Facts of the Case

The assessee, Allahabad Development Authority (ADA), a statutory body constituted under the Uttar Pradesh Urban Planning & Development Act, 1973, filed returns declaring Nil income after claiming exemption under Sections 11 and 12 of the Income Tax Act, 1961.

The Assessing Officer (AO) denied exemption under Section 11 on the grounds that:

  1. The activities of ADA were in the nature of trade, commerce, or business.
  2. The receipts exceeded the threshold under the first proviso to Section 2(15).
  3. ADA earned profits from sale of land, flats, shops, and commercial complexes.
  4. Upon dissolution under Section 58 of the U.P. Act, funds vested in the State Government without restriction for charitable use.
  5. Reservation of 2% and 10% discount in property allotments to employees violated Section 13(3).
  6. Government grants and funds were not routed through Income & Expenditure Account and were taxable.

Issues Involved

  1. Whether ADA qualifies as a charitable institution under Section 2(15) after insertion of the proviso (w.e.f. 01.04.2009).
  2. Whether exemption under Section 11 can be denied despite registration under Section 12A.
  3. Whether activities of land acquisition and sale amount to commercial activity.
  4. Whether reservation and discount to employees violates Section 13(3).
  5. Whether infrastructure funds and government grants constitute taxable income.
  6. Applicability of binding precedents including:
    • CIT v. Lucknow Development Authority
    • Additional CIT v. Surat Art Silk Cloth Manufacturers Association
    • CIT v. Andhra Pradesh State Road Transport Corporation
    • Jammu Development Authority v. Union of India

 Petitioner’s Arguments (Allahabad Development Authority)

  1. ADA is registered under Section 12A; its objects were already held to be of “general public utility.”
  2. The issue of charitable status was settled in its own case and affirmed by:
    • ITAT Allahabad
    • Allahabad High Court
  3. The judgment in CIT v. Lucknow Development Authority held that mere generation of surplus does not imply profit motive.
  4. Proviso to Section 2(15) applies only if activities are conducted with dominant commercial intent.
  5. Infrastructure funds were diverted by overriding title and were earmarked for specified government purposes.
  6. ADA acted merely as a nodal agency; grants were capital receipts.
  7. Reservation and discount were mandated by Government Order and not discretionary.

 Respondent’s Arguments (Revenue)

  1. ADA’s dominant activity was purchase and sale of land at profit.
  2. Profit-making was not incidental but primary.
  3. Proviso to Section 2(15) squarely applied.
  4. Upon dissolution, funds vested in State Government without obligation for charitable use.
  5. Reservation and discount to employees constituted benefit to specified persons under Section 13(3).
  6. Grants and funds were trading receipts; application of income does not alter character of receipt.
  7. Relied upon:
    • Jammu Development Authority v. Union of India
    • ITAT decisions in Jalandhar and Kanpur Development Authority cases.

 Court Findings / Order (ITAT Allahabad)

  • Scope of Section 2(15) post amendment.
  • Binding effect of jurisdictional High Court decisions.
  • Distinction between cancellation of registration and denial of exemption.
  • Nature of infrastructure funds.
  • Applicability of Section 13(3).

 Important Clarification

  1. The principle laid down in Surat Art Silk requires examination of dominant purpose.
  2. Jurisdictional High Court decisions are binding unless distinguishable on facts.
  3. Even where registration exists, Section 13 violations can independently disentitle exemption.
  4. Grants diverted by overriding title must satisfy strict legal tests.
  5. Applicability of proviso to Section 2(15) depends on:
    • Nature of activity
    • Profit motive
    • Scale of commercial operations
    • Manner of application of income

 

 Link to download the order - https://www.mytaxexpert.co.in/uploads/1770888632_ALLAHABADDEVELOPMENTAUTHORITYALLAHABADVS.ACITEXEMPTIONLUCKNOW2.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.