Karnataka Water Supply & Drainage Board, V. CIT, Bangalore

ITA 283/BANG/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95219 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 03-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANURAG SAHAY CITIIIDR
• Keywords: Depreciation; Charitable institution; Benefit of exemption; Cancellation of registration
• Section: 234B; 28; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.283/BANG/2015 ASSESSMENT YEAR : 2011-12 KARNATAKA WATER SUPPLY AND DRAINAGE BOARD, NO.6, JAL BHAVAN, FIRST STAGE, BANNERGHATTA ROAD, BANGALORE 560 029. PAN: AAATK 5837F VS. THE DEPUTY DIRECTOR (EXEMPTION), CIRCLE 17(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI S. PARTHASARATHI, ADVOCATE RESPONDENT BY : SHRI ANURAG SAHAY, CIT-III(DR) DATE OF HEARING : 19.08.2015 DATE OF PRONOUNCEMENT : 04.09.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DATED 16.02.2015 OF THE CIT(APPEALS)-14, LTU, BANGALORE R ELATING 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 RE TURN OF INCOME ITA NO.283/BANG/2015 PAGE 2 OF 24 DECLARING NIL INCOME AFTER CLAIMING EXEMPTION U/S 1 1 OF INCOME TAX ACT, 1961 [THE ACT]. 3. THE AO EXAMINED THE CLAIM OF THE ASSESSEE FOR E XEMPTION U/S.11 OF 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 P URPOSE FOR THE PURPOSE OF THE ACT HAD UNDERGONE AN AMENDMENT BY THE FINANC E ACT, 2008 WITH EFFECT FROM 01-04-2009. THE EXPRESSION OF CHARITABL E PURPOSE, PRIOR TO THE AFORESAID AMENDMENT READ AS FOLLOWS; (15) CHARITABLE PURPOSE INCLUDES RELIEF TO THE P OOR, EDUCATION, MEDICAL RELIEF AND THE ADVANCEMENT OF ANY OTHER OBJ ECT OF GENERAL PUBLIC UTILITY 4. THE DEFINITION AFTER THE AMENDMENT READS AS FOLL OWS; CHARITABLE PURPOSE INCLUDES RELIEF OF THE POOR, E DUCATION, MEDICAL RELIEF, (PRESERVATION OF ENVIRONMENT(INCLUDING WATE RSHEDS, FORESTS AND WILDLIFE) AND PRESERVATION OF MONUMENTS OR PLAC ES OR OBJECTS OF ARTISTIC OR HISTORIC INTEREST AND THE ADVANCEMENT O F ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY; PROVIDED THAT THE ADVANCEMENT OF ANY OTHER OBJECT O F GENERAL PUBLIC UTILITY SHALL NOT BE A CHARITABLE PURPOSE, I F IT INVOLVES THE CARRYING ON OF ANY ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS OR ANY ACTIVITY OF RENDERING ANY SERVICE I N RELATION TO ANY TRADE, COMMERCE OR BUSINESS FOR A CESS OR FEE OR AN Y 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) WHI CH CAME INTO EFFECT FROM 01-04-2009 THAT ADVANCEMENT OF ANY OTHER OBJEC T OF GENERAL PUBLIC UTILITY SHALL NOT BE A CHARITABLE PURPOSE, IF IT IN VOLVES THE CARRYING ON OF ANY ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINE SS. ITA NO.283/BANG/2015 PAGE 3 OF 24 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 A O FURTHER NOTICED THAT THE ASSESSEE WAS A STATUTORY CORPORATION CREATED TO IMPLEMENT ITS PUBLIC UTILITY SCHEMES IN RELATION TO WATER SUPPLY AND UND ERGROUND DRAINAGE SERVICES. THE ESTABLISHMENT, ADMINISTRATION AND SU PERVISION CHARGES AND WATER CHARGES ARE COLLECTED BY THE ASSESSEE FOR THE SERVICES PROVIDED BY IT. THE ASSESSEE RECEIVES ETP & SUPERVISION CHARGES FRO M THE STATE GOVERNMENT, CENTRAL GOVERNMENT AND URBAN LOCAL BODI ES (ULBS) ON THE WORKS EXECUTED BY IT. 7. FOR THE AY 2011-12 THE FOLLOWING ACTIVITIES CONS TITUTED MAJOR PORTION OF RECEIPTS:- PARTICULARS AS ON 31.3.2011 (IN RS.) ESTABLISHMENT, ADMINISTRATION & SUPERVISION CHARGES 52,75,55,713 WATER CHARGES 26,91,11,444 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 RS. 99,34,54,570 FOR THE CURRENT ASSESSMENT YEAR FR OM COLLECTION OF ESTABLISHMENT, ADMINISTRATION AND SUPERVISION CHARG ES, WATER CHARGES, INTEREST ETC. THE ASSESSEE HAS ALSO SHOWN INCOME EX CLUSIVELY COLLECTED FROM THE ULBS AND CONSUMERS IN THE FORM OF ESTABLI SHMENT, SUPERVISION ITA NO.283/BANG/2015 PAGE 4 OF 24 AND WATER CHARGES TO THE TUNE OF RS. 79 CRORES FOR AY 2011-2012. THE ASSESSEE HAS SHOWN AN EXCESS INCOME OVER EXPENDITUR E OF RS. 25,00,62,435 IN THE INCOME AND EXPENDITURE A/C AFTE R MAKING ALL THE ADJUSTMENTS. 