TMI Blog2018 (3) TMI 1646X X X X Extracts X X X X X X X X Extracts X X X X ..... rred that the land premium is nothing but a kind of rent, which is certainly taxable. Lease premium income offered by the assessee was a conscious decision and further Article 289(1) of Constitution of India is not applicable on the facts of the present case. Therefore, the grounds raised relating to this issue regarding exclusion of lease rent, land premium and interest income are devoid of merits and therefore, they are rejected. Addition on account of understatement of profit - Held that:- On perusal of the Profit & Loss account it seems that against the credit of receipt of ₹ 7,02,82,708/- expenses of ₹ 5,52,86,310/- only was incurred by the assessee. The expenses as claimed in the Profit & Loss account also having direct nexus of receipt/ income as shown in the Profit & Loss account. Since the expenses as incurred was not for the purpose of addition to the fixed assets, hence, there was no justification for making the addition merely on the basis of remarks in the clause 11[c] of the Tax audit report. The remarks of the Tax auditor which is important piece of evidence but the same is not considered as conclusive piece of evidence. Considering the written synopsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the profit and loss account . The CIT(A) has erred in not appreciating the fact that the transfer of expenses, which are prima-facie revenue in nature of the profit and loss account is according to the method of accounting consistently followed by appellant and such expenses not attributable to any specific project/fixed assets have been rightly debited to profit and loss account without being capitalized. 2. That the Ld. CIT(A) has erred in law in confirming the addition of ₹ 95,93,720/- in respect of land premium received by the appellant for and on behalf of the Governor of the State of M.P., thereby notionally treating the said amount as income of the appellant. 3. Further, the Ld. CIT(A) failed to see that the receipts in respect of land premium having been receive d by the appellant on behalf of the State Government was in the nature of a liability to the State Government, which by no stretch of imagination could be treated as income of the appellant. 4. That the Ld. CIT(A) has erred in arriving at a finding that the appellant is a lawful owner of the land in question of treating the appellant at par with the owner of the land and on that basis arriving at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts and has also erred in law in considering the same as revenue receipt liable to tax in hands of the appellant. It is, therefore, prayed that the present appeal be allowed and the order under appeal be set aside in toto. 2. The grounds of appeal as taken by the assessee before this bench for adjudication in different years are summarized as under for clarity :- M/s M.P Audyogik Kendra Vikas Nigam (I) Ltd.,Indore 143(3) Appeal S.No Nature of Grounds 2003-04 2004-05 2006-07 2007-08 2008-09 2009-10 2010-11 347/Ind-2013 348/Ind-2013 349/Ind-2013 350/Ind-2013 351/Ind-2013 760/Ind-2014 761/Ind-2014 G Nos Addition G Nos Addition G Nos Addition G Nos Addition G Nos Addition G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. Addition Ground No. Addition Grounds challenged in Appeal 1 Lease premium 1 to 2 58503365 1 to 2 13,60,81,476 8,98,42,251 Additional Ground of Appeals 2 Lease rent 1 1,99,95,758 1 2,64,95,713 3. Since the grounds as taken in the appeal of the assessee MPAKVN and also in the appeal of M/s SEZ Indore Limited, were more or less similar in all the appeals except one or two other grounds, we dispose of all these appeals by this common order for the sake of convenience. 4. In all these appeals additional grounds of appeal were taken. The Ld. Counsel for the assessee filed application in each appeal for admission of the additional grounds of appeal. The Ld. Counsel stated that no fresh material was required for deciding the same. All the materials were available before the AO. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company merely act on behalf of the state government. 4. The assessee company worked as a nodal agency of the state government, the entire funds as available with the assessee company was actually belonging to the state government. 5. That while finalization the books of account of the assessee company, following amount was credited in the Profit Loss account even when the same was not liable to tax under the Income tax Act:- S.No Nature of receipt Remarks 1 Land Premium Cost of the land was borne by the state government and the amount as received on behalf of the state government. Hence, not liable to tax but 1/99 of the land premium amount was inadvertently offered for tax 2 Lease Rent Lease rent received in connection with the land of State government as allotted by the assessee requires to be credited as liability in the books of the assessee but inadvertently credited in the Profit Loss account 3 Interest on Fixed deposit The amount of state government r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the same could not have been raised earlier for good reasons. The AAC should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also. 7.3] That Hon ble Apex Court in the case of National Thermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC), where the Hon'ble Supreme Court observed that :- The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objection before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier. 7.4] Hon ble Bombay High Court in the case of Nirmala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r remanded to the AO. 8] That in view of the above, whether the amount of lease rent, land premium and Interest on deposit are taxable as income of the assessee or not liable to tax is purely a question of law and as per article 265 of the constitution the tax cannot be levied until and unless the same was expressly provided under the Act. Hence, Hon ble Bench is hereby requested to admit the additional ground of appeal and oblige. 8. Ld. Departmental Representative opposed the applications for additional grounds of appeal. 9. We have gone through the written submissions on additional grounds of appeal submitted in the appeals by Ld. Counsel for the assessee. We have also gone though the case laws relied upon by the Ld. Counsel for the assessee. The claim as lodged by the assessee by way of additional grounds of appeal relates to exclusion of the lease rent, Land premium and interest on funds of State Government. The decisions of Hon ble Apex Court in the case of Jute Corporation of India Ltd. vs. CIT [Supra] and National Thermal Power Co. Ltd. vs. CIT [Supra] and various other High courts are squarely applicable on the facts of the present case. Respectfully following ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s emerged :- S.No Facts Para No 1 I have considered the submission of the assessee and noted that the land is provided to the assessee by Government of Madhya Pradesh through DIC. It is also noted that the M P Government, for development of industries and infrastructure acquires land and makes payment of compensation through collector of the particular area. First five lines of Para 2.5 on inner Page No 8 of CIT[A] s order 2 This land is subsequently given at the disposal of audhyogikvikaskendras and