THE BELGAUM URBAN DEVELOPMENT AUTHORITY V. THE COMMISSIONER OF INCOME-TAX

ITA/5020/2012

AI Insights

The case involves the Belgaum Urban Development Authority (appellant) challenging the decisions of the Commissioner of Income Tax and the Income Tax Appellate Tribunal, which denied their application for registration under Section 12A(1)(aa) of the Income Tax Act, 1961. The primary legal issues revolved around whether the appellant's activities amounted to trade, commerce, or business, and whether the appellant complied with the necessary rules for registration. The court examined the nature of the appellant's activities, the statutory framework under which it operates, and relevant judicial precedents to determine the charitable nature of the appellant's work and the applicability of Rule 17A of the Income Tax Rules, 1962.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 732848 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 19-02-2019
• Assessment Year: misc
• Other Referred Cases: Sole Trustee, Loka Shikshana Trust vs. Commissioner of Income Tax, Commissioner of Income Tax vs. Bagalkot Town Development Authority, Ahmedabad Urban Development Authority vs. Assistant Commissioner of Income Tax, Commissioner, Income Tax vs. Lucknow Development Authority
• Laws Referred To: Income Tax Act, 1961, Karnataka Urban Development Authorities Act, 1987
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: Y V RAVIRAJ
• Assessee Lawyers: V K GURUNATHAN
• Keywords: Audit compliance; Charitable purpose; Commercial Activity; Income tax appeal; Registration Denial
• Section: 11; 13; 12; 260A; 17A; 12A(1)(aa); 17B

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 19TH DAY OF FEBRUARY, 2019 PRESENT THE HON’BLE MRS. JUSTICE B.V. NAGARATHNA AND THE HON’BLE MR. JUSTICE BELLUNKE A.S. INCOME TAX APPEAL No.5020/2012 BETWEEN: THE BELGAUM URBAN DEVELOPMENT AUTHORITY ASHOK NAGAR, BELGAUM REPRESENTED BY ITS COMMISSIONER C.N. RAVINDRA, AGED ABOUT 40 YEARS SON OF NINGAPPA. ... APPELLANT (BY SRI V.K. GURUNATHAN FOR SRI S. PARTHASARATHI, ADVOCATES) AND: THE COMMISSIONER OF INCOME-TAX, FIROZSHET COMMERCIAL COMPLEX, OPP. DISTRICT HOSPITAL, BELGAUM. ... RESPONDENT (BY SRI Y.V. RAVIRAJ, ADVOCATE) THIS INCOME TAX APPEAL IS FILED U/SEC.260A OF INCOME TAX ACT, 1961, AGAINST ORDER PASSED IN ITA. NO.214/PNJ/2011 DATED: 15-06-2012 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, DISMISSING THE APPEAL FILED BY THE ASSESSEE. 2 THIS INCOME TAX APPEAL COMING ON FOR HEARING THIS DAY, NAGARATHNA J., DELIVERED THE FOLLOWING: JUDGMENT This appeal was admitted on 31.07.2013 to consider the following substantial questions of law raised in the memorandum of appeal: “i) Whether in law, the finding arrived at by the Tribunal is perverse and contrary to the facts and circumstances in as much as whether the activity carried on by the appellant would amount to an activity in the nature of trade, commerce or business to deny registration under Section 12A of the Income Tax Act? ii) Whether in law, the tribunal was justified in holding that the Appellant had violated rule 17A and that non-filing of audited accounts was not in accordance with rule 17A of the Income-Tax Rules, 1962 just to deny a statutory benefit?” 2. The appellant herein is Belgaum Urban Development Authority, Belgaum. It has assailed the legality and correctness of order dated 15.06.2012 passed in ITA No.214/PNJ/2011 passed by the Income Tax 3 Appellate Tribunal, Panaji Bench, Panaji (hereinafter referred to as ‘the Tribunal’, for the sake of brevity). 3. The relevant facts of the case are that the appellant, which is a statutory authority constituted under the provisions of the Karnataka Urban Development Authorities Act, 1987 (hereinafter referred to as ‘KUDA Act’, for short), filed an application for registration under Section 12A(1)(aa) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for the sake of brevity). The said application was made on 28.04.2009 before the Commissioner of Income Tax, Belgaum. The Commissioner, by order dated 27.10.2009, rejected the said application. Aggrieved by the said order, the appellant herein preferred an appeal before the Tribunal, which, by its order dated 21.06.2011 (Annexure-B), remanded the matter to the Commissioner of Income Tax for his reconsideration. Thereafter, the Commissioner of Income Tax passed an order on 28.10.2011, at Annexure-C, which was an order once again rejecting the application filed by 4 the appellant. Aggrieved by the said order, the appellant herein once again approached the Tribunal. By order dated 15.06.2012, the Tribunal has dismissed the appeal. In the circumstances, the appellant has preferred this appeal under Section 260A of the Act by raising the aforesaid substantial questions of law. 4. We have heard learned counsel, Sri V.K.Gurunathan, for the appellant, and Sri Y.V. Raviraj, learned standing counsel for the respondent-Department and perused the material on record. 