[aaykarbhavan] Judgments.

It seems that special Bench judgement in case of Times Guranty has not been argued or cited by the department.

[2010] 40 SOT 14 (MUM.) (SB)

IN THE ITAT MUMBAI BENCH 'E' (SPECIAL BENCH)

Deputy Commissioner of Income-tax, Circle 1(3), Mumbai*

v.

Times Guaranty Ltd.

D. MANMOHAN, VICE-PRESIDENT R.S. SYAL, ACCOUNTANT MEMBER AND N.V. VASUDEVAN, JUDICIAL MEMBER

IT APPEAL NOS. 4917 AND 4918 (MUM.) OF 2008

[ASSESSMENT YEARS 2003-04 AND 2004-05]

JUNE 30, 2010

Section 32 of the Income-tax Act, 1961 - Depreciation -Unabsorbed depreciation - Assessment years 2003-04 and 2004-05 - Assessee-company was deriving income from business of merchant banking - Assessee filed its return for assessment years 2003-04 and 2004-05 wherein it sought to set off unabsorbed depreciation determined in assessment years 1997-98 to 1999-2000 against income under head 'Income from other sources' - Assessing Officer rejected assessee's claim - Whether unabsorbed depreciation relating to assessment years 1997-98 to 1999-2000 was to be dealt with in accordance with provisions of section 32(2) as applicable for assessment years 1997-98 to 1999-2000 - Held, yes - Whether in view of provisions of section 32(2) as applicable to assessment years 1997-98 to 1999-2000, assessee could set off unabsorbed depreciation only against income under head 'profits and gains of business or profession' - Held, yes - Whether, therefore, Assessing Officer was justified in rejecting assessee's claim - Held, yes

2013-TIOL-792-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'E' MUMBAI

ITA No.579/Mum/2009
Assessment Year: 2005-06

M/s ELMA ELECTRIC CO PVT LTD
PLOT NO. D-10, MIDC COMPOUND, ROAD NO 33,
WAGLE ESTATE, THANE 
PAN NO:AAACE3263E

Vs

THE ITO
WARD 3(2), VARDAAN, GROUND FLOOR,
MIDC, WAGLE ESTATE, THANE

H L Karwa, President And N K Billaiya, AM

Dated: July 5, 2013

Appellant Rep by: Shri Hiro Rai
Respondent Rep by: Shri Abanikant Nayak

Income Tax- Sections 32(2), 50C – Whether the CIT(A) was justified in confirming the action of the AO in not referring the valuation of the asset to Valuation Officer as required under provision of Sec. 50C(2) when the assessee has claimed, why the stamp duty value should not be adopted - Whether brought forward unabsorbed depreciation cannot be set off against the Long Term Capital Gains of the current year.

The AO noticed that the assessee has made transfer of capital assets being land and building. The assessee has considered Rs. 55 lacs as sale consideration for land for the purpose of computing capital gains as against the actual sale consideration of Rs. 1,23,09,500/-. The assessee was asked to explain why the provisions of Sec. 50C should not be applied .The AO went on to recompute the capital gains by adopting the Stamp duty value at Rs. 1,23,09,500/-.The CIT(A) was convinced that provisions of Sec. 50C were clearly applicable and has been rightly invoked by the AO. The assessee has claimed set off of brought forward unabsorbed depreciation to be set off against the LTCG so computed. The CIT(A) held that the brought forward unabsorbed depreciation cannot be set off against the LTCG computed in the hands of the appellant on transfer of property.

On Appeal before the Tribunal the AR submitted that AO should have referred the matter to the DVO, once the assessee has claimed, why the stamp duty value should not be adopted. The DR submitted that provisions of Sec. 50C are mandatory. The AR further submitted that as per provisions of Sec. 32(2), the unabsorbed depreciation brought forward shall be merged with current year's depreciation and since current year's depreciation can be set off against LTCG, the same treatment should be given to the unabsorbed brought forward depreciation.

Having heard the parties, the Tribunal held that,

++ if the AO was to invoke the provisions of Sec. 50C, he should have first referred the matter to the Valuation Officer. The AO has erred in not referring the matter to the Valuation Officer. The CIT(A) has also erred in not asking the AO to refer the matter for valuation. The AO is directed to refer the matter of valuation to the appropriate valuation authority as per the provisions of the Act after giving reasonable opportunity of being heard to the assessee;

++ on the issue of denial of the set off of brought forward unabsorbed depreciation of Rs. 32,76,385/- against Long term capital gains of the current year, the AO to first determine the long term capital gain as per the directions given hereinabove and thereafter allow the claim of set off of unabsorbed depreciation from the same.

Assessee's appeal allowed

Case followed.

Suresh Industries (P) Ltd. Vs ACIT 54 SOT 450.

ORDER

Per: N K Billaiya:

This appeal by the assessee is directed against the order of the Ld. CIT(A)-1, Thane dt.14.11.2008 pertaining to A.Y. 2005-06.

2. The assessee has raised following 3 substantive grounds of appeal:

"1. The Ld. CIT(A) has erred in confirming the order of the AO, adopting the value determined by the stamp valuation authority, under provisions of Sec. 50C, for the transfer of property at Wagle Estate.

2. The Ld. CIT(A) has erred in concluding that the AO was justified in not referring the valuation of the asset to Valuation Officer as required under provision of Sec. 50C(2).

3. The Ld. CIT(A) has erred in concluding that brought forward unabsorbed depreciation of Rs. 32,76,385/- cannot be set off against the Long Term Capital Gains of the current year."

3. Facts relating to the grievance raised vide ground No. 1 & 2 relates to the sale of property of Wagle Estate. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has made transfer of capital assets being land and buildings located at Poona and Wagle Estate. However, we are concerned only with property at Wagle Estate, Thane.

3.1. In the computation of income for the year under consideration, the assessee has considered Rs. 55 lacs as sale consideration for land at Wagle Estate, Thane for the purpose of computing capital gains as against the actual sale consideration of Rs. 1,23,09,500/-. The assessee was asked to explain why the provisions of Sec. 50C of the I.T. Act should not be applied on the facts of the case. The assessee filed a detailed reply vide letter dt. 18.12.2007 and explained the urgency /necessity for the sale of the said land at Wagle Estate, Thane. The reply of the assessee is reproduced at page-3 & 4 of the assessment order. The AO was of the opinion that the reasons given by the assessee are not sufficient to be considered as it clearly violate the provisions of Sec. 50C of the Act. Thereafter, the AO went on to recompute the capital gains by adopting the Stamp duty value at Rs. 1,23,09,500/-.

4. Aggrieved by this, the assessee carried the matter before the Ld. CIT(A) but without any success. The Ld. CIT(A) was convinced that provisions of Sec. 50C are clearly applicable and has been rightly invoked by the AO.

5. Aggrieved by the finding of the Ld. CIT(A), assessee is before us.

6. The Ld. Counsel for the assessee submitted that the action of the AO is not in consonance with the provisions of Sec. 50C(2) of the Act. It is the say of the Ld. Counsel that the AO should have referred the matter to the DVO, once the assessee has claimed, why the stamp duty value should not be adopted.

7. Per contra, the ld. Departmental Representative supported the findings of the lower authorities and submitted that provisions of Sec. 50C are mandatory.

8. We have considered the rival submissions and perused the orders of the lower authorities. Finance Act of 2002 has inserted Sec. 50C under the head ' Special provision for full value of consideration in certain cases'. Sec. 50C(1) provides that where the consideration received or accruing as a result of the transfer of a capital asset is less than the value adopted or assessed or assessable for the purpose of payment of stamp duty in respect of such transfer, the value so adopted shall be deemed to be the full value of the consideration received as a result of such transfer. However, clause (2) to Sec. 50C provides that without prejudice to the provisions of sub-section (1) where the assessee claims before any Assessing Officer that the value adopted or assessed by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer, the AO may refer the valuation of the capital asset to a Valuation Officer. A perusal of the reply filed by the assessee before the AO dt. 18.12.2007 clearly shows that the assessee claimed why the transaction value should be accepted for the purpose of capital gain. If the AO was to invoke the provisions of Sec. 50C, then in our humble opinion , he should have first referred the matter to the Valuation Officer. The AO has erred in not referring the matter to the Valuation Officer. The Ld. CIT(A) has also erred in not asking the AO to refer the matter for valuation, therefore, in the interest of justice and fair play, we restore this issue back to the files of the AO. The AO is directed to refer the matter of valuation to the appropriate valuation authority as per the provisions of the Act after giving reasonable opportunity of being heard to the assessee. Ground No. 1 & 2 raised by the assessee are allowed for statistical purposes.

9. Ground No. 3 relates to the denial of the set off of brought forward unabsorbed depreciation of Rs. 32,76,385/- against Long term capital gains of the current year.

10. This grievance appears to be consequential to the grievance raised vide ground No. 1 & 2, as the AO has computed the deemed capital gain, the assessee has claimed set off of brought forward unabsorbed depreciation to be set off against the Long Term capital gains so computed. A perusal of the assessment order shows that this plea has not been entertained by the AO. When this matter was agitated before the Ld. CIT(A), the Ld. CIT(A) at para 5.3 while disposing ground No. 4 of that appeal has thus held as under:

"There is no merit in this ground of appeal as the brought forward unabsorbed depreciation cannot be set off against the long term capital gain computed in the hands of the appellant on transfer of property."

11. Before us, the Ld. Counsel for the assessee pleaded that as per provisions of Sec. 32(2) of the Act, the unabsorbed depreciation brought forward shall be merged with current year's depreciation and since current year's depreciation can be set off against Long Term capital gains, the same treatment should be given to the unabsorbed brought forward depreciation.

12. The Ld. Departmental Representative strongly supported the findings of the lower authorities.

13. After considering the rival submissions and perusing the orders of the lower authorities, we find that this issue is consequential to the issues related to ground No. 1 & 2. However, at this point, we would like to refer to the decision in ITA No. 5375/M/2011 in the case of Suresh Industries (P) Ltd. Vs ACIT 54 SOT 450 wherein one of us (AM) is the author of the said judgement ,has held that current year's depreciation is to be allowed as set off from the Long term capital gains and brought forward depreciation is to be treated as current year's depreciation as per the legal fiction of Sec. 32(2) of the Act, the same is also be allowed to be set off from the long-term capital gains. Respectfully following this decision of the Tribunal, we direct the AO to first determine the long term capital gain as per the directions given hereinabove and thereafter allow the claim of set off of unabsorbed depreciation from the same. This ground raised by the assessee is allowed for statistical purpose.

14. In the result, the appeal filed by the assessee is allowed for statistical purposes.

(Order pronounced in the open court on 05.07.2013)

--

IT: Housing Board is not State Government

IT: Where assessee, on directions of State Government, paid certain amount as infrastructure expenses to State Housing Corporation Board for implementing projects with which it was no way connected, said expenditure not being in nature of expenditure incurred for purpose of business, assessee's claim for deduction in respect of same was to be rejected

IT: Where assessee paid pension to its former employees in accordance with their service conditions, its claim for deduction of said payment under section 37(1) was to be allowed

IT : Where assessee was neither a contractor nor its receipts were less than Rs. 40 lakh, revenue authorities could not estimate its income from a housing project under construction by invoking provisions of section 44AD

■■■

[2013] 36 taxmann.com 561 (Hyderabad - Trib.)

IN THE ITAT HYDERABAD BENCH 'B'

Andhra Pradesh Housing Board

v.

Dy. Commissioner of Income-tax, Circle -5(1), Hyderabad*

CHANDRA POOJARI, ACCOUNTANT MEMBER 
AND SAKTIJIT DEY, JUDICIAL MEMBER

IT APPEAL NOS. 715, 717, 1216 TO 1218 & 1292 (HYD.) OF 2012
[ASSESSMENT YEARS 2004-05 TO 2008-09]

MAY  31, 2013 

Section 4 of the Income-tax Act, 1961 - Income - Chargeable as [Government/State Government] - Assessment years 2004-05 to 2008-09 - Assessee-board was formed under Andhara Pradesh Housing Board Act, 1956 - Activity of assessee was to construct housing projects on land provided by State Government or acquired by it and sell it to people belonging to different income groups - During assessment proceedings, assessee raised a plea that by introduction of sub-section (7) of section 58 of Andhra Pradesh Housing Board Act, its surplus vested in consolidated fund of State Government and, therefore, its income could not be brought to tax by virtue of article 289(1) of Constitution of India -Revenue authorities rejected assessee's claim it was noted from records that assessee board had an independent identity distinct from State Government -Further, assessee undertook housing activity as a commercial venture and not as an agent of State Government -It was also apparent that assessee was paying taxes and duties to State Government wherever it was due -Whether in aforesaid circumstances, merely because sub-section (7) of section 58 was brought into APHB Act by way of an amendment in year 2010 with retrospective effect from 2002, it could not be concluded that income earned by assessee was actually income of State Government and, therefore, income earned by assessee board was assessable in its hands only - Held, yes [Paras 42, 44 and 46] [In favour of revenue]

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Contributions] - Assessment years 2004-05 to 2008-09 - Assessee claimed deduction of infrastructure expenses paid to State Government -Revenue authorities rejected assessee's claim - Whether in view of fact that amount was paid to State Housing Corporation at directive of Government for implementing certain housing projects with which assessee was no way connected, it became apparent that expenditure was not laid out wholly and exclusively for purpose of business and, thus, assessee's claim was rightly rejected - Held, yes [Para 56] [In favour of revenue]

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Pension] - Assessment years 2004-05 to 2008-09 - Assessee board claimed deduction in respect of pension paid to its former employees - Revenue authorities rejected assessee's claim -Whether since payment of pension was in accordance with service conditions of employees, same was to be allowed as deduction - Held, yes [Para 59] [In favour of assessee]

Section 44AD of the Income-tax Act, 1961 - Civil Construction Business [Estimation of income] - Assessment years 2004-05 to 2006-07 - Assessee-board did not offer income from a housing project which was under construction -Revenue authorities proceeded to estimate profit from said project by applying rate of 8 per cent of total expenditure incurred by assessee - Whether since assessee was neither a contractor nor its receipts were less than Rs. 40 lakhs, estimation of income by applying rate of 8 per cent by invoking provisions of section 44AD was not justified - Held, yes [Para 64] [In favour of assessee]

FACTS

 

■		The assessee was an AOP established under the Andhra Pradesh Housing Board Act, 1956. It was engaged in the activity of purchase and sale of land, construction of houses and sale of the same and deriving rent from house property.
■		For the assessment year under dispute, assessee filed return declaring loss.
■		During the assessment proceedings, the Assessing Officer noted that under the head 'administrative expenditure' the assessee had debited infrastructure expenditure of Rs. 1180 crores.
■		In support of said claim, the assessee submitted that as per the housing scheme, the entire cost of infrastructure was borne by the Government and the infrastructure/cost of land had to be paid to the Government through assessee.
■		The Assessing Officer further found that the assessee had debited certain amount under the head 'pension'. When the Assessing Officer asked the assessee to explain regarding the allowability of the expenditure claimed, the assessee stated that the employees of the Board were eligible for pension benefit as applicable to the State Government employees and they were governed by pension code of 1980.
■		The assessee further submitted that the expenditure could not be considered as capital since it was incurred in course of business and no asset came into existence.
■		In course of the assessment proceedings, the assessee also took a pleading that by virtue of the amendment to the APHB Act of 1956 on 5-8-2010 with retrospective effect from 1-4-2002, the surplus of the APHB vested with the State Government and, hence, there was no liability to tax so far as the assessee was concerned.
■		The Assessing Officer rejected the assessee's contention by holding that assessee was not a State Government or Central Government body. The Assessing Officer further observed that the assessee had not obtained any exemption certificate from the department to claim exemption from tax. Accordingly, the Assessing Officer completed the assessment.
■		In the course of assessment, the Assessing Officer came to the conclusion that if the assessee at all had to pay a certain amount to the Government towards infrastructure cost as an obligation it could have done so from the profits derived by it after payment of taxes.
■		On the basis of the above said conclusion, the Assessing Officer disallowed the claim of expenditure of Rs. 1180 crores. As regards pension payment, the Assessing Officer opined that the assessee had not proved that the expenditure towards pension was made wholly and exclusively for the purpose of business and, thus, disallowed said expenditure as well.
■		The Commissioner (Appeals) confirmed the order of the Assessing Officer.
■		On second appeal:

HELD

 

■		The assessee, was formed under the Andhra Pradesh Housing Board Act, 1956 (APHB) of the State Legislature. The main object of formation of the APHB as set out in the preamble of the APHB Act, 1956 is to take such measures, to make such schemes, and to carry out such works as are necessary for the purpose of dealing with and satisfying the need of housing accommodation.
■		The activity of assessee was to construct housing projects on land provided by State Government or acquired by it and sell it to people belonging to different income groups. The assessee recognises income generated from the activity of sale of houses and also maintained regular books of account wherein such transactions were recorded. The assessee's accounts are also subject to statutory audit under the provisions of the Act. [Para 34]
■		Thus, it is very much clear that, but, for the amendment to the APHB Act made by the State Legislature in the year 2010 the assessee all along had been voluntarily filing its return of income by recognizing its income. Only after the amendment to section 58 of the APHB Act, the assessee made a claim that its income was not taxable by claiming immunity under article 289(1) of the Constitution of India. [Para 36]
■		On going through the provisions of APHB Act, it becomes clear that the Board has an independent identity distinct from the State Government. The Board is also constituted for the purpose of carrying out the work as envisaged under the preamble of the Act. The Board certainly cannot be equated with the Government or a department of the Government as it does not perform any of the duties of the Government or a Government department.
■		It is quite obvious that the Board is a statutory body performing statutory functions distinct from the State Government. It may be a fact that the State Government exercises some amount of control over the functioning of the Board similar to control exercised over all other Government corporation and public sector undertakings but that does not take away the independent identity or character of the Board. Therefore, it cannot be said that the income of the assessee Board is the income of the State Government. [Para 42]
■		Further, no material has been placed on record that a relationship of agency exists between the State Government and the APHB. On the contrary, the provisions of the APHB Act as well as the other materials on record clearly establishes the fact that the assessee APHB undertakes the housing activity as a commercial venture not as an agent of the State but independently.
■		Therefore, the income derived from sale of housing project would certainly be the income of the assessee Board and not of the State Government. Furthermore, in case of a principal and agent relationship, the agent is entitled for certain commission for the services rendered by it.
■		In the present case, there is no such consideration for which the APHB acts as an agent of the State Government for carrying out the housing schemes of the State Government. Only because sub-section (7) to section 58 was brought into the APHB Act by way of an amendment in 2010 giving retrospective effect from 2002, which provided for vesting of the surplus fund in consolidated fund of the State Government, it could not be said that the income earned by the assessee was actually the income of the State Government. [Para 44]
■		The chargeability of the income to tax is as per the charging section contained under section 4. The retrospective amendment made to the APHB Act by Act 12 of 2010 cannot dilute the effect of the provisions contained under the Income-tax Act, which is an Act of the Parliament hence has overriding effect over an act of the State Legislature.
■		It is a fact on record that the plea taken by the assessee that Board's income is the income of the State Government was not there until introduction of sub-section (7) to section 58 of the APHB Act in 2010. That is the reason the assessee had never taken this stand all these years. In fact the assessee had all along filed returns declaring income and claiming deduction under section 80-IB. Deduction under section 80-IB can only be claimed by an assessee who is an industrial undertaking having income from profits and gains from business specified therein. Therefore, assessee's own conduct goes to show that the income from housing projects were treated as business by the assessee.
■		The assessee has not revised this stand by filing any revised return. Only after the amendment was made to the APHB Act in the year 2010, the assessee came forward with a claim that its income is the income of the State Government therefore immune from Act in view of the article 289(1) of the Constitution of India. [Para 45]
■		As can be seen from the facts on record, the assessee is having its distinct and separate identity from the State Government, hence, it cannot claim immunity under article 289 of the Constitution of India. That besides both the Assessing Officer as well as the Commissioner (Appeals) have observed that the assessee board is paying taxes and duties to the State Government wherever it is due. This finding has not been controverted by the assessee. That being, the case the assessee is also required to discharge its liability under the Income-tax Act.
■		Even section 58(7) cannot be construed in a manner to mean that the income of the Board is the income of the State. On the contrary, what sub-section (7) of section 58 says that after meeting all expenditures, the surplus revenue shall vest with the consolidated fund of the State Government, but, that does not make the income of the Board the income of the State Government.
■		In aforesaid view of the matter, it is held that assessee's income cannot be held to be the income of the State and as such cannot be exempt from taxation under article 289 of the Constitution of India. As a corollary the income earned is the income of the assessee board and as such is assessable at his hands only. [Para 46]
■		The assessee has also taken the plea that there being diversion of income by overriding title the income cannot be taxed in its hands. [Para 47]
■		It may be a fact that by the operation of section 58(7) of APHB Act or by way of Government directive the surplus income or some fund has been diverted to the consolidated fund of the State Government or any other Government corporation, but, that by no means would amount to diversion of income by overriding title. [Para 50]
■		A reading of section 58(7) of APHB Act would make it clear that only after accrual of income to the assessee and after meeting all its expenditure the surplus net revenue shall vest in consolidated fund of the Government. It further provides that such surplus revenue shall be transferred to the State Government of AP on quarterly basis as per the instruction or advice of the Government. Therefore, so far as the accrual of income is concerned, there is no dispute to the fact that the income has already accrued to the assessee. Only after the accrual of income to the assessee the surplus has been diverted to the Government account. [Para 51]
■		Therefore, it is opined that the assessee having diverted a part of the income after it has accrued to it the diversion of such income can only be considered to be an application of income and not diversion of income by overriding title. In the result, this issue is decided against the assessee. [Para 52]
■		Coming to the issue relating to disallowance of infrastructure expenditure, in the light of the materials on record, it is held that it is not an allowable expenditure but only an application of income. It is not in dispute that the amount of Rs. 1180 crores is stated to have been given to the AP State Housing Corporation on the directive of the Government. However, that would not amount to an expenditure incurred for the purpose of business. An expenditure which is exclusively laid out for the purpose of business is a revenue expenditure and, therefore, allowable.
■		On appreciation of the facts on record, it is quite evident that the amount of Rs. 1180 crores was not spent by the assessee board for the purpose of its business. The said amount was transferred to AP State Housing Corporation at the directive of the Government for implementing certain housing projects, however, the assessee was no way connected with implementing said projects. This cannot be said to be an expenditure laid out wholly and exclusively for the purpose of business. Therefore, the revenue authorities were correct in disallowing such expenditure. [Para 56]
■		Coming to issue of disallowance of payment of pension to employees, on perusing the order of the Commissioner (Appeals), it is found that the disallowance has been sustained by him on the finding that pension has to be routed through a pension fund and is not an expense chargeable to the profit and loss account. He had also observed that no details whatsoever has been provided by the assessee.
■		From the aforesaid observation of the Commissioner (Appeals), it is apparent that the Commissioner (Appeals) has not gone into the depth of the issue and has confirmed the disallowance in a mechanical manner. It is not forthcoming what are the details asked for by the Assessing Officer and on failure on the part of the assessee to furnish such details, the disallowance was made.
■		The lower authorities have not disputed the fact that pension amount has been paid. It is also a fact that pension is payable as per the service conditions. That being the case it is an allowable deduction. [Para 59]
■		The next issue relates to estimation of income from 'S' project. [Para 60]
■		During the assessment proceedings, the revenue authorities noticed that the housing project undertaken by the assessee was under construction during the previous year. The revenue authorities of the view that the project being a construction project and being in the nature of construction contract undertaken by the assessee, it ought to have disclosed the annual income from this project. [Para 61]
■		Since the assessee did not offer any income for taxation from said project, the Commissioner (Appeals) proceeded to estimate the profit from the said project by applying the rate of 8 per cent of the total expenditure incurred by the assessee. [Para 61]
■		On perusal of the order of the Commissioner (Appeals), it is quite evident that he has estimated the profit at the rate of 8 per cent by taking recourse to the provision contained under section 44AD. It is a fact on record that the assessee is a Government undertaking created under a statute. It maintains regular books of account. Its books of account are not only subject to statutory audit under the provisions of Act but also subject to inspection by other Government agencies.
■		Therefore, without pointing out defect or discrepancy in the books of account maintained by the assessee, estimation of income cannot be resorted to. That besides section 44AD is applicable only in a case of contractors where the turnover is less than Rs. 40 lakhs.
■		In the present case, neither the assessee was a contractor nor its receipts were less than Rs. 40 lakhs, thus, estimation of income by applying the rate of 8 per cent that too on the expenditure by invoking the provisions of section 44AD was not justified.
■		If the department is of the view that there is a profit element which has not been disclosed by the assessee, it has to be determined after properly verifying the books of account and other evidences and not merely on presumption and guess work. Therefore, this issue is remitted to the file of the Assessing Officer who shall decide the same in accordance with law after affording reasonable opportunity of being heard to the assessee. [Para 64]
■		In the result, assessee's appeals is partly allowed. [Para 65]

CASES REFERRED TO

 

National Remote Sensing Agency, Hyderabad v. Additional Industrial Tribunal-cum-Additional Labour Court [WP. No. 17370 of 1994, dated 21-8-2002] (para 12), Bangalore Water Supply v. A. Rajappa AIR 1978 SC 548 (para 12), Lakshminarayan Ram Gopal & Sons Ltd. v. Gov. of Hyderabad [1954] 25 ITR 449 (SC) (para 13), Andhra Pradesh State Road Transport Corpn. (APSRTC) v. ITO [1964] 52 ITR 524 (SC) (para 16), Madhav Prasad Jatia v. CIT [1979] 118 ITR 200/1 Taxman 477 (SC) (para 17), CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC) (para 17), CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (SC) (para 17), S.A. Builders Ltd. v. CIT(Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) (para 17), Tata Iron & Steel Co. Ltd. v. Collector of Central Excise [2003] 263 ITR 466 (SC) (para 20), Andhra Pradesh State Civil Supplies Corpn. Ltd. v. CIT [1984] 148 ITR 497/17 Taxman 167 (AP.) (para 28), Som Prakash Rekhi v. Union of India [1981] 51 Comp. Cas. 71 (SC) (para 28), CIT v. UP Jal Nigam [2011] 202 Taxman 685/14 taxmann.com 178 (All.)(para 29), Municipal Commissioner of Dum Dum Municipality v. Indian Tourism Development Corpn. [1995] 5 SCC 251 (para 30), Adityapur Industrial Area Development Authority v. Union of India [2006] 153 Taxman 107 (SC) (para 30), Punjab Urban Planning & Development Authority v. CIT [2006] 156 Taxman 37 (Chd.) (Mag.) (para 30), Jalandhar Development Authority v. CIT [2010] 35 SOT 15 (ASR) (URO)(para 30) Jammu Development Authority v. CIT [2012] 23 taxmann.com 343/52 SOT 153 (ASR) (URO) (para 30), Vidarbha Housing Board v.ITO [1973] 92 ITR 430 (Bom.) (para 32), New Delhi Municipal Council v. State of Punjab [1997] 7 SCC 339 (para 45), Housing Board of Haryana v. Haryana Housing Board Employees Union [1996] 1 SCC 95 (para 46), CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) (para 51) and Madhav Constructions (P.) Ltd. v. CIT [I.T. Appeal No. 1143 (Hyd.) of 2006, dated 13-7-2007] (para 64).

P.K. Sahu and S. Ravi for the Appellant. M. Ravindra Sai for the Respondent.

ORDER

 

Saktijit Dey, Judicial Member - These are set of six appeals of the same assessee. Appeals for the assessment years 2004-05, 2005-06, 2007-08 and 2008-09 are by the assessee whereas there are cross appeals for assessment year 2006-07. Since facts are similar and issues are common, all these appeals are clubbed and heard together, therefore, a common order is passed for the sake of convenience.

2. First we will take up assessee's appeal for the asst. years 2004-05, 2005-06, 2006-07 and 2008-09. We will deal with facts as taken from ITA No. 717/Hyd/12 pertaining to the assessment year 2008-09 since the CIT(A) has followed his reasoning for this year in the appeal for the other assessment years.

3. Briefly the facts are, the assessee is an AOP established under the AP Housing Board Act, 1956. The assessee is engaged in the activity of purchase and sale of land, construction of houses and sale of the same and deriving rent from house property. For the assessment year under dispute, it filed return of income 30/09/2008 declaring loss of Rs. 63,15,98,329/-. The return filed by the assessee was originally processed u/s 143(1) of the IT Act. Subsequently, the assessee's case was selected for scrutiny assessment and in response to the notices issued u/s 142(1) and 143(2) of the Act, the assessee appeared before the Assessing Officer and submitted the details called for by the Assessing Officer. During the assessment proceeding, the Assessing Officer noted that under the head 'administrative expenditure' the assessee has debited infrastructure expenditure of Rs. 1180,00,00,000/-. Explaining the details of expenditure claimed in its letter dated 22/12/10, the assessee submitted that the Government of AP has formulated a scheme under the name 'Rajiv Gruhakalpa' (RGK) for providing housing to the urban poor falling in the salary income of Rs. 24,000-36,000 and the cost of the house was worked out at Rs. 82,500/- to the beneficiary. As per the scheme the beneficiary has to pay only Rs. 8,250/- and the balance to be financed by the Bank as soft loan. The APHB was to bear the financial burden of providing infrastructure facilities, drainage, water supply, internal road and power supply. It was submitted that during the assessment years 2005-06 and 2006-07 more than two lakhs houses were planned under the GORT No. 432, dated 23/12/2005 and subsequent GOs by GORT No. 433, 441 & 442. Against these GOs the APHB has paid to the Government of AP towards infrastructure fee/cost of land of Rs. 1180 crores. It was submitted that as per the RGK scheme, the entire cost of infrastructure was borne by the Government and the infrastructure/cost of land to be paid to the Government through AP Housing Corporation.

4. The Assessing Officer after going through the GOs submitted before him by the assessee was of the view that it is not a scheme providing houses to the poor without cost. It involves cost to be borne by the beneficiary. The Government provides land to the assessee free of cost and the government also provides infrastructure facilities free of cost to the assessee. The Assessing Officer was further of the opinion that as per the GO the infrastructure cost payable to the Government to the extent of cost of land has to be utilized for infrastructure development under the scheme by the assessee and it never says that the amount has to be paid back to the Government or to any authority. The Assessing Officer was also of the view that there is no compensatory payment since compensatory payments are made essentially to compensate for some losses or for a breach of contract. The Assessing Officer observed that neither the assessee has caused any loss to the AP Government nor the Government has demanded any compensation from the assessee. Hence, the amount purportedly paid to the AP State House Corporation Ltd. on the direction of the Government is not a compensatory payment. The Assessing Officer opined that when the cost of house is borne by the middle income beneficiaries and when the Government bears the cost of land and infrastructure and when there is no clear directive from the Government that the assessee has to pay them back or to any other authority the payment of Rs. 1180 crores claimed by the assessee as expenditure is without any justification. The Assessing Officer observed that for an expenditure to be allowable under the provisions of the Act it should be revenue in nature and it must have a direct nexus with the business or activity of the assessee.

5. The Assessing Officer further came to the conclusion that if the assessee at all has to pay a certain amount to the Government as an obligation it could have done so from the profits derived by it after payment of taxes. On the basis of the above said conclusion, the Assessing Officer disallowed the claim of expenditure of Rs. 1180 crores and added the same to the returned income.

6. The Assessing Officer further found that the assessee had debited an amount of Rs. 3,86,18,879/- under the head 'pension'. When the Assessing Officer asked the Assessee to explain regarding the allowability of the expenditure claimed, the assessee stated that the employees of the Board are eligible for pension benefit as applicable to State Government employees and they are governed by pension code of 1980. The retired employees are paid monthly pension on the basis of total number of years rendered on the last pay drawn as certified by the Director, State Audit. It was submitted that no reserve fund has been provided by the Board. All the pension payments are met from the revenue. The assessee submitted that the expenditure cannot be considered as capital since it is incurred in course of business and no asset came into existence. As no capital has come into existence the expenditure cannot be considered as a capital expenditure. The Assessing Officer however rejected the contention of the assessee. The Assessing Officer referring to GO No. 17 dated 29/07/94 observed that in para 6 of the said GO it is clearly mentioned that the payment of pension is to be arranged through the CAO, APHB by creating a separate pension cell and fund for meeting the entire expenditure from its own sources, which means that the assessee has to create a separate fund and meet the expenditure from that only. The Assessing Officer observing that the assessee has not proved that the expenditure towards pension was made wholly and exclusively for the purpose of business disallowed the expenditure and added the same to the income of the assessee.

7. The Assessing Officer apart from making other disallowances, also disallowed the claim of deduction u/s 80-IB of the Act, by holding that neither the assessee has fulfilled the conditions laid down in section 80-IB(10) nor it has claimed deduction in the return of income.

8. In course of the assessment proceedings, the assessee also took a pleading that by virtue of the amendment to the APHB Act of 1956 on 05/08/2010 with retrospective effect from 01/04/2002, the surplus of the APHB vests with the Government of AP and hence there is no liability to income-tax so far as the assessee is concerned. The Assessing Officer however did not accept such contention of the assessee by holding that the assessee is not a state Government or central Government body. The Assessing Officer further observed that the assessee has not obtained any exemption certificate from the income-tax department to claim exemption from tax. Accordingly, the Assessing Officer completed the assessment vide order dated 31/12/2010.