other agencies engaged in the process of development of industries, housing and infrastructure Para 2.5 on inner Page No 9 of CIT[A] s order 3 It is observed that the land under consideration has been given to the assessee by Government of MP and through an instruction as referred above, any land premium and lease rent received from leased out land will be kept with respective audhyogikkendras for maintenance and further development. Para 2.5 on inner Page No 9 of CIT[A] s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent/ equivalent to the owner of the land. This can be seen from clause C(22) of the memorandum wherein it has been clearly brought out that the object of the Audhyogik Kendra shall be to sell, improve, manage, develop, exchange, lease, mortgage, dispose off, deal with all or any part of property and rights of the company. Moreover there is no denial on the part of the assessee that income has arisen. Once the income has arisen out of any transaction, the same has to be taxed under the income Tax Act, 1961, under the taxation scheme unless the same is exempted by a particular provisions of the Act. I have also noted that till the AY 2003-04, the assessee has been claiming exemptions u/s 10(20A) of the Income Tax Act. However, the same has been omitted with effect from 01-04-2003. Therefore, in my considered view the income arising as a land premium which has duly been accounted for by the assessee is necessary to be taxed under the hand of the assessee. The Government of Madhya Pradesh shall not come into picture for taxation purpose because the assessee is an independent and separate identity who is filing its return of income any paying taxes etc. 2.6 The second limb o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (12) To sell or otherwise dispose of the undertakings of the company or nay part thereof for such consideration as the company may think fit and in particular (but so as not to restrict the generality of the foregoing) for shares, debentures, bonds or securities or obligations of any other company having objects altogether or in part similar to those of the company. 2.8 A careful consideration of above clauses o memorandum reveals that the assessee is in the business. Leasing out of the land and getting rental income as well as the premium is the business of the assessee. Therefore, a land premium is nothing but a revenue receipt in the form of advance rent which has loosely been named as land premium. Since the assessee is showing annual rent on account of leasing of the plots, there is no reason why the advance rent received should not be taxed accordingly. Moreover as brought out clearly in prepares, the assessee itself has offered 1/99th portion of such land premium as revenue receipt to be taxed in the year under consideration which goes to prove that the nature of receipt is revenue. In this regard, it will be appropriate to refer the agreement made by the assessee with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is not applicable in the instant case where land premium charged is nothing but the advances rent. 2.10 The another case law, i.e., Ukhara Estate Zamindaries P. Ltd. relied upon by the assessee was also gone through and it was seen that the facts and findings in the said case law are also clearly distinguishable from the facts of the instant case. In that case, the assessee was himself a lessee who took over he zamindari properties of a family for 999 years. The lease items comprised of coal bearing lands/ mines, government promissory notes, jewellery, arrears of rent etc. The assessee granted several sub lease for 900 years to various companies and received salami as well as compensation for compulsory acquisitions. This was single lease by the assessee and receipt of salami by granting of sub lease for management of real property as an owner of lease hold interest was constructed and treated as capital receipt. Whereas in the instant case as brought out above, the land was given by the state government and the assessee has transferred the same on long term lease and earned rental income as well as the advance rent in the form of land premium. In the case relied upon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) on behalf of the State Government before commencement of lease is Capital Receipt or Revenue Receipt? Brief facts The assessee Madhya Pradesh Audhyogik Kendra Vikas Nigam (Indore) Limited (MPAKVN) was incorporated in the year 1981 by the State Government as wholly owned government company with the main object to develop industrial area for industrial growth in the State of Madhya Pradesh. The State Government had acquired the land from the private landowners and contributed its own land for development of industrial area. The raw land were handed over to the assessee for development and further management and maintenance of the same. The land remained in the ownership of the State and the assessee was allowed to act as a nodal agency. The development of industrial area which was commenced in the year 1981 came to at halt around 2000 when most of the land available have been utilized for development. It is further submitted that in the year 2005 the State Government decided to develop fist Special Economic Zone and therefore established a new entity in the name of SEZ Indore Limited and diverted the development work in that company. Therefore, no major projects re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he State Government had acquired the lands in Dhar district from the private landowners, farmers in addition to Govt. land available with the State Government. That, after acquisition of the land and payment of compensation to the landowners/farmers in terms of the award passed by Land Acquisition Officer and as may be modified by the competent authority or the Courts as the case may be, the land so acquired have been entered in the revenue record in the name of Industries Department, Government of Madhya Pradesh. Therefore the State Government through industries department became the owner of entire land acquired to develop an industrial area/SEZ. It is made clear that the State Government paid the compensation for acquisition of land from its exchequer. Therefore, the State Government had acquired the land on payment of due consideration/compensation. Thus, the State Government is the owner of the land on which industrial area/SEZ has been developed by the assessee. The extract of the provisions of MP Land Revenue Code, 1959 which deals the issue of ownership of land are reproduced hereinunder: Sec. 57. State ownership in all lands: (1) All lands belongs to the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The State Government instead of undertaking the industrial infrastructure development work on its own delegated the responsibility up on its instrumentalities in the name of MPAKVN/SEZ and entrusted the task of development of infrastructure on the land owned by the State. That, the assessee/MPAKVN incurred all cost and expenses for development on behalf of the State Government, however the State Government instead of reimbursement of the same allowed the assessee to adjust the amount of Lease Premium collected/to be collected to meet the cost of development of infrastructure by order dated 14.12.1981 and explanation dated 31.03.2017. Thus, the MPAKVN/Appellant are the nodal agency of State