Karnataka Industrial Areas Development Board, V. Addl.DIT,

ITA 378/BANG/2013

• Counselvise Citation: 37821114 RSA 2013
• Duration Of Justice: 2 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 25-08-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 22-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Charitable institution; Cost of acquisition; Competent authority; Benefit of exemption
• Section: 143(3); 5(2); 32; 12; 28; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.378/BANG/2013 ASSESSMENT YEAR : 2009-10 M/S. KARNATAKA INDUSTRIAL AREA DEVELOPMENT BOARD, NO.14/3, 2 ND FLOOR, R.P. BUILDING, NRUPATHUNGA ROAD, BANGALORE 560 001. PAN: AAATK 1350J VS. THE ADDITIONAL DIRECTOR OF INCOME TAX (EXEMPTIONS), RANGE 17, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA RESPONDENT BY : SMT. NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 25.08.2015 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)-V, BANGALORE RELATI NG TO ASSESSMENT YEAR 2011-12. ITA NO.378/BANG/2013 PAGE 2 OF 27 2. THE ASSESSEE FOR THE AY 2009-10 FILED A RETURN . OF INCOME DECLARING NIL INCOME AFTER CLAIMING EXEMPTION U/S 11 OF INCOM E 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 WAT ERSHEDS, 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 ITA NO.378/BANG/2013 PAGE 3 OF 27 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. 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. IN TH E ORDER OF ASSESSMENT, THE ASSESSING OFFICER HAS CONCLUDED THAT:- (A) THE ASSESSEE IS NOT A CHARITABLE ORGANIZATION AS PER THE DEFINITION OF CHARITABLE PURPOSE U/S. 2(15) READ WITH PROVIS OS THEREUNDER; (B) THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION U/S. 11 / 12 OF THE ACT. THE AFORESAID CONCLUSIONS WERE DRAWN FOR THE FO LLOWING REASONS:- (I) THE ASSESSEE HAS EARNED A PROFIT OF RS.155,76, 64,004 FOR THE YEAR ENDING 31.3.2009; (II) THE SAID PROFIT WAS AROUND 80% OF TOTAL INCOME . THE SAME WAS MUCH MORE THAN ANY PRIVATE BUILDERS PROFIT ENG AGED IN SIMILAR KIND OF BUSINESS. (III) THE ASSESSEE HAS BEEN EARNING PROFITS SYSTEMA TICALLY OVER LAST FEW YEARS; (IV) THESE PROFITS HAVE BEEN EARNED BY SYSTEMATIC C OMMERCIAL ACTIVITY IN THE NATURE OF SALE OF LAND AND PROVIDIN G OF SERVICES; (V) THE ASSESSEE IS RUNNING PURELY ON COMMERCIAL PRINCIPLES; AND (VI) THE COMPETENT AUTHORITY I.E.. DIRECTOR OF INCO ME TAX (EXEMPTIONS). BANGALORE HAS CANCELLED THE REGISTRAT ION GRANTED UNDER SECTION L2A VIDE ORDER DATED 28.10.20 11 AND HENCE, THE ASSESSEES INCOME CAN ONLY BE COMPUTED U NDER NORMAL PROVISIONS OF THE ACT IN THE STATUS OF AN AS SOCIATION OFPERSONS (AOP). ITA NO.378/BANG/2013 PAGE 4 OF 27 7. ON THE BASIS OF THE AFORESAID CONCLUSIONS / REAS ONS, THE AO ASSESSED TO TAX THE EXCESS OF INCOME OVER EXPENDITU RE AMOUNTING TO RS. 156.39.68,078/- UNDER NORMAL PROVISIONS OF THE ACT AND EXEMPTION UNDER SECTION 11 OF THE ACT WAS DENIED. THE AO ASSESSED T HE ASSESSEE IN THE STATUS OF ASSOCIATION OF PERSONS (AOP) AND LEVIED T AX AT 30% OF THE ASSESSED INCOME. 8. THE CIT(APPEALS) CONFIRMED THE ORDER OF THE ASSE SSING OFFICER. 9. IN RESPECT OF THE ORDER PASSED UNDER SECTION 12 AA(3) CANCELLING REGISTRATION GRANTED U/S. 12AA(3), THE ASSESSEE HAD FILED AN APPEAL BEFORE THE TRIBUNAL. THE SAID APPEAL WAS ALLOWED BY THE T RIBUNAL VIDE ORDER DATED 31.1.2013. THE REVENUE CHALLENGED THE ORDER OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT OF KARNATAKA. PENDING ADMISSION OF THE REVENUES APPEAL, THE HONBLE HIGH COURT VIDE ORDER DATED 14. 8.2013 HAS STAYED THE OPERATION OF THE ORDER DATED 31.1.2013. IT IS IN T HIS BACKGROUND THAT THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE TH E TRIBUNAL. 10. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED C OUNSEL FOR THE ASSESSEE AND THE LEARNED DR. 11. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAD NO JURISDICTION TO ASSESS THE ASSESSEE AFTER CANCELLAT ION OF THE REGISTRATION BY THE DIT (EXEMPTIONS). NOTIFICATION NO.880(E) DATED 14.9.2001 GRANTED JURISDICTION TO THE DIRECTOR OF INCOME-TAX (E) IN C ASE OF ASSESSEES CLAIMING ITA NO.378/BANG/2013 PAGE 5 OF 27 EXEMPTION UNDER SECTION11 (BEING HEADQUARTERED IN B ANGALORE). A DEPUTY DIRECTOR OF INCOME-TAX (EXEMPTIONS) CANNOT ASSUME JURISDICTION UNLESS SO AUTHORISED. THE ASSESSMENT MADE AND THE ORDER PASSE D UNDER SECTION 143(3) BY THE LEARNED ADDITIONAL DIRECTOR OF INCOME TAX (EXEMPTIONS) - RANGE 17, BANGALORE IN THE CASE OF A NON-CHARITABL E ORGANIZATION [AS PER THE ORDER PASSED UNDER SECTION I2AA(3)], IS THEREFO RE BAD IN LAW AND LIABLE TO BE QUASHED. 12. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER S UBMITTED THAT THE ORDER PASSED IN THE STATUS OF AOP (TRUST) IS BAD IN LAW. IT WAS SUBMITTED BY HIM THAT SECTION 2(31) OF THE ACT DEFINES PERSON I N AN INCLUSIVE MANNER. BEING INCLUSIVE IN NATURE. IT HAS TO BE GIVEN A BRO AD MEANING. SEVEN CATEGORIES OF PERSONS ARE MENTIONED IN SECTION 2(31 ). THESE ARE NATURAL PERSONS AS WELL AS JURISTIC PERSONS. CLAUSE (VII) T HEREIN CLARIFIES THAT EVERY ARTIFICIAL JURIDICAL PERSON, NOT FALLING WITHIN CLA USES (I) TO (VI) OF SECTION 2(31) IS ALSO A PERSON FOR THE PURPOSE OF THE ACT. BY T HE FINANCE ACT, 2002, WITH EFFECT FROM APRIL 1, 2003, AN EXPLANATION WAS INSER TED TO SECTION 2(31) WHICH MAKES IT CLEAR THAT, INTER ALIA, AN ARTIFICIA L JURIDICAL PERSON SHALL BE DEEMED TO BE A PERSON WHETHER OR NOT IT IS ESTABLIS HED OR INCORPORATED WITH THE OBJECT OF DERIVING INCOME, PROFITS OR GAINS. 13. AS PER SECTION 5(2) OF THE KARNATAKA INDUSTRIAL AREAS DEVELOPMENT ACT, 1966 (HEREINAFTER REFERRED TO AS KIAD OR KIAD ACT), THE BOARD CONSTITUTED UNDER SUCH ACT (WHICH IS THE ASSESSEE I N THE PRESENT APPEAL) ITA NO.378/BANG/2013 PAGE 6 OF 27 SHALL BE A BODY CORPORATE HAVING PERPETUAL SUCCESSI ON AND A COMMON SEAL WITH POWER TO ACQUIRE, HOLD AND DISPOSE OF THE PROP ERTY AND MAY BY ITS CORPORATE NAME SUE AND BE SUED. A BODY CORPORATE IS A PERSON. HE REFERRED TO THE DECISION OF THE SUPREME COURT IN ASSISTANT COMMISSIONER, ASSESSMENT II,. BANGALORE V. VELLIAPPA TEXTILES LTD . (2003) 263 ITR 550 (SC) IN SUPPORT OF THE ABOVE STAND THAT A BODY CORPORATE IS A PERSON. ONCE THE BOARD IS FORMED, IT WOULD BECOME A JURIDICAL PE RSON AS OPPOSED TO NATURAL PERSONS. ACTIVITIES AND FUNCTIONS OF THE AP PELLANT ARE CARRIED ON IN THE NAME OF THE ASSESSEE BOARD AND NOT IN THE NAME OF THE PERSONS WHO FORM THE SAID BOARD. THE PROPERTIES OF THE ASSESSEE VEST IN THE NAME OF THE ASSESSEE MANAGED BY THE BOARD (SECTION 18 OF KIAD A CT). THEREFORE THE ASSESSEE IS AN ARTIFICIAL JURIDICAL PERSON RATHER THAN ASSOCIATION OF PERSONS. THEREFORE THE STATUS OF THE ASSESSEE IS AJP. 14. IT WAS SUBMITTED THAT IN THE ORDER PASSED UNDER SECTION 143(3), THE AO HAS ASSESSED THE ASSESSEE IN THE STATUS OF ASSO CIATION OF PERSONS. IN THE FOLLOWING DECISIONS, IT HAS BEEN HELD THAT W HEN RETURN OF INCOME IS FILED IN ONE STATUS AND ASSESSMENT IS MADE UNDER A DIFFERENT STATUS, WITHOUT INITIATION OF PROCEEDINGS AGAINST THE ASSESSEE IN A STATUS IN WHICH ASSESSMENT IS INTENDED TO BE FRAMED, IS BAD IN LAW. CWT V RIBKARAI, [1972] 84 ITR 705 (RAJ) CIT V ADINARAYANA MURTHY K [1967] 65 ITR 607 (SC) CIT V ASSOCIATED CEMENT AND STEEL AGENCIES [1984] 1 47 ITR 776 (BOM) CWT V JAGDISH PURI [1987] 163 ITR 458 (RAJ) ITA NO.378/BANG/2013 PAGE 7 OF 27 CIT V SOBHAGMAL MISHRILAL SEMLAVADA [1997] 223 ITR 554 (MP) CWT V SRIVASTAVA (J.K.) AND SONS [1983] 142 ITR 183 (ALL) CIT V. SURESH CHANDRA GUPTA [1988] 173 ITR 407 (RAJ ) SRI NATH SURESH CHAND RAM NARESH V. CIT [2006] 280 ITR 396 (ALL) CIT V. RAM DAS DEOKINANDAN PRASAD (HUF) [2005] 277 ITR 197 (ALL)) KARAMSHIBHAI M THUMAR (HUF) V ITO, 12 DTR 534 (AHD TRI) SURAJ MAL (HUF) V ITO (2007) 110 TTJ 834 (DEL TM) 15. IT WAS SUBMITTED THAT IN VIEW OF THE ABOVE, THE ORDER PASSED U/S. 143(3) IS BAD IN LAW AND LIABLE TO BE QUASHED. 16. THE NEXT SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS ON THE APPLICABILITY OF THE PROVISO TO SEC.2(15) OF THE ACT TO THE ASSESSEE. IT WAS SUBMITTED THAT THE DEVELOPMENT OF INDUSTRIES IS THE DUTY OF THE STATE GOVERNMENT. INDUSTRIES, TRADE AND COMMERCE, PRODUC TION AND SUPPLY OF GOODS, LAND AND MATTERS CONNECTED THERETO ARE THE D OMAIN OF THE STATE GOVERNMENT UNDER LIST II - STATE LIST - SEVENTH SCH EDULE OF THE CONSTITUTION OF INDIA. THE CONSTITUTION OF CORPORATIONS, TRUSTS, BOARDS, ETC FOR THE PURPOSES OF LOCAL GOVERNMENT IS ALSO WITHIN THE POW ERS OF A STATE LEGISLATURE UNDER ENTRY NO. 5 OF THE STATE LIST. IT IS A BOUNDEN DUTY OF THE STATE GOVERNMENT TO CONTRIBUTE TOWARDS THE GROWTH A ND DEVELOPMENT OF INDUSTRIES. ITA NO.378/BANG/2013 PAGE 8 OF 27 17. THE DEVELOPMENT OF INDUSTRIES HAS MANY BENEFITS SUCH AS GENERATION OF EMPLOYMENT, PROVISION OF GOODS AND SE RVICES, GROWTH OF CITIES/TOWNS IN A PHASED MANNER, GROWTH OF ACTIVITI ES COMPLEMENTING AND SUPPLEMENTING THE VARIOUS REQUIREMENTS OF INDUSTRIE S, GROWTH OF HOUSING, INCREASE IN PER CAPITA INCOME, INCREASE IN STANDARD OF LIVING, INCREASE IN INCOME/WEALTH GENERATION ETC. INDUSTRIAL DEVELOPMEN T LEADS TO OVERALL ECONOMIC DEVELOPMENT OF THE STATE AND THE NATION. 