Wp(C)/6899/2009 Of M/S.infoparks, Kerala v. The Dy.commissioner Of Income Tax (Tds)

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMACHANDRA MENON FRIDAY, THE 16TH OCTOBER 2009 / 24TH ASWINA 1931 WP(C).No. 6899 of 2009(F) ------------------------- PETITIONER(S): --------------- M/S.INFOPARKS KERALA,KUSUMAGIRI PO KAKKANAD, KOCHI 682 030. BY ADV. SRI.K.ANAND (A.201) SMT.LATHA KRISHNAN RESPONDENT(S): --------------- 1. THE DEPUTY COMMISSIONER OF INCOME TAX (TDS) INCOME TAX OFFICE, C.R.BUILDING, I.S.PRESS ROAD, KOCHI. 2. THE DEPUTY COMMISSIONER OF INCOME TAX RANGE II, ERNAKULAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX FOR R THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 16/10/2009,ALONG WITH WPC NO. 6900 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX PETITIONER'S EXHIBITS EXHIBIT P1 :TRUE COPY OF ORDER DATED 29.10.2007 U/S 12 AA OF THE INCOME TAX ACT.THE INCOME TAX ACT. EXHIBIT P2 :TRUE COPY OF APPLICATION DATED 03.11.2008 SUBMITTED BY THE PETITIONER BEFORE THE FIRST RESPONDENT.SUBMITTED BY THE PETITIONER BEFORE THE FIRST RESPONDENT. EXHIBIT P3 :TRUE COPY OF LETTER DATED 15.01.2009 OF THE FIRSTRESPONDENT TO THE PETITIONER.RESPONDENT TO THE PETITIONER. EXHIBIT P4 :TRUE COPY OF LETTER DATED 31.01.2009 SUBMTTED BY THE PETITIONER BEFORE THE FIRST RESPONDENT.THE PETITIONER BEFORE THE FIRST RESPONDENT. EXHIBIT P5 :TRUE COPY OF LETTER DATED 02.02.2009 OF THE FIRSTRESPONDENT TO THE PETITIONER.RESPONDENT TO THE PETITIONER. /TRUE COPY/ P.A. TO JUDGE. P.R.RAMACHANDRA MENON, J. ----------------------------------------------- WP(C) NO. 6899 & 6900 OF 2009-------------------------------------------- Dated this the 16[th] day of October, 2009 J U D G M E N T Whether the refusal on the part of the respondents/departmentalauthorities to issue exemption certificate under Section 197 of the IncomeTax Act ('Act' in short) to the petitioners, in view of the amendment broughtabout by incorporating a 'proviso' to Section 2(15) of the Act with effectfrom 01.04.2009 is justified; forms the common issue involved in both thesecases. 2.The petitioners are State Government owned Societiesregistered under the Travancore Cochin Literary, Scientific and CharitableSocieties Registration Act (Act XII of 1955), allegedly with the main objectof setting up of Information Technology Parks in Kerala, among othergoals. Pursuant to the said objective, the petitioners acquired lands andconstructed buildings which have been let out to various InformationTechnology Companies for rent. Petitioners' institutions were gotregistered as a Charitable Trust under Section 12A of the Act andexemption was obtained under Section 11 of the Income Tax Act in respectof the income derived by them on letting out the premises. WPC NO.6899 & 6900 of 2009 2.The petitioners are State Government owned Societiesregistered under the Travancore Cochin Literary, Scientific and CharitableSocieties Registration Act (Act XII of 1955), allegedly with the main objectof setting up of Information Technology Parks in Kerala, among othergoals. Pursuant to the said objective, the petitioners acquired lands andconstructed buildings which have been let out to various InformationTechnology Companies for rent. Petitioners' institutions were gotregistered as a Charitable Trust under Section 12A of the Act andexemption was obtained under Section 11 of the Income Tax Act in respectof the income derived by them on letting out the premises. WPC NO.6899 & 6900 of 2009 3.In view of the fact that there was no tax liability in respect ofthe income derived on letting out the premises as above, having beenassigned the status as a charitable purpose, the petitioners submittedapplication before the departmental authorities for issuance of a certificateunder Section 197(1) of the Act for non deduction of tax at source. Whileso, Section 2(15) of the Act was amended incorporating a 'proviso',stipulating that the advancement of 'any other object of general publicutility' reckoned for giving the charitable status shall not be reckoned as acharitable purpose, if it involves the carrying on of any activity in the natureof trade, commerce or business or any activity of rendering any service inrelation to any trade, commerce, or business for a cess or a fee or anyother consideration, irrespective of the nature of use or application orretention of the income from such activity. The position in this regard wasbrought to the notice of the petitioners by the respondents/ departmentalauthorities; whereupon the petitioners maintained that the amendment willnot be applicable to their case and requested to consider their applicationsfor issuance of the certificate. After considering the matter, therespondents/departmental authorities rejected the applications for issuanceof the certificate under Section 197(1); which is under challenge in theseWrit Petitions. 