Government engaged in development of infrastructure of industrial area. Copies of order dated 14.12.1981 and explanation dated 31.03.2017 are annexed herewith for ready reference. That, the lease premium represents the recovery of cost of acquisition of land and since the cost of acquisition has been incurred by the State, therefore the State has right over the lease premium. It is also the duty of the State to incur the development cost on its land, therefore State has allowed the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee nor revenue has ever claimed that the land is stock in trade of the assessee. (x) In case of renting or leasing business only rental income and other recurring charges and fees are revenue receipt but not the lease premium which is received for parting away the rights in capital assets. The aforesaid facts clearly establish that assessee has no right of ownership on the land and has acted merely as an agent or nodal agency for and on behalf of the State Government to achieve the object of industrialization in the State. Since, the assessee is not the owner of the land, therefore the CIT(A) has erred in confirming the additions made by the ld. AO by treating the land premium as revenue receipt of the assessee. Thus, the lease premium received/collected by the assessee is capital receipt for and on behalf of the State Government, hence not taxable in the hands of the assessee. Response to observation in Appellate Order in ITA No. 402/2009-10 and 882, 883, 884/2011-12 which is relied upon by the CIT(A) in impugned order: Sr. No. Observation of CIT Response Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /acquire the eland on its own apart from the land earmarked by the Government of M.P. There is no dispute about the power and authority of Assessee to purchase and acquire any land. However, it is submitted that the lands on which industrial area/SEZ has been developed are not acquired or purchased by the assessee. The right to purchase given in memorandum does not mean that the land which has been developed by the assessee on behalf of the State has been purchased. 4. Para 2.5 continued . Therefore, there is no doubt that as far as the management and leasing of land under the consideration is concerned the assessee has been adequately independent/equivale nt to owner of land. This observation of CIT(A) is misconceived and without substance. The Ld. CIT has failed to appreciate that how and under what circumstances the assessee has become the owner of land. This observation shows the whims and fancies of the Ld. CIT to somehow treat the land under the ownership of assessee. Though there is no evidence or document, however only to bring the collection of lease premium on behalf of State Government by the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. 9 Para 2.7 It is observed that the second issue in this case is whether the receipt under consideration is a capital receipt or revenue receipt. In order to decide and examine this issue, it will be appropriate to go through the memorandum articles of association. A careful perusal of the same makes it crystal clear that the assessee s main business is to develop, promote encourage, assist in growth and establishment of industries etc. with ancillary/ incidental objects of carrying out of business. There is no dispute that the main object of the assessee is to develop industrial areas as an instrumentality of the State Government on the land owned by the State. It is only a nodal agency. The nature of business of the assessee nowhere affect the nature of receipt. It may be capital or revenue in any business. The capital and revenue receipt depends upon the nature of transaction. In the present case the lease premium has been received for parting away the right and possession over the capital assets and the same is received before parting away, therefore it has cloth of capital receipt as held by Supreme Court and other High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and renewables after 99 years. The contentions of the CIT(A) are misconceived one, on one hand he has stated that the land premium is nothing but advance rent fully dependent on the rate of rent. Further in that case the salami was defined as lump sum not recurring receipt of money paid by the tenant to landlord before making a settlement of holding . Whereas all the same ingredients are present in the case under reference as the assessee has received the premium as i. non-recurring, one time receipt. ii. it has been paid before entering into lease agreement iii. it has been received for parting away the capital assets (rights and possession in the land) iv. lease rent are separately receivable alongwith annual maintenance charges for allowing the lessee to continue to enjoy the benefits of the lease. The CIT(A) has erred in distinguishing the case law cited before him by the assessee. Land/lease Premium or Salami Whether Capital Receipt or Revenue Receipt. Irrespective of the ownership of the land the major issue is whether the one time lease premium collected by the assessee is capital receipt or revenue receipt: The assessee collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capital expenditure. It is clear beyond doubt that if any consideration is paid for acquiring leasehold rights then such payment would be in the nature of capital expenditure. So, if the interest of the lessor is parted with for a price then the price paid as to be considered as premium/salami which is neither assessable as income in the hands of the recipient nor allowable as deduction in the hands of the payer (ii) The issue has been discussed by the Supreme Court in case of CIT Assam Versus The Panbari tea Company Limited (1965) 57 ITR 422 SC wherein the Apex Court while dealing with the nature of receipt of premium on the land leased to lessee has held that it is a payment made for the acquisition of the right of lessor to enjoy benefits granted by the lease the general right may properly be regarded as a capital asset and the money paid to purchase to it may properly be held to payment on capital account. The para 4 to 8 are reproduced herein below: 4. The distinction between premium and rent was brought out by the Judicial Committee in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar Orissa[1943] 11 ITR 513 thus : It (salami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right of an endeavoring nature in the plot in question is capital expenditure for the lessee. Therefore the same would be capital receipt for the lessor. Para 23 of the order reads as under: 23. In view of the foregoing discussion, we are of the opinion that the principles laid down in the cases relied on by learned counsel for the Department are applicable to the facts and circumstances of the instant case. From a perusal of the various terms, subject to which the permanent lease was granted by M/s. Hindustan Steel Company Limited in favour of the assessee, it is apparent that the assessee obtained a right of an enduring nature in the plot in question and in order to obtain this right it had to pay a sum of ₹ 62,500 as premium. On the terms of the contract, it is again apparent that ground rent in the sum of ₹ 3,125 per annum was payable by the assessee in addition to the premium of ₹ 62,500. The amount of premium, in our opinion, could not, on the facts of the