TMI Blog2004 (7) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... uary 28, 2003, passed by the Income-tax Appellate Tribunal, Nagpur Bench, Nagpur, whereby appeal preferred by the appellant-assessee against the order of the Commissioner of Income-tax (Appeals) was partly allowed. The substantial questions of law involved in the present appeal are thus: (I) Whether the income of the assessee is not exigible to tax by virtue of the exemption under section 10(20A) of the Income-tax Act, 1961? (II) Whether the assessing authority and the Tribunal were in gross error in holding that the business of the assessee has not commenced and as such its income under section 28 of the Income-tax Act, 1961, cannot be computed? Shri Manohar, learned senior counsel for the appellant, states that Vidarbha Irrigation Development Corporation is a "development authority" within the meaning of section 10(20A) of the Income-tax Act, 1961 (hereinafter referred to as "the IT Act"). The Corporation is established for the purpose of planning, development or improvement of cities, towns and villages and the moment such an authority is constituted, its income is exempted under section 10(20A) of the Income-tax Act. It is submitted that the assessee-corporation is esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred in that behalf be brought on the books of the corporation and the rights, liabilities and obligations of the State Government, whether arising out of any contract or otherwise pertaining to the said projects of the State Government shall be deemed to be rights, liabilities and obligations of the corporation. It is, therefore, contended that from the appointed date, the assessee-corporation stepped into the shoes of the State Government and performs all the duties and acts, which were prior to the appointed date, performed by the State Government through the irrigation department. Learned senior counsel Shri Manohar submits that the functions and powers of the assessee-corporation are defined in section 18 of the Act, which contemplates that the functions of the corporation shall be- (a) to promote and operate- (i) some irrigation projects mentioned in the Schedule and command area development including flood control; and (ii) some schemes for the generation of hydro-electrical energy; (iii) to plan, investigate, design, construct and manage the schemes of the generation of hydro-electric energy. It is, therefore, contended that the assessee-corporation is establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... water of effluents, which are harmful to water supply, irrigation, public health or fish life; (d) to stock its reservoirs or water courses with fish and to sell fish or fishing rights and prohibit taking out fish from the water under its control; (e) to assist in the establishment of water users association and other organisations formed under the Maharashtra Co-operative Societies Act, 1961 (Mah. XXIV of 1961), for the better use of facilities made available by the Corporation; (f) to lease rights for water sports, other recreational activities related to the use of reservoir and its surroundings and reservoir water; (g) to establish, maintain and operate laboratories experimental and research stations and farms for conducting experiments and research for- (i) utilising the water, electrical energy and other resources in the most economical manner for the development of the Godavari and Tapi River Valley in Vidarbha region; (ii) determining the effect of its operations on the flow conditions in the Godavari and Tapi River and its tributaries in Vidharba region; (iii) providing navigation condition in the Godavari and Tapi River and its tributaries in Vidharba region ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation under the provisions of the VIDC Act are undoubtedly development activities, which are bound to cause improvement of cities, towns and villages. It is submitted that it could not be disputed that water is an essential natural resource and adequate supply of which has a direct effect on the development and improvement of the cities, towns and villages. Similarly, productivity of lands in villages and basic survival of human beings in cities, towns and villages as well as proper functioning of industries located therein depends amongst other factors on adequate supply of water and power. Adequate and timely availability of water is the most important factor for optimum agricultural produce and has the direct effect on development and improvement of lands. It is contended that the provisions of the VIDC Act make it evident that the object of the assessee-corporation falls within the ambit of section 10(20A) of the Income-tax Act. It is contended by learned senior counsel Shri Manohar that the requirement under section 10(20A) of the Income-tax Act is that the assessee-corporation must be established with the object of planning, development or improvement of cities, towns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly, it was also pointed out that the assessee-Corporation is "State" within the meaning of article 289 of the Constitution. The assessee-corporation specifically pointed out the provisions of the VIDC Act referred to hereinabove and also argued on the basis of the said provisions of the VIDC Act that the activities of the corporation are required to be understood in the backdrop of the provisions of the VIDC Act, which clearly establish that the functions and duties of the corporation are sovereign in nature and developmental in character, which undoubtedly results in improving cities, towns and villages, and, therefore, the provisions of section 10(20A) of the Income-tax Act are attracted. However, the Appellate Tribunal gave a complete go-by to the grounds raised by the assessee-corporation and in paras. (20) to (51) of the impugned judgment recorded a finding that the provisions of section 10(20A) of the Income-tax Act are not attracted only in view of the preamble to the VIDC Act and did not discuss the provisions of the VIDC Act. It is contended that the provisions of the VIDC Act are required to be considered as they are and appropriate meaning must be given to the pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion projects of the State of Maharashtra. The submission of the assessee is supported by the statement of objects and reasons at the time of issuing of Ordinance by the Governor of Maharashtra. It is submitted that the Appellate Tribunal has reproduced the same in para. (17) of its order. A perusal of the aforesaid statement will clearly indicate that the irrigation projects were transferred to the corporation. It is thus evident that the existing irrigation facility was taken over by the assessee-corporation in addition to development of further