India: Assistant Commissioner Of Income-tax (Exemptions) v. Ahmedabad Urban Development Authority [2022] 143 Taxmann.com 278 (SC)

This article aims to analyse the case of Assistant Commissioner of Income-tax (Exemptions) v. Ahmedabad Urban Development Authority which is landmark case that dynamically changed the interpretation of Section 2(15) of the Income Tax Act, 1961.

BRIEF FACTS

The Gujarat Town Planning and Urban Development Act, 1976 (hereinafter referred to as GTPUDA, 1976) under section 22 conferred power on the State Government to constitute the Assessee, Ahmedabad Urban Development Authority (hereinafter referred to as AUDA) as an Urban Development Authority (hereinafter referred to as UDA). As a UDA, GTPUDA's role was to prepare and implement town planning schemes in accordance with GTPUDA, 1976 requirements. Assessee claimed deduction per section 11 and section 2(15) and submitted return stating total income. The Assessing Officer concluded that the Assessee's acts were not "charitable" in accordance with the proviso to section 2(15), and as a result, the Assessee was not eligible for the deduction sought under section 11. Both the Tribunal and the Commissioner (Appeals) upheld the section 11 disallowance, citing that the case of the Assessee is hit by Section 2(15). In the present batch of appeals and SLPs, the main issue before the Apex Court is interpretation of Section 2(15) of the Income Tax Act, 1961 (hereinafter referred to as IT Act).

ISSUES UNDER CONSIDERATION

Upon consideration of all arguments presented by the parties, the Apex Court framed and delved into the following legal issues:

• Issue 1: What is the general test under Section 2(15) of the IT Act?
• Issue 2: What is the difference between "property or business held under trust" and "a business carried on by or on behalf of the trust" and when can a business be considered property held under trust?
• Issue 3: Whether statutory bodies, trade promotion bodies, non-statutory bodies, sports associations and private trusts are eligible for exemption under IT Act?

JUDGMENT

General Trust Under Section 2(15)

Charitable purpose is defined under Section 2(15)¹ of the IT Act. "An assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ("cess, or fee, or any other consideration")". This is expressly clear from mere glance of the statutory language of Section 2(15). "However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services, or other such organization, can carry on trade, commerce or business r provide services in relation thereto for consideration, provided that(i) the activities of trade, commerce or business are connected to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit". The proviso to Section 2(15) creates an exception for certain activities which otherwise are prohibited from engaging in by GPU charities. Trade, commerce, business, or service activities must take place during the "actual carrying on" of the GPU object in order for GPU charities to engage in them, and the amount of revenue from these activities must surpass 20% of the overall revenue.

Trade, Commerce Or Business

"Charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be trade, commerce, or business." This means that an amount charged for a GPU activity only to cover costs or which is only marginally above the cost incurred would not be construed as trade, commerce or business. Only when the amount charged is "significantly above the cost incurred by the assessee" that the same would be construed.

Achievement Of GPU Object

Section 11(4A)² of the IT Act, enunciates that when a trust carries on a business, unless the business is incidental or ancillary to the attainments of the objectives of the trust, it would be disentitled to an exemption under Section 11(1)³ which applies only where the property itself is held under a trust or other legal obligation. The correct way of interpreting the use of the word "incidental" in the verbatim of Section 11(4A) is to read it with Section 2(15) proviso. Thus, "carrying out activity in the nature of trade, commerce or business or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental."

Business Held Under Trust V. Business Carried On Behalf Of Trust

"If a property is held under trust, and such property is a business, the case would fall under section 11(4)⁴ and not under section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust." The distinction between the two is that, under section 11(1) of the IT Act, the revenue from a business undertaking held in trust for charitable purposes is exempt.⁵

Exemption Under IT Act

1. Statutory Body
   Such bodies charging nominal fees for carrying out "exclusive duties of prescribing curriculum, disciplining professionals and prescribing standards of professional conduct" would not be construed as business or commercial receipts as long as the "overall quantitative limit prescribed in the proviso to Section 2(15) are complied with. Only if in case the fees charged is "significantly higher than the cost incurred" hen it would amount to business or commercial receipts and in that case the body would not be eligible for exemption.
2. Trade Promotion Bodies
   Such bodies that are exclusively involved in coordinating and assisting trade organisations" and not in providing "additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc." would be regarded as being "involved in advancement of objects of general public utility" and hence would be eligible for tax exemption subject to proviso to Section 2(15).
3. Non-Statutory Bodies
   In the matter beforehand, "ERNET and NIXI" were such bodies "engaged in important public purposes" who were charging nominal fees for the purposes provided by it. This is why, they were eligible for exemption. However, it is incumbent upon the authorities to ascertain whether the fees furnished exceed the actual cost or have escalated to significantly greater sums. Claims of such non-statutory entities carrying out public duties must be verified annually.
   On the other hand, GS1 India even though engaged in the advancement of GPU, was receiving excessive fees for the services it was rendering which were for the "benefit of trade and business". This is why, it was not eligible for tax exemption.
4. Sports Associations
   With respect to the State Cricket Associations, the Apex Court directed the tax authorities to consider all tangents of the case and "adjudicate the matter afresh".⁶
5. Private Trusts
   The "assessee-Tribune Trust" is not eligible for tax exemption even though it advances GPU because it received income "from advertisments, constituted business or commercial receipts."⁷

