Hoshiarpur Improvement Trust vs. ITO (ITAT Amritsar)

The assessee trust is set up under the Punjab Towns Improvement Act 1922, (PTIA, in short) by the Government of Punjab with the principal objective to bring about improvement in the town by the means set out under section 22 to 26 of the PTIA. The land for development is provided by the State Government, by acquiring the same under the Land Acquisition Act. The land so given to the assessee trust is developed, inter alia, by providing for public amenities such as gardens, schools, religious places, community halls and shopping areas. The area available, after providing for access roads and streets as also public amenities, is then allotted in accordance with the State Government policies which include policy regarding reservation for specified categories such as members of Scheduled Castes and Scheduled Tribes, army personnel, sports persons etc. The assessee claimed the entire income to be exempt under section 11 of the Act. The Assessing Officer was of the view that the aim of the assessee trust is “acquisition of land, to develop it and sell it in the shape of plots, flats and commercial booths, after calling the applications from public with some registration fees”. He noted that these plots, shops and flats are sold at market rates. The Assessing Officer was of the view that these activities cannot be treated as advancement of any other object of “general public utility”. The Assessing Officer further observed that these activities are only to earn profits and that its functioning cannot be regarded as ‘charitable’ within the meanings of Section 2(15) of the Act. He relied on Lok Shikshan Trust Vs CIT (1975) 101 ITR 234 (SC) and Indian Chamber of Commerce & Ors Vs CIT (1975) 101 ITR 797 (SC). This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

(i) Vide Finance Act, 2008, the words “preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest)”, were added and, on a more relevant note, a new proviso (i.e. fist proviso) was added to this provision, carving out an exception in the cases of ‘advancement of any other object o f general utility’, and, by the immediately following Finance Act 2009, there was yet another proviso (i.e. second proviso) introduced to carve out an exception from the exception itself. In essence, the effect of these provisos was that even when an assessee was pursuing ‘a charitable purpose’ in the event of advancement of any other object of public utility’ it would cease to be for charitable purposes if it involves (a) carrying on an activity in the nature of trade, commerce or business; or (b) rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of nature of use or application or retention of the income from such activity. However, these provisions are not to apply when the activities are such a modest scale that the value of receipts in respect of the same are less than Rs 25 lakhs. Therefore, as the legal position stands as on now, even after the insertion of the above two provisos, as long as the object of general public utility is not merely a mask to hide true purpose or rendering of any service in relation thereto, and where such services are being rendered as purely incidental to or as subservient to the main objective of ‘general public ut ility’, the carrying on of bonafide activities in furtherance of such object ives of ‘general public utility’ cannot be hit by the proviso to s. 2(15).

(ii) By the Finance Act 2015, these two provisos also stand substituted, with effect from 1st April 2016, a new proviso to Section 2(15). It may be noted that while the earlier proviso simply stated that exclusion from ‘charitable purposes’ will come into play “if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business ”, the requirement of exclusion clause extends even to situations “ in which such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility”. In other words, the exclusion clause, by proviso to Section 2 (15), was earlier triggered by “involvement in any activity in the nature of trade, commerce or business etc” but, post Finance Act 2015 amendment, it will be triggered even if “such an activity in the nature of trade, commerce or business etc is undertaken in the course of carrying out such advancement of any other object of general public utility”.