4.Section 11 of the Act stipulates that the income from property WPC NO.6899 & 6900 of 2009 held for charitable or religious purpose shall not be included in the totalincome of the previous year of the person in receipt of the income to begiven effect in the manner as specified therein. The term ‘charitablepurpose’ has not been defined under the statute; but for the inclusivenature of the term as specified under Section 2(15) of the Act, which asexisted before the amendment is as follows:- Section 2(15):- “Charitable purpose” includes relief of thepoor, education, medical relief and the advancement of any otherobject of general public utility. As per Section 2 of the Finance Act, 2008, the said provision was amended adding a 'proviso' with effect from 01.04.2009 as follows: “provided that the advancement of any other object of generalpublic utility shall not be a charitable purpose, if it involves thecarrying on of any activity in the nature of trade, commerce orbusiness or any activity of rendering any service in relation to anytrade, commerce or business for a cess or fee or any otherconsideration irrespective of the nature of use or application orretention of the income from such activity. The department has taken a stand that by virtue of theamendment as above, the petitioners are not entitled to get thecertificate under Section 197(1) of the Act for non deduction atsource. 5.Mr. V. Ramachandran, Senior Counsel appearing for thepetitioners submits that, the idea and understanding of the respondentswith regard to the scope of amendment to Section 2(15) is thoroughly The department has taken a stand that by virtue of theamendment as above, the petitioners are not entitled to get thecertificate under Section 197(1) of the Act for non deduction atsource. 5.Mr. V. Ramachandran, Senior Counsel appearing for thepetitioners submits that, the idea and understanding of the respondentswith regard to the scope of amendment to Section 2(15) is thoroughly wrong and misconceived. There is no trade or business in the activitypursued by the petitioner in letting out the premises for rent and that suchan exercise will not take it outside the purview of charity and hence that the'proviso' added to Section 2(15) is not at all attracted to the cases in hand.Learned Senior counsel also submits that the statute, as it stood stillearlier, had clarified the charitable purpose mentioned in Section 2(15) by“”the words not against involving the carrying on of any activity for profit.By virtue of the existence of these clarifying words, if there was anyelement of profit it was enough liable to be reckoned as charitable purposeright from the inspection of the Act in 1961 till 01.04.1984; when the words“not involving the carrying on of any activity for profit” were deleted. Thusthe contention is that after 01.04.1984, there is no allergy to profit and if theprofit feeds charity, it stands cleared for exemption under Section 11 of theAct. 6.To analyse the scope and object of the amendment, thelearned Senior counsel placed reliance on the “Budget Speech” of theMinister for Finance, which stated as follows:- “Charitable purpose includes relief of the poor, education,medical relief and any other object of general public utility.These activities are tax exempted as they should be.However, some entities carrying on regular trade, commerceor business of providing services in relation to any trade,commerce or business and earning incomes have sought toclaim that their purposes would also falls under “charitable WPC NO.6899 & 6900 of 2009 purpose”. Obviously, this was not the intention of theparliament and hence I propose to amend the law to excludethe aforesaid cases. Genuine charitable organizations willnot in any way be effected” (para 180). 