2025 (7) TMI 365 - AT - Income Tax

Jurisdiction of AO with regard to the scope of scrutiny - as per assessee AO had made certain additions on account of receipt of development charges by the assessee which was not covered under the reasons for selection of the case of the assessee - HELD THAT - We find merit in the submission of DR that the present case was selected for complete scrutiny and under such scrutiny the AO is empowered to examine all issues arising from the ROI and documents submitted. The mere fact that the selection was based on certain parameters it does not limit the jurisdiction of Ld. AO under complete scrutiny. Hence in our considered opinion the argument of the assessee that the Ld. AO was not entitled to verify the receipt of development charges is devoid of merit and is liable to be rejected. Accordingly the ground of the assessee are dismissed. Nature of receipt - treatment of entire development charges as revenue receipt - Only the mode of utilisation has been prescribed by the government. In the said G.O. it has been specified that the assessee shall utilise 85% of the income to implement the provisions of Master Plans viz. (a) traffic improvement; (b) construction of bridges; (c) development of green belts and parks etc. and remaining 15% can be utilised for administration and other maintenance. In the said G.O. there is no restriction that the assessee cannot utilise 85% of the development charges or the assessee has no liberty over 85% of development charges. We found that the assessee has incurred certain expenditure i.e. lake and road development work and development of sites and services which are in the nature of expenditure covered under specified objects. The incurrence of these expenses also establishes that the assessee was not prevented from undertaking specified object. We are of the opinion that there was no restriction on the assessee for utilisation of 85% of the development charges. Accordingly we hold that the entire amount collected by the assessee towards development charges is liable to be treated as revenue receipts. Therefore we find no irregularity in the order of revenue authorities. Accordingly the ground no.3 of the assessee is dismissed. Disallowance on account of claim of TDS as application of income by the assessee - as submitted assessee had claimed the amount of TDS as application of income on the ground that the said amount was not available with the assessee for utilisation as the same was deducted at source by the payer - HELD THAT - As in addition to TDS on sale of land TDS has been deducted on other receipts as well which the Ld. AR contended to have been offered as income by the assessee. In view of the above we are of the considered opinion that the matter requires verification. Therefore the Ld. AO is directed to verify the nature of receipt on which TDS has been deducted. In respect of receipts which had been treated as income in the hands of the assessee the corresponding TDS amounts may be treated as application of income. However no such benefits shall be extended in respect of receipts which have not been treated as income in the hands of the assessee including the sale proceeds of land where the assessee has merely acted as a collecting agent of the state government. Accordingly ground of the assessee is treated as partly allowed for statistical purposes. Disallowance of the claim towards application of income on account of repayment of loan - AR submitted that the assessee had availed loan from HUDCO for construction of express highway which were utilized in F.Y. 2010-11 and 2012-13 towards object of the assessee - AO has rejected the claim of the assessee contending that the amount had already been utilized for the object in earlier year and hence could not be treated as application of income in the year of repayment - CIT(A) dismissed the appeal of the assessee on the ground that application of loan amount has already been claimed by the assessee in the year of actual utilization - HELD THAT - Where a charitable institution utilises borrowed fund towards its object and such utilization is not claimed as application of income in the year of utilization then the repayment of such loan can be treated as application of income in the year of repayment. Therefore in the present case the factual verification is required whether the utilization of loan amount was already treated as application of income in earlier year or not. If the assessee had not claimed the utilization of loan as application at the time of utilization the repayment thereof must be allowed as application of income in the year of repayment. Accordingly we direct the Ld. AO to verify whether the assessee had claimed application of loan amount in the year of utilization or not. If it is found that the assessee had not claimed the utilization of loan amount in the year of application the Ld. AO shall allow the claim of the assessee for the repayment of loan as application of income in the year under consideration. Denial of the claim for set off of excess expenditure incurred over income ( deficit ) in earlier years - scope of Explanation 5 to section 11(1) of the Act which has been inserted by Finance Act 2021 w.e.f. A.Y. 2022-23 wherein the statute has restricted the set off of b/f deficit against the income of current year - HELD THAT - The restriction imposed by Explanation 5 to section 11(1) of the Act is prospective and applicable only from A.Y. 2022-23 onwards. We are also of the opinion that the law prior to insertion of Explanation 5 to section 11(1) clearly permitted the charitable institution to set off b/f deficit of earlier year against the income of current year. Therefore for the year under consideration we hold that the Ld. AO has erred in denying the claim of the assessee on account of set off of b/f deficit against the income of the current year. However we are of the considered view that the set off of b/f deficit claimed by the assessee needs to be verified with the record of the assessee to ensure correctness and arithmetical accuracy. Accordingly we direct the Ld. AO to verify the correctness of the amount of b/f deficit claimed by the assessee from the record and if found correct to allow the set off of the same against the income of current year while completing the assessment. Disallowance on account of GST Service Tax ( GST/ST ) claimed as deduction by the assessee - HELD THAT - We found that sale of land is not a taxable supply under the GST Act and hence no GST is leviable thereon. Further it is not disputed that the assessee has not offered the sale proceeds of land as income as the assessee has acted only as an agent on behalf of the state government. However the issue that requires verification is whether the GST/ST claimed by the assessee as deduction pertains to revenue receipts which has been offered as income in the ROI. In our opinion if the GST/ST has been paid on such receipt that has been shown as income then the corresponding GST/ST must be allowed as application of income. In the interest of justice and fair play we deem it appropriate to remand this issue to the file of Ld. AO. AO shall verify from the record the nature of receipt on which the GST/ST has been paid by the assessee.