9. The assessee being aggrieved of the assessment order, preferred an appeal before the CIT(A).

10. In course of the proceedings before the first appellate authority, the assessee raised the following additional grounds:

"(a)		The appellant, Andhra Pradesh Housing Board (APHB), is an instrumentality and agency of the Government of Andhra Pradesh. It functions as an extended arm of the Government. It is to be considered as an attached office or department of the State Government. For this reason, it cannot be considered as an independent taxable entity and the amounts received by it in the course of its activities as its taxable income.
(b)		The activities of the appellant are undertaken in systematic organized manner Income from such activities by a taxable person is normally taxable under the head 'income from business'. But there is no profit motive by the appellant while undertaking its activities for the purpose for which it exists. Statutorily it exercises sovereign and government functions. Therefore, income cannot be taxed under the head 'business income' or any other head.
(c)		Even if the appellant is treated as an entity independent of the State Government and the income is arising from business activity, the appellant acts as an agent of the State Government. Therefore, the income accrues to its principal, the State Government. Such income cannot be taxed in the hands of the State Government under Article 289 of the Constitution."

11. The CIT(A) called for a remand report from the Assessing Officer on the additional grounds filed by the assessee and the submissions made in that regard. The Assessing Officer also submitted a remand report, a copy of which was also forwarded to the assessee. The assessee submitted a rejoinder to the remand report of the Assessing Officer. It was contended on behalf of the assessee that APHB is an instrumentality and an agency of Government of AP and as a result it functions as an extended arm of the Government. Being a part and parcel of the Government it works as a dependent entity. It was further submitted that the APHB was constituted under a statute by the State legislature to carry out the activities which are essentially Government functions. The APHB is completely under the control and supervision of the Government. The APHB Act also provides that all surplus amounts are to be vested in the consolidated fund of the state Government. It was submitted that even though there is a Board that governs the working of the APHB, yet, the Board functions under the Government and its employees are governed by the same terms and conditions as are applicable to the state Government employees. It was submitted that since there is no profit motive, the income cannot be assessed under the head 'business'. It was further submitted by the assessee that APHB being an instrumentality and agency of the state Government has to be considered as 'State' and its income cannot be brought to tax in view of Article 289 of the Constitution of India.

12. The CIT(A) after considering the submissions of the assessee and other facts and materials on record was not convinced with the contention of the assessee that APHB being a state its income cannot be brought to tax in view of Article 289 of the Constitution of India. The CIT(A) relying upon the ratio laid down by the AP High Court in case of National Remote Sensing Agency Hyderabad v. Additional Industrial Tribunal-Cum-Additional Labour Court [WP. No. 17370 of 1994, dated 21-8-2002] and by the Hon'ble Supreme Court in case of Bangalore Water Supply v. A. Rajappa AIR 1978 SC 548 opined that merely because the employer is a Government department or local body the enterprise does not cease to be an industry. He further observed that governments and municipal statutory body may run enterprises which do not for that reason cease to be an industry. Charitable activities may also be industries. Undertakings without profit motive can very well be industries. He observed that any operation carried on in a manner analogous to trade or business may legitimately be a statutory industry. The absence of profit motive or gainful objective is irrelevant by the venture in the public joint, private or other sector. The CIT(A) referring to section 3(2) of the APHB Act, opined that the APHB is not Government but is a body corporate established by the Government of AP which is distinct from the Government of AP. Further referring to section 4 of the Act, the CIT(A) observed that the provision contained in sub-clause (m) providing for appointment of various members of the Board including members from the financial institutions which provide financial assistance to the Board clearly establishes the character of the Board as being a commercial body distinct from the Government. The CIT(A) referring to section 7 of the APHB Act, which provides for salary and remuneration to the employees, opined that this section itself clearly brings out the fundamental distinction between the Government and the assessee Board as the Board has separate fund and the salaries of the Board are to be paid from the fund of the Board, which is unlike the salaries of the Government servants and of the Government which are paid from consolidated fund of the state. Further referring to section 17 of the APHB Act, the CIT(A) observed that the provision contained therein clearly states that employees of the APHB are not the government servants but they are servants of the board. The CIT(A) observed that APHB Act clearly states that the general rules regarding government shall apply to the servants of the Board. However, exceptions can be provided and the Board is competent to frame different rules for its servants. He further observed that sections 16, 17, 18 & 18A, 19 & 20 of APHB Act makes it clear that the employees of Board are servants of the Board and not servants of the AP government. From the analysis of the aforesaid facts, the CIT(A) concluded that the APHB is clearly a commercial corporate body of the Government and is distinct from the Government itself. The CIT(A) further observed that when it comes to the direct revenue of the Government the receipts go to the consolidated fund of the state Government, which is exemplified by all the taxes and other receipts of the Government. The loans taken by the Government are in the form of Government bonds for which the Government itself stands surety. However, in the case of the assessee all receipts go to the fund of the Board and not to the Government. All loans taken by the Board on commercial terms and are not at all equated with the Government securities. He further observed that the Government of AP does not stand surety to any of the loans of the Board and it is the balance sheet and projects of the APHB which are examined financial institutions before giving loans. None of these factors indicate the work of the Government or the work of an agent of the Government. Rather this is exactly how a private commercial organization works.

13. While dealing with the contention of the assessee to the effect that it is an agent of the Government, the CIT(A) after referring to 'agent' as has been defined under various law including Income-tax Act, and also the decision of the Hon'ble Supreme Court in case of Lakshminarayan Ram Gopal & Sons Ltd. v. Gov. of Hyderabad [1954] 25 ITR 449 observed that an agent is an earner of independent income and is subject to taxation. The CIT(A) observed that for considering the assessee's claim that it only acts on behalf of the Government as an agent and therefore is not subject to taxation, it is required to understand the nature of assessee's relationship with the Government while carrying out the following Acts:

1.		The level of control being exercised by the assessee and the Government over the property.
2.		How are the amounts being remitted to the Government and in what manner.
3.		Under the which account are the payments from property being deposited.

14. The CIT(A) on examining the sale deed executed by APHB found that it has been described in the sale deed as the owner. As per the sale deed it is the APHB which is said to have transferred the land to the purchaser. There is no reference to the state Government being the owner of the land and the assessee acting as its agent for the purpose of sale. The CIT(A) referring to section 13 of APHB Act observed that the said section clearly keeps the authority to the Board to enter into contract in its own capacity and not on behalf of the Government. The CIT(A) referring to various provisions of the APHB Act, inferred that APHB is competent to and makes and executes housing schemes as it feels necessary or those which are entrusted to it by the Government. In other words, it is not acting at all as an agent of the Government because it is independently forming various housing projects and executing them in commercial terms. The fact that some approval is required from the Government does not alter the basic characteristics of the APHB. In every Corporation or company certain approvals are required from the top management as per rules of the company. The CIT(A) observed that though the Government may be having 100% ownership and it is entirely upto the Government to decide on the level of control, however, the level of control does not in any manner convert the commercial organization to an agent of the Government. He observed that the APHB Act also categorically states that the ownership of land vests with APHB and not with the Government. Even the local authorities are required to transfer the land to the APHB. The complete ownership of the lands vests with the Board which has total and complete powers to deal with the lands and to also make purchases, lease agreements etc. That besides the Board has its own funds and powers to obtain loans from other institutions for its own management.

15. The CIT(A) further observed that if the assessee is a state or agent of the state then it need not pay state or local taxes whereas the assessee pays all state and local taxes as applicable. With regard to the contention of the assessee that it is a non- profit organization and hence not taxable, the CIT(A) referring to certain Government orders observed that along with other commercial organizations like HUDA, APIIC, the assessee is a major resource earner for the Government through its commercial activity and it is not a charitable organization. The CIT(A) further inferred that the assessee does not hand over the sale amounts to the Government on a transaction to transaction basis. Rather ad-hoc or surplus amounts is transferred.

16. With regard to the contention of the assessee that its income cannot be taxed in view of the restrictions imposed under Article 289 of the Constitution of India, the CIT(A) referring to the decision of Hon'ble Supreme Court in case of Andhra Pradesh State Road Transport Corpn. (APSRTC) v. ITO [1964] 52 ITR 524 (SC) observed that the Hon'ble Supreme Court after interpreting all the clauses of Article 289 has held that the income in respect of which exemption is claimed ought to be the income of the state in terms of clause (1) of Article 289 and secondly, there must be a declaration by the Parliament in terms of clause (3) of the Article 289 of the Constitution, which is absent in the case of the assessee. The CIT(A) referring to various other judicial precedents finally came to hold that exemption claimed by the assessee in terms of Article 289 of the Constitution of India is not sustainable in law, which is also proved by assessee's own conduct when he filed the return of income. The CIT(A) held that the Government apart from implementing the mandate of constitution which is a sovereign function of the Government also conducts many commercial operations by creating different organization and public sector undertakings. Though these organizations function under the control of the Government, however, they do not perform any sovereign functions of the Government. Neither these type of organizations are extended arm of the Government nor their employees are state Government employees. With the aforesaid observations, the CIT(A) rejected the contentions of the assessee with regard to the additional grounds raised by it.

17. The CIT(A) also repelled assessee's contention of diversion of income by overriding title with regard to claim of infrastructure expenditure amounting to Rs. 1180 crores. The CIT(A) was of the view that for an expense to be allowed it should be revenue in nature and it must have a direct nexus with the business of the assessee. The CIT(A) relying upon the decision of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200/1 Taxman 477 (SC) and CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC) opined that for claiming a business expenditure the conditions to be cumulatively satisfied are i) the expenditure should not be disallowed under any section of the IT Act, ii) the expenditure should not be of the nature of capital expenditure, iii) it should not be a personal expenditure, and iv) the expenditure should have been laid out or expended wholly and exclusively for the purposes of business or profession. The CIT(A) relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 observed that the Hon'ble Supreme Court therein held that a burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business is on the assessee. The CIT(A) also relied upon the decision of the Hon'ble Supreme Court in case of S.A. Builders Ltd. v.CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 wherein the Hon'ble Apex Court held that a nexus has to be established between the expenditure and the purpose of the activity before it can be allowed.

18. The CIT(A) examining the facts of the assessee's case noted that the assessee claimed to have incurred an expenditure on infrastructure amounting to Rs. 1180 crores showing it under the head 'administrative expenditure'. The assessee had claimed that the amount was paid to the Government of AP as per their directive under different Government orders. From the preamble of the APHB Act, the CIT(A) was of the view that the main objective of the APHB is to make and implement schemes for providing housing accommodation. However, the intention is not to provide charity or free housing schemes to poor people. Rather, the APHB as a commercial arm of the AP Government acquires lands, develops and sales houses built on those lands. The houses are sold at market rate through draw of lots or through auction. The Singapore housing project undertaken by the assessee would show that it is an ultra modern housing scheme wherein more than 2000 flats have been constructed in various categories along with duplex houses. The complex has modern facilities with regard to road, greenery and other amenities. All the flats and duplex houses have been sold in the open market through a commercial draw of lots and at market rates of the property.

19. The CIT(A) noted that huge amount of advances have been taken from customers even before the commencement of the work on the project. He further noted that not a single dwelling unit was constructed by the Housing Board for lower income group or poor persons under the scheme. He further noted that the state Government is the only authority which has a right on the revenues of the assessee. Negating the contention of the assessee to the effect that the objective of providing housing accommodation is not a commercial activity rather a charitable one with no business motive and with a mandate to provide development to the state through housing activity, the CIT(A) observed that providing housing does not change the character of the organization. On the other hand, the activity vis-à-vis the housing is commercial in nature. He observed that the assessee builds and sales houses in very much the same manner in which a commercial builder does it and only difference being while for a commercial builder the profits are made available to the owners/partners, in case of the assessee the ownership vests with the AP Government and so do all rights over the property. The application of the profit by the AP Government either for schemes for the poor or for its own administrative expenses does not in any way change the character of business of the assessee just as the application of the profits by partners or shareholders does not alter the nature of the business of the partnership or company. The CIT(A) held that the assessee is a commercial arm of the State Government and carries on its activity with the same commercial expediency. He further observe that a reading of the APHB Act, 1956 would clearly show that there is no element of charity or of non-profit motive enshrined with respect to the APHB. The CIT(A) held that the Government orders issued are purely administrative instructions asking the APHB to transfer some funds to AP State Housing Corporation. As such it is not a legal charge by any stretch of imagination. He observed that a legal charge of tax is imposed with legal authority provided by the relevant taxing statute. A legal order is also passed for the same. Whereas in case of the assessee no such conditions exist.

20. The CIT(A) referred to the definition of taxes and legal charges by OECD and relied upon the decision of the Hon'ble Supreme Court in case of Tata Iron & Steel Co. Ltd. v. Collector of Central Excise [2003] 263 ITR 466 wherein the Hon'ble Supreme Court has held that taxes or cess or legal charges have to be levied by either the Government or a legal authority through the powers conferred by a Statute. Further, any cess or tax or a legal charge must have a prescribed rate under a Statute for the purpose. The Government cannot arbitrarily ask for any amount it deems fit. On the basis of the above, the CIT(A) concluded that there is absolutely no nexus between the amounts paid by the assessee to the State Government and the actual activity of the assessee. He further held that the assessee has also not discharged its onus to prove that indeed this payment was made due to business expediency. The CIT(A) held that the transfer of fund by the assessee is an application of income. The CIT(A) observed that there is absolutely no arrangement of sale and purchase of land between the State Government and the AP Housing Board. He further noted that the Government orders quoted by the assessee does not in any way state that any money is to be paid to the State Government in lieu of lands provided. The CIT(A) further held that the transfer of fund cannot also be said to be in the nature of compensatory payment as compensatory payment is essential to compensate for some loss. Compensatory payment can also be for a breach of contract. Since in case of the assessee no such event has happened as the assessee has not caused any loss to the Government for which any compensation has been demanded.

21. While dealing with the assessee's contention with regard to diversion of income by overriding title, the CIT(A) held that the said principle applies only in cases where the income never reaches the assessee as his income. Merely because the assessee has an obligation to apply certain amount out of its income for a particular purpose will not make it a case of diversion of income by overriding title. An obligation to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. He opined that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of his income. Where by the obligation income is diverted before it reaches the assessee it is deductible but where the income is required to be applied to discharge an obligation after such income has reached the assessee then the same consequence in law does not follow. The CIT(A) referring to sub-section (7) of section 58 of the APHB Act, opined that the word 'surplus net revenue' does not in any way state that it is to be calculated by denying the liability under the IT Act. The CIT(A) held that 'surplus net revenue' in other words would mean net profit after taxes. The CIT(A) observed that the assessee has fully paid all the State taxes, local taxes wherever applicable. However, when it comes to payment of income-tax, the assessee interprets the law in a different manner which is in complete dis-consonance with the Constitution of India, the Income-tax Act and even the directions of the AP Government. The CIT(A) observed that the implication of the amendment brought to section 58 of the APHB Act, is only to the extent that the net surplus [after all expenses and taxes] would lie with the Government and not in the APHB account to do away with repeated issuance of Government orders for transfer of fund. However, to interpret the amendment as a legal sanction for not paying income-tax is a deliberate act, which is not only against the spirit of the constitutional provisions but also against the letter and spirit of the amendment in question. On the basis of the aforesaid conclusion the CIT(A) held that the infrastructure expenditure claimed amounting to Rs. 1180 crores being an application of income it cannot be allowed as an expenditure. Accordingly, he sustained the addition made by the Assessing Officer.

22. The CIT(A) also sustained the addition of Rs. 3,86,18,879/- being the claim made by the assessee towards pension payment by observing that pension has to be routed through a pension fund and is not an expense chargeable to the profit and loss account. The CIT(A) also rejected assessee's contention with regard to claim of deduction u/s 80-IB.

23. Being aggrieved of the aforesaid order, the assessee is in appeal before us on the following grounds:

"1.		The learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant is an instrumentality and agency of the Government of Andhra Pradesh. It functions as an extended arm of the Government. It is and for this reason, it cannot be considered as an independent taxable entity.
2.		The learned Commissioner of Income Tax (Appeals) failed to appreciate that there is no profit motive by the appellant while undertaking its activities for the purpose for which it exists. Statutorily it exercises sovereign and government functions. Therefore. income cannot be taxed under the head "business income" or any other head.
3.		The learned Commissioner of Income Tax (Appeals) failed to appreciate that even if the appellant is treated as an entity independent of the State Government and the income is arising from business activity. the appellant acts as an agent of the State Government. Therefore. the income accrues to its principal. the State Government. Such income cannot be taxed in the hands of the State Government under article 289 of the Constitution.
4.		The learned Commissioner of Income Tax (Appeals) erred in not considering the oral submissions of the appellant made on the last date of hearing on 08.03.2012, besides in his order the last date of hearing has been stated as 01.03.2012, which is not a fact.
5.		The learned Commissioner of Income Tax (Appeals) erred in not dealing in his appellate order several oral and written submissions or the appellant as well as the rulings relied upon by it in its appeal and rejoinder to the remand report of the Assessing Officer.
6.		The learned Commissioner of Income Tax (Appeals) committed grave impropriety in reproducing the views of the Assessing Officer in the remand report in his own order instead of applying his mind on the subject.
7.		The learned Commissioner of Income Tax (Appeals) failed to appreciate the submissions made by the appellant with respect to amendment to section 58 of the A.P. Housing Board Act. 1956. The Commissioner ought to have appreciated that by virtue of the said amendment with retrospective effect from 1st April 2002, the entire surplus of the Appellant stood vested in the consolidated fund of the State Government of Andhra Pradesh. It is as if the entire income accruing to the appellant was sliced away and there was diversion of income by over riding title in favour of the Government of Andhra Pradesh.
8.		The learned Commissioner of Income Tax (Appeals) has erred in passing the order in the appellant's appeal only for the Assessment Year 2008-09, when the Hon'ble ITA T had remitted its appeals for the Assessment Years 2004-05. 2005-06 & 2006-07 for fresh consideration and the appellant had filed fresh written submissions before him. In the fitness of things, the Commissioner of Income Tax (Appeals) should have passed the orders for all the four assessment years together, as the most important Issues are common and the dispute continues from the A.Y. 2004-05.
9.		The learned Commissioner of Income Tax (Appeals) has erred in stating in his order that the appellant had claimed itself to be a local authority whereas there was no such pleading by it.
10.		The Commissioner of Income Tax (Appeals) has erred in declining the claim of the appellant to the deduction under section 36( I )(xii) by referring to his earlier order passed for the A. Y. 2006-07. which had since been set aside by the Hon'ble ITAT and remitted back to him for fresh consideration. In the process. the learned Commissioner of Income Tax (Appeals) has ignored the fresh submissions and recent rulings submitted by the appellant.
11.		The learned Commissioner of Income Tax (Appeals) has failed to appreciate that payment of pension to the employees of the appellant is an admissible expenditure incurred wholly for its business. He has not considered the written submissions of the appellant and the rulings relied upon by it.
12.		The learned Commissioner of Income Tax (Appeals) has erred in ignoring the directive of the Government of Andhra Pradesh to the appellant to treat the infrastructure expenditure incurred by it as an expense in its books of account which the Appellant under the law is bound to obey. Further, the learned Commissioner of Income Tax (Appeals) has erred in holding that the amendment to section 58 of the APHB Act. providing for transfer of the surplus net revenue after meeting its expenditure to the AP Government is ultra vires the construction.
13.		The learned Commissioner of Income Tax (Appeals) has erred in holding that the appellant was clearly a commercial body corporate of the government and is distinct from the government itself.
14.		The learned Commissioner of Income Tax (Appeals) erred in heavily relying on the decisions in the case of APSRTC v. ITO [( 1964) 52 ITR 524 (SC)] and New Delhi Municipal Council v. Punjab and Others [SCC (1997) 7 SCC 339] to hold that the income of the appellant is taxable without taking into account the appellant's submissions distinguishing these cases."

24. Apart from the submissions made by the learned counsel for the assessee Shri P.K. Sahu at the time of hearing the assessee has also filed written submissions containing the issues on which the order of the CIT(A) was challenged. Hereafter, we will deal with the issue-wise contention of the parties and record our finding.

25. The first issue raised by the assessee which is common for all the assessment years under appeal is - Income of the assessee is the income of the State Government, hence, not taxable.

26. In this regard the assessee's written submission reads as under:

The assessee is an extended arm of the State Government, hence, its income is not taxable as per Article 289 of the Constitution of India.

"In the appeal order, the CIT(A) has extracted paragraphs 3, 3.1 to 3.6 from the written submissions made by the appellant on the additional grounds. These extract pertains to the plea that APHB is a creature of statute, clothed with statutory powers and functions under strict supervision, control and direction of the State Government. The CIT(A) has extracted only paragraphs 4 and 4.12 of the written submissions, and not the other paragraphs 4.1 to 4.11 and 4.13. These relate to the plea that as an instrumentality of the State, for carrying out Government functions, APHB is an extended arm of the Government and not a separate independent entity, which can be subjected to tax. But, the CIT(A) has given a finding that APHB has independent existence, manages its own affairs, does not discharge sovereign functions and is not an extended wing of the Government. While doing so, several submissions by the appellant in paragraphs 4.1 to 4.11 and 4.13 have escaped consideration by the CIT(A).

The CIT(A) has not considered the following plea that APHB is clothed with statutory powers. It could acquire land from the local authorities, compulsorily acquire land under Land Acquisition Act, 1984. It has the statutory power to reconstitute land allotment and dispossess persons by awarding compensation for the purpose of housing schemes. The main plea of the appellant is that it is so pervasively controlled and supervised by the Government under the terms of the statute under which APHB was constituted, that it cannot be regarded as an independent and autonomous entity. It is the extended arm of the Government. The appellant had cited rulings in which the courts have laid down that in similar circumstances, the organisation involved was not considered an entity separate and independent of the Government.

The appellant had argued that APHB is empowered with statutory powers to acquire land, evict any person from the premises, following the procedure laid down in the Act, and recover rent or damages from such persons. It can prosecute offenders for imprisonment/fine. Clothing of APHB with statutory powers is indicative of discharging sovereign functions. Such powers and privileges are inconsistent with profit making venture that can be described as trade or business. The CIT(A) has not considered this plea. He has simply gone by the argument that there is no difference between APHB and any private real estate developer. Both construct buildings, sell properties and make profit. He has not considered the following Supreme Court's rulings. In Shri Ramtanu Co-operative Housing Society v. State of Maharashtra, 1970 (3) SCC 323, in which the activities of lease, sale, exchange, was not held to be trading activities, taking into account the purpose for which Maharashtra Development Corporation is constituted under Maharashtra Industrial Development Act, 1961. In Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi, (1975) 1 SCC 421 (SC) , the Supreme Court observed that a public authority performs statutory duties and carries out transactions for the benefit of the public and not for private profit.

The CIT(A) has referred to the submissions made by the A.O. in the remand report and has extracted from it at paragraph 5.1 of the appeal order. But the paragraphs no.5.12.1 to 5.12.3 appearing at pages 46 to 54 of the appeal order contain the finding of the CIT(A) in his own words rejecting the contention of the appellant that the income of the APHB can be regarded as that of the Government of Andhra Pradesh , and not taxable in view of the prescription in Article 289 of the Constitution. The appellant finds that these paragraphs containing the findings of the CIT(A) are verbatim reproduction from the pages 17 to 27 of the Remand Report of the A.O. Thus, he has adopted the language and the logic of the A.D. for his own conclusions. The appellant has submitted a rejoinder to the remand report on 15.12.2011, countering the observations of the A.O., which have been adopted by the CIT(A) in his order. However, the submissions made by the appellant in the rejoinder have not been referred to or considered at all by the CIT(A). Some of the important pleas taken in this rejoinder are given below:

i.		The appellant is used as an instrument by the State for resource mobilisation. For this land is allotted for exploiting commercially for this purpose.
ii.		The employees of APHB are governed by the same terms and conditions as are applicable to the State Government officers. The same order of the Government issued on Pay Commission report applies to the officers of the Government as also of APHB. This is indicative of the fact that APHB is an extended arm of the Government.
iii.		The Accountant General of Andhra Pradesh has categorised APHB for civil audit and not for commercial audit. The fact that the Accountant General's office does not conduct commercial audit for APHB and APHB is categorized under the group for civil audit shows that APHB is not being considered as a commercial organization. The Accountant General conducts performance audit of the organizations selected for civil audit.
iv.		In Blharilalllobray v. Roshan Lal Dohray (1984) 1 SCC 551 (SC), the Supreme Court held that, even though the incorporation of a body corporate may suggest that the statute intended it to be a statutory corporation independent of the Government it is not conclusive on the question whether it is really so independent. Sometimes the form may be that of a body corporate independent of the Government but in substance it may be just the alter ego of the Government itself. The true test of determination of the said question depends upon the degree of control the Government has over it, the extent of control exercised by the several other bodies or committees over it and their composition, the degree of its dependence on Government for its financial needs and the functional aspect, namely, whether the body is discharging any important Governmental function or just some function which is merely optional from the point of view of Government.
v.		The Supreme Court in Virendra Kumar Srivastava v. V.P. Rajya Karmachari Kalyan Nigam (2005) 1 SCC 149 (SC) , the Supreme Court held that on a detailed examination of the administrative, financial and functional control there is no doubt that it is nothing but an "instrumentality and agency of the state" and the control of the State is not only "regulatory" but it is "deep and persuasive" in the sense that it is formed with the object of catering to the needs of the government employees as a supplement to their salaries and other perks. Even day to day functioning of the corporation is watched, supervised and controlled by the various departmental authorities of the state particularly the Department of Ford & Civil Supplies. The multiple test indicated to be applied both by the majority and minority view in Pradeep Kumar Biswas v. Indian Institute of Chemical Biology (2002) 5 SCC 111. (SC) is fully satisfied in the present case for recording a conclusion that the Corporation is covered as an "agency and instrumentality of the State" in the definition of "State" under Article 12 of the Constitution.
vi.		The Supreme Court in V.P. Avas Evam Vikas Parishad v. Friends Coop. Housing Society Ltd, 1996 AIR 114 : 1995 SCC Supl. (3) 456, has held that right to shelter is a fundamental right, which springs from the right to residence assured in Art.19( 1)( e) and right to life under Article 21 of the Constitution. The State Government is expected to provide housing facilities to the public and create housing infrastructure ensuring planned urban development. In W.B. Housing Board v. Brijendra Prasad Gupta (1997) 6 SCC 207, the Supreme Court held that the public purpose is not lost, if the State or Housing Board earns any profit. In Gulam Mustafa vs. The State of Maharashtra (1976) 1 SCC 800, the Supreme Court held that the excess land acquired by the Municipal Committee, when sold in plots for housing colony, it served public purpose. Similarly, the Supreme Court in State of Gujarat v. Sankalchand Khodidas Patel, (1977) 4 SCC 590, has held that the acquisition of land for housing facilities of a Cooperative Society was for public purpose. All the housing schemes of APHB are sanctioned by the Government. The activity undertaken by the APHB at the behest of the Government is a Governmental function carried on for public purpose. The observations of the Supreme Court in above rulings are supportive of the appellant's plea that the housing schemes implemented by APHB are for public purposes and not with any profit motive.
vii.		The CIT(A) has laid considerable emphasis on the Supreme Court's ruling in Andhra Pradesh State Road Transport Corporation v.Income Tax Officer , (1964) 52 ITR 524 (SC) to argue that like APSRTC, APHB is a legal entity distinct from the State. In this case, the Supreme Court had held that the trading activity carried on by APSRTC was not carried on by the State Government nor through its agent. Accordingly, income of APSRTC does not qualify for exemption in terms of Article 289(1). In response, at paragraph 18 of the rejoinder (page 292 of Paper Book-H), the appellant had analysed the Supreme Court's observation in APSRTC's case in detail, and argued that the same is not against the stand of the appellant. The Court had observed that APSRTC was a company, in which the State and others were having shareholding. In case of APSRTC, income was not made over to the State or it became part of the general revenue of the State. The surplus fund can be used for road development only. In contrast, the appellant had inter alia argued that APHB does not have any shareholding, it is entirely owned by the State Government and that the surplus net revenue vests in the consolidated funds of the State under APHB Act. Unlike in the case of a corporation having independent board of directors, the State Government has unlimited power under the Act to interfere in the working of the APHB. These and the other submissions made in the tabular analysis by the appellant of the APSRTC's case have not been considered by the CIT(A).

No Profit Motive

The CIT(A) has extracted in his order paragraphs 5, 5.1, 5.2(part) and 5.5 of the written submissions on the additional grounds, relating to the plea of the appellant that APHB discharges statutory functions to carry out the housing schemes of the Government. Since the activities are not undertaken with any profit motive, the receipts cannot be treated as income from business. The CIT(A) has extracted the first part of paragraph 5.2, wherein the constitution bench of the Supreme Court in New Delhi Municipal Council v. State ofPunjab, (1997) 7 SCC 339, has held that where there is no profit motive involved in any activity, it cannot be said that it constitutes trade or business. Significantly, the second part of the paragraph 5.2 has not been extracted in the order of the CIT(A). In this, the appellant has relied on the observation of the Supreme Court in Baburao Shantaram More v. Bombay Housing Board, 1954 SCR 572 : AIR 1954 SC 153, wherein it was held that Bombay Housing Board as a corporate body was brought into existence for the purpose of framing housing schemes to solve the problem of acute shortage of accommodation in Bombay. In effect, it is a Government sponsored body not having any profit making motive. The same principle applies to the appellant. Accordingly, its activity cannot be regarded as a business. Had this ruling on a Housing Board been taken into account, the decision of the CIT(A) would have been otherwise.

In W.B. Housing Board v. Brijendra Prasad Gupta (1997) 6 SCC 207, the Supreme Court held that the public purpose is not lost, if the State or Housing Board earns any profit. In Gulam Mustafa v. The State of Maharashtra (1976) 1 SCC 800, the Supreme Court held that the excess land acquired by the Municipal Committee, when sold in plots for housing colony, it served public purpose. Similarly, the Supreme Court in State ofGujarat v. Sankalchand Khodidas Patel, (1977) 4 SCC 590, has held that the acquisition of land for housing facilities of a Cooperative Society was for public purpose. All the housing schemes of APHB are sanctioned by the Government. The activity undertaken by the APHB at the behest of the Government is a Governmental function carried on for public purpose. The Supreme Court in Bajirao T. Kote v. State of Maharashtra (1995) 2 SCC 442, has held that satisfaction of the State Government regarding existence of public purpose is not open to judicial scrutiny unless there is malafide or colourable exercise of power. APHB is executing the decisions taken by the Government as its executing agency. Therefore, APHB is discharging functions which are Governmental in nature. Its entire activities are sanctioned and dictated by the Government. It only executes what the Government wants to be carried out.

The appellant would submit that the structure and functions of APHB are such that there is no concept of cost or profit. The accounts are based on cash flow. The accounting is only for the purpose of monitoring activities and recording receipts and expenditure. The concept of profit can be applied only to for profit organizations. The AO/CIT(A) has understood that any activity generating surplus would by itself show profit motive. The appellant would submit that this conclusion is not based on any appreciation of the development of income tax law. In the past there was confusion about the meaning of profit motive. In section 2(15) of Income Tax Act, as it was then worded, the expression "not involving the carrying on of any activity for profit" came to be examined by a Five Member Bench of the Supreme Court in Additional Commissioner of Income-tax v. Surat Art Silk Cloth Manufacturers Association, (1980) 121 ITR 1 (SC). The Bench referred to the views of the learned judge of a Division Bench in an earlier case that an activity generating surplus would automatically mean an activity for profit. In fact, the judge had observed that the advancement of object of general public utility must not involve the carrying on or of any activity for profit and if it does, the exemption is forfeited. But the Larger Bench disagreed with this view. It held that the expression "activity for profit" means for the purpose of making profit and connotes the end with reference to which something is done. It is not, therefore, enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit-making must be the end to which the activity must be directed or in other words, the predominant object of the activity must be making of profit. The predominant object of APHB is not making profit but creating housing infrastructure as per the scheme of the Government.

In view of the authoritative rulings of the Supreme Court that surplus by itself does not tantamount to profit motive, the Revenue's conclusion should be rejected. The appellant has already explained that providing housing infrastructure in an orderly manner is a Governmental function and APHB is carrying out such schemes on behalf of the Government. Further, it has earlier explained that by virtue of the statutory provisions, the revenue generated by it is either spent for housing infrastructure or it vests in the consolidated fund of the State. Therefore, there is no profit motive in the activities undertaken by APHB. All its activities are driven by public purpose under the direction of the Government. The CIT(A) has considered a plea which the appellant has not made. He has held that income of APHB is not exempt from tax as its activities are not charitable. For this, he has noted that the housing schemes are not for the poor and that the houses are not sold at subsidised prices. But the appellant has not raised any plea that it is a charitable organisation. What it has argued is that its existence is not with profit motive and it is exemplified by the fact that it serves public purpose.

The appellant would explain that the private parties may be undertaking the activities in the joint venture for their profit motive but the same does not apply to APHB, which is only harnessing the capability of the private parties to achieve the public purpose. In this regard, the appellant would quote from the Supreme Court's ruling in Sooraram Pratap Reddy and Others v. District Collector, Ranga Reddy District, (2008) 9 SCC 552, wherein foreign rulings were cited with approval before concluding that such joint venture arrangement does not sully public purpose. Clause (1) of Article 289 of the Constitution states that the property and income of a State shall be exempt from Union taxation. However, clause (2) is an exception to this and prescribes that Parliament may by law provide for taxing the income from trade or business of any kind carried on by and on behalf of the Government of a State or any operation connected therein. The AO seeks to invoke this clause after holding that APHB is undertaking real estate business with profit motive. But for the reasons explained in the foregoing paragraphs, the appellant would submit that APBH is a not-for-profit organisation. The nine judge bench of the Supreme Court in New Delhi Municipal Council v. State of Punjab, (1997) 7 sec 339, has held that an activity can be described as trade or business only when it is carried on with profit motive. Accordingly, it held that only where a trade or business is carried on with profit motive, clause (2) of Article 289 would be attracted. Where there is no profit motive involved in any activity carried on by the State Government, the Court held that it cannot be said to be carrying on a trade or business within the meaning of clause (2), merely because some surplus results from such activity. This observation of the Supreme Court squarely applies to APHB.