18. OUR ATTENTION WAS DRAWN TO THE PREAMBLE OF TH E KARNATAKA INDUSTRIAL AREAS DEVELOPMENT ACT, 1966 (HEREINAFTER REFERRED TO AS KIAD) UNDER WHICH THE ASSESSEE WAS ESTABLISHED AS A BODY CORPORATE, WHICH READS THUS: AN ACT TO MAKE SPECIAL PROVISIONS FOR SECURING THE ESTABLISHMENT OF INDUSTRIAL AREAS IN THE STATE OF K ARNATAKA AND GENERALLY TO PROMOTE THE ESTABLISHMENT AND ORDERLY DEVELOPMENT OF INDUSTRIES THEREIN, AND FOR THAT PURPOSE TO ESTA BLISH AN INDUSTRIAL AREAS DEVELOPMENT BOARD AND FOR PURPOSES CONNECTED WITH THE MATTERS AFORESAID. WHEREAS IT IS EXPEDIENT TO MAKE SPECIAL PROVISIONS FOR SECURING THE ESTABLISHMENT OF INDUSTRIAL AREAS IN T HE STATE OF KARNATAKA AND GENERALLY TO PROMOTE THE ESTABLISHMEN T AND THE ORDERLY DEVELOPMENT OF INDUSTRIES IN SUCH INDUSTRIA L AREAS, AND FOR THAT PURPOSE TO ESTABLISH AN INDUSTRIAL AREAS DEVEL OPMENT BOARD AND FOR PURPOSES CONNECTED WITH THE MATTERS AFORESA ID; 19. HE BROUGHT TO OUR NOTICE THAT IN PURSUANCE OF T HE POWER VESTED UNDER SECTION 5 OF THE KIAD ACT, THE STATE GOVERNME NT HAS NOTIFIED A BOARD CALLED AS THE KARNATAKA INDUSTRIAL AREA DEVE LOPMENT BOARD (BOARD ITA NO.378/BANG/2013 PAGE 9 OF 27 IN SHORT) TO ACHIEVE THE OBJECTIVES OF THE KIAD ACT . THE PURPOSE OF ESTABLISHING THE BOARD IS PROVIDED UNDER SECTION 5( 1) OF THE KIAD ACT, WHICH PROVIDES: ESTABLISHMENT AND INCORPORATION. FOR THE PURPOS ES OF SECURING THE ESTABLISHMENT OF INDUSTRIAL AREAS IN T HE STATE OF KARNATAKA AND GENERALLY FOR PROMOTING THE RAPID AND ORDERLY ESTABLISHMENT AND DEVELOPMENT OF INDUSTRIES AND FOR PROVIDING INDUSTRIAL INFRASTRUCTURAL FACILITIES AND AMENITY I N INDUSTRIAL AREAS IN THE STATE OF KARNATAKA, THERE SHALL BE ESTABLISH ED BY THE STATE GOVERNMENT BY NOTIFICATION A BOARD BY THE NAME OF T HE KARNATAKA INDUSTRIAL AREA DEVELOPMENT BOARD. 20. KARNATAKA INDUSTRIAL AREAS DEVELOPMENT BOARD (K IADB) IS A WHOLLY OWNED INFRASTRUCTURE AGENCY OF GOVERNMENT OF KARNAT AKA. SET UP UNDER KARNATAKA INDUSTRIAL AREAS DEVELOPMENT ACT OF 1966. IT IS ESTABLISHED THROUGH A STATE GOVERNMENT NOTIFICATION. THE ASSESS EE IS A CREATION OF LAW. THE LAW WAS ENACTED WITH CERTAIN SPECIFIC OBJECTIVE S. THUS, THE OBJECTIVES FOR WHICH THE ASSESSEE IS CONSTITUTED WAS LAID OUT EVEN PRIOR TO ITS INCORPORATION. THE ASSESSEE AND ITS ACTIVITIES ARE THEREFORE RING FENCED TO THIS SPECIAL ACT, NAMELY KIAD ACT. 21. THE STATE GOVERNMENT CAN GIVE DIRECTIONS TO THE ASSESSEE, AS IN ITS OPINION, ARE NECESSARY OR EXPEDIENT FOR CARRYING OU T THE PURPOSES OF THE ACT AND IT IS THE DUTY OF THE ASSESSEE TO COMPLY WITH S UCH DIRECTIONS [SECTION 17 OF KIAD ACT]. ITA NO.378/BANG/2013 PAGE 10 OF 27 22. IT WAS NEXT HIGHLIGHTED THAT THE ASSESSEE CARRI ES ON ITS ACTIVITIES IN ACCORDANCE WITH THE PROVISIONS OF KIAD ACT. IT DOE S NOT HAVE THE UNFETTERED POWER TO CARRY ON ITS ACTIVITIES. IT FU NCTIONS WITHIN THE BROAD FRAMEWORK OF THE OBJECTIVES LAID DOWN H THE KIAD AC T. 23. THE WEBSITE OF THE ASSESSEE WHICH OUTLINES ITS AIMS AND OBJECTIVES AND FUNCTIONS. IT STATES: AIMS & OBJECTIVES : (A) PROMOTE RAPID AND ORDERLY DEVELOPMENT OF INDUS TRIES IN THE STALE. (B) ASSIST IN IMPLEMENTATION OF POLICIES OF GOVERN MENT WITHIN THE PURVIEW OF KIAD ACT. (C) FACILITATE IN ESTABLISHING INFRASTRUCTURE PROJ ECTS. (D) FUNCTION ON NO PROFIT - NO LOSS BASIS. FUNCTIONS : (A) ACQUIRE LAND AND FORM INDUSTRIAL AREAS IN THE STATE. (B) PROVIDE BASIC INFRASTRUCTURE IN THE INDUSTRIAL AREAS. () ACQUIRE LAND FOR SINGLE UNIT COMPLEXES. (D) ACQUIRE LAND FOR GOVERNMENT AGENCIES FOR THEIR SCHEMES AND INFRASTRUCTURE PROJECTS. APPLICATION OF APPELLANTS FUNDS & PROPERTY 24. THE FUNDS OF THE ASSESSEE CAN ONLY BE USED AS P ER THE PROVISIONS AND FOR THE PURPOSES OF THE KIAD ACT. SECTION 8 OF THE ACT PROVIDES THAT ALL PROPERTY AND ALL OTHER ASSETS VESTING IN THE ASSESS EE SHALL BE HELD AND ITA NO.378/BANG/2013 PAGE 11 OF 27 APPLIED BY IT, SUBJECT TO THE PROVISIONS AND FOR TH E PURPOSES OF THIS ACT. THE PURPOSE OF APPLICATION IS OUTLINED. THE FUNDS CANNO T BE DISTRIBUTED OR APPROPRIATED TO ANY PERSON UNLESS THE SAME IS IN AC CORDANCE WITH THE ASSESSEES OBJECTIVES. THE EMPLOYMENT UTILIZATION A ND CHANNELIZING OF FUNDS CAN BE DONE WITHIN THE BROAD FRAMEWORK OF THE ASSESSEES OBJECTIVES. ACQUISITION AND DEVELOPMENT OF LANDS 25. THE ACQUISITION SECTION (ONE OF THE WINGS OF TH E ASSESSEE) CONDUCTS THE PROCEEDINGS FOR ACQUISITION OF LAND AS PER KIAD ACT AND HANDS THESE LANDS TO KIADB. SPECIAL DEPUTY COMMISSIONER HEADS A CQUISITION WING. HE IS ASSISTED BY SPECIAL LAND ACQUISITION OFFICERS AT ZONAL