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Income Tax Exemption cannot be denied to a Trust deriving income from developing / selling of land under Statutory Scheme: Punjab & Haryana HC [Read Judgment]

Recently, in the case of CIT (Ex), Chandigarh v. M/s Improvement Trust, the two-judge bench of the Punjab and Haryana High Court has categorically held that a Trust deriving income from developing/ selling of land under statutory scheme do not lose its “charitable nature and therefore, the exemption granted to such a Trust under section 12A of the Income Tax Act cannot be withdrawn. The bench comprised of Chief Justice S.J Vasifdar and Justice Deepak Sibal emphasised that  such commercial activities e are incidental to the main object of the trust and therefore, exemption cannot be withdrawn.

In the instant case, the assessee, a Trust, derives its income from constructing and selling residential apartments, commercial flats and booths etc.The Audit Report reveals that the assesse purchases land at nominal cost, develops it, cuts it into small plots and sell them at much higher prices earning huge profits. Rejecting exemption to the assessee- Trust u/s 12A, the AO observed that that the auction and the conditions imposed on the bidder clearly indicate that the activities of the assessee were more in the nature of a big private builder/colonizer rather than the institution constituted for‘charitable purpose’ of the advancement of any other object of general public utility.

The first appellate authority confirmed the order. However, the Tribunal held that the activities of the trust fall within the category “objects of general public utility’ and noted that the assessee maintained separate books for the business.

The bench noted that in order to fall within the ambit of “advancement of any other object of general public utility, it is sufficient if the assessee-Trust does precisely what the last category in Section 2(15) states namely being involved in activities for the advancement of an object of general public utility. They include a proper systematic development of certain areas.These activities are by virtue of the PTI Act undertaken by this assessee.

The bench noted that it cannot possibly be suggested that the Government of Punjab formed the trusts under the Punjab Town Improvement Act, 1922 because it wanted to carry on the business as colonizers or developers under the mask of the category of “objects of general public utility”.

It was further noted that the preamble of the Punjab Town Improvement Act provides for the “improvement of certain areas.”Section 28(2)(iii) of the Punjab Town Improvement Act, 1922 permits a scheme under this Act to provide interalia for the disposal of the land vested in or acquired by the trust including by lease, sale and exchange thereof. This, however, is not the predominant activity or responsibility of the trust. Nor for this assessee is making profits from this activity its predominant motive.

“The Act in general and Chapter-IV thereof in particular indicates the reason for and the basis of the establishment of the trust. Almost every section in the Chapter indicates clearly that the trust is established for the purpose of “advancement of the object of general public utility”. This is the predominant purpose of the trust.”

“Mere profit making on account of certain incidental or ancillary activities of the trust do not disentitle it to the exemptions. The Trust constituted under the PTI Act is likely to make profit on account of its commercial or business activities such as when it acts pursuant to the power under section 28(2)(iii) by disposing off its lands. That, however, does not take it out of the definition of ‘charitable purpose’ in Section 2(15). As we held earlier, trade, commerce and business in Section 2(15) must be such as to involve an element of profit. Profit, however, is not the predominant motive of such trusts. In our view considering the nature of the Act, selling of plots and premises by the trust is only incidental and ancillary to its main purpose which at the cost of repetition “town improvement” in almost every respect. Even where the plots are developed and premises are constructed and sold at the market price, the activity is not commercial or business venture per se but one necessitated on account of the implementation of the provisions of the trust through statutory schemes. The main purpose of such schemes is driven by public requirements and not as a commercial venture per se. They are incidental to the main object of the trust.”

While concluding, the bench noted that “However, Section 2(15) and the corresponding sections including Sections 11, 12, 12A and 12AA are independent of Section 10(20A) of the Act. Upon the omission of Section 10(20A), the provisions of the other sections were not affected. They remained intact. An assessee could have been entitled to the provisions of Section 10(20A) and the other provisions simultaneously. The omission of one, however, does not affect the validity or the existence of the others. The two provisions are distinct and independent of each other. Thus the omission of Section 10(20A) did not affect the rights of the parties claiming the benefit of Sections 2(15), 11, 12, 12A and 12AA of the Act.”

Read the full text of the Judgment below.

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