TMI Blog2011 (12) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... unt do not belong to the assessee - learned first appellate authority in asst. yr. 2007-08 has rightly observed that argument of the assessee demonstrating the 'infrastructure funds' as a separate entity, independent of assessee is a fiction - It is not registered under s. 12A of the Act and claimed the benefit of exemption under ss. 11 and 12 of the Act - Decided against the assessee - ITA Nos. 830/Del/2010 and 853/Del/2011; - - - Dated:- 2-12-2011 - G.E. Veerabhadrappa, Rajpal Yadav, JJ. K. Sampath for the Appellant Raj Tandon for the Respondent ORDER Rajpal Yadav, Judicial Member:- 1. The present two appeals are directed at the Instance of assessee against the orders of learned CIT(A), dt. 2nd Dec., 2009 and 5th Jan., 2011 passed for asst. yrs. 2006-07 and 2007-08. 2. In asst. yr. 2006-07, the assessee has raised two grounds of appeals. In ground No. 2, it has pleaded that learned CIT(A) has erred in holding that prior period adjustments were not deductible. The learned counsel for the assessee did not press this ground of appeal, hence, it is rejected. 3. Ground No. 1 in asst. yr. 2006-07, is verbatim same with solitary ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d infrastructure fund at Rs. 24,67,73,593. It has incurred a sum of Rs. 4,39,71,667. The balance amounting to Rs. 20,28,01,927 was not included in the total income of the assessee by the assessee on the ground that as per the office memorandum issued by the UP Government on 15th Jan., 1993, State Government has a overriding title and thus there is a diversion of this income because of this Government Order, it vests in the State Government and not in the assessee. This argument of the assessee has been rejected by the AO in this year also. He made the addition of Rs. 20,28,01,927 in asst. yr. 2007-08. 6. Dissatisfied with the action of the AO, assessee carried the matter in appeal before the learned CIT(A). Learned first appellate authority had made a lucid enunciation of law and facts in asst. yr. 2007-08. The learned CIT(A) took into consideration the office memorandum issued by the UP Government as well as the provisions of UP Urban Planning and Development Act, 1973 which brought the assessee into existence. After a detailed analysis, learned first appellate authority has observed that there is no overriding title over the alleged infrastructure fund account by the State Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government of UP, it only provides the collection of fees and how it is to be utilized for the fulfilment of the assessee's objects. The assessee has been collecting fees on a large number of counts, namely, development fees, conversion charges on account of land user, map sanction fee, compounding fee, supervision fee, income on housing scheme, car parking income and sample fees etc. 90 per cent of the amounts collected on three counts, namely, development fees, fees collected for giving certificates of change of land user and stamp duty is being transmitted to alleged infrastructure funds. The assessee is unable to point out distinction between other charges collected by it vis-a-vis this amount as far as its right to collect them. The amounts were collected in its independent rights. They were part of the assessee's funds and there is no overriding title of the State Government over such collection. He took us through the order of the learned CIT(A) in asst. yr. 2007-08 and relied upon the orders of the Revenue authorities below. He also relied upon the following decisions for apprising us the meaning of concept diversion of income by overriding title vis-a-vis application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary to the State Government in charge of the Department of Finance, ex officio; the Chief Town and Country Planner, Uttar Pradesh ex officio; the Managing Director of the Jal Nigam established under the Uttar Pradesh Water Supply and Sewerage Act, 1975, ex officio; the Mukhya Nagar Adhikari, ex officio; the District Magistrate of every District any part of W included in the development area ex officio; four members to be elected by Sabhasads of the Nagar Mahapalika for the said city from amongst themselves:- Provided that any such member shall cease to hold office as such as soon as he ceases to be Sabhasad of the (municipal corporation):- (j) such other members not exceeding three as may be nominated by the State Government. (4) The appointment of the Vice Chairman shall be whole time. (5) The Vice Chairman shall be entitled to receive from the funds of the authority such salaries and allowance and be governed by such conditions of service as may be determined by general or special order of the State Government in this behalf. (6) A member referred to in cl. (c), cl. (d), cl. (e) or cl. (f) of sub-s. (3) may instead of attending a meeting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s received by the authority from the State Government by way of grants, loans, advances or otherwise; (b) all moneys borrowed by the authority from source by the State Government by way of loans or debentures; (c) all fees, tolls and charges received by the authority under this Act; (d) all moneys received by the authority from the disposal of lands, buildings and other properties, movable and immovable; and (e) all moneys received by the authority by way of rents and profits or in any other manner or from any other source. (2) The fund shall be applied towards meeting the expenses incurred by authority in the administration of this Act and for no other purpose. (3) Subject