By TIOL News Service

BENGALURU, APR 18, 2019: THE ISSUE IS - Whether proviso to Sec 2(15) applies if activity is embarked upon solely with the view to earn profit and not merely because activity has resulted in huge surplus or profits. YES IS THE VERDICT.

Facts of the case

The assessee, Bangalore Development Authority (BDA), a statutory body constituted under the State Government of Karnataka, filed its return of income for relevant AY claiming exemption u/s 11 of the Act. The assessment was concluded u/s 143(3) of the Act. During assessment the AO was of view that the assessee's activities which earn income were hit by the proviso to section 2(15) of the Act, introduced w.e.f. 01.04.2009 by Finance Act, 2010, consequently denied to assessee the exemption claimed u/s 11 of the Act and brought to tax the assessee's income from AY 2009-10 onwards. The assessee raised several alternate grounds contending that the AO had not assessed the business income as per the provisions of the Act and had denied the assessee several eligible deductions which the assessee was entitled to even if it were to be assessed as a business entity.

On appeal, Tribunal held that,

++ it is after the introduction of the proviso to section 2(15) of the Act that the Income Tax Department took a view that the activity of 'BDA' was in the nature of trade, commerce or business and cancelled the registration, granted under section 12A of the Act, vide order dated 08.11.2011. The assessee's registration under section 12A of the Act however stood restored by a decision of the Co-ordinate Bench of this Tribunal vide order in ITA No.12/Bang/2012 = 2015-TIOL-941-ITAT-BANG dated 10.04.2015. In this prevailing factual matrix, there is no change in the objects and the only issue which apparently prompts Revenue to take the view it has taken, i.e., that the activity of the assessee is hit by the proviso to section 2(15) of the Act; is the fact that the activity of the assessee has resulted in huge surplus or profits. The fact of surplus or shortfall is not to be reckoned as the test for applicability of the proviso to section 2(15) of the Act; but rather, whether the activity is embarked upon solely with the view to earn profit or not; which the AO and CIT(A) have not done;

++ the activities of the assessee are squarely hit by the proviso to section 2(15) of the Act and is consequently not eligible and to be claimed exemption under section 11 of the Act. The assessee's Registration under section 12A of the Act which was cancelled by the CIT(Exemption), has since been restored by a Co-ordinate Bench of this Tribunal, by following the decision of the Karnataka High Court in the case of Director of Income Tax (Exemption) Vs. Karnataka Industrial Area Development Board (ITA No.261/2013 dated 07.11.2014). In that legal view of the matter, the judicial pronouncements relied upon by the AO would not come to the rescue of Revenue in the case on hand. Further, in view of the decision of the Apex Court in the case of CIT Vs. Vegetable Products, 2002-TIOL-574-SC-IT-LB , it is judicially correct to follow the decisions of High Courts of Gujarat and Allahabad which support the case of the assessee, when the same are in favour of the assessee; despite there being decisions contrary by other High Courts; when there is no decision of the jurisdictional High Court against the assessee. In view of the factual and legal matrix of the case, it was hold that the activities of the assessee, Bangalore Development Authority are not hit by the proviso to section 2(15) of the Act. It was decided to direct the AO to allow the assessee the benefits of section 11 of the Act while giving effect to this order. Consequently, grounds raised by the assessee on this issue are allowed.

(See 2019-TIOL-795-ITAT-BANG)