Exemption from specific activities, such as the sale of plots of land or apartments, is granted under Section 11 in exchange for receipt of a trust

Fact and issue of the case

This is Assessee’s appeal for assessment year 2016-17 against the order dated 04.03.2020, passed by ld. CIT(A), Patiala.

The following Grounds have been raised:- A. That the CIT(A) was not justified in upholding the action of the Assessing Officer in denying the exemption claimed u/s 11. B. That both CIT(A) and AO failed to appreciate that the exemption u/s 11 in the previous years had been allowed by the ITAT and approved by P&H High Court. Therefore, CIT(A) ought to have allowed this exemption as a judicial discipline. C. That the orders of the AO & CIT(A) are against the law and facts of the case.

There is a delay of 34 days in filing the appeal. The Assessee, vide its Application dated 15.07.2020, has submitted that the due date of filing of the Appeal fell in the Covid Lock Down Period, which started from 23.3.2020; and that the due date was extended finally upto 31.7.2020. The ld. Counsel for the assessee has submitted on record a copy of the Instructions issued in this regard by the Hd. Qrs. of the ITAT itself. It is submitted that hence, the delay of 34 days be

We have considered the facts and reasoning given in the Assessee’s Application for condonation of delay. In view of the explanation given by the Assessee, which is found to be justified, the delay of 34 days in filing the Appeal is condoned, the Assessee having been prevented by a reasonable cause from filing the appeal in time.

The facts of the case are that during the assessment proceedings, the Assessing Officer asked the Assessee-trust to explain its activities during the year, which resulted in income, and to explain how these activities were charitable in nature. The Assessee submitted that the objects / activities of the trust were to bring about improvement in the town of Sangrur by providing streets, housing facilities, development of parks, development of roads and other infrastructures, providing drinking water, etc., and that all these activities are charitable in nature. Vide notice dated 22.11.2018, issued u/s 143(1) of the Income Tax Act, 1961 (hereinafter called also ‘the I.T. Act’ or ‘the Act’), the Assessee was asked to show cause as to why exemption under sections 11 and 12 of the I.T. Act be not disallowed. In the notice, it was stated that it had been observed that the Assessee had earned income from sale of land, non-construction fee, transfer fee, penal rent, compounding fee, etc.; that the trust was mainly doing the work of sale of plots, SCOs, SCFs, booths, other commercial and residential places, etc., at market rates, and of development of land; that the Assessee buys land at nominal cost, develops it, cuts it into small plots and sells it at a much higher price in order to earn profits; that these activities of the trust are in the nature of trade, commerce or business and are similar to the activities of a builder operating on commercial lines and cannot be construed as charitable activities; and that in order to qualify for claiming deduction u/ss 11 and 12 of the I.T. Act, for carrying out the charitable work of ‘general public utility’, the trust must fulfill the conditions laid down in the proviso to section 2(15) of the I.T. Act.

The Assessee, vide reply dated 1.12.20 18, stated that for carrying out all this activity, the Assessee has to incur expenditure on advertisement, quoting tenders in newspapers for sale of land to the general public, and quoting tenders for civil contract works, and all these activities have to be done for fulfilling the main objects, which are charitable in nature; that in the case of Moga Improvement Trust, the Amritsar Bench of the ITAT had allowed exemption u/s 11 by considering all the activities of the trust to be charitable in nature; that further, for assessment year 2014-15, the appeal of the Department before the ITAT Amritsar, in the Assessee’s own case, had been dismissed by the ITAT and exemption u/s 11 on the surplus of sale of land and building had been allowed to the Assessee.