instant case, be treated as advance rent. The fact that facility of paying the amount of premium in instalments was provided to the assessee will, in our opinion, in no way derogate from the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Deo Versus CIT Bihar and Orissa (1971) 82 ITR 464 Hon'ble Supreme Court has held that the principle on which the Courts have acted whether a payment described as Salami or Premium is capital or revenue receipt are well settled. Salami or Premium is a single payment made for the acquisition of right of the lessor by the lessee to enjoy the benefits granted by the lease. That general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be a payment on capital account. Para 4 and 6 (relevant portion) are reproduced herein below: 4. The principles on which the courts have acted whenever a question has arisen whether a payment described as a salami is capital or revenue receipt are well settled. Salami is a single payment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits granted to him by the lease. That general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be a payment on capital account. But merely because a certain amount paid to the lessor is termed as salami it does not follow that no inquiry can be made to determine whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or may also think that the rate of royalty need not be the same as it was in the case of the prospecting lease and taking an over all business view royalty at a slightly less rate may be charged. The Tribunal's decision based as it was only on a comparison of the terms of the leases of 1941 and 1944 does not appear to take into consideration all these relevant matters. It must not be forgotten that the mere fact that the amount taken on account of salami was substantial and on the face it looked considerably large would not justify the view that that amount represented capitalized royalty. In the Panbari Tea [1965] 57 ITR 422(SC) case certain tea estates had been leased put for a period of 10 year. The lease was executed on a consideration of a sum of ₹ 2,25,000 as and by way of premium or salami and an annual rent of ₹ 54,000 to be paid by the lessee to the lessor. The payments were to be made by installments. This Court declined to assume that the parties had camouflaged their real intention and fixed a part of the rent in the shape of premium and it was observed that no material had been placed either direct or circumstantial to disbelieve the description given i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be a periodical monetary return coming in with some of sort of regularity or expected regularity from definite sources. (4) Salami or premium paid at the beginning of a mining lease for a long period ordinarily represents the purchase price of an out and out sale of the property and the sum received is capital and not income, but rent or royalty paid periodically is income. The principle is the same, whether the premium is for a simple lease of mineral rights. But royalty payable under the mining lease stands on a different footing from premium or salami. (5) When a premium is received merely as an incident in the possession of property (even if leasehold) and there is no finding that the letting out of the property is the business of the assessee, the premium receipt is capital. (6) Salami or premium paid in advance of rent once for all at the outset, the period of tenancy being uncertain and the chances of the resettlement of the same land to some tenant being remote, is capital. (7) Premium (salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to him by the lease. Money paid to purchase the said general rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following word : The salami has been, rightly in their Lordships opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account. The Supreme Court in the said case defined salami as follows : The characteristics and incidence of salami disclosed from the 'statements of the cases' are that it is a lump sum non-recurring receipt of money by a landlord from a tenant before making a settlement of the holding, waging C.A. No. 162 of 1955 varied from ₹ 7 to ₹ 10 per bigha and was less in other cases. He is also entitled to charge a fixed periodical amount of 11 thousand per bigha per annum. Salami is charged whenever a fresh settlement is made whether it is of a piece of virgin land or of an auction-purchase holding. Thus, salami is payment by a tenant to the landlord antecedent to the constitution of the relationship of landlord and tenant. It is really a payment by the tenant to the landlord for bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital expenditure. The assessee contended that it was an advance rent and, therefore, deductible as revenue expenditure. Held: The contention of the assessee was not acceptable. The amount paid as premium or salami was not an advance rent and enduring benefit was to be obtained by the assessee for 99 years and as such it was a premium or salami and thus to be treated as capital expenditure. In view of above submission, the appeal may kindly be allowed and the impugned orders of Ld. AO and CIT(A) may kindly be set aside. 18. During the course of hearing it was asked from the Ld. counsel of the assessee to explain the treatment in respect of these receipts prior to the Asst Year 2003-04 where the assessee company eligible to claim exemption U/s 10[20A] of the Act. The Ld. Counsel for the assessee submitted the written submission, which is placed on record. The Ld. Counsel for the assessee reiterated his arguments as per written submission, which is reproduced as under, :- 2.1] During the course of hearing an argument was put forth by the Ld. DR stating that in the years prior to 2003-04 the assessee was showing lease premium, lease rent and other revenue as its income an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t shown under the head Capital Work in Progress and upon completion of the work the same has been debited to the account of State Government in Schedule D. Thus, evidently, the entire lease premium, lease rent and security deposit collected on behalf of the State Government have been shown in Schedule D as liability and the expenses incurred on development has been deducted therefrom. Thus, the assessee was acting as Nodal Agency of the State Government. [B] ASST YEAR 1991-92 [ FOR THE YEAR ENDED ON 31-03-1991] (i) On page 1 of the Balance Sheet the State Government Account has been shown in the liabilities side and details have been provided in Schedule 4 at page (5) where State Government Account has been shown and under point no. (2) Direct Collection of Land Premium, Security Deposit, Lease Rent on its behalf for Industrial Area has been shown. Similarly the cost of construction and development has been deducted from the account of State Government under Expenditure on behalf of State Government. Similarly all the deposits in the banks have been shown in Schedule 7 at page (7) on behalf of State Government and Interest received have been shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been debited to the account of State Government in Schedule 6 as per Annexure 1 on page 18. Thus, evidently, the entire lease premium, lease rent and security deposit collected on behalf of the State Government have been shown in Schedule 4 as liability and the expenses incurred on development has been deducted therefrom. Thus, the assessee was acting as Nodal Agency of the State Government. 