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2015 (10) TMI 481 - ITAT BANGALORE

2015 (10) TMI 481 - ITAT BANGALORE - TMI - Entitlement to exemption u/s.11 - charitable activity - 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 - Held that:- The main aim and object for which the Assessee was established is to (a) Promote rapid and orderly development of industries in the stale. (b)Assist in implementation of policies of Government within the .....

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ng in mind the above factual aspects and the provisions of the KIDA Act [Karnataka Industrial Areas Development Act, 1966], and principle laid down in the case of India trade Promotion Organization (2015 (1) TMI 928 - DELHI HIGH COURT ), in our view, 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 utility. The assessee is operating on no profit basis. This is substantiated by th .....

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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.378/Bang/2013 - Dated:- 4-9-2015 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For .....

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the Act, in the light of the proviso to Sec.2(15) of the Act. u/s 2(15) of the Act, which defines the expression Charitable purpose for the purpose of the Act had undergone an amendment by the Finance Act, 2008 with effect from 01-04-2009. The expression of charitable purpose, prior to the aforesaid amendment read as follows; (15) Charitable purpose includes relief to the poor, education, medical relief and the advancement of any other object of general public utility 4. The definition after the .....

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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 . 5. It can be seen from the proviso to Sec.2(15) which came into effect from 01-04-2009 that 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 t .....

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he Act. The aforesaid conclusions were drawn for the following reasons:- (i) The assessee has earned a profit of ₹ 155,76,64,004 for the year ending 31.3.2009; (ii) The said profit was around 80% of total income. The same was much more than any private builder s profit engaged in similar kind of business. (iii) The assessee has been earning profits systematically over last few years; (iv) These profits have been earned by systematic commercial activity in the nature of sale of land and pro .....

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nditure amounting to ₹ 156.39.68,078/- under normal provisions of the Act and exemption under section 11 of the Act was denied. The AO assessed the assessee in the status of Association of Persons (AOP) and levied tax at 30% of the assessed income. 8. The CIT(Appeals) confirmed the order of the Assessing Officer. 9. In respect of the order passed under section 12AA(3) cancelling registration granted u/s. 12AA(3), the assessee had filed an appeal before the Tribunal. The said appeal was all .....

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nsel for the Assessee submitted that the AO had no jurisdiction to assess the Assessee after cancellation of the registration by the DIT (Exemptions). Notification No.880(E) dated 14.9.2001 granted jurisdiction to the Director of Income-tax (E) in case of assessees claiming exemption under section11 (being headquartered in Bangalore). A Deputy Director of Income-tax (Exemptions) cannot assume jurisdiction unless so authorised. The assessment made and the order passed under section 143(3) by the .....

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. Seven categories of persons are mentioned in section 2(31). These are natural persons as well as juristic persons. Clause (vii) therein clarifies that every artificial juridical person, not falling within clauses (i) to (vi) of section 2(31) is also a person for the purpose of the Act. By the Finance Act, 2002, with effect from April 1, 2003, an Explanation was inserted to section 2(31) which makes it clear that, inter alia, an artificial juridical person shall be deemed to be a person whether .....

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a person. He referred to the decision of the Supreme Court in Assistant Commissioner, Assessment II,. Bangalore v. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC) in support of the above stand that a body corporate is a person. Once the Board is formed, it would become a juridical person as opposed to natural persons. Activities and functions of the Appellant are carried on in the name of the assessee Board and not in the name of the persons who form the said Board. The properties of the assess .....

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status, without initiation of proceedings against the Assessee in a status in which assessment is intended to be framed, is bad in law. • CWT v Ribkarai, [1972] 84 ITR 705 (Raj) • CIT v Adinarayana Murthy K [1967] 65 ITR 607 (SC) • CIT v Associated Cement and Steel Agencies [1984] 147 ITR 776 (Bom) • CWT v Jagdish Puri [1987] 163 ITR 458 (Raj) • CIT v Sobhagmal Mishrilal Semlavada [1997] 223 ITR 554 (MP) • CWT v Srivastava (J.K.) and Sons [1983] 142 ITR 183 (All) & .....

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ssee was on the applicability of the proviso to Sec.2(15) of the Act to the Assessee. It was submitted that the development of industries is the duty of the State Government. Industries, trade and commerce, production and supply of goods, land and matters connected thereto are the domain of the State Government under List II - State list - Seventh schedule of the Constitution of India. The constitution of corporations, trusts, boards, etc for the purposes of local government is also within the p .....