Summary

Issues presented and considered in the judgment primarily revolve around the assessment and taxation of income of a development authority under the Income Tax Act, 1961, for the assessment year 2020-21. The core legal questions considered include:

1. Whether the Assessing Officer (AO) was justified in conducting a complete scrutiny beyond the limited reasons specified in the notice under section 143(2) of the Act.

2. Whether the entire amount of development charges collected by the assessee should be treated as revenue receipts or only 15% thereof, with the balance 85% being non-revenue in nature due to usage restrictions imposed by the Government Order (G.O.).

3. Whether the claim of payment of Income Tax Deducted at Source (TDS) can be treated as application of income under section 11 of the Act when the corresponding receipts have not been offered as income.

4. Whether repayment of a loan availed for charitable purposes can be treated as application of income in the year of repayment if the utilization of the loan amount was not claimed as application of income in the year of utilization.

5. Whether the assessee is entitled to set off brought forward deficits (excess expenditure over income) from earlier years against the income of the current year, given the statutory amendments effective from assessment year 2022-23.

6. Whether the expenditure claimed by the assessee has been correctly adopted by the AO.

7. Whether the disallowance of GST and Service Tax (GST/ST) paid by the assessee is justified when the underlying receipts on which GST/ST was paid were not offered as income.

Issue-wise detailed analysis:

1. Jurisdiction of AO to conduct complete scrutiny beyond specified reasons (Grounds 2 & 4 of assessee)

The assessee contended that the AO's scrutiny was limited to 11 specific items mentioned in the notice under section 143(2) and that additions beyond these items, particularly relating to development charges, were outside the AO's jurisdiction. The AO and Revenue argued that the case was selected for complete scrutiny, which empowers the AO to examine all aspects of the return of income and related documents, not limited to the specified reasons.

The Court examined the AO's order, which listed the reasons for selection but also noted that the scrutiny was comprehensive. The Court held that under complete scrutiny, the AO's jurisdiction is not confined to the specified reasons but extends to all issues arising from the return and documents submitted. Therefore, the AO was entitled to verify the receipt of development charges and make additions accordingly.

This reasoning rejects the assessee's technical objection and confirms the AO's jurisdiction to scrutinize all relevant aspects under complete scrutiny.

2. Treatment of development charges as revenue receipts (Ground 3 of assessee)

The assessee received development charges amounting to Rs. 576.66 crores and contended that only 15% of these receipts should be treated as revenue, while 85% should not be treated as income due to restrictions imposed by Government Order (G.O.) No. 439 dated 13.06.2007. The assessee argued that the 85% portion was required to be expended strictly for specified objects (traffic improvement, construction of bridges, development of green belts and parks) and that it had no discretion over this amount, thus it should not be treated as income.

The Revenue countered that the G.O. only prescribed the mode of utilization, not a prohibition on treating 85% as income. The assessee was free to utilize the 85% for specified objects, which was evident from the expenditure incurred on lake and road development, development of sites and services, and other capital payments. The Revenue also pointed to the deficit shown in the accounts as evidence of utilization.

The Court analyzed the G.O. and found no restriction preventing the assessee from treating the entire development charges as income. The G.O. mandated utilization of 85% of the income for specified objects but did not deny the assessee's control or ownership over these funds. The Court distinguished prior decisions cited by the assessee, including a Bombay High Court decision where the assessee was held to be an agent or arm of the State with no discretion, and a Tribunal decision where the assessee had created a sinking fund as per a different G.O., which was not applicable here.

Accordingly, the Court upheld the treatment of the entire development charges as revenue receipts and dismissed the assessee's ground on this issue.

3. Claim of TDS as application of income under section 11 (Ground 5 of assessee)

The assessee claimed that TDS deducted on various receipts, including sale of land, should be treated as application of income because the amounts were not available for utilization by the assessee. The AO and CIT(A) rejected the claim primarily because the sale proceeds of land, on which TDS was deducted, were not offered as income by the assessee, who acted as an agent of the State for such receipts.