3.1] That from the analysis of the Balance sheet as enclosed for the period prior to 2003-04 it is proved beyond doubt that the assessee company act as a nodal agency for and on behalf of the State Government. 3.2] That it is admitted facts by the assessing officer and also by the Ld CIT[A] that land was acquired by the State Government through collector and handed over the same for development and allotment for installation of the new industries as per order dated 14.12.1981 and clarification dated 31.03.2017. 3.3] The land was allotted by the assessee for and on behalf of the Governor of State Government under Article 299 of the Constitution of India in accordance to the M.P. Industries (Allotment Shed, Plot Land) Rule, 1974 and 2008. 3.4] The amount of land pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Export Corporation Ltd ITA No 1078/Bang/2012 dt 20-12-2013 for the Asst Year 2008-09 4 CIT Vs Delhi State Industrial Development 295 ITR 0406 [Delhi] MATCHING CONCEPT OF ACCOUNTING : 3.7] The assessing officer was also grossly erred in taxing the entire amount as received by the assessee company on account of land premium, lease rent, Transfer Fee and Interest on funds of the State Government as income of the assessee company without following the basic accounting principle of matching concept. Since, cost of land and development expenses have never been charged by the assessee in its books of account as expenses but all such cost have been deducted from the outstanding due of the State Government. Therefore, the Ld. AO has grossly erred in considering the Lease Premium, Lease Rent and other income pursuant to allotment of land to the industries as Income but failed to appreciate that without expenditure how these assets were created. 3.8] The Ld. AO and CIT(A) has heavily relied upon Other Object and Incidental Objects of the Memorandum Articles of Association of the assessee Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. It is settled position of law that right in land was transferred for longer lease is to be considered as transfer of ownership to the lessee and therefore the amount of land premium as paid for the transfer of right is to be considered as capital receipt in the hand of the assessee company. For this preposition we placed reliance on the following direct decisions: - 1 Member for the Board of Agricultural Income Tax Vs Sindhurani Chaudharani and Ors 32 ITR 0169 [SC] 2 Ukhara Estate Zamindaries (P) Ltd vs CIT 120 ITR 0549 [SC] The assessee also rely upon all other 11 judgments on this subject which have provided in the Synopsis of Judgments during the course of Arguments. 3.10.3] The Lease Deed provided in paper book clearly prove the contentions of the assessee as under: (i) Lease Premium is one time upfront amount received by the assessee on behalf of the State Government for parting away the interest in the property and right to enter in the land, therefore it is capital receipt. (ii) Lease Rent i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay by Law declare to be incidental the ordinary functions of Government . 39. To our mind, the entire case of the assessee in the instant case, hinges on clause (2) or clause (3) of Article 289 of the Constitution of India. The basic purport of Article 289(2) is to neutralize clause (1), but with a rider that, if there is any trade or business , done on behalf of the Government or any operations connected therewith or any property issued or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. To make this clause effective, even for Government / State, conduct of trade or business is necessary, which simply means involvement of commercial and profit motive for the vendor. This is in line with the decision of Hon'ble Supreme Court of India in the case of APSRTC (supra), relied upon by the DR, wherein the Hon'ble Supreme Court had observed, ....the facts that the trading activity carried on by the assessee may be covered by article 289 (2) of the Constitution does not really assist the assessee's case. Even if a trading activity falls under clause (2) of article 289 of the Constitution, it can sustain a clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r commercial motive attached with it. The only clause left for our consideration then would be clause (3), which shall come into play once clause (2) is disbanded and as soon as it become disbanded, clause (3) come to life, which operates only if, Parliament may by Law declare to be incidental to the ordinary functions of Government . Here, in the instant case, we have to read Parliament as State Government because in the instant case, it is the State Government which has authorized the assessee to perform the development projects at Navi Mumbai, Vasai- Virar, Waluj and such other places. 40. We cannot agree with the argument of the DR that there is no document which has drawn out the Agent- Principal relationship, because the very first Resolution dated 18th March, 1970 mention in para no. 2 that .... which would act as an agent of Government for the development of the areas with a view to secure the above objective , and in para no. 3 of this Resolution clearly say, The subsidiary company will work under the control and supervision of the State Government in the General Administrative Department . In our opinion, the first Resolution itself makes it clear that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Government undertaking for the last three years, therefore, even this cannot be called as an afterthought and applying the 'rule of consistency' we hold that the department cannot be allowed to take a distinctive approach in the current year. 44. The revenue authorities were thus, clearly in error, in assessing the business income in the hands of the assessee at ₹ 63,786.58 lacs. We delete this income, as not belonging to the assessee. 45. Ground no. X to XXIV. We have held that there is no business activity of the assessee on its own and the assessee does not hold any assets in its own name, as is evident from the Balance Sheet filed with the revenue authorities, the question of treatment of the same does not arise, besides that all expenses incurred by the assessee whether capital or revenue are on behalf of the State Government of Maharashtra and which are reimbursed to the assessee. In these circumstances, there cannot be any capital expenditure incurred by the assessee on physical and social infrastructure. In that case, all the impugned grounds become infructuous, hence these are dismissed. 46. Ground no. XXV The ground is taken on contingency t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue that the assessee was carrying on any business or activities of its own while implementing the scheme in question. The unutilised money, during which the project could not be fully implemented, is deposited in a bank to earn interest. That interest earned is also again utilised for the implementation of the mega-city scheme which is also permitted under the scheme. Therefore, in computing the total income of the assessee for any previous year the interest accrued on bank deposits cannot be treated as an income of the assessee as the interest is earned out of the money given by the Government of India for the purpose of implementation of mega-city scheme. 