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of living, increase in income/wealth generation etc. Industrial development leads to overall economic development of the state and the nation. 18. Our attention was drawn to the preamble of The Karnataka Industrial Areas Development Act, 1966 (hereinafter referred to as KIAD) under which the Assessee was established as a body corporate, which reads thus: An Act to make special provisions for securing the establishment of industrial areas in the State of Karnataka and generally to promote the es .....

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for purposes connected with the matters aforesaid; 19. He brought to our notice that in pursuance of the power vested under section 5 of the KIAD Act, the State Government has notified a Board called as the Karnataka industrial Area Development Board (Board in short) to achieve the objectives of the KIAD Act. The purpose of establishing the Board is provided under section 5(1) of the KIAD Act, which provides: Establishment and incorporation. - For the purposes of securing the establishment of i .....

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of Karnataka. set up under Karnataka Industrial Areas Development Act of 1966. It is established through a State Government notification. The assessee is a creation of law. The law was enacted with certain specific objectives. Thus, the objectives for which the assessee is constituted was laid out even prior to its incorporation. The assessee and its activities are therefore ring fenced to this special Act, namely KIAD Act. 21. The State Government can give directions to the assessee, as in its .....

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bjectives and Functions. It states: Aims & Objectives: (a) Promote rapid and orderly development of industries in the stale. (b) Assist in implementation of policies of Government within the purview of KIAD Act. (c) Facilitate in establishing infrastructure projects. (d) Function on No Profit - No Loss basis. Functions: (a) Acquire land and form industrial areas in the state. (b) Provide basic infrastructure in the industrial areas. (ç) Acquire land for Single Unit Complexes. (d) Acqu .....

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opriated to any person unless the same is in accordance with the assessee s objectives. The employment utilization and channelizing of funds can be done within the broad framework of the assessee s objectives. Acquisition and development of lands 25. The Acquisition section (one of the wings of the assessee) conducts the proceedings for acquisition of land as per KIAD Act and hands these lands to KIADB. Special Deputy Commissioner heads acquisition wing. He is assisted by Special Land Acquisitio .....

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or such compulsory acquisition. The Board cannot decide what land to acquire and how much to compensate the land owners. It is only when an area is declared as an industrial area and the land is acquired under section 28 of KIAD Act or transferred by the Government under section 32 of the KIAD Act, that the role of the Board begins. Restraint on expenditure from funds of the assessee 26. Section 23 stipulates that the assessee shall have the authority to spend such sums as it thinks fit for the .....

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lity ? 28. The objectives of the assessee are explicit and cannot he circumvented. The assessee is a creation of law, It is not formed or set-up by any person(s) for any pecuniary benefit or commercial motive. The assessee owes its genesis to KIAD Act, a State Government legislation. The assessee s incorporation. Functioning, powers and scope are set out in the KIAD Act. Being a creation of a special law, compliance with the provisions therein is mandatory. The statute repeatedly emphasizes the .....

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nd standardization becomes achievable. All these transformations translate into overall amelioration of the society and country as a whole. An institution with such a far sighted and development oriented objective is certainly one which benefits the public at large. The assessee serves the cause of general public utility and is therefore covered within the gamut of Charitable purpose as defined by section 2(15) of the I.T. Act. 30. In the course of carrying on its activities, the benefit arising .....

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objects, it is not intended to serve merely the interests of the members of the assessee. Advancement or promotion of trade, commerce and industry leading to economic prosperity ensures the benefit of the entire community. That prosperity would be shared also by those: who engage in trade, commerce and industry but on that account the purpose is not rendered any the less an object of general public utility. It may be remembered that promotion and protection of trade, commerce and industry canno .....

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objective is not service of individual industrial houses but promotion of overall industrialization of Karnataka. An incidental benefit to some industrialists/entrepreneurs would not dilute the progressive and charitable objective of the assessee. 32. To summarize, the ld. counsel submitted that the assessee plays a vital role in supplementing the governmental efforts in boosting industrialization. The assessee is a creation of law constituted for the purpose of development of industries and ex .....

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ourt. Activities of the assessee are therefore to be regarded as covered within the operative provisions of section 2(15). 33. It was also submitted that assessee has continuously devoted itself to the promotion of industries in the State of Karnataka. It has not been formed and is not carrying on activities with a motive to distribute its surplus. There is no intention to make profits. The objects are to carry out Industrial and infrastructure promotion. The surplus, if any, arising from the ac .....