The aforesaid reply of the Assessee did not find favour with the While passing the assessment order, the AO observed that the aims and objects of the trust with regard to the improvement of the city and providing streets and roads and making provision for drinking water, etc., are covered under general public unity; that however, the activities of the trust with regard to the acquisition of land and development of the land and sale thereof in the shape of plots, flats and commercial booths at market rates, after calling for applications from the public with some registration fee cannot be treated as charitable activities under ‘general public utility’; that the question was whether the activities carried out by the Assessee involved carrying out any activity in the nature of trade, business or commerce or rendering services in relation to the same; that the dictionary definition of the term ‘business’ was ‘activity of making, buying, selling or supplying goods or services for money’; that the legislature has consciously departed from restricting the import of the term ‘business’; and that thus, the term ‘business’ also includes rendering services of a variegated character. Reference was made to the Hon’ble Supreme Court’s decision in ‘Laxminaryan Ram Gopal and Son Ltd. Vs. Govt. of Hyderabad’, 25 ITR 449 (SC) and the decision of the Hon’ble Supreme Court in ‘Sole Trustee, Lok Shikshana Trust Vs. CIT’, 101 ITR 234 (SC). It was further observed by the AO that the trust is involved in business, like a builder, to earn money, i.e., it purchases / acquires property and divides the same into plots or builds the same and sell the plots or the buildings at a much higher price, in order to earn profits; that applications with certain amounts are called for and after public draw / auction, flats / plots and commercial booths are sold; that these activities are similar to those of a colonizer operating on commercial lines; that the income and expenditure account furnished by the Assessee shows the complete picture of the Assessee’s activities; that the Assessee has earned income from non-construction fee, transfer fee, penal interest, compounding fee, etc.; that this shows that the Assessee has been engaged in business and commercial activities like a colonizer or builder; that the test is to see if an organization is charitable under the limb ‘advancement of general public utility’, as has been laid down by the Hon’ble Supreme Court in the case of ‘Indian Chamber of Commerce’, 101 ITR 797 (SC); that as per this decision, the true test is to ask for answers to the following questions: (a) Is the object of the Assessee one of the general public utility? (b) Does the advancement of the object involve activity bringing in moneys? and (c) If so, are such activities taken (i) for profit or (ii) without profit; that even if (a) and (b) are answered in the affirmative, if (c) (i) is answered in the affirmative, the claim for exemption collapses; that in the present case, the Assessee has been undertaking activities with profit element included in the sale price, utility charges, etc.; that section 10(20A) of the I.T. Act has been omitted by the Finance Act, 2002, w.e.f. 1.4.2003; that as per section 10(20A) ‘any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation, or for the purpose of planning, development or improvement of cities, towns and villages, or for both’, was not to be included in computing the total income of a previous year, of any person; and that by omission of section 10 (20A) of the I.T. Act, the clear intention of the legislature was not to give exemption on any income of an authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation, or for the purpose of planning, development or improvement of cities, towns and villages, or for both. Reference was made to ‘Punjab Urban Development Authority Vs. CIT’, 103 TTJ (Chd.) 988, ‘Jalandhar Development Authority Vs. CIT’, 35 SOT (Asr.) 15 and ‘Jammu Development Authority Vs. CIT’, 52 SOT (Asr.) 153. It was observed that ‘Jammu Development Authority Vs. CIT’ (supra) was upheld by the Hon’ble High Court, as well as by the Hon’ble Supreme Court. It was further observed that the proviso to section 2(15) of the I.T. Act, as amended w.e.f. A.Y. 2016-17, also goes against the Assessee; that in view of the said amended proviso to section 2(15), even if the Assessee claims that these business activities were undertaken in the course of actual carrying out of such advancement of ‘general public utility’, the Assessee cannot be said to be engaged in charitable activities, as the aggregate receipt from these activities exceeds 20% of the total receipts. Reference was made to the order dated 10.9.20 15 passed by the Amritsar Bench of the Tribunal in eleven appeals, in the cases of Hoshiarpur, Pathankot, Bhatinda, Jalandhar, Amritsar and Moga Improvement Trusts. It was observed that according to section 13(8) of the I.T. Act, nothing contained in section 11 or 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof, if the provisions of the first proviso to section 2(15) become applicable in the case of such person in the said previous year. The AO concluded that the Assessee was covered by the proviso to section 2(15) of the I.T. Act and could not be held to be engaged in charitable activities; that therefore, the Assessee was not liable for exemption u/ss 11 and 12 of the I.T. Act, as per the provisions of section 13(8); and that during the year, the Assessee had incurred a loss, i.e., excess expenditure over income. The Assessee was, accordingly, assessed at ‘NIL’ income, as returned, and exemption under sections 11 and 12 of the I.T. Act was denied to it.

By virtue of the impugned order, the ld. CIT(A) dismissed the appeal filed by the Assessee trust against the aforesaid assessment order. It was observed, inter alia, rejecting the arguments of the Assessee, that section 13(8) of the I.T. Act speaks of non-exclusion of any income u/s 11 and 12 from total income, if the provisions of section 2(15) become applicable; that the AO had clearly mentioned that the aggregate receipts of the Assessee from its activities of sale of plots, flats and commercial booths and also income earned from non-construction fee, transfer fee, penal interest, compounding fee, etc., exceeded 20% of the total receipts; that therefore, the amended provisions of section 2(15), effective w.e.f. 1.4.2016, were applicable to the Assessee’s case; that the Assessee was involved in carrying out activities in the nature of trade, commerce and business, for fee and other consideration; and that hence, irrespective of the nature of use or application or retention of income from the Assessee’s activities of acquisition of land, development thereof and sale thereof in the shape of plots, flats and commercial booths at market rate, after calling for applications from the public, with some registration fee, could not be said to be for charitable purposes, since the aggregate receipt from such activity during the previous year exceeded 20% of the total receipts of the trust during the previous year.