9. THE DETAILS OF OTHER INCOME EARNED BY THE ASSE SSEE WERE AS FOLLOWS:- 10. THE SUBMISSIONS OF THE ASSESSEE WERE NOT ACCEPT ED BY THE AO. HE NOTED THAT THE ASSESSEE IS DIRECTLY INVOLVED IN REN DERING 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 ACTI VITIES OF TRADE, COMMERCE OR BUSINESS, AND IS ALSO RENDERING SERVICE OF MAINTENA NCE OF VARIOUS FACILITIES ON PAYMENT OF CERTAIN CHARGES. ACCORDING TO THE AO, IT IS EVIDENT THAT THE ITA NO.283/BANG/2015 PAGE 5 OF 24 ASSESSEE HAS EARNED SUBSTANTIAL AMOUNT OF ITS INCOM E BY WAY OF FEES FROM THE ADMINISTRATIVE, SUPERVISION AND WATER CHARGES. THE ASSESSEE HAS GENERATED RECEIPTS IN EXCESS OF RS.25 LAKHS FOR THE CURRENT ASSESSMENT YEAR OUT OF ITS COMMERCIAL ACTIVITIES AND HENCE THE PROVISO TO SEC.2(15) IS ATTRACTED IN ITS CASE. THEREFORE THE AO WAS OF THE VIEW THAT THAT THE INCOME GENERATED FROM THE ACTIVITIES OF ASSESSEE COMPANY C LEARLY 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 PRO VIDING 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 EXE MPTION U/S 11. 11. AS A CONSEQUENCE, THE AO DENIED EXEMPTION U/S.1 1 OF THE ACT. THE TAXABLE INCOME OF THE ASSESSEE WAS ARRIVED AT AN AM OUNT OF RS.34,82,50,137 AND TOTAL DEMAND OF RS.14,52,80,690 WAS RAISED INCLUSIVE OF INTEREST U/S 234B AND 234D. 12. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED APPEAL BEFORE CIT(A). BEFORE CIT(A), THE ASSESSEE CONTENDED THAT UNDER CLAUSE 3 OF ARTICLE 246 OF THE CONSTITUTION OF INDIA THE STATE IS EMPOWERED TO MAKE LAWS IN RESPECT OF ANY MATTERS ENUMERATED IN LIST I I OF SEVENTH SCHEDULE TO THE CONSTITUTION OF INDIA [HEREIN AFTER REFERRED T O THE STATE LIST]. ITEM NO 17 OF THE STATE LIST, READS THUS:- ITA NO.283/BANG/2015 PAGE 6 OF 24 17. WATER, THAT IS TO SAY, WATER SUPPLIES, IRRIGAT ION AND CANALS, DRAINAGE AND EMBANKMENTS, WATER STORAGE AND WATER POWER SUBJECT TO THE PROVISIONS OF ENTRY 56 O F 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 GOVERNMEN T OF KARNATAKA FORMED THE KUWSD BOARD BY AN ENACTMENT CALLED KARNATAKA U RBAN WATER SUPPLY & DRAINAGE BOARD ACT 1973. THE PREAMBLE TO THIS ACT MENTIONS THE OBJECTS OF ENACTMENT AS FOLLOWS:- TO UNDERTAKE THE INVESTIGATION, PREPARATION AND EXECUTION OF SCHEMES FOR THE REGULATION AND DEVELOP MENT OF DRINKING WATER AND DRAINAGE FACILITIES IN THE UR BAN AREAS, IT IS CONSIDERED NECESSARY TO HAVE A STATUTO RY BOARD AT THE STATE LEVEL WHICH WILL HELP IN BRINGIN G ABOUT CO-ORDINATION IN THE ACTIVITIES RELATING TO THE IMPLEMENTATION OF SUCH SCHEMES. THUS THE FORMATION OF THE KUWSD BOARD AND THE FUNCT IONS/ACTIVITIES OF THE ASSESSEE BOARD ARE ONLY TO FULFILL THE OBLIGATIONS THRUST ON THE STATE GOVERNMENT BY THE CONSTITUTION OF INDIA. NEITHER TH E 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 N ATURE OF TRADE, COMMERCE OR BUSINESS. THUS, NEITHER THE STATE GOVER NMENT NOR THE ASSESSEE ENGAGED IN FULFILLING THE OBLIGATIONS OF T HE STATE GOVERNMENT UNDER THE CONSTITUTION OF INDIA CAN BE SAID TO BE I NVOLVED IN CARRYING ON ANY ACTIVITY IN THE NATURE OF TRADE COMMERCE OR BUSINES S AS ENVISAGED IN THE PROVISO TO SECTION 2 (15) OF THE ACT. SIMILARLY, U NDER ARTICLE 243W OF THE ITA NO.283/BANG/2015 PAGE 7 OF 24 CONSTITUTION OF INDIA, STATE LEGISLATURE HAS EMPOWE RED AND AUTHORIZED THE URBAN LOCAL BODIES NAMELY MUNICIPALITIES AND CORPOR ATIONS BY WAY OF ENACTMENT OF KARNATAKA MUNICIPALITIES ACT, 1964( CH APTER V) TO CARRY OUT THE OBLIGATIONS OF WATER SUPPLY AND DRAINAGE FACILI TIES IN THEIR RESPECTIVE AREAS. THUS THE URBAN LOCAL BODIES CARRY OUT THE A CTIVITIES OF PROVISIONS OF WATER SUPPLY AND DRAINAGE FACILITIES IN FULFILLMENT OF THE OBLIGATIONS UNDER THE CONSTITUTION OF INDIA. THUS THE URBAN LOCAL BO DIES (MUNICIPALITIES AND CORPORATIONS) IN CARRYING OUT THE OBLIGATIONS AND F UNCTIONS PRESCRIBED UNDER THE CONSTITUTION OF INDIA CANNOT BE SAID TO CARRYIN G ON ANY ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS AS ENVISAGED IN PROVISO TO SECTION 2(15) OF THE ACT. 13. THE ASSESSEE AT THE INSTANCE OF THE STATE GOVER NMENT OR THE URBAN LOCAL BODIES CARRIES OUT THE ACTIVITIES OF INVESTIG ATION, PREPARATION OF SCHEMES FOR REGULATION AND DEVELOPMENT OF DRINKING WATER AND DRAINAGE FACILITIES. THESE ACTIVITIES ARE CARRIED OUT STRICT LY IN ACCORDANCE WITH DIRECTIONS RULES AND REGULATIONS FRAMED BY GOVERNME NT. 14. WHILE THE ASSESSEES MAJOR TASK IS TO TAKE UP CAPITAL WORKS (98.60% OF EXPENDITURE FOR ASSESSMENT YEAR IS ON CAPITAL WO RKS AS AGAINST 1.40% ON MAINTENANCE WORKS). THE ASSESSEE IS ENGAGED IN BULK WATER SUPPLY TO THE URBAN LOCAL BODIES (ULBS) IN 4 LOCAL AREAS UNDE R STATE GOVERNMENT. ONLY IN TWO LOCAL AREAS, NAMELY, KUSHAL