assesseee is entitled to exemption under section 11 of the Act. In view of the judgment of the Division Bench in the case of Ahmedabad Urban Development Authority (supra), no different view needs to be taken in this appeal. The larger question of reopening is however kept open. Appeal is dismissed. Substantial questions of law as framed are answered in favour of the assessee and against the Revenue. No costs.

55. Similar view were also expressed by Karnatka High Court in the matter of Karnataka Industrial Area Development Board2020] 121 taxmann.com 88 (Karnataka)

“8. The Tribunal, inter alia by taking into account the provisions of the Act, has held that the primary and dominant object of the assessee is not profit making. It has further been held that income side of income and expenditure account shows that the main component of income of the assessee is derived in the form of interest of Rs. 131.17 crores and the interest of fixed deposits is Rs.120.90 crores. Therefore, there is no profit element in earning income as interest. It has also been noticed that the income of the assessee comprises of repairs and maintenance, administrative expenses, water and electricity charges, special and other charges, depreciation. It has also been held by the Tribunal that the assessee has been established to promote rapid and orderly development of industries in the State and to assist in implementation of the policy of the Government within the purview of the KIAD Act, to facilitate in establishing infrastructure projects and to function on ‘No Profit-No Loss’ basis. It has also been held that the State Government acquires the land for the scheme of the assessee and hand over the same to the assessee after the acquisition for the development of the industrial area. The Tribunal has further held that the profit making is not the driving force or objective of the assessee. The Tribunal has therefore, recorded the conclusion that the assessee is engaged in the charitable activity through advancement of an object of general public utility and therefore, has concluded that the Proviso to section 2(15) of the Act is not applicable to the case of the assessee and has further held that the assessee is entitled to benefit of Section 11 of the Act. It has also been noticed that the Assessing officer has not disputed that the assessee fulfills the conditions, which is necessary for allowing the exemption of the deductions applicable under the Act except Proviso to Section 2(15) of the Act. Thus, the Tribunal has held that the Proviso to section 2(15) of the Act is not applicable to the case of the assessee.

9. The order passed by the Tribunal, in our considered opinion, is based on the meticulous appreciation of materials on record and by no stretch of imagination can be said to be perverse. The issue with regard to the perversity is not raised on behalf of the revenue. Besides that, in case of various statutory bodies, the different High Courts have taken a similar view, namely, in the cases (a) to (f) stated (supra)that which we respectfully agree. In view of the said enunciation of law, substantial question of law, which has been framed by this Court, is answered in the negative and against the revenue.”

56. It is the settled proposition of law that the when two views are possible, the view favorable to assessee should be followed . Hence respectfully Following the decision of the Gujrat High Court in the matter of. SUDA (supra) and in the matter Karnataka Industrial Area Development Board 2020] 121 taxmann.com 88 (Karnataka), we allow Ground no.3 of the appeal of the assessee .

57. As we have decided Ground No. 3, in favour of the assessee and against the revenue, all the remaining grounds raised in the assessee appeal are also required to be allowed, being consequential in nature , as the assessee had derived all its income only on account of charitable activities undertaken by it pursuant to its object and for the welfare the general public, which were not in the nature of trade , commerce or business. The income even if any earned by way of the interest income on the fixed deposit is also required to be exempted under section 11 of the Act,as there is no other source of income of the assessee other than doing the charitable activities .For the purpose of exemption of interest income we may rely upon the full bench decision of Karnatka High Court in the matter of HewlettPackard Global Soft Ltd.*2017] 87 taxmann.com 182 (Karnataka) (FB), which on examining the exempt income under section 10, had allowed the exemption even on interest income , if there is no other source of income except the exempt income , as in present case , wherein it was held as under :

36. We have to take a purposive interpretation of the Scheme of the Act for the exemption under Section 10-A/10-B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play-in-the-joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon’ble Supreme Court in the following cases:—

[I] In Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480, the Hon’ble Supreme Court held that:—

“5. . . . . . Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper.

…”

[II] In R.K. Garg v. Union of India [1982] 133 ITR 239/[1981] 7 Taxman 53, the Hon’ble Apex Court has held as under:—

‘8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style:

“In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events — self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.”

The Court must always remember that “legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry”; “that exact wisdom and nice adaption of remedy are not always possible” and that “judgment is largely a prophecy based on meagre and uninterpreted experience”. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.’

37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as ‘Income from other Sources’ under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act.

Hence respectfully following the decision of High courts (supra) in the matter of SUDA (supra), Karnataka Industrial Area Development Board(supra) and HewlettPackard Global Soft Ltd.*(supra) , the appeal of the assessee is allowed.

In the result the appeal of the assessee is allowed and the appeal of the revenue is dismissed.

ITA Nos. 149 to 151/Agra/2017) (ASSESSMENT YEAR: 2011­12 to 2013-14)

58. The facts of these appeals are similar to that of the appeal decided by us for the assessment year 2010 –11. Respectfully Following the decision rendered by us for the assessment year 2010 –11 we also allow these appeals filed by the assessee.

Order pronounced in the open court on 13/01/2021.