5. Learned counsel for the appellant made a two- fold submission. At the outset, he contended that the Tribunal was not right in giving a finding that the activity carried on by the appellant-authority is in the nature of commercial or business activity thereby not coming within the scope and ambit of Section 12A of the Act so as to be registered under Section 12A(1)(aa) of the Act. He submitted that Section 11 of the Act deals with income from property held for charitable or religious purpose, 5 while Section 12 deals with income of trusts or institutions from contributions. That the provisions of Sections 11 and 12 would not apply in relation to the income of a trust or an institution on fulfillment of certain conditions. That under Section 12A(1)(aa), a person in receipt of the income, if it makes an application for registration in the prescribed form, then the Commissioner has to register the said trust or institution under Section 12A(1)(aa) of the Act. On such registration, the income of the trust or the institution shall be eligible for the benefit under Sections 11 and 12 of the Act. That under Section 11 of the Act, income from property held under trust for charitable or religious purpose shall not be included in the total income of the previous year of the person in receipt of the income and under Section 12 of the Act, any voluntary contributions received by a trust created wholly for such purposes shall, for the purposes of Section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purpose and the provisions of that Section and Section 13 shall apply accordingly. 6 Section 13 states that Section 11 shall not apply in certain circumstances. 6. Learned counsel for the appellant contended that the appellant being a statutory authority is constituted under Section 3 of KUDA Act. That the object and purpose of the said Act is to provide for the establishment of Urban Development Authorities for the planned development of major and important urban areas in the State and the areas adjacent thereto and for matters connected therewith. That Sections 15 to 34 of the said Act deal with development schemes. Sections 35 and 36 deal with acquisition of land and Sections 37 to 39 deal with property and finance and there are other sections to the said Act dealing with incidental, ancillary and other matters. 7. Having regard to the nature of activity carried on by the appellant-authority, it is squarely coming within the scope of Section 12A(1)(aa) of the Act and its activity is in the nature of charitable activity and not commercial or 7 with the profit motive. Therefore, the authorities under the Act as well as the Tribunal ought to have granted registration under Section 12A(1)(aa) of the Act. 8. In support of his submissions, learned counsel for the appellant placed reliance on certain decisions of Hon’ble Supreme Court as well as this Court which shall be referred to later. 9. Learned counsel for the appellant next contended that the Appellate Authority has held that Rule 17A of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’, for short) applies to an application filed under Section 12A(1)(aa), and it is not Rule 17B. Therefore, the substantial questions of law may be answered in favour of the appellant and a direction may be issued to the respondent to register the appellant under Section 12A(1)(aa) of the Act. 10. Per contra, learned counsel, Sri Y.V. Raviraj, for the respondent, fairly submitted that having regard to 8 the decisions of the Hon’ble Supreme Court as well as this Court, appropriate finding may be given on substantial question of law No.1. He further contended that, if the answer to substantial question of law No.1 is answered in favour of the appellant, then the appellant would have to take steps to ensure that their application is in accordance with the requirement and hence, an appropriate order may be made on substantial question of law No.2. 