Case Law Details
Director of Income Tax (Exemption) Vs Ahmedabad Urban Development Authority (Gujarat High Court)
The Revenue filed a tax appeal under Section 260A of the Income Tax Act, 1961 against the Income Tax Appellate Tribunal’s order dated 09.09.2011 for Assessment Year 2008-09. The appeal raised two substantial questions of law: whether the Tribunal was justified in restoring the matter to the Assessing Officer for recomputation under Sections 11, 12 and 13, and whether the Director of Income Tax (Exemption) had rightly cancelled the assessee’s registration under Section 12AA on the ground that its activities were not charitable.
The High Court noted that the issue had already been settled by the Supreme Court in the assessee’s own case in Assistant Commissioner of Income Tax (Exemptions) vs. Ahmedabad Urban Development Authority, reported in [2022] 143 Taxmann.com 278 (SC). Referring to the Supreme Court’s interpretation of Section 2(15) read with Section 10(23C), the Court reproduced the principles that statutory bodies engaged in objects of general public utility (GPU) may continue to qualify as charitable institutions even if, while pursuing their objects, they undertake activities involving trade, commerce or business, subject to the statutory conditions and prescribed limits. The Supreme Court had also held that statutory bodies in sectors such as housing development and town planning are entitled to be considered as GPU category charities, and that recovery of statutory charges, fees, rent or similar amounts does not by itself amount to trade, commerce or business.
The High Court further noted that, in the assessee’s own case for Assessment Year 2009-10, the Tribunal had followed the Supreme Court’s reasoning, and this Court had earlier agreed with the Tribunal’s order setting aside the cancellation of registration under Section 12AA, observing that no specific reasons had been given for cancellation. It had also held that merely because the assessee was engaged in selling plots or other business activities, it could not be said that its activities were inconsistent with the object for which it had been constituted, and that its public utility services fell within the meaning of charitable purpose under Section 2(15).
In view of the Supreme Court’s decision on merits in favour of the assessee, the High Court held that the first question of law did not require an answer. It answered the second question in favour of the assessee and against the Revenue, holding that registration under Section 12AA was required to be granted as the assessee’s activities possessed the character of charitable activities under Section 2(15). The appeal was held to be devoid of merit and was disposed of.
Cases Discussed:
- Assistant Commissioner of Income Tax (Exemptions) vs. Ahmedabad Urban Development Authority, [2022] 143 Taxmann.com 278 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr.Aman Mir appearing for the appellant – Revenue and learned advocate Mr.B.S.Soparkar for the respondent.
2 . This Tax Appeal is preferred under Section 260A of the Income Tax Act, 1961 (for short “the Act”) by the appellant – Revenue being aggrieved by the order dated 09.09.2011 passed by the Income Tax Appellate Tribunal, “A” Bench, Ahmedabad (for short “the Tribunal”) in ITA No. 1682/Ahd/2011 for the Assessment Year 2008-09.
3. This tax appeal was admitted for consideration of the following substantial questions of law on 19.07.2012:
“[1] Whether the Appellate Tribunal is right in law and on facts in restoring the matter to the file of the Assessing Officer with a direction to recompute the income of the assessee in light of the provisions of Section 11, 12 and 13 of the Income Tax Act, 1961 and in accordance with law after providing adequate opportunity of being heard to the assessee?
[2] Whether the Appellate Tribunal is right in law and on facts in not appreciating the fact that DIT (E) has rightly cancelled the registration granted under Section 12AA as the activities of the assessee Trust does not involve in any charitable activities?”
