TMI Blog2015 (10) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... th the expenditure on operations incurred by the Assessee, it becomes clear that the Assessee does not have profit motive. The proviso to Sec.2(15) of the Act is therefore not applicable to the case of the Assessee. We therefore hold that the Assessee is entitled to the benefits of Sec.11 of the Act for the impugned assessment years. The AO has not disputed the conditions necessary for allowing exemption u/s.11 of the Act, except the applicability of proviso to Sec.2(15) of the Act. In view of our conclusions that the said proviso is not applicable to the case of the Assessee, we hold that the Assessee’s income is not includible in the total income and therefore the income returned by the Assessee is directed to be accepted. - Decided in favour of assessee. - ITA No.283/Bang/2015 - - - Dated:- 4-9-2015 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Appellant : Shri S. Parthasarathi, Advocate For The Respondent : Shri Anurag Sahay, CIT-III(DR) ORDER Per N.V. Vasudevan, Judicial Member This appeal by the assessee is directed against the order dated 16.02.2015 of the CIT(Appeals)-14, LTU, Bangalore relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it. The Assessee receives ETP supervision charges from the State Government, Central Government and Urban Local Bodies (ULBS) on the works executed by it. 7. For the AY 2011-12 the following activities constituted major portion of receipts:- Particulars As on 31.3.2011 (in Rs.) Establishment, Administration Supervision charges 52,75,55,713 Water charges 26,91,11,444 Interest 15,63,96,764 Rent 70,80,155 Other Income 3,33,10,495 Total 99,34,54,570 8. The AO noted that that the assessee has shown a total income of ₹ 99,34,54,570 for the current assessment year from Collection of establishment, administration and supervision charges, water charges, interest etc. The assessee has also shown income exclusively collected from the ULB s and consumers in the form of establishment, supervision and water charges to the tune of ₹ 79 crores for AY 2011-2012. The assessee has shown an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee was arrived at an amount of ₹ 34,82,50,137 and total demand of ₹ 14,52,80,690 was raised inclusive of interest u/s 234B and 234D. 12. Aggrieved by the order of the AO, the Assessee filed appeal before CIT(A). Before CIT(A), the Assessee contended that under clause 3 of Article 246 of the Constitution of India the State is empowered to make laws in respect of any matters enumerated in List II of Seventh Schedule to the Constitution of India [ herein after referred to the State List ]. Item no 17 of the State List, reads thus:- 17. Water, that is to say, water supplies, irrigation and canals, drainage and embankments, water storage and water power subject to the provisions of entry 56 of List II. Thus, it is the obligation of the state government to provide for water supplies, water storage and drainage facilities to the people of the state. To fulfill the above said obligation, the Government of Karnataka formed the KUWSD Board by an enactment called Karnataka Urban Water Supply Drainage Board Act 1973 . The preamble to this Act mentions the objects of enactment as follows:- To undertake the investigation, preparation and execution of sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment. Only in two local areas, namely, Kushal Nagar and Kolar, water is being supplied directly by the assessee to the consumers on behalf of respective local bodies. These schemes were transferred from the erstwhile Public Health Engineering Department. The assessee collects water charges from the consumers on behalf of local bodies, uses it for maintenance expenses of the scheme like power, maintenance of pumping machinery, chlorination etc. 15. The Government of Karnataka authorizes the assessee to debit as a percentage of the capital project costs from the funds released by Government of Karnataka as ETP (Establishment Tools Plant) charges to meet the establishment, salaries and pension liabilities of the Board. Thus, the assessee has to act in strict adherence with the Government directions and regulations while executing the projects as also while recovering its cost as ETP charges, water charges etc. 16. The Assessee explained that its main source of income was from ETP charges and Water Charges. ETP Charges 17. During the year, the assessee has earned ETP charges of ₹ 52,75,55,712. The details of the same are as per Schedule 16 of the financial sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.27 Other Income 3.33 TOTAL (A) 61.35 Less: Expenses on employee s remuneration 28.07 Operation and maintenance expenses 18.05 Administrative Expenses 17.20 Depreciation 1.18 TOTAL (B) 64.5 NET LOSS (3.15) 21. Accordingly, even in complying with the constitutional obligations, the assessee has been carrying on its activities in a real charitable manner and by no stretch of imagination could it be considered as carrying on activity in the nature of trade, commerce or business or providing services in relation thereto. The assessee is engaged only in those activities that are authorized or approved by the Government. It is pertinent to note here that the assessee does not deal with any private individuals/organisations at all. It deals only with State Government and Urban Local Bodies. Thus it can be seen that the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, the proviso to section 2(15) of the Act does not apply to the assessee. 