(iii) This substitution of proviso to Section 2(15) may be viewed as representing a paradigm shift in the scope of the exclusion clause. The paradigm shift is this. So far as the scope of earlier provisos is concerned, the CBDT itself has, dealing with an assessee pursing “the advancement of any object of general pubic utility”, observed that “If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service in connection to trade, commerce or business, it would not be entitled to claim that its object is for charitable purposes” because “In such a case, the object of ‘general public utility’ will only be a mask or a device to hide the true purpose which is trade, commerce, or business or rendering of any service in relation to trade, commerce or business.” The advancement of any objects of general public utility and engagement in trade, commerce and business etc. were thus seen as mutually exclusive in the sense that either the assessee was pursuing the objects of general public utility or pursuing trade, commerce or business etc. in the garb of pursing the objects of general public utility. As the CBDT circular itself demonstrates, there could not have been any situation in which the assessee was pursing the objects of general public utility as also engaged in trade, commerce of business etc. In the new proviso, however, even when the assessee is engaged in the activities in the nature of trade, commerce or business etc. and “such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility” it is excluded from the scope of charitable purposes only when “the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year”. In other words, even when the activities are in the course of advancement of any other object of general public utility, but in the nature of trade, commerce or business etc, the proviso seeks to exclude it only when the threshold level of activity is not satisfied. Whether such a statutory provision stands the legal scrutiny or not is another aspect of the matter, and that is none of our concern at present anyway, it is beyond doubt that the new proviso, with effect from 1st April 2016, seeks to exclude, from the scope of section 2(15), the situations in which even in the course of pursuing advancement of any objects of general public utility when any activities in the nature of trade, commerce or business etc “is undertaken in the course of actual carrying out of such advancement of any other object of general public utility”, unless, of course, the activity level remains within the threshold limit i.e. receipts from such activities are less than twenty percent of total receipts of that year.

(iv) As the above provisions seeks to restrict the scope of Section 2(15) is effective from the assessment year 2016-17, these provisions are only prospective in effect. As a corollary to this legal position, even if the activities in the nature of trade, commerce or business etc are undertaken in the course of actual carrying out of advancement of any object of general public utility, till the end of the previous year relevant to the assessment year 2016-17, the activities will continue to be covered by the scope of Section 2 (15).

(v) In view of the above discussions, the reliance placed by the authorities below on the CBDT instruction no. 1024 dated 7th November 1976 and on Hon’ble Supreme Court decisions in the cases of Lok Shikshan Trust Vs CIT (1975) 101 ITR 234 (SC) and Indian Chamber of Commerce & Ors Vs CIT (1975) 101 ITR 797 (SC) is devoid of any legally sustainable merits. These decisions are no longer good law, the relevant provision in the context of which the decisions were given does no longer exist on the statute, and the judicial precedent, which the CBDT instruction has interpreted, has already faded into oblivion.

(vi) The above discussions clearly show that so far as making profits from a business activity incidental to the attainment of objectives of the trust is concerned, the legal position always was that, as long as separate books of accounts have been maintained by the assessee, the same were exempt from tax under section 11. There is no substantive change in law vis-à-vis the law prevailing as at the point of time in the context of which Hon’ble Supreme Court’s five judge bench had delivered the judgment in the case CIT Vs Surat Art Silk Clothes Manufacturers Association [(1980) 121 ITR 1 (SC)]. In the said case, Their Lordships had, inter alia, held, by majority view, that “What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost”. Of course, as the law was so laid down, the school of thought to the effect “However, if the object of the trust is advancement of an object of general public utility and it carried on any activity for profit, it is excluded from the ambit of charitable purpose defined in s. 2(15)” was articulated in the said order but that was part of the minority view stated by Justice A P Sen, as he then was.

(vii) Clearly, therefore, so far as pre insertion of Explanations to Section 2(15), i.e. prior to 1st April 2009, is concerned, the stand taken by the authorities below cannot be sustained in law. Assuming that all the allegations of the Assessing Officer, with respect to presence to profit motive in activities of the assessee are correct, since these activities were carried out with the larger and predominant objective of general public utility. It is only when, to use the words of the CBDT circular cited earlier in this order and the beneficial impact of which has the binding force on the field authorities under section 119 of the Act, the Assessing Officer finds that the income is “ income of any other business which is not incidental to the attainment of the objectives of the trust or institution” that the such an income will “not be exempt from tax”. There is no finding to that effect by any of the authority below. In any case, it is not even the case of revenue authorities that the activities of the trusts do not serve the objects of the general public utility but the case is confined to the stand that these activities have been carried out in such a manner as to make profit and no activities directly of any general public utility are carried out. The registration granted to the assessee evidences that the objects of the assessee trust were advancement of objects of general public utility, and there is nothing to demonstrate any paradigm shift from this fundamental position. The allegation is only of the profit making but that does not obliterate the overall objects of general public utility. As regards the maintenance of the separate books of accounts for the business activities pursued by the assessee trust, since all the activities of the assessee trust are said to be of the business nature, the books of accounts maintained by the assessee trust meet this requirement as well. Of course, we will deal with the issue of activities being in the nature of ‘profit making activities’ a little later, but, suffice to say, that on the admitted facts of this case, so far period prior to 1st April 2009 is concerned and for the reasons set out above, the benefit of Section 11 read with Section 2(15) could not have been declined at all.