projects under construction as well as future projects to be established. The offer document and status report submitted also indicate that partially completed projects wherein irrigational facilities were operational were transferred to the assessee-corporation for operation. Learned senior counsel for the appellant states that the preamble to the VIDC Act indicates that apart from completion of some ongoing irrigation projects in a time bound manner, the corporation has also to promote and operate existing projects. It is contended that section 15 of the VIDC Act clearly indicates that irrigation projects, hydro-electrical power proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute to prepare the financial statement in accordance with the provisions of sections 42 and 43 of the VIDC Act. The letter dated February 16, 2001, filed before the Assessing Officer only explains the method of accounting considered by the assessee in the financial statement prepared by the assessee. The revenue authorities, however, without appreciating the contention of the assessee and the provisions of the VIDC Act with regard to preparation of account have concluded that the method of accounting adopted by the assessee is such that by itself it recognises that the business of the assessee has not yet commenced. The entire transaction and facts were available on record and therefore the Assessing Officer ought to have considered the entire facts rather than merely going by the presentation of entries of the books of account of the assessee in the financial statement. Learned senior counsel Shri Manohar states that the observations of the Appellate Tribunal that the assessee cannot ask for two different methods-one for writing books of account for the purpose of his business and another having its tax liability determined under the Income-tax Act is contrary to the law laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed reliance on the decision of the apex court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, wherein it is observed as under: "But it is now well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Learned senior counsel for the appellant states that the appellant-assessee also placed reliance on the judgment of the Bombay High Court in CIT v. V.S. Dempo and Co. Pvt. Ltd. [1994] 206 ITR 291 wherein it is held as under: "The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1997, and business was continued by the assessee. It is submitted it is a fact on record that the assessee has received receipts of sale of water running into Rs. 1.12 crores from various projects. Thus, the assessee has generated revenue and, therefore, there cannot be any manner of doubt that the assessee has commenced business. It is further submitted that the Appellate Tribunal has recorded that query of Bench was that if there had been sale of water, it only leads to presumption that the assessee has commenced business notwithstanding the stage of completion of various irrigation projects undertaken by the assessee. The Appellate Tribunal, however, for the reason that the assessee has recorded net deficit of the year as capital cost to the project concluded that business is not commenced. The presumption raised in favour of the assessee has not been rebutted by the Revenue. Learned senior counsel Shri Manohar states that the Appellate Tribunal has relied on the decision of the Privy Council in CIT v. Sarangpur Cotton Manufacturing Co. Ltd. [1938] 6 ITR 36. The Appellate Tribunal has reproduced part of para. (1) of the said decision, which reads thus: "Their Lordships ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the business carried on by it. It follows, therefore, that the rent derived by the assessee from the letting out of the residential quarters to its employees is assessable not under section 22 of the Income-tax Act, but under section 28 of the Income-tax Act under the head 'Income from business or profession'." Learned senior counsel Shri Manohar further states that reliance is placed on the decision of the apex court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 and the decision of the Gujarat High Court in the case of Deputy CIT v. Core Healthcare Ltd. [2001] 251 ITR 61. It is contended that on the basis of the law laid down by the Supreme Court and the High Court, it is amply clear that the Appellate Tribunal misdirected itself on the pure questions of law regarding the primary duty of the assessing authority to compute the real taxable income of the assessee irrespective of the method of accounting adopted by the assessee. The finding regarding non-commencement of business is perverse as it is contrary to the admitted facts and material on record. Shri Jaiswal, learned counsel for the respondent, states that during the course of arguments, learned senior c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplated by section 10(20A) of the Income-tax Act, has to be read in the context of the entire section. The term "planning, development and improvement" clearly contemplates the functions of the actual planning, development and improvement of areas, which are inhabited by persons, namely, cities, towns and villages. They do not deal with the concept of development and improvement of agriculture, which is not an activity which is carried on within the confines and boundaries of any city, town and village. Therefore, to fall within the exemption given by section 10(20A) of the Income-tax Act, the Act which constitutes the authority must deal with planning, development or improvement within the cities, towns and villages, which necessarily means civic activities. Even otherwise, the appellant merely supplies the water to the concerned local authority, which then distributes it within its jurisdiction. It is also not incumbent on the local authority to purchase water from the appellant, but it may do so from any other source. The area which is sought to be developed by the appellant is not any village, town or city, but the catchment area, submergence area and the command areas of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. There is a categorical admission that none of the projects with the assessee were completed or ready for their intended use. Once having made a statement to that effect and not having retracted it till today, the assessee cannot go back and claim that its business had commenced. Besides this, mere sale of water is not a business or function contemplated by the statute. The functions under the statute are for promotion and operation of irrigation and power projects. The reasoning given by the Appellate Tribunal in the order clearly shows that the system of accounting followed by the assessee itself recognised that the assessee had not commenced its business. For this