ANALYSIS

Whether The Judgment Is Still Valid On The Present Date?

Yes, the judgement is still valid till the present date. The Apex Court rendered a dynamic judgement that has significantly changed the interpretation of Section 2(15). The Apex Court has limited the definition by rigorously construing the provisos, requiring the imposition of the two requirements. This means that in order to qualify for the exemption, one must not only determine that the purpose is incidental to the primary goal but also that the proceeds must fall within the specified financial range. As a result, the Apex Court changed focus from the activities' "predominant objective" to an examination of the character of the actions and their inherent relationship to the GPU goals. which existed. Under the previous provisions , the trade and commerce associations were not able to get exemption which ultimately discouraged their growth. But under the new changes , majority of the loopholes have been covered making it applicable till this time as well.⁸

Whether The Judgment Stands Good Or Has Been Overruled?

The judgment stands good on the present date and has not been overruled. It is imperative to highlight the fact that this judgment has led to noteworthy ramifications, which may result in imposition of stringent conditions and invalidation of claims of deserving institutions if the Revenue opines that certain activities do not carry out the GPU object or that the profits exceed the prescribed limits etc.⁹

Whether The Judgment Has Been Followed By High Courts And Tribunals?

In Fernandez Foundation¹⁰ v. Commissioner of Income Tax (Exemption), the ITAT while taking into consideration the law laid down in AUDA judgment, observed that the Assessee, formerly known as "Fernandez Hospital Private Limited," now renamed as "Fernandez Foundation" continued to charge patients at market prices even after such conversion. Nothing about the assessee's operations, administration, location of services, or patient care costs changed. The Assessee could have engaged in any philanthropic activity, such as lowering the profit margin while providing services or using the earnings to provide free assistance to those in need but no such activities were undertaken by the Assessee. Therefore, a simple name charge did not entitle the Assessee to any exemption.

While taking note of the law laid down in AUDA judgment, the Apex Court in Servants of People Society¹¹, wherein, the Ld. Appellate Commissioner, the Hon'ble ITAT and Hon'ble High Court of Delhi granted an exemption to the Assessee following the decision of the Delhi HC in India Trade Promotion Organisation¹² which was no longer good in law opined that the matter be re-examined because the law with respect to interpretation of Section 2(15) had undergone a change in AUDA judgment.

Again, in the case of Improvement Trust¹³, The Assessing Officer found that the Improvement Trust's land purchase, development, and sale activities were not charitable endeavours under the criteria of "general public utility." This was the case once more with regard to the trust's efforts to improve the town of Sangrur.

CONCLUSION

In summary, neither did the Apex Court prohibit any Assessee pursuing GPU activity from being able to claim exemption, nor did it give the tax authorities permission to later refuse exemption in the event that the relevant year's receipts exceed the quantitative limit. Every year, the assessing authorities ought to to carefully review the record in order to determine whether the Assessee's operations, as determined by its receipts and revenue, constitute trade, commerce, or business. In the event that it is determined that they are in fact engaged in trade, commerce, or business, it is necessary to investigate if the defined limit specified in Section 2(15) proviso has been exceeded, thereby removing their eligibility for exemption.

Footnotes

1. Income Tax Act, 1961 s. 2(15)

2. Income Tax Act, 1961 s. 11(4A)

3. Income Tax Act, 1961 s. 11(1)

4. Income Tax Act, 1961 s. 11(4)

5. Additional Comissioner of Income Tax v. Surat Art Silk Cloth Manufacturers Association [1979] 2 Taxman 501 (SC)/[1978] 121 ITR 1 (SC)[19-11-1979]

6. [2023] 151 taxmann.com 508 (Article)[28-06-2023]

7. [2023] 151 taxmann.com 508 (Article)[28-06-2023]