(viii) Turning once again to the amendments brought on the statue with effect from 1st April 2009, we have to understand that there are the two mutually exclusive situations in which business activities are carried out by the assessee trust – one, in which “the object of ‘general public utility’ will only be a mask or a device to hide the true purpose which is trade, commerce, or business etc” [referred to in the CBDT circular no. 11 dated 19th December 2008 issued at the point of time when first proviso to Section 2(15) was introduced]; and – second, in which any activities in the nature of trade, commerce or business etc are “undertaken in the course of actual carrying out of such advancement of any other object of general public utility”, [insertion of new proviso to replace first and second proviso to section 2(15)- effective 1st April 2016 i.e. assessment year 2016-17]. As for the first category, post 1st April 2009 amendment, this category cannot be treated as covered by Section 2(15) but then that’s not the case before us. It is not, and it cannot be, the case that the Government formed these trusts by legislating the Punjab Towns Improvement Act 1922 because it wanted to carry on the business as colonizer or developer. Therefore, by no stretch of logic, formation of trusts can be said to a mask or device to hide the true purpose of the doing business. The case of the revenue at best is that the manner in which the activities are carried out is of a profit seeking entity that a business inherently is. In other words, thus, the case of the revenue is that the activities in the nature of trade, commerce and business are carried out for advancement of objects of general public utility. This situation at best falls in the second category. However, these cases, for the detailed reasons set out above, the exclusion of these cases from Section 2(15) is only effective 1st April 2016, i.e. assessment year 2016-17. The law is well settled by a five judge bench of Hon’ble Supreme Court, in the case of Vatika Township Pvt Ltd (supra), that, following the maxim lex prospicit non respici, the law, particularly with respect to a requirement which is more onerous on the assessee, cannot be treated as retrospective in effect unless it is specifically legislated to be so. In our considered view, therefore, this amendment cannot be treated as clarificatory or retrospective in effect. In view of these discussions, even post insertion of proviso to Section2(15) but before 1st April 2016, when business activities are carried by the assessee trust “in the course of actual carrying out of such advancement of any other object of general public utility”, the benefit of Section 11 read with Section 2 (15) cannot be declined. Nothing, therefore, turns on the assessee carrying out, even if that be actually so, activities in the nature of trade, commerce or business etc as long as these activities are carried out in the course of actual carrying out of advancement of any other object of general public utility. The planned development of cities and towns is an object of general public utility, and that is an object consistently followed by the assessee in all its activities. For this short reason alone, the stand of the authorities below must be held to be unsustainable in law.

(ix) As regards the fundamental allegation of the revenue authorities that the assessee has sold residential and commercial units and residential and commercial lands “just to earn profit”, the Departmental Representative has pointed out that the commercial plots and units are auctioned off which shows that the idea is to make maximum profits but what he clearly overlooks is the fact that since it is not a desirable state of affairs for the State to subsidize businesses, and to ensure highest degree of transparency in maximising returns from public assets, competitive bidding for commercial units is a safe option, and that the use of bidding process is justified for the larger causes. The bidding process ensures transparency in functioning of the improvement trusts and that, by itself, does not make the functioning of the improvement trust a commercial venture. It is also important that this use of bidding process is only in the context of commercial units etc. The development of commercial areas is in the interest of planned growth of an area and when such commercial areas develop, all the stakeholders in the development of that area benefit. In order of this benefit to the common cause, it is not necessary that the businessmen, buying such units, must also benefit. The denial of any advantage, at the cost of general public, to the business entities buying the commercial areas, in our considered view, does not amount to an defeating an object of general public utility. In this context, it is important to understand the benefit from developing commercial areas, which is for public good, and benefit to the business persons in buying these units from the assessee trust, which can only be for the good of benefit of these entrepreneurs.