LEVEL. THE BOARD DOES NOT HAVE THE POWER TO ACQUIRE LAND OF ITS CHOI CE; DEVELOP IT AND THEN SELL IT: UNDER SECTION 3 OF KLAD ACT, IT IS ONLY TH E STATE GOVERNMENT WHICH CAN DECLARE ANY AREA AS AN INDUSTRIAL AREA BY A NOT IFICATION, AND SPECIFY THE LIMITS OF SUCH AREA. THUS, THE BOARDS ACQUISITION POWERS ARE RING FENCED BY THE STATE GOVERNMENTS AUTHORITY. AS PER SECTION 28 OF KIAD ACT, THE STATE GOVERNMENT CAN ACQUIRE LAND FOR THE PURPOSE OF DEVE LOPMENT, AND PAY COMPENSATION FOR SUCH COMPULSORY ACQUISITION. THE B OARD CANNOT DECIDE WHAT LAND TO ACQUIRE AND HOW MUCH TO COMPENSATE THE LAND OWNERS. IT IS ONLY WHEN AN AREA IS DECLARED AS AN INDUSTRIAL AREA AND THE LAND IS ACQUIRED UNDER SECTION 28 OF KIAD ACT OR TRANSFERRE D BY THE GOVERNMENT UNDER SECTION 32 OF THE KIAD ACT, THAT THE ROLE OF THE BOARD BEGINS. ITA NO.378/BANG/2013 PAGE 12 OF 27 RESTRAINT ON EXPENDITURE FROM FUNDS OF THE ASSESSEE 26. SECTION 23 STIPULATES THAT THE ASSESSEE SHALL H AVE THE AUTHORITY TO SPEND SUCH SUMS AS IT THINKS FIT FOR THE PURPOSES A UTHORISED UNDER THIS ACT FROM OUT OF BOARDS FUNDS. EVERY EXPENSE HAS TO THE REFORE PASS THE PURPOSE TEST. 27. IT WAS ARGUED BY LD. COUNSEL FOR THE ASSESSEE THAT IN THE PRESENT CASE, THE ASSESSEE IS PRIMARILY ENGAGED IN PROMOTI ON OF INDUSTRIAL GROWTH IN KARNATAKA. IT IS NOT COVERED WITHIN ANY OF THE SPECIFIC CATEGORIES ENLISTED IN SECTION 2(15). THE QUESTION THEREFORE IS WHETHER THE ASSESSEES OBJECTIVE IS COVERED WITHIN THE PHRASE ADVANCEMENT OF ANY OT HER OBJECT OF GENERAL PUBLIC UTILITY? 28. THE OBJECTIVES OF THE ASSESSEE ARE EXPLICIT AN D CANNOT HE CIRCUMVENTED. THE ASSESSEE IS A CREATION OF LAW, IT IS NOT FORMED OR SET-UP BY ANY PERSON(S) FOR ANY PECUNIARY BENEFIT OR COMME RCIAL MOTIVE. THE ASSESSEE OWES ITS GENESIS TO KIAD ACT, A STATE GOVE RNMENT LEGISLATION. THE ASSESSEES INCORPORATION. FUNCTIONING, POWERS A ND SCOPE ARE SET OUT IN THE KIAD ACT. BEING A CREATION OF A SPECIAL LAW, COMPLIANCE WITH THE PROVISIONS THEREIN IS MANDATORY. THE STATUTE REPEAT EDLY EMPHASIZES THE NEED TO CARRY ON ACTIVITIES HAVING REGARD TO THE OB JECTS OF THE ACT. THE OBJECT IS PROMOTION OF INDUSTRIES. IT ASSISTS IN IM PLEMENTATION OF POLICES OF GOVERNMENT WITHIN THE PURVIEW OF KIAD ACT. THERE IS ESTABLISHMENT OF ITA NO.378/BANG/2013 PAGE 13 OF 27 INFRASTRUCTURE PROJECTS. ABOVE ALL, IT IS UNDER DIR ECT SURVEILLANCE OF STATE GOVERNMENT. 29. INDUSTRIALIZATION IS AN INITIATION OF SOCIAL RE FORM AND ECONOMIC DEVELOPMENT. IT BOOSTS THE PRODUCTION AND MANUFACTU RING SEGMENTS. EMPLOYMENT WOULD SCALE UP; EFFICIENCIES STAND ENHAN CED AND STANDARDIZATION BECOMES ACHIEVABLE. ALL THESE TRANS FORMATIONS TRANSLATE INTO OVERALL AMELIORATION OF THE SOCIETY AND COUNTR Y AS A WHOLE. AN INSTITUTION WITH SUCH A FAR SIGHTED AND DEVELOPMENT ORIENTED OBJECTIVE IS CERTAINLY ONE WHICH BENEFITS THE PUBLIC AT LARGE. T HE ASSESSEE SERVES THE CAUSE OF GENERAL PUBLIC UTILITY AND IS THEREFORE CO VERED WITHIN THE GAMUT OF CHARITABLE PURPOSE AS DEFINED BY SECTION 2(15) OF THE I.T. ACT. 30. IN THE COURSE OF CARRYING ON ITS ACTIVITIES, TH E BENEFIT ARISING FROM SUCH PROMOTION MAY BE SHARED BY THOSE ENGAGED IN TH E INDUSTRIAL SECTOR. THE BENEFIT TO THESE CANNOT DETER THE CLAIM OF THE ASSESSEE TO BE A CHARITABLE INSTITUTION. IN THE WORDS OF THE APEX COURT IN THE CASE OF CIT V ANDHRA CHAMBER OF COMMERCE (1965) 55 ITR 722 (SC): THE PRINCIPAL OBJECTS OF THE ASSESSEE ARE TO PROT ECT, TRADE, COMMERCE AND INDUSTRIES AND TO AID, STIMULATE AND P ROMOTE THE DEVELOPMENT OF TRADE, COMMERCE AND INDUSTRIES IN IN DIA OR ANY PART THEREOF. BY THE ACHIEVEMENT OF THESE OBJECTS, IT IS NOT INTENDED TO SERVE MERELY THE INTERESTS OF THE MEMBE RS OF THE ASSESSEE. ADVANCEMENT OR PROMOTION OF TRADE, COMMER CE AND INDUSTRY LEADING TO ECONOMIC PROSPERITY ENSURES THE BENEFIT OF THE ENTIRE COMMUNITY. THAT PROSPERITY WOULD BE SHARED A LSO BY THOSE: WHO ENGAGE IN TRADE, COMMERCE AND INDUSTRY BUT ON T HAT ACCOUNT THE PURPOSE IS NOT RENDERED ANY THE LESS AN OBJECT OF GENERAL ITA NO.378/BANG/2013 PAGE 14 OF 27 PUBLIC UTILITY. IT MAY BE REMEMBERED THAT PROMOTION AND PROTECTION OF TRADE, COMMERCE AND INDUSTRY CANNOT BE EQUATED WITH PROMOTION AND PROTECTION OF ACTIVITIES AND INT ERESTS MERELY OF PERSONS ENGAGED IN TRADE, COMMERCE AND INDUSTRY. 