TMI Blog2016 (5) TMI 1175X X X X Extracts X X X X X X X X Extracts X X X X ..... ntant Member) For the Petitioner : Salil Kapoor For the Respondent : Ratinder Kaur ORDER A. D. Jain (Judicial Member) 1. These are the assessee's appeal for the assessment years 2008-09 and 2010-11, against different orders, each dated December 12, 2013, passed by the learned Commissioner of Income-tax (Appeals), Amritsar. The issues involved in both the appeals are similar and so, both these appeals are being disposed of together by this common order. 2. In ITA No. 91(Asr)/2014, for the assessment year 2008-09, the assessee has taken the following grounds : 1. The assessment order passed under section 143(3) and the additions/disallowances made by the Assessing Officer are illegal bad in law and without jurisdiction. 2. That, in view of the facts and in the circumstances of the case, the notice issued by the Commissioner of Income-tax (Appeals) for enhancement of income is illegal and bad in law. 3. That, in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in enhancing the income by making the addition of ₹ 6,58,59,246 on account of excess of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned assessment order and the Commissioner of Income-tax (Appeals) orders passed are against the principles of natural justice and the same have been passed without affording reasonable and adequate opportunity of being heard. 12. That the interest under section 234B has been wrongly and illegally charged as the appellant could not have foreseen the disallowances/additions made and could not have included the same in the current income for payment of advance tax. The interest charged under various sections is also wrongly worked out. 3. In ITA No. 92(Asr)/2014, for the assessment year 2010-11, the assessee has taken the following grounds : 1. The assessment order passed under section 143(3) and the additions/disallowances made by the Assessing Officer are illegal bad in law and without jurisdiction. 2. That, in view of the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the disallowance under section 11 of the Act on the ground that the activities carried out by the assessee is not for charitable purpose as per section 2(15) of the Act. In any case it is wrongly held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der various sections is also wrongly worked out. 4. At the outset, the learned counsel for the assessee states at the Bar that ground No. 5 in ITA No. 91(Asr)/2014 for the assessment year 2008-09 and ground No. 2 in ITA No. 92(Asr)/2014 for the assessment year 2010-11 pertain to one and the same issue, i.e., the assessee's challenge to the Commissioner of Income-tax (Appeals)'s action in disallowing the exemption under section 11 of the Income-tax Act to the assessee on the ground that the objects of the assessee are not for charitable purposes as per section 2(15) of the Act. According to the learned counsel for the assessee, for the assessment years 2009-10 and 2011-12, vide order dated September 10, 2015 (Hoshiarpur Improvement Trust v. ITO [2016] 45 ITR (Trib) 682 (Amritsar)), the Income-tax Appellate Tribunal had decided this issue in favour of the assessee, under similar facts and circumstances. 5. The learned Departmental representative, on the other hand, placed reliance on the impugned order. 6. The grievance of the assessee by way of ground No. 5 for the assessment year 2008-09 and ground No. 2 for the assessment year 2010-11, under similar facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of trade, commerce or business ; or (b) 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. However, these provisions are not to apply when the activities are such a modest scale that the value of receipts in respect of the same are less than ₹ 25 lakhs. These two provisos, as they stand now, are as follows : '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.' Explaining the scope of these provisions, a co-ordinate Bench of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 generalisations are not possible. An assessee who claims 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 rendering of any service in relation to any trade, commerce or business. (emphasis supplied) As the above Central Board of Direct Taxes circular, which is binding on the Commissioner of Income-tax under section 119(1)(a) of the Act, aptly puts it, whether the assessee has, as its object, advancement of any other object of general public utility is essentially a question to be decided on the facts of the assessee's own case an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 utility ; 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.' It may be noted that while the earlier proviso simply stated that exclusion from 'charitable purposes' will come into play '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', the requirement of exclusion clause extends even to situations 'in which such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility'. In other words, the exclusion clause, by the proviso to section 2(15), was earlier triggered by 'involvement in any activity in the nature of trade, commerce or business, etc.,' but, post- Finance Act, 2015, amendment, it will be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , commerce or business, etc., the proviso seeks to exclude it only when the threshold level of activity is not satisfied. Whether such a statutory provision stands the legal scrutiny or not is another aspect of the matter, and that is none of our concern at present anyway, it is beyond doubt that the new proviso, with effect from April 1, 2016, seeks to exclude, from the scope of section 2(15), the situations in