Agent of State Government

APHB has been created under a statute to work as executing agency of the State Government. In Housing Board of Haryana v. Haryana Housing Board Employees Union, (1996) 1 sec 95 (se), Supreme Court examined the provisions of the Haryana Housing Board Act, 1971. The provisions extracted in the ruling closely resembles those of Andhra Pradesh Housing Board Act, 1956. Some of the provisions of the APHB Act suggest even greater degree of control by the State Government of APHB. The appellant had submitted a section wise comparison between APHB Act and those extracted and analysed by the Supreme Court of Haryana Housing Board Act before the CIT(A) (page 96 of Paper Book - I). After extracting the relevant provisions from the Haryana Housing Board Act, the Supreme Court has observed as under:

29. The above provisions clearly spell out that the Board which is basically and essentially a creation of the Act of State Legislature consists of persons appointed by the State Government on salary basis. The Board's personnel are not elected by the people and there is no element of people's choice being represented in any manner in the constitution of the Board. The Board functions strictly under the supervision and control of the State Government and does not hold or possess a "local fund". What constitutes the fund of the Board has already been specified above.

30. These functions as are indicated in a housing scheme are essentially performed by municipal boards or municipal council which, undoubtedly, are "local authorities" but on that analogy the Haryana Housing Board cannot be treated to be a "local authority" as the extent of control of the State Government under which the Board has to function is so prominently pervasive that it is almost destructive of its independence which will also be apparent from the fact that in the matter of settlement of its Annual Programmes, Budget and Establishment Schedule, the Board has to obtain the sanction of the State Government under Section 24 of the Act. The supplementary budget and programme, if any, has also to be sanctioned by the State Government.

31. We need not refer to other provisions as the provisions already referred to above are sufficient to bring home the point that Haryana Housing Board does not have even the semblance of independence which are normally possessed by local self-governments, like Municipal Boards or District Boards etc. The Board also does not even partially consist of elected representatives of the people. The above observations of the Supreme Court are equally applicable to APHB. The provisions of APHB Act are similar to those considered by the Supreme Court with respect to Haryana Housing Board Act. As in the case of Haryana Housing Board, APHB has no autonomy or independence, and it works as a captive instrumentality under the close control and supervision of the State Government.

The law of agency contained in sections 182, 212, 213, 222, 223 and 226 of the Indian Contract Act throw light on the relationship between the principal and his agent. The principal always indemnifies the agent for the loss incurred in the course of the business. The agent is required to act in the interest of the principal with due diligence. He is to give accounts of dealings with other principals to his principals. The agent is not to make any profit from the dealings apart from the remuneration received from the principal. The appellant would submit that all the ingredients of relationship between principal and agent are present in the statutory arrangement between the State Government and APHB. The funds and land are provided by the Government and any surplus over the expenditure incurred for the purposes of the Act vests in the consolidated funds of the State. Though APHB enters into contract in its own name, it can be contended that it is doing so on behalf of the State. Law of agency recognises that an agent can deal with counter parties in his own name and without disclosing the identity of the principal. What is to be seen is whether the profit or loss arising in the course of the dealings of the agent accrues to the principal, and not to the agent. In the arrangement prescribed under APHB Act, all the works done by APHB is assigned to it when the housing schemes are sanctioned by the Government, and when directions are issued by it to APHB. All the expenditure on the administration of APHB is met by the Government. Therefore, APHB as an entity does not suffer any loss or enjoy any profit on its own account. The full accounts of the amounts spent and received are given to the Government. The appellant had earlier cited the Supreme Court' ruling in Housing Board of Haryana case (supra), wherein it has been held that the degree of control and supervision the State Government has over the Housing Board results in the Housing Board not having any semblance of independence. Therefore, the appellant herein (APHB) is acting as an agent in the capacity of executing agency of the State Government. Accordingly, all the receipts arising from the activities of APHB in implementing the housing schemes accrues to the principal, the State Government. Since APHB functions under no-pro fit- no-loss basis, it does not have any income at all. If at all, any income arises, it is that of the State Government.

In Andhra Pradesh State Road Transport Corporation v. Income Tax Officer, (1964) 52 ITR 524 (SC), the Supreme Court explained that, if a trade or business is carried on by the State departmentally and income is derived from it, there would be no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State.

The Gujarat High Court in U.K. Acharya v. State of Gujarat, AIR 1989 Gujarat 81, has held that the State of Gujarat is entitled to give directions to the Housing Board for the purposes of the Act and these are binding on the Housing Board. The control of the State Government is all pervasive in connection with any of the housing scheme undertaken by APHB. This observation of the Hon'ble High Court is equally applicable to the APHB.

APHB has been created to operate as an executing agency for the plans and programmes of the State Government. It is bound by the directions issued by the Government. Most of the income tax demand has been raised by the A.O. with respect to the sale of land and transfer of proceeds to the A.P. Housing Corporation or to the Government. When any land is transferred to or is acquired by APHB, it does not become absolute owner of such land. Section 40-C of the A.P. Housing Board Act, 1956, states that the Government land can be transferred to the "control" of APHB for the purpose of providing housing accommodation. Section 45 empowers APHB to sell, exchange, mortgage or otherwise disposes off any land, building or property "vested" in it, and such action is subject to any rules made by the Government. The Supreme Court in Fruit & Vegetable Merchants Union v. Delhi Improvement Trust, AIR 1957 SC 344: 1957 SCR 1, has examined the meaning of "vest" and held that when the land was transferred from the Government to the Delhi Improvement Trust, it was not to vest in the Improvement Trust absolutely free from all encumbrances. The land did not vest in the Improvement Trust in title but merely in possession, so that the Improvement Trust can use the land for the purpose for which the land is transferred. Placing of the property at the disposal of the Trust does not signify that the Government had divested itself of its title to the property. Similar is the situation with the APHB. The Government has transferred land to APHB for use for its own purpose. It is entitled to require APHB to sell the land and transfer the sale proceeds to either its nominee (AP Housing Corporation) or to itself, for use of such fund for public purpose. There are a number of meetings in the chamber of the Chief Minister of Andhra Pradesh, in which APHB has been given directions for resource mobilisation for the State exchequer. Accordingly, APHB had sold land and transferred the amounts to APHC and the State Government from time to time. The State Government has issued orders directing APHB to treat such payments as expenditure in its accounts. Thus, APHB has been undertaking the activities as and when the Government requires it to do so in the capacity of its agent.

It may be noted that the sole purpose for which APHB has been constituted is to execute housing schemes. Each housing scheme is formulated for execution with the sanction of the State Government. If the State Government does not accord any sanction, APHB would have no activity to perform. Apart from sanctioning the schemes, the State Government is thickly involved in guiding, directing and facilitating the activities of APHB. The statutory powers and privileges conferred on APHB by the Legislature of the State is to help it in carrying out its functions. Hence, there is no doubt that the activities of APHB are undertaken for and on behalf of the State. As of now, there is no law made by the Parliament to levy income tax with respect to any trade or commerce carried on by or on behalf of the Government of a State or any operations connected with therewith. Therefore, any income arising out of the operations in the course of execution of housing schemes cannot be subjected to tax in the hands of the State Government. The same income does not accrue to APHB, as it is merely functioning as an agent of the State Government."

27. The learned Departmental Representative also filed written submissions before us putting forth his contentions. At the outset, the learned Departmental Representative strongly denied the assessee's contention that some of his arguments and case laws have not been considered by the First Appellate Authority. He submitted that the CIT(A) had passed the order after considering all the facts and contentions raised by the assessee. The learned Departmental Representative submitted that APHB cannot be considered to be an extended arm of the State Government due to the following reasons:

(i)		State Government does not have any shareholding with the APHB.
(ii)		The funds given by the State Government for different projects are shown as unsecured loans in the balance sheet and the APHB is also paying huge interest to the Government on such loans.
(iii)		APHB is doing business activity as a body corporate and earns profits on the sale made by it and its houses/flats to the public. Thus, the real estate business of APHB is neither incidental to the ordinary functions of the State Government nor the Union Government as declared by law under clause (3) of Article 289 of the Constitution. Hence, the Article 289 does not apply to APHB.

28. It is submitted by relying upon the decision of the Hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corpn.(supra) and of the Hon'ble AP High Court in the case Andhra Pradesh State Civil Supplies Corpn. Ltd. v. CIT [1984] 148 ITR 497/17 Taxman 167 (AP.) based on certain principles which are as under:

(1)		Corporation has a personality which is distinct from the State and, hence, normal income of a corporation cannot be treated as income of State.
(2)		The corporation is its own master and is answerable as fully as any other person or corporation. It is not the crown and has none of the profits or privileges of the crown. Its services are not civil services and its property is not crowned property. It is as much bound by the Act of Parliament as any other subject of the Kind and corporation constituted through a State Act is of course a public authority and its purposes no doubt are public purposes but it is not a Government department nor do its powers fall within the provisions of the Government and trading activity carried by the corporation is not a trading activity carried on by the State Departmental nor is it a trading activity carried on by a State through its agencies appointed in that behalf.
(3)		State may issue a notification under the Statute under which the corporation is constituted providing expressly or by necessary implication that the income derived by the corporation from its trading activity would be income of the State.
		It is submitted that application of the above principles to the facts of the assessee's case would bring out the following features, which are :

(i)		the assessee has distinct personality from the State, which is evident from the Constitution as a company and the fact that the account of the Board are different than the State. The assessee is conducting trading on its own and showing receipts and expenditure on its own account, the entire activity of the assessee is subject to tax audit, and the assessee is donating part of its income to State and claiming 80-IB deduction separately for some assessment years and the State is not indemnifying the assessee for any of its acts or omissions or commissions.
(ii)		The assessee is also not covered under Article 289(3) because the activity of the assessee is not declared by the Parliament as an activity incidental to the ordinary function of the government.
		It is submitted that these facts make it clear that the income of the assessee is not that of the State and, hence, is liable to tax. It is submitted that the Hon'ble AP High Court in the case of Andhra Pradesh State Civil Supplies Corpn. Ltd. (supra) and Hon'ble Supreme Court in the case of Som Prakash Rekhi v. Union of India [1981] 51 Comp. Cas. 71 have laid down certain tests, which are—

(i)		If the entire share capital of the Corporation is held by the Government it would go a long way towards indicating that the corporation is instrumentality or an agency of the Government. Existence of deep and pervasive State control may be an indication that the corporation is a State agency or an instrumentality whether the corporation enjoys monopoly status it is state conferred or state protected.
(ii)		If the functions of the corporation are of public importance and closely related to the governmental functions it would be relevant factor on classifying the corporation as an instrumentality or an agency of the Government.
(iii)		Specifically if a department of government is transferred to a corporation it would be a strong factor supportive of the inferences of the corporation being an instrumentality or agency of the government.
(iv)		Even if a Corporation meets all the tests to be termed as instrumentality of the state in such case also it is held that an instrumentality is different from the state and its income cannot be equated to that of the state.

29. It is further submitted that company as defined in section 2(17) of the Act includes any Indian company, anybody corporate incorporated by or under the laws of a country and any institution, association or body whether incorporated or not. A State undertaking incorporated under the companies Act is not outside the definition of company. 'Person' defined u/s 2(31) includes a company. Income derived by any person is liable to charge of income tax u/s 4 of the Act. It was submitted that the assessee has not claimed exemption under any of the provisions of the IT Act, but, under Article 289 of the Constitution of India. It was submitted that what is exempt from taxation under Article 289(1) is the income of a state and not the income of the instrumentality or an agency of a state. The income of the company being distinct from the income of the state, immunity from taxation provided under Article 289(1) of the Constitution is not attracted. It was submitted that if the newly brought in amendment in section 58(7) of the APHB Act, applicable retrospectively will be interpreted to mean that income of the Corporation is that of the state it would imply that the legislation is passed by a state on a subject on which center is only competent to legislate. It was submitted that when there is repugnancy between the state legislation and central legislation as per Article 254 of the Constitution the central legislation will prevail and the state legislation shall be treated as void to the extent of the repugnancy. In support of such contention, the learned Departmental Representative relied upon the decision of the Hon'ble Allahabad High Court in case of CIT v. UP Jal Nigam [2011] 202 Taxman 685/14 taxmann.com 178. It was submitted that APHB first earns its income for a particular FY which is taxable after meeting its expenditure and the surplus fund is transferred to consolidated fund of the state Government. Thus, the exemption from taxation claimed by the APHB on the ground that its surplus is transferred to the consolidated fund of the state Government is not acceptable as the transfer of surplus is nothing more than mere application of its income.

30. It was submitted that all public sector undertakings and corporations which have been created under some Act, passed by the state Government or the Parliament are also subject to taxation under the Income-tax Act, 1961, even though, their net surpluses are transferred to the consolidated funds of the Government. Relying upon the decision of the Hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corpn. (supra) and in case of Municipal Commissioner of Dum Dum Municipality v. Indian Tourism Development Corpn. [1995] 5 SCC 251 and Adityapur Industrial Area Development Authority v. Union of India [2006] 153 Taxman 107 (SC), it is submitted that APHB is a distinct legal entity and it is not a state Government per se. It is submitted that all the Directors of the APHB are nominated by the Government of Andhra Pradesh, therefore, it is convenient on their part to influence the Government of AP to pass a legislation in the AP Housing Board Act by introducing the provision of sub-section (7) of section 58 retrospectively with a clear intent to circumvent the provisions of IT Act, 1961 and to make sure that the surplus of the assessee is given the colour of being exempt from taxation. It is submitted that such amendment brought into the APHB Act is clearly repugnant to Article 73 read with Article 254 of the Constitution of India. It is submitted that the repugnancy becomes more apparent from the fact that the APHB had filed return of income claiming deduction u/s 80-IB. It prepares its own income and expenditure account and balance sheet which is duly certified by Chartered Accountant and filed along with returns of income. It furnishes a tax audit report u/s 44AB of the IT Act. It is submitted that APHB is a distinct legal entity being a body corporate and is not an instrumentality of the Government of AP or an extended arm of the state Government. It was submitted that APHB is not an authority as envisaged under Article 12 of the Constitution as it does not have the power to act as Government of AP. It is only a Board formed for the purpose of housing constituted with a limited mandate under the APHB Act, 1956. In support of such contention, the learned Departmental Representative relied upon the following decisions:

1.		Punjab Urban Planning & Development Authority v. CIT [2006] 156 Taxman 37 (Chd.) (Mag.)
2.		Jalandhar Development Authority v. CIT [2010] 35 SOT 15 (ASR) (URO)
3.		Jammu Development Authority v. CIT [2012] 23 taxmann.com 343/52 SOT 153 (ASR) (URO)

31. The learned Departmental Representative submitted that the returns filed for the relevant assessment years would give an indication that for the AYs 2004-05 and 2006-07 the assessee itself filed return of income admitting income under the head 'income from other sources' and claimed deduction u/s 80-IB. However, as per the computation, the income in fact was excess of income over expenditure, which falls in the category of business income. For the AY 2005-06 it filed its return of income declaring the income under the head 'house property' and 'income from capital gain' and went on to show net loss. For the AY 2007-08 the assessee filed its return of income declaring income under the head 'income from house property' and 'income from other sources' and claimed deduction u/s 80-IB. For the AY 2008-09 the assessee filed its return of income declaring income under the head 'income from house property'. It is submitted that deduction can be claimed u/s 80-IB only when there are profits derived from business. Though the assessee returned its income under the head 'income from other sources' but the very fact that in the return of income the assessee claimed deduction u/s 80-IB clearly demonstrates that the income of the assessee is in nature of business. It is submitted that the assessee having claimed deduction u/s 80-IB it cannot turn back at the time of proceedings before Income-tax Appellate Tribunal to claim that its income is exempt from being taxed under the IT Act, 1961 due to retrospective amendment carried out in the APHB Act, 1956 in the year 2010. It is submitted that the assessee having voluntarily complied with tax audit provisions and commercial audit provisions year after year clearly shows that it recognised its liability under the income-tax Act. It is submitted that irrespective of the retrospective amendment effected to the APHB Act, assessee's liability under income-tax Act would not change because the assessee itself filed return of income declaring taxable income and claimed deduction u/s 80-IB. It is submitted that having filed its return of income the only way the assessee can claim that its income is not taxable is by way of filing revised return of income u/s 139(5) of the Act. Since the assessee has not filed any revised return claiming exemption from tax the claim of the assessee on legal grounds as well as on fact cannot be accepted.

32. The learned Departmental Representative finally submitted that in an identical case decided by the Hon'ble Bombay High Court in case ofVidarbha Housing Board v. ITO [1973] 92 ITR 430, the Bombay High Court after relying upon the decision of the Hon'ble Supreme Court in case of Andhra Pradesh State Road Transport Corpn. (supra) held that the income and property of the board could not be regarded as income and property of the state Government, hence, the immunity claimed under Article 289(1) of the Constitution will not be available. It is submitted that the assessee's case clearly fits in to the aforesaid case decided by the Hon'ble Bombay High Court and in view of the ratio laid down there in the income of the assessee cannot be held to be the income of the state under Article 289(1) of the Constitution of India.

33. We have considered the elaborate submissions made by both the parties orally at the time of hearing as well as through their respective written submissions. We have also perused materials placed on record as well as in the paper books. We have carefully applied our mind to the catena of decisions cited before us by both the parties. Before dwelling upon the merits of the contention of the parties we consider it necessary to narrate certain facts.

34. The assessee, APHB was formed under the AP Housing Board Act, 1956 of the state legislature. The main object of formation of the APHB as set out in the preamble of the APHB Act, 1956 is to take such measures, to make such schemes, and to carry out such works as are necessary for the purpose of dealing with and satisfying the need of housing accommodation. The activity of the assessee is to construct housing projects on land provided by the state Government or acquired by it and sale it to people belonging to different income groups. The assessee recognises income generated from the activity of sale of houses and also maintains regular books of account wherein such transactions are recorded. The assessee's accounts are also subject to statutory audit under the provisions of the IT Act. It is also a fact that for the AY 2004-05, 2005-06 and 2006-07 the assessee had filed return of income declaring certain income and also claiming deduction u/s 80-IB of the Act. Assessments for the aforesaid assessment years were completed by rejecting claim of deduction u/s 80IB of the Act and also treating the income as business income. In fact it is evident from the assessment order passed for the assessment year 2005-06 the assessee itself in course of assessment proceeding had admitted the profit from sale of land as its business income. The assessee challenged the assessment before the First Appellate Authority and having failed there, approached the Income-tax Appellate Tribunal, Hyderabad Bench.

35. In course of hearing before the Income-tax Appellate Tribunal, the assessee raised certain additional grounds claiming its income to be not taxable in view of the amendment brought retrospectively to the APHB Act by introduction of sub-section (7) of section 58. The additional grounds having been raised for the first time before the Tribunal, it remanded the matters back to the CIT(A) for consideration of additional grounds as well as the other grounds. In the meanwhile, assessment for the AY 2007-08 and 2008-09 were also completed and the assessee's appeal against the assessment orders were pending before the CIT(A). It will be pertinent to mention here that for the AY 2007-08 and 2008-09 also the assessee had filed its return of income declaring income under the head 'income from house property' and 'income from other sources' and for the assessment year 2007-08 claimed deduction u/s 80-IB of the IT Act. After the retrospective amendment effected in the year 2010 to the APHB Act by introduction of sub-section (7) of section 58 of the APHB Act, the assessee claimed that the income earned by it is the income of the State.

36. From the aforesaid narration of fact, it is very much clear that, but, for the amendment to the APHB Act made by the state legislature in the year 2010 the assessee all along had been voluntarily filing its return of income by recognizing its income. It is also a fact that the assessee all along was claiming deduction u/s 80-IB of the Act. Only after the amendment to section 58 of the APHB Act, was made the assessee made a claim that its income is not taxable under the IT Act, by claiming immunity under Article 289(1) of the Constitution of India. The main thrust of the argument of the learned AR of the assessee for claiming immunity from taxation under the IT Act, 1961 are broadly the following reasons:

1.		The APHB is a creature of statute, clothed with statutory powers and functions under supervision, control and direction of the state Government. It is an instrumentality of the state for carrying out Government functions and as such is an extended arm of the Government and not a separate independent entity which can be subjected to tax.
2.		The state Government exercises pervasive control over the Board under the terms of the statute, hence, it cannot be regarded as an independent and autonomous body.
3.		The Board is empowered with statutory power to acquire land, evict any person from the premises, following the procedure laid down in the Act, and recover rent or damages from such person. Exercise of such statutory power is indicative of the fact that the Board is discharging sovereign function which is inconsistent with profit making venture in the nature of trade or business.
4.		The assessee is used as an instrument by the state for resource mobilization for which land is allotted for exploiting commercially for this purpose.
5.		The employees of the APHB are governed by the same terms and conditions as are applicable to the state government officers, which establishes that it is an extended arm of the Government.
6.		The Accountant General of AP has categorized APHB for civil audit and not for commercial audit, which shows that the APHB is not considered as a commercial organization.
7.		The activities of the Board are not undertaken with any profit motive. It only discharges statutory functions to carry out housing schemes of the Government of providing of housing infrastructure in an orderly manner is a governmental function and APHB is carrying out such schemes on behalf of the Government. Further as provided under the statutory provisions the revenue generated by the Board is either spent for housing infrastructure or it vests in the consolidated fund of the state.
8.		APHB has been created under a statute to work as an executing agency of the state Government. All the ingredients relationship between principal and agent are present in the statutory arrangement between the state Government and APHB. The funds and land are provided by the Government and any surplus over the expenditure is incurred for the purposes of the Act vests in the consolidated fund of the state. Though APHB enters into contract in its own name but in effect it is doing so on behalf of the state. In law of agency what is to be seen is whether the profit or loss arising in the course of the dealing of the agent accrues to the principal and not to the agent.

37. The learned counsel for the assessee taking us through various provisions of the APHB Act,1956 had submitted that the State Government exercises pervasive control over the Board. To emphasize such contention he referred to the transfer order of one Shri G. Sai Prasad and appointment of law officer. He submitted that the Board cannot take any decision on its own but every action of the Board has to be with the approval of the Government. In this context the learned counsel referred to the minutes of meeting held in the chamber of the chief minister. He further submitted that Rajiv Gruha Kalpa scheme is a scheme of the State Government and the Board is only implementing it as an agency of the Government. He further submitted that for mobilizing resources by way of sale of land the Board is utilized as a tool. It was submitted that the mode and manner of maintaining the accounts is also as per the direction of the Government. For mortgaging also permission is required. In sum and substance it is the contention of the learned counsel that the state Government exercises pervasive control and the Board as such is not an independent autonomous body but is an extended arm of the state Government. It is the submission of the learned counsel that the income of the Board therefore, in effect, is the income of the State Government, hence, for that reason immune from taxation under Article 289(1) of the Constitution of India.

38. All the aforesaid contentions raised by the learned counsel has been dealt with and answered by the Hon'ble Supreme Court in case ofAndhra Pradesh State Road Transport Corpn. (supra). The Hon'ble Supreme Court while affirming the decision of the Hon'ble AP High Court examined the provisions of APSRTC Act vis-à-vis Article 289 of the Constitution of India and held that the income of the APSRTC cannot be held to be the income of the State Government as APSRTC has its own identity and distinct from the Government. The Hon'ble Supreme Court analysing the three clauses of Article 289 of Constitution of India, held in the following manner:

"Reading the three clauses together, one consideration emerges beyond all doubt and that is that the property as well as the income in respect of which exemption is claimed under clause (1) must be the property and income of the State, and so, the same question faces us again: is the income derived by the appellant from its transport activities the income of the State ? If a trade or business is carried on by the State departmentally and income is derived from it, there would no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by using a notification under the relevant provisions of the Act. The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately; and so, prima facie, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation."

39. The Hon'ble Supreme Court after analyzing the different clauses of Article 289(1) in the context of the claim made by the assessee held as under:

"The main point which we are examining at this stage: is the income derived by the appellant from its trading activity, income of the State under article 289(1) ? In our opinion, the answer to this question must be in the negative. Far from making any provision which would make the income of the corporation the income of the State, all the relevant provisions emphatically bring out the separate personality of the corporation and proceed on the basis that the trading activity is run by the corporation and the profit and loss that would be made as a result of the trading activity would be the profit and loss of the corporation. There is no provision in the Act which has attempted to lift the veil from the face of the corporation and thereby enable the shareholders to claim that despite the from which the organization has taken, it is the shareholders who run the trade and who can claim the income coming from it as their own. Section 28 which provides for the payment of interest clearly brings out the dualty between the corporation on the one hand and the State and Central Governments on the other. Take, for instance, the case of supersession of the corporation authorized by section 38. Section 38(2)(c) emphatically brings out the fact that the property really vests in the corporation, because it provides that during the period of supersession, it shall vest in the State Government. Similarly, section 39(2) which deals with the distribution of assets in case of liquidation, brings out the same feature. It has been urged before us by the Advocate-General that section 30 contemplates that after provisions is made as required by section 28 and 29 and funds are utilized as prescribed by section 30, the balance has to be given to the State Government for the purpose of road development, and that, it is suggested, indicates that income belongs to the State Government. This argument is clearly not well-founded. When we are deciding the question as to whether the income derived by the corporation is the income of the State, the provision made by section 30 for making over to the State Government the balance that may remain as indicated therein, is of no assistance. The income is undoubtedly the income of the corporation. All that section 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road development. It is not suggested or shown that when such income is made over to the State, it becomes a part of the general revenue of the State. It is income which is impressed with an obligation and which can be utilized by the State Government only for the specific purpose for which it is entrusted to it. Therefore, we are satisfied that the income derived by the appellant from its trading activity cannot be said to be the income of the State under article 289(1), and if that is so, the facts that the trading activity carried on by the appellant may be covered by article 289(2) does not really assist the appellant's case. Even if a trading activity falls under clause (2) of article 289, it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State. That is how ultimately, the crux of the problem is to determine whether the income in question is the income of the State, and on this vital test, the appellant fails."

40. Even though the learned AR has tried to impress upon us that the Assessee Board is nothing but an extended arm of the Government or part of the Government, but, in our view, it is not so. Sub-section (2) of Section 3 of the APHB Act, 1956 reads as under:

"The Board shall be a body corporate having perpetual succession and a common seal and may sue and be sued in its corporate name and shall be competent to acquire and hold property both moveable and immoveable and to contract and do all things necessary for the purpose of this Act."

41. A reading of the aforesaid provision makes it clear that the assessee is a body corporate having perpetual succession and a common seal and it can sue and be sued in its corporate name. The said provision also makes it clear that the Board shall be competent to acquire and hold property both movable and immovable and to contract and do all things necessary for the purposes of the Act. Sub-section (3) of section 3 of the Act provides that the Board shall be deemed to be a local authority for the purposes of Land Acquisition Act, 1894. The Constitution of the Board shall be as per section 4 of the APHB Act. As per the aforesaid provision, the Board shall be constituted of members, who are not only Government officials but also representative of the financial institution providing financial assistance to the Board. Sections 5 to 12 deal with the terms of office and conditions of service of the members, filing up vacancies, appointment of committees, meeting of the board etc. Section 13 of the Act empowers the Board to enter into and perform all such contracts as it may consider necessary or expedient for carrying out any of the purposes of the Act. Section 14 of the Act provides that every contract shall be made on behalf of the Board by the Vice Chairman and Housing Commission. However, amendment was made by Act No. 12 of 2010 by introducing new clauses which require sanction of the Government if the contract exceeds certain monetary limit fixed by the Government. Section 21 of the Act provides that the Board subject to the control of the Government may incur expenditure and undertake works for the framing and execution of such housing schemes as it may consider necessary or as may be entrusted by the Government. Section 58 provides that the Board shall have its own fund and may accept grants, subventions, donations, gifts or loans from the central or state government or a local authority or any individual or body, whether incorporated or not for all or any of the purposes of the Act. It also provided that government shall every year make a grant to the Board of a sum equivalent to the administrative expenses of the Board. Section 58(4) provides that all moneys received by the Board, all proceeds of land or any other kind of property sold by the Board, all rents, betterment charges and all interest, profits and other moneys accruing to the Board shall constitute the fund of the Board. An amendment was made to section 58 by Act No. 12 of 2010 by introducing sub-section (7) with retrospective effect from 01/04/2002. The newly introduced sub-section (7) provides that the surplus net revenue after meeting the expenditure of the Board shall vest in consolidated fund of the State of Andhra Pradesh. Section 59 of the Act as it stood earlier provided that all property, the Board fund and all other assets vesting in the Board shall be held and applied by it, subject to the provisions and for the purposes of the Act. However, the earlier section 59 was substituted by a new section 59 by Act No. 12 of 2010 with retrospective effect from 01/04/2002. The amended section 59 reads as under:

"59. Application of the fund: subject to the provisions contained in sub-section (7) of section 58 all property, the Board fund and all other assets vesting in the Board shall be held and applied by it, subject to the provisions and for the purposes of this Act."

Section 81 of the Act empowers the Government to dissolve the Board.

42. On going through the aforesaid provisions it becomes clear that the Board has an independent identity distinct from the State Government. The Board is also constituted for the purpose of carrying out the work as envisaged under the preamble of the Act. The Board certainly cannot be equated with the Government or a department of the Government as it does not perform any of the duties of the Government or a Government department. It is quite obvious that the Board is a statutory body performing statutory functions distinct from the state Government. It may be a fact that the state Government exercises some amount of control over the functioning of the Board similar to control exercised over all other government corporation and public sector undertakings but that does not take away the independent identity or character of the Board. Therefore, it cannot be said that the income of the assessee Board is the income of the state Government. In case of Vidarbha Housing Board (supra), the Hon'ble Bombay High Court after interpreting the provisions of the MP Housing Board Act, 1950, which are akin to the provisions in APHB Act, vis-à-vis the assessee's claim of immunity under Article 289(1) of the Constitution of India held as under:

"13. In our view, though it is true that the State has undoubtedly an obligation to promote the welfare of its citizens and providing housing accommodation would be one of the welfare activities of the State, the question is whether by constituting the petitioner board under the Madhya Pradesh Housing Board Act, 1950, a separate legal entity has been established undertaking the various activities on its own or whether the entity established is either a department of the State Government or an agent of the State Government acting on behalf of the State Government, for, it is obvious that if the activity undertaken is being performed by the petitioner board directly as the department of the State Government or as an agent acting on behalf of the State Government, it would be clear that the property and income of the board would be the property and income of the State Government, but if that be not the case and if the board under relevant provisions of the Act is a separate legal entity discharging functions enjoyed upon it on its own and not as an agent or department of the State Government, then clearly the immunity claimed by the petitioner board under article 289(1) of the Constitution would not be available to it. In our view, with the possible exception of the provision contained in section 32A, none of the other features pointed out by Mr. Thakar shows at all that the board is a department of the State Government or is its agent and even the provisions of section 32A does not indicate that. Under that section all moneys recoverable by the board under the Act or under any agreement are declared to be recoverable as arrears of land revenue and Mr. Thakar urged that this provision showed that the board will have to be regarded as recoveries of the State Government, otherwise these would not have been made recoverable as arrears of land revenue. In our view, it is not possible to accept this submission of Mr. Thakar, for, all that section 32A provides for is merely indicate a mode a recovery and simply because a particular mode of recovery which is generally available to the State Government for making its recoveries has been made available to the board for making its recoveries, it cannot mean that the said recoveries becomes recoveries of the State Government or that the recoveries made by adopting that particular mode become recoveries made by the board for and on behalf of the State Government. Similarly, the provision under which the board has been deemed to be a local authority for the purposes of the Land Acquisition Act could not be suggestive of an inference which would favour or support the petitioner's contention. In fact, the provision contained in section 3(3) is a deeming provision which implies that but for the said provision the board would be not a local authority, and what is more, it has been declared local authority for the purposes of certain enactment, namely, the Land Acquisition Act, which only facilitates acquisition of properties for the board. The features that the board as a corporate body has no power to raise share capital or that its activities are not of trading or commercial nature or that the element of profit-making is absent may have some relevance on the point whether its income will attract exemption under section 4(3)(i) of the 1922 Act, but from these features no inference could be drawn that the board is a mere department of the State Government or its agent. It is true that under the Act the board while discharging its functions does so under the general supervision and control of the State Government but that by itself cannot lead to the necessary inference that the board is a department or agent of the State Government. As against this, there are several provisions in the Act which support Mr. Manohar's contention for the 1st respondent.