5. Therefore, we do not find any error in the conclusion reached by the Tribunal that there was no income earned by way of interest by the assessee and setting aside the order of AO which is affirmed by the first appellate authority. The finding given by the Tribunal is purely a question of fact. We do not find any substantial question of law involved in this appeal and therefore, this appeal is liable to be dismissed at the stage of admission itself. 21. The Ld. Departmental Representative has reiterated the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernor of MP, (c) the appellant company has not purchased any land on its own for establishment/promotion of industries, (d) Government allocates and disburses the funds for acquisition of land under consideration which reaches to the assessee through DIG, (e) As per instruction 6/3/81/ 11-B, dated 14.12.1981 issued by Commerce and Industry department of MP government, the government is supposed to make available the land to the assessee. Further during the course of appellate proceedings, the assessee has brought to my notice the instance when the MP government has instructed the assessee to spare an amount of ₹ 10 Crores to be given to MP Trade and facilitation corporation to participate in equity of MPAKVN, Ujjain. Through the above mentioned arguments, the assessee has tried to establish that the land belongs to Madhya Pradesh government and the amount of land premium needs to be considered as liability of the appellant towards the government of Madhya Pradesh. I have considered the submissions of the assessee and noted that the land is provided to the assessee by government of Madhya Pradesh through DIG. It is also noted that the MP government, for development of indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m is a capital receipt. This part of argument was mainly advanced before the Assessing Officer at the time of passing the assessment order. However the same set of arguments have been put forth before me also. The assessee has relied mainly on decisions of Hon'ble Supreme Court which are as under:- (i) Ukhara Estate Zamindaries P. Ltd. Vs. CIT 120 1TR 549 (SC) (ii) Member for the Board of Agricultural Income Tax, Assam Vs. Sindhurani Chaudhurani Others 32 ITR 169. It is observed that the second in this case is whether the receipt under consideration is a capital receipt or revenue receipt. In order to decide and examine this issue, it will be appropriate to go through the memorandum article of the association. A careful perusal of the same makes it crystal clear that the assessee's main object is to develop, promote, encourage, assist in growth and establishment of industries etc. with ancillary/incidental objects of carrying out of businesses, A reference to objects as specified under B9 to B12 makes it clear that the assessee is in the business with a motive of earning the profit. The relevant paras of such objects are reproduced as under :- Ancillary/inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement makes it abundantly clear that the amount of land premium is nothing but the rent in advance. The clause 2 reads as under :- 2. The lessee having, paid to the lessor for said land the advance rent and premium of Rs .. ........... as security amount before the execution of this deed. In view of above discussion, there remains no doubt that the advance rent in the form of land premium is nothing but revenue receipt to be taxed as per Income Tax Act. During the course of appellate proceedings, the counsel of the assessee has further submitted that the decisions relied upon by the assessee in the cases of Member for the Board of agriculture income and Ukhara Estate Zamindaries P. Ltd. are squarely applicable in the instant case. Although Assessing Officer has briefly distinguished these two cases yet in the interest of natural justice, I have gone through the above case laws to verify the contention of the assessee. In the case of Member of the Board of Agriculture Income Tax, it is seen that the salamis/premia were not at all dependent on the rate of the rent charged. However, the same varied with the quality of land leased out for the purpose of agriculture. But in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Supreme Court reversed the decision of High Court saying that the appellant had dealt with its lease hold interest in the zamindari property as a. land owner and the receipt of salami, premia and compensation were receipts of capital nature. Therefore, the facts are altogether different. In view of the foregoing discussion, I am of the considered opinion that the AO has correctly assessed the income as revenue receipt. The additions made under this head in the instant assessment year as well as in the AY 2006-07, 2007-08 2008-09 are hereby confirmed. 3. Special Audit u/s 142(2) of Income Tax Act 1961on land premium- During the subsequent assessment years i.e.2011- 12,2012-13,2013-14 2014-15, the assessing officer had got the special audit conducted section under 142(2A) of Income Tax Act 1961. The copies of special audit reports are placed at page no.79 to 137 of paper book. The special auditor has clearly reported that the Land Premium is the revenue income of the appellant. The said conclusion was drawn by the auditor keeping in account various documents like memorandum of association, lease deeds and various facts and circumstances of the case. The relevant part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain or acquire land from government or private. The company work on model of leasing out land to industries for industrial purpose. On this, they collect upfront land premium and other lease charges. As stated above company is engaged in the business of industrial and infrastructure development, thus, land premium and other lease charges so received is a part and parcel of its business receipt. Therefore, land premium and lease rent so received is not a liability in the hand of the company. As in the estate business a builder debit all expenses incurred on construction and credit sale proceeds to profit and loss account considering them as revenue in nature. The company also debit all expenses incurred on development of plot in profit and loss account. Therefore, the land premium being the consideration of leasing out of plot needs to be given the same treatment i.e. treated as revenue in nature. Also no capital gain is offered when the lease is cancelled due to surrender of plot or due to any other reason and the said plot is allotted to other lessee on higher premium which shows that the difference of premium received is not a capital receipt, thus, the same stands reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms and conditions of lease have been specified and the nature and name of consideration in lieu of the lease of the land has been properly specified. It has clearly been brought out that land has been leased out for rent or advance rent or land premium. The appellant has also been reflecting the part of land premium in the return of income for the A.Y. 2003-04 to 2008-09 and subsequent. Therefore, there is no question of considering the land premium as capital receipt. Accordingly it is requested that the action of CIT(A) in confirming the order of AO may kindly be upheld on the issue of taxability of land premium. 