NAGAR AND K OLAR, WATER IS BEING SUPPLIED DIRECTLY BY THE ASSESSEE TO THE CONSUMERS ON BEHALF OF RESPECTIVE ITA NO.283/BANG/2015 PAGE 8 OF 24 LOCAL BODIES. THESE SCHEMES WERE TRANSFERRED FROM T HE ERSTWHILE PUBLIC HEALTH ENGINEERING DEPARTMENT. THE ASSESSEE COLLECT S WATER CHARGES FROM THE CONSUMERS ON BEHALF OF LOCAL BODIES, USES IT FO R MAINTENANCE EXPENSES OF THE SCHEME LIKE POWER, MAINTENANCE OF PUMPING MA CHINERY, CHLORINATION ETC. 15. THE GOVERNMENT OF KARNATAKA AUTHORIZES THE ASS ESSEE TO DEBIT AS A PERCENTAGE OF THE CAPITAL PROJECT COSTS FROM THE FUNDS RELEASED BY GOVERNMENT OF KARNATAKA AS ETP (ESTABLISHMENT TOOLS & PLANT) CHARGES TO MEET THE ESTABLISHMENT, SALARIES AND PENSION LIABIL ITIES OF THE BOARD. THUS, THE ASSESSEE HAS TO ACT IN STRICT ADHERENCE WITH TH E GOVERNMENT DIRECTIONS AND REGULATIONS WHILE EXECUTING THE PROJECTS AS ALS O WHILE RECOVERING ITS COST 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 RS. 52,75,55,712. THE DETAILS OF THE SAME ARE AS PER S CHEDULE 16 OF THE FINANCIAL STATEMENTS IS REPRODUCED BELOW:- ITA NO.283/BANG/2015 PAGE 9 OF 24 THESE CHARGES HAVE BEEN COLLECTED STRICTLY IN ACCOR DANCE WITH RULE 4 (B) OF APPENDIX III OF KARNATAKA PUBLIC WORKS ACCOUNTS COD E VOLUME II. WATER CHARGES 18. DURING THE YEAR, THE TOTAL WATER CHARGES EARNE D IS RS.26,91,11,444 AS PER SCHEDULE 17 OF THE FINANCIAL STATEMENTS WHIC H IS REPRODUCED BELOW:- SL.NO. PARTICULARS CREDIT (RS.) 1 WATER CHARGES ACTUALLY RECEIVED 5,27,32,721 2 WATER CHARGES RECEIVABLE 21,63,78,723 TOTAL 26,91,11,444 CL BALANCE 26,91,11,444 19. THE ACTUAL WATER CHARGES RECEIVED IS ONLY RS. 5, 27, 32,721. THE SUM OF RS.21,63, 78,723/-, REPRESENTS INTEREST ACCR UED ON THE AMOUNTS RECEIVABLE FROM URBAN LOCAL BODIES IS RS. 18,11,72, 905. THIS INTEREST CHARGED HAS NOT BEEN RECEIVED FROM URBAN LOCAL BODI ES 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. ITA NO.283/BANG/2015 PAGE 10 OF 24 20. THE ASSESSEE IS OPERATING ON NO PROFIT BASIS. THIS IS SUBSTANTIATED BY THE ACTUAL INCOME RECEIVED ON OPERATIONS OF THE ASSESSEE AND THE EXPENDITURE INCURRED. THE ASSESSEE POINTED OUT THAT THE FOLLOWING TABLE WOULD SHOW THAT THE ASSESSEE HAS ACTUALLY INCURRED A LOSS ON ITS OPERATIONS AND IS OPERATING ON A NO PROFIT BASIS:- AMOUNT IN RS.(CR.) PARTICULARS 31/3/11 ETP CHARGES 52.75 WATER CHARGES 5.27 OTHER INCOME 3.33 TOTAL (A) 61.35 LESS: EXPENSES ON EMPLOYEES REMUNERATION 28.07 OPERATION AND MAINTENANCE EXPENSES 18.05 ADMINISTRATIVE EXPENSES 17.20 DEPRECIATION 1.18 TOTAL (B) 64.5 NET LOSS (3.15) 21. ACCORDINGLY, EVEN IN COMPLYING WITH THE CONSTI TUTIONAL OBLIGATIONS, THE ASSESSEE HAS BEEN CARRYING ON ITS ACTIVITIES IN A REAL CHARITABLE MANNER AND BY NO STRETCH OF IMAGINATION COULD IT BE CONSID ERED AS CARRYING ON ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINE SS OR PROVIDING SERVICES IN RELATION THERETO. THE ASSESSEE IS ENGAGED ONLY I N THOSE ACTIVITIES THAT ARE AUTHORIZED OR APPROVED BY THE GOVERNMENT. IT IS PER TINENT TO NOTE HERE THAT THE ASSESSEE DOES NOT DEAL WITH ANY PRIVATE INDIVID UALS/ORGANISATIONS AT ALL. IT DEALS ONLY WITH STATE GOVERNMENT AND URBAN LOCAL BODIES. THUS IT CAN BE SEEN THAT THE STATE GOVERNMENT, THE ASSESSEE AND URBAN LOCAL BODIES ARE ALL ACTING UNDER AN OBLIGATION PRESCRIBED BY TH E CONSTITUTION OF INDIA. ITA NO.283/BANG/2015 PAGE 11 OF 24 ACCORDINGLY, NONE OF THESE AUTHORITIES COULD BE SAI D TO BE INVOLVED IN CARRYING ON ANY ACTIVITY IN THE NATURE OF TRADE, CO MMERCE AND BUSINESS. 22. THE ASSESSEE, IN SERVING EITHER THE STATE GOVE RNMENT OR URBAN LOCAL BODIES, CANNOT ALSO BE SAID TO BE INVOLVED IN RENDE RING SERVICES IN RELATION TO TRADE, COMMERCE OR BUSINESS. ACCORDINGLY, PROVI SO TO SECTION 2(15) OF THE ACT DOES NOT APPLY TO THE ASSESSEES CASE. CONS EQUENTLY, THE EXEMPTION UNDER SECTION 11 CANNOT BE DENIED TO THE ASSESSEE. 