Aggrieved, the Assessee is in further appeal before us.

Challenging the impugned order, the ld. Counsel for the Assessee contended that the ld. CIT(A) has erred in confirming denial of exemption u/s 11 of the I.T. Act to the Assessee, failing to appreciate that under circumstances exactly similar to the ones attending the year under consideration, exemption u/s 11 of the Act had been allowed by the ITAT in the earlier years, which action stood approved by the Hon’ble High Court; that the Bench had required the Assessee to clarify as to how the decision of the Hon’ble High Court in the Assessee’s own case would apply, in view of the amended provisions of section 2(15) of the Act, as relevant to the year under consideration; that for assessment years 2007-08, 2011-12 and 20 12- 13, the ld. CIT(A) passed order dated 12.01.2016, allowing the appeal of the Assessee and granting exemption u/s 11; that the Department filed appeal before the ITAT for all these Assessment years; and that the ITAT, vide order dated 28.9.20 17, passed in ITA Nos. 16 to 18/Chd/2016, dismissed the Department’s appeals. A copy of the said ITAT order has been placed on record. It was further stated that for assessment year 2011-12, pertaining to the same issue of disallowance of exemption u/s 11, the ld. CIT(A) dismissed the appeal of the Assessee; that the ITAT, vide order dated 14.12.20 15 (copy placed on record) in ITA No. 987/Chd/2014, allowed the exemption u/s 11 to the Assessee; that on appeal by the Department, the Hon’ble High Court, vide order dated 23.12.2016 (copy placed on record), dismissed the Department’s appeal, relying on its own order in the case of ‘Moga Improvement Trust’, 390 ITR 547 (P&H); that for assessment year 20 14-15, the issue of exemption u/s 11 of the Act attained finality, the department having not challenged the CIT(A)’s order grating such exemption; that for assessment years 2012-13 to 20 15-16, no regular assessment was framed and the exemption u/s 11 of the Act was allowed by processing the return u/s 143(1) of the Act; that for the year under consideration, the ld. CIT(A), while confirming disallowance of exemption u/s 11 of the Act to the Assessee, has placed reliance on the order dated 26.7.2018 passed by the Chandigarh Bench of the Tribunal, in ITA No. 1382/Chd/2016, in the case of ‘Chandigarh Lawn Tennis Association Vs. ITO (Exemptions), Chandigarh’; that this action of the ld. CIT(A) is unsustainable in law, in view of the fact that in the Assessee’s own case, the Hon’ble High Court has granted exemption u/s 11 of the Act to the Assessee; that the Hon’ble High Court has held that the Assessee’s activities are not commercial, even if plots have been sold at market price; that this decision of eh Hon’ble High Court has been confirmed by the Hon’ble Supreme Court in “Asstt. Commissioner of Income Tax (Exemptions) Vs. Ahmedabad Urban Development Authority and Others”, 449 ITR 1 (SC), wherein the decision of the Hon’ble Gujarat High Court, in the case of ‘Ahmedabad Urban Development Authority Vs. Asstt. CIT’, 396 ITR 323 (Gujarat), holding similar activities of the Ahmedabad Urban Development Authority to be non-commercial in nature and, therefore, the provisions of section 2 (15) of the I.T. Act to be not applicable.

Observation of the court

The Hon’ble High Court also held (page 606, placitum 82 of the Report) that considering the nature of the PTI Act, selling of plots and premises by the trust is only incidental and ancillary to its main purpose of “town improvement”; that mere profit making on account of such incidental or ancillary activity does not disentitle the trust to the exemptions under the Income Tax Act; that the trust is likely to make profit on account of its commercial or business activities of disposing of its lands pursuant to the power under section 28(2) (iii) of the PTI Act; that, however, does not take it out of the definition of ‘charitable purpose’ in section 2(15); that ‘trade’, ‘commerce’ and ‘business’ in section2(15) must be such as to involve an element of profit; thatprofit, however, is not the predominant motive of such trusts; that even where the plots are developed and premises are constructed and sold at market price, the activity is not a commercial or business venture per se, but one necessitated on account of implementation of the provisions of the trust, through statutory schemes, the main purpose of which schemes is driven by public requirements and not as a commercial venture per se, and which schemes are incidental to the main object of the trust. (Emphasis supplied to stress the crucial finding of the High Court, as confirmed by the Hon’ble Supreme Court).