6. High Court orders in writ petition It is not out of place to mention here that the appellant, in the subsequent year i.e. A.Y. 2014-15, soon after the completion of assessment order and raising the demand on the same issue of land premium had preferred a writ petition in Hon ble M.P. High Court for stay of the demand. Hon ble High Court vide it s order dated 13.11.2017 had declined to interfere with the action of assessing officer in perusing the recovery of demand. Rather Hon ble High Court had opined that the department was justified in issuing demand notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be incidental the ordinary functions of Government . As per Article 289(2) of the Constitution of India, the Union Government is authorized to impose any tax to such extent, being as Parliament by law provides in respect of trade or business of any kind carried on by us on behalf of the Government for State, for any operation connected therewith or any property used or occupied for the purpose of its trade or business or any income accruing or arising in connection therewith. However, as per Article 289(3) nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by Law declare to be incidental to the ordinary functions of Government. We have perused the objects of the assessee company. A bare perusal of the same, demonstrates that what the assessee company is doing, is purely a work of businessman/contractor. Therefore, the assessee company cannot take shelter under Article 289(1) or 289(3) of the Constitution of India. Hence, this plea of the assessee company is rejected. Now coming to another plea of the assessee company that whatever is being done is done on behalf of the Government of Madhya Pradesh. In supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a payment made for the acquisition of the right of lessor to enjoy benefits granted by the lease the general right may properly be regarded as a capital asset and the money paid to purchase to it may properly be held to payment on capital account. and Hon'ble Madhya Pradesh High Court in the case of Project Automobiles, 167 ITR 781, wherein it was held that premium payable by the assessee to secure a permanent lease cannot be considered as advance rent and the same has to be held as capital expenditure. Both the above cases are distinguishable on facts. In the present case, the assessee is also empowered to acquire land and deal with the same in the manner it likes. Another distinguishing facts in the present case is that the assessee itself has treated as taxable in earlier years and in the present case, there was special audit, wherein the auditors have given a finding on facts by observing as under :- As stated above company is engaged in the business of industrial and infrastructure development, thus, land premium and other lease charges so received is a part and parcel of its business receipt. Therefore, land premium and lease rent so received is not a liability in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sell or otherwise dispose of the undertakings of the company or nay part thereof for such consideration as the company may think fit and in particular (but so as not to restrict the generality of the foregoing) for shares, debentures, bonds or securities or obligations of any other company having objects altogether or in part similar to those of the company. Clause 2 of the agreement of Lease Deed : 2. The lessee having, paid to the lessor for said land the advance rent and premium of Rs. as security amount before the execution of this deed. Moreover, it is contended by the assessee that matching principle is to be applied to give set off of the expenditure incurred in respect of the lease premium. It demonstrates that the assessee is not clear whether this receipt is revenue or capital in nature. From the above, it is clear that one time premium received by the assessee would be income of the year of the receipt. It can be safely inferred that the land premium is nothing but a kind of rent, which is certainly taxable. Under the identical facts, Coordinate Bench of this Tribunal in I.T.A.No. 1299/Bang/2013, in the case of M/s. New Mangalore Port Trust, Mang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease rent as received by the assessee company from different industries to whom land was leased out by it for and on behalf of the State Government. In the ground of Land premium, it was held that the same was received by the assessee company for and on behalf of the State Government. Similarly, 1/99th share of land premium as offered inadvertently also claims to exclude, since the same was also relates to the land leased out by the assessee company to different industries. Similarly, the amount of interest as credited in the books of the assessee on the amount of State Government as received in the form of Land Premium, Lease rent, Transfer fee and development funds which actually pertained to the State Government and as per order of the State Government dated 31-03-2017 also it was clarified that the amount of lease rent, Interest on State Government, Transfer fee and development funds as received by the assessee actually pertained to the State Government. The assessee before the assessing officer himself vide his letter dated 17-12-2009 has submitted its detailed reply which was also considered in Para 7.6 of the assessment order the same is reproduced as under: - Further t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. That from the above, it is clear that the assessee before the Assessing officer himself has stated that Land premium and other receipts were received by it for and on behalf of the State Government and, therefore, entire amount so received was not liable to be taxed in its hand. Thus, entire material and claims was before the assessing officer himself at the time of passing of the assessment order. 27. The Ld. Counsel for the assessee during the course of hearing relied on various decisions and claimed that merely the amount of lease rent, land premium and Interest on State Government Funds inadvertently offered for tax does not deprive the assessee company to lodge its claim before the Hon ble Bench. 28. The Hon'ble Bombay High Court in the case of Balmukund Acharya Vs DCIT as reported in 310 ITR 310 has held that :- 31. Having said so, we must observe that the apex Court and the various High Courts have ruled that the authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 ITR 383 (SC) 2 Jute Corporation of India Ltd. vs. CIT (1991) 187 ITR 688 (SC) 3 Nirmala L. Mehta v. A. Balasubramaniam, Commissioner of Income-tax 269 ITR 1 (Bom) 4 CIT v/s. Mayur Foundation (2005) 274 ITR 562 (Guj) 5 CIT v/s. Kerala State Co-Operative Marketing Federation Ltd. (1992) 193 ITR 624 (Ker) 6 Balmukund Acharya Vs DCIT 310 ITR 310 [ Bombay ] 7 Mayank Poddar [HUF] vs Wealth Tax Officer 262 ITR 0633[ Calcutta] 31. The Ld. Departmental Representative vehemently argued supporting the order of both the lower authorities and further added that the assessee has itself offered the income for tax on account of lease premium in the return of income. 31.1 We have heard the rival contentions and perused the records placed before us and gone through the judgments referred and relied by both the parties. We observe that in the preceding para no.22, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -. I therefore make the addition of ₹ 2,18,75,469/- to the total income of the assessee. I am satisfied that the assessee had concealed the correct particular of its income, penalty proceeding u/s 271(1) of the Act are being initiated separately. 