14. In the first place, as we have stated in the earlier part of the judgment, the very constitution of the board under section 3 of the Act clearly shows that the board on its incorporation shall be a body corporate having perpetual succession and common seal. This provision clearly shows that prima facie the board is statutory entity distinct from the State Government. Even the constitution of the board which has been provided for by section 4 clearly shows that some members of the board could be nominated by the Speaker of the Legislative Assembly and by the State Government. The provision contained in section 12 of the Act would be a clear pointer to the board being a separate entity distinct from the State Government. Under that section the board shall have its own fund and such fund is to get augmented by acceptance of grants, subventions, donations or gifts as well as loans from the Central or the State Governments and obviously the board would be paying interest on such loans. Now, if the board were the department of the Government or an agent undertaking various activities for and on behalf of the Government, no provision would have been made enabling the board to borrow loans from the State Government or to pay interest thereon to the State Government, for, it is inconceivable that a party would by interest to itself. This provision, in our view, is a clear pointer to the fact that the Board is a distinct entity apart from the State Government and not department or an agent of the State Government. On the other hand, this provision clearly suggests that the board is a separate entity, possesses its own property, assets or funds and undertakes the various activities on its own account. The other provision which, in our view, is of a clinching character is the one to be found in section 40(2) of the Act. That provision indicates as to what should happen to the property and assets of the board upon its dissolution being made by the State Government. Under sub-clause (a) of sub-section (2) of section 40 it is provided that with effect from the date specified in the notification under sub-section (1), all properties, funds and dues which are vested in or realizable by the board shall vest in and be realizable by the State Government. If the board was acting as department of the State Government or was merely as agent undertaking the activities for and on behalf of the State Government, it was utterly unnecessary to make the provision of the type indicated above. The very fact that provision has been made in section 40(2)(a) that upon the dissolution of the board all properties funds and dues recoverable by the board shall vest in the Government clearly shows that the board is a distinct entity and is not an agent or a department of the State Government. Similarly, section 40(2)(b) is further indication in the same direction. It provides that all liabilities enforceable against the board shall be enforceable against the State Government but only to the extent of the properties, funds and dues vested in and realised by the State Government. In other words, upon the dissolution of the board if the board is found to have created liability in excess of its assets or properties and funds which shall vest in the State Government, then the State Government is not responsible for such excess liabilities incurred by the board. If the board were merely acting as a department of the State Government or as an agent of the State Government, then the State Government would have been liable for all the liabilities created by the board. These provisions, in our view, run counter to the contention urged by Mr. Thakar before us that the petitioner-board, when it under took the activities enjoined upon it by the Act, did so either as a department of the State Government or as an agent of the State Government acting on behalf of the State Government. On the other hand, these provisions clearly show that the petitioner-board is a separate statutory body distinct from the State Government and it has been undertaking the activities enjoined on it not as an agent of the State Government but on its own. If that the position which really emerges from examination of the several provisions of the Act, it seems to us very clear that the income and property of the board could not be regarded as income and property of the State Government, with the result that the immunity claimed by the petitioner-board under article 289(1) of the Constitution is clearly not available to the petitioner-board. In our view, therefore, on an examination of the provisions of the Act, the contention raised by Mr. Thakar must fail."

43. The Hon'ble Bombay High Court while coming to such conclusion also followed the ratio laid down by the Hon'ble Supreme Court in case ofAndhra Pradesh State Road Transport Corpn. (supra) and held as under:

"15. In this context it would not be out of place to refer to the judgment of the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation v. Income-tax Officer. In that case a similar question based on the provisions of the article 289(1) of the Constitution was raised and immunity from Union taxation thereunder was claimed by the Andhra Pradesh State Road Transport Corporation, and on an examination of the relevant provisions of the Road Transport Corporation Act, 1950, under which the Andhra Pradesh State Road Transport Corporation was constituted the court came to the conclusion that the trading or business activity that was being carried on by the Andhra Pradesh State Road Transport Corporation was not carried on by that corporation either as department of the State Government or as an agent on behalf of the State Government, but the corporation indulged in concerned trade or business activity on its own and it was held that the immunity claimed by that corporation under article 289(1) of the Constitution was not available to it. In that case there were provisions of that Act which showed that the bulk of the capital necessary for the establishment of the corporation had been contributed by the State Government, a small portion by the Central Government and a few shares were held by some individuals; the provisions of the Act also indicated that the activity of the corporation was controlled by the State and in particular there was a provision to be found in section 30 of the Act for making over surplus receipts to the State Government after disbursements indicated in sections 28 and 29 had been made and, notwithstanding these features, which emerged from the provisions of the Road Transport Corporations Act, 1950, the Supreme Court took the view that the other features emerging from the examination of the other provisions of the Act showed that the Andhra Pradesh State Road Transport Corporation was a distinct statutory corporation and the property and income thereof were not the property and the income of the State Government and as such the immunity from Union taxation under article 289(1) of the Constitution could not be claimed by that corporation. It is true that some distinguishing features would be noticed if the provisions of the Madhya Pradesh Housing Board Act, 1950, are exclaimed in the context of the provisions which obtained in the Road Transport Corporations Act, 1950, but, in our view, the distinguishing features which were pointed out by Mr. Thakar could not be regarded as having any bearing on the question which is required to be considered in this case by us; for example, it was pointed out by Mr. Thakar that whereas under the Road Transport Corporations Act, 1950, there was provision for raising a share capital which could be subscribed by private individuals, there was not such provision for raising any share capital for the petitioner-housing board, under the Madhya Pradesh Housing Board Act, 1950; it was also pointed out that there was a glaring difference between the nature of activity undertaken by the Andhra Pradesh State Road Transport Corporation and the nature of activity undertaken by the petitioner-board, as, for instance, the activity undertaken by the former entity was in the nature of trading activity, while the activity undertaken by the petitioner-board could not be regarded as any trading activity in any sense of the term; further, it was pointed out that since profit motive was absent in the instant case before us, there was no question of making any provision for making over surplus receipts to the State Government which was feature which appeared clear under section 30 of the Road Transport Corporations Act, 1950. In the first place, in spite of the aforesaid peculiar features which obtained under the Road Transport Corporations Act, 1950, the Supreme Court took the view that the A. P. State Road Transport Corporation was distinct entity. Secondly, as stated earlier, the distinguishing features mentioned by Mr. Thakar may be relevant on the point of attracting the exemption under section 4(3)(i) and not on the issue which has been raised. The principal question involved both in that decision as well as in the case before us has been whether the income and the property of the board could be regarded as the income and property of the State Government and on that question the provisions of the Madhya Pradesh Housing Board Act, 1950, especially provisions of sections 3, 4, 12 and 14, clinchingly indicate that the petitioner-board cannot be regarded as department or an agent of the State Government and will have to be regarded as separate legal entity distinct from the State Government, and, therefore, the income and property of the board could not be regarded as the income and the property of the State Government. In other words, the relevant provisions concerning a particular entity established under a particular enactment would have to be considered for deciding the question and, in our view, as stated earlier, the provisions of the Madhya Pradesh Housing Board Act, 1950, clearly indicate that the board, its property and income cannot be regarded as property and income of the State Government. In this view of the matter, we feel that the principle enunciated in the Supreme Court's decision in the case of Andhra Pradesh State Road Transport Corporation, would be applicable to the instant case before us and on an analysis of the provisions of the concerned Act before us, we have come to the conclusion that the property and income of the board is not the property and income of the State Government. Mr. Thakar's contention, therefore, must fail."

44. Facts being identical, the ratio laid down as above clearly applies to the assessee. The assessee's contention that the income of the Board cannot be subjected to tax under the income-tax Act, in view of the provisions contained under Article 289(1) of Constitution of India is not acceptable. For the same reason, the assessee's contention that it acted as an agent of the state Government is also tenable. No material has been placed on record that a relationship of agency exists between the state Government and the APHB. On the contrary, the provisions of the APHB Act as well as the other materials on record clearly establishes the fact that the assessee APHB undertakes the housing activity as a commercial venture not as an agent of the state but independently. Therefore, the income derived from sale of housing project would certainly be the income of the assessee Board and not of the state Government. Furthermore, in case of a principal and agent relationship, the agent is entitled for certain commission for the services rendered by it. In the present case, there is no such consideration for which the APHB acts as an agent of the state Government for carrying out the housing schemes of the state Government. Only because sub-section (7) to section 58 was brought into the APHB Act by way of an amendment in 2010 giving retrospective effect from 2002, which provided for vesting of the surplus fund in consolidated fund of the state Government it cannot be said that the income earned by the assessee is actually the income of the state Government. In fact a similar provision u/s 30 of the APSRTC Act, provided for vesting of the surplus fund with the State Govt. In spite of such provision, the Hon'ble Supreme Court held that APSRTC is a distinct statutory corporation and the property and income of APSRTC is not the income of the State.

45. The chargeability of the income to tax is as per the charging section contained u/s 4 of the IT Act, 1961. The retrospective amendment made to the APHB Act by Act 12 of 2010 cannot dilute the effect of the provisions contained under the income-tax Act, which is an Act of the Parliament hence has overriding effect over an Act of the State Legislature. It is a fact on record that the plea taken by the assessee that Board's income is the income of the state Government was not there until introduction of sub-section (7) to section 58 of the APHB Act in 2010. That is the reason the assessee had never taken this stand all these years. In fact the assessee had all along filed returns declaring income and claiming deduction u/s 80-IB of the Act. Deduction u/s 80-IB can only be claimed by an assessee who is an industrial undertaking having income from profits and gains from business specified therein. Therefore, assessee's own conduct goes to show that the income from housing projects were treated as business by the assessee. The assessee has not revised this stand by filing any revised return. Only after the amendment was made to the APHB Act in the year 2010, the assessee came forward with a claim that its income is the income of the state Government therefore immune from income-tax Act in view of the Article 289(1) of the Constitution of India. As has been held by the Hon'ble Supreme Court in case of Andhra Pradesh State Road Transport Corpn. (supra) which was subsequently approved by the Constitution Bench decision of the Hon'ble Supreme Court in case of New Delhi Municipal Council v. State of Punjab [1997] 7 SCC 339 and followed by the Hon'ble Bombay High Court in case of Vidarbha Housing Board (supra), immunity under Article 289 of the Constitution is subject to fulfillment of the conditions laid down in sub-clauses (1), (2) & (3) of Article 289 which are interrelated. As per Article 289, only income or property of the state cannot be taxed under any other law.

46. As can be seen from the facts on record the assessee is having its distinct and separate identity from the state Government, hence, it cannot claim immunity under Article 289 of the Constitution of India. That besides both the AO as well as the CIT(A) have observed that the assessee Board is paying taxes and duties to the State Government wherever it is due. This finding has not been controverted by the assessee. That being, the case the assessee is also required to discharge its liability under the Income Tax Act. Even section 58(7) cannot be construed in a manner to mean that the income of the Board is the income of the State. On the contrary, what sub-section (7) of section 58 says that after meeting all expenditures, the surplus revenue shall vest with the consolidated fund of the State Government, but, that does not make the income of the Board the income of the State Government. The learned AR has relied upon a number of decisions of the Apex Court in his submissions. However, in none of the decisions, the ratio laid down is in the context of chargeability of income under the Income-tax Act vis-à-vis Article 289(1) of the Constitution of India. Therefore, though there is no dispute with regard to the ratio laid down in those decisions, however, they are not applicable to the facts of the case of the assessee. It will be pertinent to mention here that the learned AR placed strong reliance upon the judgment of Hon'ble Supreme Court in case of Housing Board of Haryana v. Haryana Housing Board Employees Union [1996] 1 SCC 95. In this context, the learned AR drawing a parallel between the provisions of Haryana Housing Board Act, 1971 and APHB Act, 1956 submitted that the Hon'ble Supreme Court on considering the provisions of Haryana Housing Board Act has held that the control of the Government is so pervasive that the Board does not have even a semblance of independence. It was submitted that in assessee's case also due to the control of the State Government the assessee does not have any independent existence. The aforesaid decision of the Hon'ble Apex Court is not applicable to the assessee firstly because the observation made by the Hon'ble Supreme Court was in the context of whether Haryana Housing Board is a local authority and secondly the Hon'ble Supreme Court was not considering the issue whether income of the Board is the income of the State Government. On the other hand, the decision of the Hon'ble Supreme Court in case of Andhra Pradesh State Road Transport Corpn. (supra) and of the Hon'ble Bombay High Court in case of Vidarbha Housing Board (supra) are directly on the issue. In aforesaid view of the matter, we hold that assessee's income cannot be held to be the income of the state and as such cannot be exempt from taxation under Article 289 of the Constitution of India. As a corollary the income earned is the income of the assessee board and as such is assessable at its hands only.

47. Diversion of Income by Overriding Title

The assessee in his written submissions has also taken the plea that there being diversion of income by overriding title the income cannot be taxed at the hands of the assessee. In this regard, the assessee has submitted as under:

"In the written submission of the original grounds, as also in the written submissions in the additional grounds, the appellant had argued that the income of APHB is diverted to the government of Andhra Pradesh by overriding title and is never a part of its taxable income. The CIT(A) has referred to section 58(7) of the Andhra Pradesh Housing Board Act, which mandates that surplus net revenue after meeting the expenditure of APHB shall vest in the consolidated fund of the Andhra Pradesh, and that such surplus net revenue shall be transferred to the State Government on quarterly basis, as the State Government from time to time may instructor advise APHB. The CIT(A) has held that State Act cannot override the Central enactment in Income Tax Act. Therefore, the above provisions should be interpreted that the surplus revenue after meeting all expenditure including income tax can alone be transferred to the Government of Andhra Pradesh. While dealing with this issue, the CIT(A) has completely overlooked the following rulings cited by the appellant in the rejoinder and written submission on the original grounds. In CIT v. Sitaldas Iirathdas (1961) 41 ITR 367 (SC) and Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 (SC) , the Supreme Court has held that where the obligation is not self-imposed or gratuitous, and it flows out of an antecedent and independent title, it will constitute diversion of income by overriding title. In CIT v. Nizam Sugar Factory Ltd. (2002) 253 ITR 68 (AP), under Molasses Control Order, 1972, one third of the sale price of molasses was required to be set apart from construction of storage tanks. The amount was claimed by the assessee as not taxable having been diverted by overriding title under the authority of the law. The High Court found that the assessee had no control over the fund, and the same was diverted from the source and did not reach it. Therefore, it was not taxable. Similar view was taken in the following cases:

♦		Somaiya Orgeno-Chemicals Ltd. v. CIT (1995) 216 ITR 291
♦		CIT v. New Horizon Sugar Mills (P.) Ltd. (2003) 128 Taxman 300 (Mad) : (2000) 244 ITR 738 (Mad)Commissioner of' Income-taxv. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690 (Kar.)

In CIT v. New Horizon Sugar Mills (P.) Ltd., (2004) 269 ITR 397 (SC) and CIT v. Ambur Co-op. Sugar Mills Ltd., (2004) 269 ITR 398 (SC), the Supreme Court has dismissed civil appeals by the Revenue on this issue. It should be noted that in all these cases, there was no plea the amount was taxable on the ground that Income Tax Act will prevail over the Molasses Control Order. Income tax law applies to income recognised by the above principle considered by the court. The CIT(A) should not have ignored the importance of these rulings on the plea taken by the appellant on the issue of diversion of income by overriding title."

48. The learned Departmental Representative has submitted that there is no diversion of income by overriding title as the income has already accrued to the assessee board and after meeting its expenditure whatever surplus revenue remains is transferred to consolidated fund of the State Government of AP. Therefore, it is only an application of income after its accrual to the assessee.

49. We have considered the submissions of both the parties on this issue. From the facts on record, it is quite obvious that the income accrues to the assessee. Section 58(4) of APHB Act is very clear on this aspect, which reads as under:

"All moneys received by or on behalf of the Board by virtue of this Act, all proceeds of land or any other kind of property sold by the Board, all rents, betterment charges and all interest, profits and other moneys accruing to the Board shall constitute the fund of the Board."

50. It may be a fact that by the operation of section 58(7) or by way of Government directive the surplus income or some fund has been diverted to the consolidated fund of the state Government or any other Government corporation, but, that by no means would amount to diversion of income by overriding title. Section 58(7) of the APHB Act, which was brought to the APHB Act in 2010 with retrospective effect from 01/04/2002 reads as under:

"(7) Now withstanding anything contained in subsections (1), (4) and (5) of this section, the surplus net revenue after meeting the expenditure of the Board shall vest in Consolidated fund of the State of Andhra Pradesh. Such surplus revenue shall be transferred to the State Government of Andhra Pradesh into such account on quarterly basis, as the State Government from time to time instructor advice the Board in this behalf. As amended by Act No. 12 of 2010 and provisions shall be deemed to have come into force with effect from 1st April, 2002."

51. A reading of the aforesaid provision would make it clear that only after accrual of income to the assessee and after meeting all its expenditure the surplus net revenue shall vest in consolidated fund of the Government. It further provides that such surplus revenue shall be transferred to the state Government of AP on quarterly basis as per the instruction or advice of the Government. Therefore, so far as the accrual of income is concerned, there is no dispute to the fact that the income has already accrued to the assessee. Only after the accrual of income to the assessee the surplus has been diverted to the Government account. The Hon'ble Supreme Court in case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 held as follows:

"There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable."

52. The same principle has also been reiterated in other decisions relied upon by the assessee. Therefore, considering the principles laid down in the aforesaid decision the assessee having diverted a part of the income after it has accrued to it the diversion of such income can only be considered to be an application of income and not diversion of income by overriding title. Therefore, we are unable to accept the contention of the assessee, which is accordingly rejected. In the result, this issue is decided against the assessee.

53. The next issue is with regard to disallowance of infrastructure expenditure amounting to Rs. 1180 crores. This issue is common to assessment years 2006-07 and 2008-09.

54. The assessee in its written submissions has submitted as under:

"The CIT(A) was not justified in holding that the expenditure in question was not an allowable business expenditure. Under Govt. order, APHB had remitted Rs.1180 crores to A.P. State Housing Corporation who was to provide infrastructure facilities on the land assigned to the appellant. [The appellant had similarly transferred Rs.285 crores in A.Y. 2006-07.] The land assigned by A.P. Govt. was held by APHB, on which A.P. State Housing Corporation was to provide housing and infrastructure facilities to the residents of the State, mainly belonging to lower and middle income groups. Since inception of APHB, Govt. of A.P. has been allotting/assigning land without or at nominal cost which was used for constructing and providing housing accommodation to the public. This was the first time that the Govt. had demanded payment of which was complied with. The appellant is a wholly owned government organization and it is to obey the dictates of its master. The purpose of the expenditure is within the mandate of the appellant. Unless it carries out the orders of its sole owner, the State Government, its business will be in jeopardy. The appellant is not a commercial organization but developmental organization. Its structure and function are like that of the government though given a separate shape. Generation of some surplus in course of its operation does not necessarily make this wholly owned government body an organization with profit motive. This aspect has also been explained in detail in the rejoinder on the remand report of A.O. with supportive case laws. Funding of the infrastructure created by the A.P. State Housing Corporation at the behest of State Government is incidental to the main activity of the appellant. It did directly benefit from this expenditure as such infrastructure was meant for the houses sold by it. Its existence and purpose are served as long as it plays direct or indirect role in dealing with and satisfying the need of housing accommodation in the State. The expenditure in question is in course of its normal business operation which, though, had not taken place previously. The appellant is working in a dynamic socio-economic environment and keeping in view the changing need the necessity of such expenditure had arisen.

In the earlier proceedings, the A.O. and CIT(A) have wrongly concluded that the amount paid to A.P. State Housing Corporation under the order of the State Government was capital expenditure. Development of housing facility is the purpose for which the appellant has been constituted. The State Government has set up several executing agencies to provide housing accommodation and create housing infrastructure. It is the ultimate decision making authority as to which agency is to execute which work for this purpose. The State Government, in its wisdom, had decided that certain housing infrastructure facilities are to be developed by A.P. State Housing Corporation, and that the appellant would transfer the stipulated amount to the Corporation for this purpose. Therefore, the purpose for which the amount is to be spent is very much connected with the activities undertaken by the appellant.

In Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT (1971) 82 ITR 376 (SC), the assessee was a private company, carrying on the business of manufacturing and sale of sugar, paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane producing centers and the sugar factories of the assessee. This expenditure was incurred under an obligation to make the aforesaid contribution under the provisions of U'P. Sugarcane Regulation of Supply and Purchase Act, 1953. The roads remained the property of the Government and there was no finding that the assessee would get an enduring benefit from those roads. The Supreme Court held that apart from the element of compulsion, the development of roads facilitates the business and the expenditure was revenue in nature. In L.H. Sugar Factory and Oil Mills (P.) Ltd. vs. CIT, (1980) 1251TR 293 (SC), the assessee had contributed towards cost of construction of roads in the area around the factory. The argument of the Revenue was that the newly constructed roads, though not belonging to the assessee, brought to the assessee an enduring advantage for the benefit of its business and, therefore, the expenditure was capital in nature. Rejecting this argument, the Supreme Court held that it is no doubt true that the advantage secured for the business was of a long duration, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee, nor there was any addition to or expansion of the profit making apparatus of the assessee.

In CIT v. Coats Viyella India Ltd. (2002) 253 ITR 667 (Mad.), the assessee had made payment to the Government for construction of new bridge, providing access to the assessee's factory for its workmen and movement of goods. The High Court held that the assessee did not acquire any ownership over the bridge and there was no addition to the value of the assets owned by it. Therefore, the payment made to the Government was revenue expenditure. In Navsari Cotton and Silk Mills Ltd. (1982) 135 ITR 546 (Guj.), the assessee discharged an effluent causing health hazard, which was protested by the citizens of the area. Apprehending a spate of suits therefrom, and in view of the Municipality being unable to remedy the situation, and prevent litigation, the assessee made contribution to the Municipality for providing underground pipeline through the municipal land for disposal of effluents. It was argued that the purpose of this expenditure was to avoid losing market, customers and goodwill. The High Court accepted this and held that the expenditure was allowable under section 37 the LT. Act. In Joint Commissioner of Income Tax v. Deverson Industries Ltd. (2007) 290 ITR (A.T.) 287 (ITAT - Ahm), the assessee had paid an amount to the State Government to help villagers affected by effluent discharged from the assessee's factories and such amounts were paid to Municipal Corporation for treating effluents. It was argued by the assessee that the expenditure was laid out to protect its business as an ongoing entity and to avoid possible protracted litigation. The Tribunal held that the assessee had business reasons to participate in a scheme framed by the High Court to make contributions for this social cause. Therefore, the entire expenditure incurred was deductible. In view of these rulings, the appellant would submit that the amount paid to A.P. State Housing Corporation was not capital, but revenue expenditure.

The CIT(A) had observed that the amount paid to A.P. State Housing

Corporation was application of income and the order of the State Government was not a legal charge. The appellant would submit that section 79(1) of the A.P. Housing Board Act provides that the Government may give the appellant such direction as and when necessary or expedient for carrying on the purposes of this Act. Therefore, such direction had statutory force. The appellant would not have been able to continue its activities lawfully without obeying the order of the State Government to pay the amount to A.P. State Housing Corporation. In this context, the appellant would cite the following observation of the Gujarat High Court in U.K. Acharya v. State of Gujarat, AIR 1989 Gujarat 81, in which similar provision in the Gujarat State Housing Board was examined:

Disposal of Property Regulations cannot be said to be merely contractual in character nor can they be said to be framed for merely regulating internal affairs of the statutory body, as, with respect, wrongly assumed by the learned Judge. It has also to be kept in view that members of the public for whom housing schemes are floated by the Board have no control over the implementation of the regulations by the Board. Hence, these housing regulations have to be considered as mandatory in character, having binding statutory force. We are, therefore unable to agree with T.U. Mehta, J's conclusion that Disposal of Property Regulations framed by the Housing Board in exercise of its statutory power under S. 74(b) are not statutory in character. We hold that they are, of necessity, to be treated as statutory in character for the reasons aforesaid. However, that does not advance the case of the learned Advocate for the petitioners an inch further. Even though' regulation 33 of the Regulations is statutory in character, the directions issued by the State of Gujarat in exercise of its statutory powers under S. 82 cannot be said to be in any way inconsistent with this regulation.

The second reason is that under S.82 of the Act, the State of Gujarat is entitled to give directions to the Housing Board for the purposes of the Act and if these directions are not found to be arbitrary or illegal, they are binding on the Housing Board and they would supersede any of the earlier contrary decisions of the Housing Board and impose a special obligation on the Housing Board to comply with such directions. As seen earlier, by S.24 of the Act, it is the duty of the Housing Board to incur expenditure and undertake works of such housing schemes as it may consider necessary from time to time, subject to the control of the State Government. Thus, control of the State Government is all pervasive in connection with any of the housing schemes undertaken by the Board.

Thus, the payment to A.P. State Housing Corporation was done in the manner prescribed in the A.P. Housing Board Act, under which the appellant has been constituted. Therefore, such payment is part and parcel of its regular business. Accordingly, the amount should be treated as revenue expenditure laid out wholly for the purpose of its business under section 37 of I.T. Act.

This expenditure is definitely a charge on income and not an application of income as held by the CIT(A). In case of application of income, there is discretion with the person making the payment as to pay it or otherwise, whereas in case of obligatory or compulsory payment the same has to be charge on income. In the instant case, the payment by the appellant to A.P. State Housing Corporation as per the order of Government was nothing but statutory obligation in nature flowing from section 79(1) of A.P.H.B. Act. This expenditure is also in the nature of diversion of income by overriding title. The Government of A.P. through its Govt. Order required the appellant to treat the amount paid to A.P. State Housing Corporation as its expenditure. This further shows that the appellant had no discretion in retaining the amount and there was legal compulsion in diverting the amount to A.P. State Housing Corporation. The infrastructure expenditure incurred by the appellant is clearly an allowable expenditure on two grounds; one is on commercial expediency and second being of legal impost by virtue of Govt. order.

The Hon'ble ITAT had remanded the appeals for the A.Ys. 2004-05, 2005- 06 and 2006-07 to the CIT(A) for fresh consideration. Hearing had taken place for these years on additional grounds. The A.O. has submitted remand report on these submissions and the appellant has submitted rejoinder on the remand report. Further, the appellant had submitted written submissions on the original grounds taken in these appeals as the orders of the CIT(A) no longer exist in the eyes of the law. The A.O. has also not submitted any remand report for these years as also for the A.Y. 2008-09 for which the CIT(A) has passed the appeal order. In this situation, the CIT(A) should not have relied upon verbatim reproduction of the part of the earlier order for the A. Y. 2006-07 in his order for A.Y. 2008-09. The appellant finds that the language of paragraphs 6.14 to 6.20 of the present order has been copied from the paragraphs 6.13 to 6.17 of the earlier appellate order for the A.Y. 2006-07, which has been remanded. Observations and conclusions in the earlier order passed on 30.10.2009 of the CIT(A) cannot be expected to take into account the submissions made and rulings relied upon by the appellant in the present proceeding. In this process, some errors have crept into the appeal order:

i.		At paragraph 6.17 of the appeal order for A.Y.2008-09, the CIT(A) has, mentioned that Government orders quoted by the appellant does not in any way indicate that any money is to be paid to the State Government in lieu of lands provided. But the CIT(A) has missed out the content of the letter dated 23.12.2005 from the Government of Andhra Pradesh, extracted by him at page 39 of his order. The heading of this letter states" Utilisation of an amount to the extent of value of Government lands to be paid to the Government by the APHB for infrastructure development of Rajiv GruhaKalpa". At paragraph 3 in this letter, it is stated that infrastructure cost up to the extent of value of land to be paid to the Government by the APHB will be utilised for infrastructure development under Rajiv GruhaKalpa scheme. In the event of shortfall, the Government will allot additional land to APHB. Further, in the Minutes of Meeting held in chamber of Hon'ble Chief Minister, extracted at page 41 of the order of the CIT(A), it is noted that APHB would remit Rs.150 crore in October and Rs.400 crore in Nov. and another Rs.400 crore in December by leveraging land allotted to it. At page 55-56 of the appeal order, the CIT(A) has extracted GORT No.432 of Government of Andhra Pradesh. At paragraph 2 to 4 in this, it is mentioned that land has been allotted to APHB for which it has to pay the land value to the Government, which will bear the cost of infrastructure. In the event of shortfall, the Government will allot additional land. The significance of these have been missed out by the CIT(A) for the simple reason that his discussion and conclusion have been copied from an order passed in 2009.
ii.		At paragraph 6.20, the CIT(A) has stated that the appellant had argued that it is a local authority. In the submissions made by the appellant for the A.Y. 2008-09, there was no such pleading. This observation and elaborate discussion along with citations of rulings on what constitutes a local authority by the CIT(A) have found place in the order only because several paragraphs have been copied from the earlier order dated 30.10.2009 of the CIT(A) for the A.Y. 2006-07.
iii.		The appellant has made submissions on allowability of deduction under section 80-1B. Without considering the same, the CIT(A) has relied upon the findings of his order dated 31.10.2009 for the A.Y. 2006-07 for upholding the disallowance of deduction claimed under section 80-IB. The appellate order for the A.Y. 2006-07 has already been set aside by the IT A T for fresh consideration. Therefore, the submissions made by the appellant on this issue has not been considered by the CIT(A).

The CIT(A) at paragraph 5.7.9 has extracted section 13 of APHB Act, and at paragraph 5.7.10 he has stated that APHB is fully competent to enter into contracts in its own capacity and has referred to section 14 to state that the Vice Chairman shall make every contract on behalf of APHB. However, he has not referred to several other provisions which are important to decide the extent of autonomy enjoyed by APHB. The proviso to section 14 mandates that no contract involving expenditure of Rupees more than the limitation as may be fixed by the Government shall be made without the previous sanction of the Government. This amount was mentioned in this proviso as Rs. 3,0001- till the amendment of the Act in 2010. The CIT(A) has given the finding that APHB is controlling its own affairs and is independent in entering into contracts and taking loans. Therefore, in paragraph 5.8.1 and 5.8.2, he has argued that APHB is not functioning as an agent of the State Government. He has not referred to section 21 of the APHB Act, which clearly states that subject to the control of the Government, Board may incur expenditure and undertake works for framing and execution of housing schemes. Section 60 allows APHB the freedom to incur expenditure not exceeding Rs. 10,0001- in extreme urgency, which is not included in the annual programme sanctioned by the Government. Section 62(1) permits APHB from time to time, with the previous sanction of the Government and subject to the provisions of the APHB Act and to such conditions as may be prescribed in this behalf, burrow any sum required for the purpose of the Act. Section 79 empowers the State Government to give direction to APHB and overrule any decision or order of it. These provisions, severely restricting the freedom to operate, spend, enter into contracts and borrow money have not been referred to or discussed in the order of the CIT(A)."

55. The CIT(A) while upholding the disallowance of the aforesaid expenditure has opined that for claiming a particular expenditure it is to be examined whether there is any nexus between the main activity of the assessee and the expenditure in question. It was further held by the CIT(A) referring to various govt orders, as per which according to the claim of the assessee an amount of Rs. 1180 crores was transferred to AP State Housing Corporation, that the main objective of the APHB to make and implement schemes for providing of housing accommodation is by selling the houses to prospective buyers at the market rate. For this purpose, it acquires lands, develops and sales houses build on those lands. The govt. orders directing transfer of funds to AP State Housing Corporation is only an administrative instruction and no legal charge is created. Therefore, the amount transferred since does not fall within the category of taxes, cess, or legal charges they cannot be considered as expenditure. It was further held by the CIT(A) that there is no nexus between the amount paid by the assessee to the state govt and the actual activity of the assessee. It was further observed that the assessee has also not proved that the payment has been for business expediency.

56. On considering the submissions of the parties in the light of the materials on record and also the ratios cited before us, we are constrained to hold that it is not an allowable expenditure but only an application of income. It is not in dispute that the amount of Rs. 1180 crores is stated to have been given to the AP State Housing Corporation on the directive of the Government. However, that would not amount to an expenditure incurred for the purpose of business. An expenditure which is exclusively laid out for the purpose of business is a revenue expenditure and, therefore, allowable. On appreciation of the facts on record, it is quite evident that the amount of Rs. 1180 crores was not spent by the assessee board for the purpose of its business. The said amount was transferred to AP State Housing Corporation at the directive of the Government for implementing certain housing projects. The assessee is no way connected with implementing the project. This cannot be said to be an expenditure laid out wholly and exclusively for the purpose of business. The decisions relied upon by the learned AR are factually distinguishable as in those cases there was nexus between the expenditure incurred and the business of the assessee. Therefore, in our view the revenue authorities were correct in disallowing such expenditure.

57. In ground No. 11, the assessee has raised the issue of disallowance on account of payment of pension to employees. In this regard, the following submissions have been made by the assessee:

"On allowability of payment of pension to employees as deduction for computing taxable income, the CIT(A) has reproduced paragraph 15 - 16 from the written submission on the original grounds by the appellant. He has given a finding that the pension has not been routed through a pension fund and therefore is not an expense chargeable to the Profit and Loss Account, without citing any legal provision or ruling. He has not referred to paragraph 17 of the written submission by the appellant. In this, it had relied on the Supreme Court's observation in Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44 ITR 551 (SC), in which the Court has held that pension is allowed as a deduction, when concerned employees had expectation of getting it as terms of the employment. Following this ruling, the Kerala High Court in Travancore Rubber and Tea Co. Ltd. v. State of Kerala (1999) 239 ITR 351 (Kerala), observed that the pension paid to an employee who has gone out of service, can, in no case, be said to be a gratuitous payment. Therefore, the court held that it is allowable as deduction for computing taxable income. The appellant had submitted that the terms of the employment the employees of APHB are the same as are applicable to the State Government employees. Since the employees are entitled to post-retirement pension, the same is allowable in view of the above quoted rulings. The CIT(A) has not considered these rulings."

