TMI Blog2020 (9) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to exemption under Section 11 of the Act. Both the questions are therefore, answered in favour of the assessee and against the revenue. - R/Tax Appeal No. 273 of 2011 - - - Dated:- 17-2-2020 - Mr. Justice J.B. Pardiwala And Mr. Justice Bhargav D. Karia For the Appellant(s) : Mrs Mauna M Bhatt For the Opponent(s) : Mr B S Soparkar ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This Tax Appeal under Section 260A of the Income Tax Act, 1961, is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, 'A' Bench, Ahmedabad, dated 5th August 2010, in the ITA No.1835/Ahd/2010 for the Assessment Year 2007-08. 2. This Tax Appeal came to be admitted on the following substantial questions of law : Whether the Tribunal below committed substantial error of law in cancelling the order of Director of Income Tax (Exemption) passed under Section 12-AA(3) of the Income Tax Act, by totally overlooking the amendment effected in the nature of first proviso to Section 2(15) of the Act, with effect from April 01, 2009. 3. In view of the judgment rendered by a coordinate bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at activities of the said organization cannot be considered as business . While holding so, Delhi High Court has observed and held as under: An activity would be considered 'business' if it is undertaken with a profit motive, but in some cases, this may not be determinative. Normally, the profit motive test should be satisfied, but in a given case activity may be regarded as a business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business. 12.6. In the aforesaid decision, after considering the decision of the Hon'ble Supreme Court in the case of Commissioner of Sales Tax vs. Sai Publication Fund reported in (2002) 258 ITR 70(SC), it is held by the Delhi High Court that thus, if the dominant activity of the assessee was not business, then any incidental or ancillary activity would also not fall within the definition of business. In para 64, 67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth Manufacturers : [1980] 121 ITR 1 (SC), the Supreme Court held as under: The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to sub-serve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to any out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely be cause some profit arises from the activity. 70. Although in that case the statutory provisions being considered by the Supreme Court were different and the utilization of income earned is, now, not a relevant consideration in view of the express words of the first proviso to Section 2 [15] of the Act, nonetheless the test of dominant object of an entity would be relevant to determine whether the entity is carrying on business or not. In the present case, there is little doubt that the objects of the activities of the petitioner are entirely for cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be discharged by private bodies. Often, apart from the controlling or parent statutes, like the BIS Act, these statutory bodies (including BIS) are empowered to frame rules or regulations, exercise coercive powers, including inspection, raids; they possess search and seizure powers and are invariably subjected to Parliamentary or legislative oversight. The primary object for setting up such regulatory bodies would be to ensure general public utility. The prescribing of standards, and enforcing those standards, through accreditation and continuing supervision through inspection etc., cannot be considered as trade, business or commercial activity, merely because the testing procedures, or accreditation involves charging of such fees. It cannot be said that the public utility activity of evolving, prescribing and enforcing standards, involves the carrying on of trade or commercial activity. 12.8 Circular No.11 of 2008 issued by the CBDT fell for consideration by the Delhi High Court in the case of M/s G.S. 1 India v. Director General of Income-tax (Exemption) and Another : WP(C) 7797/2009, decided on 26.09.2013 (2013) 219 Taxman 205. It is held that even as per the said circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not convert charitable activity into business, commerce or trade in the absence of contrary evidence. Quantum of fee charged, economic status of the beneficiaries who pay, commercial value of benefits in comparison to the fee, purpose and object behind the fee etc. are several factors which will decide the seminal question, is it business ? 27. As observed above, fee charged and quantum of income earned can be indicative of the fact that the person is carrying on business or commerce and not charity, but we must keep in mind that charitable activities require operational/running expenses as well as capital expenses to be able to sustain and continue in long run. The petitioner has to be substantially self-sustaining in long term and should not depend upon government, in other words taxpayers should not subsidize the said activities, which nevertheless are charitable and fall under WP(C) 1872/13 Page 53 of 55 the residuary clause general public utility. The impugned order does not refer to any statutory mandate that a charitable institution falling under the last clause should be wholly, substantially or in part must be funded by voluntary contributions. No such requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. 13. Applying the aforesaid decisions to the facts of the case on hand and with respect to the activities of the AUDA Ahmedabad Urban Development Authority under the provisions of the Gujarat Town Planning Act by no stretch of imagination, it can be said that the activities of the assessee (AUDA) can be said to be in the nature of trade, commerce or business and/or its object and purpose is profiteering. Merely because under the statutory provisions and to meet with the expenditure of Town Planning Scheme and/or providing various services under the Town Planning Scheme, such as road, drainage, electricity, water supply etc. if the assessee is permitted to sale the plots (land) to the extent of 15% of the total area under the Town Planning Scheme and while selling the said plots they are sold by holding the public auction, it cannot be said that activities of the assessee is profiteering, to be in the nature of trade, commerce and business. 13.1 In the case of Lucknow Development Authority, Gomti Nagar (supra), it is held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Division Bench of this Court in the case of Sabarmati Ashram Gaushala Trust (supra) is required to be referred to. In the case before the Division Bench, the assessee Trust Sabarmati Ashram Gaushala Trust was engaged in the activity of breeding milk cattle; to improve the quality of cows and oxen and other related activities. The Assessing Officer denied the exemption to the trust under Section 11 of the Act on the ground that considerable income was generated from the activities of milk production and sale and therefore, considering the proviso to Section 2(15) of the Act, the said Trust-assessee was denied the exemption under Section 11 of the Act. While holding that the activities of the assessee trust still can be said to be for charitable purpose within the meaning of Section 2(15) of the Act and same cannot be said to be in the nature of trade, commerce or business for which proviso to Section 2(15) of the Act is required to be applied. In para 6, 7, 8 and 12, it is observed and held as under : 6. The legal controversy in the present Tax Appeal centers around the first proviso. In the plain terms, the proviso provides for exclusion from the main object of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in section 2 (15). Hence, such entities will not be eligible for exemption under section 11 or under section 10 (23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on any activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity. 3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under any other object of general public utility. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade, commerce or business. As clarified by the CBDT in its Circular No. 11/2008 dated 19th December 2008 the proviso aims to attract those activities which are truly in the nature of trade, commerce or business but are carried out under the guise of activities in the nature of public utility. 15.1. Applying the aforesaid decision to the facts of the case on hand and the object and purpose for which the assessee is established/constituted under the provisions of the Gujarat Town Planning Act and collection of fees and cess is incidental to the object and purpose of the Act, even the case would not fall under second part of proviso to Section 2(15) of the Act. 15.2 Considering the aforesaid facts and circumstances of the case, we are of opinion that the learned Tribunal has committed a grave error in holding the activities of the assessee in the nature of trade, commerce or business and consequently holding that the proviso to Section 2(15) of the Act shall be applicable and therefore, the assessee is not entitled to exemption under Section 11 of the Act. For the reasons stated above, it is held that the proviso to Section 2(15) of the Act shall not be applicable so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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