34 The assessee preferred an appeal before the Ld CIT[A] and disputed the additions as made by the assessing officer. The Ld CIT[A] vide his order dated 26-02-2014 has dealt with the said issue in detail but confirmed the action of the Assessing officer. The finding of the Ld CIT[A] is reproduced as under:- 2.7 After careful perusal of the submissions of the assessee, the main contentions are summarized as under:- (i) The AO has simply relied on the comments of the Auditor whereas the assessee has accounted for the same as per guidelines of Chartered Accountant. (ii) The AO has mechanically relied upon the Audiotrs comments without taking into account the notes on accounts from which it emanates that the assessee was considering employee remuneration, administrative and general overheads as capital expenditure only when such expenditures were specifically attributable to the construction of a project. This means such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s confirmed. Accordingly, the ground no.2 of the appeal is dismissed. 35 The assessee preferred an appeal before this bench and challenged the assessment order as passed by the assessing officer and order of the Ld CIT[A], the assessee in addition to his verbal arguments filed detailed written synopsis, the same is reproduced as under: - The assessee Madhya Pradesh Audhyogik Kendra Vikas Nigam (Indore) Limited was incorporated in the year 1981 by the State Government as wholly owned government company with the main object to develop industrial area for industrial growth in the State of Madhya Pradesh. The State Government had acquired the land from the private landowners and contributed its own land for development of industrial area. The raw land were handed over to the assessee for development and further management and maintenance of the same. The land remained in the ownership of the State and the assessee was allowed to act as a nodal agency. The development of industrial area which was commenced in the year 1981 came to at halt around 2000 when most of the land available have been utilized for development. It is further submitted that in the year 2005 the State Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above note made by the Auditor in their report without ascertaining whether the attribution of expenses to the extent of 75% is required or not under the generally accepted accounting principles and various Accounting Standards Guidelines issued by The Institute of Chartered Accountants of India from time to time. The ld. AO while relying upon a mechanical note given by the Auditor conveniently ignored the statement of the company on significant Accounting Policies given under notes to account in Schedule 17 under the head Fixed Asset which reads: Previously Expenditure incurred on employees remuneration and benefits and the administrative and general overheads which are specifically attributable to the construction of a project fixed assets are treated as part of the cost of the project/fixed assets. Likewise 75% of employee remuneration, administrative expenses and financial expenses have been charged to capital works in progress. Now this year management has changed their policy and it has been decided that major expenditure has been incurred on maintenance activities instead of infrastructure activities hence there is no need to allocate 75% of expenditure to work in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the therefore to nullify the effect of change the assessee has to pay taxes on income element of ₹ 2,18,75,469/-(sic). That the ld. AO even in his Remand Report could not brought any justification for not accepting the employee remuneration benefits, administrative and general overheads as revenue expenditure particularly in light of the Notes to Accounts which says that these expenses, when specifically attributable to the construction of a project/ fixed assets then, 75% of the same were transferred to the capital assets. It is submitted that during the year under consideration, the major project was under progress and the industrial area was fully developed, therefore only routine maintenance expenses were incurred, which have been correctly charged to profit and loss account. The Ld. CIT(A) in his appellate order has accepted the contentions of the Ld. AO without going in to the merit and submissions made by the assessee. The Ld. CIT(A) failed to appreciate the notes to the accounts , which categorically mentioned that the assessee was capitalising the revenue expenses only in case these expenses have been specifically attributable to any project or fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore the observation made by the Ld. AO and Ld. CIT(A) are misplaced and wholly influenced by the comments of the Auditor without appreciating the nature and merit. Comment by Auditor The Auditor has made the mechanical comment without commenting upon true nature of expenses. The Auditor s comment should not be read in isolation, the same should be read along with the significant accounting policies mentioned in Schedule 17 under the head Notes to Accounts. Secondly, the assessee should not suffer due to any comment of the Auditor, which is inconsistent to the Accounting Standard and GAAP. The Auditor s comment on change of accounting policy was unwarranted as in fact, there was no change in accounting policy. The assessee still maintains its accounting policy regarding capitalization of revenue expenditure when the same are specifically attributable and when these revenue expenses are not specifically attributable, the assessee is treating the same as revenue expenditure following accounting standards GAAP. The assessee rely upon following Judgment in support of his argument: (i) CIT Vs. Punjab State Industrial Development Corporation Limited (2002) 255 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as filed by the assessee and on perusal of the Balance sheet of the assessee company, we find that major development work has already been completed till the Asst Year 2002-03. The amount of opening Capital WIP and expenses as incurred in this year capitalized in the books of the assessee company and also in the book of M/s SEZ Indore Limited. The assessee further claimed that expenses directly related to the fixed assets have already been capitalized to the cost of assets. On perusal of the Profit Loss account it seems that against the credit of receipt of ₹ 7,02,82,708/- expenses of ₹ 5,52,86,310/- only was incurred by the assessee. The expenses as claimed in the Profit Loss account also having direct nexus of receipt/ income as shown in the Profit Loss account. Since the expenses as incurred was not for the purpose of addition to the fixed assets, hence, there was no justification for making the addition merely on the basis of remarks in the clause 11[c] of the Tax audit report. The remarks of the Tax auditor which is important piece of evidence but the same is not considered as conclusive piece of evidence. Considering the written synopsis of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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