4. It is not in dispute that the issue raised in this appeal has now been settled by the Hon’ble Apex Court in the case of Assistant Commissioner of Income Tax (Exemptions) vs. Ahmedabad Urban Development Authority., reported in [2022] 143 Taxmann.com 278 (SC) in the assessee’s own case. The Hon’ble Apex Court, while interpreting Section 2(15) of the Act, read with Section 10(23C) of the Act, has held as under:
“168. If one understands the definition in the light of the above enunciation, the sequitur is that the reference to “income being profits and gains of business with a further reference to its being incidental to the objects of the Trust, cannot and does not mean proceeds of activities incidental to the main object, incidental objects or income derived from incidental activities. The proper way of reading reference to the term “incidental” in section 11(4A) is to interpret it in the light of the sub-clause (1) of proviso to section 2(15), ie, that the activity in the nature of business, trade, commerce or service in relation to such activities should be conducted actually in the course of achieving the GPU object, and the income, profit or surplus or gains can then, be logically incidental. The amendment of 2016, inserting sub clause (i) to proviso to section 2(15) was therefore clarificatory. Thus interpreted, there is no conflict between the definition of charitable purpose and the machinery part of section 11(4A). Further, the obligation under section 11(4A) to maintain separate books of account in respect of such receipts is to ensure that the quantitative limit imposed by sub-clause (ii) to section 2(15) can be computed and ascertained in an objective manner.
169. The conclusion recorded above is also supported by the language of seventh proviso50 to section 10(230). Whereas section 2(15) is the definition clause, section 10 lists out what is not income. Section 10(23C) by sub-clauses (iv) and (v) exempt incomes of charitable organisations. Such organisations and institutions are not limited to GPU category charities but rather extend to other types of charities (ie the per se kind as well). The controlling part of section 10(23C) along with the relevant clauses (iv) and (v) seek to exclude income received by the concerned charities. However, the provisos hedge such exemption with conditions. The seventh proviso much like section 11(4A) and the definition – carve out an exception, to the exemptions such that income derived by charities from business, are not exempt. The seventh proviso virtually echoes section 11(4A) in that business income derived by a charity (in the present case, the GPU charities) which arises from an activity incidental to the attainment of its objective is not per se excluded.
170. Classically, the idea of charity was tied up with eleemosynary51 However, “charitable purpose” and charity as defined in the Act have a wider meaning where it is the object of the institution which is in focus Thus, the idea of providing services or goods at no consideration, cost or nominal consideration is not confined to the provision of services or goods without charging anything or charging a token or nominal amount. This is spelt out in Indian Chamber of Commerce (supra) where this Court held that certain GPUS can render services to the public with the condition that they would not charge “more than is actually needed for the rendering of the services, may be it may not be an exact equivalent, such mathematical precision being impossible in the case of variables, may be a little surplus is left over at the end of the year the broad inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit”.
171. Therefore, pure charity in the sense that the performance of an activity without any consideration is not envisioned under the Act. If one keeps this in mind, what section 2(15) emphasizes is that so long as a GPU’s charity’s object involves activities which also generates profits (incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated), it can be granted exemption provided the quantitative limit (of not exceeding 20%) under second proviso to section 2(15) for receipts from such profits, is adhered to.
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190. In light of the above discussion, this court is of the opinion that:
i. The fact that bodies which carry on statutory functions whose income was eligible to be considered for exemption under section 10(20A) ceased to enjoy that benefit after deletion of that provision w.e.f. 1-4-2003, does not ipso facto preclude their claim for consideration for benefit as GPU category charities, under section 11 read with section 2(15) of the Act.
ii. Statutory Corporations, Boards, Authorities, Commissions, etc. (by whatsoever names called) in the housing development, town planning, industrial development sectors are involved in the advancement of objects of general public utility, therefore are entitled to be considered as charities in the GPU categories
iii. Such statutory corporations, boards, trusts authorities, etc. may be involved in promoting public objects and also in the course of their pursuing their objects, involved or engaged in activities in the nature of trade, commerce or business.
iv. The determinative tests to consider when determining whether such statutory bodies, boards, authorities, corporations, autonomous or self-governing government sponsored bodies, are GPU category charities
a. Does the state or central law, or the memorandum of association, constitution, etc. advance any GPU object, such as development of housing, town planning, development of industrial areas, or regulation of any activity in the general public interest, supply of essential goods or services such as water supply, sewage service, distributing medicines, of food grains (PDS entities), etc.,
b. While carrying on of such activities to achieve such objects (which are to be discerned from the objects and policy of the enactment, or in terms of the controlling instrument. such as memorandum of association etc.), the purpose for which such public GPU charity. is set-up whether for furthering the development or a charitable object or for carrying on trade, business or commerce or service in relation to such trade, etc.
