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2015 (10) TMI 480 - ITAT BANGALORE

2015 (10) TMI 480 - ITAT BANGALORE - TMI - Entitlement to exemption u/s 11 - assessee is a Karnataka Urban Water Supply and Drainage Board - Assessee explained that its main source of income was from ETP charges and Water Charges - Held that:- The principle laid down in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others [2015 (1) TMI 928 - DELHI HIGH COURT] if applied to the facts of the present case, will clearly show that the Assessee does not driven primarily by des .....

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ap, tender forms etc.). If interest, rent and other income are excluded and compared with 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 exe .....

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e 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 to assessment year 2011-12. 2. The assessee Board, Karnataka Urban Water Supply and Drainage Board [KUWSD Board], for the AY 2011-12 filed a return of income declaring NIL income after claiming exemption u/s 11 of Income Tax Act, 1961 [ .....

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cement of any other object of general public utility 4. The definition after the amendment reads as follows; 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 c .....

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ot be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business. 6. According to the AO, the Assessee was carrying on any other object of general public utility and therefore the proviso to Sec.2(15) of the Act would apply to the case of the Assessee. The AO further noticed that the Assessee was a statutory corporation created to implement its public utility schemes in relation to water supply and underground drainage services. The establis .....

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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 2011-2 .....

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ns of the assessee were not accepted by the AO. He noted that the assessee is directly involved in rendering services in the form of maintenance and supply of potable water as well as the sanitation system for various facilities like the urban local bodies or the customers themselves on payment of certain ETP , Supervision charges and water charges. As such, the assessee is hit by the newly introduced proviso to section 2(15) as it is directly engaged in the activities of trade, commerce or busi .....

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t that the income generated from the activities of assessee company clearly attracts the amended proviso to section 2(15) of the I.T. Act as amended by the Finance Act, 2008. He held that the assessee is providing services on payment of certain amount of fees and therefore its income is liable to be taxed, independent of cancellation of registration by the DIT(Exemption), Bangalore and assessee will not be entitled for exemption u/s 11. 11. As a consequence, the AO denied exemption u/s.11 of the .....

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erein 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 .....

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es . Thus the formation of the KUWSD Board and the functions/activities of the assessee Board are only to fulfill the obligations thrust on the State Government by the Constitution of India. Neither the State Government nor the assessee has any intention to make any profit, which is an essential element to be considered as having engaged in the nature of trade, commerce or business. Thus, neither the State Government nor the assessee engaged in fulfilling the obligations of the State Government .....

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their respective areas. Thus the urban local bodies carry out the activities of provisions of water supply and drainage facilities in fulfillment of the obligations under the Constitution of India. Thus the urban local bodies (Municipalities and Corporations) in carrying out the obligations and functions prescribed under the Constitution of India cannot be said to carrying on any activity in the nature of trade, commerce or business as envisaged in proviso to section 2(15) of the Act. 13. The as .....

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e assessee is engaged in bulk water supply to the Urban Local Bodies (ULBs) in 4 local areas under State Government. 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 .....

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st 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 statements is reproduced below:- Sl. No. Particulars Credit Rs. 1 Establishment Charges 39,26,39,327 Tools & Plant Charges 4,79,41,726 Supervision Charges 89,58,854 Contingency 7,80,15,805 Total 52,75,5 .....

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The actual water charges received is only ₹ 5, 27, 32,721. The sum of ₹ 21,63, 78,723/-, represents interest accrued on the amounts receivable from urban local bodies is ₹ 18,11,72,905. This interest charged has not been received from urban local bodies for more than a decade. However, the assessee has no option, but to charge interest as per Water Supply Regulations, 1985 approved in the Government Order No. HUD 16 UMS 83 Bangalore dated 14.06.1985. 20. The assessee is operati .....

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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 i .....

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ither the state Government or urban local bodies, cannot also be said to be involved in rendering services in relation to trade, commerce or business. Accordingly, proviso to section 2(15) of the Act does not apply to the assessee s case. Consequently, the exemption under section 11 cannot be denied to the assessee. 23. Further, the Assessee drew attention to the speech of Finance Minister dated 29-2-2008 which clarifies that the proviso is not intended to be applicable to genuine charitable org .....

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e assessee. Since the term trade, commerce and business have been mentioned together in section 2(15) of the Act, it has to mean that the activity has to be systematic and organized activity carried out with the said purpose and objective of making profit. For this purpose, reliance was placed on the decisions of the Hon ble Supreme Court in the case of Loka Shikshana Trust Vs. CIT reported in 101 ITR 234 (SC) and CIT (Addl) Vs. Surat Art Silk Cloth Manufacturers Association reported in 121 ITR .....