11. The detailed narration of facts and contentions would not require a reiteration. The grievance of the appellant, in the first instance, is the rejection of its application filed under Section 12A(1)(aa) of the Act on the ground that the appellant is not carrying on any charitable work or activity. In that regard, appellant’s counsel has relied upon certain judgments of the Hon’ble Supreme Court as well as this Court which could be adverted to at this stage. In the case of Sole Trustee, Loka Shikshana Trust vs. Commissioner of Income Tax reported in (1975) 101 ITR 0234, the Hon’ble Supreme Court has 9 highlighted on the concept of ‘charitable purpose’ as it existed under the provisions of the Income Tax Act, 1922 and that the advancement of an object of general public utility which involved carrying of any activity for profit, should not come within the ambit of charitable purpose. While pondering on the meaning of expression ‘charitable purpose’ under Section 2(15) of the Act, the Hon’ble Supreme Court held that the expression ‘charity’ does not necessarily exclude carrying on an activity which yields profit, provided that profit has to be used for what is recognised as charity. The very concept of charity denotes altruistic thought and action. Its object must necessarily be to benefit others rather than one’s self; that in a truly charitable activity any possible benefit to the person who does a charitable act is merely incidental or even accidental and immaterial. That charity is always directed at benefiting others. The said direction must be evident and obligatory upon the trustee from the terms of a deed of trust before it can be held to be really charitable. 10 12. The Hon’ble Supreme Court, on considering the Deed of Trust in the said case found that the assesse-Trust therein was formed with the object of educating people by spread of knowledge on all matters of general interest and welfare through publication of newspaper and journals, but printing and publishing of newspaper could not be held to be education within the meaning of Section 2(15) of the Act and hence not entitled to exemption under Section 11 thereof. It was observed therein that concluding words “not involving the carrying on of any activity for profit” at the end of Section 2(15), even if for the purpose of trust is on ‘advancement of any other object of general public utility’. It would not be considered to be a ‘charitable purpose’, unless it is shown that the above purpose does not involve the carrying on of any activity for profit. That both the above conditions must be fulfilled before the purpose of the trust can be held to be a ‘charitable trust’. 13. A Co-ordinate Bench of this Court in the case of Commissioner of Income Tax vs. Bagalkot Town 11 Development Authority reported in [(2015) SCC Online Kar. 6951], considered the appeal filed by the Department against the grant of registration under Section 12A(1)(aa). After noting that the respondent therein had applied and obtained registration under Section 12A(1)(aa) of the Act it was considered as an institution of charitable purpose. Consequently the assessee’s income therein was exempted from tax under Section 11 of the Act. The Co- ordinate Bench considered the expression ‘any other object of general public utility’ under Section 2(15) of the Act and interpreted it by saying that the said expression must have a widest connotation with the advancement of any object or benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose. The said expression would prima facie include all objects which would promote the welfare of the general public. That if the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose. If the primary or 12 predominant object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose, would not prevent the institution from being a valid charity. Referring to CIT vs. APSRTC reported in [(1986) 2 SCC 391] in which, it had been held that APSRTC was established for the purpose of providing efficient transport system, having no profit motive and therefore, the income earned was not liable to Income Tax. The Co-ordinate Bench held that Bagalkot Town Development Authority was a statutory authority created under KUDA Act to carry out public purpose and therefore, the assessee was entitled to exemption of tax and dismissed the appeal filed by the Department. 