The Punjab and Haryana High Court has held that an improvement trust cannot be treated as a commercial developer merely because it earns income from the sale of developed plots. Where such sales are incidental to the trust’s statutory town-development functions and the resulting surplus is used for public welfare, its activities remain charitable under the Income Tax Act, 1961.
The Bench of Justice Ajay Kumar Mittal and Justice Avneesh Jhingan has concluded that the trusts’ objects and activities constituted the advancement of an object of general public utility under Section 2(15). It observed that acquiring land, developing it and selling plots were ancillary activities undertaken to implement statutory town-improvement schemes and could not be equated with the business of a private coloniser or developer.
The appellant/assessee was constituted under the Punjab Town Improvement Act, 1922. It was granted registration under Section 12AA of the Income Tax Act with effect from June 12, 2003.
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The controversy arose after the Finance Act, 2008 amended Section 2(15) with effect from April 1, 2009. The amended provision stipulated that the advancement of an object of general public utility would not qualify as a charitable purpose if it involved an activity in the nature of trade, commerce or business for a fee or other consideration.
Relying on the amendment, the Commissioner of Income Tax issued a show-cause notice to the Bathinda trust on June 20, 2012, asking why its registration should not be cancelled.
The trust replied that its activities were directed towards public utilities. It maintained that even if certain operations generated a surplus, the funds were used for public-development projects rather than private commercial gain.
The Commissioner, however, concluded that the trust’s activities did not satisfy the amended definition of “charitable purpose” and cancelled its registration by an order dated July 20, 2012.
The ITAT initially upheld the cancellation. The High Court subsequently set aside that decision on August 6, 2014, and remanded the matter to the Tribunal for reconsideration in light of the amended Section 2(15) and the provisions of the Punjab Town Improvement Act.
Following the remand, the Tribunal allowed the trust’s appeal on August 31, 2015. It relied upon its ruling concerning the Kapurthala Improvement Trust and held that the power to cancel registration under Section 12AA(3) was limited. The Revenue then approached the High Court.
The Income Tax Department argued that the trusts purchased land at nominal rates, divided it into plots and sold those plots at substantially higher prices. According to the Revenue, these activities resembled those of builders and private property developers and were therefore commercial in character.
It also contended that the trusts could not automatically claim tax exemption merely because they were statutory bodies. The Revenue further alleged that the Tribunal had failed to comply adequately with the High Court’s earlier remand directions.
The trusts countered that their predominant purpose was planned urban development and the provision of public utilities. Plot sales were only one part of a broader statutory framework, and any surplus earned through those sales was used to implement development and welfare projects.
They maintained that the presence of profit in an incidental activity did not, by itself, convert the entire organisation into a commercial enterprise.
The High Court took note of several public projects undertaken or proposed by Improvement Trust, Bathinda.
These included the development of a sewerage system at an estimated cost of ₹58.36 crore without any recovery of charges, reservation of 18.27 acres for a public bus stand and provision of land to the police department free of cost.
The trust also proposed or carried out the construction of community halls, service lanes, parking facilities, footpaths, road dividers and approach roads. It supplied a town-cleaning machine to the municipal corporation and provided plots and constructed houses for economically weaker persons without charge.
Other activities included donating money to a school for deaf and speech-impaired children, reserving land for a senior citizens’ home, providing land for a public healthcare centre and paying street-lighting expenses for various trust schemes.
The financial statements placed before the authorities also showed losses for several assessment years between 2003-04 and 2007-08.
Rejecting the Revenue’s case, the High Court said that the Department’s principal emphasis was on the profits earned from selling plots. That fact alone, the Bench held, was insufficient to deny the benefit available to a charitable organisation.
The sale of plots and premises was incidental and ancillary to the trusts’ predominant objective of planned town development. The trusts were statutory bodies established to provide public utilities and develop localities falling within municipal limits.
Acquisition of land and its subsequent disposal formed part of the mechanism through which statutory improvement schemes were implemented. Such activities could not be isolated from the trusts’ broader public obligations and characterised as an independent real-estate business.
The Court observed that there was no evidence to show that the surplus earned from plot sales had been diverted away from public-utility purposes. On the contrary, the material indicated that the money was used for charitable and civic-development activities.
It further clarified that the Income Tax Act does not require charitable activities to be funded exclusively through donations or government assistance. An institution may raise its own funds and still retain its charitable character, provided its predominant purpose remains the advancement of public utility.
The Bench relied substantially on the High Court’s earlier decision concerning Improvement Trust, Moga. In that ruling, the Court had examined the duties and powers of improvement trusts created under the Punjab Town Improvement Act.
The statutory responsibilities of such trusts include improving congested areas, dealing with insanitary buildings, developing streets and open spaces, improving ventilation and traffic facilities and preparing development, expansion and housing-accommodation schemes.
The High Court reiterated that the Government of Punjab had not created improvement trusts to conduct property-development businesses under the guise of public utility.
Although Section 28 of the Punjab Town Improvement Act permitted a trust to dispose of land through sale, lease or exchange, that power was connected with the implementation of statutory schemes. It was not an unrestricted commercial power independent of the trust’s public functions.
The trusts were required to adopt a comprehensive approach to the improvement and expansion of urban areas. Their schemes were driven by public requirements and statutory responsibilities, unlike private developments undertaken primarily to earn profit.
The Court accordingly held that the predominant purpose of the trusts was “town improvement” and not commercial exploitation of land.
The High Court explained that an improvement trust may earn a surplus while exercising its power to develop and dispose of land. However, the existence of such surplus does not automatically take the trust outside the definition of charitable purpose.
The relevant question is whether earning profit is the predominant object of the institution or merely a consequence of activities undertaken to fulfil its principal public purpose.
In the present case, the Revenue had focused on the extent of the profits without connecting those profits with the trusts’ remaining activities. It had also failed to establish that the trusts departed from their statutory public-welfare objectives.
Consequently, the Court held that the Commissioner was not justified in cancelling the Section 12AA registration merely because income had been generated from plot sales.
The department relied on the High Court’s decision involving Tribune Trust. The Bench, however, found that ruling distinguishable because, in that case, the profits were not being utilised for charitable purposes. No similar allegation had been established against the improvement trusts.
The Department’s reliance on Supreme Court decisions concerning statutory authorities was also rejected. Those cases dealt with claims for exemption under Article 289 of the Constitution or with whether a corporation qualified as a local authority under Section 10(20) of the Income Tax Act.
The improvement trusts, by contrast, were claiming benefits on the basis of registration under Section 12AA and the charitable character of their activities. The cited decisions, therefore, did not advance the Revenue’s case.
The Court also distinguished the ITAT’s ruling involving Jammu Development Authority. It noted that the decision was based on the particular facts of that case, where a finding had been recorded that the authority was not advancing objects of general public utility.
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