These findings of the Hon’ble High Court, thus, directly meet the mandate of the Hon’ble Supreme Court that in case the receipts are not found to be in the nature of ‘trade, commerce or business’, breach of the quantitative limit would not have to be examined. Herein, the Hon’ble High Court has held that even where the plots and premises are sold at market price, the activity is not a commercial or business venture. This finding has been confirmed by the Hon’ble Supreme Court while rejecting the Department’s appeal in C.A.No. 17527/20 17, rendering the quantitative limit of 20 per cent under the second proviso to section 2(15) of the I .T. Act to be inapplicable, shutting out taxation pro bono publico by ascertaining minimum cost to the end consumer.

It is also seen that as per the Budget Speech of the Hon’ble Finance Minister, for A.Y. 2023-24, pursuant to the aforementioned Supreme Court judgement in ‘Ahmedabad Urban Development Authority’,w.e.f. 1.4.2004, a new section, i.e., section 10 (46A) is slated to be incorporatedin the Income Tax Act, so as to exempt any income arising to abody or authority, or Board or Trust or Commission, notbeing a company, which has been established or constituted by or under a Central of State Act with one or more of the following purposes, namely:-

dealing with and satisfying the need for housing accommodation;

planning, development or improvement of cities, towns and villages;

regulating, or regulating and developing, any activity for the benefit of the general public; or

regulating any matter, for the benefit of the general public, arising out of the object for which it has been created. [source : 330 CTR (Statutes) 257]

Further, we find that our aforesaid view is supported by the decision of the Hon’ble Gujarat High Court in the case of ‘CIT (Exemptions) vs. Gujarat Industrial Development Corporation’, (2023) 452 ITR 27 (Guj.) wherein, the Hon’ble Gujarat High Court, following the decision of the Hon’ble Supreme Court in the case of ‘Ahmedabad Urban Development Authority’ (supra) has dismissed the appeal filed by the Revenue, holding that the matter is squarely covered by the decision of the Hon’ble Supreme Court and no question of law, much less any substantial question of law arises for consideration. It is relevant to note that in the said case, the Senior Standing Counsel appearing for the Revenue fairly submitted that the decision rendered by the Hon’ble Supreme Court in the case of ‘Ahmadabad Urban Development Authority’ (supra) would govern the case of the assessee. We, therefore, find that the Revenue has also accepted the decision of the Hon’ble Supreme Court as applicable in the case of Gujarat Industrial Development Corporation, which is also a statutory corporation constituted under the Gujarat Industrial Development Act for the purpose of securing and assisting rapid and orderly establishment and organisation of industrial areas and industrial estates in the State of Gujarat.

In view of the forgoing discussion, we conclude as follows:

For A.Y. 2011-12, the Hon’ble High Court has granted exemption to the Assessee trust under section 11 of the Income Tax Act.

The Civil Appeal of the Department against the said High Court judgement has been rejected by the Hon’ble Supreme

The Hon’ble High Court has held the Assessee’s activity of sale of plots and premises, even at market price, not to be a commercial or business venture per se, but to be necessitated by the statutory mandate of the Punjab Town Improvement Act, 1922, i.e., the mother statute qua the Assessee trust.

Facts for the year under consideration, i.e., A.Y. 20 16-17, not having undergone any change at all from the facts in A.Y. 2011-12, the judgement of the Hon’ble High Court for A.Y. 2011-12, as approved by the Hon’ble Supreme Court in ‘Ahmedabad Urban Development Authority’, 449 ITR 1 (SC) (supra), is squarely applicable to the year under consideration, that is, A.Y. 20 16-17.

Therefore, the second proviso to section 2 (15) and, consequently, section 13 (8) of the Income Tax Act are held not applicable to the Assessee’s case, and so, the aggregate receipts of the Assessee trust from its activities of sale of plots, flats and commercial booths and also its income earned form non-construction fee, transfer fee, penal interest and compounding fee, etc., are held to be entitled for exemption under section 11 of the I.T. Act. Such exemption is allowed to the Assessee.

The Order under appeal is, thus, reversed and cancelled on accepting the grievance of the Assessee.

In the result, the appeal is allowed.

Order pronounced on 25.05.2023.