23. FURTHER, THE ASSESSEE DREW ATTENTION TO THE SP EECH OF FINANCE MINISTER DATED 29-2-2008 WHICH CLARIFIES THAT THE P ROVISO IS NOT INTENDED TO BE APPLICABLE TO GENUINE CHARITABLE ORGANIZATIONS W HICH DO NOT CARRY REGULAR TRADE, COMMERCE OR BUSINESS OR RENDERING SE RVICES IN RELATION TO SUCH TRADE COMMERCE OR BUSINESS. THE MEMORANDUM EXP LAINING FINANCE BILL OF 2008 REPORTED IN 298 ITR (STATUE) 190, CLAR IFIES THAT ONLY THE ENTITIES OPERATING IN COMMERCIAL LINES AND WHICH ARE CLAIMIN G EXEMPTION OF THEIR INCOME EITHER U/S 10(23) OR SEC. 11 OF THE INCOME-T AX ACT HAVE BEEN SOUGHT TO BE EXCLUDED FROM THE DEFINITION OF CHARI TABLE PURPOSE AND NOT GENUINE CHARITABLE INSTITUTION LIKE THE 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 OBJE CTIVE OF MAKING PROFIT. FOR THIS PURPOSE, RELIANCE WAS PLACED ON THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF LOKA SHIKSHANA TRUST VS. CIT REPORTED IN 101 ITR 234 ITA NO.283/BANG/2015 PAGE 12 OF 24 (SC) AND CIT (ADDL) VS. SURAT ART SILK CLOTH MANUFACTURERS A SSOCIATION REPORTED IN 121 ITR 1 (SC) . IT WAS SUBMITTED THAT HAVING REGARD TO THE FACT THAT THE ASSESSEE SERVES ONLY THE STATE GOVERNMENT AND LOCAL AREA BODIES ONLY TO COMPLY WITH THE OBLIGATIONS THRUST ON IT BY THE CONSTITUTION OF INDIA; FURTHER, THE ASSESSEE IS ACTUALLY INCURRING LOSSES ON ITS OPERATIONS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS TO FOLLOW THE DIRECTIONS, RULES AND REGULATIONS FORMULATED BY THE STATE GOVERNMENT WITH OUT ANY DISCRETION OF ITS OWN. ACCORDINGLY, IT WAS ARGUED THAT THE ASSES SEE IS A GENUINE CHARITABLE INSTITUTION, TO WHICH THE LEGISLATURE DO ES NOT INTEND TO DENY EXEMPTION. THUS, THE PROVISO TO SECTION 2(15) OF TH E ACT DOES NOT APPLY TO THE ASSESSEE. 24. THE ASSESSEE ALSO EXPLAINED AS TO HOW THE RATE S FOR SUPPLY OF WATER ARE FIXED. THE ESTIMATES FOR WATER SUPPLY AN D UNDERGROUND DRAINAGE PROJECTS ARE PREPARED ADOPTING THE CURRENT SCHEDULE OF RATES APPROVED BY THE ASSESSEE AND PUBLIC WORKS DEPARTMEN T. AFTER ESTIMATES ARE SANCTIONED, THE RECOGNIZED SYSTEMS TO CARRY THE WORK IS BY CONTRACT WORK. THE CONTRACTOR IS SELECTED BY INVITING TENDER S IN ACCORDANCE WITH PROCEDURES PRESCRIBED IN KARNATAKA TRANSPARENCY ACT IN PUBLIC PROCUREMENT ACT, 1999 [KTPP ACT]. THE TENDERS RECE IVED ARE COMPARED WITH THE ESTIMATED RATES. THE TENDERER WHOSE TENDER IS LOWEST AND FULFILS ALL THE PRESCRIBED FINANCIAL AND TECHNICAL ELIGIBILITY CRITERIA IS SELECTED. THUS, RATES ARE FIXED BY FOLLOWING THE PROCEDURES PRESCRI BED IN KTPP ACT. ITA NO.283/BANG/2015 PAGE 13 OF 24 25. IN VIEW OF THE ABOVE, IT WAS PRAYED THAT THE A SSESSEE HAS TO BE GRANTED EXEMPTION U/S. 11 OF THE ACT. 26. THE CIT(A) DID NOT AGREE WITH THE SUBMISSION M ADE 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 ASSESSEES ACTIVITIES HAVE TO BE CARRIED OUT WI THOUT ANY PROFIT MOTIVE. THERE IS ALSO NO PROHIBITION THROUGH ANY G OVERNMENT ORDER THAT PREVENTS THE ASSESSEE FROM MAKING PROFIT S OR GENERATING SURPLUS. 2. THE ACTIVITIES OF THE ASSESSEE SHOWED COMPONENTS OF SYSTEMATIC BUSINESS ACTIVITY EMPLOYING HUMAN AND TE CHNICAL RESOURCES, AND CONSCIOUSLY CONDUCTED FOR HEALTHY SU RPLUS GENERATION. THE ASSESSEE HAD TO SUPPORT ITS EXPEND ITURE THROUGH ITS OWN REVENUE INFLOWS WITHOUT ANY GOVERNMENT GRAN TS OR SUBSIDY. THE ASSESSEE DID GENERATE SURPLUS FROM OP ERATIONS DURING THE PREVIOUS YEAR. 3. THE ASSESSEE PROVIDES SERVICE OF PROJECT SUPERVI SION AGAINST THE RECEIPT OF ESTABLISHMENT, SUPERVISION A ND ADMINISTRATION CHARGES (ETP CHARGES) FROM ULBS AND SALE OF WATER AGAINST A FEE/CESS AND THESE FACTORS CLEARLY INDICATE THAT THE ASSESSEES ACTIVITIES ARE IN THE NATURE OF BUSINESS /COMMERCE. THOUGH SUPPLY OF WATER MIGHT BE A CONSTITUTIONAL DU TY OF THE GOVERNMENT, THE FACT THAT THE ASSESSEE FACILITATES PERFORMANCE OF SUCH DUTY WILL NOT RENDER THE ASSESSEES ACTIVITY A S 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 IT IN DICATES INEFFICIENT OPERATION OF THE ASSESSEE. THE FACT THAT THE ASSESSEE EXECUTES PROJECT ON BEHA LF OF THE ULBS AND NOT FOR PRIVATE PARTIES CANNOT BE THE BASI S TO HOLD THAT ITA NO.283/BANG/2015 PAGE 14 OF 24 THE ASSESSEES ACTIVITIES ARE NOT IN THE NATURE OF TRADE OR COMMERCE. 27. AGGRIEVED BY THE ORDER OF THE CIT(A), THE A SSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 28. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED C OUNSEL FOR THE ASSESSEE AND THE LEARNED DR. THE LEARNED COUNSEL F OR THE ASSESSEE REITERATED SUBMISSIONS AS WERE MADE BEFORE CIT(A) O N 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 RE LIED 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 U NDER KARNATAKA ACT NO. 25 OF 1974 (FIRST PUBLISHED IN THE KARNATAK A GAZETTE EXTRAORDINARY ON THE TWENTY-FIRST DAY OF AUGUST, 19 74). THE KARNATAKA URBAN WATER SUPPLY AND DRAINAGE BOARD ACT, 1973. TH E PREAMBLE TO THE ACT GIVES THE OBJECTS AND REASONS W HICH READS THUS: AN ACT TO PROVIDE FOR THE ESTABLISHMENT OF A WATER SUPPLY AND DRAINAGE BOARD AND THE REGULATION AND DEVELOPMENT O F DRINKING WATER AND DRAINAGE FACILITIES IN THE URBAN AREAS OF THE STATE OF KARNATAKA. WHEREAS IT IS EXPEDIENT TO PROVIDE FOR THE ESTABLIS HMENT OF A WATER SUPPLY AND DRAINAGE BOARD AND THE REGULATIO N AND DEVELOPMENT OF DRINKING WATER AND DRAINAGE FACILITI ES IN THE URBAN ITA NO.283/BANG/2015 PAGE 15 OF 24 AREAS OF THE STATE OF KARNATAKA AND FOR MATTERS CON NECTED THEREWITH; 30. BY SEC.3 OF THE KUWSDB ACT, THE ASSESSEE WAS CR EATED AS A BODY CORPORATE. THE SAID PROVISION READS AS FOLLOWS: SEC.3. CREATION AND INCORPORATION OF THE BOARD.- T HE DUTY OF CARRYING OUT THE PROVISIONS OF THIS ACT SHALL, SUBJ ECT TO THE RESTRICTIONS, CONDITIONS AND LIMITATIONS THEREIN CO NTAINED BE VESTED IN A BOARD TO BE CALLED THE KARNATAKA URBAN WATER SUPP LY AND DRAINAGE BOARD AND SUCH BOARD SHALL BE A BODY CORPO RATE AND HAVE PERPETUAL SUCCESSION AND A COMMON SEAL AND SHALL BY THE SAID NAME SUE AND BE SUED. 31. THE FUNCTIONS AND POWERS OF THE ASSESSEE ARE SE T OUT IN SEC.16, 17 & 18 OF THE KUBWSDB ACT, WHICH READS AS FOLLOWS: POWERS AND FUNCTIONS OF THE BOARD 16. FUNCTIONS OF THE BOARD.- (1) THE BOARD SHALL BE CHARGED WITH THE FUNCTIONS OF PROVIDING FINANCIAL ASSISTANCE BY WAY OF LOANS AND ADVANCES TO THE LOCAL AUTHORITY IN THE STATE FOR AS SISTING IN PROVIDING FOR THE FOLLOWING AMENITIES, NAMELY:- (I) WATER SUPPLY AND DRAINAGE FOR URBAN AREAS; AND (II) OTHER ACTIVITIES WHICH ARE ENTRUSTED TO THE BO ARD FROM TIME TO TIME BY THE GOVERNMENT. 17. OTHER FUNCTIONS OF THE BOARD.- (1)THE BOARD SH ALL PERFORM ALL OR ANY OF THE FOLLOWING FUNCTIONS, NAMELY:- (A) AT THE INSTANCE OF THE GOVERNMENT OR A LOCAL AU THORITY OR SUO MOTU,- (I) INVESTIGATING THE NATURE AND TYPE OF SCHEMES TH AT CAN BE IMPLEMENTED IN THE AREA OF ANY LOCAL AUTHORI TY FOR THE PROVISION OF DRINKING WATER AND DRAINAGE FACILITIES; (II) PLANNING AND PREPARING OF SCHEMES INCLUDING SCHEMES COVERING AREAS FALLING WITHIN THE JURISDICT ION OF MORE THAN ONE LOCAL AUTHORITY FOR THE PURPOSE OF PROVIDING THE SUPPLY OF DRINKING WATER OR DRAINAGE FACILITIES; ITA NO.283/BANG/2015 PAGE 16 OF 24 (III) EXECUTING SUCH SCHEMES UNDER A PHASED PROGRAMME FOR THE PROVISION OF DRINKING WATER AND DRAINAGE FACILITIES WITHIN THE AREAS OF LOCAL AUTHO RITIES TO WHICH SUCH SCHEMES RELATE ; (IV) OPERATION AND MAINTENANCE OF DRINKING WATER SUPPLY AND DRAINAGE UNDERTAKINGS EITHER WHOLLY OR I N PART AND SUBJECT TO SUCH TERMS AND CONDITIONS AS TH E GOVERNMENT MAY SPECIFY; (V) LEVY AND COLLECTION OF WATER RATES, FEES, RENTA LS AND OTHER CHARGES IN RESPECT OF SUCH UNDERTAKINGS AS TH E STATE GOVERNMENT MAY SPECIFY. (B) PROVIDING TECHNICAL ASSISTANCE OR GIVING ADVICE TO LOCAL AUTHORITIES IN THE EXECUTION AND MAINTENANCE OF URB AN WATER SUPPLY AND DRAINAGE WORKS; (C) ESTABLISHING AND MAINTAINING SCHEMES INCIDENTAL TO URBAN WATER SUPPLY AND DRAINAGE SUCH AS TESTING OF WATER, DESIGNING OF PLANT FOR PURIFICATION OF WATER, CONDUCTING RESE ARCH RELATING TO URBAN WATER SUPPLY AND MAINTAINING FARM SCHEMES; (D) ANY OTHER MATTER WHICH IS SUPPLEMENTAL, INCIDEN TAL OR CONSEQUENTIAL TO ANY OF THE ABOVE FUNCTIONS; AND (E) SUCH OTHER FUNCTIONS AS MAY BE PRESCRIBED. (2) NO SCHEME ESTIMATED TO COST MORE THAN TEN LAKHS OF RUPEES SHALL BE CARRIED OUT BY THE BOARD EXCEPT WIT H THE PREVIOUS APPROVAL OF THE STATE GOVERNMENT. 18. GENERAL POWERS OF THE BOARD.- THE BOARD SHALL F OR THE PURPOSE OF CARRYING OUT ITS FUNCTIONS UNDER THIS AC T. HAVE THE FOLLOWING POWERS, NAMELY:- (I) TO ACQUIRE AND HOLD SUCH MOVABLE AND IMMOVABLE PROPERTY AS IT DEEMS NECESSARY AND TO LEASE, SELL O R OTHERWISE TRANSFER ANY SUCH PROPERTY SUBJECT TO SUC H CONDITIONS AS MAY BE PRESCRIBED; (II) TO ACQUIRE UNDER THE LAND ACQUISITION ACT, 18 94 (CENTRAL ACT I OF 1894) ANY LAND OR ANY INTEREST TH EREIN REQUIRED BY THE BOARD FOR IMPLEMENTING ANY SCHEMES; (III) TO INCUR EXPENDITURE AND UNDERTAKE ANY WORK I N ANY AREA IN THE STATE FOR THE PREPARATION AND EXECUTION OF SUCH SCHEMES AS IT MAY CONSIDER NECESSARY FOR THE PURPOSE OF CARRYING OUT THE PROVISIONS OF THIS ACT, OR AS THE CASE MAY BE, THE FUNCTIONS ENTRUSTED TO IT BY T HE GOVERNMENT ; (IV) TO ENTER INTO ANY CONTRACT; AND (V) TO