which even in the course of pursuing advancement of any objects of general public utility when any activities in the nature of trade, commerce or business, etc., 'is undertaken in the course of actual carrying out of such advancement of any other object of general public utility', unless, of course, the activity level remains within the threshold limit, i.e., receipts from such activities are less than twenty per cent. of total receipts of that year. As the above provisions, which, in our humble understanding, seeks to restrict the scope of section 2(15) is effective from the assessment year 2016-17, in our considered view, these provisions are only prospective in effect. As a corollary to this legal position, in our considered view, even if the activities in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efly deal with the relevant developments. The Central Board of Direct Taxes Instruction No. 1024, dated November 7, 1976, was issued in the light of the two Supreme Court rulings referred to above and it stated as follows : 'Board's Instruction No. 1024, dated November 7, 1976 7th November, 1976 Section 2(15) of the Income-tax Act, 1961, defines 'charitable purposes' as under : Charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. 2. In the definition of charitable purpose the expression 'not involving the carrying on of any activity for profit' was added in the 1961 Act. The significance of this expression has been examined by the Supreme Court in the great detail in the cases of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) and Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC). Commenting on this expression, their Lordships, in the case of the Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC), etc., observed (page 803) : Notwithstanding the possibility of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hamber of Commerce decision [1975] 101 ITR 796 (SC) and the majority views, expressed by honourable Justice Khanna and honourable Justice Gupta, in the case of Sole Trustee, Loka Shikshana Trust [1975] 101 ITR 234 (SC) did not meet the approval of a Larger Bench of the honourable Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC). While doing so, the honourable Justice Bhagwati, in his order representing majority views, observed as follows (page 27) : 'There is, however, one comment which is necessary to be made whilst we are on this point and that arises out of certain observations made by this court in Sole Trustee, Loka Shikshana Trust's case [1975] 101 ITR 234 (SC) as well as Indian Chamber of Commerce's case [1975] 101 ITR 796 (SC). It was said by Khanna J. in Sole Trustee, Loka Shikshana Trust's case [1975] 101 ITR 234 (SC) : . . . if the activity of a trust consists of carrying on a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the words not involving the carrying on any activity for profit were dropped from section 2(15). In view of the above discussions, the reliance placed by the authorities below on the Central Board of Direct Taxes Instruction No. 1024 (supra) and on the honourable Supreme Court decisions in the cases of Indian Chamber of Commerce [1975] 101 ITR 796 (SC) and Sole Trustee, Loka Shikshana Trust [1975] 101 ITR 234 (SC) is devoid of any legally sustainable merits. These decisions are no longer good law, the relevant provision in the context of which the decisions were given does no longer exist on the statute, and the judicial precedent, which the Central Board of Direct Taxes instruction has interpreted, has already faded into oblivion. It is, however, important to bear in mind the fact that, going by the Circular No. 372 dated December 8, 1983 ([1984] 146 ITR (St.) 9 ) issued by the Central Board of Direct Taxes explaining the amendments made by the Finance Act, 1983, dropping of the words not involving the carrying on any activity for profit did not represent any paradigm shift or substantive amendment in law inasmuch as this amendment was stated to be only consequenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (4A) in section 11 of the Income-tax Act to provide that the provisions of sub-section (1) of that section relating to exemption of income derived from property held under trust for charitable or religious purposes ; or of sub-section (2) thereof relating to accumulation of setting apart of such income for application to such purposes ; or the connected provisions of sub-sections (3) and 3(A) of the said section will not apply in relation to profits and gains of business. This provisions will apply irrespective of whether the profits and gains are derived from a business carried on by the trust or institution or from a business undertaking which is held in trust for such purposes. An exemption has, however, been made in relation to profits and gains of business in the following cases : (a) where the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central Government in this behalf in the Official Gazette ; (b) the business is carried on by an institution wholly for charitable purposes and the work in connection w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Sub-section (1) or sub-section (2) or sub-section (3) or sub- section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.' Explaining this amendment in law, the Central Board of Direct Taxes Circular No. 621 dated December 19, 1991 ([1992] 195 ITR (St.) 154 ), read with Circular No. 642 dated December 15, 1992 ([1993] 199 ITR (St.) 7 ) stated as follows : 'Central Board of Direct Taxes Circular No. 621, dated December 19, 1991 ([1992] 195 ITR (St.) 154 at page 165) 15.8 In order to bring exemption of charitable or religious trusts in line with the corresponding provisions in section 10(23C)(iv) or (v) sub-section (4A) of section 11 has been amended to permit trust and institutions to carry out business activities if the business activities are incidental to the attainment of its objective. The charitable or religious trust will no longer lose complete exemption from Income-tax. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inority view stated by Justice A. P. Sen, as he then was. His Lordships did proceed to observe, as is the stand taken by the authorities below, as follows (page 49 of 121 ITR) : 'With respect, I venture to say that if an object of general public utility is engaged in an activity for profit, it ceases to be a charitable purpose and, therefore, the income is not exempt under section 11(1)(a). In case of a trust falling under any of the first three heads of charity, viz., relief of the poor , education and medical relief it may engage in any activity for profit, and the profits would not be taxable if they were utilised for the primary object of the trust. In other words, the business carried on by them is incidental or ancillary to the primary object, viz., relief of the poor, education and medical relief. To illustrate, a charitable hospital holding buildings on trust may run a nursing home. The profits of the nursing home owned and run by the trust will be exempt under section 11(4), because the business is carried on by the trust in the course of the actual carrying out of the primary purpose of the trust. The concept of profits to feed the charity , therefore, is app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c utility. As regards the maintenance of the separate books of account for the business activities pursued by the assessee- trust, since all the activities of the assessee-trust are said to be of the business nature, the books of account maintained by the assessee- trust meet this requirement as well. Of course, we will deal with the issue of activities being in the nature of 'profit making activities' a little later, but, suffice to say, that on the admitted facts of this case, so far period prior to April 1, 2009, is concerned and for the reasons set out above, the benefit of section 11 read with section 2(15) could not have been declined at all. Turning once again to the amendments brought on the statue with effect from April 1, 2009, we have to understand that there are two mutually exclusive situations in which business activities are carried out by the assessee-trust-one, in which 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, etc. (referred to in the Central Board of Direct Taxes Circular No. 11, dated December 19, 2008, issued at the point of time when the first prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities in the nature of trade, commerce or business, etc., as long as these activities are carried out in the course of actual carrying out of advancement of any other object of general public utility. The planned development of cities and towns is an object of general public utility, and that is an object consistently followed by the assessee in all its activities. For this short reason alone, the stand of the authorities below must be held to be unsustainable in law. We must, however, also deal with the fundamental allegation of the Revenue authorities that the assessee has sold residential and commercial units and residential and commercial lands 'just to earn profit'. This profiteering, as the learned Departmental representative puts it, is the core issue in these appeals. As we deal with this aspect of the matter, we may reproduce the following written submissions filed by the learned Departmental representatives : A : In all improvement trust cases It is submitted that the learned counsel namely Shri Y. K. Sood, chartered accountant and Shri J. S. Bhasin, advocate have argued these appeals. My counter-submissions are as under :- It is submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is finding of the honourable Delhi High Court clearly supports the cause of the Revenue as the precise nature of the activities is the same as articulated by the honourable Delhi High Court in the above paragraph. It is further submitted that at paragraph 58, the court has observed that the provisions of section 2(15) need to be read down but such reading has been contemplated in the context of section 10(23C)(iv) of the Income-tax Act, 1961 and when read in its totality, the judgment support the case of the Revenue as it squarely supports a case where the intention is to do charity by activities which may embark upon any trade, commerce or business or rendering any service in the nature of trade, commerce or business and not that income accrues due to the exigency of undertaking general public utility activities. It is further submitted the judgment in the case of City and Industrial Development Corporation of Maharashtra Ltd. v. Asst. CIT [2012] 343 ITR 102 (Bom) reported at S. No. 2 is project specific and further it has been held by the honourable Tribunal Mumbai C Bench that the assessee is an agent of the Government and does not hold any independent entity whereas the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional source of income. The trust spends the income generated out of the said activities on the public utility services.' It clearly shows that there is admission that the trust with the intention of providing public utility services first does business of purchase and sale of landed property like a builder and after earning a huge profit as possible, i.e., by putting the reserve price at a high pitched figure and also putting the commercial plots and commercial building on auction, it spends on such