58. The learned DR submitted that the pension paid during the year to the retired employees was directly debited to the expenditure and was claimed as expenditure. Since pension is not recurring revenue expenditure it is generally incurred out of reserve fund. Even as per the govt order No. 17 dated 29/07/1984 payment of pension is to be arranged through CAO, APHB by a creating separate pension cell and fund and meet the expenditure from that fund. It was further submitted that as the pension was not routed through a pension fund and is an expenditure chargeable to profit and loss account, the expenditure cannot be allowed as a deduction.

59. We have considered the submissions of both the parties and perused the relevant materials on record. On perusing the order of the CIT(A), we find that the disallowance has been sustained by him on the finding that pension has to be routed through a pension fund and is not an expense chargeable to the profit & loss account. He had also observed that no details whatsoever has been provided by the assessee. From the aforesaid observation of the CIT(A), we are of the view that the CIT(A) has not gone into the depth of the issue and has confirmed the disallowance in a mechanical manner. It is not forthcoming what are the details asked for by the AO and on failure on the part of the assessee to furnish such details, the disallowance was made. The lower authorities have not disputed the fact that pension amount has been paid. It is also a fact that Pension is payable as per the service conditions. That being the case it is an allowable deduction. The decisions cited by the learned AR also support such view. Accordingly, we direct the Assessing Officer to delete the addition made.

60. The next issue relates to estimation of income from Singapore project. This issue arises in appeals being ITA Nos. 1216, 1217 & 1218/H/12 for the assessment years 2004-05, 2005-06 and 2006-07.

61. In course of assessment proceedings, the AO on examining the income and expenditure statement filed with the return noticed that the assessee though had shown income and expenditure towards sale of flat at Singapore project (Pocharam) but actually as per assessee's own admission the same represent the advance received from the prospective buyers of the flats being built at Pocharam. The AO, therefore, held that since the sale of flats have actually not taken place, the advances received cannot be treated as income and similarly the expenditure claimed also cannot be considered. He, therefore, excluded both the income and expenditure. The CIT(A) also sustained such exclusion made by the AO by endorsing the view of the AO. During the appeal proceedings, the first appellate authority was of the view that the housing project undertaken by the assessee was under construction during the previous year. He was further of the view that the project being a construction project and being in the nature of construction contract undertaken by the assessee it ought to have disclosed the annual income from this project. He, therefore, asked the assessee to explain as to why no income from the project has been offered for taxation as per the percentage of completion method of accounting. The assessee was further asked to furnish the amount of estimated profit as per the percentage of completion method of accounting for Singapore project. Though the assessee submitted its reply to the query made by the first appellate authority, the CIT(A) was not convinced to the same and he proceeded to estimate the profit from the Singapore project by applying the rate of 8% of the total expenditure incurred by the assessee. Further no deduction u/s 80-IB was also allowed on the profit estimated on the ground that the assessee has not fulfilled the conditions for claiming deduction u/s 80-IB.

62. Before us, the assessee in the written submissions has submitted as under:

"One of the main disputes of the appellant with the department relates to computation of taxable income, if any, from the Singapore Project. The A.O. and the CIT(A) have disallowed the benefit u/s 80-IB to the appellant on different grounds for different years, such as inconsistency in accounts, income and expenditure being of capital nature, delayed filing of return and so on. Yet the CIT(A) estimated the income from this project taking into account the expenditure by applying Accounting Standard-7 and following the prescription in section 44AD. In this regard, the appellant submits that without rejecting the entries in the books of accounts, it was not permissible for the CIT(A) to resort to any estimation of income. For this, he had relied on the rulings of IT AT in ITA No.1143/Hyd.l2006 dated 13.07.2007 inMadhava Constructions Pvt. Ltd. v. CIT. In that, the ITAT had held that, though prescription for estimating contract income at 8% in section 44AD is applicable where the gross receipts of the contractor is up to Rs.40 lacs, the same percentage can be applied for estimating income for turnover exceeding Rs.40 lacs. The CIT(A) was clearly wrong in applying the prescription meant for contractor to the appellant who is not a contractor. Further, this percentage is applied to gross receipts and not to expenditure incurred during the year. Further, it does not prevent an assessee from claiming that the actual profit from the business is lower than what is ascertained on the basis of estimating at 8% of the turnover. In Pyarelal Mittal v. Assistant Commissioner of Income-tax, (2007) 291 ITR 214 (Gau.), it was held that income has to be deduced from the books of account and other documents furnished and there is no scope for any conjectures and surmises. Similarly, in M. Durai Raj v. CIT, (1972) 83 ITR 484 (Ker), the High Court has held that the A.O. was not correct in ignoring the book entries and estimating the income.

Though the CIT(A) was informed during the appeal proceeding that the appellant was following cash system of accounting for Singapore Project', still then he went on to apply Accounting Standard - 7 to determine income of the appellant on percentage completion method, which is not applicable to the appellant. The appellant engages contractors for construction of houses. It is not a contractor itself. It is selling flats on installments. Therefore, Accounting Standard - 7 (Revised 2002) prescribed by the Institute of Chartered Accountants of India is not applicable to it for recognition of income from its activity of selling flats after getting the same constructed by the contractors. In this regard, the appellant relies on the decision in M/s Unique Enterprises v. Income Tax Officer, Mumbai, 010-(ID2)-GJX-0394-TBOM : 2010-(TIOL)-737- ITAT - Mum, wherein it has been held that the AS-7 cannot be applied to enterprises which are in the business of real estate developers. AS-7 is also not applicable to an assessee following cash system of accounting. It is applicable to those following mercantile system only. This was so held in DCIT v. M/s Stup Consultants Pvt. Ltd., 2011-(ID1)-GJX-2653-TBOM: 2011-TIOL-642-ITAT - Mum. It is further submitted that, when the appellant had been maintaining regular books of accounts which are audited and the same had not been rejected either by the A.O. or CIT(A), there was no justification to determine the appellant's income on presumptive basis."

63. The learned DR on the other hand supported the order of the first appellate authority.

64. We have considered the arguments of both the parties and perused the materials on record. We have also applied our mind to the decisions cited. On perusal of the order of the CIT(A) it is quite evident that he has estimated the profit at the rate of 8% by taking recourse to the provision contained u/s 44AD of the Act. For that purpose, he has relied upon a decision of the ITAT in case of Madhav Constructions (P.) Ltd. v. CIT in ITA No. 1143/Hyd/2006, dated 13/07/2007. It is a fact on record that the assessee is a government undertaking created under a statute. It maintains regular books of account. Its books of account are not only subject to statutory audit under the provisions of income-tax Act but also subject to inspection by other government agencies. Therefore, without pointing out defect or discrepancy in the books of account maintained by the assessee estimation of income cannot be resorted to. That besides section 44AD of the Act is applicable only in a case of contractors where the turnover is less than Rs. 40 lakhs. In the present case, neither the assessee is a contractor nor its receipts are less than Rs. 40 lakhs. Therefore, estimation of income by applying the rate of 8% that too on the expenditure by invoking the provisions of section 44AD is not justified. If the department is of the view that there is a profit element which has not been disclosed by the assessee, it has to be determined after properly verifying the books of account and other evidences and not merely on presumption and guess work. We, therefore, remit this issue to the file of the Assessing Officer who shall decide the same in accordance with law after affording reasonable opportunity of being heard to the assessee. We also direct the assessee to cooperate with the Assessing Officer by producing all its books of account and other relevant documents for verification. If the assessee will not produce its books of account the Assessing Officer will be at liberty to complete the assessment to the best of his judgment. We may further add that while deciding this issue the Assessing Officer shall also consider allowability or otherwise of the assessee's claim of deduction u/s 80IB of the Act.

65. In the result, assessee's appeals being ITA No. 717/Hyd/12 for AY 2008-09 is partly allowed and ITA Nos. 1216, 1217 & 1218/H/12 for the assessment years 2004-05, 2005-06 and 2006-07 are partly allowed for statistical purposes.

ITA NO. 715/Hyd/2011 for AY 2007-08 by the assessee

66. The facts are identical to the appeals of the assessee dealt earlier in this order. The learned Sr. Counsel Shri S. Ravi appearing for the assessee has filed a written submission submitting as under:

"Among various grounds that are raised in the Memorandum of Appeal one ground relates to the amendments made to the AP Housing Board Act, 1958 (hereinafter referred to as "the Act") retrospectively. This ground is common to all the years under consideration including the ones where another learned Counsel has appeared. This Memorandum is confined to the under mentioned ground, but all the grounds are pressed before the Hon'ble Tribunal.

Briefly stated, section 58 of the Act deals with Board's fund under Chapter VII captioned Finance, Accounts and Audit. Having regard to the extensive control that is exercised by the Government of Andhra Pradesh on the functioning of the Appellant, sub-section 7 was introduced into the Act by State Act 12 of 2010 with retrospective effect from 1st April, 2012.

Under the Constitution of India, the power to legislate is vested in the Parliament and/or the State Legislatures. The power is traceable to Article 246 of the Constitution of India, and the power is plenary with respect to the subjects specified in respective lists in Schedule 7 of the Constitution of India. The principles that govern the interpretation of a power of legislation are as follows:

(A). The Parliament/Legislatures have the power to legislate both prospectively and retrospectively.

Ref: (i). Rai Ramkrishna & Others v. State of Bihar 50 ITR 171 (SC)

(ii) A. Manjula Bhashini & Others v. Managing Director, Andhra Pradesh Women's Cooperative Finance Corporation Limited & Another (2009) 8 SCC 431

(B). A statute is presumed to be valid unless a Constitutional Court of competent jurisdiction strikes down the statute or any part thereof.

(C). The legislation can be struck down only if:

(i).		It is beyond legislative power of the legislating body examined on the touchstone of Schedule VII to the Constitution of India, or different classes of people are discriminated while legislating thereby offending Article 14 of the Constitution of India, or the legislation is contrary to any of the Fundamental Rights guaranteed by the Constitution of India.
(ii).		In the present case, there is not even a challenge to the Act as amended, and fullest and widest meaning should be given to section 58(7) of the Act.

By this amending provision it is made explicit that the surplus after incurring expenditure vests in the Government of Andhra Pradesh. The limited right of the Appellant Board is only to apply the income and that too as a trustee of the Government of Andhra Pradesh for incurring expenditure. There is a statutory divestment of the income at source.

The following judgments show that upon such legal right in a third party the income does not belong to the tax-payer at all:

♦		The Commissioner of Income-tax, Bombay City- II v. Shri Sitaldas Tirathdas AIR 1961 SC 728
♦		Motilal Chhadami Lal Jain v. Commissioner of Income Tax, Delhi (1991) 190 ITR 1 (SC)
♦		Delhi Tourism & Transport Development Corporation Ltd. v. Deputy Commissioner of Income-tax (1996) 56 ITD 524 (Del)

In view of the above, it is submitted that the income does not accrue or arise for the Appellant and it cannot be taxed in its hands."

67. The learned DR reiterated the submissions made in case of other appeals.

68. We have heard rival contentions and perused the relevant materials on record. In view of our detailed discussion and finding in ITA No. 717/Hyd/12(supra), we hold that the income earned by the assessee is not the income of state and as such the assessee is assessable under the Income-tax Act.

69. So far as the disallowance of infrastructure expenditure of Rs. 784,32,00,000/- on account of payment made to AP State Housing Corporation is concerned, in view of our finding in Paragraph 56 we uphold the order of the revenue authorities and dismiss the ground raised by the assessee.

70. In respect of the addition of an amount of Rs. 3,31,168/-, perusal of the order of the CIT(A) it is to be seen that the assessee has not reconciled the difference by submitting any explanation. Hence, in that view of the matter, the addition made is sustained.

71. So far as the ground raised with regard to disallowance of claim made u/s 80IB of the Act following our observation in concluding part of Paragraph 65 hereinbefore, we remit the issue to the file of the Assessing Officer, who shall consider the allowability or otherwise of the same in accordance with law after affording a reasonable opportunity of being heard to the assessee.

72. In the result, appeal being ITA No. 715/Hyd/2011 by the assessee is partly allowed for statistical purposes.

ITA No. 1292/Hyd/2012 for AY 2006-07 by the revenue

73. The department has filed the aforesaid appeal challenging the deletion by the CIT(A) of the amount of Rs. 1,31,01,333/-added by the Assessing Officer on account of difference in letters of credit.

74. In course of assessment proceedings, the Assessing Officer noticed that there was a discrepancy between the amounts that the Board has authorized its various branches to spend and between the actual expenditure made by the various branches. The expenditure is incurred by the various branches after the head office issues letters of credit (LOC) to the branches. Though, the assessee submitted its reply to the query made by the Assessing Officer, the Assessing Officer rejected the explanation of the assessee and added the amount by observing that the discrepancies pointed out were not reconciled by the assessee. In course of the proceeding before the first appellate authority, the assessee contended that the Board disbursed the amounts to various divisions or branches for expenditure in accordance with the indents received from the divisions which are termed as LOC. The amounts transferred to various divisions enable them to incur the expenditure. Thereafter, the accounts statements are sent to the Head office which reconciles the same under various heads. It was further submitted that the reconciled amounts can be verified from the bank balances. The CIT(A) called for a remand from the Assessing Officer on the submissions made by the assessee. The Assessing Officer in the remand report stated that the assessee could not produce details during the assessment proceedings to reconcile the difference. The CIT(A) after considering the submissions of the assessee, deleted the addition made by observing in the following manner:

"7.2 I have gone through the various submissions and the facts of the case and I find that the issue of letters of credit and transfer of funds is an ongoing process. At any point of time there will be some differences which require reconciliation. The AO has not identified specific expenditures which have been incurred over and above the authorization or which are not allowable as per the Income Tax Act. I also find that the LOCs are internal instruments by which accounting is done vis-à-vis the various branches. Even during the remand proceedings the AO has not given a specific finding on the expenses which are disallowable, I, therefore, find force in the argument of the appellant. Accordingly, the addition of Rs. 1,31,01,383/- is ordered to be deleted."

75. The learned Departmental Representative submitted before us that the assessee had explained that the amounts disbursed by the Head Office and the divisions have no other source and so the amounts spent had to be out of funds disbursed through LOC's and deposited in the bank account. The assessee's explanation was considered satisfactory because by applying this logic the divisions can never spend more than what is received. Whereas exactly that is the case before the Assessing Officer. Since the assessee could not reconcile properly the addition made by the Assessing Officer was justified.

76. The learned AR on the other hand supported the order of the CIT(A).

77. We have heard rival submissions and perused the materials on record. On perusal of the order of the CIT(A), we find that the Assessing Officer has not been able to identify the specific expenses which are disallowable, hence, the CIT(A) deleted the addition made by the Assessing Officer. After going through the finding of the CIT(A), we do not find any reason to interfere with the same, as the Assessing Officer has failed to substantiate the basis for disallowance not only at the time of assessment proceeding but during the remand also. Accordingly, we uphold the order of the CIT(A) on this issue and dismiss the grounds raised by the department.

78. In the result, appeal of the revenue being ITA No. 1292/Hyd/2012 is dismissed.

79. To sum up, ITA No. 717/H/12 is partly allowed, ITA No. 715/H/11 and ITA Nos. 1216, 1217, & 1218/H/12 are partly allowed for statistical purposes and ITA No. 1292/H/12 is dismissed.

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

ST: Setting of question papers and conducting exam for non-educational institution is, prima facie, Management or Business Consultant's Service

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[2013] 37 taxmann.com 66 (Bangalore - CESTAT)

CESTAT, BANGALORE BENCH

Merittrac Services (P.) Ltd.

v.

Commissioner of Service Tax, Bangalore*

P.G. CHACKO, JUDICIAL MEMBER
AND M. VEERAIYAN, TECHNICAL MEMBER

STAY ORDER NO. 1329 OF 2012 
APPLICATION NO. ST/STAY/1537 OF 2010 
APPEAL NO. ST/2426 OF 2010

AUGUST  7, 2012 

Section 65(65) of the Finance Act, 1994 - Management or Business Consultant's Services - Stay Order - Period from December 2007 to July 2009 - Assessee was providing services to Universities by way of conducting regular examinations as well as online entrance/admission examinations - Assessee was arranging examinations at select centres, deploying own personnel for conduct of examinations, and conveying results of such examinations - Department sought levy of service tax thereon Management or Business Consultant's Services - HELD : Assessee was conducting examinations for universities, which were educational institutions imparting education to students - Examinations were conducted by assessee with question papers set by universities; therefore, only infrastructure, manpower etc. required for conduct of examinations were provided by assessee - In this activity, prima facie, no element of consultancy or technical assistance was involved - Assessee's activities were undertaken in aid of educational institutions - Hence, stay was granted in full [Para 3] [In favour of assessee]

Section 65(65) of the Finance Act, 1994 - Management or Business Consultant's Services - Stay Order - Period from December 2007 to July 2009 - Assessee was providing services to National Association of Software and Service Companies (NASSCOM) by way of conducting skill assessment tests for candidates who wanted to get accreditation certificates from NASSCOM - Said tests/examinations were held with question papers set by assessee on pattern designed by NASSCOM - Department sought levy of service tax thereon Management or Business Consultant's Services - HELD : There was no evidence that NASSCOM was an educational institution - Further, role of assessee was of a different complexion i.e., pattern of question papers was given by NASSCOM but questions were prepared by assessee - In this process, prima facie, there was an element of technical assistance of assessee to NASSCOM - In absence of prima facie case on limitation or on ground of financial hardships, assessee was directed to make pre-deposit of Rs. 20 lakh [Para 4] [In favour of revenue]

K.S. Ravi Shankar for the Appellant. R.K. Singla for the Respondent.

ORDER

 

P.G. Chacko, Judicial Member - This application filed by the appellant seeks waiver and stay in respect of the dues adjudged against them, which include an amount of Rs. 3,11,31,213/- demanded as service tax and education cess for the period from December 2007 to July 2009. The impugned demand is under the Head "Management or Business Consultancy Services". On a perusal of the records, we find the following facts which are not in dispute :

(a)		Demand of Rs. 1.95 crore towards service tax and education cess is on the gross amount collected by the appellant from the Sikkim-Manipal University (SMU) as consideration for the services rendered to the university.
(b)		Demand of Rs. 82 lakh is on the gross amount collected by the appellant from the Manipal University/Manipal Academy of Higher Education as consideration for the services rendered to the academy which is a part of the university.
(c)		Demand of approximately Rs. 20 lakh is on the gross amount collected by the appellant from the National Association of Software and Service Companies (NASSCOM) for the services rendered to them.
(d)		All the aforesaid services were rendered under the respective agreements entered into by the appellant with the service recipient.
(e)		Under the agreements with the Manipal University, and the SMU, appellant conducted regular examinations for the students of the two universities and online entrance examinations for the candidates who sought admission to the universities. The appellant arranged these examinations at select centres, deployed then own personnel for the conduct of these examinations, and conveyed the results of these examinations to the respective universities. The question papers for these examinations were set by the respective universities.
(f)		Under the agreement with NASSCOM, the appellant conducted skill assessment tests for candidates who wanted to get accreditation certificates from NASSCOM in subjects related to information technology. These examinations were held with question papers set by the appellant on the pattern designed by NASSCOM.

2. We have examined the findings recorded by the learned Commissioner with reference to the definition of "Management and Business Consultant". It was found that the appellant was just assisting the conduct of the examinations of the universities and NASSCOM, thereby giving technical assistance to the universities and NASSCOM. It was also observed that the appellant, in their reply to the show-cause notice, admitted technical assistance having been given to the universities and NASSCOM. The learned Commissioner (A.R.) has reiterated these and other relevant findings recorded in the impugned order. Learned counsel for the appellant, who has spelt out the terms and conditions of the agreement, at the outset, has contested the finding recorded by the adjudicating authority to the effect that the appellant admitted having given technical assistance to the universities and NASSCOM. With reference to the definition of "Management and Business Consultant", the learned counsel submits that the activities undertaken by the appellant would not in any way be encompassed by this definition and therefore the appellant is not liable to pay the service tax demanded. It is submitted that, in any case, the services rendered to the universities are exempt from the levy. In this connection, the learned counsel has referred to the definition of certain services viz. "Rent-a-Cab service", "Tour Operator's Service etc.", wherein such services rendered to educational institutions were kept out of the levy. In this connection, the learned counsel has also invited our attention to the negative list notified under the Finance Act, 2012. The plea of limitation has also been raised. Finally, it is submitted that the appellant's financial condition is very bad as evidenced by the audited balance sheet for the year ending 31st March, 2011.

3. We have given careful consideration to the submissions. The substantive issue is whether the activities undertaken by the appellant under the agreements with the Manipal University, the Sikkim-Manipal University and the NASSCOM during the period of dispute would qualify to be services of "Management and Business Consultant" as defined under Section 65(65) of the Finance Act, 1994. The definition reads as follows:

'management or business consultant" means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization or business in any manner and include any person who renders any advice, consultancy or technical assistance, in relation to financial management, human resources management, marketing management, production management, logistics management, procurement and management of information technology resources or other similar areas of management.'

It is not in dispute that the appellant was conducting examinations for the two universities. It is not in dispute that both the universities are educational institutions imparting education to the students. The examinations for these students were conducted by the appellant with question papers set by the universities. The infrastructure, manpower etc. required for the conduct of examinations were provided by the appellant. In this activity, prima facie, no element of consultancy or technical assistance was involved. As it is not in dispute that the service recipient viz. universities are educational institutions offering various academic courses with specific curricula and specific syllabi and conducting examinations for the students on completion of such courses and issuing certificates or degrees to the successful students, the activities undertaken by the appellant were prima facie activities undertaken in aid of education institutions. For these reasons, prima facie, we have found a strong case for the appellant against the demand raised to the extent of Rs. 1.94 crore + Rs. 82 lakh.

4. However, the appellant has not made out such a case against the demand of Rs. 20 lakhs which was quantified on the gross amount received by the appellant from the NASSCOM. There is no evidence on record to indicate that NASSCOM is an educational institution. The role of the appellant in relation to NASSCOM is of a different complexion. Pattern of question papers was given by the NASSCOM but the questions were prepared by the appellant. In this process, there appears to be an element of technical assistance of the appellant to NASSCOM. Prima facie, therefore, the appellant is liable to pre-deposit the entire amount of service tax and education cess demanded in relation to NASSCOM. As we have not found prima facie case on limitation or on the ground of financial hardships, we require the appellant to pre-deposit this amount of Rs. 20,00,000/- (Rupees twenty lakh only) within 8 weeks from today (this much time sought by the learned counsel for pre-deposit) and report compliance to the Assistant Registrar on 25-10-2012. Assistant Registrar to report to the Bench on 31-10-2012. Subject to due compliance, there will be waiver of pre-deposit and stay of recovery in respect of the penalties imposed on the appellant and the balance amount of service tax and education cess and interest thereon.

IT: For initiating proceedings under section 158BC against person not searched, Assessing Officer must record his satisfaction during search that undisclosed income belonged to such person

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[2013] 36 taxmann.com 554 (Gujarat)

HIGH COURT OF GUJARAT

Deputy Commissioner of Income-tax, Central Circle -1, Baroda

v.

Lalitkumar M Patel*

AKIL KURESHI, AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO.192 OF 2012

MAY  6, 2013 

Section 158BD, read with section 158BC, of the Income-tax Act, 1961 - Block assessment in search cases - Undisclosed income of any other person [Conditions Precedent] - Assessment years - Whether for taking recourse to block assessment in relation to person not searched, Assessing Officer of searched person needs to record his satisfaction that undisclosed income belongs to person, other than person searched - Held, yes - Whether, where essential requirement for initiating proceedings under section 158BC being recording of satisfaction that undisclosed income belonged to assessee had not been fulfilled, notice issued to assessee under section 158BD was liable to be quashed - Held, yes [Paras 12 & 14] [In favour of assessee]

FACTS

 

■		During search conducted on one 'J' group, certain incriminating materials were found in relation to assessee which were not accounted for in regular books of account. Therefore, the Assessing Officer issued notice under section 158BD to the assessee.
■		On first appeal, the Commissioner (Appeals) confirmed the action of Assessing Officer.
■		On second appeal, the Tribunal quashed and set aside the notice on ground that there was no valid satisfaction recorded by the Assessing Officer in case of the person searched prior to issuance of the notice to the assessee.
■		On revenue's appeal:

HELD

 

■		The Assessing Officer is authorised under section 158BD provision when he finds any undisclosed income emerging from record in case of the person who is not searched, while carrying out the search to transfer entire material to the Assessing Officer having jurisdiction over such person, on recording his satisfaction. [Para 9]
■		The Apex Court in the case of Manish Maheshwari v Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 had examined the provisions of Section 158BD where the premises of a director of a company and his wife were searched under section 132 and the question came of carrying out block assessment in relation to the company. The Court held that the Assessing Officer had to satisfy essentially two requirements (i) record his satisfaction that any undisclosed income belonged to the company, and (ii) handover the books of account and other documents and assets seized to the Assessing Officer having jurisdiction against the company. [Para 10]
■		Thus the law laid down on the subject is very clear that for taking recourse to block assessment under section 158BC in relation to the person not searched, whenever search has been conducted under section 132 or the documents have been requisitioned under section 132A, the Assessing Officer of the searched person needs to record his satisfaction that undisclosed income belongs to the person, other than the person with respect to whom search was carried out under Section 132. He is also required to handover the books of account or other documents or assets seized, to the Assessing Officer having jurisdiction over such person and thereafter, the Assessing Officer who has the jurisdiction would proceed under Section 158BC against such person who has not been searched. [Para 11]
■		In the instant case, as could be noted from the record, search had been carried out in case of 'J'. On examination of the files produced by the revenue it can be seen that the satisfaction recorded by the Assessing Officer is in the case of this very assessee. On pertinently questioned about the satisfaction of the Assessing Officer in case of the searched person, the revenue is unable to point out any such satisfaction of the Assessing Officer in case of 'J'. It had been emphatically argued that the Assessing Officer being the same person such satisfaction when recorded in case of the present assessee should be considered and construed as a due compliance under the provisions and there would not be any occasion to handover the materials to himself being the very officer. [Para 12]
■		As far as second requirement of endowing the papers to the Assessing Officer having the jurisdiction to initiate the proceedings under section 158BC is concerned, it is also not being disputed by the assessee that such formal order of transfer to oneself would neither be warranted nor in any manner affect the validity of the proceedings. [Para 13]
■		However, the vital and mandatory requirement of recording the satisfaction under section 158BD is concerned, as has been rightly noted by the Tribunal, such satisfaction is absent as far as 'J' is concerned in whose case search under section 132 has been carried out by the department. As such an essential requirement prior to initiating the proceedings under section 158BC, has not been fulfilled, the Tribunal is justified in quashing the notice issued against the assessee respondent and the assessment order passed pursuant thereto. As the order of the Tribunal is in consonance with the law laid down on the subject in case of Manish Maheshwari (supra) it is found that there is no reason to interfere with the same. [Para 14]

CASES REFERRED TO

 

Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC) (para 7), Khandubhai Vasanji Desai v. Dy. CIT [1999] 236 ITR 73/103 Taxman 181 (Guj.) (para 10) and Asstt. CIT v. A.R. Enterprises [2013] 350 ITR 489/212 Taxman 531/29 taxmann.com 50 (SC) (para 10).

K.M. Parikh for the Appellant. Manish J. Shah for the Respondent.

JUDGMENT

 

Ms. Sonia Gokani, J. - Aggrieved by the order of the Income Tax Appellate Tribunal for the block period between 1.4.1995 to 19.12.2001, this Tax Appeal is preferred under section 260A of the Income Tax Act, 1961 ("the Act" for short) proposing following substantial question of law for our consideration :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in quashing and setting aside the notice under section 158BD of the Act as well as the assessment order passed under section 158BD of the Act passed in the case of the assessee by holding that reasons recorded for issue of the notice under section 158BD of the Act by Assessing Officer to the assessee cannot be said to be valid satisfaction for issue of notice under section 158BD of the Act and thereby ignoring the findings on the basis of the seized documents by the Assessing Officer that certain undisclosed income belongs to the assessee?"

2. Brief facts are as follows :

3. Search and seizure action in case of Jayraj Group was carried out under section 132 on 19.12.2001. On the department finding certain incriminating materials in relation to Shri Upendra N. Patel, Shri Champak M. Patel and the present assessee respondent which were not accounted for in regular books of account, the Assessing Officer noted that the assessee and Shri Champak M. Patel acquired the rights in the property of M/s. Hindusthan Earth Movers Pvt. Ltd. Such rights were eventually acquired by Shri Jayesh Dave and Shri Upendra N. Patel on the strength of compromise agreement arrived at by and between the parties dated 30.9.2000. Civil Court also put a seal of approval on the same and compromise decree to that effect came to be passed. It was further noted that when the Memorandum of Understanding was arrived at on 1.11.1996, the rights in the land of M/s. Hindusthan Earth Movers Pvt. Ltd. had been acquired. The total cash payment was to the tune of Rs. 37 lakhs and the bank draft of Rs. 1 crore was also given which was handedover to the Court receiver appointed by the High Court of Bombay. It was noted that by virtue of compromise decree, the other two persons and the present assessee respondent received huge parcel of land, nearly 1,20,000 sq, mtrs., the sale deed was executed however, only reflecting the sale consideration of Rs.5.60 lakh in case of Shri Upendra Patel. As the market price was much higher, these facts when were discovered during the search in case of Jayraj Group, notices under section 158BD of the Income Tax Act were issued. Authority relied on various documents as also on appraisal report for the same purpose.

4. Aggrieved by the order of the Assessing Officer, the assessee had moved the Commissioner of Income Tax and on failing to get any relief eventually it challenged the order of CIT(Appeals) before the Tribunal. Tribunal upheld the version of assessee and therefore, this appeal proposing afore-mentioned substantial question of law.

5. In the present appeal thus, we are essentially concerned with the question whether the Tribunal rightly quashed and set aside the notice under section 158BD and the assessment order passed in case of the assessee respondent on the ground that there was no valid satisfaction recorded by the Assessing Officer in case of the person searched prior to issuance of the notice to the assessee respondent.

6. We have heard learned counsel Shri K.M. Parikh for the department who has fervently argued before us that the Assessing Officer Shri A.K. Sinha was the Assessing Officer in case of both, searched and non-searched assessees. He also further urged that the satisfaction recorded by the Assessing Officer in case of present assessee shall have to be construed in case of searched assessee only. The Tribunal incorrectly appreciated the law on the subject and also did not aptly apply the correct ratio to the facts of the case of the assessee. Therefore, the order requires interference.

7. Learned senior counsel Shri J. P. Shah appearing for the assessee respondent relying on various case laws has urged that this appeal deserves no consideration on merits inasmuch as the mandatory requirements as set out by the Apex court in case of Manish Maheshwari v. Asstt. CIT[2007] 289 ITR 341/159 Taxman 258 have not been fulfilled. He further urged that the Tribunal while dealing with the issue in question has appropriately scanned the entire materials and has rightly arrived at a correct decision which calls for no intervention.

8. On thus hearing both the sides and on examination of the order impugned and the materials produced before us, for the reasons to follow hereininafter, we are of the opinion that this appeal merits no consideration and deserves dismissal.

9. At the outset the law on the subject requires discussion :

Firstly taking up the relevant provision of the Income Tax Act, Section 158BD which reads thus :

"158BD. Undisclosed income of any other person.—Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 or whose books of account or other documents or any assets were requisitioned under section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handedover to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed under section 158BC against such other person and the provisions of this Chapter shall apply accordingly."

Section 158BC provides thus :

"158BC. Procedure for block assessment. — Where any search has been conducted under Section 132 or books of account, other documents or assets are requisitioned under Section 132A, in the case of any person, then, —

(a)

the Assessing Officer shall —

(i)		in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days
(ii)		in respect of search initiated or books of account or other documents or any assets requisitioned on or after the 1st day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days, as may be specified in the notice a return in the prescribed form and verified in the same manner as a return under clause (i) of sub-section (1) of Section 142, setting forth his total income including the undisclosed income for the block period:

		Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter:
		Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;
(b)		the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply;
(c)		the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment;
(d)		the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the provisions of section 132B."

The Assessing Officer is authorised under section 158BD provision when he finds any undisclosed income emerging from record in case of the person who is not searched, while carrying out the search to transfer entire material to the Assessing Officer having jurisdiction over such person, on recording his satisfaction.

10. The Apex Court in the case of Manish Maheshwari (supra) had examined the provisions of Section 158BD of the Income Tax Act where the premises of a director of a company and his wife were searched under section 132 of the Income Tax Act and the question came of carrying out block assessment in relation to the company. The Court held that the Assessing Officer had to satisfy essentially two requirements (i) record his satisfaction that any undisclosed income belonged to the company, and (ii) handover the books of account and other documents and assets seized to the Assessing Officer having jurisdiction against the company. Relevant findings of the Apex court on the subject need to be noted as under :

"11. The Condition precedent for invoking a block assessment is that a search has been conducted under Section 132, or documents or assets have been requisitioned under Section 132A. The said provision would apply in the case of any person in respect of whom search has been carried out under Section 132A or documents or assets have been requisitioned under Section 132A. Section 158BD, however, provides for taking recourse to a block assessment in terms of Section 158BC in respect of any other person, the conditions precedents wherefor are : (i) Satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 of the Act; (ii) The books of account or other documents or assets seized or requisitioned had been handedover to the Assessing Officer having jurisdiction over such other person; and (iii) The Assessing Officer has proceeded under Section 158BC against such other person.

12. The conditions precedent for invoking the provisions of Section 158BD, thus, are required to be satisfied before the provisions of the said chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under Section 132A of the Act.