DO ALL THINGS NECESSARY FOR THE PURPOSE OF CARRYING OUT THE PROVISIONS OF THIS ACT. ITA NO.283/BANG/2015 PAGE 17 OF 24 32. CHAPTER VI CONTAINING SECS.19 TO 28 H OF THE KU WSDB ACT PROVIDES AS TO HOW THE ASSESSEE HAS TO INVESTIGATE, PREPARE AND EXECUTE, MAINTAIN SCHEMES BY THE ASSESSEE. THE COST OF ANY SCHEME HA S TO BE BORNE ONLY BY THE ULBS. IT IS CLEAR FROM THESE PROVISIONS THA T 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 DIRE CTED BY THE STATE GOVERNMENT TO BE CARRIED OUT BY THE ASSESSEE. OTHE RWISE THE SCHEMES WHEN COMPLETED ARE HANDED OVER TO THE URBAN LOCAL B ODIES (ULBS). WHEN A SCHEME IS DIRECTED TO BE MAINTAINED AND OPER ATED BY THE ASSESSEE, THE ALL RESERVOIRS, TANKS, CISTERNS, FOUN TAINS, WELLS, PUMPS, CONDUITS AND OTHER WORKS AND WATER SCHEME AND THE S EWERS ETC., AS THE CASE MAY BE, SHALL VEST WITH THE ASSESSEE. IT IS O NLY IN RESPECT OF SCHEMES WHICH VEST WITH THE ASSESSEE PURSUANT TO DIRECTION OF THE GOVERNMENT THAT THE ASSESSEE HAS THE POWER TO LEVY RATES, FEES, REN TAL AND OTHER CHARGES IN RESPECT OF WATER SUPPLY OR SEWERAGE. IN THIS REGARD , THE PROVISIONS OF SEC.31A OF THE KUWSDB ACT, WHICH READS THUS: 31A. BOARDS POWER TO LEVY RATES ETC.- THE BOARD M AY, IN RESPECT OF ANY WATER SUPPLY OR SEWERAGE UNDERTAKING VESTING IN IT, LEVY RATES, FEES, RENTALS AND OTHER CHARGES AND MAY VARY SUCH R ATES, FEES, RENTALS AND OTHER CHARGES FROM TIME TO TIME IN ORDE R 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 IMPROVEMENT S; AND (D) TO PROVIDE FOR SUCH OTHER PURPOSES BENEFICIAL T O THE PROMOTION OF WATER SUPPLY AND SEWERAGE. ITA NO.283/BANG/2015 PAGE 18 OF 24 33. IT CAN BE SEEN FROM THE POWERS OF THE ASSESSEE TO LEVY AND COLLECT WATER CHARGES, FEES ETC., CANNOT HAVE ANY ELEMENT O F PROFIT AND IS BASED ONLY ON THE REQUIREMENTS FOR FULFILMENT OF THE PURP OSES SET OUT IN SEC.31A OF KUWSB ACT. IN ALL OTHER RESPECTS THE ASSESSEE ON LY ACTS AS A PERSON WHO EXECUTES THE SCHEME APPROVED BY THE GOVERNMENT FOR ULBS. PRIOR TO THE INTRODUCTION OF THE PROVISO TO SECTION 2(15) OF THE ACT, THERE WAS NO DISPUTE THAT THE ASSESSEE WAS ESTABLISHED FOR CHARI TABLE PURPOSES. THE INCOME DERIVED BY THE ASSESSEE IS IN THE FORM OF CO LLECTION OF WATER AND SEWERAGE CHARGES. THE DOMINANT AND MAIN OBJECT OF THE ASSESSEE AS WE HAVE ALREADY SEEN IS TO PROVIDE FOR THE ESTABLISHME NT OF A WATER SUPPLY AND DRAINAGE BOARD AND THE REGULATION AND DEVELOPME NT OF DRINKING WATER AND DRAINAGE FACILITIES IN THE URBAN AREAS OF THE S TATE OF KARNATAKA. THE SOURCE OF INCOME OF THE ASSESSEE AS CAN BE SEEN FRO M THE INCOME SIDE OF THE INCOME AND EXPENDITURE ACCOUNT IS FROM (A) ESTA BLISHMENT, ADMINISTRATION & SUPERVISION CHARGES IT RECEIVES FR OM ULBS, WATER CHARGES LEVIED BY IT, INTEREST ON FUNDS KEPT WITH THE BANK ON DEPOSITS. THE FUNDS THAT ARE NOT IMMEDIATELY REQUIRED FOR EXECUTION OF SCHEMES ARE PARKED IN DEPOSITS. THE ASSESSEE ALSO IS IN RECEIPT OF RENTA L INCOME. THE OTHER INCOME OF THE ASSESSEE IS FROM FINES, SALE OF TENDE R FORMS, REGISTRATION/RENEWAL FEES, SALE OF SCRAP, COST OF S R BOOK, OTHER RECEIPTS, P & L CONTRIBUTION OF BOARD, VENDOR ASSESSMENT CHARGE S. 34. A LOOK AT THE INCOME STREAM OF THE ASSESSEE CLE ARLY REVEALS THAT ALL THE ACTIVITIES FROM WHICH THE ASSESSEE DERIVES INCO ME ARE AN INHERENT PART ITA NO.283/BANG/2015 PAGE 19 OF 24 OF THE MAIN OBJECT OF THE ASSESSEE. IT IS CLEAR FRO M 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 T O 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 GENERATED BY THE ASSESSEE DOES NOT FIND ITS WAY INTO THE POCKETS OF ANY INDIVIDUALS OR ENTITIES. IT IS TO BE UTILIZED FULLY FOR THE PURPOSES OF THE OBJECTS OF THE PETITIONER. 35. KEEPING IN MIND THE ABOVE FACTUAL ASPECTS AND T HE PROVISIONS OF THE KUWSDB ACT, WE SHALL NOW UNDERSTAND THE APPROACH TO BE ADOPTED IN COMING TO THE CONCLUSION AS TO WHETHER THE PROVISO TO SEC.2(15) OF THE ACT WILL BE APPLICABLE TO THE ASSESSEE IN THE LIGHT OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIA TRADE PROMOTI ON ORGANIZATION VS. DGIT(EXEMPTION) AND OTHERS 371 ITR 333 (DELHI). TH E LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED STRONG RELIANCE ON THIS DEC ISION TO SUPPORT HIS PLEA THAT THE PROVISO TO SEC.2(15) OF THE ACT IS NO T APPLICABLE TO ASSESSEE. THE FACTS OF THE CASE BEFORE THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIA TRADE PROMOTION ORGANIZATION (SUPRA) WAS THAT THE ASSESSEE IN THAT CASE ENJOYED THE BENEFIT OF EXEMPTION U/S.10(23C)(I V) OF THE ACT. SEC.10(23C)(IV) PROVIDES ANY INCOME RECEIVED BY ANY PERSON ON BEHALF OF ANY OTHER FUND OR INSTITUTION ESTABLISHED FOR CHARI TABLE PURPOSES WHICH MAY BE APPROVED BY THE PRESCRIBED AUTHORITY, HAVING REG ARD TO THE OBJECTS OF THE FUND OR INSTITUTION AND ITS IMPORTANCE THROUGHOUT I NDIA OR THROUGHOUT ANY ITA NO.283/BANG/2015 PAGE 20 OF 24 STATE OR STATES, SHALL NOT FORM PART OF THE TOTAL I NCOME UNDER THE ACT. THE PRESCRIBED AUTHORITY WITHDREW THE APPROVAL GRANTED 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 DE RIVING INCOME FROM SALE OF TICKETS AND INCOME FROM FOOD AND BEVERAGE OUTLETS. THE SAID WITHDRAWAL WAS CHALLENGED BY THE ASSESSEE BEFORE THE HONBLE D ELHI HIGH COURT. THE HONBLE DELHI HIGH COURT HAD TO GO INTO THE QUESTIO N AS TO THE SCOPE OF THE PROVISO TO SEC.2(15) OF THE ACT. THE HONBLE DELHI HIGH COURT HAS LAID DOWN THE FOLLOWING VERY IMPORTANT PRINCIPLES AS TO HOW THE PROVISO TO SEC.2(15) OF THE ACT HAS TO BE INTERPRETED. (I) THE PROVISO TO SEC.2(15) OF THE ACT INTRODUCED BY VIRTUE OF THE FINANCE ACT, 2008 WITH EFFECT FROM 01.04.2009 HAS T WO PARTS. THE FIRST PART HAS REFERENCE TO THE CARRYING ON OF ANY ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS. THE SECOND PART HAS REFERENCE TO ANY ACTIVITY OF RENDERING ANY SERVICE IN RELATION TO ANY TRADE, COMMERCE OR BUSINESS. BOTH THESE PARTS ARE FURTHER SUBJECT TO THE CONDITION THAT THE ACTIVITIES SO CARRIED OUT ARE FO R 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 CONSIDERATIO N, INCOME IS GENERATED BY ANY OF THE TWO SETS OF ACTIVITIES REFE RRED TO ABOVE, THE NATURE OF USE OF SUCH INCOME OR APPLICATION OR RETE NTION OF SUCH INCOME IS IRRELEVANT FOR THE PURPOSES OF CONSTRUING THE ACTIVITIES AS CHARITABLE OR NOT. (II) IF AN ACTIVITY IN THE NATURE OF TRADE, COMMER CE OR BUSINESS IS CARRIED ON AND IT GENERATES INCOME, THE FACT THAT S UCH INCOME IS APPLIED FOR CHARITABLE PURPOSES, WOULD NOT MAKE ANY DIFFERENCE AND THE ACTIVITY WOULD NONETHELESS NOT BE REGARDED AS B EING CARRIED ON FOR A CHARITABLE PURPOSE. IF A LITERAL INTERPRETATI ON IS TO BE GIVEN TO THE PROVISO, THEN IT MAY BE CONCLUDED THAT THIS FACT WO ULD HAVE NO BEARING ON DETERMINING THE NATURE OF THE ACTIVITY C ARRIED ON BY THE PETITIONER. BUT, IN DECIDING WHETHER ANY ACTIVITY IS IN THE NATURE OF ITA NO.283/BANG/2015 PAGE 21 OF 24 TRADE, COMMERCE OR BUSINESS, IT HAS TO BE EXAMINED WHETHER THERE IS AN ELEMENT OF PROFIT MAKING OR NOT. SIMILARLY, WHIL E CONSIDERING WHETHER ANY ACTIVITY IS ONE OF RENDERING ANY SERVIC E IN RELATION TO ANY TRADE, COMMERCE OR BUSINESS, THE ELEMENT OF PROFIT MAKING IS ALSO VERY IMPORTANT. (III) THE MEANING OF THE EXPRESSION 'CHARITABLE PU RPOSES' HAS TO BE EXAMINED IN THE CONTEXT OF INCOME, BECAUSE, IT IS ONLY WHEN THERE IS INCOME THE QUESTION OF NOT INCLUDING THAT INCOME IN THE TOTAL INCOME WOULD ARISE. THEREFORE, MERELY BECAUSE AN IN STITUTION, WHICH OTHERWISE IS ESTABLISHED FOR A CHARITABLE PURPOSE, RECEIVES INCOME WOULD NOT MAKE IT ANY LESS A CHARITABLE INSTITUTION . WHETHER THAT INSTITUTION, WHICH IS ESTABLISHED FOR CHARITABLE PU RPOSES, WILL GET THE EXEMPTION WOULD HAVE TO BE DETERMINED HAVING REGARD TO THE OBJECTS OF THE INSTITUTION AND ITS IMPORTANCE THROUGHOUT IN DIA OR THROUGHOUT ANY STATE OR STATES. (IV) MERELY BECAUSE AN INSTITUTION DERIVES INCOME O UT OF ACTIVITIES WHICH MAY BE COMMERCIAL, THAT DOES, IN ANY WAY, AFF ECT THE NATURE OF THE INSTITUTION AS A CHARITABLE INSTITUTION IF IT O THERWISE QUALIFIES FOR SUCH A CHARACTER. (V) MERELY BECAUSE A FEE OR SOME OTHER CONSIDERATIO N IS COLLECTED OR RECEIVED BY AN INSTITUTION, IT WOULD NOT LOSE ITS C HARACTER OF HAVING BEEN ESTABLISHED FOR A CHARITABLE PURPOSE. IF THE D OMINANT ACTIVITY OF THE INSTITUTION WAS NOT BUSINESS, TRADE OR COMMERCE , THEN ANY SUCH INCIDENTAL OR ANCILLARY ACTIVITY WOULD ALSO NOT FAL L WITHIN THE CATEGORIES OF TRADE, COMMERCE OR BUSINESS. IF THE DRIVING FORC E IS NOT THE DESIRE TO EARN PROFITS BUT TO DO CHARITY, THE EXCEPTION CA RVED OUT IN THE FIRST PROVISO TO SECTION 2(15) OF THE SAID ACT WOULD NOT APPLY. (VI) IF A LITERAL INTERPRETATION WERE TO BE GIVEN T O THE SAID PROVISO, THEN IT WOULD RISK BEING HIT BY ARTICLE 14 (THE EQUALITY