Loans Extended By NOIDA Is Not Commercial Activity, Eligible For Section 10(46) Exemption: Delhi High Court

The Delhi High Court has held that the loans and advances extended by the New Okhla Industrial Development Authority (NOIDA) are not commercial activities and are eligible for exemption under Section 10(46) of the Income Tax Act.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that the respondent department has erred in holding that the loans and advances extended by the petitioner would fall within the ambit of commercial activity. The conclusion not only fails to take into consideration the directives of the state government that prompted and facilitated the action, but the grant of those loans has also not been established to have been motivated with a view to profiteering.

The New Okhla Industrial Development Authority (NOIDA), an entity constituted under the Uttar Pradesh Industrial Area Development Act, 1976, impugns the order in terms of which the Central Board of Direct Taxes (CBDT) has refused to accede to its prayer for being accorded appropriate certification as contemplated in terms of Section 10(46) of the Income Tax Act, 1961.

The statutory provision enables the CBDT to certify the specified income of a body or authority constituted under a Central, State, or Provincial enactment or one that is created by the Union or the State Governments with the object of regulating and administering any activity for the benefit of the general public and that is not engaged in any commercial activity to be exempt from taxation, with the income so specified not being liable to be included in its total income of the previous year.

The order has come to be passed based on an application made by NOIDA for being accorded the requisite certification under Section 10(46). The record would reflect that since the application had remained pending for a considerable period of time, the petitioner was constrained to approach the Court by way of a writ petition, which came to be disposed of with the Court directing the CBDT to decide the petitioner's application within 12 weeks.

The CBDT has also observed that NOIDA had made huge investments in bonds and shares of various entities and created interest-yielding fixed deposits, which again could not be said to have had any direct, immediate, or fundamental connection with the role assigned to it under the UPID Act, thus being in contravention of Section 20(2). The CBDT concluded that NOIDA was systematically indulging in activities that were commercial in nature and undertaken with the view of earning profit. The CBDT noted that the petitioner did not fulfill the conditions for the grant of exemption as contemplated under Section 10(46).

The petitioner contended that NOIDA is an authority duly constituted under Section 3 of the UPID Act, represents a state enactment, and whose objectives are essentially for the benefit of the general public. The Board has clearly erred in holding that the petitioner is engaged in commercial activity. The petitioner is, in one sense, a wing of the state government itself constituted for the purposes of regulating and undertaking planned development of the industrial development area falling under its jurisdiction and thus subserving the interests of the general public.

The petitioner laid stress on NOIDA having been declared to be an industrial township in terms of the proviso to Article 243Q(1) of the Constitution, bearing in mind the undisputed fact that it performs municipal functions as contemplated under Schedule XII of the Constitution.

The department contended that on a plain reading of Section 10(46), it is apparent that apart from an entity seeking certification being found to have been established or constituted under a Central, State, or Provincial Act, it has to be further established that the said entity has been created with the avowed objective of discharging functions for the benefit of the general public and is not engaged in any commercial activity. From the financial statements that were tendered by the petitioner, it is apparent that it had advanced loans of more than INR 5,000 crores to various entities, including private parties, which had no direct or fundamental connection with the objectives and duties statutorily placed upon the petitioner. The financial statements revealed that the petitioner had earned INR 793 crores in Assessment Year 2018-19 and INR 350 crores in AY 2017-18 as interest income.

The court held that the petitioner did not claim exemption from interest income earned from bonds and shares for the purposes of Section 10(46). The placement of funds and the interest income could not have constituted a valid ground for denial of exemption under Section 10(46).

The court allowed the writ petition and quashed the order passed by the CBDT.

The court directed the department to process the application for exemption made by the petitioner under Section 10(46).

Counsel For Petitioner: Balbir Singh

Counsel For Respondent: Nidhi Raman

Case Title: New Okhla Industrial Development Authority Versus Union Of India & Ors.

Citation: 2024 LiveLaw (Del) 775

Case No.: W.P.(C) 4711/2021

Click Here To Read The Order