31. IT WAS SUBMITTED THAT THE AO IN HIS ORDER HAS O BSERVED THAT THE ASSESSEE HAS CARRIED OUT THE ACTIVITIES/RENDERED SE RVICES TO INDUSTRIALISTS/ ENTREPRENEURS IN LIEU OF WHICH IT COLLECTED/RECEIVE D CONSIDERATION TOWARDS SALE OF INDUSTRIAL SITES AND FEES FOR VARIOUS SERVI CES RENDERED THEREOF. THESE ARE NOT SERVICES RENDERED TO SPECIFIC INDUSTR IALISTS/ENTREPRENEURS. THE OBJECTIVE IS NOT SERVICE OF INDIVIDUAL INDUSTR IAL HOUSES BUT PROMOTION OF OVERALL INDUSTRIALIZATION OF KARNATAKA. AN INCIDENT AL BENEFIT TO SOME INDUSTRIALISTS/ENTREPRENEURS WOULD NOT DILUTE THE P ROGRESSIVE AND CHARITABLE OBJECTIVE OF THE ASSESSEE. 32. TO SUMMARIZE, THE LD. COUNSEL SUBMITTED THAT T HE ASSESSEE PLAYS A VITAL ROLE IN SUPPLEMENTING THE GOVERNMENTAL EFFORT S IN BOOSTING INDUSTRIALIZATION. THE ASSESSEE IS A CREATION OF LA W CONSTITUTED FOR THE PURPOSE OF DEVELOPMENT OF INDUSTRIES AND EXISTS FOR PUBLIC GOOD. ITS CONTROL AND MANAGEMENT IS VESTED WITH THE STATE GOVERNMENT. THE BENEFIT ARISING FROM ITS ACTIVITIES MAY BE SHARED BY PERSONS ENGAGE D IN THE INDUSTRIAL SECTOR. THIS HOWEVER DOES NOT DETRACT FROM ITS CHAR ITABLE CHARACTER. THE OBJECT OF THE ASSESSEE IS CLEAR; THE FUNCTIONS ARE RING FENCED AND POWERS ARE FRAME ALL WITH A VIEW TO ACHIEVE INDUSTRIAL DEV ELOPMENT IN KARNATAKA. DEVELOPMENT OF INDUSTRIES HAS BEEN CONSTRUED TO BE ADVANCEMENT OF ITA NO.378/BANG/2013 PAGE 15 OF 27 GENERAL PUBLIC UTILITY BY THE APEX COURT. ACTIVITI ES OF THE ASSESSEE ARE THEREFORE TO BE REGARDED AS COVERED WITHIN THE OPER ATIVE PROVISIONS OF SECTION 2(15). 33. IT WAS ALSO SUBMITTED THAT ASSESSEE HAS CONTIN UOUSLY DEVOTED ITSELF TO THE PROMOTION OF INDUSTRIES IN THE STATE OF KARN ATAKA. IT HAS NOT BEEN FORMED AND IS NOT CARRYING ON ACTIVITIES WITH A MOT IVE TO DISTRIBUTE ITS SURPLUS. THERE IS NO INTENTION TO MAKE PROFITS. THE OBJECTS ARE TO CARRY OUT INDUSTRIAL AND INFRASTRUCTURE PROMOTION. THE SURPLU S, IF ANY, ARISING FROM THE ACTIVITIES ARE SOLELY UTILIZED FOR THE ACHIEVEMENT OF ITS OBJECTS AND NO PORTION IS UTILIZED FOR DISTRIBUTION OF ANY INCOME OR PROFI TS. IN SUBSTANCE, THE ASSESSEE NEITHER EARNS ANY PROFITS NOR IS IT INVOLV ED IN THE ACTIVITIES OF TRADE, COMMERCE OR BUSINESS. THE ACTIVITIES OF ASSE SSEE ARE THEREFORE CHARITABLE IN NATURE. 34. AS ALREADY MENTIONED, ASSESSEE OPERATES ON A N O PROFIT OR NO LOSS BASIS. THIS IS EVIDENT FROM THEIR PRICING MECHANISM . THE ASSESSEE ACQUIRES AGRICULTURAL LAND FROM THE FARMERS BY PAYING COMPEN SATION TO THE FARMERS. SUCH COMPENSATION IS DETERMINED BY DEPUTY COMMISSIO NER OF DISTRICT. SUCH LAND WOULD BE DEVELOPED INTO PLOTS FOR THE PUR POSES OF PROJECTS APPROVED BY STATE HIGH LEVEL CLEARANCE COMMITTEE (H EADED BY CHIEF MINISTER). STATE LEVEL SINGLE WINDOW CLEARANCE COMM ITTEE IS HEADED BY CHIEF SECRETARY. GOVT. OF KARNATAKA AND DISTRICT LE VEL SINGLE WINDOW ITA NO.378/BANG/2013 PAGE 16 OF 27 CLEARANCE COMMITTEE IS HEADED BY THE DEPUTY COMMISS IONERS OF THE DISTRICTS. 35. THE ASSESSEE PREPARES A BUDGET FOR COMPENSATION PAYABLE FOR LAND ACQUISITION AND DEVELOPMENT EXPENDITURE THEREON. TO TAL PRICING OF LAND WOULD PRIMARILY INCLUDE COST OF LAND ACQUISITION AN D TOTAL DEVELOPMENT COST AND 12.75% INTEREST FOR ONE YEAR ALONG WITH ESTABLI SHMENT & BOARD SERVICE CHARGES TOWARDS MAINTENANCE OF THE BOARD. THE COMPU TATION OF TOTAL COST OF ACQUISITION AND DEVELOPMENT IS TABULATED BELOW:- 36. ONCE THE TOTAL COST IS SO COMPUTED, IT IS ALLOC ATED TO THE ALLOTABLE EXTENT OF THE LAND (GENERALLY AROUND 65 TO 70% OF L AND). THEREAFTER ALLOTMENT OF PLOTS IS CARRIED ON TO THE ENTREPRENEU RS FOR THE STATE / DISTRICT ITA NO.378/BANG/2013 PAGE 17 OF 27 APPROVED PROJECTS AT THE SAME PRICE. THERE IS NO MA RGIN INCLUDED. THE OBJECTIVE IS NOT TO EARN PROFITS ON ALLOTMENT OF SU CH PLOT OF LAND. THE EXCESS OF INCOME OVER EXPENDITURE OR THE SURPLUS REMAINING IN THE FINANCIAL STATEMENTS OF THE BOARD PRIMARILY ARISES ON ACCOUNT OF BANK INTERESTS. THESE ARE EXCESS FUNDS AVAILABLE WITH THE BOARD WHI CH ARE HOUSED WITH THE BANKS TO GENERATE PASSIVE INTEREST INCOME. THUS, TH E CORE ACTIVITY OF INDUSTRIALIZATION OF LANDS (THE ALLEGED BUSINESS AC TIVITY) DOES NOT FETCH PROFITS; THE SOURCE OF INCOME WHICH GENERATES SURPL US IS FROM BANK INTERESTS AND THEREBY NOT GENERATED ON ACCOUNT OF BOARDS NOR MAL COURSE OF ACTIVITIES. 37. IN VIEW OF ALL THE ABOVE, IT WAS SUBMITTED BY T HE LD. COUNSEL FOR THE ASSESSEE THAT THE ACTION OF THE AO AFFIRMED BY CIT (A) THAT THE ACTIVITIES OF THE ASSESSEE ARE COMMERCIAL IN NATURE THEREBY ATTR ACTING THE PROVISO TO SECTION 2(15) IS INCORRECT, CONTRARY TO FACTS, BAD IN LAW AND LIABLE TO BE QUASHED. 