Recently, the Chhattisgarh High Court, while dealing with a case involving the Raipur Development Authority, held that statutory bodies performing public functions and charging cost-based or nominal fees do not forfeit their charitable character under Section 2(15) of the Income Tax Act, 1961 , merely because of revenue generation, unless they are involved in profit-oriented business activities.
Brief Facts:
The dispute revolves around the disallowance of exemption benefits under Sections 11 & 12 of the IT Act to the Raipur Development Authority, which is a statutory authority established to implement town development plans and schemes for the betterment of urban areas, on the premise of applicability of the proviso to Section 2(15) read with Section 13(8) of the IT Act. This disallowance has resulted in the addition of Rs 21.62 crores to the income of RDA by opining that the fees charged by it for urban infrastructure services and land development form part of a commercial activity.
When the matter went on appeal, the CIT, as well as the ITAT, overturned the decision of the AO to conclude that the operations of RDA were charitable, since it had obtained registration u/s 12AA back in 2008 and its activities were carried out under the control of the State Government. This led to a further appeal before the High Court.
Contentions of the Appellant:
The counsel for the Appellant submitted that the CIT(Appeals) and the ITAT have concurrently erred in holding that the proviso to Section 2(15) of the IT Act would not be applicable in the case of RDA, since they failed to appreciate that institution of public importance like schools, community centres are created/ developed, the RDA is charging the cost of it from the public at large and the money is coming from the jury of the Government. He further submitted that the objects/activities of the RDA are of a commercialised nature and no charity is involved in.
Contentions of the Respondent:
The counsel for the respondent contended that the CIT(Appeals) and the ITAT have rightly held that the proviso to Section 2(15) of the IT Act would not be applicable as the Appellant Authority is constituted under Section 38(1) of the Chhattisgarh Nagar Tatha Gram Nivesh Adhiniyam, 1973 and its functions are enumerated in Section 38(2) of the Act of 1973 and the State Government has complete control over the Authority. Thus, the RDA is not conducting its affairs solely on a commercial line with a motive to earn profit, and there is not an iota of evidence brought on record to hold that the Authority is involved in commercial activity with a motive to earn profit.
Observations of the Court:
The Division Bench of Justice Sanjay K Agrawal and Justice Sanjay Kumar Jaiswal upheld the concurrent findings of the CIT(A) and ITAT, holding that the RDA was established by statute to perform public functions under government control and supervision, and its activities fell within the scope of “advancement of any other object of general public utility” under Section 2(15) of the IT Act.
The Court noted that the State Government retained overarching powers to supervise, direct, and even dissolve the Authority under Sections 72 to 76 of the Chhattisgarh Nagar Tatha Gram Nivesh Adhiniyam, 1973, highlighting its non-commercial character.
Relying on the Supreme Court's judgment in Ahmedabad Urban Development Authority (2023), the Court reiterated that statutory bodies performing public duties and charging cost-based or nominally priced fees do not lose their charitable character unless they engage in business activities with significant profit margins.
Since there was no evidence that the RDA had charged fees significantly above cost or deviated from its statutory purpose, the Court concluded that the proviso to Section 2(15) was inapplicable.
The decision of the Court:
Observing that the additions made by the AO were rightly deleted, the Court dismissed the Revenue’s appeal while affirming the charitable status of the RDA.
Case Title: Deputy CIT vs Raipur Development Authority
Case Number: TAXC No. 81 of 2019
Coram: Hon’ble Justice Sanjay K Agrawal and Hon’ble Justice Sanjay Kumar Jaiswal
Counsel for Appellant: Advocates Amit Chaudhary and Vijay Chawla
Counsel for Respondent: Senior Adv Ashish Shrivastava, and Advocates Rohishek Verma, Rahul Ambast, Udit Khatri, and Ashutosh Shrivastava
Read Order @ Latestlaws.com
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