14. In Ahmedabad Urban Development Authority vs. Assistant Commissioner of Income Tax reported in [(2017) 396 ITR 0322 (Gujarat)], the Gujarat High Court held that the Tribunal had committed a grave error in holding the activities of the assessee therein 13 namely the Ahmedabad Urban Development Authority, which is similar to the appellant herein, was in the nature of trade, commerce or business and therefore, the proviso to Section 2(15) of the Act was applicable and the assessee was not entitled to exemption under Section 11 of the Act. It was further held that the proviso to Section 2(15) of the Act was not applicable as far as the Ahmedabad Urban Development Authority was concerned as the activity of the said Authority was in the nature of providing general public utility services and therefore, was entitled for exemption under Section 11 of the Act. 15. Further, in Commissioner, Income Tax vs. Lucknow Development Authority reported in (2014) 98 DTR 0183 (All.), the Allahabad High Court considered a similar question and observed that it is an undisputed fact that the assessee therein namely, Lucknow Development Authority, being a statutory Authority, established under the provisions of the Uttar Pradesh Planning and Development Act, 1973, was constituted with 14 the object of providing shelter to the homeless people. That registration under Section 12A being mandatory to claim exemption under Sections 11 and 13 of the Act, it is necessary to consider if the objects and purpose of the Authority is charitable as public utility, and then to grant the benefit of being charitable institution. After referring various judgments of the Hon’ble Supreme Court in the case of CIT vs. Gujarat Maritime Board reported in (2007) ITR 561 (SC) and CIT vs. APSRTC reported in (1986) 159 ITR (SC) (referred to above), it is held that there was no material or evidence to suggest that Luknow Development Authority, the assessee therein, was conducting its affairs on commercial lines with a motive to earn profit or it deviated from its objects and that therefore, the proviso to Section 2(15) was not applicable to the facts and circumstances of the case. Consequently, it was held that the assessee therein was entitled to exemption provided under Section 11 for the relevant assessment year. 15 16. From the aforesaid judgments what emerges is that in respect of two similar authorities namely Bagalkot Town Development Authority and Luknow Development Authority which are similar to the appellant Authority, it has been held that they are entitled to registration under Section 12 (A)(1)(aa) of the Act and to the benefit under Sections 11 and 12 of the Act. As already submitted by learned counsel for the appellant, the appellant Authority is a statutory body constituted under Section 3 of the KUDA Act, the object of the appellant Authority is planning and promoting and securing the development of Belagavi urban area and for that purpose to acquire, hold, manage and dispose off movable and immovable properties and to carry out building and engineering operations and to take all steps for the purpose of development of the Belagavi urban area. 17. Sections 15 to 34 pertain to development schemes that could be undertaken by the appellant Authority for the development of the urban area from 16 time to time. Sections 35 and 36 empower the appellant Authority to acquire lands for the purpose of achieving the development schemes by agreement from the owners of the lands. Sections 17 to 19 empower the Authority to acquire the lands from the land owners by acquisition process and pay compensation to the land owners. Under Section 37 of the Act, the State Government can also transfer to the Authority, lands, belonging to it for the purpose of development scheme. There are various provisions under the Act which are supplemental to the main object and purpose of the act. The Authority is also empowered to develop sites, layouts and allot sites to the eligible persons, as well as auction sites and generally carry out the objects and intentions of KUDA Act. 18. The activity of the appellant is thus a charitable activity as defined under the expression ‘charitable trust’ under Section 2(15) of the Act. The activity of the appellant comes within the scope and ambit of the expression “the advancement of any other object of 17 general public utility”. The activity carried on by the appellant does not involve an activity which is in the nature of trade, commerce or business so as to come within the mischief of proviso to Section 2(15). As already noted, the appellant is a statutory authority constituted under the provisions of KUDA Act, whose object is to establish and develop urban areas in an orderly fashion. Even though the appellant Development Authority may be involved in developing various residential or commercial areas and thereby preparing house sites or commercial sites and even alienating such sites through auction or through allotting to eligible persons, the said activity cannot be held to be profit motive so as to come within the mischief of the expression trade, commerce or business. The upshot of the aforesaid discussion is that the appellant – assessee is a statutory Authority created under the Karnataka Urban Development Authorities Act, 