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aritable institution, to which the legislature does not intend to deny exemption. 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 contrac .....

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nted 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 created, did not specify that the Assessee s activities have to be carried out without any profit motive. There is also no prohibition through any government order that prevents the Assessee from making profits or generating surplus. .....

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on charges (ETP charges) from ULBS and sale of water against a fee/cess and these factors clearly indicate that the Assessee s activities are in the nature of business/commerce. Though supply of water might be a constitutional duty of the Government, the fact that the Assessee facilitates performance of such duty will not render the Assessee s activity as one without any profit motive. The fact that the water charges are levied are low does not mean that there was lack of profit motive. Rather i .....

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ade before CIT(A) on the applicability of the proviso to Sec.2(15) of the Act. He also drew our attention to the various provisions of the KUWSDB Act and relied on certain judicial pronouncements, in this regard. The learned DR relied on the order of the CIT(A). We will first deal with the applicability of the proviso to Sec.2(15) of the Act to the Assessee. 29. The Assessee was established as a corporation under KARNATAKA ACT No. 25 OF 1974 (First published in the Karnataka Gazette Extraordinar .....

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lopment 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 .....

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providing for the following amenities, namely:- (i) water supply and drainage for urban areas; and (ii) other activities which are entrusted to the Board from time to time by the Government. 17. Other functions of the Board.- (1)The Board shall perform all or any of the following functions, namely:- (a) at the instance of the Government or a local authority or suo motu,- (i) investigating the nature and type of schemes that can be implemented in the area of any local authority for the provision .....

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y and drainage undertakings either wholly or in part and subject to such terms and conditions as the Government may specify; (v) levy and collection of water rates, fees, rentals and other charges in respect of such undertakings as the State Government may specify. (b) providing technical assistance or giving advice to local authorities in the execution and maintenance of urban water supply and drainage works; (c) establishing and maintaining schemes incidental to urban water supply and drainage .....

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Board shall for the purpose of carrying out its functions under this Act. have the following powers, namely:- (i) to acquire and hold such movable and immovable 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 undert .....

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d 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. Otherwise the schemes when completed are handed over to the Urban Local Bodies (ULBs). When a scheme is directed to be maintained and operated by the Asses .....

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levy rates etc.- The Board may, in respect of any water supply or sewerage undertaking vesting in it, levy rates, fees, rentals and other charges and may vary such rates, fees, rentals and other charges from time to time in order to provide sufficient revenue,- (a) to cover operating expenses, taxes and interest payments and to provide for adequate maintenance and depreciation; (b) to meet repayment of loans and other borrowings; (c) to finance normal year to year improvements; and (d) to provi .....

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Act, there was no dispute that the Assessee was established for charitable purposes. The income derived by the Assessee is in the form of collection of water and sewerage charges. The dominant and main object of the Assessee as we have already seen is 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. The source of income of the Assessee as can be seen fr .....

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her 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 ur .....

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l be applicable to the Assessee in the light of the decision of the Hon ble Delhi High Court in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others 371 ITR 333 (Delhi). The learned counsel for the Assessee has placed strong reliance on this decision to support his plea that the proviso to Sec.2(15) of the Act is not applicable to Assessee. The facts of the case before the Hon ble Delhi High Court in the case of India Trade Promotion Organization (supra) was that the Ass .....

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anted to the Assessee consequent to the insertion of the proviso to Sec.2(15) of the Act, on the ground that the Assessee was deriving rental income from letting out space for rent during trade fairs and exhibitions, was deriving income from sale of tickets and income from food and beverage outlets. The said withdrawal was challenged by the Assessee before the Hon ble Delhi High Court. The Hon ble Delhi High Court had to go into the question as to the scope of the proviso to Sec.2(15) of the Act .....

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or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess or fee or any other consideration, 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 p .....

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f 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 incom .....

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roughout any State or States. (iv) Merely because an institution derives income out of activities which may be commercial, that does, in any way, affect the nature of the Institution as a charitable institution if it otherwise qualifies for such a character. (v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant activity of the institution was not busines .....

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should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above. (vii) Section 2(15) is only a definition clause. Section 2 begins with the words, _in this Act, unless the context otherwise requires‖. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression "charitable purpose& .....

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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 .....

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y 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) 36. The principle laid down in the aforesaid decision, in our view, if applied to the facts of the present case, will clearly show that the Assessee does not driven primarily by desire or motive to earn profits but to do charity through advancement of an object of general public .....

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