7.The learned Senior Counsel points out that, the amendment was brought about as a measure of rationalization and simplification,streamlining the definition of charitable purpose and not as a measure oftaxation. It is also stated that the concept of charity in India is wider than inEngland; simultaneously adding that, by virtue of the amendment, theposition that existed prior to 01.02.1984 has been brought back and that isall. This however will not tilt the balance in any manner in the case of thepetitioners so as to take the activities outside the charitable purpose,particularly in view of the fact that, letting out the buildings for I.T.development will not constitute any trade or business. Reliance is alsoplaced on the decision rendered by the Apex court in Commissioner ofIncome Tax, New Delhi Vs. Federation of Indian Chambers ofCommerce & Industry [130 ITR 186], Commissioner of Income TaxAndhra Pradesh Vs. Andhra Pradesh State Road TransportCorporation [159 ITR 1], Victoria Technical Institute Vs.Commissioner of Income Tax (additional and another][188 ITR 57]and Commissioner of Income Tax Vs. Gujarat Maritime Board [295ITR 561] to ascertain and understand the meaning of the terms “any other WPC NO.6899 & 6900 of 2009 object of general public utility” and the “charitable purpose” ascontemplated under the statute. WPC NO.6899 & 6900 of 2009 object of general public utility” and the “charitable purpose” ascontemplated under the statute. 8.It is contended that, by virtue of the 'preamble' and contents ofSection 32 of the Travancore Cohin Literary, Scientific and CharitableSocieties Registration Act (XII of1955) describing the eligibility of thesocieties to get the benefit, the petitioners admittedly since are registeredunder the Kerala Act, they are liable to be reckoned automatically underthe Income Tax Act as well, particularly when extended definition is givenunder the Kerala Act unlike the Income Tax Act. Referring to the decisionrendered by the Apex Court in Dharmadeepti Vs. Commissioner ofIncome Tax, Kerala [114 ITR 454] and by a Division Bench of the MadrasHigh Court in Commissioner of Income Tax Vs. Sri. Thyaga BrahmaGana Sabha (Regd.) [188 ITR 160] and another decision by the verysame Court in C.I.T. Vs. Chennai Properties and Investments Ltd. [266ITR 285], the learned Senior Counsel submits that, to perform charity,income/money is inevitable and contends that the activity being pursued byan institution may constitute a trade or business, if buildings areconstructed and sold; whereas it will not be a trade or business if theactivities are construction of the buildings and letting them out for rent. Thedistinction between the income from business contemplated under Section9 and income from property contemplated under Section 10 is also sought to be explained with reference to the dictum laid by the Apex Court in Karnani Properties Ltd. Vs. C.I.T. [82 ITR 547]. 9.The respondents have filed a detailed statement in WP(C)6899/2009 contending that the eligibility for exemption under Section 11has to be evaluated at the time of assessment and hence that the allegedcause of action now projected by the petitioner is rather premature.Reliance is also placed on Annexure R1(a) Circular issued by the CentralBoard of Direct Taxes, clarifying the position with regard to the amendedsection 2(15) holding that where the purpose of trust or institution is therelief of the poor, education or medical relief, it will be constitute 'charitablepurpose', even if it incidentally involves the carrying on of commercialactivities and that the amendment will have effect only to the entities whosepurpose is advancement of “any other object of general public utility”. 10.With regard to the specific case in WP(C) 6899/2009, referringto the contents of the ‘memorandum of association’ of the petitioner asspecified in paragraph 3, it is contended that, in order to perform the objectof society as enumerated in paragraph 3.1, the society may carry out thefunctions as stated in para 3.2.1. The nature of functions enumeratedincludes planning, establishing and managing Software IT, ITES, BPOParks in Kerala with all the necessary infrastructure and support facilities,set up incubator and pilot production facilities for entrepreneurs as well as various other activities. The primary function of the assessee would berunning of technology parks setting up all facilities, take part in jointventures and conduct international seminars, conferences, marketing etc.for promotion of the park, undertake publications in form of paper book,audio video cassettes and other functions. Referring to the said activities itis contended that, it is a business enterprise, doing all necessary activitiesfor running an electronic park in whatever form necessary. various other activities. The primary function of the assessee would berunning of technology parks setting up all facilities, take part in jointventures and conduct international seminars, conferences, marketing etc.for promotion of the park, undertake publications in form of paper book,audio video cassettes and other functions. Referring to the said activities itis contended that, it is a business enterprise, doing all necessary activitiesfor running an electronic park in whatever form necessary. 