to any directions of the State Government, the authority may keep in current account of any scheduled bank such sum of money out of its fund as it may think necessary for meeting its expected current requirement and invest any surplus money in such manner as it thinks fit. (4) The State Government may, after due appropriation made by legislature by law in that behalf, make such grants, advances and loans to the authority as that Government may deem necessary for the performance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and to inspect the office of the authority. The accounts of the authority, as certified by the auditor or any person appointed by him in that behalf, together with audit report thereon shall be forwarded to the State Government annually or at such times as may be directed by it. The State Government may issue such directions to the authority as it may deem fit and the authority shall be bound to comply with such directions, (5) Any expenditure, incurred by the auditor in connection with the audit shall be payable by the authority to the auditor. .............. 41. Control by State Government:- (1) The authority, the Chairman or the Vice Chairman shall carry out such directions as may be issued to it from time to time by the State Government for the efficient administration of this Act. (2) If in, or in connection with, the exercise of its powers and discharge of its functions by the authority, the Chairman or the Vice Chairman under this Act any dispute arises between the authority, the Chairman or the Vice Chairman and the State Government, the decision of the State Government on such dispute shall be final. (3) The State Government may, at any time, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Table, it is revealed that all the incomes are retained by the assessee in its main account except the charges/fees collected on four counts. These are development fees, conversion charges of land user, stamp duty and fees on regularization of colonies. The 90 per cent of the amounts collected under these heads were retained in the alleged infrastructure fund account. According to the assessee, the Government had issued a memorandum on 15th Jan., 1998 and by virtue of this office memorandum, there is diversion of income at source which relates to this infrastructural fund account and, therefore, the amounts transmitted in this account do not belong to the assessee. Before adverting ourselves to the alleged office memorandum and how it is to be construed, we would like to refer the decisions relied upon by the parties, in order to understand the concept of diversion of income on account of overriding title. 12. The first decision referred by the learned Departmental Representative is of Hon'ble Gujarat High Court in the case of CIT vs. Mehsana Disk Co-operative Milk Producers' (supra). The facts in this decision are that assessee is a co-operative society. According to it, as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t share capital contribution within the specified period, the co-operative societies were required to set aside necessary amount for a fund known as the "Government Share Capital Redemption Fund" before arriving at their profits for the purposes of appropriation under s. 65(2) of the Maharashtra Co-operative Societies Act. The amount standing to the credit of the Government Share Capital Redemption Fund had to be deposited by the assessee as fixed deposits with the central finance agency or invested in Government loans and securities in consultation with registering authorities as contemplated under s. 70 of the Maharashtra Co-operative Societies Act, 1960. The assessee society was not entitled to use the fund standing to the credit of the above account in its business of wholesale stores. The assessee society in the previous year relevant to asst. yr. 1975-76, set apart Rs. 2,10,000 for repayment of the Government share capital contribution and transferred the amount to the Government Share Capital Redemption Fund Account. The assessee claimed the deduction of the above amount in computing its business income. It claimed that this income cannot form part of total income of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oop. Societies Act, namely, ss. 62, 63 and r. 68 and thereafter held that the reserve fund did not go to any other party than the assessee itself. The concept of diversion of income by overriding title is that income reaches to the party other than the assessee by reason of a pre-existing title to it. As a matter of fact on interpretation of Rajasthan Co-op. Societies Act, 1965, Hon'ble Court had arrived at a conclusion that there is no pre-existing title to the alleged fund by any other person than the assessee. 15. The next judgment relied upon by the learned Departmental Representative is of Hon'ble Supreme Court in the case of Associated Power Co. Ltd. (supra). The facts of this case are that assessee is a company engaged in the business of generation of electricity and distribution thereof to consumers. It is governed by the Electricity Supply Act, 1948. By virtue of provisions of Electricity Supply Act and the Schedules thereunder, the assessee company was required to maintain a reserve account where it credited a sum of Rs. 46,460 out of its revenues to such contingency reserve account. It claimed the deduction of this amount which was rejected by the AO. The learned AAC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. According to the Hon'ble Court, money in the contingency reserve belongs to the electricity company only. The doctrine of diversion of income by diversion of an overriding title is quite inapposite. The doctrine applies when by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. The contingency reserve in that case has to be credited from the existing reserve or from the revenues of the undertaking, the money put into the contingency reserve reaches electricity company and are not diverted away from it. The Hon'ble Court has rejected the contention of the assessee for excluding the amount credited in the contingency reserve from the total income. 