purpose, the respondent relies on the decision in CIT v. L. and T. Mcneil Ltd. [1993] 202 ITR 662 (Bom). It is further contended by learned counsel for the respondent that the third ground as to whether the interest paid to the bondholders is an allowable deduction from the interest received from the bank is not before this court and hence, cannot be considered. Besides this, it is not a ground, which can be raised under section 260A of the Income-tax Act as will be clear from the decision of the Rajasthan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of cities, towns and villages and, therefore, its income is exempted from payment of tax. Before we adjudicate upon this aspect, it will be proper for us to consider what are the grounds raised by the appellant-assessee in the appeal before the Appellate Tribunal other than the ground that the appellant-corporation is a local authority. The appellant is claiming that though the appellant had raised specific grounds and also submitted in its written note of the arguments that in view of the provisions of the VIDC Act, the purpose and object of the appellant-Corporation is planning, development or improvement of cities, towns and villages and, therefore, it falls within the ambit of section 10(20A) of the Income-tax Act and is entitled for the benefit provided therein from payment of tax on the income of the corporation. A perusal of the grounds in the memo of appeal filed by the appellant-assessee before the Appellate Tribunal shows that the appellant had raised ground No. 2, which read thus: "It is submitted that the Commissioner of Income-tax (Appeals) wrongly arrived at the conclusion that the appellant-corporation is not a 'developmental authority' within the meaning o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... water supply to cities, towns or villages or both. Specific grounds are raised before the Appellate Tribunal by the assessee in view of the provisions of the VIDC Act. Reference is made to the definition of "hydro-electrical power project" and in view of the said definition specific ground is raised by the assessee that water is an essential natural resource required for any development or improvement of cities, towns and villages. Due to increasing population, drinking water has become a scarcity and, therefore, for supply of drinking water to public, reservoirs are required to be created. This is the basic necessity of any civic population and, therefore, it is a public function to provide adequate quantity of drinking water to the public, which is being fulfilled and planned to be fulfilled as per the objectives of the appellant-corporation For development of cities, towns and villages, water is required for most of the developmental functions performed by the local bodies and the appellant-corporation is helping in fulfilling the essential necessities for supply of water for development purposes. It is evident that the corporation in fact has raised various grounds on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra. (51) of the impugned order concluded the issue by observing thus: "Firstly, the object of the Act as spelt out in the preamble is for the purpose of completing certain irrigation projects. Therefore, it cannot be said that the assessee has been established with the objective of satisfying the need for housing accommodation as laid down in the first part of the section 10(20A) of the Income-tax Act, 1961. Secondly, the second part of section 10(20A) deals with the corporation established for the purpose of planning, development or improvement of cities, towns and villages. It cannot be disputed that the main purpose of the VIDC Act is for completion of the irrigation projects, which are handed over to the assessee for completion by the State Government. There is no planning, development or improvement of cities, towns and villages in carrying out the purposes for which the assessee has been formed. Thirdly, as rightly contended by learned standing counsel we find that under section 50 of the VIDC Act, the rehabilitation is to be carried out only by the State Government and not by the assessee. Whatever planning, development or improvement of cities, towns and villages are done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es is of planning, development or improvement of cities, towns and villages or both, is also exempted from tax. It is, therefore, evident that if the authority is constituted under enactment, either for satisfying the need for housing accommodation or for planning, development or improvement of cities, towns and villages or for both, income of such authority is exempted from tax under section 10(20A) of the Income-tax Act. It was, therefore, necessary for the Appellate Tribunal to consider the issue in the light of the provisions of the VIDC Act, the Maharashtra Irrigation Act, 1976, and the Bombay Canal Rules, 1934. However, the conclusion arrived at by the Appellate Tribunal in respect of question No. 1 mentioned hereinabove in the present appeal appears to be not correct and in our view, needs to be reconsidered by the Appellate Tribunal. So far as the second substantial question of law is concerned, the appellant-assessee had raised the following specific ground before the Appellate Tribunal: "The appellant-corporation started its business on the inception and the income and expenditure account and the balance-sheet of the year under consideration should be read keeping in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer without considering the entire transaction and facts, which were on record. The Assessing Officer, in fact, should have considered the entire facts rather than considering it only on the basis of presentation of entries of the books of account of the assessee. It was necessary for the Appellate Tribunal to consider the true nature of the transaction and whether the same has ultimately resulted in profit or loss to the assessee-Corporation. It is no doubt true that the entries made by the assessee in the books of account were relevant for the purpose of finding out whether the assessee has earned any profit or suffered any loss, however, the assessment cannot be solely based on this aspect alone unless the authority considers the true nature of the transaction and factual aspect of profit or loss to the assessee. It is therefore, necessary for the Assessing Officer to compute the real taxable income of the assessee irrespective of method of accounting adopted by the assessee. For the reasons stated herein above, in our considered view, the Appellate Tribunal needs to reconsider the second substantial question of law in the light of the observations made by us in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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