11.It is brought to the notice of this Court from the part of therespondents that, although the primary function of the assessee is theencouragement, development and management of the Info Park, theassessee functions in a business oriented manner, obtaining lands andconstructing buildings, developing infrastructural facilities and then hiringout the premises to the various persons/institutions at a fee and thereforethe assessee is in the business of promotion of development andmanagement of estate, which incidentally is occupied by the IT basedcompanies. The fact that such activities being pursued are on behalf of theGovernment or on the orders of the Government is of no significance. Asa whole, it is stated, since the operation is in a business oriented manner, itwill definitely come within the fourth limb of the amended section 2(15),where the prohibition of activity in the nature of trade, commerce orbusiness or any activity of rendering any service in relation to a trade or commerce or business for a cess or any other consideration, irrespective ofthe nature of the use or application or retention of the income of suchactivity is specified and hence not entitled to any exemption. 12.In response to the case put forth by the petitioner, reference isalso made to R1(b) ‘Profit and Loss Account’ of the petitioner for the yearending 31.03.2008 as revealed from the latest return available on record. Itis stated that the assessee has shown the income from lease rent under'Schedule A' and the other income under 'Schedule B'. It is also stated thaton the expense side, the assessee has claimed salary and conveyance,administrative and other charges, printing and stationery, Staff welfareexpenses, promotional expenses, repairs and maintenance anddepreciation. From the above, it is revealed that, while claiming that theincome from the property the determination has been made by theassessee for the purpose of income and expenditure account, as in anybusiness case,claiming all the deductions including depreciation for thecurrent year for Rs.5,92,01,178/-which shows the business nature of theactivities pursued by the assessee. 13.Mr.Jose Joseph, the learned Standing Counsel appearing onbehalf of the respondents submits that, as made clear by the CBDT videAnnexure R1(a) Circular, each case has to be examined independently, asto the eligibility for exemption and that is essentially a ‘fact adjudication process’ to be pursued at the time of assessment and not resolvable in thepresent Writ Petition. Referring to the mandate under the statutoryprescription and also placing reliance on the dictum laid down by the ApexCourt in Aditanar Educational Institution’s case [224 ITR 310]. It issought to be established that evaluation has to be done every year and thatinstance of exemption is not automatic. 13.Mr.Jose Joseph, the learned Standing Counsel appearing onbehalf of the respondents submits that, as made clear by the CBDT videAnnexure R1(a) Circular, each case has to be examined independently, asto the eligibility for exemption and that is essentially a ‘fact adjudication process’ to be pursued at the time of assessment and not resolvable in thepresent Writ Petition. Referring to the mandate under the statutoryprescription and also placing reliance on the dictum laid down by the ApexCourt in Aditanar Educational Institution’s case [224 ITR 310]. It issought to be established that evaluation has to be done every year and thatinstance of exemption is not automatic. 14.From the nature of activities being pursued by the petitioners,particularly as contained in the ‘memorandum of association’ extracted bythe respondent in the statement filed in WP(C) 6899/2009 (stated as moreor less similar in the other case as well), it is very much evident that thederivation of income by the petitioner cannot be held as merely the incomefrom property, so as to oust the involvement of ‘trade, commerce orbusiness’ or ‘any service in connection with trade commerce or business’as contemplated under the statute, which requires to be exempted andappreciated in detail by the departmental authorities at the time ofassessment. For the very same reason, the petitioners cannot have ashort cut, to have an automatic declaration of exemption, by seeking forissuance of a Certificate