17. The next judgment referred by the learned Departmental Representative is again of the Hon'ble Supreme Court in the case of CIT vs. Sunil J. Kinariwala (supra). In this case, the assessee is a partner in the partnership firm known as "Kinariwala R.J.K. Industries, Ahmedabad". He was having 10 per cent shares therein. On 27th Dec., 1973, he created a trust namely "Sunil Jeevan Lal Kinariwala Trust". By a deed of settlement assigning 50 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of s. 29(1) of the Indian Partnership Act, the trust, as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assigner-partner. In this view of the matter, it is unnecessary to consider the alternative contention based on s. 60 of the Act. For the aforementioned reasons, we are of the view that the order under challenge cannot be sustained. It is, accordingly, set aside. Consequently, the share of the income of the assessee assigned in favour of the trust has to be included in the total income of the assessee. The questions are, accordingly, answered in favour of the Revenue and against the assessee." 18. The learned counsel for the assessee on the other hand mainly relied upon the decision of Hon'ble Karnataka High Court in the case of CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (supra) which has been followed by the Hon'ble Karnataka High Court in subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reaches the assessee, it cannot be claimed as deduction but where the income is applied to discharge an obligation after such income reaches to the assessee then it can be claimed as a deduction. In other words, the mere fact that the assessee has an obligation to apply a certain amount out of its income for a particular purpose cannot make it a case of diversion of income by overriding title. 20. Let us consider the office memorandum dt. 15th Jan., 1998 and how it provides a diversion of income on account of overriding title i.e. how the income would vest in the State Government. This memorandum reads as under:- " Uttar Pradesh Government Residential Department-I No.: 152/9/Aa-I-1998 Lucknow, dt. 15th Jan., 1998 Office memorandum Development authorities for the development of infrastructure in the cities and for the development of the income and its sources and their partly disposal as according it has been decided and as per the order of the Governor these directions have been given:- 1. That the income of the development authorities described in cl. 5 will not be deposited in ordinary pool but it will be deposited in separate account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities. By order Atul Kumar Gupta Secretary" 21. On a conjoint reading of this memorandum vis-a-vis the provisions of UP Urban Planning and Development Act, 1973, it would reveal that an authority was given to the assessee for collecting certain fees and charges in the process of its functioning. If the State Government had collected the fees and charges and then given the same to the assessee for doing its work, it would be the assessee's income. Thus, it does not make any material difference to the situation if the Government has allowed the assessee to collect fees and charges directly instead of infusing the funds by it in the assessee. According to s. 20, extracted supra, the assessee could retain the funds collected by it under this Act. Thus, its powers to collect the funds are already in existence under s. 20 of the Act. It has to credit the fees and charges collected by it to its own funds and which are to be applied towards fulfilment of assessee's object. 22. The nature and scope of the so-called 'infrastructure fund' have to be understood in the light of statutory contexts available in s. 20 of the UP Urban Planning and Development Act, 1973. As o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent identity of so-called infrastructure funds at its own. The inquiry on this angle revealed that there was no such entity called the infrastructure funds. It is just a name given to the earmarked bank account. There is no separate account or audit. The Empowered Committee is concerned with only giving approval for specific items of work to be done by the assessee and not administration of the funds. The funds form part of the assessee's balance sheet and were audited in the course of audit of its own account. This also indicates that there is nothing called 'infrastructure funds'. It is just a bank account which is designated for crediting the specific part of the assessee's receipt. The important factor is that alleged fund has to be used for the fulfilment of assessee's objects. 23. As far as the decision relied upon by the learned counsel for the assessee is concerned, we find that Hon'ble Karnataka High Court has specifically observed that assessee was appointed as a nodal agency for implementing certain Central and State Governments' objects. Hon'ble Court further observed that it is not the case of the Revenue that the assessee was carrying on any business or activ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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