By TIOL News Service

NEW DELHI, MAR 03, 2018: THE issue is - Whether the authority is to be denied benefit of Section 10 (46) of the Act merely because it earns profits or income from activities undertaken while performing their regulatory and administrative role. NO is the VERDICT. IN response to whether the wider definition of "economic activity" should not be applied while interpretating the expression "commercial activity" for the purpose of Section 10 (46) of the Act, the HC rules YES as the answer.

Facts of the case :

The assessee (Greater Noida Industrial Development Authority) is a body established under Section 3 of UPID Act. It was established by the State of Uttar Pradesh with the primary aim and object to undertake planned development of industrial development area known as “Greater New Okhla Industrial Development Authority”. The assessee filed the writ petition for setting aside and quashing the order passed by the Additional CIT, rejecting its request for issue of notification of exemption u/s 10(46) of the Act. The Ministry of Finance, Central Board of Direct Taxes and Assistant CIT, Noida, Uttar Pradesh, was the AO of the assessee. In November, 2011 the assessee had made an application with the AO for issue and grant of exemption notification. The AO had required the assessee to furnish certain information which were duly furnished by the assessee. However the AO expressed its prima facie view that the assessee did not meet the prescribed conditions for approval u/s 10(46) of the Act and had required the assessee to furnish clarification with necessary documents for claiming eligibility. The assessee submitted the same and requested that grants received from the State Government, moneys received from the disposal/90 years lease of immovable properties etc should be notified for exemption. But AO rejected the assessee's prayers for issue of notification of exemption on the ground that the assessee was making huge profits out of its activity of acquiring land and selling it at much higher prices for residential, industrial, institutional and commercial purposes and the activities of the assessee were commercial in nature.

the High Court held that,

++ clause (b) of Section 10(46), which states that such authority/body must not be engaged in any commercial activity, should be interpreted in harmony and symmetrically with clause (a) of Section 10(46) to fulfil the primary objective. This exemption provision is predicated on the assumption that the authority/body satisfying and meeting requirements of clause (a) of Section 10(46) would earn and have taxable income under the heads stated in Section 14 and therefore would apply and seek exemption. Perceptively, when no fee or consideration is charged and paid, the authority/body would not have any income (except interest or other income from investments) and, hence, would not require an exemption notification under Section 10(46) of the Act. Clause (b) of Section 10(46) does not require and mandate that interest income or the like alone would be exempt. Sub-Section (46) to Section 10 of the Act exempts specified income from the charge. Only specified income is granted exemption and excluded from the ambit of the charging section and not all incomes other than those specified. Therefore while granting exemption, the Revenue can restrict and specify the income which would be exempt. All incomes earned from varied and different activities need not be granted exemption;

++ bar and negative stipulation in clause (b) should not be interpreted as forbidding charging of fee, service charge or consideration while regulating and administering the activities for which the authority/body is established in general public interest. This would be impracticable and extremely restrictive and archaic interpretation. A more realistic, pragmatic and reasonable interpretation of the expression "any commercial activity" would be more acceptable and in consonance with the legislation in question. It is important to delineate and define the scope and ambit of disqualification envisaged by the words "any commercial activity" in clause (b) of the said Section. In the absence of any clear statutory definition elucidating these words, we have to outline a definitive and clear standard and test to be applied;

++ if an authority/body created and established under a statutory enactment or constituted by Central or State government, charges and is paid for regulating and administrating any activity for which it was established and set up, clause (b) is not contravened and breached. Where, however, an authority/body established is with a commercial intent and objective, i.e. on commercial lines, and intends to or earn profits as one of its goals, it would falter under clause (b) and would be denied registration. Authority/body satisfying the requirements of clause (a) can also be denied registration if it carries on any commercial activity, i.e. economic activity unconnected and un-associated with the regulatory and administrative purpose for which they were created and established, even when such receipts, income and profit generated is used for undertaking regulatory and administrative functions for the benefit of public. Consequently it was held that an authority/body satisfying the requirements of clause (a) would not incur disentitlement under clause (b) when it charges and receives money by way of fee, reimbursement or even consideration as rent or for transfer of rights in movable and immovable properties directly connected and having nexus with regulatory and administrative functions that they are obliged and mandated to perform and execute. Not to charge any fee or consideration for services rendered or for rights granted, specially from those who can afford, would be contrary to general public interest specified and stipulated in clause (a) of section 10(46) of the Act;

++ the activity should not run on commercial lines i.e. with the profit motive and intent to earn profit but given the regulatory and administrative role assigned to the body or authority, the activity must be and should be for meeting and complying with the responsibility and mandate of the role prescribed and assigned. If the answer is in favour of the authority, body etc. exemption would not be denied in view of clause (b) to section 10(46) of the Act. Exemption would not be available and granted to a body or authority, which is carrying on a commercial activity with intent and motive to earn profit even when the profit and income earned is with the object to sub-serve the object of general public utility. In other words, profits which arise even when utilized for and to feed the charitable purpose i.e. the general public interest, would result in disqualification/ ineligibility;

++ one can urge that the interpretation given by us would mean and imply that Section 10 (46) and the provisions relating to charity under Section 2 (15) read with Sections 11 to 13 of the Act would overlap. Overlapping to some extent is possible. However, Section 10 (46) of the Act is a specific provision dealing with body or authority etc. created or constituted by the Central or State Government or under the Central or State enactment. Further, exemption under the said provisions could be restricted to only specified types or categories of income and not all incomes. The assessee cannot be denied benefit of Section 10 (46) of the Act for the reason that it may well qualify and would be entitled to benefit under Section 2 (15) read with Sections 10 to 13 of the Act. The activities of assessee necessarily require money and funds, which are received from the State Government. The assessee, given the regulatory and administrative functions performed is required and charges fee, cost and consideration in the form of rent and transfer of rights in land, building and movable properties. Similarly payments have to be made for acquisition of land, creation and construction of infrastructure and even buildings. Carrying out and rendering the said activities is directly connected with the role and statutory mandate assigned to the assessee. It has not been asserted and alleged that these activities were or are undertaken on commercial lines and intent. The assessee does not earn profits or income from any other activity unconnected with their regulatory and administrative role. Income in the form of taxes, fee, service charges, rents and sale proceeds is intrinsically, immediately and fundamentally connected and forms part of the role, functions and duties of the assessee. Resultantly, the writ petition was allowed and the impugned order dated 8th June, 2015 was set aside and quashed. The assessee's activities, it was held, were not "commercial activity" within the meaning of clause (b) to Section 10(46) of the Act.

(See 2018-TIOL-371-HC-DEL-IT)