**

**

**

16. Law in this regard is clear and explicit. The only question which arises for our consideration is as to whether the notice dated 06.02.1996 satisfies the requirements of Section 158BD of the Act. The said notice does not record any satisfaction on the part of the Assessing Officer. Documents and other assets recovered during search had not been handedover to the Assessing Officer having jurisdiction in the matter."

The Apex Court took into account the decision of this Court given in case of Khandubhai Vasanji Desai v. Dy. CIT [1999] 236 ITR 73/103 Taxman 181, wherein this Court held thus :

"This provision indicates that where the Assessing Officer, who is seized of the matter and has jurisdiction over the person other than the person with respect to whom search was made under sec. 132 or whose books of account or other documents or any assets were requisitioned under sec. 132A, shall proceed against such other person as per the provisions of Chapter XIV-B which would mean that on such satisfaction being reached that any undisclosed income belongs to such other person, he must proceed to serve a notice to such other person as per the provisions of sec. 158BC of the Act. If the Assessing Officer who is seized of the matter against the raided person reaches such satisfaction that any undisclosed income belongs to such other person over whom he has no jurisdiction, then, in that event, he has to transmit the material to the Assessing Officer having jurisdiction over such other person and in such cases the Assessing Officer who has jurisdiction will proceed against such other person by issuing the requisite notice contemplated by sec. 158BC of the Act."

The Apex Court in case of Asstt. CIT v. A.R. Enterprises [2013] 350 ITR 489/212 Taxman 531/29 taxmann.com 50 has held thus:

"13. A bare reading of the afore-extracted provision makes it clear that the condition precedent for invoking a block assessment is a search conducted under section 132, or documents or assets requisitioned under section 132A. Moreover, section 158BD permits the application of the provisions of this Chapter only on the satisfaction of the Assessing Officer that the seized documents show undisclosed income of a person other than the person with respect to whom search was conducted or a requisition was made. It is trite law that such satisfaction must be recorded for the benefit of the assessee. In Manish Maheshwari v. Asstt. CIT (2007) 3 SCC 794, this Court summarized the perquisites of section 158BD of the Act as follows :

11. ... (i) Satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 of the Act; (ii) the books of account or other documents or assets seized or requisitioned had been handedover to the Assessing Officer having jurisdiction over such other person; and (iii) the Assessing Officer has proceeded under Section 158BC against such other person.

14. In Asstt. CIT v. Hotel Blue Moon [2010] 3 SCC 259 at page 264, one of us (H L Dattu J.), while explaining the purport of Chapter XIV-B of the Act, has observed that a search is the sine qua non for the block assessment; the special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous year falling in the block period, intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. Hence, from the afore-mentioned discussion it is clear that a valid search under section 132 of the Act is a sine qua non for invoking block assessment proceedings under Chapter XIV-B. Further, according to section 158BD of the Act, the Assessing Officer must record his or her satisfaction that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 of the Act."

11. Thus the law laid down on the subject is very clear that for taking recourse to block assessment under section 158BC in relation to the person not searched, whenever search has been conducted under section 132 or the documents have been requisitioned under section 132A, the Assessing Officer of the searched person needs to record his satisfaction that undisclosed income belongs to the person, other than the person with respect to whom search was carried out under Section 132 of the Act. He is also required to handover the books of account or other documents or assets seized, to the Assessing Officer having jurisdiction over such person and thereafter, the Assessing Officer who has the jurisdiction would proceed under Section 158BC against such person who has not been searched.

12. In the instant case, as could be noted from the record, search had been carried out in case of Jayraj Group. On examination of the files produced before us by the learned counsel Shri Parikh, it can be seen that the satisfaction recorded by the Assessing Officer is in the case of this very assessee. On pertinently questioned about the satisfaction of the Assessing Officer in case of the searched person (i.e. Jayraj Group) , Revenue is unable to point out any such satisfaction of Assessing Officer in case of Jayraj Group. It had been emphatically argued before us that the Assessing Officer being the same person i.e. Shri A.K. Sinha, such satisfaction when recorded in case of the present assessee should be considered and construed as a due compliance under the provisions and there would not be any occasion to handover the materials to himself being the very officer.

13. As far as second requirement of endowing the papers to the Assessing Officer having the jurisdiction to initiate the proceedings under section 158BC is concerned, learned counsel Mr. Parikh is right and is also not being disputed by the respondent that such formal order of transfer to oneself would neither be warranted nor in any manner affect the validity of the proceedings.

14. However, the vital and mandatory requirement of recording the satisfaction under section 158BD is concerned, as has been rightly noted by the Tribunal, such satisfaction is absent as far as Jayraj Group is concerned in whose case search under section 132 of the Income Tax Act has been carried out by the department. As such an essential requirement prior to initiating the proceedings under section 158BC, has not been fulfilled, the Tribunal is justified in quashing the notice issued against the assessee respondent and the assessment order passed pursuant thereto. As the order of the Tribunal is in consonance with the law laid down on the subject in case of Manish Maheshwari (supra), we find no reason to interfere with the same.

15. As the substantial question of law raised in this case is duly answered, nothing remains for entertaining this petition.

16. Tax Appeal is therefore, dismissed.

IT: Notional depreciation to be claimed even for the period during which income wasn't chargeable to tax

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[2013] 36 taxmann.com 442 (Allahabad)

HIGH COURT OF ALLAHABAD

Commissioner of Income-tax-1

v.

U.P. State Warehousing Corpn.*

SIBGHAT ULLAH KHAN AND DR. SATISH CHANDRA, JJ.

IT APPEAL NO. 111 OF 2007†

JULY  9, 2013 

Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Written down value method] - Assessment year 2003-04 - Assessee was enjoying benefit of exemption for years - From current year, assessee was denied said exemption and, hence, had to file return first time - Whether even though assessee's income was exempted in earlier years, assessee had to claim notional depreciation on year to year basis in its books of account as per principles of accounting and, thus, depreciation for current year was to be allowed by adopting written down value method - Held, yes [Para 16] [Matter remanded]

FACTS

 

■		The assessee, a State Government Undertaking, was denied benefit of exemption under section 10(29). Thereafter, first time it had filed its return and claimed full depreciation on various assets.
■		The Assessing Officer opined that depreciation was allowable at prescribed percentage of actual cost of assets in year of acquisition and on written down value. Accordingly, he worked out depreciation and added differential between depreciation computed by assessee and as worked out by him to income of the assessee.
■		Said addition was upheld by the Commissioner (Appeals).
■		However, the Tribunal allowed assessee's claim by observing that till since the previous assessment year, the income was exempted from tax, no depreciation could 'notionally' be treated.
■		On second appeal:

HELD

 

■		In the instant case, the dispute is that the assessee has claimed the depreciation on the "straight line method" by considering that it is the first opportunity to the assessee to claim the same. This the first year, where the assessee has filed the return. [Para 13]
■		In the 'straight line method', depreciation is allowed at a fixed percentage of the original cost year after year till the original cost is exhausted; that is to say, a constant sum of depreciation is allowed year after year. But, at the same time, as per the 'written down value method', the depreciation is allowed at a fixed percentage not on the original cost, but on the written down value, namely, the original cost less depreciation previously allowed year after year. The written down value has to be calculated and arrived at for each amount year. It is diminishing figure year after year and the allowance for depreciation consequently is also a diminishing allowance year after year. The difference between the two may be defined that "straight-line method" is cumbersome inasmuch as a track has to be maintained of various items of plant or machinery purchased on different dates and of the year in which they should be taken out of the computation of depreciation, as the entire allowance would have by then been made. The 'written down value method', however, automatically, ensures that the aggregate allowances would never exceed the permissible hundred per cent. The "written down value method" being simpler and easier to follow had been adopted in respect of depreciable assets except ocean going ships. [Para 14]
■		In the instant case, the assessee has claimed the entire depreciation during the assessment year under consideration, which is not permissible as per the scheme of the depreciation. The depreciation will have to be claimed on the basis of year to year. Though the income was exempted under section 10 (29), but it does not bar the assessee to claim the notional depreciation in its books of account. Even the income is exempted nonetheless, the balance-sheet etc. will have to be prepared as per law for each assessment year as per principle of accounting. Thus, the law for claiming the depreciation is year to year basis, soon after acquiring the assets. [Para 16]
■		In the light of above discussion and by considering the totality of the peculiar facts and circumstances of the case, the order was set aside and the matter remanded back to the Assessing Officer to allow depreciation as per the schedule from the date of acquisition of the assets on the basis of year to year i.e., by taking notional depreciation for the earlier years, but the depreciation cannot be more than 100 per cent of the value of the assets. [Para 17]

CASES REFERRED TO

 

CIT v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 (SC) (para 6), Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677/91 Taxman 205 (SC) (para 6), CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC) (para 6), CIT v. Dewan Bahadur Ramgopal Mills Ltd. [1961] 41 ITR 280 (SC) (para 12), Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) (para 12) and Madeva Upendra Sinai v.Union of India [1975] 98 ITR 209 (SC) (para 15).

D.D. Chopra for the Appellant. Prateek Kumar, Ashish Chaturvedi and Nirmal Seth for the Respondent.

ORDER

 

Dr. Satish Chandra, J. - Present appeal is filed by the department under Section 260-A of the Income Tax Act, 1961 against the judgment and order dated 27.06.2007 passed by Income Tax Appellate Tribunal, Lucknow in Appeal No.1059/Luc/2006 for the assessment year 2003-04.

2. On 09.07.2012, a Coordinate Bench of this Court has admitted the instant appeal on the following substantial question of law:

"The Tribunal while interpreting Section 10 of Income Tax Act 1961 was wrong in recording finding that persons exempted under Section 10 of the Act are not required to computate its total income in accordance with the provisions of the Act, which may include the computation of depreciation on written down value and not in any other manner?"

3. The brief facts of the case are that the assessee is a statutory public undertaking of the State Government, which was constituted under the Warehousing Corporation Act, 1962. It derived income from storage fees, handling and transportation services, processing charges etc. Till the assessment year i.e. up to 31.03.2003 (Assessment Year 2002-03), the assessee was exempted from the clutches of the Income Tax as per Section 10 (29) of the Act, but on 01.04.2003, the said exemption was withdrawn. So, for the assessment year under consideration, first time assessee has filed its return. In the return, the assessee had claimed the deduction on account of depreciation of "straight line method" at Rs. 2,58,61,223/-. According to the A.O., the depreciation was allowable at the prescribed percentage of the actual cost of the assets in the year of acquisition and of the written down value (for short "WDV"). So, he has worked out the depreciation to Rs. 22,07,08,617/- whereas the assessee has claimed the depreciation of Rs. 25,98,40,226/-. Finally, the A.O. made the addition of Rs. 3,91,31,609/-, which was upheld by the first appellate authority. However, the Tribunal vide its impugned order has allowed the claim of the assessee by observing that till the previous assessment years, the income was exempted from tax. So, no depreciation can "notionally" be treated. First time, the assessee has claimed the depreciation on actual cost of assets. Not being satisfied, the department has filed the present appeal.

4. With this background, Sri D. D. Chopra, learned counsel for the department has justified the order passed by the A.O. as well as the first appellate authority. He submits that Explanation 5 to the Section 32(1) provides that:

"for the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income".

5. He submits that this provision is applicable with effect from 01.04.2002 but it does not mean that it change the scope of provisions after that date. It had the effect of laying down the intention of the legislature that the depreciation was an essential charge on the income of the assessee arising from the wear and tear of the assets in the course of the use thereof for the purpose of business and should be allowed mandatory in all cases.

6. According to learned counsel, in the instant case, the assessee does not derive any strength from the proposition that the depreciation was optional or that the Explanation 5 (supra) had only prospective effect. Depreciation is allowable. He also submits that in this case, the assets owned by the assessee were used by the assessee for business purposes and the A.O. allowed the depreciation, as shown in the profit and loss account and balance sheet as now no exemption to the assessee was given under section 10 (29) of the Income Tax Act. He further submits that the A.O. has rightly disallowed the excess depreciation claimed for the earlier years and only the 'WDV' of the fixed assets as on 01.04.2002 was considered on the actual cost of the assets acquired during the previous years. So, no interference is required in the order passed by the A.O. as well as CIT (A). For this purpose, he relied on the ratio laid down in the cases of CIT v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 (SC); Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677/91 Taxman 205 (SC); and CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC).

7. By reading the explanation 5 of Section 32, he submits that the law on the subject can be stated to be a settled by stating that the rate of depreciation will be applicable at the rate, as prevailing on 1st April of the relevant assessment year on the asset owned by the assessee. So, that any amendment made thereof will be available for the next succeeding year.

8. On the other hand, Sri N. K. Seth, learned counsel for the assessee submits that the depreciation is not a 'fiction', it is a fact. The deduction has been envisaged in the Income Tax Act in appreciation of the Act that, in course of the business, the fixed assets suffer wear and tear, which is a cost to the business and must be quantified and deducted before computing the profits of the business. Deduction is a charge on the profits of the business. He further submits that the assessment year under consideration is the first year where the assessee has filed return and offer its income for the purposes of Tax. Prior to it, the entire income of the assessee was exempted as per Section 10 (29) of the Act. So, the depreciation is not actually allowed/claimed to the assessee. For this purpose, he read out Section 43 (6) of the Act, which defines the 'WDV'. The said section, on reproduction reads as under:

Section 43(6):

'(6) "written down value" means-

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income- tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income- tax Act, 1886 (2 of 1886), was in force.

(c)**

**

**'

9. He also submits that the assessee has rightly claimed the depreciation as per the "straight line method". However, he admits that the depreciation will have to be allowed as per the rate prescribed in the schedule on various items of the assets. Lastly, he justified the impugned order passed by the Tribunal.

10. We have heard learned counsel for the parties and gone through the material including the written note supplied by the parties.

11. It is an undisputed fact that prior to the assessment year under consideration, the total income of the assessee was exempted as per Section 10 (29) of the Income Tax Act. This is the first year, where the assessee has offered its income for the purposes of tax and claimed the depreciation.

12. In CIT v. Dewan Bahadur Ramgopal Mills Ltd. [1961] 41 ITR 280 (SC), the Hon'ble Apex Court observed that the basic and normal scheme of depreciation under the Indian Income Tax Act, is that value of the asset decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years, the actual cost less all depreciation actually allowed under the Income Tax Act or any Act repealed thereby. Thus, depreciation allowance is in respect of such assets as are used in the business and is to be calculated on the written down value, i.e. in the case of assets acquired in the previous year, the actual cost of the assets and, in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act. For this purpose, expenses, relating to installation and even interest on borrowed capital for acquiring plant and machinery had been treated as such cost as per the ratio laid down in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC).

13. In the instant case, the dispute is that the assessee has claimed the depreciation on the "straight line method" by considering that it is the first opportunity to the assessee to claim the same. This the first year, where the assessee has filed the return.

14. It may be mentioned that in the "straight line method", depreciation is allowed at a fixed percentage of the original cost year after year till the original cost is exhausted; that is to say, a constant sum of depreciation is allowed year after year. But, at the same time, as per the "written down value method", the depreciation is allowed at a fixed percentage not on the original cost, but on the written down value, namely, the original cost less depreciation previously allowed year after year. The written down value has to be calculated and arrived at for each amount year. It is diminishing figure year after year and the allowance for depreciation consequently is also a diminishing allowance year after year. The difference between the two may be defined that "straight-line method" is cumbersome in as much as a track has to be maintained of various items of plant or machinery purchased on different dates and of the year in which they should be taken out of the computation of depreciation, as the entire allowance would have by then been made. The "written down value method", however, automatically, ensures that the aggregate allowances would never exceed the permissible hundred per cent. The "written down value method" being simpler and easier to follow had been adopted in respect of depreciable assets except ocean-going ships.

15. In Madeva Upendra Sinai v. Union of India [1975] 98 ITR 209 (SC), the Hon'ble Apex Court explained that the pivot of the definition of written down value is the actual cost of the assets. Where the asset was acquired and also used for the purpose of business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In the subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. As per Section 43 (6) of the Act, it was explained that the key word in clause (b) is 'actually'. It is the antithesis of that which is merely speculative, theoretical or imaginary. Thus, unless the depreciation has been 'actually' allowed in terms, it should not be taken into account for the purpose of Section 43 (6) of the Act.

16. In the instant case, the assessee has claimed the entire depreciation during the assessment year under consideration, which is not permissible as per the scheme of the depreciation. The depreciation will have to be claimed on the basis of year to year. Though, the income was exempted under section 10 (29) of the Act, but it does not bar the assessee to claim the notional depreciation in its books of accounts. Even the income is exempted nonetheless, the balance-sheet etc. will have to be prepared as per law for each assessment year as per principle of accounting. Thus, the law for claiming the depreciation is year to year basis, soon after acquiring the assets.

17. In the light of above discussion and by considering the totality of the peculiar facts and circumstances of the case, we set aside the impugned order and remanded the matter back to the AO to allow depreciation on various items of the assets as per the schedule from the date of acquisition of the assets on the basis of year to year i.e. by taking notional depreciation for the earlier years, but the depreciation cannot be more than 100% of the value of the assets.

18. The answer to the substantial question of law is in affirmative and in favour of the department.

19. In the result, the appeal filed by the department is allowed for statistical purposes.

IT : Interest on capital and remuneration payable to partners were to be excluded for computing profits eligible for exemption under section 10B

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[2013] 37 taxmann.com 22 (Rajkot - Trib.)

IN THE ITAT RAJKOT BENCH

Assistant Commissioner of Income-tax, Circle -2, Jamnagar

v.

Meridian Impex*

T.K. SHARMA, JUDICIAL MEMBER 
AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER

IT APPEAL NOS. 357 & 358 (RAJKOT) OF 2012
[ASSESSMENT YEARS 2006-07 & 2009-10]

JULY  26, 2013 

Section 10B, read with section 40(b), of the Income-tax Act, 1961 - Export oriented undertaking [Computation of deduction] - Assessment years 2006-07 and 2009-10 - Assessee, a partnership firm, claimed exemption under section 10B - Assessing Officer noticed that partnership deed provided for payment of interest on capital and remuneration to partners and by invoking section 40(b), he excluded said interest and remuneration from overall profits of business to work out profit eligible for exemption under section 10B - However, Commissioner (Appeals) reversed said order - Whether since clauses of partnership deed did not violate prescription of section 40(b), interest on capital and remuneration payable to partners were admissible for deduction and were to be considered for computing profits eligible for exemption under section 10B - Held, yes - Whether, therefore, Assessing Officer had correctly excluded interest on capital and remuneration to partners from overall profits of business - Held, yes [Paras 13 & 14] [In favour of revenue]

FACTS

 

■		The assessee, a partnership firm, was engaged in the business of manufacture and export of brass items. It claimed to be a 100 per cent export oriented undertaking. It filed its return and claimed exemption under section 10B.
■		The Assessing Officer found that terms of partnership provided for payment of interest on capital of partners and remuneration to working partners and excluded said interest and remuneration payable under section 40(b) from profits of business eligible for exemption under section 10B.
■		However, the Commissioner (Appeals) held that as per partnership deed it was not mandatory but discretionary for assessee to pay interest or remuneration to partners and the Assessing Officer by invoking section 40(b), could not compel to charge such interest or remuneration and reversed order passed by the Assessing Officer.
■		On second appeal:

HELD

 

■		Section 10B exempts from tax any profit and gain derived by a 100% Export-Oriented Undertaking from the export of articles or things or computer software subject to the fulfilment of conditions stipulated in section 10B. The profits and gains eligible for exemption under section 10B can neither be artificial nor inflated profits and gains but actual profits and gains. In other words, all outgoings including expenses eligible for deduction need to be considered while computing the profits and gains of the business. Payment of interest on capital and remuneration to partners is eligible for deduction under section 37 subject to the restrictions placed by section 40(b). Section 40(b) however places certain restrictions on the deductibility of amount of interest and remuneration payable to partners. The relevant clauses in the copies of partnership deeds filed do not violate the prescription of section 40(b). Therefore interest on capital and remuneration payable to partners were admissible for deduction under section 37 and is therefore required to be taken into account for computing the profits eligible for exemption under section 10B. [Para 12]
■		Perusal of the partnership deed dated 28-11-2002 requires payment of interest on capital and remuneration to partners. There is similar stipulation in partnership deed dated 14-09-2005. It is interesting to observe that the partnership deed was executed on 14.09.2005 which is not only duly signed by the existing partners as well as retiring partners but also registered with Sub-Registrar. The supplementary deed is also stated to have been executed on 14-09-2005 but it is not registered with Sub-Registrar. Both the deeds, i.e., the partnership deed and the supplementary partnership deed, have reportedly been executed on 14-09-2005. Supplementary deed was not filed before the Assessing Officer at the time of original assessment proceedings. The supplementary partnership deed, if it was genuinely in existence at the time of original assessment proceedings, ought to have been filed before the AO not because it was required by law but because it was relied upon by the assessee in support of its claim that interest and remuneration was not payable to partners as per supplementary partnership deed. Besides, the supplementary deed contains a recital that both the partners have mutually agreed not to pay any interest or remuneration etc. for FY 2005-06. There is no similar supplementary deed for Assessment Year 2009-10. There is another deed of partnership dated 31-03-2006 which also provides for payment of interest on capital and remuneration to the partners. In fact, clause 17 of the aforesaid partnership deed provides that the remuneration shall be paid to the partners as per the details given in the said clause. [Para 13]
■		On careful perusal of the relevant partnership deeds, payment of interest on capital and remuneration to partners is not hit by section 40(b). The mere fact that the partners have chosen to forego interest on capital and remuneration payable to them does not ipso-factomean that they are not admissible for deduction. The fact that the assessee has not debited such interest and remuneration payable to partners to its profit & loss account in spite of their admissibility to deduction makes its intention quite evident, namely, to inflate the profits eligible for exemption under section 10B. Since the Assessing Officer had correctly worked out interest on capital and remuneration payable to partners and excluded them from overall profits of business for working out profits eligible for exemption under section 10B, order of Commissioner (Appeals) was reversed and that of the Assessing Officer restored. [Para 14]

CASES REFERRED TO

 

ITO v. Devine Impex [IT Appeal No. 279 (Rjt.) of 2012, dated 24-1-2013] (para 8).

Avinash Kumar for the Appellant. P.M. Maharishi for the Respondent.

ORDER

 

D.K. Srivastava, Accountant Member - Appeal bearing ITA No. 357/Rjt/2012 and ITA No. 358/Rjt.//2012 filed by the Revenue are directed against two separate orders passed by the CIT(A), Jamnagar on 13.03.2012 for Assessment Year 2006-07 and 2009-10 respectively. Grounds of appeal in both the appeals are identically worded except for the difference in figures. Both the parties fairly submitted at the time of hearing that the issues in both the appeals are common and therefore a consolidated order may be passed to dispose of both the appeals. Both the appeals are therefore being disposed of by a consolidated order.

2. In ITA No.357/Rjt/2012 for assessment year 2006-07, the Revenue has taken the following grounds of appeal:—

"1.		The CIT (A) has erred in law and on facts in deleting the addition of Rs. 11,36,461/- by charging interest on partners capital and addition of Rs. 30,61,317/- towards remuneration to the partners.
2.		The CIT (A) has erred in law and on facts in directing to allow the total deduction u/s. 10B of the Act at Rs. 36,02,046/- as against the allowable deduction worked out by the Assessing Officer at Rs. 18,52,845/- after deducting the interest on partners capital and remuneration payable to the partners as per partnership deed.
3.		The CIT (A) has erred in law and on facts in holding that it was not mandatory to pay interest and remuneration to partners even though there was a clear provision in partnership deed. The CIT (A) failed to appreciate that the dubious method adopted by the assessee firm to reduce tax burden cannot be allowed in view of the judgment of Hon'ble Supreme Court in the case of Mac Dowell & Company v. CIT [154 ITR 148].
4.		That on the facts and in the circumstances of the case, the CIT (A) ought to have upheld the order of the Assessing Officer.
5.		It is therefore prayed that the order of the CIT (A) be set aside and that of the Assessing Officer be restored.
6.		That the revenue craves leave to add, amend, alter or withdraw any grounds of appeal."

3. In ITA No.358/Rjt/2012 for assessment year 2009-10, the Revenue has taken the following grounds of appeal:—

"1.		The CIT (A) has erred in law and on facts in deleting the addition of Rs. 29,53,516/- by charging interest on partners capital and addition of Rs. 14,54,731/- towards remuneration to the partners.
2.		The CIT (A) has erred in law and on facts in directing to allow the total deduction u/s. 10B of the Act at Rs. 38,01,492/- as against the allowable deduction worked out by the Assessing Officer at Rs. 11,72,310/- after deducting the interest on partners capital and remuneration payable to the partners as per partnership deed.
3.		The CIT (A) has erred in law and on facts in holding that it was not mandatory to pay interest and remuneration to partners even though there was a clear provision in partnership deed. The CIT (A) failed to appreciate that the dubious method adopted by the assessee firm to reduce tax burden cannot be allowed in view of the judgment of Hon'ble Supreme Court in the case of Mac Dowell & Company v. CIT [154 ITR 148].
4.		That on the facts and in the circumstances of the case, the CIT (A) ought to have upheld the order of the Assessing Officer.
5.		It is therefore prayed that the order of the CIT (A) be set aside and that of the Assessing Officer be restored.
6.		That the revenue craves leave to add, amend, alter or withdraw any grounds of appeal."

4. For the sake of convenience, facts are being extracted from records relating to assessment year 2006-07. Perusal of the assessment order shows that the assessee is a partnership firm. It claims to be a 100% Export-Oriented Undertaking and therefore entitled to exemption from tax in respect of profits and gains derived from the export of articles or things or computer software. The assessee is engaged in the business of manufacture and export of brass items. The assessee filed its return of income for Assessment Year 2006-07 on 31.12.2006 returning total income at Rs. 28,91,892/- after claiming exemption for a sum of Rs. 36,02,046/- u/s 10B of the Income-tax Act. Order of assessment was passed u/s 143(3) on 30.12.2008 assessing total income of the assessee for the Assessment Year 2006-07 at Rs. 50,56,540/-. The assessment records were called for and examined by the ld. Commissioner of Income-tax u/s 263 of the Income-tax Act pursuant to which a revision order was passed by him on 28.03.2011 by which the order of assessment passed by the Assessing Officer on 30.12.2008 for the Assessment year 2006-07 was set aside with the following observations:—

"4. I have carefully considered the submission made by as the assessee but the same is not accepted. The supplementary deed furnished by the assessee is not found authentic and genuine. The xerox copy of deed submitted by the assessee bears no signature or seal of the notary. It was also ascertained that, during the assessment proceedings itself, the assessee was asked to produce the partnership deed for verifying the distribution of interest and remuneration among the partners. In reply, the AR of the assessee said that the firm had not made any supplementary deed for the distribution of interest and remuneration among the partners. Consequently, the firm was unable to produce the partnership deed at that time. It clearly appears that the supplementary deed is an afterthought, to avoid the proceedings where the question of non-payment of remuneration and interest was arised. Therefore the supplementary deed produced by the assessee is rejected being bereft of merits.

5. Income from profits and gains of business or profession i.e. referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43D. the Supreme Court in the case of Mec dowell & Company v. CIT (154 ITR 148) held that the tax planning should be legitimate and within the framework of law. Colorful devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting the dubious method.

6. I therefore hold that the assessment finalized by the AO u/s. 143(3) is erroneous and prejudicial to the interest of revenue. Accordingly, the assessment is set aside with a direction to the AO to re-frame the assessment afresh after giving the assessee an opportunity of being heard. AO should also take steps to recover the demand raised, by the due date."

5. Pursuant to the aforesaid directions given by the ld. Commissioner of Income-tax, the Assessing Officer has now passed a fresh order of assessment on 16.12.2011 u/s 143(3) read with section 263 of the Income-tax Act by which a sum of Rs. 11,36,461/- and Rs. 30,61,317/- being interest and remuneration respectively payable to the partners u/s 40(b) of the Income-tax Act has been reduced from the profits of the business eligible for exemption u/s 10B of the Income-tax Act.

6. Return of income for assessment year 2009-10 was filed by the assessee on 25.09.2009 returning total income at Rs. 28,48,876/- as against which total income of the assessee has been assessed at Rs. 54,78,060/- in the order of assessment passed u/s 143(3) of the Income-tax Act on 16.12.2011 after excluding the interest and remuneration payable to the partners u/s 40(b) of the Income-tax Act from the profits of the business eligible for exemption u/s 10B.

7. The aforesaid action of the Assessing Officer was challenged by the assessee before the ld. CIT(A). Though the ld CIT(A) has passed orders for both the assessment years separately on 13.03.2012, the operative portion of his order is not only identically worded but also carry the same paragraph numbers. Paragraph 6 and 6.1 in the appellate orders passed by the ld. CIT(A) for both the assessment years read as under:—

"6. I have carefully considered the submission made by the appellant and the discussion made by the AO in the assessment order. The basic argument of the appellant is that it is not mandatory to allocate interest on partners' capital and remuneration to partner u/s. 40(b) merely on the fact that the partnership deed contained provisions of interest and remuneration. The payment of interest and remuneration to the partners is governed by mutual consent of the partners. If partners mutually decide not to pay interest and remuneration, in spite of having clause of the same in partnership deed, assessing authority is not justified in enforcing deduction of interest on capital and remuneration to the partners.

6.1 In the instance case, it is correct that the terms of partnership provided payment of interest @ 12% on capital of partners and remuneration to the working partners. However, the appellant did not make payment thereof to the partners not made any provision of liability in the books of account. On perusal of deed of partnership reveals that there was no any compulsion of the payment of interest or remuneration to the partners. The relevant clause in the deed indicate the flexibility by using words: "That the parties have decided that simple interest at the rate as may be mutually agreed by the partners from time to time or prescribed under section-40(b) of the Income Tax Act, may be paid to the partner on their capital invested, current, loan accounts and such interest may be paid even if in any particular year the partnership firm may have incurred losses". From this clause, it is evident that partnership deed which authorized the partners to charge interest on their capitals and remuneration to the working partners could be varied or amended either verbally or even by conduct. It was not necessary for the parties to have reduced such terms in writing in case they desired not to charge any interest or remuneration as such. This view also founds further supported by the decision of Jodhpur Bench of Tribunal in the case of Tulsa Ram Kanhiyalal & Sonsv. ITO [2008] 118 TTJ 536. In view of the above, I opine that the AO could not have compelled the appellant to charge such interest or remuneration by invoking section 40(b) of the Act more particularly when it is not mandatory but discretionary of the assessee to have made such a claim. Therefore, ground of appeal taken by the appellant is allowed."

8. Aggrieved by both the orders passed by the ld CIT(A), the Revenue is now in appeal before this Tribunal. In support of appeal, the ld. Departmental Representative relied upon the findings recorded by the ld. Commissioner of Income-tax in his order passed u/s 263 for the assessment year 2006-07 as also the findings recorded by the Assessing Officer in the assessment orders for both the years under appeal. He submitted that the issue under appeal was covered by the order passed by this Tribunal on 24.01.2013 in ITO v. Devine Impex IT Appeal No. 279/Rjt/2012.

9. In reply, the ld Authorized Representative for the assessee supported the order passed by the ld CIT(A). He invited our attention to the partnership deed dated 28.11.2002 which was executed between four existing partners and two retiring partners. Referring to clauses 16 and 17 of the aforesaid partnership deed dated 28.11.2002, he submitted that interest on capital and remuneration was required to be paid to the partners in conformity with section 40(b) of the Income-tax Act. He further submitted that another partnership deed was executed on 14.09.2005 between two existing partners, namely, (1) Shri Vallabhbhai Shamjibhai Shiyani and (2) Shri Bharatkumar Gopaldas Faldu and two retiring partners, namely, (1) Shri Karsanbhai Shamjibhai Shiyani and (2) Shri Vallabhbhai Shamjibhai Shiyani. Inviting our attention to clauses 16 and 17 of the said partnership deed dated 14.09.2005, he submitted that interest on capital and remuneration was required to be paid to the partners in conformity with section 40(b) of the Income-tax Act. He also referred to a supplementary partnership deed executed on the same date, i.e., 14.09.2005 between existing two partners, namely, (1) Shri Vallabhbhai S. Shiyani and (2) Shri Bharatkumar G. Faldu as per which they mutually agreed not to pay any interest or any remuneration, bonus and/or commission for FY 2005-06 (AY 2006-07) to any of the partners. Relying upon the supplementary partnership deed executed on the same date on which the main deed of partnership deed was executed, he submitted that payment of interest on capital and remuneration to partners was optional and therefore no payment of interest or remuneration was made to any of the partners. According to him, the profits were thus correctly worked out without excluding the element of interest and remuneration as both of them were not payable to the partners as per supplementary partnership deed. He contended that the Assessing Officer was bound to accept the aforesaid position as it was in conformity with the stipulation in supplementary partnership deed.

10. The ld Authorized Representative for the assessee took us through the provisions of section 10B and sub-sections (8) and (10) of section 80(IA) of the Income-tax Act for the proposition that none of the aforesaid provisions authorizes the Assessing Officer to work out interest on capital and remuneration payable to partners and exclude them from the profits of business eligible for relief u/s 10B.

11. As regards the reasons for not filing a copy of the supplementary partnership deed at the time of original assessment, the ld. Authorised Representative for the assessee submitted that there was no requirement in law to file such a supplementary partnership deed before the AO.