1987. The purpose and intent of creation of the appellant – Authority is to establish urban areas in Belgaum in a planned manner. The appellant – assessee being a statutory 18 Authority is under the control of the State Government, which has the power to issue directions to the Authority as per Section 65 of the Act. The said directions are those, which are necessary or expedient for carrying out the purposes of the Act and it shall be the duty of the assessee to comply with such directions. Even the utilization of funds by the assessee is fully controlled by periodical instructions issued by the Government. The funds standing in the name of the assessee is under the absolute control of the Government as the assessee functions in a fiduciary capacity. Therefore, following the judgment of Bagalkot Town Development Authority, which has inturn followed the judgment of the Hon’ble Supreme Court in the case of Gujarat Maritime Board, it is held that the assessee, being a statutory Authority, created under the Karnataka Urban Development Authority Act, 1987 has to carryout its activity towards public purposes. Therefore, the argument advanced on behalf of the revenue that the assessee was not entitled for exception under Section 11 of the Act, is untenable and is rejected. In the 19 circumstances, substantial question of law No.1 is answered in favour of the assessee and against the revenue. 19. The next substantial question of law raised by the appellant is with regard to the applicability of the relevant rule in making an application for registration of charitable or religious trust. According to the learned counsel for the appellant, Rule 17A of the Rules applies and under the said Rule, an audit report of the accounts of the institution need not be furnished. In other words, the accounts need not be certified by a chartered accountant. The same is a requirement under Rule 17B of the Rules wherein the said audit report is required to be furnished when registration is required under Rule 17B of the Rules. That the appellant has sought for registration under Section 12A(1)(aa) of the Act and hence it is only Rule 17A of the Rules which applies. 20. Learned counsel for the respondent very fairly submits that there has to be compliance with Rule 17A of 20 the Rules and there can be no relaxation in that regard and if there is any compliance to be made by the appellant then this Court may grant an opportunity to the appellant to comply with the said Rule. He, however, submitted that any non-compliance of the requirements of the Rule 17A of the Rules would not entitle the appellant from seeking registration under Section 12A(1)(aa) of the Act. Consequently, substantial question of law No.2 is answered by holding that the appellant would have to comply with all requirements stipulated under Rule 17A of the Rules. If there has been any non-compliance with the same, then, the appellant is at liberty to comply with the said requirements in accordance with law. Consequently, the substantial questions of law raised in this appeal are answered as under: Sl. No. Questions of law Answers i) Whether in law, the finding arrived at by the Tribunal is perverse and contrary to the facts and circumstances in as much as whether the activity The Tribunal was not right in the facts and circumstances of the case in holding that the activity carried on by the 21 carried on by the Appellant would amount to an activity in the nature of trade, commerce or business to deny registration under Section 12A of the Act? appellant amounts to an activity in the nature of trade, commerce or business and thereby is not entitled for registration under Section 12A of the Act. ii) Whether in law, the Tribunal was justified in holding that the appellant had violated Rule 17A and that non-filing of audited accounts was not in accordance with Rule 17A of the Income Tax Rules, 1962 just to deny a statutory benefit? The Tribunal was not right in holding that there was violation of Rule 17A of the Rules as there was non-filing of audit accounts by the appellant. It is further observed that Rule 17A of the Rules does not require the filing of audit accounts but has certain other stipulations which would have to be complied by the appellant herein, if not already complied. 21. In the result, the appeal is allowed by answering the substantial questions of law in favour of the appellant, by setting aside the order passed by the 22 Tribunal dated 15.06.2012 in I.T.A.No.214/PNJ/2011 and the order passed in CIT/BGM/12A/BUDA/2011-12/198, dated 28.10.2011 at Annexures-A and C respectively. Sd/- JUDGE Sd/- JUDGE Kms/Naa/Kmv/mvs "