CLAUSE ENSHRINED IN ARTICLE 14 OF THE CONSTITUTION). COURTS SHOULD ALWA YS ENDEAVOUR TO UPHOLD THE CONSTITUTIONAL VALIDITY OF A PROVISION A ND, 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. SE CTION 2 BEGINS WITH THE WORDS, IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQUIRES . THE EXPRESSION 'CHARITABLE PURPOSE' APPEARING IN SECTIO N 2(15) OF THE SAID ACT HAS TO BE SEEN IN THE CONTEXT OF SECTION 1 0(23C)(IV). WHEN THE EXPRESSION 'CHARITABLE PURPOSE', AS DEFINED IN SECTION 2(15) OF THE SAID ACT, IS READ IN THE CONTEXT OF SECTION 10( 23C)(IV) OF THE SAID ACT, WE WOULD HAVE TO GIVE UP THE STRICT AND LITERA L INTERPRETATION ITA NO.283/BANG/2015 PAGE 22 OF 24 SOUGHT TO BE GIVEN TO THE EXPRESSION 'CHARITABLE PU RPOSE' BY THE REVENUE. (VIII) THE EXPRESSION 'CHARITABLE PURPOSE', AS DEFI NED IN SECTION 2(15) CANNOT BE CONSTRUED LITERALLY AND IN ABSOLUTE TERMS. THE CORRECT INTERPRETATION OF THE PROVISO TO SECTION 2( 15) OF THE SAID ACT WOULD BE THAT IT CARVES OUT AN EXCEPTION FROM THE C HARITABLE PURPOSE OF ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLI C UTILITY AND THAT EXCEPTION IS LIMITED TO ACTIVITIES IN THE NATURE OF TRADE, COMMERCE OR BUSINESS OR ANY ACTIVITY OF RENDERING ANY SERVICE I N RELATION TO ANY TRADE, COMMERCE OR BUSINESS FOR A CESS OR FEE OR AN Y OTHER CONSIDERATION. IN BOTH THE ACTIVITIES, IN THE NATUR E OF TRADE, COMMERCE OR BUSINESS OR THE ACTIVITY OF RENDERING ANY SERVIC E IN RELATION TO ANY TRADE, COMMERCE OR BUSINESS, THE DOMINANT AND THE P RIME OBJECTIVE HAS TO BE SEEN. IF THE DOMINANT AND PRIME OBJECTIVE OF THE INSTITUTION, WHICH CLAIMS TO HAVE BEEN ESTABLISHED FOR CHARITABL E PURPOSES, IS PROFIT MAKING, WHETHER ITS ACTIVITIES ARE DIRECTLY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS OR INDIRECTLY IN THE RENDERING OF ANY SERVICE IN RELATION TO ANY TRADE, COMMERCE OR BUSINESS, THEN I T WOULD NOT BE ENTITLED TO CLAIM ITS OBJECT TO BE A 'CHARITABLE PU RPOSE'. ON THE FLIP SIDE, WHERE AN INSTITUTION IS NOT DRIVEN PRIMARILY BY A DESIRE OR MOTIVE TO EARN PROFITS, BUT TO DO CHARITY THROUGH T HE ADVANCEMENT OF AN OBJECT OF GENERAL PUBLIC UTILITY, IT CANNOT BUT BE REGARDED AS AN INSTITUTION ESTABLISHED FOR CHARI TABLE PURPOSES. (EMPHASIS SUPPLIED) 36. THE PRINCIPLE LAID DOWN IN THE AFORESAID DECISI ON, IN OUR VIEW, IF APPLIED TO THE FACTS OF THE PRESENT CASE, WILL CLEA RLY SHOW THAT THE ASSESSEE DOES NOT DRIVEN PRIMARILY BY DESIRE OR MOTIVE TO EA RN 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 THE ACTUAL INCOME RECEIVED ON OPERATIONS OF THE ASSESSEE AND THE EXPE NDITURE INCURRED SET OUT IN PARA-14 OF THIS ORDER. THE INCOME OF THE ASS ESSEE IS PRIMARILY CONSISTS OF ESTABLISHMENT, ADMINISTRATION AND SUPER VISION CHARGES, WATER CHARGES, INTEREST, RENT AND OTHER INCOME (COMPRISIN G OF HIRE CHARGES, FINES, ITA NO.283/BANG/2015 PAGE 23 OF 24 SALE OF SCRAP, TENDER FORMS ETC.). IF INTEREST, RE NT AND OTHER INCOME ARE EXCLUDED AND COMPARED WITH THE EXPENDITURE ON OPERA TIONS INCURRED BY THE ASSESSEE, IT BECOMES CLEAR THAT THE ASSESSEE DOES N OT HAVE PROFIT MOTIVE. THE PROVISO TO SEC.2(15) OF THE ACT IS THEREFORE NO T APPLICABLE TO THE CASE OF THE ASSESSEE. WE THEREFORE HOLD THAT THE ASSESS EE IS ENTITLED TO THE BENEFITS OF SEC.11 OF THE ACT FOR THE IMPUGNED ASSE SSMENT YEARS. THE AO HAS NOT DISPUTED THE CONDITIONS NECESSARY FOR ALLOW ING EXEMPTION U/S.11 OF THE ACT, EXCEPT THE APPLICABILITY OF PROVISO TO SEC .2(15) OF THE ACT. IN VIEW OF OUR CONCLUSIONS THAT THE SAID PROVISO IS NOT APP LICABLE TO THE CASE OF THE ASSESSEE, WE HOLD THAT THE ASSESSEES INCOME IS NOT INCLUDIBLE IN THE TOTAL INCOME AND THEREFORE THE INCOME RETURNED BY THE ASS ESSEE IS DIRECTED TO BE ACCEPTED. 37. SEVERAL OTHER CONTENTIONS REGARDING APPLICABILI TY OF SEC.10(2) OF THE ACT, SEC.10(46) OF THE ACT AND WHETHER THE LEVY OF TAX WOULD BE IMPROPER IN VIEW OF ARTICLE 289(1) OF THE CONSTITUTION OF INDIA , WERE ADVANCED BEFORE US. WE HAVE NOT DEALT WITH THOSE CONTENTIONS, IN VIEW O F OUR CONCLUSION ON THE APPLICABILITY OF THE PROVISO TO SEC.2(15) OF THE AC T TO THE ASSESSEE. 38. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF SEPTEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 4 TH SEPTEMBER, 2015. /D S/ ITA NO.283/BANG/2015 PAGE 24 OF 24 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.