12. We have heard both the parties and carefully considered their submissions. Section 10B exempts from tax any profit and gain derived by a 100% Export-Oriented Undertaking from the export of articles or things or computer software subject to the fulfillment of conditions stipulated in section 10B of the Income-tax Act. The profits and gains eligible for exemption u/s 10B can neither be artificial nor inflated profits and gains but actual profits and gains. In other words, all outgoings including expenses eligible for deduction need to be considered while computing the profits and gains of the business. Payment of interest on capital and remuneration to partners is eligible for deduction u/s 37 of the Income-tax Act subject to the restrictions placed by section 40(b) of the Income-tax Act. According to section 37, any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession". Section 40(b) however places certain restrictions on the deductibility of amount of interest and remuneration payable to partners. The relevant clauses in the copies of partnership deeds filed before us do not violate the prescription of section 40(b) of the Income-tax Act. Therefore interest on capital and remuneration payable to partners are admissible for deduction u/s 37 and is therefore required to be taken into account for computing the profits eligible for exemption u/s 10B of the Income-tax Act.

13. Perusal of the partnership deed dated 28.11.2002 requires payment of interest on capital and remuneration to partners. There is similar stipulation in partnership deed dated 14.09.2005. It is interesting to observe that the partnership deed was executed on 14.09.2005 which is not only duly signed by the existing partners as well as retiring partners but also registered with Sub-Registrar, Jamnagar. The supplementary deed is also stated to have been executed on 14.09.2005 but it is not registered with Sub-Registrar, Jamnagar. Both the deeds, i.e., the partnership deed and the supplementary partnership deed, have reportedly been executed on 14.09.2005. Supplementary deed was not filed before the Assessing Officer at the time of original assessment proceedings. The supplementary partnership deed, if it was genuinely in existence at the time of original assessment proceedings, ought to have been filed before the AO not because it was required by law but because it was relied upon by the assessee in support of its claim that interest and remuneration was not payable to partners as per supplementary partnership deed. Besides, the supplementary deed contains a recital that both the partners have mutually agreed not to pay any interest or remuneration etc. for FY 2005-06. There is no similar supplementary deed for Assessment Year 2009-10. There is another deed of partnership dated 31.03.2006 which also provides for payment of interest on capital and remuneration to the partners. In fact, clause 17 of the aforesaid partnership deed provides that the remuneration shall be paid to the partners as per the details given in the said clause.

14. On careful perusal of the relevant partnership deeds, we are convinced that payment of interest on capital and remuneration to partners is not hit by section 40(b) of the Income-tax Act. The mere fact that the partners have chosen to forego interest on capital and remuneration payable to them does not ipso-facto mean that they are not admissible for deduction. The fact that the assessee has not debited such interest and remuneration payable to partners to its profit & loss account in spite of their admissibility to deduction makes its intention quite evident, namely, to inflate the profits eligible for exemption u/s 10B. The Assessing Officer has correctly worked out interest on capital and remuneration payable to partners and excluded them from the overall profits of business for working out the profits eligible for exemption u/s 10B of the Income-tax Act. The order of the ld. CIT(A) in this behalf is therefore reversed and that of the Assessing Officer restored. Both the appeals filed by the Revenue are allowed.

POOJA

---

*In favour of revenue.

--

IT: For initiating proceedings under section 158BC against person not searched, Assessing Officer must record his satisfaction during search that undisclosed income belonged to such person

■■■

[2013] 36 taxmann.com 554 (Gujarat)

HIGH COURT OF GUJARAT

Deputy Commissioner of Income-tax, Central Circle -1, Baroda

v.

Lalitkumar M Patel*

AKIL KURESHI, AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO.192 OF 2012

MAY  6, 2013 

Section 158BD, read with section 158BC, of the Income-tax Act, 1961 - Block assessment in search cases - Undisclosed income of any other person [Conditions Precedent] - Assessment years - Whether for taking recourse to block assessment in relation to person not searched, Assessing Officer of searched person needs to record his satisfaction that undisclosed income belongs to person, other than person searched - Held, yes - Whether, where essential requirement for initiating proceedings under section 158BC being recording of satisfaction that undisclosed income belonged to assessee had not been fulfilled, notice issued to assessee under section 158BD was liable to be quashed - Held, yes [Paras 12 & 14] [In favour of assessee]

FACTS

 

■		During search conducted on one 'J' group, certain incriminating materials were found in relation to assessee which were not accounted for in regular books of account. Therefore, the Assessing Officer issued notice under section 158BD to the assessee.
■		On first appeal, the Commissioner (Appeals) confirmed the action of Assessing Officer.
■		On second appeal, the Tribunal quashed and set aside the notice on ground that there was no valid satisfaction recorded by the Assessing Officer in case of the person searched prior to issuance of the notice to the assessee.
■		On revenue's appeal:

HELD

 

■		The Assessing Officer is authorised under section 158BD provision when he finds any undisclosed income emerging from record in case of the person who is not searched, while carrying out the search to transfer entire material to the Assessing Officer having jurisdiction over such person, on recording his satisfaction. [Para 9]
■		The Apex Court in the case of Manish Maheshwari v Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 had examined the provisions of Section 158BD where the premises of a director of a company and his wife were searched under section 132 and the question came of carrying out block assessment in relation to the company. The Court held that the Assessing Officer had to satisfy essentially two requirements (i) record his satisfaction that any undisclosed income belonged to the company, and (ii) handover the books of account and other documents and assets seized to the Assessing Officer having jurisdiction against the company. [Para 10]
■		Thus the law laid down on the subject is very clear that for taking recourse to block assessment under section 158BC in relation to the person not searched, whenever search has been conducted under section 132 or the documents have been requisitioned under section 132A, the Assessing Officer of the searched person needs to record his satisfaction that undisclosed income belongs to the person, other than the person with respect to whom search was carried out under Section 132. He is also required to handover the books of account or other documents or assets seized, to the Assessing Officer having jurisdiction over such person and thereafter, the Assessing Officer who has the jurisdiction would proceed under Section 158BC against such person who has not been searched. [Para 11]
■		In the instant case, as could be noted from the record, search had been carried out in case of 'J'. On examination of the files produced by the revenue it can be seen that the satisfaction recorded by the Assessing Officer is in the case of this very assessee. On pertinently questioned about the satisfaction of the Assessing Officer in case of the searched person, the revenue is unable to point out any such satisfaction of the Assessing Officer in case of 'J'. It had been emphatically argued that the Assessing Officer being the same person such satisfaction when recorded in case of the present assessee should be considered and construed as a due compliance under the provisions and there would not be any occasion to handover the materials to himself being the very officer. [Para 12]
■		As far as second requirement of endowing the papers to the Assessing Officer having the jurisdiction to initiate the proceedings under section 158BC is concerned, it is also not being disputed by the assessee that such formal order of transfer to oneself would neither be warranted nor in any manner affect the validity of the proceedings. [Para 13]
■		However, the vital and mandatory requirement of recording the satisfaction under section 158BD is concerned, as has been rightly noted by the Tribunal, such satisfaction is absent as far as 'J' is concerned in whose case search under section 132 has been carried out by the department. As such an essential requirement prior to initiating the proceedings under section 158BC, has not been fulfilled, the Tribunal is justified in quashing the notice issued against the assessee respondent and the assessment order passed pursuant thereto. As the order of the Tribunal is in consonance with the law laid down on the subject in case of Manish Maheshwari (supra) it is found that there is no reason to interfere with the same. [Para 14]

CASES REFERRED TO

 

Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341/159 Taxman 258 (SC) (para 7), Khandubhai Vasanji Desai v. Dy. CIT [1999] 236 ITR 73/103 Taxman 181 (Guj.) (para 10) and Asstt. CIT v. A.R. Enterprises [2013] 350 ITR 489/212 Taxman 531/29 taxmann.com 50 (SC) (para 10).

K.M. Parikh for the Appellant. Manish J. Shah for the Respondent.

JUDGMENT

 

Ms. Sonia Gokani, J. - Aggrieved by the order of the Income Tax Appellate Tribunal for the block period between 1.4.1995 to 19.12.2001, this Tax Appeal is preferred under section 260A of the Income Tax Act, 1961 ("the Act" for short) proposing following substantial question of law for our consideration :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in quashing and setting aside the notice under section 158BD of the Act as well as the assessment order passed under section 158BD of the Act passed in the case of the assessee by holding that reasons recorded for issue of the notice under section 158BD of the Act by Assessing Officer to the assessee cannot be said to be valid satisfaction for issue of notice under section 158BD of the Act and thereby ignoring the findings on the basis of the seized documents by the Assessing Officer that certain undisclosed income belongs to the assessee?"

2. Brief facts are as follows :

3. Search and seizure action in case of Jayraj Group was carried out under section 132 on 19.12.2001. On the department finding certain incriminating materials in relation to Shri Upendra N. Patel, Shri Champak M. Patel and the present assessee respondent which were not accounted for in regular books of account, the Assessing Officer noted that the assessee and Shri Champak M. Patel acquired the rights in the property of M/s. Hindusthan Earth Movers Pvt. Ltd. Such rights were eventually acquired by Shri Jayesh Dave and Shri Upendra N. Patel on the strength of compromise agreement arrived at by and between the parties dated 30.9.2000. Civil Court also put a seal of approval on the same and compromise decree to that effect came to be passed. It was further noted that when the Memorandum of Understanding was arrived at on 1.11.1996, the rights in the land of M/s. Hindusthan Earth Movers Pvt. Ltd. had been acquired. The total cash payment was to the tune of Rs. 37 lakhs and the bank draft of Rs. 1 crore was also given which was handedover to the Court receiver appointed by the High Court of Bombay. It was noted that by virtue of compromise decree, the other two persons and the present assessee respondent received huge parcel of land, nearly 1,20,000 sq, mtrs., the sale deed was executed however, only reflecting the sale consideration of Rs.5.60 lakh in case of Shri Upendra Patel. As the market price was much higher, these facts when were discovered during the search in case of Jayraj Group, notices under section 158BD of the Income Tax Act were issued. Authority relied on various documents as also on appraisal report for the same purpose.

4. Aggrieved by the order of the Assessing Officer, the assessee had moved the Commissioner of Income Tax and on failing to get any relief eventually it challenged the order of CIT(Appeals) before the Tribunal. Tribunal upheld the version of assessee and therefore, this appeal proposing afore-mentioned substantial question of law.

5. In the present appeal thus, we are essentially concerned with the question whether the Tribunal rightly quashed and set aside the notice under section 158BD and the assessment order passed in case of the assessee respondent on the ground that there was no valid satisfaction recorded by the Assessing Officer in case of the person searched prior to issuance of the notice to the assessee respondent.

6. We have heard learned counsel Shri K.M. Parikh for the department who has fervently argued before us that the Assessing Officer Shri A.K. Sinha was the Assessing Officer in case of both, searched and non-searched assessees. He also further urged that the satisfaction recorded by the Assessing Officer in case of present assessee shall have to be construed in case of searched assessee only. The Tribunal incorrectly appreciated the law on the subject and also did not aptly apply the correct ratio to the facts of the case of the assessee. Therefore, the order requires interference.

7. Learned senior counsel Shri J. P. Shah appearing for the assessee respondent relying on various case laws has urged that this appeal deserves no consideration on merits inasmuch as the mandatory requirements as set out by the Apex court in case of Manish Maheshwari v. Asstt. CIT[2007] 289 ITR 341/159 Taxman 258 have not been fulfilled. He further urged that the Tribunal while dealing with the issue in question has appropriately scanned the entire materials and has rightly arrived at a correct decision which calls for no intervention.

8. On thus hearing both the sides and on examination of the order impugned and the materials produced before us, for the reasons to follow hereininafter, we are of the opinion that this appeal merits no consideration and deserves dismissal.

9. At the outset the law on the subject requires discussion :

Firstly taking up the relevant provision of the Income Tax Act, Section 158BD which reads thus :

"158BD. Undisclosed income of any other person.—Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 or whose books of account or other documents or any assets were requisitioned under section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handedover to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed under section 158BC against such other person and the provisions of this Chapter shall apply accordingly."

Section 158BC provides thus :

"158BC. Procedure for block assessment. — Where any search has been conducted under Section 132 or books of account, other documents or assets are requisitioned under Section 132A, in the case of any person, then, —

(a)

the Assessing Officer shall —

(i)		in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days
(ii)		in respect of search initiated or books of account or other documents or any assets requisitioned on or after the 1st day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days, as may be specified in the notice a return in the prescribed form and verified in the same manner as a return under clause (i) of sub-section (1) of Section 142, setting forth his total income including the undisclosed income for the block period:

		Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter:
		Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;
(b)		the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply;
(c)		the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment;
(d)		the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the provisions of section 132B."

The Assessing Officer is authorised under section 158BD provision when he finds any undisclosed income emerging from record in case of the person who is not searched, while carrying out the search to transfer entire material to the Assessing Officer having jurisdiction over such person, on recording his satisfaction.

10. The Apex Court in the case of Manish Maheshwari (supra) had examined the provisions of Section 158BD of the Income Tax Act where the premises of a director of a company and his wife were searched under section 132 of the Income Tax Act and the question came of carrying out block assessment in relation to the company. The Court held that the Assessing Officer had to satisfy essentially two requirements (i) record his satisfaction that any undisclosed income belonged to the company, and (ii) handover the books of account and other documents and assets seized to the Assessing Officer having jurisdiction against the company. Relevant findings of the Apex court on the subject need to be noted as under :

"11. The Condition precedent for invoking a block assessment is that a search has been conducted under Section 132, or documents or assets have been requisitioned under Section 132A. The said provision would apply in the case of any person in respect of whom search has been carried out under Section 132A or documents or assets have been requisitioned under Section 132A. Section 158BD, however, provides for taking recourse to a block assessment in terms of Section 158BC in respect of any other person, the conditions precedents wherefor are : (i) Satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 of the Act; (ii) The books of account or other documents or assets seized or requisitioned had been handedover to the Assessing Officer having jurisdiction over such other person; and (iii) The Assessing Officer has proceeded under Section 158BC against such other person.

12. The conditions precedent for invoking the provisions of Section 158BD, thus, are required to be satisfied before the provisions of the said chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under Section 132A of the Act.

**

**

**

16. Law in this regard is clear and explicit. The only question which arises for our consideration is as to whether the notice dated 06.02.1996 satisfies the requirements of Section 158BD of the Act. The said notice does not record any satisfaction on the part of the Assessing Officer. Documents and other assets recovered during search had not been handedover to the Assessing Officer having jurisdiction in the matter."

The Apex Court took into account the decision of this Court given in case of Khandubhai Vasanji Desai v. Dy. CIT [1999] 236 ITR 73/103 Taxman 181, wherein this Court held thus :

"This provision indicates that where the Assessing Officer, who is seized of the matter and has jurisdiction over the person other than the person with respect to whom search was made under sec. 132 or whose books of account or other documents or any assets were requisitioned under sec. 132A, shall proceed against such other person as per the provisions of Chapter XIV-B which would mean that on such satisfaction being reached that any undisclosed income belongs to such other person, he must proceed to serve a notice to such other person as per the provisions of sec. 158BC of the Act. If the Assessing Officer who is seized of the matter against the raided person reaches such satisfaction that any undisclosed income belongs to such other person over whom he has no jurisdiction, then, in that event, he has to transmit the material to the Assessing Officer having jurisdiction over such other person and in such cases the Assessing Officer who has jurisdiction will proceed against such other person by issuing the requisite notice contemplated by sec. 158BC of the Act."

The Apex Court in case of Asstt. CIT v. A.R. Enterprises [2013] 350 ITR 489/212 Taxman 531/29 taxmann.com 50 has held thus:

"13. A bare reading of the afore-extracted provision makes it clear that the condition precedent for invoking a block assessment is a search conducted under section 132, or documents or assets requisitioned under section 132A. Moreover, section 158BD permits the application of the provisions of this Chapter only on the satisfaction of the Assessing Officer that the seized documents show undisclosed income of a person other than the person with respect to whom search was conducted or a requisition was made. It is trite law that such satisfaction must be recorded for the benefit of the assessee. In Manish Maheshwari v. Asstt. CIT (2007) 3 SCC 794, this Court summarized the perquisites of section 158BD of the Act as follows :

11. ... (i) Satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 of the Act; (ii) the books of account or other documents or assets seized or requisitioned had been handedover to the Assessing Officer having jurisdiction over such other person; and (iii) the Assessing Officer has proceeded under Section 158BC against such other person.

14. In Asstt. CIT v. Hotel Blue Moon [2010] 3 SCC 259 at page 264, one of us (H L Dattu J.), while explaining the purport of Chapter XIV-B of the Act, has observed that a search is the sine qua non for the block assessment; the special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous year falling in the block period, intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. Hence, from the afore-mentioned discussion it is clear that a valid search under section 132 of the Act is a sine qua non for invoking block assessment proceedings under Chapter XIV-B. Further, according to section 158BD of the Act, the Assessing Officer must record his or her satisfaction that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 of the Act."

11. Thus the law laid down on the subject is very clear that for taking recourse to block assessment under section 158BC in relation to the person not searched, whenever search has been conducted under section 132 or the documents have been requisitioned under section 132A, the Assessing Officer of the searched person needs to record his satisfaction that undisclosed income belongs to the person, other than the person with respect to whom search was carried out under Section 132 of the Act. He is also required to handover the books of account or other documents or assets seized, to the Assessing Officer having jurisdiction over such person and thereafter, the Assessing Officer who has the jurisdiction would proceed under Section 158BC against such person who has not been searched.

12. In the instant case, as could be noted from the record, search had been carried out in case of Jayraj Group. On examination of the files produced before us by the learned counsel Shri Parikh, it can be seen that the satisfaction recorded by the Assessing Officer is in the case of this very assessee. On pertinently questioned about the satisfaction of the Assessing Officer in case of the searched person (i.e. Jayraj Group) , Revenue is unable to point out any such satisfaction of Assessing Officer in case of Jayraj Group. It had been emphatically argued before us that the Assessing Officer being the same person i.e. Shri A.K. Sinha, such satisfaction when recorded in case of the present assessee should be considered and construed as a due compliance under the provisions and there would not be any occasion to handover the materials to himself being the very officer.

13. As far as second requirement of endowing the papers to the Assessing Officer having the jurisdiction to initiate the proceedings under section 158BC is concerned, learned counsel Mr. Parikh is right and is also not being disputed by the respondent that such formal order of transfer to oneself would neither be warranted nor in any manner affect the validity of the proceedings.

14. However, the vital and mandatory requirement of recording the satisfaction under section 158BD is concerned, as has been rightly noted by the Tribunal, such satisfaction is absent as far as Jayraj Group is concerned in whose case search under section 132 of the Income Tax Act has been carried out by the department. As such an essential requirement prior to initiating the proceedings under section 158BC, has not been fulfilled, the Tribunal is justified in quashing the notice issued against the assessee respondent and the assessment order passed pursuant thereto. As the order of the Tribunal is in consonance with the law laid down on the subject in case of Manish Maheshwari (supra), we find no reason to interfere with the same.

15. As the substantial question of law raised in this case is duly answered, nothing remains for entertaining this petition.

16. Tax Appeal is therefore, dismissed.

MGF Automobiles Ltd vs. ACIT (ITAT Delhi)

S. 153A: In case of completed assessments, addition can be made only if incriminating document found during search

Pursuant to a search and seizure operation u/s 132, the AO passed an assessment order u/s 153A in which he held that the accumulated loss and unabsorbed depreciation of the amalgamating company was not allowable u/s 72A of the Act. The assessee claimed that as the assessment for that year had not abated, an addition u/s 153A could be made only if there was incriminating material found during the search and as the issue of amalgamation was a part of the record in the original assessment, it could not be assessed u/s 153A. The CIT(A) rejected the claim. On appeal by the assessee to the Tribunal HELD allowing the appeal:

There are three possible circumstances that emerge on the date of initiation of search u/s 132 (1): (a) proceedings are pending; (b) proceedings are not pending but some incriminating material found in the course of search indicating undisclosed income and/or assets and (c) proceedings are not pending and no incriminating material has been found. In circumstance (a), since the proceedings are pending, they are abated and the AO gets a free hand to make the assessment. In circumstance (b), there is no question of abatement as the proceedings are not pending and the AO has to pass an assessment order u/s 153A to assess the undisclosed income. In circumstance (c), the AO has to pass an assessment order though as there is no incriminating material no income can be assessed. On facts, as the assessments were completed and there was no incriminating material found during the search, the AO was not entitled to make any addition (All Cargo Global Logistics 137 ITD 287 (Mum)(SB), Anil Kumar Bhatia 80 DTR 169 (Del), Pratibha Industries (ITAT Mum) & Gurinder Singh Bawa(ITAT Mum) followed)

Parliament Committee Hauls Up Dept For 'Adventurous' Assessment Orders

September 18th, 2013

The Parliamentary Public Accounts Committee has released a report on "Tax Administration" in which several far-reaching observations have been made regarding the functioning of the Income-tax department. One of the issues that irked the Committee was the tendency amongst the Assessing Officers of passing "adventurous" assessment orders. It noted that the arbitrary additions made in such "adventurous" orders were causing undue harassment to the taxpayers and had led to high levels of dis-satisfaction. It recorded the solemn statement of the Revenue Secretary that a system would be implemented which would provide disincentives against such orders. The department assured the Committee that it would henceforth inculcate in the Assessing Officers an attitude of passing "fair and judicious" assessment orders.

The Report makes for interesting reading because there are several other important suggestions made by the Committee to reform the tax administration of the Country.

IT: Where Assessing Officer reopened assessment of assessee after four years and Commissioner had simply affixed 'approved' at bottom of report prepared by Assessing Officer and accorded sanction under section 151(1), Commissioner had not accorded sanction after applying mind and, therefore, reassessment proceedings were bad in law

■■■

[2013] 37 taxmann.com 7 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'E'

Amarlal Bajaj

v.

Assistant Commissioner of Income-tax, Circle -19(1), Mumbai*

I.P. BANSAL, JUDICIAL MEMBER 
AND N.K. BILLAIYA, ACCOUNTANT MEMBER

IT APPEAL NOS. 534 & 611 (MUM.) OF 2004 
[ASSESSMENT YEAR 1995-96]

JULY  24, 2013 

Section 151, read with section 147, of the Income-tax Act, 1961 - Income escaping assessment - Sanction for issue of notice - Assessment year 1995-96 - Assessing Officer completed original assessment under section 143(3) - Subsequently he issued on assessee a notice under section 148 after four years seeking to reopen aforesaid assessment - Commissioner simply affixed 'approved' at bottom of report prepared by Assessing Officer and accorded sanction under section 151(1) for reopening assessment - Nowhere Commissioner had recorded a satisfaction note - Whether Commissioner had accorded sanction under section 151(1) after applying his mind and after recording his satisfaction - Held, no - Whether, therefore, reassessment proceedings were bad in law - Held, yes [Paras 6, 7 & 9] [In favour of assessee]

FACTS

 

■		For the assessment year 1995-96, the Assessing Officer completed original assessment of the assessee under section 143(3) on 30-3-1998. Subsequently he issued on the assessee a notice under section 148 on 27-3-2002, i.e., after four years from the end of the relevant assessment year seeking to reopen the aforesaid assessment. He rejected the objections raised by the assessee that the reopening of the assessment was without jurisdiction.
■		On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.
■		On second appeal, the assessee contended that (i) the reopening was in contravention of the provisions of section 151, (ii) it was mandatory for the Assessing Officer if he proposed to reopen an assessment after four years to take a prior sanction from the Commissioner, and (iii) while giving the sanction the Commissioner had mechanically accorded permission without applying his mind. The revenue, on the other hand, submitted that the approval granted by the Commissioner was not mechanical, on the contrary he had fully considered the facts of the case and after due consideration of the facts had given a direction for reopening of the case by writing the word 'approved'.

HELD

 

■		A simple reading of the provisions of section 151(1) with the proviso clearly show that no notice shall be issued under section 148 unless the Commissioner is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for the issue of notice, which means that the satisfaction of the Commissioner is paramount for which the least that is expected from the Commissioner is application of mind and due diligence before according sanction to the reasons recorded by the Assessing Officer. In the instant case, the Commissioner has simply affixed 'approved' at the bottom of the report prepared by the Assessing Officer. Nowhere the Commissioner has recorded his satisfaction. [Para 6]
■		Sections 147 and 148 are charter to the revenue to reopen earlier assessments and are, therefore, protected by safeguards against unnecessary harassment of the assessee. They are sword for the revenue and shield for the assessee. Section 151 guards that the sword of section 147 may not be used unless a superior officer is satisfied that the Assessing Officer has good and adequate reasons to invoke the provisions of section 147. The superior authority has to examine the reasons, material or grounds and to judge whether they are sufficient and adequate to the formation of the necessary belief on the part of the Assessing Officer. If, after applying his mind and also recording his reasons, the Commissioner is of the opinion that the Assessing Officer's belief is well reasoned and bona fide, he is to accord his sanction to the issue of notice under section 148. In the instant case, the Commissioner in the report submitted by Assessing Officer has simply put 'approved' and signed the report thereby giving sanction to the Assessing Officer. Nowhere the Commissioner has recorded a satisfaction note. Therefore, it cannot be said that the Commissioner has accorded sanction under section 151(1) after applying his mind and after recording his satisfaction. [Para 7]
■		Therefore, reassessment proceedings were bad in law and consequently the assessment was void ab initio. [Para 9]

CASE REVIEW

 

United Electrical Co. (P.) Ltd. v. CIT [2002] 125 Taxman 775 (Delhi) (para 9) followed.

CASES REFERRED TO

 

Chhugamal Rajput v. Chaliha [1971] 79 ITR 603 (SC) (para 3), Chanchal Kumar Chatterjee v. ITO [1974] 93 ITR 130 (Cal.) (para 3),Lakhmani Mewal Das v. ITO [1975] 99 ITR 296 (FB) (para 3), Arjun Singh v. CIT [2000] 246 ITR 363 (MP) (para 3) and United Electrical Co. (P.) Ltd. v. CIT [2002] 125 Taxman 775 (Delhi) (para 3).

Hiro Rai for the Appellant. Rajendra Kumar for the Respondent.

ORDER

 

N.K. Billaiya, Accountant Member - These cross appeals by the assessee and the Revenue are directed the very same order of the Ld. CIT(A)-XX, Mumbai dt. 18.11.2003 pertaining to A.Y. 1995-96. The assessee has raised 5 substantive grounds of appeal whereas revenue has raised in its appeal only one ground. Since both these appeals were heard together, they are disposed of by this common order for the sake of convenience and brevity.

ITA No. 611/Mum/2004 - Assessee's appeal

2. With ground No. 1, the assessee has questioned the validity of the reopening of the assessment u/s. 147 of the Act. It is the say of the assessee that the reopening of the assessment is without jurisdiction and void ab initio.

3. Facts of the case show that the return of income was filed by the assessee on 27.6.1996 declaring total income at Rs. 21,20,060/-. The assessment was completed u/s. 143(3) of the Act. Thereafter, the assessment was reopened by issue of notice u/s. 148 to examine issues regarding loans, expenses and the bills. The original assessment was completed on 30.3.1998 and the notices for reopening of the assessment were served upon the assessee on 27.3.2002. As the impugned assessment year is 1995-96, the reopening has been done after 4 years. The assessee has questioned the validity of this notice. The Ld. Counsel for the assessee vehemently submitted that the reopening is in contravention of the provisions of Sec. 151 of the Act. It is the say of the Ld. Counsel that it is mandatory for the AO if he proposes to reopen an assessment 4 years to take a prior sanction from the appropriate Commissioner. To substantiate, the Ld. Counsel relied upon the decision of the Hon'ble Supreme Court in the case of Chhugamal Rajput v. Chaliha [1971] 79 ITR 603. The Ld. Counsel for the assessee argued that while giving the sanction, the Commissioner has mechanically accorded permission without applying his mind as is evident from the copy of the order sheet submitted by the Ld. Departmental Representative which is on our record. The Ld. Counsel further relied upon the decision of the Hon'ble Calcutta High Court in the case of Chanchal Kumar Chatterjee v. ITO [1974] 93 ITR 130 and in the case of Lakhmani Mewal Das v.ITO [1975] 99 ITR 296. The Ld. Counsel further argued that the facts of the case are identical with the facts of the decision of the Hon'ble Madhya Pradesh High Court in the case of Arjun Singh v. CIT [2000] 246 ITR 363 and that of Delhi High Court in the case of United Electrical Co. (P.) Ltd. v. CIT [2002] 125 Taxman 775. It is the say of the Ld. Counsel that the entire reopening is in violation of the mandate provided u/s. 151 of the Act r.w. proviso therefore the assessment is invalid and should be held as such.

4. Per contra, the Ld. Departmental Representative submitted that the sanction has been granted by the CIT by due application of mind. It is the say of the Ld. DR that the approval granted by the CIT is not mechanical on the contrary the CIT has fully considered the facts of the case and after due consideration of the facts has given a direction for reopening of the case by writing the word "approved". Therefore, it cannot be said that the sanction was granted mechanically or without application of mind. The Ld. DR contended that all citations by the Ld. AR in connection with this issue are infructuous on this account.

5. We have considered the rival submissions and carefully perused the orders of the lower authorities and also the material evidences brought on record from both sides. We have also the benefit of perusing the order sheet entries by which the Ld. CIT has granted sanction. Let us first consider the relevant part of the provisions of Sec. 151 of the Act.

"151. (1) In a case where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment year, no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Assistant Commissioner or Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice :

Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice.

(2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Joint Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.

Explanation.—For the removal of doubts, it is hereby declared that the Joint Commissioner, the Commissioner or the Chief Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under section 148, need not issue such notice himself."

6. A simple reading of the provisions of Sec. 151(1) with the proviso clearly show that no such notice shall be issued unless the Commissioner is satisfied on the reasons recorded by the AO that it is a fit case for the issue of notice which means that the satisfaction of the Commissioner is paramount for which the least that is expected from the Commissioner is application of mind and due diligence before according sanction to the reasons recorded by the AO. In the present case, the order sheet which is placed on record show that the Commissioner has simply affixed "approved" at the bottom of the note sheet prepared by the ITO technical. Nowhere the CIT has recorded his satisfaction. In the case before the Hon'ble Supreme Court (supra) that on AO's report the Commissioner against the question "whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148 merely noted "Yes" and affixed his signature there under. On these facts, the Hon'ble Supreme Court observed that the important safeguards provided in sections 147 and 151 were lightly treated by the officer and the Commissioner. The Hon'ble Supreme Court further observed that the ITO could not have had reason to believe that income had escaped assessment by reasons of the appellant-firm's failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was therefore, invalid. It would be pertinent here to note the reasons recorded by the AO.

"Intimation has been received from DCIT-24(2), Mumbai vide his letters dt. 22nd February, 2002 that one Shri Nitin J. Rugmani assessed in his charge had arranged Hawala entries in arranging loans, expenses, gifts. During the year Shri Amar G. Bajaj, Prop. Of Mohan Brothers, 712, Linking Road, Khar (W), Mumbai-52 was the beneficiary of such loans, expenses and gifts. The modus-operandi was to collect cash from the parties to whom loans were given and cash was deposited into account of Shri Nitin J. Rugani and cheques were issued to the beneficiary of the loan transaction. In order to ensure that the money reached by cheques to the beneficiary Shri Nitin J. Rugani kept blank cheques of the third parties. The assessee Shri Amar G. Bajaj had taken benefit of such entries of loans, commission and bill discounting of Rs. 8,00,000/-, 11,21,243/- and 9,64,739/- respectively. The assessment was completed u/s. 143(3) of the I.T. Act on 31st March, 1998 by DCIT-Spl. Rg. 40, Mumbai. It is seen from records that the aforesaid points have not been verified in the assessment. I have therefore reason to believe that by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, income has escaped assessment within the meaning of proviso to Sec. 147 and Explanation 2(c)(i) of the Income-tax Act, 1961."

7. In the light of the above mentioned reasons, in our considerate view, Sections 147 and 148 are charter to the Revenue to reopen earlier assessments and are, therefore protected by safeguards against unnecessary harassment of the assessee. They are sword for the Revenue and shield for the assessee. Section 151 guards that the sword of Sec. 147 may not be used unless a superior officer is satisfied that the AO has good and adequate reasons to invoke the provisions of Sec. 147. The superior authority has to examine the reasons, material or grounds and to judge whether they are sufficient and adequate to the formation of the necessary belief on the part of the assessing officer. If, after applying his mind and also recording his reasons, howsoever briefly, the Commissioner is of the opinion that the AO's belief is well reasoned and bona fide, he is to accord his sanction to the issue of notice u/s. 148 of the Act. In the instant case, we find from the perusal of the order sheet which is on record, the Commissioner has simply put "approved" and signed the report thereby giving sanction to the AO. Nowhere the Commissioner has recorded a satisfaction note not even in brief. Therefore, it cannot be said that the Commissioner has accorded sanction after applying his mind and after recording his satisfaction.

8. Hon'ble Delhi High Court in the case of United Electrical Co. (P.) Ltd. (supra) has held that "the proviso to sub-section (1) of section151of the Act provides that after the expiry of four years from the end of the relevant assessment year, notice under section 148 shall not be issued unless the Chief Commissioner or the Commissioner, as the case may be, is satisfied, on the reasons recorded by the Assessing Officer concerned, that it is a fit case for the issue of such notice. These are some in-builts safeguards to prevent arbitrary exercise of power by an Assessing Officer to fiddle with the completed assessment". The Hon'ble High Court further observed that "what disturbs us more is that even the Additional Commissioner has accorded his approval for action under section 147 mechanically. We feel that if the Additional Commissioner had cared to go through the statement of the said parties, perhaps he would not have granted his approval, which was mandatory in terms of the proviso to sub-section (1) of section 151 of the Act as the action under section 147 was being initiated after the expiry of four years from the end of the relevant assessment year. The power vested in the Commissioner to grant or not to grant approval is coupled with a duty. The Commissioner is required to apply his mind to the proposal put up to him for approval in the light of the material relied upon by the Assessing Officer. The said power cannot be exercised casually and in a routine manner. We are constrained to observe that in the present case there has been no application of mind by the Additional Commissioner before granting the approval".