38. WITHOUT PREJUDICE, THE ASSESSEE SUBMITS THAT EL EEMOSYNARY ELEMENT IS NOT ESSENTIAL ELEMENT OF CHARITY. IT IS ALSO NOT A NECESSARY ELEMENT IN A CHARITABLE PURPOSE THAT IT SHOULD PROV IDE SOMETHING FOR NOTHING OR FOR LESS THAN IT COSTS OR FOR LESS THAN THE ORDI NARY PRICE. THE SURPLUS GENERATED. IF IT IS HELD AND APPLIED FOR CHARITABLE PURPOSE, THE ASSESSEE HAS TO BE CONSIDERED AS EXISTING FOR A CHARITABLE PURPO SE. THE DECISIONS IN KRUPANIDHI EDUCATIONAL TRUST V DIT(E), ITA NO. 86/2 012 DT. 14.9.2012 - ITA NO.378/BANG/2013 PAGE 18 OF 27 BANGALORE ITAT; LOKA SHIKSHANA TRUST V CLT [1975] 101 ITR 234 (SC) , CRICKET ASSOCIATION OF BENGAL V CIT [1959] 37 ITR 2 77 (CAL), CIT V. BREACH CANDY SWIMMING BATH TRUST (1955) 27 ITR 279 (BORN), THE TRUSTEES OF THE TRIBUNE, IN RE (1939) 7 ITR 423 (PC) AND PARA NO. 1 9 PAGE NO. 528 VOLUME I OF THE LAW AND PRACTICE OF INCOME TAX BY K ANGA, PALKHIVALA AND VYAS WAS RELIED UPON IN SUPPORT OF THE ABOVE PRINCIPLE. DIFFERENCE BETWEEN BUSINESS ACTIVITY AND ACTIVIT Y WITH BUSINESS PRINCIPLES 39. THERE IS A SUBTLE DIFFERENCE BETWEEN THE PHRASE CARRYING ON ACTIVITIES IN THE NATURE OF BUSINESS AND CARRYING ON ACTIVITIES ON BUSINESS PRINCIPLES. THE FORMER REFERS TO ACTIVITY ITSELF A SSUMING THE CHARACTER OF BUSINESS AND THE LATTER REFERS TO ACTIVITY CARRIED ON FOR A DIFFERENT PURPOSE BUT WITH THE ACUMEN OF BUSINESS WORLD. THE LATTER I NDICATES THE IMPORT OF BUSINESS KIND EFFICIENCY IN CARRYING OUT ACTIVITIES . IT IS AN EVIDENCE OF BEING ORGANIZED AND CARRYING ON ACTIVITIES IN A STRUCTURE D AND EFFICIENT MANNER. 40. MERE ADOPTION OF BUSINESS PRINCIPLES DOES NOT TRANSFORM A CHARITABLE INSTITUTION INTO A BUSINESS ENTITY. THE APEX COURT HAS ECHOED SIMILAR VIEW IN THE CASE OF CIT V ANDHRA PRADESH STATE ROAD TRANSPORT (1986) 159 ITR I (SC) WHEREIN HE COURT OBSERVED AS UNDER:- NO ACTIVITY CAN BE CARRIED ON EFFICIENTLY, PROPERL Y, ADEQUATELY OR ECONOMICALLY UNLESS IT IS CARRIED ON BUSINESS PRINC IPLES. IF AN ACTIVITY IS CARRIED ON BUSINESS PRINCIPLES, IT WOUL D USUALLY RESULT IN PROFIT, BUT, AS POINTED OUT BY THIS COURT IN SUR AT ART SILK CLOTH MANUFACTURERS ASSOCIATIONS CASE [1980] 120 ITR (SC ), IT IS NOT POSSIBLE SO TO CARRY ON A CHARITABLE ACTIVITY IN SU CH A WAY THAT THE ITA NO.378/BANG/2013 PAGE 19 OF 27 EXPENDITURE BALANCES THE INCOME AND THERE IS NO RES ULTANT PROFIT, FOR, TO ACHIEVE THIS, WOULD NOT ONLY BE DIFFICULT O F PRACTICAL REALISATION BUT WOULD REFLECT UNSOUND PRINCIPLES OF MANAGEMENT. (EMPHASIS SUPPLIED) 41. IN THE PRESENT CASE, THE ASSESSEE HAS CARRIED O N ITS ACTIVITIES ON BUSINESS PRINCIPLES AND SOUND PRINCIPLES OF MANAGEM ENT. AS A RESULT, THE ASSESSEE HAS BEEN ABLE TO REPEATEDLY GENERATE SURPL US FUNDS. THIS FACT BY ITSELF DOES NOT RENDER THE ASSESSEE A NON-CHARITAB LE ENTITY; BUT ONLY IS AN EXECUTION OF SOUND MANAGEMENT PRINCIPLES BY A CHARI TABLE ORGANISATION. THE ASSESSEE UNDERTAKES DEVELOPMENT OF INDUSTRIES A ND INFRASTRUCTURE IN THE STATE OF KARNATAKA. IT IS NOT CARRYING ON BUSIN ESS; BUT EXECUTING THE TASKS ASSIGNED BY THE STATE GOVERNMENT UNDER THE KI AD LEGISLATION. THERE IS NO OCCASION FOR THE OFFICE BEARERS TO TAKE THE PROFIT MAKING ROUTE AS THE FUNDS AND THEIR DEPLOYMENT IS UNDER THE SURVEILLANC E OF THE STATE GOVERNMENT (THROUGH ITS OFFICE BEARERS/PUBLIC SERVA NTS). TO CONCLUDE, THE ACTIVITIES OF THE ASSESSEE DO NOT CONSTITUTE BUSINE SS. 42. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO SEVERAL JUDICIAL PRONOUNCEMENTS. WE WILL MAKE A REFERENCE TO THOSE DECISIONS AT THE APPROPRIATE PLACE, TO THE EXTENT IT IS NECESSARY TO DISPOSE THIS APPEAL. 43. THE LEARNED DR PLACED STRONG RELIANCE ON THE FI NDINGS OF THE AO IN THE ORDER OF ASSESSMENT AND THE ORDER OF THE CIT(A) . ITA NO.378/BANG/2013 PAGE 20 OF 27 44. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. THE PURPOSE FOR WHICH THE ASSESSEE EXISTS IS FOR TH E ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY. THE FACT THAT THE ASSESSEE ENJOYED REGISTRATION U/S.12AA OF THE ACT IN THE PAST IS ITS ELF SUFFICIENT TO COME TO THIS CONCLUSION. THE WITHDRAWN OF REGISTRATION U/S.12AA OF THE ACT WAS ONLY CONSEQUENT TO THE INTRODUCTION OF THE PROVISO TO SE C.2(15) OF THE ACT BY THE FINANCE ACT, 2008. THEREFORE THE QUESTION THAT WE NEED TO BE ANSWERED IS AS TO WHETHER THE PROVISO TO SEC.2(15) OF THE ACT W OULD BE APPLICABLE TO THE CASE OF THE ASSESSEE. 