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y paying compensation to the farmers. Such compensation is determined by Deputy Commissioner of District. Such land would be developed into plots for the purposes of projects approved by State High level Clearance Committee (headed by Chief Minister). State Level Single Window Clearance Committee is headed by Chief Secretary. Govt. of Karnataka and District Level Single Window Clearance Committee is headed by the Deputy Commissioners of the Districts. 35. The assessee prepares a budget for compe .....

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t of structures, wells etc on the land (A+B) Cost of land (C) Establishment charges at 11% on (A+B) (D) Interest at 12.75% p.a on (A+B) (E) Total cost of acquisition (A+B+C+D) (F) Development cost for formation of layout (road, drainage, water supply, parks etc) (G) Board service charges at 10% on (F) (I) Interest charged by the Board at 12.75% p.a on (F) (J) Total cost of development (F+G+I) (K) Total cost of acquisition and development [(E) +(J)] 36. Once the total cost is so computed, it is a .....

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the Board which are housed with the banks to generate passive interest income. Thus, the core activity of industrialization of lands (the alleged business activity) does not fetch profits; the source of income which generates surplus is from bank interests and thereby not generated on account of Board s normal course of activities. 37. In view of all the above, it was submitted by the ld. counsel for the assessee that the action of the AO affirmed by CIT(A) that the activities of the assessee ar .....

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has to be considered as existing for a charitable purpose. The decisions in Krupanidhi Educational Trust v DIT(E), ITA No. 86/2012 dt. 14.9.2012 - Bangalore ITAT; Loka Shikshana Trust v ClT [1975] 101 ITR 234 (SC), Cricket Association of Bengal v CIT [1959] 37 ITR 277 (Cal), CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Born), The Trustees of the Tribune, In re (1939) 7 ITR 423 (PC) and para No. 19 Page No. 528 - Volume I of The Law and Practice of Income tax by Kanga, Palkhivala a .....

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f business kind efficiency in carrying out activities. It is an evidence of being organized and carrying on activities in a structured and efficient manner. 40. Mere adoption of business principles does not transform a charitable institution into a business entity. The Apex Court has echoed similar view in the case of CIT v Andhra Pradesh State Road Transport (1986) 159 ITR I (SC) wherein he Court observed as under:- No activity can be carried on efficiently, properly, adequately or economically .....

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of management. (emphasis supplied) 41. In the present case, the assessee has carried on its activities on business principles and sound principles of management. As a result, the assessee has been able to repeatedly generate surplus funds. This fact by itself does not render the assessee a non-charitable entity; but only is an execution of sound management principles by a charitable organisation. The assessee undertakes development of industries and infrastructure in the state of Karnataka. It .....

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ce to those decisions at the appropriate place, to the extent it is necessary to dispose this appeal. 43. The learned DR placed strong reliance on the findings of the AO in the order of assessment and the order of the CIT(A). 44. We have given a very careful consideration to the rival submissions. The purpose for which the Assessee exists is for the advancement of any other object of general public utility . The fact that the Assessee enjoyed registration u/s.12AA of the Act in the past is itsel .....

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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 Assessee in that c .....

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sessee 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. The Hon ble D .....

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oth 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 purposes of con .....

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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, i .....

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tate 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 business, trade or c .....

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s 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", as defined in .....

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e 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 .....

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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) 46. It can be seen from the various provisions of the KIAD Act which we have set out in the earlier part of the order that the dominant and prime objective of the Assessee is not profit making. Prior to the introduction of the proviso to Section 2(15) of the Act, there was no dispute that the Asses .....

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by the allottees are parked by the Assessee in fixed deposit and those deposits has earned the aforesaid interest income. Therefore there can be no profit element in earning this interest income. Besides the above, the other components of interest are interest from Allottees, penal interest from Allottees, interest on staff loan, interest from SB and others, interest on seed money, dividend received and interest on income tax refund. The other component of income is gain on disposal of land, sal .....

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administrative expenses of ₹ 15.42 Crores and 10.61 Crores which are fixed expenses and necessary to carry on the primary object alone are considered than there would be loss. This by itself would demonstrate that the Assessee does not exist for profit. 47. The main aim and object for which the Assessee was established is to (a) Promote rapid and orderly development of industries in the stale. (b)Assist in implementation of policies of Government within the purview of KIAD Act. (c) Facilit .....

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ssee 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 generate .....

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