9. The observations of the Hon'ble High Court are very much relevant in the instant case as in the present case also the Commissioner has simply mentioned "approved" to the report submitted by the concerned AO. In the light of the ratios/observations of the Hon'ble High Court mentioned hereinabove, we have no hesitation to hold that the reopening proceedings vis-à-vis provisions of Sec. 151 are bad in law and the assessment has to be declared as void ab initio. Ground No. 1 of assessee's appeal is allowed.

10. As we have held that the reassessment is bad in law, we do not find it necessary to decide other issues which are on merits of the case.

11. In the result, the appeal filed by the assessee is allowed and the cross appeal filed by the Revenue is dismissed.

IT : Where assessee did not challenge manner of computation of book profit by Assessing Officer before Tribunal, it now in fourth appeal could not be allowed and permitted to raise contention that adjustments required for computing book profit under section 115JA had been wrongly made by Assessing Officer

■■■

[2013] 36 taxmann.com 577 (Delhi)

HIGH COURT OF DELHI

Ester Industries Ltd.

v.

Commissioner of Income-tax*

SANJIV KHANNA AND 
SANJEEV SACHDEVA, JJ.

IT APPEAL NO. 574 OF 2009†

JULY  29, 2013 

Section 115JA, read with section 260A, of the Income-tax Act, 1961 - Minimum alternate tax [Computation of book profit] - Assessment year 1997-98 - Assessee-company did not compute taxable income under provisions of section 115JA and attached a note with return that said provisions were not applicable - Assessing Officer calculated tax payable under section 115JA at Rs. 4.07 crores - Both Commissioner (Appeals) and Tribunal upheld order of Assessing Officer - Assessee submitted before High Court that adjustments required for computing book profit under section 115JA had been wrongly made by Assessing Officer - Before Tribunal, assessee did not challenge manner of computation of book profit by Assessing Officer - Whether in view of aforesaid position, assessee now in fourth appeal could not be allowed and permitted to raise contention with regard to computation of book profit under section 115JA - Held, yes [Para 9] [In favour of revenue]

FACTS

 

■		For the assessment year 1997-98, the assessee-company declared the taxable income as nil. It did not compute taxable income under MAT provisions, i.e., section 115JA and attached a specific note with the return that the said provisions were not applicable.
■		The Assessing Officer passed regular assessment order on the assessee and calculated the tax payable under section 115JA at Rs.4.07 crores.
■		Both the Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.
■		On appeal to High Court, the assessee contended that adjustments required for computing book profit under section 115JA had been wrongly made by the Assessing Officer.

HELD

 

■		It is noticeable from the grounds of appeal raised before the Tribunal that the assessee never challenged the computation made under section 115JA or challenged or questioned the assessment order on the ground that adjustments had not been made as required and mandated by law. There is no discussion in the impugned order of the Tribunal on the question of adjustments, which should be permitted and allowed under section 115JA or computation of taxable book profit under section 115JA. It is apparent and crystal clear that this issue/question was not raised before the Tribunal. [Para 8]
■		In view of the aforesaid position, the assessee now in the fourth appeal cannot be allowed and permitted to raise the contention with regard to computation of book profit under section 115JA and set the ball rolling back once again to the Assessing Officer after lapse of several years. Therefore, the appeal of the assessee was liable to be dismissed. [Para 9]

R. Santhanam for the Appellant. Sanjeev Sabharwal for the Respondent.

ORDER

 

Sanjiv Khanna, J. - This appeal by the assessee-M/s Ester Industries Limited impugns order of the Income Tax Appellate Tribunal dated 14th December, 2007, which relates to Assessment Year 1997-98.

2. Learned counsel for the appellant submits that adjustments required for computing book profits under Section 115JA of the Income Tax Act, 1961 (Act, for short) have been wrongly made by the Assessing Officer and benefit of Section 80HHC has not been granted.

3. For the assessment year in question, the assessee had filed return on 28th November, 1997 declaring "nil" taxable income under the normal provisions. The assessee did not compute taxable income under MAT provisions, i.e., Section 115JA and a specific note was attached that the said provisions were not applicable.

4. The Assessing Officer passed an order under Section 143(1)(a) of the Act making adjustments and computing 30% of the book profit at Rs. 4,07,72,346/-. This was made subject matter of challenge in the appellate proceedings but we need not refer to the orders passed as this aspect is not relevant.

5. In the meanwhile, the Assessing Officer passed a regular assessment order and calculated the tax payable under Section 115JA at Rs. 4,07,72,346/-. The Assessing Officer directed levy of interest under Sections 234B and 234C and observed that penalty proceedings under Section 271(1)(c) had already been initiated.

6. The assessee filed first appeal but was not successful before the Commissioner of Income Tax (Appeals). Order passed by the first appellate authority has, however, not been placed on record. The assessee thereupon filed second appeal before the Income Tax Appellate Tribunal raising the following grounds:—

"1.		In upholding Rs.14,175/- U/s 40A(3) of the Income Tax Act illegally and unjustifiably.
2.		In disallowing the appellant's claim for gratuity liability of Rs. 22,48,530/-.
3.		In confirming a disallowance of 50% of the expenditure as if it is in the nature of entertainment when it is not at all falling U/s 37(2) as entertainment expenditure for disallowance.
4.		In confirming an illegal demand of Rs. 1,75,32,108/- towards Minimum Alternate Tax U/s 115JA ignoring the fact that U/s 115 JAA the deposit of any amount will be considered as available as credit and in the absence of any deposit, the credit would be denied and in the absence of any tax liability being determined in the normal assessment and adjusted within the 5 years period, the entire amount of credit would be swallowed by the Government and non-payment of any amount towards interest-free credit cannot, therefore, be considered as tax payable by the appellant and hence the imposition of Minimum Alternate Tax on the appellant is clearly illegal and unauthorised by law and must be set aside and quashed.
5.		In not directing the disallowance U/s 43 43B of Rs. 72,17,146/- to be deleted instead of remanding the matter to the Assessing Officer who does not act in a fair and just manner."

7. Subsequently, an application raising two additional grounds was filed but the said application was rejected by the tribunal by the impugned order. Additional grounds raised but were not entertained read:—

"1.		On the facts and in the circumstances of the case, the entire amount of MAT sought to be levied and collected is required to be given credit mandatorily and the amount of such credit ought to be refunded with interest to the assessee in the event of there being no such liability in the next five years in the case of the appellant, the refund of the entire amount collected with interest being granted to the appellant.
2.		On the facts and in the circumstances of the case, the authorities below have erred, both on facts and in law, in disregarding the provisions for grant of credit u/s 115 JAA and the consequent non-existence of liability to MAT during the five years following the year 1997-98 and hence, the orders passed by the authorities below and denied refund with interest to the appellant cannot be upheld."

8. It is noticeable from the grounds of appeal raised before the tribunal as well as the additional grounds that the assessee never challenged the computation made under Section 115JA or challenged or questioned the assessment order on the ground that adjustments had not been made, as required and mandated by law. The assessee in the grounds of appeal as well as additional grounds did not challenge the assessment on the said ground. To this extent, he did not raise grievance or protest. Tribunal in the impugned order dated 13th/14th December, 2007 has dealt with the grounds as originally raised on merits and has dismissed the appeal of the assessee. There is no discussion in the impugned order on the question of adjustments, which should be permitted and allowed under Section 115JA or computation of taxable book profits under Section 115JA. It is apparent and crystal clear that this issue/question was not raised before the tribunal as the petitioner, who appears, did not want to raise the said contention and issue. The tribunal in the impugned order has specifically recorded as under:—

"The grounds of appeal raised by the assessee does (sic) do not challenge the manner of determination of book profits under Section 115JA of the Act."

9. In view of the aforesaid position, we do not think the assessee can now in the fourth appeal, (maintainable only on the ground of substantial question of law arising out of the order of the tribunal) can be allowed and permitted to raise this contention and set the ball rolling back once again to the Assessing Officer, after lapse of several years. The appeal relates to the Assessment Year 1997-98. Allowing the appellant to now question the computation will be allowing a person to raise stale issue and to question a decision which was accepted. In these circumstances, we do not think the appellant-assessee should be permitted and allowed to raise this ground belatedly at this stage. The issue was not raised before the tribunal, and has not been dealt and decided by them. The appeal is accordingly dismissed.

IT : Expression 'a residential house' as appearing in section 54F cannot be interpreted in a manner to suggest that exemption would be restricted to a single residential unit

■■■

[2013] 36 taxmann.com 542 (Hyderabad - Trib.)

IN THE ITAT HYDERABAD BENCH 'A'

Vittal Krishna Conjeevaram

v.

Income-tax Officer, Ward 10(4), Hyderabad*

CHANDRA POOJARI, ACCOUNTANT MEMBER 
AND SAKTIJIT DEY, JUDICIAL MEMBER

IT APPEAL NOS. 422 TO 424 (HYD.) OF 2013
[ASSESSMENT YEAR 2009-10]

JULY  10, 2013 

Section 54F, read with section 54, of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house [Number of residential units] - Assessment year 2009-10 - Whether expression 'a residential house' appearing in sections 54 and 54F has to be understood in a sense that building should be of a residential nature and word 'a' should not be understood to indicate a singular number - Held, yes - Assessee, owner of a residential property, entered into a development agreement for construction of flats with a developer - Under agreement, assessee received seven flats towards his share - He claimed exemption under section 54F on entire amount of capital gain - Whether assessee could be allowed exemption under section 54F in respect of all seven flats - Held, yes [Paras 8 and 9][In favour of assessee]

Words and Phrases : Expression 'a residential house' as occurring in section 54F of the Income-tax Act, 1961

FACTS

 

■		The assessee was a co-owner of a residential property. He, along with the other co-owners, entered into a development agreement for construction of flats with a developer.
■		As per development agreement, the owner had to transfer 50 per cent of his land for super-structure received as consideration. The assessee received 7 flats towards his share.
■		He claimed exemption under section 54 on the entire amount of capital gains.
■		Assessing Officer rejected assessee's claim under section 54 holding that since assessee transferred long-term asset in the form of open land, without any building, no exemption could be allowed under section 54. He, however, held that the assessee was entitled to exemption under section 54F but only in respect of one flat out of the seven flats.
■		The Commissioner (Appeals) upheld the order of the Assessing Officer.
■		The assessee filed appeal before the Tribunal.

HELD

 

■		The reading of sections 54 and 54F makes it clear that both the provisions are pari materia excepting the nature of long-term capital asset which is subject to transfer. While in the case of section 54, it is a building or a land appurtenant thereto which is in the nature of a residential house, in case of section 54F, the long-term capital asset is an asset other than a residential house. However, both the sections speak of either purchase or construction of 'a residential house'. The Assessing Officer as well as the Commissioner (Appeals), while interpreting the expression 'a residential house', have come to a conclusion that such expression would mean a single residential unit 'Flat' and not all the seven flats and, accordingly, have restricted the exemption under section 54F to the cost of one flat only. However, the Karnataka High Court, while interpreting the words 'a residential house' as appearing in section 54 in case of CIT v. Smt. K.G. Rukmini Amma [2011] 331 ITR 211/196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.) has held that the expression 'a residential house' as appearing in section 54 cannot be interpreted in a manner to suggest that the exemption would be restricted to a single residential unit. The Karnataka High Court held that 'a residential house' as mentioned in section 54(1) has to be understood in a sense that the building should be of a residential nature and the word 'a' should not be understood to indicate a singular number. The jurisdictional High Court in the case of CIT v. Syed Ali Adil [2013] 352 ITR 418/215 Taxman 283/33 taxmann.com 212 (AP) agreed with the aforesaid view of the Karnataka High Court. [Para 8]
■		Considering the totality of the facts and circumstances in the light of consistent view of different High Courts including the jurisdictional High Court, the lower authorities were not correct in restricting the exemption under section 54F to only one flat. In the aforesaid view of the matter, the assessee is entitled to exemption under section 54F in respect of all the seven flats. [Para 9]

CASE REVIEW

 

CIT v. Smt. K.G. Rukmini Amma [2011] 331 ITR 211/196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.), CIT v. Syed Ali Adil [2013] 352 ITR 418/215 Taxman 283/33 taxmann.com 212 (AP) (para 9) followed.

CASES REFERRED TO

 

CIT v. Syed Ali Adil [2013] 352 ITR 418/215 Taxman 283/33 taxmann.com 212 (AP) (para 5), CIT v. Gita Duggal [2013] 30 taxmann.com 30/214 Taxman 51 (Delhi) (para 5), ITO v. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) (para 6), ITO v. Smt. Rohini Reddy [2010] 122 ITD 1 (Hyd.) (para 6), CIT v. Smt. K.G. Rukmini Amma [2011] 331 ITR 211/196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.) (para 8),CIT v. D. Anand Basappa [2009] 309 ITR 329/180 Taxman 4 (Kar.) (para 8) and CIT v. T.N. Arvind Reddy [1979] 120 ITR 46/2 Taxman 541 (SC) (para 9).

K.K. Gupta for the Appellant. R. Laxman for the Respondent.

ORDER

 

Saktijit Dey, Judicial Member - These appeals are filed by different assessees against separate Orders of the CIT(A). Since, common grounds are raised in all these appeals, these appeals are clubbed together, heard together and are disposed of by consolidated order. For the sake of convenience, we reproduce grounds raised in ITA.No.422/Hyd/2013 as under :

"1.		The appellant has entered into development agreement in respect of a joint residential property at Boiguda, Secunderabad. The fact of existence of residential house is evidenced by the 'schedule to the development agreement' which contains reference to the dwelling house. Further the fact is supported by municipal tax payment receipts. The very fact of assessment to municipal tax proves the existence of dwelling units. The order of Urban land ceiling authority clearly confirms the fact of existence of 'dwelling units'.
		No plausible reasons were given by the appellate Commissioner for not accepting the factual evidence.
2.		The assumption that the property that was given for development is only plot of land, is based on the premise that the deed of conveyance executed by the estate officer to convert leasehold land to freehold land in favour of the appellant does not mention the existence of the residential property. The residential structures on the lease hold land belongs to the appellant, whereas the land belongs to the Government. The Government could not have transferred what it did not own, and therefore sale deed was executed in favour of the appellant only for land.
3.		The appellant is entitled for exemption u/s. 54 Plurality of the flats (received as consideration) should be construed as a residential house for the purpose of exemption u/s. 54, following the Honourable Karnataka High Court in the case of Rukminiyamma 331 ITR 221. The Hon'ble Court considered all the available decisions of ITAT. Its decision is to be followed.
4.		The assumption of the values of 'flats' received as consideration which is on high side, is not correct and baseless. Similarly the fair market value in 1980 for the purpose of cost of acquisition is very low and not justified.
		On the above and other grounds that will be filed in the course of appeal, the appellant requests to hold that the exemption of entire capital gains is to be granted u/s. 54".

2. ITA No.422/Hyd/2013 : Since, facts are identical in all the appeals, we will deal with the facts taken from this appeal. As can be seen from the grounds raised by the assessee, the issue raised in ground Nos. 1, 2 and 3 relates to the nature of long term capital asset transferred by the assessee i.e., whether it is simply a land or a land with building and secondly whether the assessee is eligible to claim exemption under section 54 of the I.T. Act, 1961.

3. Briefly, the facts relating to the aforesaid issue are that the assessee is an individual. The assessee is a co-owner of a residential property bearing Nos. 6-2-97 to 100 and 6-2-102 to 110 situated at Boiguda, Secunderabad admeasuring about 6600 sq. yards. The assessee along with the other co-owners entered into a development agreement for construction of flats with a developer. Assessee's share in the property was 1818 sq. yards and as per the development agreement the owner has to transfer 50% of his land for the super-structures he will receive as consideration. Thus, under the development agreement, the assessee received 7 flats towards his share with a constructed area of 11704 sq. feet. The assessee worked out the value of the flats received as his share at Rs. 27 lakhs ( @ Rs. 239.69 per sq. feet) and worked out capital gains on Rs.15,57,534/- after deducting the amount of Rs. 11,42,466/- as index cost of acquisition. The assessee claimed exemption under section 54 of the Act on the entire amount of capital gains of Rs. 15,57,534/- in the return filed by him for the impugned assessment year. The Assessing Officer, in course of scrutiny assessment proceeding, after obtaining information from the builder computed the value of the constructed area received by the assessee at Rs. 98,89,880/- ( @ Rs. 845/-per sq. feet ) and worked out the net capital gain at Rs. 96,97,820/- after allowing the indexed cost of acquisition of Rs. 1,92,060/- based on the fair market value of the land as on 1.4.1981. So far as the exemption under section 54 of the Act is concerned, the Assessing Officer rejected the assessee's claim by holding that since long term asset transferred by the assessee is an open land without any building, no exemption under section 54 can be granted to the assessee. The Assessing Officer, however, held that the assessee is entitled to exemption under section 54F of the Act only in respect of one flat out of the seven flats and thereby, restricted the exemption under section 54F of the Act to an amount of Rs. 14,84,665/-being cost of one flat. Accordingly, the Assessing Officer completed the assessment by determining the long term capital gain at Rs. 82,32,155/-. The assessee being aggrieved of the assessment order passed, preferred appeal before the CIT(A).

4. The CIT(A) also concurred with the finding of the Assessing Officer by holding that the assessee is entitled for exemption under section 54F of the Act and that too only in respect of one residential flat.

5. The learned AR has filed written submissions before us contending as under :

1.		The Assessing Officer has restricted the exemption to 'one residential flat' u/s. 54F holding that the residential property that was given for development is only 'land'. The appellant is has produced all the evidence to establish the fact that the property was 'land with residential houses'. The paper book contains copies of the documents filed before the Assessing Officer and CIT (Appeals).
2.		Residential house' - that was referred to in the sections 54 and 54F, is now explained that it is not residential unit, as coined by the department. The Hon'ble High Court in the case of CIT v. Syed Ali Adil [2013] 352 ITR 418/215 Taxman 283/33 taxmann.com 212 (AP), While agreeing with the view of High Court of Karnataka, explained that the expression 'residential building' should be of residential nature'. It does not refer to number of units.
3.		Extract from the decision :—
		".... As held in D. Ananda Basappa's case [2009] 309 ITR 329 (Kar.) by the Karnataka High Court, the expression "a residential house" in section 54(1) of the Act has to be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT v. Smt. K.G. Rukminiamma[2011] 331 ITR 211 (Kar.) where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all the four residential flats constituted "a residential house" for the purpose of section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of section 54. Admittedly, the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G. Vyas' case (supra), P.E. Ramakrishna, HUF's case (supra) and Prem Prakash Bhutani's case (supra) wherein it was held that exemption under section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under section 54 even if such independent units were on different floors. The decision in Ms. Sushila M. Jhaveri's case [2007] 292 ITR (AT) 1 (Mumbai) (SB) holding that only one residential house should be given the relief under section 54 does not appear to be correct and we disapprave of it. We agree with the interpretation placed on section 54 by the High Court of Karnataka in D. Ananda Bassappa'scase [2009] 309 ITR 329 (Kar.) and Smt. K.G. Rukminiamma's case [2011] 331 ITR 211 (Kar.) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G. Vyas (supra), P.C. Ramakrishna, HUF (supra) and Prem Prakash Bhutani(supra). We, therefore, hold that the Commissioner of Income-tax (Appeals) was correct in setting aside the order of the Assessing Officer and the Tribunal rightly confirmed the decision of the Commissioner of Income-tax (Appeals)."
4.		The expression residential house u/ss 54 and 54F was further explained by the hon'ble High Court of Delhi in the case of CIT v.Gita Duggal [2013] 30 taxmann.com 230/214 Taxman 51. [Paper book contains the judgment copy]
		".... Section 54/54F uses the expression "a residential house". The expression used is not "a residential unit". This is a new concept introduced by the Assessing Officer into the section. Section 54154F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should before the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different f1oors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited.
5.		The appellant submits that the exemption of total gain in his case, is to be given u/s. 54 or 54F in the light of the above verdicts.

6. The learned D.R. on the other hand, submitted that the language employed in sections 54 and 54F of the Act refers to "a residential house" which in other words, mean that the assessee is entitled for exemption in respect of one residential unit. In support of such contention, the learned D.R. relied upon the decision of the ITAT, Mumbai, Special Bench in the case of ITO v. Sushila M. Jhaveri [2007] 107 ITD 327. So far as the nature of the asset transferred is concerned, the learned D.R. submitted that there is nothing on record to suggest that the assessee has transferred a residential house so as to entitle him to exemption under section 54 of the Act. He further submitted that residential house would mean a place fit for human habitation. In this context, the learned D.R. relied upon a decision of ITAT, Hyderabad Bench in case of ITO v. Smt. Rohini Reddy [2010] 122 ITD 1.

7. We have considered the submissions of the assessee and perused the materials on record. We have also applied our mind to the decisions relied upon by the parties. As can be seen from the written submissions filed by the learned A.R. he has mainly confined his arguments to the interpretation of the revenue authorities with regard to the expression "a residential house" as appears in section 54 as well as sec. 54F of the Act. At this stage, it would be appropriate to look into the provisions as contained under sections 54 and 54F of the Act. Section 54 provides that in case of an assessee being an individual or HUF where capital gains arises from the transfer of a long term capital asset being building or land appurtenant thereto and being a residential house the income of which is chargeable under the head "Income from House Property" and if the assessee within a period of one year before or two years after that date on which, the transfer took place purchased or has within a period of three years after that date, constructed a residential house, then no capital gain will be charged to tax. Section 54F provides that in a case where the assessee has transferred any long term capital asset not being a residential house and within a period of one year before or two years after the date on which the transfer took place, purchased or within a period of 3 years after that date, constructed a residential house, then the capital gain will not be charged to tax.

8. The reading of the aforesaid provisions makes it clear that both the provisions are pari materia excepting the nature of long term capital asset which is subject to transfer. While in the case of section 54 of the Act, it is a building or a land appurtenant thereto which is in the nature of a residential house in case of section 54F, the long term capital asset is an asset other than a residential house. However, both the sections speak of either purchase or construction of "a residential house". The Assessing Officer as well as the CIT(A) while interpreting the expression 'a residential house', have come to a conclusion that such expression would mean a single residential unit "Flat" and not all the seven flats and accordingly have restricted the exemption under section 54F to the cost of one flat only. However, the Hon'ble Karnataka High Court while interpreting the words 'a residential house' as appears in section 54 of the Act in case of CIT v. Smt. K.G. Rukmini Amma [2011] 331 ITR 211/196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.) following its earlier decision in case of CIT v. D. Anand Basappa [2009] 309 ITR 329/180 Taxman 4 (Kar.) have held that the expression "a residential house" as appears in section 54 of the Act, cannot be interpreted in a manner to suggest that the exemption would be restricted to a single residential unit. The Hon'ble Karnataka High Court held that "a residential house" as mentioned in section 54(1) of the Act, has to be understood in a sense that the building should be of a residential nature and the word "a" should not be understood to indicate a singular number. The Hon'ble jurisdictional High Court in the case of Syed Ali Adil (supra), while agreeing with the aforesaid view of the Hon'ble Karnataka High Court held as under :

"As held in D. Ananda Basappa's case [2009] 309 ITR 329 (Kar.) by the Karnataka High Court, the expression "a residential house" in section 54(1) of the Act has to be understood in a sense that the building should be of residential nature and "a" should not be understood to indicate a singular number and where an assessee had purchased two residential flats, he is entitled to exemption under section 54 in respect of capital gains on sale of its property on purchase of both the flats, more so, when the flats are situated side by side and the builder has effected modification of the flats to make it as one unit, despite the fact that the flats were purchased by separate sale deeds. This decision was followed by the Karnataka High Court in CIT v. Smt. K.G. Rukminiamma [2011] 331 ITR 211 (Kar.) where a residential house was transferred and four flats in a single residential complex were purchased by the assessee, it was held that all the four residential flats constituted "a residential house" for the purpose of section 54 and that the four residential flats cannot be construed as four residential houses for the purpose of section 54. Admittedly, the two flats purchased by the assessee are adjacent to one another and have a common meeting point. In the impugned order, the Tribunal has also relied upon the decisions in K.G. Vyas case (supra), P.E. Ramakrishna HUF's case (supra) and Prem Prakash Bhutani's case (supra) wherein it was held that exemption under section 54 only requires that the property should be of residential nature and the fact that the residential house consists of several independent units cannot be an impediment to grant relief under section 54 even if such independent units were on different floors. The decision in Ms. Sushila M. Jhaveri's case [2007] 292 ITR (AT) 1 (Mumbai) (SB) holding that only one residential house should be given the relief under section 54 does not appear to be correct and we disapprave of it. We agree with the interpretation placed on section 54 by the High Court of Karnataka in D. Ananda Bassappa's case [2009] 309 ITR 329 (Kar.) and Smt. K.G. Rukminiamma's case [2011] 331 ITR 211 (Kar.) and the decisions of the Mumbai, Chennai and Delhi Benches of the Tribunal in K.G. Vyas (supra), P.C. Ramakrishna, HUF (supra) and Prem Prakash Bhutani (supra). We, therefore, hold that the Commissioner of Income-tax (Appeals) was correct in setting aside the order of the Assessing Officer and the Tribunal rightly confirmed the decision of the Commissioner of Income-tax (Appeals)."

9. The Hon'ble Delhi High Court in the case of Gita Duggal (supra) while interpreting the words "a residential house" as appeared in sections 54 and 54F of the Act also expressed the same view by following the ratio laid down by the Hon'ble Karnataka High Court (supra). So far as the decision of the ITAT, Special Bench, Mumbai in the case of Suseela M. Zhaveri (supra) is concerned, a perusal of the decision of the ITAT, Special Bench does reveal the fact that the Special Bench has held that the expression 'a residential house' appearing in sections 54 and 54F of the Act, would mean that exemption would be allowable in respect of investment in a single residential house only. However, it is to be seen that the aforesaid decision of the ITAT, Mumbai Special Bench has been disapproved by the jurisdictional High Court in case of CIT v.Syed Ali Adil. (supra). Hence, the decision of the ITAT, Mumbai Special Bench no longer can be considered to be a good law. Therefore, considering the totality of the facts and circumstances in the light of consistent view of different High Courts including the jurisdictional High Court, we are of the view that the lower authorities were not correct in restricting the exemption under section 54F of the Act to only one flat by interpreting the words "a residential house" in a manner which has been held to be an incorrect interpretation in various judicial precedents as referred to hereinabove. In the aforesaid view of the matter, in our considered opinion, the assessee is entitled for exemption under section 54F of the Act in respect of all the seven flats. We, therefore, set aside the Order of the CIT(A) and direct the Assessing Officer to compute capital gain, if any, after allowing exemption under section 54F of the Act in respect of all the seven flats which were received by the assessee under the development agreement. In view of our aforesaid finding, the other issue as to whether the long term capital asset transferred by the assessee under development agreement was simply a land as held by the department or a residential house along with land as claimed by the assessee so as to entitle it for exemption under section 54 of the Act has become inconsequential and therefore, not required to be adjudicated upon. Resultantly, the decision relied upon by the learned D.R. in the case of Smt. Rohini Reddy (supra) and the decision of Hon'ble Supreme Court in the case of CIT vs. T.N. Arvind Reddy [1979] 120 ITR 46/2 Taxman 541 would not apply to the facts of the present case.

10. So far as ground No. 4 is concerned, the assessee has not canvassed any argument in respect of the aforesaid ground either orally at the time of hearing or in the written submission. Hence, it is, presumed that the assessee has nothing to say in respect of the aforesaid ground. Accordingly, the ground raised is dismissed.

11. ITA. No.423/Hyd/2013 and ITA.No.424/Hyd/2013 : Following our decision in ground Nos. 1, 2 and 3 of ITA.No.422/Hyd/2013 dealt with hereinbefore, we set aside the Orders of the CIT(A) in these appeals also and direct the Assessing Officer to compute the capital gain, if any, after allowing exemption under section 54F of the Act in respect of all the flats received by the respective assessees.

12. In the result, all the appeals viz., ITA. No. 422, 423 & 424/Hyd/2013 are partly allowed.

VARSHA

---

*In favour of assessee.

In G.M. Mittal Stainless Steel (P) Ltd. [ 2002-TIOL-220-SC-IT ], the Supreme Court had held unequivocally that the decision of the jurisdictional High Court is binding on the Revenue Authorities within the state and that, Revenue Authorities cannot refuse to follow the jurisdictional High Court's decision on the ground that the decision of some other High Court was pending disposal before the Supreme Court

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

If land within 8 kms of municipality limits deemed to be an 'agricultural land'there is no relevant notification,

• Thursday, August 2, 2012, 16:36
• Income Tax Case Laws
• Judiciary

It is not in dispute that the Central Government has not issued any notification in terms of section 2(14)(iii)(b). An agricultural land is not a capital asset; it becomes a capital asset if it is the land located under section 2(14)(iii)(a) & (b). Section 2(14)(iii)(a) covers a situation when the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee town committee of cantonment committee and which has a population of not less than 10,000.

Section 2(14)(iii)(b) covers the situation where the subject land is not only located within the distance of 8 kms. from the local limits, which is covered by clause (a) to section 2(14)(iii), but also requires the fulfilment of the condition that the Central Government has issued a notification under this clause for the purpose of including the area up to 8 kms. from the municipal limits to render the land as a 'Capital Asset'. In the instant case, it is not in dispute that the subject land is not located within the limits of Municipal Corporation therefore, clause (a) to section 2(14)(iii) is not attracted.

However, though it is contended by revenue that it is located within 8 kms. within the municipal limits of City Municipal Corporation, in the absence of any notification issued under clause (b) to section 2(14)(iii) it cannot be looked in as a capital asset within the meaning of section 2(14)(iii)(b) also and, therefore, though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a 'capital asset' by giving the very reason the conclusion arrived at by the Tribunal is nevertheless the correct conclusion.

HIGH COURT OF KARNATAKA

Commissioner of Income tax

v.

Madhukumar N. (HUF)

IT Appeal NO. 396 OF 2009

MARCH 29, 2012

UDGMENT

---

D.V. Shylendra Kumar, J. – In this appeal under Section 260A of the Income tax Act, 1961 [for short, 'the Act'] the revenue has questioned the correctness of the order of the Income Tax Appellate Tribunal, Bangalore "C Bench, Bangalore passed on 27.02.2009 in ITA/No. 1043(Bang)/2008.

2. The assessee is a Hindu undivided family and the assessment year is 2005-06. The question is as to whether the agricultural land belonging to the family sold on 02.03.2005 for a total consideration of Rs. 52,00,000/- resulted in long term capital gain in a sum of Rs. 48,94,784/-.

3. The assessee claimed that the amount does not amount to capital gain as the sale was attributable to the agricultural land and not coming either within the limits of any municipality or within the distance of 8 kms, from any notified municipality or urban area.

4. This was the bone of contention between the assessee and the revenue and while the revenue took a stand that the subjected land was located within 8 kms,, of Dasarahalli City Municipal Council, The Tribunal chose to accept the version of the assessee placing reliance on the certificate issued by Dasanapura Gram Panchayath to the effect that the population of Adakemaranahalli village within whose limits the land was located was less than 10,000 and therefore opined that the subject land cannot be considered as one coming within the definition of capital asset under Section 2(14)(iii)(a) & (b) of the Act.

5. Aggrieved by this order of the Tribunal, the present appeal by the revenue.

6. Sri. K.V. Aravind, learned standing counsel appearing for the appellants revenue has vehemently urged that the Tribunal has committed a mistake in choosing to rely upon a certificate issued by Dasanapura Gram Panchayath and ignoring the factum of the village being within 8 kms. limits of Dasarahalli City Municipal Council.

7. However, it is not in dispute that the Central Government has not issued any notification in terms of Section 2(14)(iii)(b) of the Act.

8. Mr. Arvind, learned counsel for the appellants places reliance on Section 2(14)(iii)(a) of the Act to contend that proposed Dasarahalli City Municipal Council is covered under Clause (a) of the Act i.e., lands within the limits of 8 kmts., from the boundary of the city municipal council etc.

9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under Section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.

10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a notification under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a "Capital Asset.

11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.

12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of Section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a 'capital asset' be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion.

13. Therefore, we find no need to interfere in this appeal.

Accordingly the appeal is dismissed.

Sec. 12A registration is not subordinate to ability of applicant for sec. 11 exemption

In the instant case the tribunal has examined that whether the question of exemptions under sections 11 and 12 of the Act can be raised before grant of registration. The Tribunal in this regard held that: a) the question of exemption under section 11 and 12 would come only when the said exemptions are claimed by the trust at the time when it is assessed to tax; b) language of the section 12AA does not show that in order to be able to get registration, there is necessity of first establishing as to how the concerned institution would be able to claim the exemptions under section 11 or 12 of the Ac. Hence to get registration, it is not necessary to first establish that the institution would be able to claim the exemptions under Section 11 or 12 of the Act - TISHIR SHIKSHA PRASAR SAMITI v. CIT [2012] 21 taxmann.com 525 (Agra - Trib.)

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