under Section 197(1); particularly when there issubstantial variation in the statutory position as it existed earlier when thepetitioners were given exemption under Section 11 and the position asavailable after the amendment to Section 2(15) brought into effect from 01.04.2009. All the decisions cited by the learned Senior Counsel for thepetitioners are in respect of the position as it existed earlier and theposition as it now exists does not form the subject matter of considerationin any such cases. Further, the petitioners have not chosen to challengethe amendment to Section 2(15) and Union of India is not impleaded in theparty array,so as to answer the scope and extent of amendment. 15.Yet another important aspect to be noted in this context is that,after the amendment by incorporating proviso to Section 2(15), the 4[th] limbas to the advancement of “any other object of general public utility” will nolonger remain as charitable purpose, if it involves carrying on of: (a)any activity in the nature of trade, commerce or business(b) any activity of rendering any service in relation to anytrade, commerce or business for a cess or a fee or any otherconsideration, irrespective of the nature of use or application orretention of the income from such activity. The first limb of exclusion from charitable purpose under clause (a) will be attracted, if the activity pursued by the institution involves any trade,commerce or business. But the situation contemplated under the secondlimb [clause (b)] stands entirely on a different pedestal, with regard to theservice in relation to the trade, commerce or businessmentioned therein.To put it more clear, when the matter comes to the service in relation to thetrade, commerce or business, it has to be examined whether the words The first limb of exclusion from charitable purpose under clause (a) will be attracted, if the activity pursued by the institution involves any trade,commerce or business. But the situation contemplated under the secondlimb [clause (b)] stands entirely on a different pedestal, with regard to theservice in relation to the trade, commerce or businessmentioned therein.To put it more clear, when the matter comes to the service in relation to thetrade, commerce or business, it has to be examined whether the words “any trade, commerce or business” as they appear in the second limb ofclause (b) are in connection with the service referred to the trade,commerce or business pursued by the institutions to which the service isgivenby the assessee. If the said words are actually in respect of the tradecommerce or business of the assessee itself, the said clause (second limbof the stipulation under clause (b) is rather otiose. Since the activity of theassessee involving any trade commerceor business,is already excludedfrom the charitable purpose by virtue of the first limb (clause (a))itself, thereis no necessity to stipulate further, by way of clasue (b), adding the words“or any activity of rendering any service in relation to any trade, commenceor business ………………”. As it stands so, giving a purposiveinterpretation to the statute, it may have to be read and understood that thesecond limb of exclusion under clause (b) in relation to the servicerendered by the assessee, the terms “any trade, commerce or businessrefer to the trade, commerce or business pursued by the recipient to whomthe service is rendered (as there may be a situation involving letting out thepremises for purposes other than involving trade, commerce or business aswell). Since the petitioners have not chosen to implead the UnionGovernment in the party array, to consider and finalise the scope andamendment in this regard, this Court is not in a position to lay down the lawon this aspect for the time being and hence it is left open. 16.As stated hereinbefore, whether the petitioners are entitled to get the benefit of exemption in view of the activity being pursued by them,in respect of the period after the amendment of Section 2(15) with effectfrom 01.04.2009, is a matter to be looked into and decided by thedepartmental authorities in the course of adjudication, at the time ofassessment. For the very same reason, Ext.P5 issued by the respondentsin WP(C) 6899/2009 and Ext.P7 issued in WP(C) 6900/2009 refusing toissue any certificate under Section 197 (1) of the Act, are perfectly withinthe four walls of the law and not assailable under any circumstance. Nointerference is called for. Both the Writ Petitions fail and are dismissedaccordingly. P.R.RAMACHANDRA MENONJUDGE dnc