45. WE SHALL NOW UNDERSTAND THE APPROACH TO BE ADOP TED IN COMING TO THE CONCLUSION AS TO WHETHER THE PROVISO TO SEC.2(1 5) OF THE ACT WILL BE APPLICABLE TO THE ASSESSEE IN THE LIGHT OF THE DECI SION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIA TRADE PROMOTION ORGANIZATION VS. DGIT(EXEMPTION) AND OTHERS 371 ITR 333 (DELHI) . THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED STRONG RELIANCE ON THIS 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.378/BANG/2013 PAGE 21 OF 27 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 H AS TWO PARTS. THE FIRST PART HAS REFERENCE TO THE CARRYING ON OF ANY ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS. THE SECO ND PART HAS REFERENCE TO ANY ACTIVITY OF RENDERING ANY SERVICE IN RELATION TO ANY TRADE, COMMERCE OR BUSINESS. BOTH THESE PARTS A RE FURTHER SUBJECT TO THE CONDITION THAT THE ACTIVITIES SO CAR RIED OUT ARE FOR A CESS OR FEE OR ANY OTHER CONSIDERATION, IRRESPECTIV E OF THE NATURE OR USE OR APPLICATION OR RETENTION OF THE INCOME FR OM SUCH ACTIVITIES. IN OTHER WORDS, IF, BY VIRTUE OF A CESS OR FEE OR ANY OTHER CONSIDERATION, INCOME IS GENERATED BY ANY OF THE TWO SETS OF ACTIVITIES REFERRED TO ABOVE, THE NATURE OF USE OF SUCH INCOME OR APPLICATION OR RETENTION OF SUCH INCOME IS IRRELEVA NT 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 BEING CARRIED ON FOR A CHARITABLE PURPOSE. IF A LITERAL I NTERPRETATION IS TO BE GIVEN TO THE PROVISO, THEN IT MAY BE CONCLUDED T HAT THIS FACT ITA NO.378/BANG/2013 PAGE 22 OF 27 WOULD HAVE NO BEARING ON DETERMINING THE NATURE OF THE ACTIVITY CARRIED ON BY THE PETITIONER. BUT, IN DECIDING WHE THER ANY ACTIVITY IS IN THE NATURE OF TRADE, COMMERCE OR BUSINESS, IT HAS TO BE EXAMINED WHETHER THERE IS AN ELEMENT OF PROFIT MAKI NG OR NOT. SIMILARLY, WHILE CONSIDERING WHETHER ANY ACTIVITY I S ONE OF RENDERING ANY SERVICE IN RELATION TO ANY TRADE, COM MERCE 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 INSTITUTION, WHICH OTHERWISE IS ESTABLISHED FOR A C HARITABLE PURPOSE, RECEIVES INCOME WOULD NOT MAKE IT ANY LESS A CHARITABLE INSTITUTION. WHETHER THAT INSTITUTION, WHICH IS EST ABLISHED FOR CHARITABLE PURPOSES, WILL GET THE EXEMPTION WOULD H AVE TO BE DETERMINED HAVING REGARD TO THE OBJECTS OF THE INST ITUTION AND ITS IMPORTANCE THROUGHOUT INDIA OR THROUGHOUT ANY STATE OR STATES. (IV) MERELY, BECAUSE AN INSTITUTION DERIVES INCOME OUT OF ACTIVITIES WHICH MAY BE COMMERCIAL, THAT DOES, IN A NY WAY, AFFECT THE NATURE OF THE INSTITUTION AS A CHARITABLE INSTI TUTION IF IT OTHERWISE 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 IT S CHARACTER OF HAVING BEEN ESTABLISHED FOR A CHARITABLE PURPOSE. I F THE DOMINANT ACTIVITY OF THE INSTITUTION WAS NOT BUSINESS, TRADE OR COMMERCE, THEN ANY SUCH INCIDENTAL OR ANCILLARY ACTIVITY WOUL D ALSO NOT FALL WITHIN THE CATEGORIES OF TRADE, COMMERCE OR BUSINES S. IF THE DRIVING FORCE IS NOT THE DESIRE TO EARN PROFITS BUT TO DO CHARITY, THE EXCEPTION CARVED OUT IN THE FIRST PROVISO TO SECTIO N 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 EQU ALITY CLAUSE ENSHRINED IN ARTICLE 14 OF THE CONSTITUTION). COURT S SHOULD ALWAYS ENDEAVOUR TO UPHOLD THE CONSTITUTIONAL VALIDITY OF A PROVISION AND, IN DOING SO, THE PROVISION IN QUESTION MAY HAV E 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 ITA NO.378/BANG/2013 PAGE 23 OF 27 REQUIRES. THE EXPRESSION 'CHARITABLE PURPOSE' APPEA RING IN SECTION 2(15) OF THE SAID ACT HAS TO BE SEEN IN THE CONTEXT OF SECTION 10(23C)(IV). WHEN THE EXPRESSION 'CHARITABL E PURPOSE', AS DEFINED IN SECTION 2(15) OF THE SAID ACT, IS REA D IN THE CONTEXT OF SECTION 10(23C)(IV) OF THE SAID ACT, WE WOULD HA VE TO GIVE UP THE STRICT AND LITERAL INTERPRETATION SOUGHT TO BE GIVEN TO THE EXPRESSION 'CHARITABLE PURPOSE' 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 T HE CHARITABLE PURPOSE OF ADVANCEMENT OF ANY OTHER OBJECT OF GENER AL PUBLIC UTILITY AND THAT EXCEPTION IS LIMITED TO ACTIVITIES IN THE NATURE OF TRADE, COMMERCE OR BUSINESS OR ANY ACTIVITY OF REND ERING ANY SERVICE IN RELATION TO ANY TRADE, COMMERCE OR BUSIN ESS FOR A CESS OR FEE OR ANY OTHER CONSIDERATION. IN BOTH THE ACTI VITIES, IN THE NATURE OF TRADE, COMMERCE OR BUSINESS OR THE ACTIVI TY OF RENDERING ANY SERVICE IN RELATION TO ANY TRADE, COMMERCE OR B USINESS, THE DOMINANT AND THE PRIME OBJECTIVE HAS TO BE SEEN. IF THE DOMINANT AND PRIME OBJECTIVE OF THE INSTITUTION, WHICH CLAIM S TO HAVE BEEN ESTABLISHED FOR CHARITABLE PURPOSES, IS PROFIT MAKI NG, WHETHER ITS ACTIVITIES ARE DIRECTLY IN THE NATURE OF TRADE, COM MERCE OR BUSINESS OR INDIRECTLY IN THE RENDERING OF ANY SERVICE IN RE LATION TO ANY TRADE, COMMERCE OR BUSINESS, THEN IT WOULD NOT BE E NTITLED TO CLAIM ITS OBJECT TO BE A 'CHARITABLE PURPOSE'. ON THE FLIP SIDE, WHERE AN INSTITUTION IS NOT DRIVEN PRIMARILY BY A D ESIRE 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 