The Court noted that TDS related to sale of land receipts, which were not income of the assessee, cannot be treated as application of income. However, the Court also observed that TDS was deducted on other receipts which were offered as income. The Court directed the AO to verify the nature of receipts on which TDS was deducted; where receipts were treated as income, the corresponding TDS should be allowed as application of income, but not otherwise.

This ground was partly allowed for statistical purposes pending verification.

4. Repayment of loan as application of income (Ground 6 of assessee)

The assessee claimed that repayment of a loan of Rs. 60.76 crores availed from HUDCO for construction of express highway should be treated as application of income in the year of repayment, as the loan amount was utilized for the object of the assessee but not claimed as application of income in the year of utilization. The AO and CIT(A) rejected the claim on the ground that application of income was already claimed in the year of utilization.

The Court held that if the utilization of the loan amount was not claimed as application of income in the year of utilization, then repayment of the loan can be treated as application of income in the year of repayment. The Court directed the AO to verify whether the utilization was claimed previously and allow the claim accordingly.

This ground was allowed for statistical purposes subject to factual verification.

5. Set off of brought forward deficit (Ground 7 of assessee)

The assessee sought set off of excess expenditure over income (deficit) from earlier years against the current year's income. The AO denied the claim relying on Explanation 5 to section 11(1) of the Act, which restricts such set off from assessment year 2022-23 onwards. The assessee contended that the restriction is prospective and not applicable to the year under consideration (2020-21).

The Court agreed with the assessee, holding that the statutory amendment is prospective and the law prior to insertion of Explanation 5 permitted set off of brought forward deficit. The Court directed the AO to verify the correctness and arithmetical accuracy of the deficit claimed and allow the set off if found correct.

This ground was allowed for statistical purposes.

6. Adoption of expenditure amount by AO (Additional ground of assessee)

The assessee contended that actual expenditure incurred was Rs. 639.25 crores, but AO adopted Rs. 578.49 crores. The Court found this to be a factual issue requiring verification and remanded the matter to the AO for verification and allowance as per law.

This ground was allowed for statistical purposes.

7. Disallowance of GST and Service Tax paid (Revenue's appeal)

The Revenue challenged the deletion of disallowance of GST and Service Tax (GST/ST) paid by the assessee. The AO disallowed GST/ST paid on receipts not offered as income, including sale of land proceeds. The assessee contended that sale of land is not a taxable supply under GST law and that GST/ST paid relates to other service components offered as income.

The Court examined Schedule III of the GST Act, confirming that sale of land is not subject to GST. The Court noted that the issue requires verification whether GST/ST paid relates to receipts offered as income. The Court directed the AO to verify the nature of receipts on which GST/ST was paid and allow deduction where the receipts have been offered as income, but disallow otherwise.

The Revenue's appeal was partly allowed for statistical purposes.

Significant holdings:

"The mere fact that the selection was based on certain parameters, it does not limit the jurisdiction of Ld. AO under complete scrutiny. Hence, in our considered opinion, the argument of the assessee that the Ld. AO was not entitled to verify the receipt of development charges is devoid of merit and is liable to be rejected."

"On perusal of the Government Order, it is evident that only the mode of utilisation has been prescribed by the government. There is no restriction that the assessee cannot utilise 85% of the development charges or the assessee has no liberty over 85% of development charges. The restriction has been made for utilisation of 85% for some specified objects only."

"Where a charitable institution utilises borrowed fund towards its object, and such utilization is not claimed as application of income in the year of utilization, then the repayment of such loan can be treated as application of income in the year of repayment."

"The restriction imposed by Explanation 5 to section 11(1) of the Act is prospective and applicable only from A.Y. 2022-23 onwards. The law prior to insertion of Explanation 5 clearly permitted the charitable institution to set off brought forward deficit against the income of the current year."

"Sale of land is not a taxable supply under the GST Act and hence no GST is leviable thereon. If the GST/ST has been paid on such receipt that has been shown as income, then the corresponding GST/ST must be allowed as application of income."

The Court's final determinations were:

• The AO had jurisdiction to conduct complete scrutiny beyond the limited reasons specified.
• The entire development charges collected by the assessee are to be treated as revenue receipts.
• TDS amounts corresponding to receipts offered as income should be allowed as application of income; others, including sale proceeds of land, should not.
• Repayment of loan can be treated as application of income if utilization was not claimed earlier.
• Set off of brought forward deficit is permitted for the year under consideration, subject to verification.
• Expenditure claimed by the assessee requires verification and adjustment as per actuals.
• GST/ST paid on receipts offered as income should be allowed as application of income; others should be disallowed.

Accordingly, the appeals of both the assessee and the revenue were partly allowed and remanded for factual verification on certain issues.