24. The Assessee also explained as to how the rates for supply of water are fixed. The estimates for Water Supply and Underground Drainage projects are prepared adopting the current schedule of rates approved by the Assessee and Public Works Department. After estimates are sanctioned, the recognized systems to carry the work is by contract work. The contractor is selected by inviting tenders in accordance with procedures prescribed in Karnataka Transparency Act in Public Procurement Act, 1999 [KTPP Act]. The tenders received are compared with the estimated rates. The tenderer whose tender is lowest and fulfils all the prescribed financial and technical eligibility criteria is selected. Thus, rates are fixed by following the procedures prescribed in KTPP Act. 25. In view of the above, it was prayed that the assessee has to be granted exemption u/s. 11 of the Act. 26. The CIT(A) did not agree with the submission made on behalf of the Assessee for the following reasons:- 1. The preamble to THE KARNATAKA URBAN WATER SUPPLY AND DRAINAGE BOARD ACT, 1973, (KUWSDB Act) under which the Assessee was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects and reasons which reads thus: An Act to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban areas of the State of Karnataka. WHEREAS it is expedient to provide for the establishment of a Water Supply and Drainage Board and the regulation and development of drinking water and drainage facilities in the urban areas of the State of Karnataka and for matters connected therewith; 30. By Sec.3 of the KUWSDB Act, the Assessee was created as a body corporate. The said provision reads as follows: Sec.3. Creation and incorporation of the Board.- The duty of carrying out the provisions of this Act shall, subject to the restrictions, conditions and limitations therein contained be vested in a Board to be called the Karnataka Urban Water Supply and Drainage Board and such Board shall be a body corporate and have perpetual succession and a common seal and shall by the said name sue and be sued. 31. The functions and powers of the Assessee are set out in Sec.16, 17 18 of the KUBWSDB Act, which reads as follows: POWERS AND FUNCTIONS OF THE BOARD 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property as it deems necessary and to lease, sell or otherwise transfer any such property subject to such conditions as may be prescribed; (ii) to acquire under the Land Acquisition Act, 1894 (Central Act I of 1894) any land or any interest therein required by the Board for implementing any schemes; (iii) to incur expenditure and undertake any work in any area in the State for the preparation and execution of such schemes as it may consider necessary for the purpose of carrying out the provisions of this Act, or as the case may be, the functions entrusted to it by the Government ; (iv) to enter into any contract; and (v) to do all things necessary for the purpose of carrying out the provisions of this Act. 32. Chapter VI containing Secs.19 to 28 H of the KUWSDB Act provides as to how the Assessee has to investigate, prepare and execute, maintain Schemes by the Assessee. The cost of any scheme has to be borne only by the ULBs. It is clear from these provisions that any scheme has to be approved by the Government. Sec.28A of the KUWSDB Act provides that the operation and maintenance of scheme can be directed by the State Government to be carried out by the Assessee. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds that are not immediately required for execution of schemes are parked in deposits. The Assessee also is in receipt of rental income. The other income of the Assessee is from fines, sale of tender forms, registration/renewal fees, sale of scrap, cost of SR book, other receipts, P L contribution of board, Vendor assessment charges. 34. A look at the income stream of the Assessee clearly reveals that all the activities from which the Assessee derives income are an inherent part of the main object of the Assessee. It is clear from the facts of the case that profit making is not the driving force or objective of the Assessee. Rather the purpose for which the Assessee was created is to regulate and develop drinking water and drainage facilities in the urban areas of the State of Karnataka and for matters connected therewith. This makes it clear that any income generated by the Assessee does not find its way into the pockets of any individuals or entities. It is to be utilized fully for the purposes of the objects of the petitioner. 35. Keeping in mind the above factual aspects and the provisions of the KUWSDB Act, we shall now understand the approach to be adopted in coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retention of such income is irrelevant for the purposes of construing the activities as charitable or not. (ii) If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. If a literal interpretation is to be given to the proviso, then it may be concluded that this fact would have no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important. (iii) The meaning of the expression charitable purposes has to be examined in the context of income , because, it is only wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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