C HARITABLE PURPOSES. (EMPHASIS SUPPLIED) 46. IT CAN BE SEEN FROM THE VARIOUS PROVISIONS OF T HE KIAD ACT WHICH WE HAVE SET OUT IN THE EARLIER PART OF THE ORDER THAT THE DOMINANT AND PRIME OBJECTIVE OF THE ASSESSEE IS NOT PROFIT MAKING. PRIOR TO THE INTRODUCTION OF THE PROVISO TO SECTION 2(15) OF THE ACT, THERE WAS NO DISPUTE THAT THE ITA NO.378/BANG/2013 PAGE 24 OF 27 ASSESSEE WAS ESTABLISHED FOR CHARITABLE PURPOSES. WE SHALL NOW TAKE A LOOK AT THE INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31.3.2009 OF THE ASSESSEE. THE INCOME SIDE OF THE ACCOUNT SH OWS THAT THE MAIN COMPONENT OF INCOME OF THE ASSESSEE IS DERIVED IN T HE FORM OF INTEREST OF RS.131.17 CRORES. SCHEDULE P TO THE INCOME AND E XPENDITURE ACCOUNT SHOWS THE BREAK-UP OF THE INTEREST RECEIPT BY THE A SSESSEE. THE INTEREST ON FIXED DEPOSITS IS RS.120.90 CRORES. THE EARNEST MONEY DEPOSIT GIVEN BY THE ALLOTTEES ARE PARKED BY THE ASSESSEE IN FIXE D DEPOSIT AND THOSE DEPOSITS HAS EARNED THE AFORESAID INTEREST INCOME. THEREFORE THERE CAN BE NO PROFIT ELEMENT IN EARNING THIS INTEREST INCOME. BESIDES THE ABOVE, THE OTHER COMPONENTS OF INTEREST ARE INTEREST FROM ALLO TTEES, PENAL INTEREST FROM ALLOTTEES, INTEREST ON STAFF LOAN, INTEREST FROM SB AND OTHERS, INTEREST ON SEED MONEY, DIVIDEND RECEIVED AND INTEREST ON INCOM E TAX REFUND. THE OTHER COMPONENT OF INCOME IS GAIN ON DISPOSAL OF LA ND, SALE OF APPLICATION FORMS, RECOVERIES OF FINES AND PENALTIES, INTEREST, OTHER RECEIPTS, RENT, FORFEITURE OF DEPOSITS, WATER SUPPLY CHARGES. THE INCOME FROM SALE OF LAND IS RS.18.69 CRORES. THE EXPENDITURE INCURRED BY TH E ASSESSEE COMPRISES OF REPAIRS AND MAINTENANCE, ADMINISTRATIVE EXPENSES , WATER AND ELECTRICITY CHARGES, SPECIAL AND OTHER CHARGES, DEPRECIATION. IF THE GAIN ON DISPOSAL OF LAND OF RS.18.69 CRORES WHICH IS THE PRIMARILY OBJE CT OF THE ASSESSEE AND EXPENDITURE IN THE FORM OF ADMINISTRATIVE EXPENSES OF RS.15.42 CRORES AND 10.61 CRORES WHICH ARE FIXED EXPENSES AND NECESSARY TO CARRY ON THE ITA NO.378/BANG/2013 PAGE 25 OF 27 PRIMARY OBJECT ALONE ARE CONSIDERED THAN THERE WOUL D BE LOSS. THIS BY ITSELF WOULD DEMONSTRATE THAT THE ASSESSEE DOES NOT EXIST FOR PROFIT. 47. THE MAIN AIM AND OBJECT FOR WHICH THE ASSESSEE WAS ESTABLISHED IS TO (A) PROMOTE RAPID AND ORDERLY DEVELOPMENT OF I NDUSTRIES IN THE STALE. (B)ASSIST IN IMPLEMENTATION OF POLICIES OF GOVERNME NT WITHIN THE PURVIEW OF KIAD ACT. (C) FACILITATE IN ESTABLISHING INFRASTRU CTURE PROJECTS.(D)FUNCTION ON NO PROFIT - NO LOSS BASIS. FOR THE ABOVE PUR POSE, THE ASSESSEE (A)ACQUIRE LAND AND FORM INDUSTRIAL AREAS IN THE S TATE.(B)PROVIDE BASIC INFRASTRUCTURE IN THE INDUSTRIAL AREAS.() ACQUIRE LAND FOR SINGLE UNIT COMPLEXES.(D)ACQUIRE LAND FOR GOVERNMENT AGENCIES F OR THEIR SCHEMES AND INFRASTRUCTURE PROJECTS. THE DOMINANT AND MAIN OBJECT OF THE ASSESSEE IS CHARITABLE AND NOT FOR MAKING PROFITS. 48. A LOOK AT THE INCOME STREAM OF THE ASSESSEE C LEARLY REVEALS THAT ALL THE ACTIVITIES FROM WHICH THE ASSESSEE DERIVES INCO ME ARE AN INHERENT PART 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. ITA NO.378/BANG/2013 PAGE 26 OF 27 49. KEEPING IN MIND THE ABOVE FACTUAL ASPECTS AND THE PROVISIONS OF THE KIDA ACT, AND PRINCIPLE LAID DOWN IN THE AFORESAID DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIA PROMOTION ORG ANIZATION (SUPRA), IN OUR VIEW, WILL CLEARLY SHOW THAT THE ASSESSEE DOES NOT DRIVEN PRIMARILY BY DESIRE OR MOTIVE TO EARN PROFITS BUT TO DO CHARITY THROUGH ADVANCEMENT OF AN OBJECT OF GENERAL PUBLIC UTILITY. THE ASSESSEE IS OPERATING ON NO PROFIT BASIS. THIS IS SUBSTANTIATED BY THE ACTUAL INCOME R ECEIVED ON OPERATIONS OF THE ASSESSEE AND THE EXPENDITURE INCURRED SET OUT I N THE EARLIER PARAGRAPHS OF THIS ORDER. THE PROVISO TO SEC.2(15) OF THE ACT IS THEREFORE NOT APPLICABLE TO THE CASE OF THE ASSESSEE. WE THEREFORE HOLD THA T THE ASSESSEE IS ENTITLED TO THE BENEFITS OF SEC.11 OF THE ACT. THE AO HAS NOT DISPUTED THE CONDITIONS NECESSARY FOR ALLOWING 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 APPLICABLE 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 ASSESSEE IS DI RECTED TO BE ACCEPTED. 50. SEVERAL OTHER CONTENTIONS REGARDING APPLICABILI TY OF SEC.10(20) 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. ITA NO.378/BANG/2013 PAGE 27 OF 27 51. 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/- ( S. RIFAUR RAHMAN ) ( N.V. VASUD EVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 4 TH SEPTEMBER, 2015. /D S/ 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.