c. Rendition of service or providing any article or goods, by such boards, authority, corporation, etc., on cost or nominal mark-up basis would ipso facto not be activities in the nature of business, trade or commerce or service in relation to such business, trade or commerce
d. where the controlling instrument, particularly a statute imposes certain responsibilities or duties upon the concerned body, such as fixation of rates on pre-determined statutory basis. or based on formulae regulated by law, or rules having the force of law, setting apart amenities for the purposes of development, charging fixed rates towards supply of water, providing sewage services, providing food-grains, medicines, and/or retaining monies in deposits or government securities and drawing interest therefrom or charging lease rent, ground rent, etc., per se recovery of such charges, fee, interest, etc. cannot be characterized as “fee, cess or other consideration” for engaging in activities in the nature of trade, commerce, or business, or for providing service in relation in relation thereto
e. Does the statute or controlling instrument set out the policy or scheme, for how the goods and services are to be distributed, in what proportion the surpluses, or profits, can be permissively garnered, are there are limits within which plots, rates or costs are to be worked out, whether the function in which the body is engaged in, is normally something a government or state is expected to engage in, having regard to provisions of the Constitution and the enacted laws, and the observations of this court in NDMC, whether in case surplus or gains accrue, the corporation, body or authority is permitted to distribute it, and if so, only to the government or state the extent to which the state or its instrumentalities have control over the corporation or its bodies, and whether it is subject to directions by the concerned government, etc..
f. As long as the concerned statutory body, corporation, authority, etc. while actually furthering a GPU object, carries out activities that entail some trade, commerce or business, which generates profit (ie amounts that are significantly higher than the cost), and the quantum of such receipts are within the prescribed limit (20% as mandated by the second proviso to section 2(15)) the concerned statutory or government organisations can be characterized as GPU charities. It goes without saying that the other conditions imposed by the seventh proviso to section 10(23C) and by section 11 have to necessarily be fulfilled.
(v) As a consequence, it is necessary in each case, having regard to the first proviso and seventeenth proviso (the latter introduced in 2012. w.e.f 1-4-2009) to section 10(230), that the authority considering granting exemption, takes into account the objects of the enactment or instrument concerned, its underlying policy, and the nature of the functions, and activities, of the entity claiming to be a GPU charity. If in the course of its functioning it collects fees, or any consideration that merely cover its expenditure (including administrative and other costs plus a small proportion for provision) such amounts are not consideration towards trade commerce or business, or service in relation thereto. However, amounts which are significantly higher than recovery of costs, have to be treated as receipts from trade, commerce or business. It is for those amounts, that the quantitative limit in proviso (ii) to section 12(5) applies, and for which separate books of account will have to be maintained under other provisions of the IT Act.
(ii) Statutory regulatory bodies / authorities”
5. It appears that the Tribunal in the assessee’s own case has followed the aforesaid order of the Hon’ble Apex Court for the Assessment Year 2009-10 against which Tax Appeal No. 2323 of 2010 was preferred by the revenue and this Court by order dated 25.04.2017, agreed with the the order passed by the Tribunal to set aside the order passed by the Director of Income Tax (Exemption) cancelling the registration under Section 12AA of the Act for not giving any specific reason. This Court further held that merely because the respondent – assessee is in the business of selling plots or is involved in other trade or business, it cannot be said that the activities of the respondent – assessee are not in consonance with the object and purpose for which the same was constituted. It was further held that as the respondent – assessee is providing public utility services, the same can be said to be of charitable purpose within the meaning of Section 2(15) of the Act.
6. Be that as it may. Now, the Hon’ble Supreme Court has already decided the issue on merits in favour of the assessee. In that view of the matter, the question No.1, is not required to be answered. Question No.2 is answered in favour of the assessee and against the revenue as the registration under Section 12AA of the Act is required to be granted to the respondent – assessee as the activity of the assessee involves the character of charitable activity as per the provisions of Section 2(15) of the Act.
7. The appeal therefore being devoid of any merit is accordingly disposed of.
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