public utility services which is eminently hit by the proviso to section 2(15) of the Income-tax Act, 1961. It clearly falsifies the claim of Mr. Bhasin that trusts have income from other sources as contemplated in section 68 of the Act. This shows that the Government does not give to trusts what it itself has assured the trusts in the Act. It may further be mentioned that trusts are not agent of the State as if it were so, there would not have been any provision as section 70 in the Act which empowers the State Government to attach the rents and other income of the trust. As it is submitted that the factum of the trusts making exorbitant profit is best elucidated from the wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial character though for the allottees the same is for residence purposes. Thus, it is clear that this activity is commercial activity for the assessee-trust. The trust sells the plots/buildings by way of open auction with a fixed reserve price and tries to get as much as profit as is possible and if the bidders do raise the bid beyond the reserve price, the auction is cancelled. Thus, it is clear that in this activity also no charity is involved. Reliance in this regard is placed on the judgment of the honour able Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency v. Chief CIT reported in [2013] 356 ITR 360 (AP) ; [2013] 83 DTR 23 (AP) (Copy enclosed for kind perusal). In this judgment, the honourable court has held : 'that the petitioner was engaged in certifying the varieties of seeds grown by the clients who finally carry out trade or commerce in certified seeds. Thus, petitioner had rendered its services not directly to farmers but was rendering its services directly to its clients/agents who are engaged in trading of the certified seeds with profit motive. Activities of the petitioner had not indicted involvement of any char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or two reasons : The honourable Punjab and Haryana High Court in the above order had restored the issue to the Bench being well aware of the fact that the trust had been granted registration by the Bench. The High Court clearly did not hold that once the registration is granted, exemption under section 11 cannot be denied to the assessee on the ground that it was not a charitable institution. If this decision of the Tribunal is to prevail then restoration of the issue to the Tribunal by the High Court would become redundant. It is submitted that submissions made in the case of Jalandhar Improvement Trust and other trust during the course of hearing of trusts' cases are also pressed into service in these appeals. In view of the above submissions, it is prayed that the issue may kindly be decided in favour of the Revenue.' While dealing with the profit motive allegation of the Revenue authorities, it is essential to appreciate the difference that profit on sale does not essentially and necessarily imply profit motive in activities of the assessee-trust. What is important is the motive or predominant object of the activities. As we do so, we may only make a note of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of this benefit to the common cause, it is not necessary that the businessmen, buying such units, must also benefit. The denial of any advantage, at the cost of general public, to the business entities buying the commercial areas, in our considered view, does not amount to defeating an object of general public utility. In this context, it is important to understand the benefit from developing commercial areas, which is for public good, and benefit to the business persons in buying these units from the assessee-trust, which can only be for the good of benefit of these entrepreneurs. As for the sale of residential units, it is an admitted position that in terms of the Punjab Town Improvement (Utilisation of Land and Allotment of Plots) Rules, 1983, there is a formulae on the basis of which the price is worked out. The learned Departmental representative does not dispute that aspect but he alleges profit motive embedded in this formula as shown by adjustments for (a) conservancy changes for five years at 10 per cent. per month per acre; and (b) provision for unforeseen charges at 15 per cent. of the total reserve price. Firstly, even if this allegation about presence of the two elem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncies do, there is still lot left to be done. Just because these agencies could have done more, such expectations, no matter how legitimate, do not obliterate the work done by these agencies and the role played by these agencies for public good in furtherance of advancement of objects of general public utility. The learned Departmental representative has also pointed out that the assessee-trusts do not get any grant from the State Government which shows that first they make profits from land deals and then use the income so earned for the public causes stated. It is for this reason, according to the learned Departmental representative, that the asses see-trust cannot be said to be anything other than a business simpliciter. On the contrary, according to the learned Departmental representative, it is like robbing Peter to pay Paul. We are unable to share these perceptions of the learned Departmental representative. An object of general public utility does not necessarily require that the activities or the beneficiaries must be funded or subsidised by the State. As long as broader public cause is served, whether by the State funding or by efficient regulation of the affairs, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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